Q3 2021 Mohawk Industries Inc Earnings Call

October 29, 2021

Good morning, My name is Abigail and I will be your conference operator.

Today.

At this time I would like to welcome everyone to Mohawk Industries' third quarter, two is awesome 21 conference call.

All 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 this time simply press Star then the number one on your telephone keypad to withdraw your question. Please press the pound key.

Should anyone need assistance at any time during this conference. Please press Star then zero in and not pay a will assist you.

Reminder, ladies and gentlemen, this conference is being recorded today Friday October 29, 2000 to anyone. Thank you I would now like to introduce Mr. James Clark Mr. Bronc, you may begin your conference.

Thank you Abigail and good morning, everyone and welcome to Mohawk Industries quarterly Investor call. Joining me on today's call are Jeff, Florida, Barnes, Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief operating Officer today, We will update you on the company's third 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 1995, 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 Exchange Commission. This call may include discussion.

On a 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'll turn the call over to Jeff for his opening remarks, Jeff. Thank you Jim.

Our third quarter results exceeded our expectations as net sales rose 9% over the prior year to approximately $2 8 billion. Our adjusted EPS was $3 95 per share.

All of our businesses performed well managing through a changing environment and the period covered directly and indirectly impact as many economies, creating supply chain difficulties that disrupted production as well as leading the government Lockdowns in Australia, and New Zealand, and Malaysia that halted manufacturing and retail.

Despite these and other headwinds our third quarter sales trends continued in most regions with Europe results, reflecting a more normal summer seasonality.

Home sales were robust across most geographies and consumers continued remodeling investments at a strong pace year over year. The commercial sector showed improvement, though at a slower rate as COVID-19 concerns delayed the timing of some projects are.

Our strategy is to enhance organizational flexibility reduce product and operational complexity and aligning pricing with cost improved our results in the period.

We continue to implement lean processes and reduce complexity in manufacturing and logistics.

We're managing our investments in SG&A to support new products that will expand our future revenues and margins.

Even with greater external constraints, we ran most of our operations at high levels and we successfully manage many interruptions across the enterprise.

Rather than improving as we expected the availability of labor materials, and transportation became more challenging resulting in higher costs in the period.

Chemical supplies in particular reduce the output of our Lv T carpet laminate and board panels while.

While we are presently seeing COVID-19 cases declining and most of the regions. Many of our operations experienced increased absenteeism during the period affecting our efficiencies in production.

For the near term, we do not see any significant changes in these external pressures.

Due to supply shortages government regulation and political issues natural gas costs in Europe are presently about four times as high.

They were earlier in the year. This is a temporary challenge to our European businesses.

Higher costs are reflected in gas electricity in our materials.

Though our inventories increased during the period, mostly due to higher material costs and transportation delays on customer orders. Our service levels remained below historical norms. Most of our businesses are carrying significant order backlogs and we plan to run our operations at high levels during the fourth quarter.

To improve our service and efficiencies.

Currently some of our fastest growing products are being limited by material and capacity constraints.

We have initiated additional investments to increase our production of those and increase our sales in surface.

Completion of those projects is being extended due to longer lead times on building materials and equipment.

Our results have improved significantly during 2021, and we've generated over $1 9 billion of EBITDA for the trailing 12 months.

Given this and our current valuations our board increased our stock purchase program by an additional $500 million.

Since the end of the second quarter, we bought approximately $250 million of our stock at an average price of $193 per share.

With our current low leverage we have the capital to pursue additional investments and acquisitions to expand our sales and profitability.

Jim will now review, our third quarter financials.

Thank you Jeff sales for the quarter exceeded $2 8 billion and nine 4% increase as reported and eight 7% on a constant basis. All segments showed growth primarily due to price and mix actions as volume was generally constrained by supply labor transportation and co.

With disruptions gross margin as reported was 29, 7% or 29, 8% excluding charges increasing from 28, 3% last year the year over year increase was driven primarily by improved price and mix, which offset the increasing rate of inflation. In addition.

Gains in productivity less year over year downtime and favorable FX improved our margins. The actual detailed amount of these items will be included in the MD&A section of our 10-Q, which will be filed after the call SG&A as reported was 16, 9% and flat versus prior year excluding charges.

<unk> increased SG&A dollars versus prior year's result of costs that were curtailed due to the COVID-19 pandemic higher sales increased inflation and new product development and price and mix operating margin as reported was 12, 8% restructuring charges were approximately $1 million and we have reached.

Our original savings goal exceeding $100 million.

Annual savings, we continue though to pursue other initiatives to lower our cost.

Operating margins excluding charges were also 12, 8% improving from 11, 5% in the prior year or 130 basis points. The increase was driven by improved price and mix offsetting increasing inflation as well as gains in productivity favorable FX and greater year over year.

Manufacturing uptime, improving our results.

We are partially offset by impact of constrained volume and increase cost and product development.

Interest expense was $15 million in the quarter flat versus prior year.

Our non-GAAP tax rate was 21, 4% versus 16, 9% in the prior year and we still expect the full year rate to be between 21, and a half and 22, 5%.

Earnings per share as reported was $3 93.

And excluding charges were $3, 95% $3 95, excuse me, increasing by 21% versus prior year.

Now turning to the segments global ceramic sales came in at just under $1 billion or nine 6% increase as reported or approximately nine 1% on a constant basis led by strengthening price and mix across our geographic regions, Brazil, Mexico, and the U S countertop business.

So the strongest volume gains while other products performed well against a difficult year over year Q3 comp comparison, which had an abnormal seasonality operating margin. Excluding charges was 11, 9% up 160 basis points.

<unk> prior year due to favorable price mix, offsetting increasing inflation, which improved with improved productivity and limited year over year shutdowns strengthening our results, partially offset by increased costs and new product development.

North America sales exceeded $1 billion or six 9% increase as reported sales growth was driven by price and mix actions to offset rising costs as our sales volumes were impacted by supply transportation and labor constraints.

Operating margin excluding charges was 11, 4% Thats, an increase of 320 basis points versus prior year. The improvement was driven by positive price mix offsetting the increasing inflation and volume constraints. In addition productivity gains and less temporary shutdowns favorably impacted our.

Results in <unk>.

Flooring rest of the world sales exceeded $760 million or 12, 7% as reported increase or 10, 5% on a constant basis, driven again by price and mix actions, while volumes here were constrained by material disruption, especially in <unk>.

A return to a normal summer seasonality and Covid restrictions, which caused Lockdowns in Australia, New Zealand and Malaysia.

Operating margin excluding charges was 17, 4%. This is a decrease versus prior year as a result of the return to a normal summer holiday along with material constraints, and Covid, Lockdowns, which increased our cost and lower productivity volume and increase the temporary shutdown.

Improved price mix, which offset the increase in inflation and favorable FX benefited our results.

Corporate and eliminations were $11 million and I would expect that to be $45 million for the full year.

Taking a look at the balance sheet cash for the quarter exceeded $1 1 billion with free cash flow of $351 million in the quarter and over $720 million in third quarter year to date receivables were just shy of $1 9 billion with the DSO just sound.

57 days inventories were just over $2 2 billion, an increase of approximately $374 million or 20% from the prior year Thats, an increase of about 16% compared to the year end balance.

Inventory days, just under 107 days compared to our low point.

Last year at just under 100 days and 103 days and at the year end.

Plant equipment.

<unk> added $4 4 billion with Capex for the quarter at $148 million in line with our DNA full year Capex is currently projected to be $650 million with DNA projected at $586 million.

Looking at current debt one note on October 19th the company redeemed at par their January 2020 to 500 million dollar Euro, 2% senior notes plus unpaid interest utilizing cash on hand.

The balance sheet overall cash flow remained very strong with gross debt as of the end of Q3 of $2 3 billion and leverage at <unk> six times to adjusted EBITDA.

And with that I will turn it over to Chris to review our operational results.

Thank you Jim.

For the period, our flooring rest of World segment sales increased 12, 7% as reported and 10, 5% on a constant basis operating margins were 17, 4% as a result of pricing and mix improvements offset by inflation and a return to more normal seasonality in the period.

During the quarter sales were strong across our product categories and geographies outside those affected by government Lockdowns overall raw material supplies continued to impact our operations with Lv production affected the most during the quarter.

We expect that material energy and transportation inflation will continue and chemical costs that rely on gas will accelerate in the upcoming periods.

During the period Covid shutdowns in Malaysia, Australia, and New Zealand interrupted our production and sales. These restrictions have now been lifted and we are ramping up production to meet demand.

Our laminate collections continue to have strong sales growth with consumers embracing our proprietary waterproof products, where their performance and realistic visuals are new premium laminate introductions feature unique services that replicate the handcrafted wood floors.

Our sales volume increased during the period, though our margins were pressured by higher than anticipated raw material and transportation inflation.

We added new capacity in Europe to meet demand and we are initiating other projects to support further sales growth.

In Russia, and Brazil, our laminate businesses are growing as we expand distribution with our leading collections.

As anticipated our <unk> sales were lower during the period given material shortages and lower production that reduced our output, we minimize the impact by improving our product mix and raising prices to pass through inflation sales.

Sales of our higher value rigid LBP collections with patented watertight joint outperformed and benefited our mix, we anticipate improved material availability in the fourth quarter to support higher production levels and improve our service.

We have announced additional price increases as their energy and material costs continue to rise.

Our sheet vinyl production and sales were impacted by type material supply and transportation bottlenecks and outbound shipments a Russian sheet vinyl business performed well with sales growing as our distribution expanded.

Our wood plant in Malaysia resume full operations in September after 12 weeks of government Lockdowns due to Covid sales of our wood products will be down in both the third and fourth quarters as our inventories have been depleted.

We have acquired a European wood veneer plant to improve supply yield and cost of our wood flooring, we're introducing waterproof wood collections with our patented wet protect technology and our markets. After its successful launch in the U S.

Production stops in Australia, and New Zealand reduced our sales and margins and we are scaling up our operations to meet demand as the markets reopen our new premium collections enhanced merchandising and consumer advertising will benefit our business as the markets return to normal we are increasing pricing to offset inflation in <unk>.

Transportation costs.

Sales of our European insulation panels grew in the period as we implemented another price increase to offset rising material inflation.

Our income improved with disruptions in manufacturing due to tight material supplies.

We acquired an insulation manufacturer in Ireland, and it began integrating their operations with our existing business.

During the third quarter, our panels business grew and margins expanded as we increased our price mix in pricing, we're introducing a new decorative range to enhance our participation.

Pesified markets.

We have added new press that will increase our capacity and add more differentiated features to our products our ongoing pricing actions offset rapidly rising material prices and we will increase prices further in response to inflation.

In the fourth quarter, we will complete the acquisition of and MDF manufacturer in France to expand our capacity in Western Europe. The company is a pioneer in bio based resin, which will enhance our sustainability position.

In the third quarter period, our flooring North America segment sales increased six 9% and operating margins were 11, 3% as reported as a result of productivity pricing and mix improvement partially offset by inflation.

Flooring North America had strong results given the material transportation and labor constraints impacting our sales and production during the period.

Supplies of most oil related chemicals were restricted creating unscheduled production stops that lowered our sales and raised our costs.

We implemented additional price increases across most product categories as inflationary pressures intensified we continued to streamline our product portfolio and reduce operational complexity than anything our efficiencies and quality.

And residential carpet limited material and labor availability are affecting our production and manufacturing costs. We continue to increase prices to recover continued inflation.

Volume and efficiencies are being negatively impacted by low inventories.

<unk> runs and labor challenges.

We are replacing older assets with more efficient equipment, which is improving our labor productivity.

We have an elevated backlog and we plan to run our operations at high levels in the fourth quarter to improve service and replenish inventories.

We are enhancing our sales and mix as consumers upgrade their homes with our premium smart strand in luxury nylon collections.

Commercial sales improved in the period, though the rate of growth has slowed.

As Covid cases increased the government education, and healthcare sectors outpaced office retail and hospitality channels, which are recovering more slowly.

Our hard surface sales are growing as we expand our offering and increased specifications and commercial projects. We are investing in more efficient assets to improve costs enhanced styling and reduce labor requirements.

Our laminate and wood business continues to grow though our sales were restricted by our capacities, our new laminate line should be operational by the end of this year to expand our sales and provide more advanced features.

Chemical shortages limited our laminate production in the period as we responded by reengineering, our formulations to maximize our output.

We are reducing complexities to simplify our operations and improve our efficiencies and production are.

New high performance Ultra wood collections are increasing our mix in wood and their productivity of our new plant is improving as volume increases.

Our <unk> sales increased in the period, even with materials supplies limiting production and shipping days in our sourced products.

We've improved our mix with enhanced features and lowered our costs by streamlining our processes.

Our plan has increased throughput and yields despite disruptions from a lack of material supply.

Sport future growth, we are expanding our <unk> operations, adding approximately $160 million of production with the initial phase beginning at the end of this year.

We are also increasing our sheet vinyl plants production to satisfy expanding sales of our collections.

In the quarter, our global ceramic segment sales increased nine 6% as reported and nine 1% on a constant basis operating margins were 11, 9% as a result of higher volume productivity pricing and mix improvements, partially offset by inflation.

Our U S ceramic business grew during the period with the residential sector remaining strong and commercial continuing to show improvement our margins improved in the quarter as we implemented price increases to offset higher transportation and raw material costs enhanced our mix and increased output from our plants.

Additional pricing actions are being taken to offset continuing inflation, we are reducing our manufacturing costs by reengineering, our products utilizing alternative materials and enhancing our logistics strategies.

We are introducing higher value products with new printing technologies textured finishes and polished services to provide alternatives to premium imported tayo.

We are growing our studio direct program that focuses on high end remodeling and exterior collections that sell through outdoor specialists and home centers.

Our quartz countertop sales continued to grow substantially as our production recovered during the period, our countertop mix is improving as sales of our higher end visuals grow at a faster rate.

Our Mexican and Brazilian ceramic businesses are growing as we increase prices to offset inflation in both countries. We are refining our product offering improving our efficiencies and increasing our output.

We have expanded our participation in residential projects and commercial sales, we are increasing the number of retailers that exclusively sell our products. We are investing in new manufacturing assets in both countries to expand our production and enhance our product offering.

Sales in our European ceramic business remained strong as vacation schedules returned to normal increases in price mix and productivity enhanced our results, though they were more than offset by rising inflation.

Our new products with enhanced visuals unique shapes and large slabs increased our average selling price and improved our mix.

We are upgrading production lines to further enhance our styling and improve our efficiencies in the period natural gas and electricity prices in Europe rose to unprecedented levels due to anticipated shortages.

Our margins will be negatively impacted until our prices in line with energy cost in the future.

Sales and margins increased in our Russian ceramic business, and hence mix and increased prices offset higher inflation.

Lower inventories and capacity limitations impacted our sales volume in the period and we will continue to manage our mix until new capacity is operational.

Do an equipment to delay our production expansion will not be ready until the third quarter of next year, our sanitary ware sales are growing significantly as we expand production and operators and our operations.

With that I'll return the call to Jeff.

Thanks, Chris.

Throughout 2021, Mohawk has delivered exceptional results with higher sales growth margin expansion and robust cash generation.

For the fourth quarter, we anticipate the industry seasonality will be more typical unlike last year when demand was unusually high.

In the period, we will run our operations at high levels to support our sales improve our service and increase our inventory.

Our sales in some categories are being limited by our manufacturing capacities and we are increasing investments to expand the production of these growing categories.

We're continuing to implement additional price increases.

Staffing supply and transportation constraints across the business.

We're maintaining aggressive cost management, leveraging technology and enhancing our strategies across the enterprise.

And ceramic Europe record gas prices are increasing the net cost by approximately $25 million in the fourth quarter and it will take some time for the industry to adjust to the higher cost in.

In addition, our fourth quarter calendar has 6% fewer days than the prior year.

Given these factors, we anticipate our fourth quarter adjusted EPS to be $2 80.

The $2 90.

Excluding any restructuring charges.

Despite temporary challenges from inflation and material availability, our long term outlook remains optimistic with new home construction and residential remodeling projected to remain robust in our commercial sector, improving as businesses invest in growth.

Next year, our sales should grow with capacity expansions innovate in new innovative product introductions, our strategies to optimize our results continue to evolve with the economic and supply chain conditions.

Our balance sheet is the strongest in history.

<unk> increased internal investments and strategic acquisitions.

We'll now be glad to take your questions.

Ladies and gentlemen at this time, if you would like to ask the question.

Please press Star then the number one on your telephone keypad management request that you limit your questions to one primary and one follow up. Your first question comes from the line of Matthew Bouley with Barclays. Your line is now open.

Good morning, Thank you for taking the questions.

So on the natural gas headwind the $25 million that you called out in Q4.

Should we assume that $25 million is kind of a good run rate to think about going forward if prices don't abate and what confidence do you have relative to 2018, when we last saw this that.

That you will be able to align that with price. Thank you.

Well gas and electricity costs depend on Russia, and actions, which are presently unpredictable gas prices are expected to decline after the winter.

Timing of increases being is being impacted by hedges and further increases our anticipated. We anticipate Q1 impact will be greater than Q4, Q2 will get better in Q3 prices will cover inflation.

But market changes can dramatically impact that resolved.

Just as a note yesterday said something in the prices dropped 10%. So it's highly volatile and we will have to keep adjusting to the circumstances.

Understood that's very helpful color.

One on flooring rest of world I mean, you've been signaling all year that there will be a normal seasonality this year and as expected. The margin was was down versus the prior year, but it was still over 17%.

Would you say that that's kind of a fair representation of how rest of world profitability May look going forward. Thank you.

Our business performed well as a result of pricing and mix improvements offset by return to more normal seasonality and inflation pressures sales were strong across our product categories and geographies outside those affected by the government lockdowns.

Overall raw material supplies continued to impact our operations with <unk> production affected the most inflation in materials transport and energy are continuing and chemical cost based on gas will accelerate this.

This year vacation stopped taking in Q3 as typical versus last year.

Our move with the Qt with Covid.

And one additional point there Matt is margins you're right. Our historically high there's there's really many moving parts with energy and material costs, increasing and we will continue to push price increases in response to that.

Okay, Thanks, everyone and good luck.

Yes.

Our next question is from Susan Mcclary with Goldman Sachs. Your line is now open.

Thank you good morning, everyone. Thanks for taking the questions good morning.

Question is you know as we think about the fourth quarter, you've seen some really nice improvement in the flooring North American margins over the last couple of quarters, how should we be thinking about that.

Given the seasonality in some of the pressures that are coming into the business.

As we look at fourth quarter.

So far the show has delivered exceptional results with EBITDA up to $1 9 billion on a trailing 12 months, we've grown our sales with expanded margins and robust cash generation.

We anticipate the fourth quarter seasonality will put more typical than last chi.

Last year was which was really strong through the yen and we have the 6% days you have to put in it.

We will run all the facilities at high levels, and we are increasing investments to expand the navy constricted areas that we're in.

We're implementing additional price increases and we expect at this point supply and labor constraints to continue.

Through the end of the year, we don't see anything stopping in the mail and then we'll have to keep putting in the ceramic Europe piece, which should impact the quarter by $25 million based on our best estimate at this point.

Okay. That's helpful. And then following up on that as we think about 2022 and the backlog that you're sort of presumably entering the year with how do you think about the ability to continue to expand the margins next year and is there any one segment, where maybe we should be expecting a bigger move relative to another.

Yes.

If you look out with despite the short term challenges that we're having today, we believe the long term outlook remains optimistic and start looking at the overall direction of the economy as you have government policies remained.

Supportive.

Economy, and spending should improve inflations projected to moderate and the disruptions in supply and transportation are expected to decline.

In Europe.

We have the temporary problem with this rapid increase in electricity inflation, which will impact both our energy and material cross across the businesses.

Forward prices are expected to drop in half, but once we get through the winter.

With ceramic Europe, which is most impacted due to its gas use.

And as we're expecting them recover by the third quarter as the industry aligns overtime.

We look next year, we think the sales will continue to expand with residential expected to remain strong we see commercial continuing its improvement.

The margin expansion is really going to depend on what happens with the inflation intensity and how the competitive conditions.

Change with it we're doing everything we can to push price to keep up with it.

Through the first.

Three quarters of this year, we've been able to our lineup.

As we look into next year, we expect to benefit from increasing production.

Fruit materials supply.

Higher inventories as well as new product innovations.

But keep in mind, there's still some of the businesses that will remain constrained until that new investments, we're putting in our operated well.

Expect to continue to generate significant cash, which will support greater investments in acquisitions, we're trying to fund.

Okay. Thank you that's very helpful color good luck.

Your next question is with Bill Nash.

With Jefferies. Your line is now open.

Guys. Congrats in a really good quarter in a tough environment certainly we're focused on the outlook.

Team's done a great job in a tough backdrop.

Outside of European ceramic can you give us some color when you kind of expect price cost to be neutral. Your guide seems like it implies that the rest of your business is actually a pretty good spot.

On the pricing and cost side, and then separately given the seasonal nature of Nat gas prices certainly in Europe, and you mentioned at the forward strip is expected to come down pretty hard how are you tackling price increases are you looking at that forward curve and kind of guiding your your approach on pricing or youre kind of looking at current prices and try to be really.

Active here.

Well first on.

On a year to date basis through Q3 pricing and mix has offset inflation.

We're continuing to raise prices as costs change across most of our categories.

I would say energy materials are very volatile at this point and difficult to predict.

In Europe as we've said.

Actions by Russia that will really determine the energy and material that our gas dependent.

Jeff pointed out it's very volatile just on comments we're seeing.

The spot prices drop today over 10% so at this time.

And we expect ceramic Europe to catch up.

Sometime in Q3.

This is the best answer we can give you about the future in Europe is we're going to have to keep reacting to the market conditions.

The material prices that were purchasing are just now starting to reflect the higher gas prices gas.

Gas prices, it's anybody's guess, what they're going to be tomorrow, let alone six months from now.

So the best we can say is that we're going to keep raising prices aligned with the costs that are changing.

That's really helpful.

Demand seems pretty healthy here, it's not a demand issue and you've got some pent up demand from supply chain constraints. So curious whats what are your customers, telling you backlogs any color on that front and just more broadly when we kind of look out to 2022 and appreciating you've got tougher comps do you expect volumes for your carpet and ceramic business to kind of returned to more.

More pre pandemic growth levels or continue this more elevated growth backdrop that we've seen in this past year.

I think theyre going to turn to a more typical growth rates, we think the industry is going to.

It can't keep going up dramatically housing can't keep growing by 20% a year.

So we think it's been more normalized and that will reflect in our sales as we go through.

Okay, alright, thanks, a lot really appreciate the color guys. Thank.

Thank you.

Our next question is from Tim Walsh with Baird. Your line is now open.

Hey, good good good morning, everybody.

Maybe just first question on capital investments as you think about 'twenty, two and 'twenty three.

Is there any way to size, what youre planning to spend next year and what the potential kind of output growth or kind of available capacity that might represent.

Yes, just to begin with before is the expansion of the production is being constrained by material supplies.

Passing them by transportation transportation today, as well as important the lows limiting ourselves at the moment.

To expand sales reduce costs, we're investing.

We estimate that you end up about $650 million this year and with more planned next year at the moment, we haven't finalized the budget, but we think it's going to be approximately $800 million at this point.

Major pieces that are getting expanded our laminate in the U S and Europe.

Ceramic in Mexico, Brazil, and Russia.

<unk> countertop business.

<unk> in the U S and Europe as well as other areas and then on top of these results huge amount being spent on efficiencies and productivity as we go through.

Okay. Okay. That's helpful and then from a competition standpoint on imports.

Is there any way that you guys think internally how your relative share has performed versus imported ceramic or imported LDP is there a way to kind of articulate.

How your share has shifted as those imports are more pressured.

Estimates of it there is so much change in the inventory levels. So in ceramic.

Just as an example in ceramic during the downturn everybody stopped all the imports. So what happened is all of the important Scott shutdown. So now all the inventories are trying to be we rebuilt is really difficult to see the difference in the.

The inventory in the distribution channel versus what the consumer spending.

So we think we're we think we're performing in line with the sales, but the inventories are changing dramatically in both.

Do you get the feeling that you are taking share or do you feel like youre just kind of maintaining.

So if anything I gave you would be a guess.

Is it.

What's your guess.

And I think we're doing better okay. Okay. Thank you.

Our next question is with Keith Keith Hughes with Cowen. Your line is now open.

Thank you talked a lot about production on this call a lot of other companies.

If you had to look within North America.

Wood product has been the most constrained.

And then scale, which one have you had a better ability to produce and get raw materials.

Sure.

The most constrained would be the lv production, which the vinyl supplies.

Yes.

Been hand to mouth.

Plants, stopping and starting.

So we're just running whatever they give us.

It's probably the most affected.

The least affected.

From a material standpoint, it might be.

The carpet side might be least affected from it but in north Georgia, there is a huge problem.

Labor.

And Manning the plants given the amount of.

Capacity in the areas that everybody is pulling from the same labor pool.

Just to give you an extra rooms.

Yes, I've seen your Billboard on possibly Bob I got it.

Second quarter.

Second question.

Shifting to.

Sorry, you mentioned earlier some strength.

South America, Central and South American businesses.

And the units could you can't there is input inputs, there more readily available with which correlates to what else they look a little bit better than some others.

Yeah.

Our ceramic businesses in Mexico, Brazil, and Russia are all running wide open.

We're running at capacity as it came out of Covid the industries are doing well.

The backlogs are high.

And in all three markets, we can't ship anymore as yet we went into the third quarter with low inventories.

<unk>.

We don't have material constraints on labor constraints in those markets, but we have capacity constraints.

And Keith we're adding.

Capacity to Mexico, Brazil, and Russia.

Next year.

Okay, great. Thank you.

Our next question.

<unk> Kim with Evercore ISI. Your line is now open.

Yes, Thanks, a lot guys.

Give us a lot of great information so thanks for that.

I think.

You said that you would be running equipment at high levels in <unk>, you talked about reformulation effort that youre doing in many places I guess to get around some of the material shortages.

And Tom I guess my question is are you going to be able to produce at a higher level in <unk> than you did in <unk> and <unk>.

Then regarding sales you said that would be seasonally slower so I assume you'll be rebuilding inventory in that also.

Productivity will be pretty strong as a result, I am wondering if that productivity benefit would be recognized in <unk> or would it be more than one in the first half of 2022 when those products are ultimately sold.

First is that the.

Production rates, where we're assuming are going to be fairly similar to where we are in the third quarter because at this point, we're not sure we're going to have any differences in all the constraints.

We don't know anything that's going to change them, what we're assuming is.

Unlike last year, where the volume stay strong through the winter, where it normally falls off we're going to be more typical which will allow us to increase the inventories as we go through.

The costs I think will flow through as normal as the inventory turns in the future.

Okay.

On the inventory got it.

And then you.

Talked about the U S Lv tea business, but.

There was a lot of information given in a short period of time, So just want to make sure I heard that right in the U S <unk> business, where you've historically been dealing with manufacturing challenges to try to get to nameplate capacity.

In this quarter.

To believe that you're no longer really facing those process challenges that it's really just a material availability in other words are you able to actually produce at nameplate capacity. If you could get the raw materials in and did I hear you say that you were adding a production line in the U S <unk> business by $160 million.

Did I hear that wrong.

Lv T was limited by material shortages in the U S and Europe.

Is it the.

Product mix in the business as a proven with higher rigid sales.

Better premium products were increasing prices with inflation on.

On the U S. The imported products, we have the same freight delays as everybody else does which is impacting the sales level.

And what you heard was the plant have increased the productivity of the yields and what's coming out.

But you have to have material.

Keep them going and so theyre, stopping and starting day to day or week to week.

And then we did say that we are putting more production and were expecting the output of the existing plant to increase as soon as we get more material.

To support it with a higher throughput.

And we did say, we're expanding the production in North America by another $160 million.

Is that going to be in the same building or are you going to be actually moving across the street with a new location there for the new launch for our new line of the building that they are in is full.

Yes.

What I thought okay. Thanks, guys.

Our next question Edwin with Mr. Truman Patterson with Wolfe Research. Your line is now open.

Hey, good morning, everyone just.

Wanted to touch on the spike in the natural gas inflation, which kind of happened.

Overnight.

Called out the $25 million headwind in the European ceramic business.

Is there any way you can help us frame the size of the headwind in the U S business ceramic.

U S natural gas is still inflating at a pretty high level.

Maybe not to the same degree as Europe.

Let's say to give you some reference point, the gas and electricity, which we bundle together is energy.

As roughly historically about 9%, 9%, 10% of the U S costs.

So you put that.

Patton.

Just as a reference point in gas prices or it may be double where they were.

So you can figure out approximately what's the impact is but we continue to raise prices trying to recover.

Okay. Okay. Thank you for that and then.

You all have been fairly consistently repurchasing shares over the past year, you just did another share repurchase authorization.

We have about $1 billion.

Cash on hand.

Are you all when you look forward based on the valuation or are you thinking about turning into a more program programmatic share repurchases.

I think our cash priorities really haven't changed at this point, we're going to look at expanding constrained businesses and reducing our costs, we're going to try to broaden our product offering and drive innovation and the products. We're going to continue to identify bolt on acquisitions, we talked about three of them.

<unk> and other acquisitions enter new markets and products, but share buybacks will be part of that cash priority you want to review with him the cash where it is today versus at the end of the quarter.

Lower than where he thinks yes. So we.

Yes.

Yes, we ended the quarter at just over $1 billion in cash and as I said in my prepared remarks, so we have paid off.

2% to 500 million Euro.

October so.

We used on hand cash for that.

Alright. Thank you appreciate it.

Yes.

And our next question is from Mike Dahl with RBC capital markets. Your line is now open.

Hi, Thanks for taking my questions, Jeff sorry to keep harping on the Nat gas, it's just kind of been in corn.

Given how dynamic it is.

You talked about the headwinds and <unk> and then growing into one Q I mean, given the timing of the guests Spike and we plan to turn inventory it actually seems like <unk> should be substantially north of that.

The cost that Youre seeing in <unk>, not just a little bit I'm wondering if just directionally or order of magnitude you can give.

Give us some sense of that I know, it's still dynamic, but if things were to hold today.

Order.

Okay.

Yes.

Yes, I could also just comment on that that we've already raised prices twice, even though we're significantly behind we believe some of our competition hedge some of their needs and are presently impacted as much limiting our short term pricing.

But over time, we will catch up.

And our estimates we have.

Now remember the costs, we have in one quarter flow into the next quarter with our FIFO.

So they'll pass through so in hours, we have to really things going on one is we expect to continue increasing pricing over time to get it back we've been limited a little bit because some of the competition did hedge some of it so it's limiting how fast will push it up.

And then.

The other side of it is if you look at the forward prices the natural gas prices I think in our second quarter. Prior to yesterday were predicted the dropped 50% from where they are now do you have are pricing, increasing and you have the future cost coming down which is how we get to where we want to be with in all lines.

In the third quarter of next year.

Okay got it.

Follow up is really around that when you talk about the third quarter of next year. So I'm still unclear is that it.

Seems it seems clear that ceramic this is going to be a margin headwind until the third quarter of next year, but are you, saying that margins for the overall business.

It will be down year on year until <unk>, given some of these moving pieces.

All of our comments on the margins are around specifically the ceramic Europe impact.

Is it.

Mike just one thing on the energy or other businesses require much less gas and the impact is much less we also produced significant green energy using biomass and wind reducing requirements.

So it'll impact yes.

Our view of things as they are changing so.

Our European business as anything Thats related to Nab.

Natural gas, we're just starting to see materials and other cost.

Increase in we're trying to align the cost with the prices, but it's fluid.

Yes for sure Okay. Thank you.

And our next question is from Michael Rehaut with JP Morgan. Your line is now open.

Thanks.

Everyone.

Almost good afternoon.

First question just wanted to kind of.

Maybe sum up the views here around price cost for <unk> and maybe into <unk>.

When you look at <unk>.

Depending on obviously, what youre, assuming revenue, but yes.

More or less looking at a.

200 basis points year over year drop now what's actually interesting also is that historically.

Theres a lot some of that drop.

Is is due to.

A tougher comp in the year ago. When you had flat margin sequentially, usually you can have 50 to 100 basis points.

Sequential margin declined <unk> <unk> to <unk>, you didn't have that last year.

With the shipping day tailwind.

But when you look at that year over year drop.

How much of that should be.

Covered or made up let's say in one queue.

As the price increases that you are implementing today have a chance to be more fully realized.

No.

Separate out the $25 million related to ceramic then you have what you said last year was seasonally unusually high with the pieces.

<unk> made the margin higher than the comp.

And then.

The 6% fewer days not only impacts the.

The sales level. It also impacts the coverage of all the fixed overheads.

All of those together.

Additionally to that.

Do think the challenges we saw in Q3 will continue in Q4.

Zero shortage is really constrained a number of the businesses, which is impacting productivity in <unk>.

Obviously, increasing the costs.

And the chemical supplies will continue to put pressure on.

<unk> carpet laminate and our board business.

Yes, maybe said another way.

When you look at for Q.

<unk>, obviously, you had a lot of raw material inflation.

But price and mix was able to offset that roughly.

Youre not seeing that in <unk> I was just hoping to try and get a sense of.

Either on a dollar basis or a margin impact basis, what that negative price costs inclusive of the $25 million rep.

Ah represents in.

On a consolidated company basis.

Thanks.

When do you think that that negative price costs might go back to neutral would be the first quarter in the second quarter, just trying to get a sense of because you've been implementing price increases throughout the year they've been successful.

But.

Right now you have a gap in <unk>.

When do you think that might flip.

Flip to neutral or even positive.

Positive.

But it is it is a very volatile situation, especially with the impact in and ceramic Europe, along with any chemicals that come from.

Really natural gas as part of their manufacturing process. So yes.

We will see the $25 million flow through in the fourth quarter that will increase right. Today, we believe that will increase in the first quarter, which creates a gap between price mix and inflation as well.

If you were to let's say take out for a moment the Nat gas headwind I mean, youre seeing inflation all over as well.

Just kind of putting aside the nat gas headwind.

Would you expect price cost to be neutral in the first quarter or.

How should we think about that.

Listen, we can't even figure out what the.

Gas price is going to be tomorrow.

Is it.

There is a headwind.

With the.

Inflation, but every one of the businesses is increasing prices.

And we're trying to get them to align and there is some pressure in the short term and we're trying to get them all aligned and we're raising prices as fast as we can in all the markets.

And the flow through impact doesn't does negatively impact as you go through Q4 into Q1 as well.

Okay.

Thanks, a lot.

Our next question is from Adam about Bob Gordon at Salomon. Your line is now open.

Hey, good morning, everyone. Thanks for taking my question you.

You mentioned that some of the European ceramic producers, who have hedges are benefiting and maybe holding back price a little bit are there any other categories across your global portfolio, where maybe pricing is getting a bit more difficult for some reason or another.

The ceramic Europe is the one that's most impacted.

Yes.

The other businesses, we've been able to push it through up to now and we're trying to continue to do the same.

The question on changes if the material prices start softening.

<unk>, if the marketplaces start dramatically changing at this point it looks like business will be good and at this point, we've seen more increasing than inflation rather than decreases but at some point it will change.

Got it thanks, and then just maybe thinking about flooring North America, specifically are you worried about any potential demand destruction. As you continue to increase pricing and really mainly focusing on carpet and <unk> just given their historical kind of.

Demand patterns versus pricing.

When prices continue to go up some consumers have limited budgets and when they have limited budgets. They start looking for cheaper alternatives to put in at the same time the installation costs have gone up.

Which is driving all of the cost of not only that new housing and everything else. So there is.

There is a concern that at some point you get it up as high as it can on the other hand, you have all the positives going on you have the.

We still growing more people working wages going up commercial expanding.

So the question is how are they going to balance out.

Is it right at the moment, we and everybody else are still optimistic that we'll find the right balance.

Thank you.

Our next question is from Annick Maas said with <unk>.

Blonde research your line is now open.

Thank you.

But two things.

First of all with the addition of capacity in the U S <unk> business.

Your U S manufacturing has had traveled a road.

From start to where we are now in the market has evolved.

<unk>.

It's done what they've done I'm, just curious strategically or philosophically.

Why add capacity why not import more.

And where do you think we are in the curve of penetration of <unk> in terms of market share in the U S.

Let's see.

First is the.

The industry has gotten to be a large park.

The rate of growth cannot keep up the rate of growth to Tad based.

Based on the size of it but it should still grow greater than the flooring industry in total.

Second is.

With all the shipping problems in all the different pieces there.

There are multiple players out putting more capacity in the United States.

Given those things and we think that we should increase hours also to support our needs.

Okay. Thank you.

And then.

Follow up and just try to be targeted to that asked the same question again excluding.

The days in the calendar and <unk> and excuse me excluding gas what I'm trying to figure out is you've had inflation and supply chain challenges year to date and the margin in the business has performed quite well is there something that suggests that performance is not sustainable again, ignoring the calendar issues and the natural gas.

Issues in <unk> or is there something changing suggest you can't sustain how you handle these these challenges to this point.

I don't think so we're continuing to raise prices everywhere. The only thing is the magnitude of the increases in how long it takes to balance them up.

Okay. Thank you.

Our next question comes from Kathryn Thompson with Thompson Research Group. Your line is now open.

Hey, Good morning. This is actually Brian Biros on for Catherine. Thank you for taking my questions.

First of all I guess, if the kind of general construction backlogs that are out there. It does start to get worked through next year at a higher pace.

Do you think thats further supportive of more price increases even if inflation moderates.

Or might there be pricing fatigue by then making it harder to pass on more price due to solely demand levels.

I think for the pricing too.

Start softening.

Youre going to have to see a change in the trend of all the raw materials across the category.

To do that and then your guess is as good as mine, if and when that will occur.

Okay.

And then maybe follow up on the internal initiatives you guys have around reducing complexity.

Is there a way to measure that or think about that maybe on a margin basis basis points or maybe just how much more is there to squeeze out on reducing complexity level.

Well you've seen through the year that our margins have expanded you've seen the result of those things and it's been bye bye.

Taking out the complexity and the product and the offering we're able to get more throughput through the plants and we're able to take more costs out so you're seeing the results of it and the margins and we have more of a plan.

Thank you.

And our next question is from David Macgregor with Longbow Research. Your line is now open.

Hey, good morning, everyone.

You're talking about the commercial business. You said you were seeing improvement, but at a slower rate I'm. Just wondering if you could talk about.

How price cost spreads may be different in commercial versus what you're facing in residential and how youre approaching through the inflation recovery in commercial any differently than what Youre planning to do in residential as we go into 2022.

The commercial business.

As a more differentiated offering.

A more of sale made with performance design uniqueness unique features.

No.

Because of that that tends to be higher margin businesses with it so they tend to be a little easier to to recover the increases.

Now what happens with the.

The COVID-19.

Covid increasing.

In the third quarter as it increased what we saw were some of the projects that we thought were going to conclude and move forward got pushed out.

And that impacted the rate of growth.

So all of those all the corporations are looking at how they see the economy and most of them still perceive it fairly goods.

We perceive that there'll be continued improvement over next year.

And can you remind us what percentage of commercial ceramic.

Remember its relatively high but.

Where would that stand today.

Before it collapsed in the U S. It was about 40% now its less because the whole category decreased.

Alright.

Okay.

That's all I got thanks very much.

Thank you again.

And that's the end of our question and answer period I will now turn the call back over to Mr. <unk> for closing comments.

Tom.

Mohawk today is well positioned for the long term.

Will overcome the short term disruptions that are in front of us and we appreciate all of you taking the time to join us.

Great day.

Ladies and gentlemen.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Good morning, My name is Abigail and that will be your conference operator today at this time I would like to welcome everyone to Mohawk Industries' third quarter 2021 conference call.

All 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 this time.

Star then the number one on your telephone keypad.

To withdraw your question please Brexit bounty.

If anyone needs assistance at any time during this conference. Please press Star then zero and an operator will assist you.

As a reminder, ladies and gentlemen, this conference is being recorded today Friday October 29, 2000 to anyone. Thank you I would now like to introduce Mr. James Clark Mr. Brown, you may begin your conference.

Thank you Abigail and good morning, everyone and welcome to Mohawk Industries quarterly Investor call. Joining me on today's call are Jeff <unk>, Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief operating Officer.

We will update you on the Companys third 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 1095, which are subject to various risks and uncertainties, including but not limited to those set forth.

Our press release, and our periodic filings with 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'll turn the call over to Jeff for his opening remarks, Jeff. Thank you Jim.

Our third quarter results exceeded our expectations as net sales rose 9% over the prior year to approximately $2 8 billion. Our adjusted EPS was $3 95 per share.

All of our businesses performed well managing through a changing environment and the period covered directly and indirectly impacted many economies, creating supply chain difficulties that disrupted production as well as leading the government Lockdowns in Australia, New Zealand, and Malaysia that halted manufacturing and retail.

Despite these and other headwinds our third quarter sales trends continued in most regions with Europe results, reflecting a more normal summer seasonality.

<unk> sales were robust across most geographies and consumers continued remodeling investments at a strong pace year over year. The commercial sector showed improvement, though at a slower rate as COVID-19 concerns delay the timing of some projects.

Our strategy is to enhance organizational flexibility reduce product and operational complexity and aligning pricing with cost improved our results in the period.

We continue to implement lean processes and reduce complexity in manufacturing and logistics.

We're managing our investments in SG&A to support new products that will expand our future revenues and margins.

Even with greater external constraints, we ran most of our operations at high levels and we successfully manage many interruptions across the enterprise.

Rather than improving as we expected the availability of labor materials, and transportation became more challenging resulting in higher costs in the period.

Chemical supplies in particular reduce the output of our LDP carpet laminate and board panels while.

While we are presently seeing COVID-19 cases declining and most of the regions. Many of our operations experienced increased absenteeism during the period affecting our efficiencies in production.

For the near term, we do not see any significant changes in these external pressures.

Due to supply shortages government regulation and political issues natural gas costs in Europe are presently about four times as high.

And they were earlier in the year.

As a temporary challenge to our European businesses.

Higher costs are reflected in gas electricity in our materials.

Though our inventories increased during the period, mostly due to higher material costs and transportation delays on customer orders our service levels remained below historical norms.

Most of our businesses are carrying significant order backlogs and we plan to run our operations at high levels during the fourth quarter to improve our service and efficiencies.

Currently some of our fastest growing products are being limited by material and capacity constraints.

We have initiated additional investments to increase our production of those and increase our sales and service.

Completion of those projects is being extended due to longer lead times on building materials and equipment.

Our results have improved significantly during 2021, and we've generated over $1 9 billion of EBITDA for the trailing 12 months.

Given this and our current valuations our board increased our stock purchase program by an additional $500 million.

Since the end of the second quarter, we bought approximately $250 million of our stock at an average price of $193 per share.

With our current low leverage we have the capital to pursue additional investments and acquisitions to expand our sales and profitability.

Jim and I will now review, our third quarter financials.

Thank you Jeff sales for the quarter exceeded two $8 billion of nine 4% increase as reported and eight 7% on a constant basis. All segments showed growth primarily due to price and mix actions as volume was generally constrained by supply labor transportation and co.

<unk> gains in productivity less year over year downtime and favorable FX improved our margins. The actual detailed amounts of these items will be included in the MD&A section of our 10-Q, which will be filed after the call SG&A as reported was 16, 9% and flat versus prior year excluding.

Charges increased SG&A dollars versus prior year as a result of costs that were curtailed due to the COVID-19 pandemic higher sales increased inflation, new product development and price and mix operating margin as reported was 12, 8% restructuring charges were approximately $1 million and we are.

<unk> reached our original savings goal exceeding $100 million.

Annual savings, we continue though to pursue other initiatives to lower our cost.

Manufacturing uptime, improving our results were.

We are partially offset by impact of constrained volumes and increased cost and product development.

Interest expense was $15 million in the quarter flat versus prior year or.

Our non-GAAP tax rate was 21, 4% versus 16, 9% in the prior year and we still expect the full year rate to be between 21, five and 22, 5%.

Earnings per share as reported were $3 93.

And excluding charges were $3, 95% $3 95, excuse me, increasing by 21% versus prior year.

Now turning to the segments global ceramic sales came in at just under $1 billion of nine 6% increase as reported or approximately nine 1% higher constant basis led by strengthening price and mix across our geographic regions.

<unk>, Mexico, and the U S countertop business saw the strongest volume gains while other products performed well against a difficult year over year Q3 comp comparison, which had an abnormal seasonality operating margin. Excluding charges was 11, 9% up 160 basis points.

Prior year due to the favorable price mix, offsetting increasing inflation, which improves with improved productivity and limited year over year shutdown strengthening our results, partially offset by increased costs and new product development.

Flooring, North America sales just exceeded $1 billion of.

A six 9% increase as reported the sales growth was driven by price and mix actions to offset rising costs as our sales volumes were impacted by supply transportation and labor constraints operating margin. Excluding charges was 11, 4% Thats an increase of 320 basis.

Points versus prior year, the improvement was driven by positive price mix offsetting the increasing inflation and volume constraints. In addition productivity gains and less temporary shutdowns favorably impacted our results.

In flooring rest of the world sales exceeded $760 million or 12, 7% as reported increase or 10, 5% on a constant basis, driven again by price and mix actions, while volumes here were constrained by material disruption, especially in <unk>.

A return to a normal summer seasonality and Covid restrictions, which caused Lockdowns in Australia, New Zealand and Malaysia.

Operating margin excluding charges was 17, 4%. This is a decrease versus prior year as a result of the return to a normal summer holiday along with material constraints, and Covid, lockdowns, which increased our cost and lowered productivity volume and increase the temporary shut.

Down.

Improved price mix, which offset the increase in inflation and favorable FX benefited our results corporate eliminations were $11 million and I would expect that to be $45 million for the full year.

But the DSO of just under 57 days inventories.

We're just over $2 2 billion in <unk>.

Increase of approximately $374 million or 20% from the prior year Thats, an increase of about 16% compared to the year end balance.

Inventory days, just under a 107 days compared to our low point in last year at just under 100 days and 103 days and at the year end property plant and equipment exceeded $4 4 billion with.

With capex for the quarter at $148 million in line with our DNA.

Full year Capex is currently projected to be $650 million with DNA projected at $586 million.

Looking at the current debt one note on October 19th the company redeemed at par their January 2020 to 500 million dollar Euro, 2% senior notes plus unpaid interest utilizing cash on hand.

The balance sheet overall cash flow remained very strong with gross debt as of the end of Q3 of $2 3 billion and leverage at <unk> six times to adjusted EBITDA.

And with that I will turn it over to Chris to review our operational.

<unk>.

Thank you Jim.

We expect that material energy and transportation inflation will continue and chemical costs that rely on gas will accelerate in the upcoming periods.

Our sales volume increased during the period, though our margins were pressured by higher than anticipated raw material and transportation inflation.

We added new capacity in Europe to meet demand and we are initiating other projects to support further sales growth.

In Russia, and Brazil, our laminate businesses are growing as we expand distribution with our leading collections.

Sales of our higher value rigid lv tea collections with patented watertight joint outperformed and benefited our mix, we anticipate improved material availability in the fourth quarter to support higher production levels and improve our service.

We have announced additional price increases as our energy and material costs continue to rise.

Inspiration costs.

Sales of our European insulation panels grew in the period as we implemented another price increase to offset rising material inflation.

Our income improved with disruptions in manufacturing due to tight material supplies.

We acquired an insulation manufacturer in Ireland, and it began integrating their operations with our existing business.

During the third quarter, our panels business grew and margins expanded as we increased our price mix in pricing, we're introducing a new decorative range to enhance our participation in specified markets.

We've added new press that will increase our capacity and add more differentiated features to our products, our ongoing pricing actions offset rapidly rising material prices.

And we will increase prices further in response to inflation.

In the fourth quarter, we will complete the acquisition of and MDF manufacturer in France to expand our capacity in Western Europe. The company is a pioneer in bio based resins, which will enhance our sustainability position.

Flooring North America had strong results given the material transportation and labor constraints impacting our sales and production during the period.

Supplies are most oil related chemicals were restricted creating unscheduled production stops that lowered our sales and raised our costs.

And residential carpet limited material and labor availability are affecting our production and manufacturing costs. We continue to increase prices to recover continued inflation.

Volume and efficiencies are being negatively impacted by low inventories.

Shorter runs and labor challenges.

We are replacing older assets with more efficient equipment, which is improving our labor productivity.

We have an elevated backlog and we plan to run our operations at high levels in the fourth quarter to improve service and replenish inventories.

We are enhancing our sales and mix as consumers upgrade their homes with our premium smart strand in luxury nylon collections.

Commercial sales improved in the period, though the rate of growth has slowed as Covid cases increased the government education, and healthcare sectors outpaced office retail and hospitality channels, which are recovering more slowly.

Michael shortages limited our laminate production in the period as we responded by reengineering, our formulations to maximize our output.

We are reducing complexities to simplify our operations and improve our efficiencies and production our new high performance Ultra wood collections are increasing our mix in wood and their productivity of our new plant is improving as volume increases.

Our <unk> sales increased in the period, even with materials supplies limiting production and shipping days in our sourced products. We have improved our mix with enhanced features and lowered our costs by streamlining our processes. Our plan has increased throughput and yields despite disruptions from a lack of material supply.

Sport future growth, we are expanding our <unk> operations, adding approximately $160 million of production with the initial phase beginning at the end of this year.

We are also increasing our sheet vinyl plants production to satisfy expanding sales of our collections.

We are introducing higher value products with new printing technologies textured finishes and polished services to provide alternatives to premium imported tayo.

We are growing our studio direct program that focuses on high end remodeling and exterior collections that sell through outdoor specialists and home centers.

Our quartz countertop sales continue to grow substantially as our production recovered during the period, our countertop mix is improving as sales of our higher end visuals grow at a faster rate.

Sales in our European ceramic business remained strong as vacation schedules return to normal increases in price mix and productivity enhanced our results, though they were more than offset by rising inflation.

Our new products with enhanced visuals unique shapes and large slabs increased our average selling price and improved our mix.

Our margins will be negatively impacted until our prices in line with energy costs in the future.

Sales and margins increased in our Russian ceramic business as an enhanced mix and increased prices offset higher inflation.

Lower inventories and capacity limitations impacted our sales volume in the period and we will continue to manage our mix until new capacity is operational.

Doing equipment to delay our production expansion will not be ready until the third quarter of next year, our sanitary ware sales are growing significantly as we expand production and operates in our operations.

With that I'll return the call to Jeff.

Thanks, Chris.

Throughout 2021, more often has delivered exceptional results with higher sales growth margin expansion and robust cash generation.

For the fourth quarter, we anticipate the industry seasonality will be more typical unlike last year when demand was unusually high.

In the period, we will run our operations at high levels to support our sales improve our service and increase our inventories our sales in some categories are being limited by our manufacturing capacities and we are increasing investments to expand the production of these growing categories.

We are continuing to implement additional price increases.

Staffing supply and transportation constraints across the business.

We're maintaining aggressive cost management, leveraging technology and enhancing our strategies across the enterprise.

And ceramic Europe record gas prices are increasing the net costs by approximately $25 million in the fourth quarter and it will take some time for the industry to adjust to the higher cost in.

In addition, our fourth quarter calendar has 6% fewer days than the prior year gives.

Given these factors, we anticipate our fourth quarter adjusted EPS to be $2 80.

The $2 90.

Excluding any restructuring charges.

Our balance sheet is the strongest in history and it supports increased internal investments and strategic acquisitions.

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 request that you limit your questions to one primary and one follow up your first question comes from the line of Matthew Bouley with Barclays. Your line is now open.

Good morning, Thank you for taking the questions.

So on the natural gas headwind the $25 million that you called out in Q4.

Should we assume that $25 million is kind of a good run rate to think about going forward if prices don't abate and what confidence do you have relative to 2018, when we last saw this.

That you will be able to align that with price. Thank you.

Well gas and electricity costs depend on Russia, and actions, which are presently unpredictable gas prices are expected to decline after the winter.

Timing of increases being is being impacted by hedges and further increases our anticipated. We anticipate Q1 impact will be greater than Q4, Q2 will get better in Q3 prices will cover inflation.

But market changes can dramatically impact that resolved.

Just as a note.

Yesterday said something in the prices dropped 10%. So it's highly volatile and we will have to keep adjusting to the circumstances.

Understood that's very helpful color.

One on flooring rest of world I mean, you've been signaling all year that there will be a normal seasonality this year and as expected the margin was down versus the prior year, but it was still over 17%.

Would you say that that's kind of a fair representation of how rest of world profitability may look going forward.

Well, our business performed well as a result of pricing and mix improvements offset by return to more normal seasonality and inflation pressures sales.

Sales were strong across our product categories and geographies outside those affected by the government lockdowns.

They're all raw material supplies continue to impact our operations with Lv production affected the most inflation in materials transport and energy are continuing and chemical cost based on gas will accelerate.

This year vacation stopped taking in Q3 as typical versus last year.

Our move with the Qt with Covid.

Okay, Thanks, everyone and good luck.

Our next question is from Susan Mcclary with Goldman Sachs. Your line is now open.

Thank you good morning, everyone. Thanks for taking the questions good morning.

My first question is you know as we think about the fourth quarter, you've seen some really nice improvement in the flooring North American margins over the last couple of quarters, how should we be thinking about that.

Given the seasonality in some of the pressures that are coming into the business.

As we look at fourth quarter.

So far this show has delivered exceptional results with EBITDA up to $1 9 billion in the trailing 12 months, we've grown the sales we've expanded the margins we've had robust cash generation we.

<unk> the fourth quarter seasonality will put more typical than last than last year was which was really strong through the yen and we have the 6% that is you'd have to put in it.

We will run all the facilities at high levels, and we are increasing investments to expand the navy constricted areas that we're in we're.

We're implementing additional price increases and we expect at this point supply and labor constraints to continue.

Through the end of the year, we don't see anything stopping them now and then we'll have to keep putting in the ceramic Europe piece, which should impact the quarter by $25 million based on our best estimate at this point.

Yes.

And if you look out with despite the short term challenges that we're having today.

The long term outlook remains optimistic and start looking at the overall direction of the economy as you have government policies for months or.

Supportive.

Economy, and spending should improve inflations projected the moderate and the disruptions in supply and transportation are expected to decline.

In Europe.

We have the temporary problem with this rapid increase in electricity inflation, which will impact both our energy and material across across the businesses.

Forward prices are expected to drop in half, but once we get through the winter.

With ceramic Europe, which is most impacted due to its gas use is.

The margins, we're expecting them recover by the third quarter as the industry aligns overtime.

We look next year, we think the sales will continue to expand with residential expected to remain strong we see commercial continuing its improvement.

The margin expansion is really going to depend on what happens with inflation intensity and how the competitive conditions.

Change with it we're doing everything we can to push price to keep up with it and through the first.

Three quarters of this year, we've been able to align with.

As we look into next year, we expect to benefit from increasing production.

<unk> materials supply.

Higher inventories as well as new product innovations.

But keep in mind, there's still some of the businesses that will remain constrained until the new investments, we're putting in our operated.

We expect to continue to generate significant cash, which will support greater investments in acquisitions, we're trying to fund.

Okay. Thank you that's very helpful color good luck.

Your next question is with Phil <unk> with Jefferies. Your line is now open.

Hey, guys. Congrats in a really good quarter in a tough environment certainly we're focused on the outlook, but the team's done a great job in a tough backdrop.

Outside of European ceramic can you give us some color when you kind of expect price cost to be neutral.

Guide seems like implies that the rest of your business is actually a pretty good spot.

On the pricing and cost side, and then separately given the seasonal nature of Nat gas prices certainly in Europe, and you mentioned that the forward strip is expected to come down pretty hard how are you tackling price increases are you looking at that forward curve and kind of guiding your your approach on pricing or youre kind of looking at current prices and try to be really.

Proactive here.

Bob.

First.

On a year to date basis through Q3 pricing and mix has offset inflation.

We're continuing to raise prices as costs change across most of our categories.

Obviously energy materials are very volatile at this point and difficult to predict.

Europe as we've said.

Actions by Russia that will really determine the energy and material that our gas dependent.

Jeff pointed out it's very volatile just on comments we're seeing.

The spot prices drop today over 10% so at this time.

And we expect ceramic Europe to catch up.

Sometime in Q3.

This is the.

The best answer we can give you about the future in Europe is we're going to have to keep reacting to the market conditions.

The material prices that were purchasing are just now starting to reflect the higher gas prices.

Gas prices, it's anybody's guess, what they're going to be tomorrow, yet alone six months from now.

So the best we can say is that we're going to keep raising prices along with the costs that are changing.

That's really helpful.

Demand seems pretty healthy here, it's not a demand issue and you've got some pent up demand from supply chain constraints. So curious what's what are your customers, telling you backlogs any color on that front and just more broadly when we kind of look out to 2022 and appreciating you've got tougher comps do you expect volumes for your carpet and ceramic business to kind of returned to more.

More pre pandemic growth levels or continue this more elevated growth backdrop that we've seen in this past year.

I think they are going to turn to a more typical growth rates, we think the industry is going to yes.

It can't keep going up dramatically housing can't keep growing by 20% a year is it. So we think it's going to be more normalized and that will reflect in our sales as we go through.

Okay, alright, thanks, a lot really appreciate the color guys.

Thank you.

Our next question is from Tim Walsh with Baird. Your line is now open.

Hey, good good good morning, everybody.

Maybe just first question on capital investments as you think about 'twenty, two and 'twenty three.

Is there any way to size, what you're planning to spend next year and what the potential kind of output growth or kind of available capacity that might represent.

Yes, just to begin with before the expansion the production is being constrained by materials supplies by capacities and by transport.

Transportation today as well as important the lens limiting ourselves at the moment.

To expand sales and reduce costs, we are investing.

The major pieces that are getting expanded our laminate in the U S and Europe.

Ceramic in Mexico, Brazil, and Russia.

<unk> countertop business.

Continue the U S and Europe as well as other areas and then on top of these results huge amount being spent on efficiencies and productivity as we go through.

Okay. Okay. That's helpful and then.

Competition standpoint on imports.

Is there any way that you guys think internally how your relative share has performed versus imported ceramic or imported <unk> is there a way to kind of articulate.

How your share has shifted.

Imports are more pressured.

The.

Estimates of it there is so much change in the inventory levels. So in ceramic.

Just as an example in ceramic during the downturn everybody stopped all the imports. So what happened is all of the important Scott shutdown. So now all the inventories are trying to see we rebuilt is really difficult to see the difference in.

The inventory in the distribution channel versus what the consumer spending.

So we think we're we think we're performing in line with the sales, but the inventories are changing dramatically in both.

Do you get the feeling that you are taking share or do you feel like youre just kind of maintaining.

So if anything I gave you would be a guess.

Is it.

What's your guess.

And I think we're doing better okay. Okay. Thank you.

Our next question is Smith, Keith Keith Hughes with Jefferies. Your line is now open.

Thank you talked a lot about production on this call a lot of other companies.

If you had to look within North America.

Wood products has been the most constrained.

And then scale, which one have you had a better ability to produce raw materials.

Sure.

The most constrained would be the lv production, which see vinyl supply.

Yes.

Been hand to mouth.

Plant stopping and starting.

So we're just running whatever they give us.

It's probably the most affected.

The least effective.

From a material standpoint that may be.

The carpet side might be least affected from it but in north Georgia, there is a huge problem.

Labor.

And Manning the plants given the amount of.

Capacity in the areas that everybody is pulling from the same labor pool.

Just to give you an extra rooms.

Yes, I've seen your Billboard on possibly Bob I got it.

Second quarter.

Second question.

Shifting to.

Sorry, you mentioned earlier, some shrink South America, central and South American businesses.

And the units could you can't there is input inputs, there more readily available or which which correlates to what else they look a little bit better than some others.

As ceramic businesses in Mexico, Brazil, and Russia are all running wide open they are all.

We're running at capacity.

As it came out of Covid the industries are doing well.

The backlogs are high.

And in all three markets, we can't ship anymore as yet we went into the third quarter with low inventories and.

We don't have material constraints or labor constraints in those markets, but we have capacity constraints.

And Keith we're adding.

Capacity to Mexico, Brazil, and Russia.

Next year.

Okay, great. Thank you.

Our next question is Stephen Kim with Evercore ISI. Your line is now open.

Yes. Thanks, a lot guys gave us a lot of great information so thanks for that.

I think.

You said that you would be running equipment at high levels in <unk>, you talked about reformulation effort that youre doing in many places I guess to get around some of the material shortages.

And Tom I guess my question is are you going to be able to produce at a higher level in <unk> than you did in <unk>.

And then regarding sales you said that would be seasonally slower so I assume you'll be rebuilding inventory and that also implies that productivity will be pretty strong as a result, I'm wondering if that productivity benefit would be recognized in <unk> or would it be more than one in the first half of 2022 when those products are ultimately sold.

First is that the.

We're assuming is.

Unlike last year, where the volume stayed strong through the winter where it normally falls off we're going to be more typical which will allow us to increase the inventories as we go through the.

The costs I think will flow through as normal as the inventory turns in the future.

Okay.

On the inventory got it.

Great and then you talked about the U S. L V T business, but.

In this quarter.

Led to believe that you're no longer really facing those process challenges that it's really just a material availability in other words are you able to actually produce at nameplate capacity. If you could get the raw materials in and did I hear you say that you were adding a production line in the U S <unk> business of about $160 million.

Or did I hear that wrong.

So <unk> was limited by material shortages in the U S and Europe.

Is it.

The product mix in the business as a proven with higher rigid sales.

And better premium products.

Increasing prices with inflation.

The U S. The imported products, we have the same freight delays as everybody else does which is impacting the sales level.

And what you heard was the plants have increased the productivity of the yields and what's coming out but you have to have material.

Keep them going and so theres, stopping and starting day to day or week to week.

And then we did say that we are putting more production and were expecting the output of the existing plant to increase as soon as we get more material.

To support it with a higher throughput.

And we did say, we're expanding the production in North America by another $160 million.

Is that going to be in the same building or are you going to be actually moving across the street with a new location there for the new launch for our new lines of the building that they are it is full.

Yes.

That's what I thought okay. Thanks, guys.

Our next question Edwin.

Mr Chairman Parison with Wolfe Research your line is now open.

Hey, good morning, everyone just.

Wanted to touch on the spike in the natural gas inflation, which kind of happened overnight.

You all called out the $25 million headwind in the European ceramic business.

Is there any way you can help us frame the size of the headwind in the U S business ceramics.

U S natural gas is still inflating at a pretty high level.

Maybe not to the same degree as Europe.

Tom Let's say to give you some reference point, the gas and electricity, which we bundle together is energy.

It's roughly historically about 9%, 9%, 10% of the U S costs.

So you put that.

Statin.

Just as a reference point in gas prices or it may be double where they were.

So you can figure out approximately what the impact is but we continue to raise prices trying to recover.

Okay. Okay. Thank you for that and then.

You all have been fairly consistently repurchasing shares over the past year, you just did another share repurchase authorization.

Have about $1 billion of cash on hand.

Are you all when you look forward based on the valuation or are you thinking about turning into a more program programmatic share repurchases.

I think our cash priorities really haven't changed at this point is true.

We're going to look at expanding constrained businesses and reducing our costs, we're going to try to broaden our product offering and drive innovation and the products. We're going to continue to identify bolt on acquisitions, we talked about three of them. This morning, and other acquisitions enter new markets and products, but share buybacks.

I'll be part of that cash priority you want to review with him the cash where it is today versus the end of the quarter.

Lower than where you think so.

Yes.

Yes, we ended the quarter at just over $1 billion in cash and as I said in my prepared remarks that we have paid off.

2% 500 million Euro.

In October so.

We used on hand cash for that.

Alright. Thank you appreciate it.

Yes.

And our next question is from Mike Dahl with RBC capital markets. Your line is now open.

Hi, Thanks for taking my questions, Jeff sorry to keep harping on the Nat gas, it's just kind of an important point.

Given how dynamic it is.

When you talk about the headwinds and <unk> and then growing into <unk>.

<unk> given the timing of the guests Spike and we plan to turn inventory it actually seems like <unk> should be substantially north of.

The cost that Youre seeing in <unk>, not just a little bit I'm wondering if just.

Directionally or order of magnitude you can.

Give us some sense of that I know, it's still dynamic, but if things were to hold today.

<unk>.

The pacing in one year.

Yes, I could also just comment on that that we've already raised prices twice, even though we're significantly behind we believe some of our competition head some of their needs and are presently impacted as much limiting our short term pricing.

But over time, we will catch up.

So in our estimates we have.

Now remember the costs, we have in one quarter flow into the next quarter with our FIFO base.

Pass through so on hours, we have to really things going on one is we expect to continue increasing pricing over time to get it back we've been limited a little bit because some of the competition to hedge some of it. So it's limited in how fast we will push it up.

And then.

The other side of it is if you look at the forward prices the natural gas prices I think in the second quarter. Prior to yesterday were predicted the dropped 50% from where they are now do you have are pricing, increasing and you have the future cost coming down which is how we get to where we want to be with it all lined up.

In the third quarter of next year.

Okay got it and my follow up is really around that when you talk about the third quarter of next year. So I'm still unclear is that.

It seems clear that ceramic this is going to be a margin headwind until the third quarter of next year, but are you, saying that margins for the overall business.

We'll be down year on year detail <unk>, given some of these moving pieces.

All of our comments on the margins are around specifically the ceramic Europe impact.

Is it.

Mike just one thing on the energy or other businesses require much less gas and the impact is much less we also produced significant green energy using biomass and wind reducing requirements.

So it will impact.

Full view of things as they are changing so.

European businesses anything thats related to natural gas, we're just starting to see materials and other cost increase and we're trying to align the cost with the price, but it's fluid.

Yes for sure Okay. Thank you.

And our next question is from Michael Rehaut with JP Morgan. Your line is now open.

Thanks.

Morning, everyone.

Almost good afternoon.

First question just wanted to kind of.

Maybe sum up the views here around price cost for <unk> and maybe into <unk>.

When you look at for Q.

Depending on obviously, what youre assuming for revenue but.

You are more or less looking at a.

200 basis point year over year drop now what's actually interesting also is that historically.

Theres a lot some of that drop.

Is is due to.

A tougher comp in the year ago, when you had flat margin sequentially you.

You can add 50 to 100 basis points.

Sequential margin declined <unk> <unk> to <unk>, you didn't have that last year.

With the shipping day tailwind.

But when you look at that year over year drop.

How much of that should be.

Covered or made up let's say in one queue.

As the price increases that you are implementing today have a chance to be more fully realized.

No.

Separate out the $25 million related to ceramic then you have what you said last year was seasonally unusually high with the pieces.

<unk> made the margin higher than the comp.

And then.

The 6% fewer days not only impacts the.

The sales level. It also impacts the coverage of all the fixed overheads.

All of those together and it.

Additionally to that.

We do think the challenges we saw in Q3 will continue in Q4.

Zero shortage is really constrained a number of the businesses, which is impacting productivity in <unk>.

Obviously, increasing the costs.

And the chemical supplies will continue to put pressure on.

<unk> carpet laminate and our board's business.

Yes, maybe said another way.

When you look at for Q.

<unk>, obviously, you had a lot of raw material inflation.

But.

Price and mix was able to offset that roughly.

Youre not seeing that in <unk> I was just hoping to try and get a sense of.

Either on a dollar basis or a margin impact basis, what that negative price costs inclusive of the $25 million.

<unk> represents in.

On a consolidated company basis.

Thanks.

When do you think that that negative price costs might go back to neutral would it be the first quarter and second quarter, just trying to get a sense of because you've been implementing price increases throughout the year they've been successful.

But.

Right now you have a gap in <unk>.

When do you think that might flip.

Flip to neutral or even positive.

Positive.

But it is it is a very volatile situation, especially with the impact in and ceramic Europe, along with any chemicals that come from.

Really natural gas as part of their manufacturing process. So yes.

The deficit will see the $25 million flow through in the fourth quarter that will increase right. Today, we believe that will increase in the first quarter, which creates a gap between price mix and inflation as well.

If you were to let's say take out for a moment the Nat gas headwind I mean, youre seeing inflation all over as well.

Just kind of putting aside the nat gas headwind.

Would you expect price cost to be neutral in the first quarter or.

How should we think about that.

Listen, we can't even figure out what the.

Gas price is going to be tomorrow.

Is it.

There is a headwind.

Sure.

With the.

<unk>.

But every one of the businesses is increasing prices.

And we're trying to get them to align and there is some pressure in the short term and we're trying to get them all aligned and we're raising prices as fast as we can in all the markets.

And the flow through impact doesn't does negatively impact us as you go through Q4 into Q1 as well.

Great.

Okay. Thanks, a lot.

Our next question is from Adam about Bob Gordon that Salmon. Your line is now open.

Hey, good morning, everyone and thanks for taking my question you.

The ceramic Europe is the one that's most impacted.

Most of the other businesses, we've been able to push it through up to now and we're trying to continue to do the same.

The question will changes if the material prices start softening.

Demand patterns versus pricing.

And which is driving all of the cost of not only that new housing and everything else. So there is.

There is a concern that at some point you get it up as high as it can on the other hand, you have all the positives going on you have the economy is still growing more people working wages going up commercial expanding so the question is how are they going to balance out.

Is it right at the moment, we and everybody else are still optimistic that we'll find the right balance.

Thank you.

Our next question is from Eric Foss said with Cleveland Research. Your line is now open.

Thank you.

But two things.

First of all with the addition of capacity in the U S <unk> business.

Your U S manufacturing has had traveled a road.

From start to where we are now in the market has evolved.

<unk>.

It's done what they've done I'm, just curious strategically or philosophically.

Why add capacity why not import more.

And where do you think we are in the curve penetration of <unk> in terms of market share in the U S.

Oh.

Let's see.

First is the.

The industry has gotten to be a large park.

The rate of growth cannot keep up the rate of growth to Tad based.

Based on the size of it but it should still grow greater than the flooring industry in total.

Second is.

With all the shipping problems in all the different pieces there.

There are multiple players out putting more capacity in the United States.

Given those things.

And we think that we should increase hours also to support our needs.

Okay. Thank you.

And then a follow up and just try to be targeted to that asked the same question again excluding.

Issues in <unk> is there something changing suggests you can't sustain high handle these these challenges to this point.

I don't think so we're continuing to raise prices everywhere. The only thing is the magnitude of the increases in how long it takes to balance them up.

Okay. Thank you.

Our next question is from Kathryn Thompson with Thompson Research Group. Your line is now open.

Hey, Good morning. This is actually Brian Biros on for Catherine. Thank you for taking my questions.

First of all I guess.

The kind of general construction backlogs that are out there to get it.

Walk through next year at a higher pace.

Thats further supportive of more price increases, even if inflation moderates or.

Or might there be pricing fatigue by then making a harder to pass on more price due to solely demand levels.

I think for the pricing too.

Start softening.

Youre going to have to see a change in the trend of all the raw materials across the category.

To do that and then your guess is as good as mine, if and when that will occur.

Okay.

And then maybe follow up on the internal initiatives you guys have around reducing complexity.

Is there a way to measure that or think about that maybe on a margin basis.

This points or maybe just how much more is there to squeeze out on reducing complexity level.

Well you've seen through the year that our margins have expanded you've seen the result of those things and it's been bye bye.

Taking out the complexity and the products in the offering we're able to get more throughput through the plants and we're able to take more cost out so youre seeing the results of it and the margins and we have more of a plan.

Thank you.

And our next question is from David Macgregor with Longbow Research. Your line is now open.

Hey, good morning, everyone.

You talked about the commercial business. You said you were seeing improvement, but at a slower rate I'm. Just wondering if you could talk about.

How price cost spreads maybe differ in commercial versus what you're facing in residential and how youre approaching through the inflation recovery in commercial differently than what Youre planning to do in residential as we go into 2022.

The commercial business.

As a more differentiated offering.

A more of a say all made with performance design uniqueness unique features.

So.

Because of that that tends to be higher margin businesses with it so they tend to be a little easier to to recover the increases.

What happens with.

The Covid COVID-19 increasing.

In the third quarter as it increased what we saw were some of the projects that we thought were going to conclude and move forward got pushed out.

And that impacted the rate of growth.

So all of those all the corporations are looking at how they see the economy and most of them still perceive it fairly goods.

We perceive that there'll be continued improvement over next year.

And can you remind us what percentage of commercial with ceramic.

Remember its relatively high but.

Where would that stand today.

Before it collapsed in the U S. It was about 40% now its less because the whole category decreased.

Alright.

Okay.

That's all I got thanks very much.

Thank you.

And Thats the end of our question and answer period, I will now turn the call back over to Mr. <unk> for closing comments.

Tom.

Mohawk today is well positioned for the long term.

Will overcome the short term disruptions that are in front of us and we appreciate all of you taking the time to join us.

Great day.

Ladies and gentlemen.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2021 Mohawk Industries Inc Earnings Call

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