Q2 2021 Mohawk Industries Inc Earnings Call
Yeah.
Good morning, My name is to Wanda and that will be your conference operator today.
At this time I would like to welcome everyone to Mohawk industries second quarter 2000 ex money 1 conference call.
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The speakers remarks, there will be a question and answer period.
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As a reminder, ladies and gentlemen, this conference is being recorded today Friday July 32021.
I would now like to introduce your speaker for today, Mr. James Brooke Mr. Bronx, You May begin your conference.
Good morning, everyone and welcome.
Welcome to Mohawk industries quarterly Investor call.
Joining me on today's call are Jeff, Florida, Bond, Chairman, and Chief Executive Officer, and Chris Wellborn, President and Chief operating Officer today, We will update you on the company's second quarter results I'd like to remind everyone on 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 1095, which are subject to various risks and uncertainties, including but not limited to those set forth in our press release, and our periodic filings with securities and changed our commission.
This call May include a discussion.
Non-GAAP numbers for a reconciliation of non-GAAP to GAAP amounts. Please refer to our form 8-K and press release in the investors section of our website.
Now I'll turn the call over to Jeff for his opening remarks, Jeff. Thank you Jim.
In the second quarter, we generated revenue of approximately $3 billion.
The highest quarterly sales of any period on our company's history.
Our sales increased significantly over last year, when a pandemic interrupted the global economy.
Our adjusted EPS of $4.45.
Was the highest on record for any quarter.
Our success is a result of the extraordinary.
Ordinary efforts of all of our team members across the world.
They have shown their dedication and resilience to overcome the challenges that we faced we greatly appreciate what they've been able to achieve.
Our second quarter results were significantly stronger than we had anticipated across all of our businesses with sales building on.
Income from our first period in the quarter, our operating margin expanded to their highest level in the last 4 years as we leveraged our operational and SG&A expenses.
The actions, we've taken to simplify our product offering enhance our productivity and restructure our costs are benefiting our results.
<unk>, we've delivered almost $95 million on the anticipated $100 million to $110 million in savings from our restructuring initiatives across the enterprise, we continue to respond to rising material energy and transportation costs by increasing prices and optimizing our manufacturing and logistics.
On a moment during the quarter most of our manufacturing Atlanta at capacity.
We were limited by materials supply and labor availability.
Raw material constraints in many of our operations led to unplanned production shutdowns during the period.
Overall, we successfully manage interruptions that impeded our normal.
<unk> patients as well as regional manufacturing and customer closings related to Covid regulations and local areas.
Our inventory levels increased slightly in the period, primarily reflecting higher material costs rising freight costs and limited shipping capacity impacted our material costs.
Availability of imported products local shipments to customers in international exports.
Presently we do not anticipate near term abatement of these constraints.
All of our markets continue to show strength with robust housing sales and remodeling investments across the world.
Opera Marshall projects are increasing as the global economy improves and businesses gained confidence to expand and remodel.
Mentor and levels in most channels remain low and our sales backlogs are above our historical levels.
To improve our sales mix and efficiencies, we will introduce more new products with enhanced features.
<unk> and lower production complexity in the second half of the year.
To alleviate manufacturing constraints, we have approved new capital investments of approximately $650 million to increase our production with most taking 12 to 18 months to fully implement.
In the second quarter, we purchased.
Just $142 million of our stock at an average price of $2.8 2.
$2.8.
For a total amount of approximately $830 million since we initiated the program with our strong balance sheet and historically low leverage we're reviewing additional investments to expand our sales and profitability.
Jim will now cover the second quarter financials. Thank you Jeff.
For the quarter, our sales were $2 billion $954 million, an increase of 44% as reported and 38% on a constant basis. All segments showed significant year over year growth versus Q2 of 2020, which was a.
Period, we are most impacted by the pandemic shutdowns.
Gross margin for the quarter was 35% as reported or 37% excluding charges, increasing from 21, 4% in the prior year.
Increase in gross profit was the result of higher volume and productivity improved.
Mix reduction of last year's temporary shutdowns due to the pandemic and favorable FX, partially offset by the increasing inflation.
SG&A as reported was 16, 9% of sales was 16, 8% versus 19, 7% in the prior year, both excluding charges.
<unk> as a result of strong leveraged by the business on the sharp increase in volume.
The absolute year over year dollar increase was primarily due to higher volume north.
<unk> operating costs previously curtailed by the pandemic impact of FX increased product development costs and inflation.
Operating margin.
<unk> as reported was 13, 7% with restructuring charges of approximately $7 million or.
<unk> savings are on track as we have reported approximately $95 million on the planned $100.110 million of savings.
Operating margin excluding charges was 13, 9%.
Improving from 1.7% in the prior year.
The increase was driven by the stronger volume improved price mix productivity actions the reduction of the temporary shutdowns and favorable FX, partially offset by the higher inflation and increased product development costs.
Interest.
Quarter was $15 million other income other expense was $11 million income primarily the result of a settlement of foreign non income tax contingency and other miscellaneous items.
Income tax rate as reported was 16% and 22, 5% on a non-GAAP.
For the <unk> versus a credit of 2.5% in the prior year, we expect the full year range to be between 21, and a half and 22, 5%.
That leads us to a net earnings as reported of $336 million or an earnings per share of $4.82.
Earnings per share, excluding charges was $4 and 45% or $4.45 excuse me.
Turning to the segments. The global ceramic segment had sales of just over $1 billion, an increase of 38% as reported or 34% on a constant basis with strong.
Strong geographic growth across our business led by Mexico, Brazil and Europe.
Operating margin excluding charges was 13, 2% a significant increase from the low point of 2020 at 0.5%. The earnings improvement was a result of strengthening volume and productivity favorable.
Price mix and a reduction of temporary shutdowns, partially offset by increasing inflation.
Flooring North America had sales of just under $1.1 billion for a 35% increase driven by a strong residential demand with commercial channel continuing its.
<unk> <unk> versus prior year, but still below historic levels.
Segment experienced solid growth across all product lines led by residential carpet <unk> and laminate.
Operating income excluding charges was 11, 2% and similar to global ceramic a significant increase from the 2000.
'twenty margin trough.
The operating income improvement was also driven by the increase in volume strengthening productivity improvement in price mix with a reduction of temporary shutdowns, partially offset by higher inflation.
Lastly, flooring rest of the world with sales of just over $830 million.
It's grown 68% improvement as reported are 50% on a constant basis as continued strength in residential remodeling and new home construction drove improvement across all product groups led by resilient panels laminate and our soft surface business in Australia, and New Zealand.
Operating margin excluding charges of 19, 7% and similar to our other segments was a significant increase from prior year's low point of 11, 9% and again the main drivers were consistent and that they had higher volume favorable impact from price mix with the reduction of temporary.
Shutdowns favorable FX, partially offset by increasing inflation.
Olin eliminations came in at $12 million and expect full year 2021 to be approximately $45 million true.
Turning to the balance sheet cash and short term investments of approximately $1.4.
4 billion with free cash flow of $226 million in the quarter.
Receivables of just over $2 billion and an improvement in DSO to 53 days versus 64 days in the prior year inventories.
Inventories for the quarter were just shy of $2.1 billion.
Increase of approximately $160 million or 8% from the prior year or increasing $85 million or 4% compared to Q1.2021 inventory days remain historically low at 99 days versus 126 in the prior year.
And property plant and equipment were just shy of $4.5 billion.
And capex for the quarter was $113 million with DNA of $148 million.
Full year Capex has been increased to approximately $700 million to strength in future growth with full year.
Year, and a projected to be approximately $580 million.
Overall, the balance sheet and cash flow remained very strong with gross debt of $2.7 billion total.
Total cash and short term investments of approximately $1.4 billion and our leverage at 0.7 times to.
<unk> adjusted EBITDA.
And with that I'll turn it over to Chris Wellborn to cover our operational review.
Thank you Jim.
For the period, our flooring rest of World segment sales increased 68% as reported and 50% on a constant basis operating margins expanded.
To 19, 7% due to higher volume pricing and mix improvements and a reduction of COVID-19 restrictions, partially offset by inflation.
Flooring rest of world outperformed our other segments with all of our major product categories.
Significantly as residential sales expanded.
In all regions.
We have implemented multiple price increases in most product categories to cover inflation on materials and freight.
Raw material supplies are problematic and have impacted our <unk> production and sales. The most we anticipate material and freight challenges will continue to impact our.
<unk> in the third quarter.
Sales of our high end laminate continued to grow dramatically as our proprietary products are being widely accepted as waterproof alternative to <unk> and would.
We are beginning to introduce our next generation of laminate at premium levels with collections featuring handcrafted visuals.
Our business, we are increasing our production in Europe with new capacity coming online and further capacity expansion projects are being initiated.
Our laminate business in Russia, and Brazil are growing strongly and as we enhance our offering and expand our distribution.
We recently.
We completed the acquisition of our laminate.
Distributor in the U K that will improve our position in the market.
Our <unk> sales growth was strong during the period and would have been higher if material shortages had not interrupted manufacturing.
To compensate for material inflation, we have increased prices and we expect further increases will be required.
Required as our cost continue to rise.
We are significantly expanding sales of our rigid lv tea collections with our patented watertight joins that prevent moisture from penetrating the floor.
Our manufacturing operations have made substantial progress improving throughput material cost and.
Imminent.
Our production in the third quarter, we will continue to be limited by material availability.
Our sheet vinyl sales rebounded strongly as retail stores opened in our primary markets our sheet vinyl distribution in Russia has expanded and we are maximizing production to meet the growing demand.
N yield our wood plant in Malaysia has been idle since the government instituted lockdowns to address surging COVID-19 rates.
It's a small product category for us so the sales impact in the third quarter will be limited we are awaiting permits to complete the acquisition of a plant that reduces wood veneers to lower our cost.
Our.
Failure, and New Zealand flooring businesses delivered excellent results with sales and margins exceeding our expectations. The residential business was strong with hard surface products, leading the growth.
Carpet sales are strengthening with our national consumer advertising enhanced merchandising.
Rising and the launch of a new high end wall and try extra collections that improved our mix.
Most of our facilities operated at a high level with increased volume benefiting our results.
As in all of our markets commercial sales have not recovered to their pre pandemic levels, though the Australian government has locked down.
On specific regions to contain the spread of Covid. It is not meaningfully impacted our business.
Our European insulation sales grew even though chemical shortages limited our production our margins are recovering after we implemented price increases to cover rising material costs, we have announced.
Additional price increase for the third quarter to offset further raw material inflation.
We anticipate chemical supplies to remain tight and could impact our future sales to expand our existing installation business in Ireland and the U K, we have signed an agreement to acquire an installation manufacturer, which.
And adding a government approval.
Our panels business is running at full capacity and so far we've been able to manage material shortages without interruptions to our operations, we have raised prices and improved our mix with higher value decorative products too.
To enhance our results were expand.
Which is per offering of premium products as well as our project specification team to enhance our panel offering we are commissioning a new line that creates unique surfaces and visuals to differentiate our offering in the market.
For the period, our flooring North America segment sales increased 35%.
<unk> and adjusted margins expanded to 11, 2% due to higher volume productivity pricing and mix improvements and fewer COVID-19 interruptions, partially offset by inflation.
Our business trends continued from the first quarter with sales growth being driven by residential.
We're sampling and new construction.
Commercial sales continue to improve though the channel remains below pre pandemic levels through.
Through the period, our order rate remains strong and our sales backlog remains above historical levels. We are maximizing output at our facilities to support higher sales and improve our service.
Our remarks.
During the quarter, our production levels were hindered by local labor shortages and material supply, particularly in Lv tee sheet vinyl and carpet.
Ocean freight constraints delayed receipt of our imported products impacting our sales inventory and service levels.
We implemented price increases.
<unk> is a material and transportation cost increased and we have announced additional pricing actions as inflation continues.
Our restructuring initiatives are improving efficiencies as planned and we should realize additional savings in the third quarter.
Our residential carpet sales continued their growth trend.
Trend across all channels with consumers investing in home improvement projects.
Sales of our proprietary smart strand franchise expanded with our new collections being well accepted our average strand polyester collections are expanding by providing enhanced value styling and environmental sustainability.
On an ability.
Our carpet sales have been limited by personnel shortages in our operations and we are implementing many actions to increase our staffing and productivity.
We have improved our efficiencies by rationalizing low volume Skus and streamlining our operational strategies.
Yes.
Our.
Commercial sales have improved as businesses increase remodeling and new construction projects, both carpet tile and hard surface products grew with healthcare senior living education and government recovering faster.
So down slightly from record levels. The June architectural billing index had a fifth consecutive month of expansion.
<unk>, indicating the continued strengthening of new commercial development and renovation projects.
With realistic visuals and waterproof performance our premium laminate collections are growing substantially to support higher demand. We have implemented many process improvements to maximize our U S production and are.
Importing product from our global operations, our laminate expansion remains on schedule and should be operational by the end of this year. Our new line will produce the next generation of Redwood, which is already being introduced in Europe.
To support the growth of our laminate business, our U S MDF operation completed investments.
<unk> to increase our volume and lower our cost.
Our new waterproof ultra wood collections are being launched as a high performance alternative to typical engineered wood floors.
Our <unk> and sheet vinyl sales continue to increase with growth in our residential retail and new construction channels.
Our <unk> and sheet vinyl growth and plant productivity were impacted by disruptions in supply that stopped their operations and delays in imported LPT caused by transportation constraints.
We have enhanced our <unk> offering with more realistic visuals proprietary watertight joints and.
And improved stain and scratch resistance.
Our U S operations implemented process enhancements that have increased our speeds and throughput.
On material availability increases we should see further improvements in our domestic manufacturing, which will support our recent product launches.
For the period or.
Our ceramic segment sales increased 38% as reported and 34% on a constant basis adjusted margins expanded to 13, 2% due to higher volume productivity pricing and mix improvements and fewer COVID-19 disruptions, partially offset by inflation.
Our <unk>.
Ceramic businesses around the world have greatly improved with strength in the residential channel and increasing commercial sales all of them have low inventories, which impacted our sales growth and service levels.
We have initiated expansion plans to increase our capacity and mixed in Mexico, Brazil, Russia, and Europe, our ceramic businesses.
Has continued to raise prices to cover material energy and transportation inflation.
Our U S ceramic business is strengthening and we're implementing price increases to cover material and freight inflation, we are improving our product mix with new shapes sizes and surface structures.
We are reengineering our products.
To improve material cost and productivity are restructuring projects have been fully implemented and are growing the expected providing the expected benefits our countertop sales and mix continued to improve as we expand our premium offer with new technologies in the period and mechanical failure temporarily reduce production.
Production, which has been repaired.
We have initiated the expansion of our plant to further grow our countertop business.
Our Mexican and Brazilian ceramic businesses are very strong with our residential business in both regions at historically high levels and commercial still recovering.
Due to capacity constraints are.
Products these cannot fulfill customer demand. So we are allocating our production.
We have executed multiple price increases to offset energy and material inflation, we are expanding operations in Mexico. This quarter, and we have initiated new investments to increase capacity in Brazil.
Our European.
<unk> ceramic business delivered strong sales and profitability as pricing product mix and productivity improved our margins, we increased sales of our premium products, including slabs small sizes outdoor and antibacterial collections.
Commercial sales trends are starting to improve though they remain.
We remain below historical levels.
We are selectively increasing prices to recover material energy and freight inflation during the period. Our operations ran at high levels with improved efficiencies and increase throughput. We continued to rationalize low volume skus to optimize our operations.
To support.
<unk> of our sales of high end collections, we have initiated expansion projects some of which will take through next year to complete.
Our ceramic sales in Russia were robust across all channels with our direct sales to customers through our own stores and new construction projects outperforming.
We have announced price increases to cover.
Ever rising inflation during the period, our manufacturing operations ran at capacity to respond to accelerated sales with inventory remaining below historical levels.
Due to present capacity limitations, we are focusing on optimizing our product mix, we have initiated expansion plans with new production expense.
Expected in the second half of next year.
Sales of our new sanitary Ware products are expanding primarily through our owned and franchised retail stores as our manufacturing ramp up.
With that I'll return the call to Jeff.
Thanks, Chris.
Global economy should continue to improve due to low interest.
Government stimulus and the success of Kobe Covid vaccines around the world flooring sales trends remained favorable with residential remodeling and new construction at high levels and commercial projects strengthening.
In the third quarter, we expect our strong sales to continue with our typical seasonal.
Right from the second quarter, we will expand the introduction of new products with additional features and increase our investments to enhance our future sales mix.
<unk> energy and transportation inflation is expected to continue and will require further pricing actions to offset.
Most of our facilities will operate it.
High utilization rates, so ongoing material in late local labor constraints will limit our production.
Our global ceramic and flooring rest of the World segment, we will observe the European vacation schedules in the third quarter, which reduces production and increases cost in the period.
In many country future government.
Government actions to contain COVID-19 remain a risk and could impact our business. Given these factors, we anticipate our third quarter adjusted EPS to be between $3.71 and.
And $3.81.
Excluding any restructuring charges.
We entered this year with uncertainty about COVID-19.
The economic recovery on renovation on new construction, our business is stronger than we had anticipated and we are increasing investments to support additional growth and improve efficiencies longer term housing sales and remodeling are expected to remain at historical high levels apartment renovations should accelerate as revenue department expired.
Buyers and investments and commercial projects should continue to strength.
We're expanding our operations and introducing new innovations to maximize our results our balance sheet is strong and we're exploring additional internal projects and acquisition opportunities.
We'll now be glad to take your questions.
Yes.
Thank you.
Ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number 1 key on your telephone keypad.
Management requests that you limit your questions to 1 primary and 1 follow up.
Our first question comes.
Eric was shot with Cleveland Research your line is open.
Good morning.
Good morning.
The wondering 2 things first of all in terms of the increased capital and the increased capacity investments that you're talking about over.
From a 12 to 18 months, you've got some stuff that shows up at the end of this year, but in terms of product categories or regions, where you have the most conviction where.
Or are you adding capacity.
It's on.
We're adding capacity in a constrained parts of the business all over the world.
The next trial.
Adam.
Our production, but at the same time, 1 other thing we're still limited by constraints. So some of them some of the limitations are.
Labor and materials, rather than capacity the fixed tilt to run it and then we also have some problems with the delayed product from imports.
So $650 million that were going to putting on the biggest pieces are on laminate and ceramic from counter tops, but theres a number of other areas that they include.
And when you get through with that capital forecast for the year for this year is being range to $700 million and $450 million on the 600 will.
Sure.
And next years.
Okay. That's helpful. And then secondly in terms of the third quarter.
The earnings guidance is helpful. Just wondering if you could help us at all in terms of the sales guidance you your commentary on typical seasonal slowing.
Does that.
That may does that suggest that we should look at 3 key revenues relative to 2 key revenues to.
To reflect the normal <unk> to <unk> <unk> stepped down or is there something that that would change the way that that path has traveled historically.
Well, let's see the third quarter, we expect sales trends.
That continued from the second quarter.
The operations will still run strong.
We're assuming the business and residential keep going with commercial improvement.
Residential on the European the non U S business, especially Europe.
Net slow with a normal holiday period as we go through.
And.
You might not know, but some of the non U S businesses over time and become a larger part of our results and the holidays have become a bigger impact over many years as we keep expanding outside the U S.
So with that we'd still have materials supply labor transportation and all are constraining the business.
We don't think the pricing actions we have are enough.
Our inflation keeps coming so we would expect to keep putting in more.
Increases in prices.
And then just to try to.
On other things.
As you think of the third quarter, what you have is manufacturing.
Cost from the United States are impacted by holiday in the fourth of July which is in there.
Third quarter revenue second you had the holidays, which impacts not only the.
The cost is not operating but the sales also drop off as we go through.
So that in the mix the biggest pieces of the best I can.
Lay out for you.
Thank you thanks.
Thank you.
Our next question comes from the line of Mike Dahl with RBC capital market.
Line is open.
Hi, Thanks for taking my questions. Just first question I wanted to follow up on that.
And just clarify I think you said.
150 of the 600 I don't know if you meant $4.56.
The $6.50, but just trying to figure out the next I guess the question would be when you look out to 'twenty 2.
Between the carryover from these new investments in your normal.
Capex.
How should we be thinking about.
Capex in 'twenty 2 and.
To the point about non all of these constraints.
Alright, physical capacity some of its labor some of its materials I guess.
Capex is a very long term decision and these are potentially.
Capex cases temporary constraints or even temporary demand tailwind.
How do you think about that balance and the conviction to add the capacity.
Hmm.
Yes.
The pieces that are temporary constraints.
We're not increasing those.
We are leaving those alone the things that we are increasingly things that we have exceeded our capacity. What happened is this year. The sales were much higher than we anticipated coming into the year. So with that we hadn't planned on having the capacity to support the growth that we're having this year.
And so.
To get to the money first of the $650 million is in addition to.
The capital that we had in the plan for this year.
So this year the capital before was around 550, if I remember, yes, thats correct. So I'm not sure I got the number exactly right, but it was around $5.50 under.
The $6.50.
This year to 700, and then approximately about $4.50 of that of the 600 on a go over to next year.
And then we're going to go through our final planning the rest half of this year, we havent finalized the budget for next year, yet so we'll have to decide what we're going to add more or less.
<unk> already done.
As we go through and again.
Just.
Altra.
The original presentation, we might we tried to lay out for you the different pieces and the only material.
The ceramic businesses in Mexico, Brazil, Russia.
When we bought Europe, we're humping increase.
We have the laminate businesses in the United States, and Russia, and Europe are all being increased.
<unk>.
Countertop business is being increased in the United States.
And Theres a number of other ones that are here so.
We're putting the business in shape to grow more in the future.
<unk> supports what's going on in the world.
Okay. That's really helpful. Thanks for the additional detail my second question.
Just back on on the price cost.
I guess your comments Ed.
Yes, the current pricing.
Reising actions arent quite enough given the given the escalation in cost and you're implementing more pricing how should we think about the lag and what's embedded in guidance do you assume that there'll be price cost.
<unk> and <unk> before a catch up in <unk> will you stay ahead of.
Cost in <unk>.
Or is it neutral or just a little more color on kind of order of magnitude of cost and whether whether or when you'll you'll be back to price cost neutral or positive.
Well, let's start out with the second quarter, we were able to cover the inflation, but you will see on our numbers that he publishes later on.
We've raised prices across the business, we keep announcing new increases on.
Our.
Energy materials freight continue to rise we don't work scope every week, we wake up with new increases so we'll keep adjusting as required as we go through.
And so.
We think we've.
Enough for what we know about at this point and the timing of them and how they work together, we've put all of that into the estimate that we think we're going to get them close and then with a mixed thing you do see as we raised prices in the marketplace some customers in both residential and commercial.
Budgets.
Announced that budgets they start trading day I'm looking for supplements strength in the budget. So thats just a normal process that occurs at all of this.
Okay. Thanks, Jeff I appreciate the color.
Thank you.
Our next question comes from the line of Adam Baumgarten with Zelman <unk>. Your line is open.
Hey, good morning, everyone, just maybe touching on the laminate business.
It appears there has been a really kind of meaningful surge in demand there over the last it.
Seems like year, so how much of that is due to some of the technological advances that you've seen and how much of that is due to maybe shortages in LPG supply.
And let's start out with first what happened is you had had LD keep growing dramatically and 1 of the main features.
It was waterproof.
And what's happened is in the marketplace.
There are multiple options and if you go onto retailers the day, they start talking about waterproof flooring as a category on a start.
Aren't showing products on which our laminate with the technologies we have.
Susan.
Good or better alternative to many other ones in the waterproof category.
So that's causing it to grow it has also been growing.
In.
Going into different channels.
It's being used if you're watching TV shows are remodeling pieces, they are using laminate and remodeling and new houses today, which day.
At a much higher rate than they had from the past and then separate from all of that we really do have unique technologies that give us differentiated features and visuals that separate our products from the market.
And we have a much higher portion of the premium market because of it both on the U S and Europe.
Is it.
Which is the reason why we're adding the capacity at the end of this year in the U S and that's why we had it planned as part of the 650 that Jeff talked about both on the U S.
And in Europe in the future years.
Got it thanks, and then just on that mix down comment you made Jeff are you seeing it more pronounced in certain categories over others.
And it's hard to tell.
It's all moving around.
Some people just.
Ill just say they they trade down.
Is it in other cases, you've seen the same thing as you know.
People buy homes, the remodeling part of the business tends to be a higher value customers on the new construction.
On the mask building homes, so and then the apartments are lower so theres all kinds of mix changes going on.
Thanks.
Thank you.
Our next question comes from the line of Susan Mcclary with Goldman Sachs. Your line is open.
Thank you good morning, everyone.
My first question is you know Jeff I know you gave some third quarter guidance in your comments, but.
Help us think about how the third quarter versus the fourth quarter may come together. This year, just given the comps that we're facing and you know some of the seasonality that you talked about on the in the business any kind of color or guidance. There for the next few quarters would be helpful.
So again on the third quarter.
We do.
Can you get the same sales trends to continue.
Net operations are running again at a high levels.
With all the constraints, we don't know how theyre going to happen in the third quarter, we built on our best guesses of supply and labor and transportation, but it's a moving target.
As you go from there.
Into the fourth quarter.
It is typically softer as people go into the holidays, they don't tend to buy as much flooring during Christmas.
Then.
This year, we have 6% less days and a 6% last day will impact the sales and the margins as we lose the absorptions from them.
Lower days in the period as yet.
Then.
This year versus last year and this is a guess because we don't know whats going to happen. We're expecting this point a more normal seasonality with more increased vacations people, taking with lower holiday.
Spending on remodeling on reduced utilization of the plants.
We're going to have to see how it happens.
At the end of the year compared to last year, when we had the rebound that we did.
But.
It's difficult to predict at this point.
And then we're also as we get into the end of the year last year, we can.
With new products dramatically and now on <unk>.
Just more on new products and sales in order to enhance next year.
Okay. That's very helpful color. Thank you I'm not my follow up question is you know in the last few quarters, you have purchased about $400 million Roma.
$400 million of your stock when you think about the capital allocation on the increased spend on capacity that you announced today, where do buybacks kind of fall within that what's your appetite to continue buying back the stock at these levels.
Given our balance sheet, we have a lot of options.
And at the moment.
Strength, we bought $140 million last quarter I think we have about $170 million is still open on the acquisition, but the primary pieces are where we started the constrained businesses and reducing cost which is the 650 will do more of that when we finalize the.
The plan for.
For next year from the second half of this year.
To keep broadening the product offering innovation.
We found a few bolt on acquisitions you saw we'll see more of those and then we're looking for other acquisitions to either step change the business or go on to new markets or aligned product categories and in share back.
Moment the options now with the balance sheet, we can do more than 1 thing.
Okay, Alright, thank you for that good luck.
Thank you.
Our next question comes from the line of Michael Rehaut with J P. Morgan Your line is open them on.
Hi, Thanks, good morning, everyone.
Hum.
Just wanted to clarify.
Some of your earlier comments, Jeff around.
How to think about the third quarter on you you mentioned that you expect sales.
Those trends to continue but at the same time, you know an increase in vacation time, particularly in Europe.
1 of them.
I think there might be any.
Ability to misinterpret those statements.
If you say sales trends, it's a little bit more qualitative and.
May be uneven on a year over year basis.
But I think people are just trying to understand.
On an absolute dollar basis.
Or are you, suggesting that on an absolute dollar basis <unk> revenue should be similar to <unk>.
Or indeed as I think you were trying to say.
At least in global ceramic and flooring rest of world.
We should be modeling in some type of.
Central dollar decline.
Due to the vacation.
I think whats confusing is I'd say the sales trends are continuing on which means I believe the business. It has the same strength that will go like that.
The second part is there is a seasonality.
Sure.
Not sure almost everyone understands our European businesses.
On a European and non U S businesses become a much larger part of our business day.
<unk> impact the business more today than they did 5 years ago or before because of the acquisitions and enhancements to the business we've done so.
When they step down that whole category steps down which will.
Reduced day.
Sales level in total from.
From the third quarter and had a negative impact on our sales and margins.
And it will be lower because of that as it has been in prior years and.
And that's not the business changing as the normal seasonality now separate from that last year was also unusual.
And what happened last year with Covid.
We and our plants and our facilities on our customers, we shut down a lot on the second quarter and what happened is many of the people.
We have the people taking their vacations in the second quarter. So on a business started getting better in the third quarter weighted.
Didn't do the normal shutdowns, because we use C vacation pays and things in the second quarter and then the same thing happened people didn't go on vacations like they did so the third.
Quarter was unusually high because the whole vacation structure on both our production our customers vacations for people was different so the comparison is unusual in this third quarter last year, the third quarter. This year.
Okay.
Yeah.
I think I understand.
The second question I, just wanted to circle back also clarify a little bit to the best possible on on the Capex outlook for 'twenty 2 it sounds like Youre basically saying that.
On the fixed the you know.
$4.50.
I think next year, so you're doing roughly $200 million back this year.
So that's a delta of another.
Hum.
250 million higher sequentially year to year on.
Are we to take from that debt.
Total capex all in should be.
It's bouncing closer to $900 million to $1 billion.
Jim I don't know a better way to answer this is Jeff.
Kind of reviewing with us your basic maintenance Capex.
But you know I think.
We're looking at a decent range of.
Uh huh of outcome I think as long as at least as people are trying to figure this out.
He had been better range would be helpful.
You understand what we told you.
The plan next year, what we did this year, we stopped in the middle of the year on the.
This is not.
As we have planned and we can't wait until our normal normal planning periods in order to start changing the capacity to support our business. So we took every body and we identified the things that we knew we wanted to do on went ahead and did it.
We still have to go through the planning process to decide what we wanted to more.
More than that next year, and we haven't done it there is the normal maintenance and safety, which is typically call it around $200 million could be more or less and then on top of that we havent decided yet so we can't give you any direction.
Okay.
That's.
Clarification on the tax rate if I could you know guided to 'twenty, 1 and a half from 'twenty 2 and a half does that include.
On the benefit in the second quarter, because that would kind of point you to a mid 'twenty tax rate or does it exclude that benefit.
The exclusive benefits.
So the non-GAAP rate from Q2 was 22 and a half.
The full year is 21, 5% to 22 and a half I would expect based on seasonality.
On the tax rate for Q3 to be slightly higher than Q4.
Great. Thank.
You're welcome.
Thank you. Our next question comes from on the line of Keith Hughes with Jewish Your line is open.
Thank you Bob you had talked on the release about second quarter being a record quarter, which is correct.
If you look within flooring North America.
On your revenues are bad right.
Yeah.
2017, but margins are still below just my question is what's the difference versus then what do you need to do to get those back up to the historic peaks on operating margin.
The margins did improve as you said from volume pricing and cost.
The things that are going on so now the.
And the peak period.
Commercial sales, which are higher we didn't have all this inflation. We're finding now we didn't have labor shortages, we didn't have material shortages.
We are running short runs in the factories trying to keep the service as well as we can.
On which is causing where just from the factories around creating inefficiencies as we go through.
And.
In addition, and some of the markets the competition's more fierce today than it was in.
Okay. Thank you.
Thank you.
Our next question comes from the line of Stephen Kim with Evercore.
Line is open.
Thanks, very much guys.
Nice results.
I appreciate the outlook here.
The capacity expansion program.
I wanted to get a sense for how much of a sales opportunity you think that 650 might my offer you and then.
As you as it does come in over the next 12 to 18 months you know a lot of times Theres, some startup costs that come with that and I just want to make sure we're thinking about that modest offset.
Set properly.
I remember just looking back from 2014 to 17, you know you kind of ran $10 million to $15 million a year not a lot.
And and.
I just wanted to I know you executed really well on during that period of time, just wanted to get a sense for what the offset might be as this as this.
The capacity comes on line is that a reasonable range to be thinking about.
So the capacity to 650 will translate into somewhere around 6% to 7% of our total business sales round numbers to give you a high level direction.
And yes, there's always a startup costs that come along.
On the other hand.
All of this is non technologies being put in existing facilities our existing businesses.
Could be a building next door not too far away. So we shouldn't have some of those learning curves that we had.
So we had to pay for on the other ones.
Yeah, No. That's very helpful. Yes, it makes a lot of sense.
I wanted to talk about flooring rest of world, obviously, it's been a big contributor to.
The upside positive upside surprises we've been seeing.
For about 4 quarters now I think.
This business has been really the fastest grower.
And I know this is an area that has many different business lines in it and I know you've called out a number of them.
And I know that you've also added a lot of capacity there over that over the years.
But the step up that we've seen in the last 4 quarters was pretty significant and so what I wanted to try to.
Stan is do you attribute the step up we've seen in sales in flooring rest of world.
Excluding the impact of acquisitions, but just the actual step up in the organic.
To be the bringing on of certain capacity or certain business lines.
On.
That were not there previously or do you see it as just.
Post Covid there was this big surge in demand really pretty much across the business and your capacity, where they're waiting for it and it just got still because of this generalized demand.
As you said the rest of the World performance.
<unk> is strong.
Sales and income.
High levels.
The operations.
Most of the operations are running near capacity, which is helping our cost.
Cost structures, our product mix is improving from actions we've been taking.
To the other to improve the mix.
We are aggressively trying to raise prices to align with the pieces.
As we go through.
So then you have different parts. So if you go back to some of the investments we've put in over the years.
We've put a new plant.
In Russia in sheet vinyl.
On that plant is now running 7 days a week.
2 years ago, we started up a few years ago we.
But.
The Australia, and New Zealand business, we've been putting efforts to change their product line upgrade their up their product offering.
They were just trying to get into hard surface. We have the hard surface business. We've put in all kinds of new product offerings in pieces and we're growing our share dramatically in hard surface in that marketplace.
In.
Sheet vinyl, we're the leader in sheet vinyl in the European marketplace most of our <unk>.
Isn't on the residential.
It's doing well, we put a plant in Russia.
To make cheap volume, we've talked about and laminate on.
Our laminate business, we keep introducing new innovations as we do that we keep improving on mix. We also bought a few years.
Business that we bought.
When we bought IDC a few years ago, it's taken us a few years they had a laminate business, we've been able to dramatically improve the sales and margins events over the years.
The wood panel business that we have is running wide open the margins are improving.
It's at a high level, because theres shortages on wood panels. So it's at a high level.
Our installation business, we've we've put in multiple plants, we've acquired other ones. So we have a strong installation business.
It's doing well, even though we're chasing really high chemical.
Moving on us so.
On <unk>.
Benefits from a lot of things.
Yes, really it sounds like the fulfillment of your longer term plan that you've had there and been executing as.
As we go forward into the future.
It seems like there is.
Still a lot of growth opportunities for flooring rest of world should we be expecting.
That segment to continue to outpace the other segments on a volume growth basis.
It's going to be hard to keep up the growth rates they've been at.
Is it on my own.
These are exceptional what theyre doing sure we're investing in.
Within the 650, where we're putting on new laminate line, which will add about.
120, $550 million of new capacity in laminate.
We keep investing in the other pieces.
We're trying to grow as much as we can I don't think it can stay at the growth rates of debt.
And then 1 more thing and all the business is just remember commercial everywhere as loans commercial has a higher margin business for us and as the commercial business comes back.
On the margins are going to enhance the pieces.
And we have capacities that since some places only make commercial products.
Yeah, no for sure Yeah, we have that to look forward to thanks I appreciate it.
Thank you.
Our next question comes from the line of Kathryn Thompson with Thompson Research. Your line is open.
Thank you Brian on for Catherine. Thank you for taking my questions. I guess wanted to start with you mentioned net sales were significantly stronger than anticipated going into the quarter. I guess is there any specific segment or product to call out here kind of is it a case that the strong getting stronger.
Or was there kind of more than expected momentum in areas that had previously been a weaker.
Like I say commercial.
I'm sure we're like everybody else on a world given what's going on with Covid.
And what's happening and then.
You have the huge uptick on people staying at home huge housing really sales projecting forward how strong it's.
We're not.
We projected what we thought it would be coming into the quarter and it surprised us how strong it was and maintained itself.
The United States and across the entire world and the same thing going forward.
Estimating and we talked about it in the fourth quarter.
We really don't know.
Going to be a business will stay strong like last year, our on the go back to historical ways on fall off because the big difference on what can happen, depending on which which we see in our crystal ball is no better than yours.
I guess would you characterize it as the residential side was stronger than expected.
It's good for the commercial or a combination of the 2.
On the residential is driving the whole thing, but commercial is improving quarter to quarter and kicking up and I think it's the commercial is probably a little bit better than we had expected, but we had anticipated getting better.
Okay.
Understood and I guess the second question.
I asked about labor and labor shortages and specifically on the installers.
We had a few of our contact 0.2 installers is their biggest concern for growth going forward and.
And how much of it is the of that as a concern for you guys, especially given the investments youre, making to increase production I understand.
The demand level out there, but is that would be is there going to be the labor force at the installer level to support that growth in a year or 2.
We sure hope so, but you havent right everybody has.
Listen labor as a problem with every company on every industry.
If we could.
There's twice as much to our customers they couldn't installer, so you're correct, there's limitations on our whole strength as it goes through but for the most part.
They are installing that everything that we can ship from.
Got it thank you.
Okay.
Thank you.
Our next question comes from the line of Phil Inc. With Jefferies. Your line is open.
Hey, congrats on a really strong quarter and great execution guys.
Just I guess, you know material shortages will certainly free up in time, so that will help but you mentioned you're sold out in certain products. So just curious how.
Shifting from do you have for growth next year as you kind of ramp ups on this capacity.
So.
It's different by.
Different businesses and categories.
Sure.
As you said presently.
Uh huh.
Some of the business is labor is a major problem and others. Its transportation, we actually have stuff and can't get it moved around to the customers fast enough and.
In other cases, we have imported products is this delay on it.
Hal.
We have capacity in some businesses.
<unk> other businesses.
Pick 1 Brazil, we're running wide open and we're quoting days months out is.
So as an example.
We're trying to improve on mix.
And we're trying to keep through passing the prices, but until we get the new capacity in.
<unk>.
Second half of next year, they are maxed out and so we do have that as an example of what we have pieces like debt. We have other ones that if we could get people to show up for work that we could increase our production dramatically.
Is it these <unk>.
Various ways of giving people money.
In the U S is dis incentivizing people and.
Sometimes when I get the checks that just don't show up for the next 2 days.
Got it that's super helpful.
Jeff I was curious to hear what you're seeing and hearing from your different channel partners. We've certainly seen the builders ran orders.
But and we've seen some normalization of trends in retail. So curious how have orders pattern has been tracking between these channels and when we look out is it going to have an impact on mix.
Yes.
We say that let's go through the pieces, we see the housing sales continuing at high.
Lately I know, there's ups and downs in it but relative to historical and should continue at high levels.
The houses that were purchased over the last year, they're all on various stages of remodeling when you buy a new home and existing home you typically don't remodel the whole thing that goes in in stages, So that will take a while to.
To play out going forward.
<unk>.
You have some things with with policies with the government.
On.
People, who haven't been paying their mortgages at some point some of those houses are gonna turnover and thats going to increase the.
Leveling sales somewhat you have people in the rentals that hasn't been paying rents at some point some of those are going to change Oliver and theyre going to have to remodels on for the next people.
The commercial parts of the business on.
Companies are getting more confident or not.
To remind and theyre starting to invest more it takes time to put it on a budget time to start on Theres, a void for a while on new construction that got stopped.
There's going to be avoid till it comes back.
There's a lot of upside in it and it's it's a more profitable business because the products are more unique and differentiated.
So.
All the trends look good.
As far as we can see them on the other side.
Short term.
We don't know if we have enough materials to run the place tomorrow in some cases and so we wake up in the.
The materials are supposed to come in in <unk>.
Something happens and then we just shut the plant down we have you come in and we have.
People just aren't showing up for work like they normally do.
Is it.
On the people, we're hiring it's more difficult to training and it takes longer and there's more turnover.
So they are huge amount of.
Moving parts and we're managing them all but it makes day to day in the short term hard to predict.
Got it that's great color, Jeff I appreciate it.
Yeah.
Thank you our next question.
Comes from the line of Lord Laura Champagne with loop capital. Your line is open.
Thank you, Jeff I really wanted to follow up on your the comments you just made and it seems like your inventories are tight in terms of units because of all these production complications do you have line of sight.
As to when.
You'll have your inventories in unit terms back where you want them and what's the plan to offset these production difficulties.
First.
We.
We are struggling.
Site labor, we've talked about and material flows.
The what we expect to happen doesn't happen.
And so we're making as much as we can give on those constraints and we're taking actions that we can take the influence them as best we can.
We need the inventories.
With Alere in order to hit the service levels as you said.
If the demand stays high there is a chance that given all these constraints, we won't be able to build much inventory until we hit the end of the year.
Or it could be further and it depends on the constraints and the availability on the other.
Hi, Yeah.
Something happens on the materials come in faster on we can get people to operate the facilities.
Could increase the.
Outputs.
On the other hand, Theres a price that we really can't tell how strong the demand is going to be.
And as we in the earlier comments you heard me make.
They're hand, we don't know whether the end of the fourth quarter is going to look like last year and stay strong or it's going to go back to the normal seasonality that we see so we're just we make plans month to month and week.
Keep changed them.
And as they happen and it's I can't give you a clear answer because that's the reality of the what we're living in.
Do you think that the gross margins are.
Sustainable given the debt you've you've taken a lot of pricing and that's got to be a tailwind.
But you've probably given up some in productivity as you just mentioned how should we think about your gross margin.
Trajectory into next year.
On the goal is to improve the business with the top line and the magnitude.
The margins as we go through.
The margins this year will be up substantially with the higher demand and improved costs.
The second quarter was it really.
Hi, Pierre because everything was running wide open as.
As we go out next year, we think it is going to improve but it really depends on demand and material pricing and competitive environment, which.
It's really hard to predict these days.
We think we're going to do better but putting every.
<unk> price to do better we are.
We are improving our own internal things that are under our control we're investing in new things, we are expanding our production on where everything is limited.
Uh huh.
We're doing the right things to grow the business, if we get a little help from the from the world. We can be a really good position.
Got it thank you.
Thank you.
Our next question comes from the line of Truman Patterson.
Wolfe Research your line is open.
Hey, good morning, and thanks for taking my question.
First just wanted to touch on our M&A you know could.
Now discuss the environment and the potential pipeline, there and could you just possibly balance these thoughts with the organic.
Or the decision to invest in.
Organic.
Capital investments of the $650 million I imagine in the product categories.
As you're expanding and just there's not a lot out there but wanted to get your updated thoughts.
The 2 are really not related.
On the internal investments or when we see the trends of our business. What we think the demand is going to be our ability to sell it in the marketplace.
That's.
That's the basis of our investments.
Acquisitions were continuing to investigate.
<unk>.
The conditions are improving.
Theres, a little less options at the moment because people perceive them.
Business improving valuations are high.
So it's a little more difficult in this environment.
As we announced agreements to acquire some smaller bolt on businesses.
Our.
Relative to.
By the other businesses, if we can identify the right ones at the right valuations that we think are.
Good for a long time.
And do you have any suggestions comment.
[laughter] fair enough any key geographies or products.
It's more around we get the most benefit.
Out of a 1.
And our president Jay.
The author fees that we can leverage between the 2 of those gives us the most benefit from.
Our longer term going into new geographies with the right growth gives us a base to go into that business and we can use as a growth proposition to go on to new markets and then the same.
So products, if we can find the right products and at the same geographies that are related to us the tie in with what we know on how we do it we can leverage them and then we're still considering at some point.
We think we could add another leg to the business and go on to another product category at some point.
To keep growing the business so.
We have the right talent, we have the people on we have the money, we just have to find the right.
The right propositions.
Okay. Thanks for that and you know I'm just hoping on this next question that you can just.
Give us either a tour around the world or or.
No your product portfolio, we're hearing very strong pricing power and incremental price.
Price hikes in the channels, just hoping you can maybe quantify some of that by product or geography.
The pricing.
We tried to answer it generically.
All of the businesses that we have are having dramatic increases in costs.
Our competitors are in the same position. We are we also have limited materials and our competitors also have those.
So.
The market competition isn't a spot where everybody is pushing it through more aggressively given those conditions across the world as it is.
And how long it is from our last like that I cant say, but as long as the business is like it is.
So that's what's enabling us to push through the price.
Okay. Thank you for that.
Yeah.
Thank you.
Ladies and gentlemen on the interest of time I would now like to turn the call back over to Mr. Blah Blah blah.
Hi, Mark.
Okay.
This is Jim.
Good shape, we think the conditions going forward on a positive.
And we're trying to take advantage of the opportunities. We appreciate you listening and have a good day.
Closing.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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Yes.
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