Q1 2021 Mohawk Industries Inc Earnings Call

Good morning, My name is Natalia and I will be your conference operator today at this time I would like to welcome everyone to the Mohawk industries first quarter 2021 conference call.

Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during that time simply press Star then the number one on your telephone keypad to withdraw your question press the pound key should anyone need assistance at any time. During this conference. Please press star zero and an operator will assist you as a reminder, ladies and gentlemen, this conference is being recorded today.

Friday April 30th 14th with him on thank you.

I'd like to introduce your speaker, Mr. James Bronx, Mr. Brock you May begin your conference. Thank you Natalia good morning, everyone and welcome to Mohawk Industries quarterly Investor Conference call. Joining me on today's call are Jeff <unk>, Chairman and Chief Executive Officer, and Chris Wellborn.

President and Chief operating officer today, we will update you on the company's first quarter results I'd like to remind everyone that our press release and statements that we make during this call may include forward looking statements as defined in the private Securities Litigation Reform Act of $19 95, which are subject to various risks and.

Uncertainties, including but not limited to those set forth on our press release and our periodic filings with the Securities and Exchange Commission.

This call May include discussion of non-GAAP numbers for a reconciliation of any non-GAAP to GAAP amounts. Please refer to our form 8-K and press release in the investors section of our website.

Now I will turn the call over to Jeff for his opening remarks, Jeff. Thank you Jim in the first quarter. We had all time record sales of almost $2 7 billion, an increase of 17 percentage reported a 9% on a constant basis with adjusted operating income of 329 million on.

Highest ever first quarter EPS of $3 49.

Our business continued to strengthen on the first quarter and did not reflect the industries normal seasonality.

Around the world consumers are continuing to invest in their homes and new flooring plays a major role in most remodeling projects. We're also starting to see moderate improvement in commercial demand as global economies expand and businesses begin to invest in anticipation of a return to normal.

In most countries construction is considered an essential business. So our sales have been less impacted by government restrictions on those specific regions have been erupted our customers' businesses.

Our flooring rest of World segment continues to outperform with strong residential sales of our flooring improved mix from our premium products and less exposure to commercial channels. The segment benefited from lower marketing expenses product mix and increased days, which resulted in a greater margin in the first quarter.

All other segments also performed well with strong growth in residential products and expanding operating margins while their results were impacted by low commercial sales and severe storms in the United States.

Market demand strengthened as superior progressed, and our order backlog remains robust going into the second quarter.

Most of our businesses are running at high production rates low inventories remain lower than we would like our production on operating costs were impacted in the period by supply limitations and many of our markets as well as absenteeism, new employee training and severe winter weather in the United States.

Our margins have benefited from stronger consumer demand, our restructuring and productivity actions and leverage on SG&A costs.

With increased prices in most product categories, and geographies, reflecting inflation on raw materials labor energy and transportation.

Global transportation capacity has been limited.

Increasing our costs and delaying receipt of our imported products, we've seen similar constraints on local shipments and are increasing our freight rates to respond.

The investments we've made in our U S trucking fleet and local delivery systems have enabled us to provide our customers with more consistent service, while improving our efficiencies.

Even with COVID-19 searches in some markets. We anticipate continued strengthening of economies around the world government actions on monetary policies are stimulating higher economic growth rates and stronger housing markets and vaccination program should reduce the risk of COVID-19 related disruptions.

Recent U S stimulus actions as well as proposed infrastructure spending should further expand economic growth and employment levels.

The government is restaurants are lower than in the U S.

Other countries are beginning to see their economies expand which should support ongoing demand in our product categories.

We continue to implement our restructuring plans, which have achieved $75 million or anticipated 100 per $110 million in sales in the balance of the savings will be spread over the next three quarters and specific projects are completed.

In the first quarter, we purchased $123 million of our stock at an average price of $179 for a total of $686 million since we initiated our purchasing program on.

Our balance sheet remained strong with net debt less short term investments of $1 3 billion.

Our leverage is now below one times adjusted EBITDA.

Given our higher sales and operating levels, we are reviewing additional investment opportunities to expand our business and capacity.

Jim will review the first quarter financials. Thank you Jeff sales in Q1, 2020, 142 billion and 669 million, that's a 17% increase as reported and 9% constant basis. All segments showed positive volume growth with flooring rest of the world being the strongest as a reminder, Q.

<unk> had three additional shipping days in Q4 will have four fewer days.

Gross margin was 29, 7% as reported or 31% excluding charges, increasing from 27, 5% in the prior year.

The year over year increase was driven primarily by higher volume and productivity greater manufacturing uptime improved price mix and favorable FX, partially offset by increased inflation.

Actual detail amounts of these items will be included in the MD&A section of our 10-Q, which will be filed later today.

SG&A as reported was 17, 8% or 17, 7% versus 23 in the prior year, both excluding charges as we saw strong leverage on the increased volume and productivity actions, partially offset by inflation and FX.

It gives us an operating income has reported a 11, 9% of sales restructuring charges for the quarter were $11 million and our savings as Jeff said are on track as we have recorded approximately $75 million of the plan.

Operating margin excluding charges was 12, 3% improving from seven 2% in the prior year or 510 basis points similar to gross margin. The increase was driven by stronger volume productivity actions improved price mix and FX greater manufacturing uptime, partially offset by the <unk>.

Increased inflation interest expense of $15 million includes the full impact of the 2020 bond offerings. Other income of $2 million, mainly the result of favorable transactional FX.

Our non-GAAP tax rate was 22% versus 20% in the prior year and we expect the full year to be 21 522, 5%.

It's giving us an earnings per share as reported or $3 36 or.

Excluding charges $3, 49, which is 110% improvement versus prior year.

Now turning to the segments global ceramic had sales of $930 million, a 10% increase as reported or approximately 5% on a constant basis with strong geographic growth, especially in Brazil, Mexico, and Russia, while the U S was unfavorably impacted by the February ice storm on.

Operating income excluding charges of nine 6%, that's up 400 basis points versus prior year and this improvement was from strengthening in volume and price mix increased manufacturing uptime and productivity, partially offset by unfavorable inflation.

In flooring, North America sales of $969 million or a 14% increase as reported or 9% on a constant basis, driven by strong residential demand with commercial begin to recover from its trough.

Operating income excluding charges of nine 3%, that's an increase of 410 basis points versus prior year.

Proved its similar to global ceramic was driven by increased volume and productivity less temporary shutdowns, partially offset by higher inflation.

Finally flooring rest of the world with sales of $770 million.

That's an increase of 31% as reported or 15% on a constant basis as our focus on the residential channel drove improvement across product all our product groups led by a laminate <unk> and soft surface business in Australia, and New Zealand.

Operating margin excluding charges of 29% an increase of 740 basis points versus prior year, driven by the higher volume favorable impact of price mix and productivity, partially offset by the increase in inflation.

Corporate and eliminations came at $11 million and I expect for the full year 2021 to be approximately 40% to $45 million.

Turning to the balance sheet cash and short term investments of approximately $1 3 billion with free cash flow in the quarter of $145 million.

Receivables at just over $1 $8 billion, giving us a DSO improvement to 54 four days versus 57 days in the prior year.

Inventories were just shy of $2 billion, that's a decrease of approximately $200 million on a 9% from the prior year with the marginal sequential increase of 4% from Q4 or approximately $80 million inventory days remain historically low at 105 five days versus almost one one.

<unk> 30 in the prior year.

Plant equipment, just over $4 4 billion with Capex for the quarter of $115 million versus DNA of $151 million full.

Full year Capex is currently estimated at $620 million with us reevaluating our plan and we will most likely see an increase from that level full year D&A is projected to be $583 million.

And lastly, the overall balance sheet and cash flow remain very strong with gross debt of $2 7 billion as I said total cash and short term investments of over $1 3 billion, giving us a leverage of <unk> nine times adjusted EBITDA.

With that I'll turn it over to Chris for an operational overview of our first quarter, Chris. Thank you Jim.

First quarter sales of our flooring rest of World segment increased 31% as reported or 15% on a constant basis exceeding our expectations sales across all our product categories and geographies were strong as housing and residential renovation continued at a brisk pace margins expanded over last year or two approx.

Only 21% due to higher volume favorable price and mix and positive leverage on SG&A, partially offset by inflation.

During the period most of our facilities ran at high levels. There was some supply constraints limited our utilization at this point, we anticipate some material shortages continuing into the second quarter. Our backlog has increased as customer inventories remain low we have raised prices across all product categories and they've announced additional increases.

Share material inflation has continued to expand.

Our laminate.

The segment's largest product category.

<unk> to record significant growth as consumers embrace our more realistic visuals and superior performance our leadership in premium laminate products and our higher volumes drove improved margins during the period.

Our unique manufacturing methods create proprietary products that cannot be duplicated.

Our next generation laminate technology provides premium would consumers with features that exceed traditional wood in beauty and durability.

In the second quarter, we are installing additional manufacturing assets to support future growth.

During the period, our <unk> sales rose substantially with significant growth in rigid L. V T. Our margins expanded from enhanced formulations and operational improvements that increased our production speeds in the period, our sales were restricted by material supply disruptions that caused unscheduled shutdowns.

We anticipate continued improvement in our operations as the material supply normalizes and production increases to expand our new rigid L. B T collections.

Our sheet vinyl sales were limited in the period by COVID-19 Lockdowns of our retailers in Europe, we anticipate sheet vinyl sales improving as government restrictions are lifted and our customers reopen their shops are Russian sheet vinyl business continues to expand rapidly as we broadened our customer base and product offering.

We have initiated a third shift at the plant to support higher sales volumes.

Our installation business continues to grow as our panels provide the best option for energy conservation sales growth was robust in most of our geographies, though COVID-19 restrictions in Ireland impacted our plant operations and results chemical supply problems have limited our production and dramatically increased our cost.

We have announced our third price increase to offset the continued inflation and chemical shortages are expected to last through the second quarter.

Our wood panels business delivered improved performance with our plant running full and operating margins expanding as market demand for panels grows we are allocating our production we improved our mix during the period with increased sales of our higher value decorative products and mezzanine floors.

We're installing a new melamine press to expand production of our higher value products and increased efficiencies our new plant that uses waste to create energy for the facilities is operating well and benefiting our results.

<unk>.

Sales in both Australia, and New Zealand increased significantly and margins expanded due to higher volume improved productivity and favorable price mix, partially offset by inflation.

Sales grew in soft and hard surfaces with a strong residential performance driven by high levels of remodeling and a solid housing market.

Our updated carpet collections and smart strength, and we'll have enhanced our sales and mix.

We increased our sales by leveraging our comprehensive soft and hard surface collections strong sales organization and industry, leading service the commercial performance with stronger primarily driven by projects that were postponed.

For the period, our flooring North America sales increased 14% as reported or 9% on a constant basis adjusted margins expanded to 9% due to higher volume productivity gains and mix improvements partially offset by inflation.

Our performance was seasonally stronger than historical first quarters with consumers increasing investments in residential remodeling and new construction.

Commercial business continued to improve sequentially from its trough with growing investments in new projects are order rates remained strong and our backlog is higher than normal.

We have increased prices as their material and transportation cost escalated and we'll adjust further as required all of our operations are maximizing their output to support higher sales and improve our service.

In the period, we managed through interference from labor shortages and supply constraints, which impacted our production levels are inventories and service levels have also been impacted by delayed shipment of our imported products due to bottlenecks in ocean freight.

We are continuing to execute our restructuring initiatives, which will provide ongoing benefit to our results as they are completed this year.

Our residential carpet sales improved as consumers desire more comfortable quieter spaces in their homes.

Retail remodeling was our strongest channel improving our mix through increased sales of our premium products.

We are expanding our proprietary smart SRAM franchise with new collections that offer superior design and performance.

We have significantly reduced operational complexity by simplifying our yarn and product strategies and reducing low volume skus.

We grow our workforce to meet the higher market demand, we have implemented an extensive training processes and are relocating assets to increase production where necessary.

Our commercial sales are recovering as business remodeling increases along with the economic improvement.

We are also seeing increasing volume of higher value products as larger specified projects are commencing.

The April architectural billing index reflects the highest level of project inquiries since 2019.

We have increased carpet tile production in anticipation of the commercial market's improving.

In our commercial L. B T business, we're managing supply limitations and import delays.

Our laminate sales are setting records as the appeal of our realistic visuals and waterproof performance expands across all channels through numerous process improvements we have significantly increased our domestic production and are supplementing it with imports from our global operations.

We are installing additional production at the end of this year to further expand our sales.

Our new line will also produce the next generation of Redwood, which is already being well accepted by European consumers.

We have completed upgrades and streamlined our MDF board facility to enhance our volume and cost we are ramping up production of our premium ultra would the first waterproof natural wood flooring that also features industry, leading scratch dent and fade resistance Ultra what is being well received.

Superior alternative to traditional engineered wood flooring.

Our L. B T in sheet vinyl sales continue to increase in the new construction and residential retail channels.

We're upgrading our L. B T offering with enhanced visuals unique watertight joints and improve staying and scratch resistance.

Our local manufacturing has continued its improvement and production output increased as we implemented processes similar to those proven to work in our European operations.

Our service has been impacted by material supply disruptions in the U S and delays in shipments of source products, we anticipate our supply will increase and we will see further improvements in our domestic offering and production output.

In the quarter, our global ceramic sales rose, 10% as reported and 5% on a constant basis with sales increases in each of our markets driven by growth in residential remodeling and new construction.

The segment's adjusted margin expanded to approximately 10% due to volume price mix and productivity gains partially offset by inflation.

Our Russian Brazilians and Mexican ceramic businesses delivered strong results, though they were limited by their capacities and are allocating production as necessary.

All of our businesses are facing rising material energy and transportation costs, and we've taken pricing actions to offset.

Our U S ceramic residential sales grew from remodeling and new construction and commercial sales are improving from their low levels. Our strongest growth was in new residential construction and we are seeing activity strengthened with contractors at our service centers.

We are introducing higher value products, including polished mosaic decorative wall and anti microbial collections to improve our mix. We are focusing on the fastest growing channels and implementing advanced technologies to make doing business with us faster easier and more profitable for our customers.

Across the business our plants are running at higher levels, and we have increased our productivity with our restructuring actions escalating freight costs have hurt our margins and we are raising prices to offset.

Our quartz plant is improving its productivity and we are introducing more sophisticated bank elections, which are increasing our mix and should enhance our margins.

In the period, the ice storm that hit the southwest temporarily stopped production at most of our manufacturing facilities by interrupting our electricity and natural gas supply.

Facilities have all recovered and are operating as expected improving our service.

Our European ceramic business delivered a strong performance in the quarter, driven productivity, improving mix and greater consumer demand.

<unk> grew substantially in southern Europe, and then our export markets led by robust residential business and with some improvement in commercial projects. Our operations are running at high rates to satisfy the greater demand and improved service leveraging our costs and enhancing our results we are increasing our production levels.

Evil's through improvements in our processes and equipment as well as optimizing product flows to support growth and enhance our mix.

Our ceramic businesses in Mexico, Brazil, and Russia are all benefiting from lower interest rates and expanded credit which are driving greater hungry modeling in housing sales and all three businesses. Our order backlog is high and we are allocating production as necessary.

We have streamlined our product offering and enhanced our planning strategies to optimize service our inventory levels are low and we are maximizing our output by enhancing our manufacturing and scheduling processes.

In Brazil, and Mexico, we are increasing capacity this year to improve our sales and mix in Russia, we are optimizing our tile production and ramping up our new premium sanitary ware plant to meet growing demand.

Sanitary ware complements our floor and wall tile offering and allows our owned and franchise stores to provide a more complete solution to satisfy our customer needs given.

Given higher market demand and our increased sales we are reviewing the expansion of our ceramic capacities.

With that I'll return the call to Jeff.

Thank you Chris.

As we progress through the year, we anticipate that historically low interest rates government actions and fewer pandemic restrictions should improve our markets around the world, which foresee the present robust residential trends continue on with commercial sales slowly improving in the second period.

Across the enterprise, we will increase product introductions that provide additional features to strengthen our offering in margins, we're enhancing our manufacturing operations to increase our volume and efficiencies while executing our ongoing cost savings programs are suppliers indicate that material availability should improve from the first quarter.

Some operations could still face supply constraints, we are managing challenging labor markets in some of our U S community.

And supplemental federal unemployment programs could interfere with staffing to maximize those operations.

Raw materials energy and transportation cost continue to rise further price increases could be required around the world.

Given these factors, we anticipate our second quarter adjusted EPS to be $3 57 to $3 67, excluding any restructuring charges.

Currently our strong backwater backlog reflects the escalated levels of residential demand across the globe, we're introducing new product innovations to enhance our offerings and optimizing our production to improve our service we're preparing for an improvement in commercial projects anticipating on economic expansion and a return to normal.

On this investments with strong liquidity and historically low leverage we will increase our capital investments and take advantage of opportunities to expand well.

I will now be glad to take your questions.

Ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.

Management requests that you limit your questions to one primary and one follow up please hold while we compile the Q&A roster.

Your first question is from the line of Keith Hughes with a true it.

Thank you I know you don't normally like to talk more than one quarter.

On the unusual period, so I thought I'd give it.

On a tribe.

Do you anticipate.

Despite some debt more difficult comps.

Increased volume and products year over year and also on margins given you've got some even tougher margin comps do you think you'll be able to push the ball forward on margins in the second half.

Let's see if I can give you some qualitative views of things.

We've already provided second quarter guidance, and which we believe the present trends will continue into the second quarter and in the second quarter also included.

As expected supply limitations.

<unk> are going on.

We're raising our prices and we expect to run all of the facilities at high rates as you look into the second half the third quarter.

We think residential sales will continue to remain good within commercial demand will improve.

Our production rates should continue to increase those sales in some areas could be constrained by capacity of supply that we've talked about a few minutes ago.

Last year.

Just to remind you that market strength as it went in on make the comps higher than the third quarter on.

Also remember in Europe people take summer vacations in the third period and it impacts both of our residents as well as our rest of world in ceramic segments.

And margins as historical.

Sales could also be impacted by changing consumer behavior or other government actions with COVID-19.

As you go into the fourth quarter remember, we have six fewer days than last year, and we do expect a more normal seasonality this year and production levels that occurred last year.

For the full year, if you look at it we expect strong improvement sales in Hong Kong, we see SG&A being leveraged on operational improvements also helping on margin.

With the higher growth, we are evaluating you know raising the capital investments for both this year and next and we're in the process of thinking it through and.

On the tax rate as you said will go up from last year to about 21, 5% to 22 on a half.

Yeah.

Okay.

Just final question you talked a lot about your laminate growth I believe you used the phrase record setting in the release.

That growth in permanent debt.

Taking share from other laminate producers or is this a case, where it's actually making a dent on the LPT or other product sales.

Keith.

The market has become a clickable flooring market with L V T laminate and wood alternatives. Our laminate is waterproof with better features and is expanding in all channels and we're importing laminate from other plants and adding capacity to satisfy.

So would that be it's just a clickable share gains is that a better way to say it.

People are looking at they go on to the stores and I see them all on there being presented at all is the same as alternatives.

On a partner is happening as we focus on the premium part. So we have a waterproof story this equal with LPT and net.

Visuals and things are equal or better than.

The other products that they are offered so it's really growing the category. The category is improving and then premium laminate is really bringing expanded and we're really limited by our capacity.

This year, we substantially increased our production in the U S plants.

And we're importing products from plants around the world and we still can't satisfy the growth by the end of the year. We will have a new line that will be up and running which will give us a lot more production.

Okay. Thank you.

Your next question is from the line of Phil Inc. With Jefferies.

Hey, guys.

Jeff I guess bigger picture after seeing pretty noticeable declines in carpet for the last few years. It looks like you saw really strong growth in net participated with the strength youre seeing in R&R and new construction.

If we look out to 2022, and let's say if we see a mid single digit growth environment for R&R. For example, what type of growth could you see carpet and ceramic putting on.

On.

I think what Youre seeing is the whole category of Florida is increasing and so all the categories are growing.

I still think that.

The.

Carpet will lose share, but it's a much higher growth market, which is causing it but the other side, we still have the whole commercial carpet business, which is really at low levels and as it picks up we have higher margins is it because of the more differentiated products and that's going to help as we go forward both in.

And as well as the ceramic categories as you go through.

Got it that's really helpful.

Based on your <unk> guidance it looks like your margins is holding up pretty well and certainly you've been on.

Really proactive on pricing and it may go out with more price increases.

Based on what you have out there and the traction youre seeing.

Do you feel pretty good debt pricing alone should like fully offset inflation. This year and do you envision any at least timing mismatches throughout the year.

Well, we're doing everything we can to keep it alive as you know the materials energy and transportation continue to run.

They are flowing through inventory and we're raising prices as we see it.

We're having to react to the changing prices in our supply base.

Every month, we get a different view of it than we had the month before.

We are.

Trying to push through price increases to align with it and so far it looks like we are doing reasonably well with that some products, we've actually increased three times already.

As yet and then all we can do is keep review on what's going on and keep making adjustments.

Okay, that's pretty encouraging appreciate it thank you.

Your next question is from the line of Susan Mcclary with Goldman Sachs.

Yes.

Good morning.

My first question is around the <unk> facility in the U S. Can you give us an update on how that's coming through and how that's expected to kind of add to this demand that you're seeing there.

Yes, so just a quick start up.

European operations are operating well and continue to improve our cost of margins.

People in the United States over there on a continuous from Europe, and they're implementing the demonstrated processes that we have there and we're improving our speeds and yields has been disrupted both on the U S and Europe at the moment the PVC PVC supply is limited both on the U S and in Europe and.

We expect it to get better, but it's causing us to not to run the plants to optimize them at this minute.

Okay. That's helpful and then as a follow up you know, you've obviously been making progress in terms of a lot of the cost cutting and.

The productivity initiatives that you set out last year can you give us some more color on where you are with that and how we should be thinking about that's moving through for the second quarter and then in the back half of the year as well, especially as we anniversary some of that.

Okay. Susan So we have made significant progress as we said.

We've seen about $75 million of the 100 $110 million that we had planned certainty that impact favorably impact our cost and margins.

We'll complete as we go through the balance of the year I would expect that Q2 would have the most as we anniversary.

Those restructuring actions from Q2 2020.

And so if you look at the average savings of somewhere between 25 and $35 million. Those are included in our full year projections.

Just remember that $75 million is embedded in last.

In the prior quarters, so the comparisons already have it embedded in it the first $75 million.

Right. Okay. That's helpful. Thank you and good luck with everything.

Thank you Susan.

Your next.

Question is from the line of Tim <unk> with Baird.

Yeah, Hey, everybody good morning.

Maybe just the first question is how youre thinking about investments and SG&A.

He has run a little bit lower than sales over the last couple of quarters and so just as you think over the next 12 to 18 months, where some of the biggest opportunities for you guys to bring some SG&A investment back into the business.

You're right with the SG&A has been lower if we're gonna have to start increasingly SG&A, but for the topline growth. The goal is to grow the SG&A lower than the growth rate at the top so we get leverage out of it and still satisfy the need to bring new products to market.

At the same time too.

Support the expanding sales on the top.

Okay. Okay. So you'll bring some back book to be able to leverage it okay and then.

Then just on the M&A environment I mean, your balance sheet, it's probably in the best shape, it's been in years.

Could you just give us an update on on the M&A environment and kind of how that's progressing if there was any sort of opportunities out there for you to take advantage of them.

You said the balance sheet is in good position with the ability to invest significant amounts of money.

We're looking for the right opportunities at the right price is to make sure that we can get the returns we need all the time and you never know when those things are going to get through an agreement for it takes a while but.

There are things available and we're talking to people.

Okay. Okay.

I appreciate the time.

Thank you Tim.

Your next question is from the line of Stephen Kim with Evercore ISI.

Very much guys.

Historically, Jim you guys have given sort of the breakout input cost volume productivity in terms of the benefits operating income I'm. Just curious if you were able to give us the rundown on that.

Okay.

As I said, Stephen you'll get it in our MD&A and because we will file our 10-Q later today, but was there a one specific one that you were looking on Thats. Okay. We've just no that's fine well I guess, we'll have to wait spend that's that's fine.

Let me let me then ask you a question if I could about your comment about making potential potentially more capital investments that you are evaluating some opportunities was curious if you could give us a hand.

Which segments, you're evaluating the most opportunities in and related to that in laminate you talked about just on.

A tremendous amount of demand and in North America, where you're expanding capacity already how much are you expanding that capacity.

Both in North America, and Europe and are you are you confident at this point that it's enough.

On.

Let's see if I can answer that one starting with the businesses. The pieces that have the most limitations right now with the U S laminate or.

Our European Board businesses.

In our ceramic business is outside the U S and Europe would be the ones that are the most constrained at this point.

We have new capacity.

In this year to add to both the U S and European laminate in the U S. I think it's around $130 million to $140 million of additional capacity.

I remember the number in Europe.

We have new equipment coming in above, Brazil, and Mexico operations in ceramic.

And we have a lot of ongoing optimization on our Lv peak production, which will increase it and theres other things on that but those are the big ones.

Yeah, no that's very helpful. Thanks, a lot for that.

Then lastly from me is just margins.

You mentioned that <unk> was a bit of an unusual.

<unk> seasonally.

And a lot of those things I would imagine benefited your margins in <unk>, usually margins rise sequentially into <unk> and I'm wondering if you think that that is expected to happen again this year or would you potentially see margins down just because of some unusual seasonality that's happening this year.

On the.

You're right fourth quarter, one was seasonally stronger which does temper the increase as you go through.

The flooring rest of World, which we said the first quarter margins was positively affected by product mix lower marketing expenses and increased day. So that one is going to.

That was that was not going to stay at those levels and then we have the first quarter remember this year has 5% more day and so when you think about the historic relationship.

On the second quarter, usually has more days in the first quarter. This year, it's going to reverse so it changes the relationships you have to keep all that in perspective, when youre looking at the trend low.

Yes got it thank you very much guys.

Thank you.

Your next question is from the line of Eric <unk> with Cleveland Research.

You talked about relative to your original expectations for the quarter. The rest of the World was better you didn't totally characterized the flooring north American ceramic.

What I'm curious about is within those two businesses.

Anything that notably limited the growth of those in the quarter the changes in the growth can accelerate in the coming quarters.

I can speak to use ceramic.

U S ceramic was stronger in residential while our commercial is just starting to improve and then in the first quarter, we were negatively impacted by the storm.

Interrupted electricity and gas supply and we estimate at least $15 million to $20 million sales impact.

Our margins improve with productivity and restructuring and we're raising prices to offset transportation going forward.

Uh huh.

Other North American businesses, we did have limitations on the.

Availability of product to satisfy the pieces you heard about the laminate, we've been trying to do.

<unk> was also impacted by a lack of supply of PTC to run the plants as hard.

The imported products are all coming on late so we lost sales from those as we go through.

And then in the carpet manufacturing and some of the markets, we're having trouble finding on the labor.

On to run the plant so our raw materials on some of our production has been limited by labor, which we're trying to do everything we can improve.

Improved at which includes training programs on one side and we've actually picked up and moved some equipment from one local market to another plant.

More on labor availability, so all those things impacted it.

We built that all into the projection on the second quarter on the other hand, we still believe we're going to have supply limitations of chemicals coming out of out of the <unk>.

Texas area or all in limited supply.

We don't know exactly how long we think.

Supply is going to get better.

We'll have to see how it goes.

Okay. That's helpful. And then secondly, just curious on your inventory situation and perhaps the channel inventory and as much as you have visibility to that.

Your sales are up.

Good bit your inventories are down year over year on on your balance sheet.

How do you think about rebuilding inventory your inventory or channel inventory.

How important are relevant is that.

And when do you think that might happen.

Yeah.

I'll start with the <unk>.

The inventory sequentially as I noted we did increase.

By about $84 million, which is impacted by the combination of volume inflation and FX and if you remember back in February we talked about that we thought the inventory would increase somewhere between five and 10% from 2020 year end to 21 year and we would now expect.

That's actually be more than 10% with the combination of the higher sales and inflation, even though that we do believe that the turns will stay higher than historic levels in terms of the channel inventory, we do believe the inventory remains low.

So with most of our customers and this should actually help.

The near term demand.

In addition.

We are working obviously to try to improve and increase our service as we go through the quarter as well.

I spoke to several of our large customers this week in their business.

This is a strongest some of them been in business for 40 years, it's as strong as I've ever seen it is it the customers some of them are being limited by their ability to install it most of them. So.

In addition.

So we haven't been able to fill the channel like they would like and our surface instead of being immediate and some cases its taken a little while to get there now it's not impacting on that much because they couldnt been solid if we could ship. It all the more so I think the point is that the backlogs are good the demand is good.

And we have to get them aligned in it.

Should be good through the second quarter and at this point I can't see why the third quarter wouldn't be also good.

Great. That's helpful. Thank you.

Your next.

Moving from the line of Truman Patterson with Wolfe Research.

Hi, Good morning, guys and thanks for taking my question.

Just wanted to.

Follow up on the flooring rest of world margins.

Very strong op margin, one in queue at 21% and Jeff.

You suggested that we shouldnt use this kind of 21% as the new base going forward.

When I look at the second quarter. It seems like you all should still be generating very strong leverage from from the sales growth.

So I'm just hoping you can help walk us through or screen.

Some of the costs that might be coming back online in the back part of the year. The European vacations, just seeing if you can give a little bit more color there.

Okay.

Sure.

So the first quarter.

One is that the sales are stronger just as we said on everything else coming into it so, but we do see the sales and margins increasing all year for the flooring rest of world.

As we said it benefited from lower marketing expenses.

We're going to have to ramp up the marketing expenses as we go through the year.

On the higher level, so thats going to impact it youre going to have the product mix was really favorable in the first quarter and we don't see debt.

Maintaining itself and the mix between different channels and products.

And then the increase day is also helped by getting greater leverage through it as we go through but I mean the.

The margins for the year are going to be better than last year. They just won't be at that level.

We go through the third quarter. If you go back historically and look at the business, you'll see that the rest of world margins and sales.

Second quarter is the highest usually for the year and it's because of those vacations. If you go back and look at historical Youll see a trend line that you should use as a base to start.

Okay. Okay. Thanks for that and for clarity you were specifically talking about margin expansion for the full year not necessarily each quarter.

On rest of World. That's currently on treatment.

Okay.

And then.

On.

On Obeche seems like Youre, making some pretty good progress on the internal manufacturing both at USC in Europe.

Could you remind us again, how much capacity in dollar terms, you think you'll you'll be at when everything is running at full capacity.

And part.

Part B just.

Along with your third party Lv T imports.

Any idea on what your market share might be running at <unk> in the U S.

So our manufacturing capacity is over $1 billion, when we get it all optimized and we're headed towards that.

We're using imported supply to give us additional capacity that we need and broaden the marketplace. We're reviewing long term, what we do long term.

It could go from here.

Haven't concluded at this point.

<unk>.

What else I would say right now Truman.

We are growing with the market in the U S and.

Even though we still have shared game, we're not 100% sure what the market is but we think we're growing at least as fast as the market.

Okay. Okay. Thank you and good luck on the upcoming quarter.

Thank you.

Your next question is from the line of Justin Speer with Zelman and associates.

Oh good morning, Thanks, guys.

One question I had in terms of.

Mapping out future plans I know, maybe you can't speak to details but.

Rewind a few years.

Made the decision to do a lot of Greenfield investment internal investment I guess as opposed to going out and doing a lot of M&A I guess as you look at it today, how should we think about maybe prospective growth projects and maybe give us a sense for the magnitude range of magnitude of potential capex projects and on M&A.

In terms of capital priorities.

I think youre ahead of us a little bit when a middle of the study.

On some of the things from the first time, we put in.

New machinery that hadn't been run by anybody was the learning curve, we went into new markets and products like Countertops. We've never made before we went into new geographies, we've put up plants in Russia, and a new product category, we have no more customer customers. So it took us longer to get them, but I mean.

We put imports ceramic countertops in Europe, it's in our plan to expand at our Russian a Russian vinyl plant. We just put a third shift on this making as much money as anything else that we have in the business.

When we got them all together it just took us longer Lv T. Within the last steps of it to get it up where we want to so.

When you're a greenfield to do stuff to outside the normal it's going to take longer.

Haven't put the plans together so far the plans are all around how to expand existing businesses in existing geographies and existing equipment is operating so we don't anticipate having the same.

Jim.

Things to overcome on the other side.

Also looking at what can we do to step change the business at the same time so low.

We haven't got far enough along on that under the side, we really didn't expect.

The economies in the business to be doing as well this year and we're really looking at things we'd planned in 'twenty, two and 23 on pulling them in.

That's helpful.

One other question I had is just.

Yeah, I think the topic de jour right now across most of the earnings calls, there's been supply chain and commodity prices input transportation.

Price is there any context, you can give us in terms of what your commodity basket is up and maybe when you expect the most I guess extreme part of that year over year headwind to flow through your income statement.

So I guess the two questions how much is your basket up and when do we start seeing the most extreme.

Part of that.

At a lag into your into your P&L.

So we're just like everybody else had started rising in the in the fourth quarter.

We have about three.

Three five to four months of inventory call. It round numbers what flows through there. So some of it's sitting on the first quarter.

The biggest part is going to show up on our second quarter, which were trying to get the price is aligned with it and then the third quarter.

There's going to be more of it and we still don't even know how highest going on flight.

Yeah.

So they're all working through.

Working through.

We think we've got the pricing in the marketplace.

Time to hit when its going to show up on the P&L and we'll do everything we can to manage it as we go through.

And last question, if I could I'm sorry.

From one of the things we think we.

Raising things round numbers, 3% to 8% and Theres some things that are 25%.

Is it so it's all over the board.

And is the reception to these price increases consistent across all categories.

On the marketplace.

Is pushing prices through.

Everywhere, all our competitors and we have the same.

Same increases in raw materials.

For the most part of we set the.

The supply through the channels are low.

Yeah.

It's easier than the historical to push them through at this point.

Perfect. Thank you guys really appreciate it.

Your next question is from the line of Michael Rehaut with J P. Morgan.

Thanks.

Good morning, everyone. Thanks for taking my questions.

Firstly I just wanted to get a little better sense of.

<unk> mix for the different businesses.

More specifically you know thinking about mix here.

It has been an issue over the last year or two I would say, particularly Maureen.

Ceramic and flooring North America could you just give us a better sense, obviously when you talk about price mix on the whole you've had sort of on price increases in the market and that influences the price part of price mix, but.

If you can just give us a sense of how mix itself is going.

For both ceramic and flooring North America, and if that's changed at all so far this year versus the prior year or two.

Michael I'll just comment on ceramic one of the things that is impacting mix at the moment is we have a stronger residential business and the commercial business is just starting to come back and typically our pricing would be a little higher on the commercial side.

Yeah.

That's also impacting the other wells.

We have large commercial businesses the commercial is doing better, but it's still way below where it was and then all of the businesses. The commercial is higher margins because the products are more differentiated so we have <unk>.

<unk> opportunity over the next I don't know, what's going on a year year and a half as those move back to normal.

Our higher margin product categories. There so that'll help every day.

And I appreciate that I mean, I guess also what I'm thinking about here is within the residential sphere.

Over the last couple of years with <unk> coming on that's caused some mix challenges in your other flooring categories like carpet or or ceramic perhaps to better compete with <unk>. So I was wondering within the residential product portfolio as well.

Are you seeing any change in mix for the better or worse or if it's.

Or if it's stabilized.

Let's see if I can answer it it's much more complex. So what you have is.

Things going on so in the carpet business.

Had polyester carpets, which are lower price carpets growing as a share of the market. So thats impacting the mix.

<unk> is at the moment you have different channel is growing so the.

New construction business is growing rapidly and it tends to use lower quality products than the remodeling part of the business. The remodeling part of the business is picking up and doing well and that's helping the mix in the other direction.

Then you have the commercial side, which has the highest margins.

Vs yet.

And the sales are low so it is impacting the mix.

As you go through where they are all moving at the same time and then.

Well just have to see how they evolve.

Okay.

Sorry in terms of the overall net impact.

We're expecting the mix to improve through the year.

There's a question on the remodeling business comes because what happened is that the remodeling is higher higher margin will builder. The builders picked up earlier on remodeling piece is doing better. So we're hoping that we're going to get a mix improvement as we go through the year and couple that Mike with.

Commercial improving you'll get also the benefit of the favorable mix as well.

Right.

That's helpful.

Secondly, I guess.

On the second quarter guidance.

You've talked a little bit about how you expect the flooring rest of world margins to maybe come in from from this 21%.

But in terms of sales versus margin.

You've talked about.

Increasing your production rates.

There's still a lot of pent up demand out there.

You won't be in the summer months debt.

Impact your European businesses. So is it fair to expect sales.

Sales on an absolute dollar basis.

To be greater than in the second quarter.

Second quarter should be greater than the first quarter all those things considered.

The second quarter should be higher than the first quarter.

I won't have the same differential.

On the page because you have the 5% more days in the first one that you didn't have sort of comparisons versus historical on exactly the same.

Is it.

But we expect the sales to go up at the same time, because the inventories are still low.

Limited to how much we can ship out.

Is it also but were trying to get the capacity is up.

And then you throw on top of it you have the supply piece, which we're not 100% share how much we're going to get.

Other than that.

Okay.

Your next question is from the line of Matthew Bouley with Barclays.

Hey, good afternoon.

Thank you for taking the questions.

I actually wanted to follow up on the last one on around seasonality.

It was touched on earlier with the margins into Q2 given.

Given what you're implying.

I appreciate everything you said the unusual seasonal strength of Q1 and in the shipping days issue.

But is there anything else when talking about the margins that might be a greater sequential headwind and specifically I'm thinking of price cost is just being materially different in the second quarter versus what you got in the first quarter.

I'll just comment on day again on flooring rest of World Q1 benefited from lower marketing expenses and improved product mix and increase of days, which.

Caused a greater margin in that business.

So the SG&A all in all the business is going to go up to support the higher level of sales, we're going to put more new products out so it's going to go up.

<unk>.

We should still get some leverage we're trying to keep it below the volume increase but we're trying to put enough debt to support not only this year, but to keep the business increasing in next year.

We go through when you compare to last year, we were more stingy on the investments, we're making because we didn't know what the economy was going to be so that.

So that's going to increase and you need to think about on the margins.

The cyclicality of that piece.

On.

You have to keep.

When you look at first quarter versus second you almost have to take 5% off the first quarter to compare.

To get it in the same relationship before you start.

And then I, just keep reminding people that.

We've seen some of the models that they don't take into consideration the European vacations, which.

Second both the rest of world and the.

Ceramic business in the third quarter.

And when you step back again for the full year, we expect strong improvement in sales and income you will see that leverage on SG&A and then we'll also get the operational improvements as well.

Yes, no that's great color and understood.

Quick one is just on the production rates in the quarter seemingly high and above normal seasonality I'm just curious on.

How that might impact your fixed cost absorption this year relative to normal.

Does that therefore mean that the incremental margins on volume might be higher than it typically is as you deliver on on these inventories you're producing today. Thank you.

Does help and it will continue to help that we haven't talked about all the stuff going on even where we are with COVID-19 and pieces, we still have higher absenteeism that labor is not as so.

Hard to manage we're paying overtime to get people in so there's other costs that are also impacting the business trying to get as much.

You went through the place and then the fall was really as we come out of the year. The question is going to be last year. We ran hard all the way through the fourth quarter all the way to be in on a question is going to be what does the business look like when we get there.

Too early to tell I'm, hoping it's going to be strong all the way through.

Okay.

Got it great. Thank you for the color.

Your final question is from the line of Kathryn Thompson with Thompson Research.

Hi, Thank you for taking my questions today.

Focusing on the port congestion, which has been an issue for many companies along the value chain.

Could you give us an update how you're managing this port congestion and more specifically.

Thoughts on are you increasing inventory our.

<unk> space.

Hum.

How are you able to meet growing demand in light of the port congestion.

And just help us understand the cost.

Increasing costs with the storage and transportation ability to plan for the future. Thank you.

Like everyone else.

The delays are there and the cost per there in some cases the freight costs were four times higher than they were on what we call normal.

Where they work so there's a huge impact on the cost pieces that have to be added into the products.

On the delays or.

Anywhere it could be.

Four weeks to eight week delays in it.

We are ordering things earlier to try to get them in.

In line.

He.

It's getting a little better as the stuff starts landing from what we have but we're still chasing it as we go through.

And at this point, we're assuming that the <unk>.

Transportation is going to stay like this for quite a while and we're trying to align the purchases and the timing of it to get them here.

Let's see how it works out.

Are you are you have you stepped up and renegotiated rates because he wanted to things that we're hearing is if youre going back.

Simple different companies that are going back and renegotiating rates net has allowed them to get more space on ships is that been your experience.

I can't say that we're getting more space.

We have put together orders and the orders are getting.

But to put on the shifts with delays in them and we're adding the delays to the piece to try to alignment.

And the prices that we're paying are high.

Okay.

I'll follow up on that later on.

Follow up on just with the lift that did the Texas freeze.

I understand it the key products resins are were significantly disrupted where do we stand today in terms of the resolution with that.

From the supply side, we're still in the middle of it.

Sure.

We have things that we're buying I mean were sent in trucks on its coming off their lines on what's picking it up and moving it to I mean, the same day to try to keep the plants running so I mean, the problems are still there.

It affects anything Thats, a chemical from glues and one business to resins in another.

And.

The indications are that it's getting better.

Part is all of the customers like us are ordering more so the capacities are constrained, even though that getting better.

It's difficult to tell whether youre going to get what percent of what youre going to get when you're going to get.

Is it in.

We're just playing as it goes and begging for everyone on we can get.

Okay, great. Thanks very much.

We appreciate you being on the call.

The markets are strong.

We're improving our performance of our businesses.

We're well positioned in the business and we're managing all the disruptions as best as possible.

We think we're going to have a good year, but we have to manage through all these things, which makes a little more unpredictable.

Because of the supply base on all of the things we've been talking about.

We appreciate you joining us and have a good day.

This concludes the Mohawk industries first quarter 2021 conference call. Thank you for your participation you may now disconnect.