Q1 2022 Mohawk Industries Inc Earnings Call
[music].
Good morning, My name is Charlotte and I will be your conference operator today at this.
Tim I would like to welcome everyone to Mohawk Industries' first quarter 2022 conference call.
All lines have been placed on mute to prevent any background noise I started the speaker's remarks, there will be a question and answer period if.
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.
And then operator will assist you as I reminder, ladies and gentlemen. This conference is being recorded today Friday April 29 2022. Thank you.
I'd now like to introduce Mr. James from Mr. Brown, you May begin your conference. Thank you Charlotte 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 today, we will update.
You're on the company's first quarter performance and provide guidance for the second quarter 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 and.
Clothing, but not limit to.
Those set forth in our press release, and our periodic filings with the Securities and Exchange Commission.
This call May include discussion of non-GAAP numbers for a reconciliation of any non-GAAP to GAAP amounts. Please refer to our form 8-K and press release in the investors section of our website.
With that I'll turn the call over to Jeff for his opening remarks, Jeff. Thank you Jim.
Mark's performance in our first quarter exceeded our expectations sales in the quarter rose to an all time record of 3 billion up 13% as reported or approximately 17% on a constant currency and days basis.
Our sales momentum continued from the fourth quarter, reflecting higher pricing growth in our ceramic businesses and improving commercial sector and benefit from our small acquisitions, our operating income exceeded our forecast as strength in our global ceramic business offset rising European energy costs.
Proved operational efficiencies enhanced flooring north America's results in our management of European market pressures benefit at flooring rest of the world.
During the quarter, we ran our operations at high levels in most markets to address order backlogs and replenish inventory.
During the past year rapid cost escalations have required multiple pricing actions to pass through.
Once implemented these unprecedented increases across our markets and have also announced additional increases across the businesses as inflation continues to rise well.
We're also controlling SG&A spending enhancing operational efficiencies and introducing new features.
Labor shortages persist requiring enhanced training programs and process improvement to Maxim to minimize impacts.
Supply chain issues continued through the quarter impacting specific products and markets, we managed material shortages by reengineering product streamlining our skus and improving production planning.
Market conditions for flooring remains favorable even as governments raised interest rates to combat inflation in.
Appointment is at high levels and wages are increasing in most of our markets millions of millennials in our late Twenty's in early thirties are forming households, and desire home ownership.
Unlike past cycles U S home housing inventories historically low more single family homes are under construction and the home deficit will take years to align supply with demand.
New residential construction will continue at high levels and the late 2021 of home construction will increase flooring purchases this year.
Remodeling should remain strong supported by rising home equity and buyers of existing homes completing long term projects they've initiated over the past few years.
Aging housing stock and changing needs of those working from home also expand property updates we continue to introduce differentiated products that inspire remodeling projects at families customized recently acquired homes.
Commercial new construction and remodeling continues to strengthen as business conditions improve and projects that were delayed due to COVID-19 are initiated.
<unk> projects.
Our commercial products create and fighting environments for businesses, and we're deploying appealing new collections to capture pent up commercial demand.
In some markets our growth in the quarter was limited by inventory and production constraints. We are executing multiple expansion projects. So that we can satisfy demand for our higher growth products create innovation innovative new features and improve operational efficiencies.
The categories that we're expanding include U S laminate Lv T and quartz countertops.
European Laminate high end porcelain slabs and specialty products.
And ceramic tile in Brazil, and Mexico.
Our recent bolt on acquisitions in Europe are enhancing our growing installation and panels businesses sale.
Sales of products remained strong and design and.
Our design and features are bringing to the market give us competitive advantages in all price points.
Against the background of geopolitical tensions and rising inflation Mohawk has continued to deliver sales growth generate strong cash flow and maintain a historically low leverage.
Given the undervaluation of our stock relative to our earnings our board approved an additional 500 million share repurchase program in February .
We acquired $2 1 million shares during the first quarter for a total of $307 million since the start of 2020, we've acquired eight 5 million shares representing 12% of the outstanding balance, reflecting our confidence in <unk> long term growth and profitability.
Our strong balance sheet provides many alternatives for investments, including product extensions geographic expansion acquisitions and further stock buybacks.
Since becoming a public company Mohawk has completed many transformational and bolt on acquisitions and we continue to explore additional options.
Finally, I am pleased that Jerry burst has joined our board of directors. Jerry is the president and CEO of Midwest can company. He brings unique strengths and business strategy and operations to our board.
Now Jim will cover our first quarter financial results in more detail.
Thank you Jeff.
Sales for the quarter were just over $3 billion Thats, a 13% increase as reported 17% constant basis setting an all time quarterly record.
Year over year increase in sales was primarily driven by pricing actions in response to significant global inflation and volume growth in a number of our product categories compared to a strong unit expansion in Q1 of 2021.
Gross margin for the quarter was 26, 6% versus the prior year of 31% excluding charges on an absolute dollar basis gross earnings was flat versus prior year as pricing actions and productivity countered increase inflation offset by FX headwinds higher temporary shutdown.
Student material supply shortages and eliminate unit volume growth.
Actual detail amounts of these items will be included in the MD&A of our 10-Q, which will be filed after this call.
SG&A as reported was 16% of sales versus 17, 7% in the prior year the.
The increase in SG&A dollars was due to the impact of product mix inflation and volume, partially offset by increased productivity and the impact of FX.
Operating income as reported was $321 million, excluding charges was $323 million or 10, 7% compared to 12, 3% in the prior year.
Adjusted operating income on a constant FX basis was $334 million compared to $329 million in the prior year. The year over year increase was the result of strong pricing actions and increased productivity offsetting the higher inflation negatively impacted.
By a lower overall volume overall volume.
And higher temporary shutdowns due to material shortages.
Interest expense for the quarter was $11 million the year over year decrease of approximately $4 million was mainly due to the settlement of our 2022, 2% eurobond in Q4 of 2021.
Other income other expense was an expense of $3 million, our non-GAAP tax rate for the quarter was 22, 3% and we expect a full year tax rate to be between 22, and 23% with possible quarterly variations.
<unk> two in earnings per share on a GAAP and non-GAAP basis of $3 78.
That's an increase of 13% versus the prior year on a GAAP basis, and 8% on a non-GAAP basis.
Turning to the segments.
Global ceramic had sales of just under $1 $1 billion Thats, an increase of 14, 5% as reported or approximately 18, 5% on a constant basis.
Year over year increase in sales was primarily the result of segment wide pricing actions with the strongest volume increase in Europe , Mexico, and with our U S quartz countertop business.
Operating margin excluding charges was nine 4% versus nine six in the prior year and adjusted operating income on a constant basis was $103 million compared to $89 million last year. The year over year increase is due to pricing actions combined with productivity.
<unk> to offset inflation, even with the European energy crisis. In addition to favorable year over year volume.
Flooring North America sales also just shy of $1 $1 billion. So its a 10, 6% increase as reported or 12, 3% constant basis. The year over year sales growth is due to aggressive pricing actions and volume strength and resilience laminate in the commercial business units.
Offset by softness in residential carpet.
Operating margin, excluding charges eight 9% versus nine 3% in the prior year and operating income was $95 million compared to $90 $90 million last year.
Segment increase in operating income dollars was due to pricing actions and increased productivity initiatives offsetting inflation, which do was due primarily to rising material costs lower overall volume and shutdown costs caused by material shortages.
Finally in flooring rest of the world sales were $879 million, that's an increase of 14, 2% as reported or 22% on a constant basis, driven by strong pricing actions across the segment and volume growth in laminate panels and installation businesses.
Operating margin excluding charges was 15, 5% a decrease from our 29% in the prior year adjusted.
Adjusted operating income on a constant basis was $145 million compared to $161 million last year. The year over year decrease was driven by significant inflation, primarily offset by pricing actions. In addition to unfavorable productivity and temporary shutdowns due to materials.
<unk> and material substitution.
Corporate and eliminations was $10 million this year in line with prior year.
Turning to the balance sheet cash and short term investments was $541 million with free cash flow being a use of cash of $75 million in the quarter with a return to normal seasonality full year cash flow is projected to approach prior year.
<unk> for the quarter were just over $2 billion with a DSO of 53 eight days slightly down from the 54 four days in the prior year.
Inventories were just over $2 5 billion, that's an increase of $517 million or 26% from the prior year with approximately 60% due to inflation and 40% due to unit growth.
Inventory days were 110 five versus 105 six in the prior year.
Plant equipment was just over $4 5 billion.
With capex for the quarter at $129 million versus a DNA of $141 million full.
Full year Capex is forecasted to be approximately $800 million with DNA forecast is at $570 million.
And finally to balance your balance sheet and free cash flow for the full year remains very strong with gross debt currently at $2 6 billion and leverage at one one times adjusted EBITDA.
With that I'll turn the call over to Chris for a review of our key operational areas.
Jim.
Our U S ceramic business continues to improve its sales and margins, we are enhancing our product mix and implementing multiple price increases to cover inflation.
During the quarter the residential sector remained strong while the commercial sector gained momentum as businesses initiated new projects and commence deferred remodeling.
Our sales should be positively impacted by providing alternatives to tile imports, which are increasing in price and experiencing shipping delays.
We have enhanced our technology tools to make product selection ordering and pick up the fastest and easiest in the industry.
Our quartz countertop sales are growing rapidly and to satisfy demand we have initiated construction to expand capacity at our Tennessee countertop facility.
We see our position in the U S ceramic market, improving with new construction at high levels and strengthening commercial channels as we provide domestically produced options with outstanding visuals and features.
The results of our ceramic business in Mexico, and Brazil continue to be strong even with our sales in the quarter being limited by low inventory levels. Our performance was supported by ongoing strength in residential construction and remodeling with commercial projects improving.
During the past year, we have responded to rising inflation and higher energy costs with multiple price increases with which both markets have accepted.
We will continue to take pricing actions as inflation rises near term, we see strength in both markets, continuing though increasing interest rates and inflation may impact future demand too.
To relieve constraints, we have increased capacity in Mexico, and we are negotiating with government agencies for permits and incentives to construct a new porcelain facility in Brazil.
And our European ceramic business, our management team is taking extraordinary steps to adapt to a uniquely challenging environment.
Sales in the first quarter grew as consumer demand strengthen and our customers increased inventory levels in anticipation of inflation.
The ceramic industry production in Europe was interrupted when your cranium clay supplies to Western Europe six <unk>.
Natural gas prices for the balance of the year have escalated from prior estimates raising our future cost.
We improved the results by increasing prices more than we expected and we enhanced our product mix to improve our results we.
We anticipated the your cranium clay problems and increased our inventory levels before the invasion to avoid interrupting our production our clay inventory should provide sufficient time to reformulate products with alternative materials without disrupting our operations.
There's more market uncertainty in the second half of 2022 with economic growth expected to slow and energy costs higher than earlier estimates, we are prepared to adjust our strategies as necessary based on market conditions.
The flooring rest of the World segment delivered solid topline growth as demand remained strong our management team took actions to manage rising energy costs escalating material inflation and volatile supply chains.
Multiple price increases we are lagging rapidly rising cost in Europe , and have announced additional price increases in response to continuing inflationary pressures.
Our continuous innovation and new features supports our market position and margins.
Due to their unique visuals and water resistant performance demand for our premium laminate collections remained strong.
So material supply in the quarter limited production, our laminate sales increased and we expected continued long term growth as we expand the premium laminate category with new innovation and design and features.
To maximize our distribution in laminate, we introduce our leading edge innovations in the specialty channel under our quick step brand and followed them up in other channels with premium features that add value utilizing unique brands.
With this market strategy for our laminate, we are expanding our market share and adding new capacity to support in Belgium by the end of 2023.
Sales in our L. B T in sheet vinyl business were negatively impacted by material disruptions and low inventory levels, our margins improved through the period driven by increased production and prices raw material supply for both categories was especially challenging but improved as we went through the period we are continuing.
To enhance our L. B T processes and formulations to improve our sales and margins are Richard L. B T cells are growing substantially as the category increases in consumer preference.
Our two bolt on acquisitions contributed to our topline during the quarter and the integration of both is proceeding as planned our purchase of an insulation manufacturer with plants in Ireland and the U K increased our market share and sales of polyurethane installation products.
And one of the insulation plants, we acquired a new production line with state of the art technology is presently starting up.
Our new French MDF facility has enhanced our product offering and extended the geographic reach of our business, we will enhance the plant's operations by improving processes, expanding capacity and generating energy from waste wood.
Despite material constraints, our panel sales grew significantly in the quarter, including strong results in our mezzanine business, which is expanding with e-commerce demand.
Our new high pressure laminate line is performing well and extending our manufacturing into a new product category that coordinates with other wood panels.
To deliver more sustainable panel products, we have introduced a new patented technology for reclaiming wood fiber from M. D F boards that will reduce carbon emissions and our.
Cost position.
Our two energy plants fueled with wastewater lower our carbon emissions and significantly reduce our energy cost.
Our Australian business had robust demand for flooring in the quarter. Following the loosening of Covid restrictions, while New Zealand remain difficult due to continued COVID-19 restrictions.
This increases had been implemented in both countries in response to rising material and transportation costs.
As in flooring rest of World flooring, North America is managing their greatest inflation, we've ever experience the strategies, we've been implementing during the past two years have improved our sales execution cost structure and service levels and enabled us to manage a difficult environment. Most of our manufacturing costs are related to oil and gas.
Prices and our supplies continue to increase their margins.
Given supply constraints to offset we have announced new price increases. This year. In addition to the multiple rounds of increases in 2020 one across the segment. We have indicated initiated many projects to increase productivity improve efficiencies and upgrade our assets to enhance our results.
Mohawk holds a leading share of the north American laminate market and sales of our premium collections continued to grow in the quarter as our new production line ramped up we anticipate achieving our targeted production levels as planned during the second quarter, which will expand the sales of our next generation project products.
With realistic visuals and superior performance, our laminate has become an appealing waterproof alternative to both wood and L. B T in most channels, including new home construction.
Escalating market demand in North America is absorbing our additional production as it comes online and we are further expanding our U S laminate capacity.
Next year to support continued growth.
Our L. B T sales continued to grow substantially in the first quarter as we benefited from an improved offering across all channels. Our margins were impacted by material disruptions that interrupted manufacturing delays and source products and higher ocean freight costs.
Our legacy L. B T operation has significantly improved its processes and as increasing line speeds and capacity, our new West Coast L. B T facility is initiating production and fine tuning processes.
When fully implemented our east and West Coast operations will provide logistics and service advantages to our customers.
We will continue to strategically utilize sourced L. B T to round out our portfolio and maximize our business.
Our sheet vinyl sales also increased though material shortages stopped their operations and raised our cost in the period, we anticipate material supply, we're a resilient business normalizing during the second quarter, which will improve our sales and margins.
Residential carpet service improved substantially and customers are lowering inventory impacting sales, we are raising prices further to offset escalating material and energy costs by reducing complexity simplifying operations and increasing efficiencies we are improving costs, we're managing tight labor markets.
That are impacting staffing and productivity.
Our commercial sales continued to rebound led by strength in the government workplace and healthcare channels sales in both our carpet tile and commercial L. B T collections are growing as new and deferred projects are being initiated.
Commercial design activity continues to strengthen as reflected by the March architectural billing index.
This project pipeline will support future specification and sales growth of our commercial products.
Our domestically produced L. B T is being more widely specified due its greater dimensional stability superior performance and preference for more consistent local supply we are committed to becoming carbon neutral with our commercial flooring products and have introduced a new carpet tile that provides superior acoustics and comfort while achieving the high.
This level of sustainability certifications with half the carbon footprint.
With that I'll return the call to jets.
Thanks, Chris.
Four months into 2022 room, we remain cautiously optimistic about industry growth. This year, despite inflation and interest rate pressures, we've announced additional price increases in most of our products and markets as inflation continues to rise housing supply has historically low and rising mortgage Reits are sparse.
Families to purchase home sooner.
Remodeling should be supported by continued existing home sales higher home equity and the upgrading of homes purchased over the past two to three years, we anticipate the commercial sector will continue its rebound with people returning to pre pandemic routines, we expect improvement in the supply of constrained materials, which should increase our production levels.
Our capital investments when completed will relieve specific capacity constraints and increase our offering.
This year, we are focused on optimizing our mix and margins by limiting.
The impact of inflation through price increases controlling our spending and initiating additional productivity actions, which should increase and our.
It should increase and.
In our year over year earnings per share.
Given these factors, we anticipate our second quarter adjusted EPS to be $4 25.
To $4 35.
Excluding any restructuring charges.
We have confidence in our long term future of our business. Despite near term uncertainties globally. There is a structural deficit for housing that will take years to satisfy and we should benefit from strong long term trends in new home construction residential remodeling and commercial projects. Our brands are the most recognized and flooring.
And provide a comprehensive product portfolio that includes the industry's strongest collection of sustainable products.
We're making it easier for our customers to grow their business through leading digital tools that generate customer leads simplify ordering and expedite deliveries.
Through the innovation of our talented team we continue to lead the industry in design performance and value.
The strength of our balance sheet allows us to pursue both transformational and bolt on acquisitions that complement our business over the next three to five years. These advantages should enhance Mohawk sales and margin expansion.
I'll now be glad to take your questions.
Ladies and gentleman 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 time money and one follow up.
Your first question comes from the line of <unk> <unk> with Baird. Your line is now open.
Maybe just first question on mix I'm, just kind of curious if.
You can maybe give us an update about what youre seeing maybe maybe broad strokes on the mix side and.
Have you seen any reaction to higher prices.
From a mixed perspective, and then I.
I guess from your own capacity, what is the opportunity to kind of mix up within your productivity within your product lines to improve margins and it gets you got something you'd you'd want to do in the current environment or not.
There is some trading down going on in the various markets with as you increase prices. Some people have budgets and it requires them to reduce the quality of the product and that is occurring in different pieces.
That's probably more in the middle.
The bottom end of the market theres not much place to go in the top and the people are not squeezed.
So there is some of that coming.
Thank the industry will remain at high levels.
Relative with volumes with increases in average selling prices.
We anticipate seasonality returning to normal versus prior year, the last year or so and.
And inflation slowing.
Also anticipate the U S dollar strengthening and negatively impacting our translated results this year.
Okay. Okay. So there's a little bit I guess on.
Within your within your own capacity I mean, just given the environment would you would you look to mix up within the product lines, just improve margins or are you. Okay with your current mix.
We always try to improve the mix.
In certain cases, where.
Our European ceramic business on purpose, we have limited the sales of the low end given the rising inflation and pushed it up which also helped our margins in our ceramic business and the goal each year is to introduce new products too.
Hence the mix of the business to help us improve the margins.
Okay. Okay got it and then I guess just for context, I mean, I know supply has been a challenge in certain of your businesses I mean, if you had the necessary.
Access to raw materials, I mean, what type of volume growth would have been would you have been able to deliberate if you've got the right amount of raw materials.
Well, let's just the operations many of them were disrupted by materials and they can close.
<unk> sheet vinyl in the U S and Europe , let our laminate business, our panel business and some of the others are all by material lack of materials. There was also COVID-19 restrictions in Australia and New Zealand.
Had delays and imported products.
We went through the quarter all of the.
Impacts reduced.
We think the second quarter will be substantially better.
And then what I would say from a cost perspective, we know.
Impacted us about $9 million in the quarter, but the sales loss is really hard to estimate.
Okay, Okay understood.
Back in queue. Thanks, guys.
Our next question comes from the line of Matthew Bouley from Barclays. Your line is now open.
Good morning, everyone and thank you for taking the questions.
Just on <unk>.
Supply again, specifically the European Clay supply it sounds like you procured inventory ahead of disruption I think I heard you say that.
The inventory build is going to allow you some extra time to reformulate materials.
Could you just elaborate just on the supply picture for clay in Europe , and sort of what you and the industry are doing to address that thank you.
Well as you mentioned Ukrainian clay is widely used in Europe , and we did increase our inventories.
I think we can have a sustainable advantage in this area because one we have a good supply for the transition and we have really good R&D resources and logistics resources.
Working on alternatives and I think we will have an advantage versus many companies going forward.
Okay. Thank you for that Jim I guess the same topic.
The European ceramic.
You mentioned that the volume was I think you said strong I guess in spite of the price increases it sounded like some customers were building inventory.
Ahead of inflation could you just speak to what that inventory build could mean for future volumes and just how you think about the elasticity of customer demand customer demand as these higher prices do come through thank you.
Well we were.
Able to take pricing.
And we do believe that there was some.
Early buy in to those price increases we don't really have a good judge as to just how much that volume was but I would anticipate there was some pre buy.
Alright, well, thank you Jim and thanks, everyone.
Thank you.
Our next question comes from the line of Susan Mcclary from Goldman Sachs. You May now state your question.
Thank you good morning, everyone.
Good morning.
One is you talked a lot about the ability to gain market share just given a lot of these global dynamics, whether it's domestic or international that are coming through and I guess as you look forward can you just comment on the ability to retain a lot of that market share.
That you are doing differently to make that perhaps a bit stickier than it has been in the past and how we should be thinking about what that could mean for volumes as we go through the next couple of quarters and maybe the supply chain's incrementally improve.
Hum.
As we look forward, we are cautiously optimistic about what's going to happen. This year, despite the rising inflation and interest rates.
Given our international business, the strengthening dollar will reduce the translation of the pieces.
Our basis, starting as the GDP old continue to grow though at a lower rate we.
We see higher pricing, continuing and continuing to raise it with increasing material costs and we see that the availability of materials who's going to help us increase.
We mentioned before that the commercial will continue improving.
And we've announced other increases to cover the cost that we're chasing.
The other thing that's going to benefit us going forward is this purchase stock we've done we'll continue to increase the EPS.
Just as a note while we're talking.
The seasonality.
As a business. The Q2 was our strongest period of the year and then Q3 is impacted by European vacations. Some of the models don't keep that put that in it and then the fourth quarter's typical with holidays and lower than the third quarter.
Okay, that's helpful and actually.
That sort of leads into my next question, Jeff, which is as we do look out to the rest of the year can you just give us some commentary on how we should be thinking about the different puts and takes across the different segments.
Given that some of these comps are still a little bit weird as we go through the next couple of quarters.
So when you when you look at last year, the first half of the year.
We went into the year and the industry was.
The inventory in the channels, we're really low the capacities were constrained and.
What happened is we shipped a lot in the first half of the year seasonally high so the comps in the first half.
Are harder than normal and then in the second half.
It should normalize and then we should see the comps get easier versus last year.
Okay. That's helpful. Thank you good luck.
Our next question comes from the line of Keith Hughes from <unk>. Your line is now open.
Thank you.
Flooring North America growth.
<unk> considered a carpet.
Had its struggles in the quarter could you give us some kind of magnitude of how much your hard surface grew within that segment to get this result.
Yeah.
So on the first quarter performance.
Youre right the sales increased 12% on a constant basis, primarily due to pricing actions and youre right. The elevate TN laminate had strong sales momentum while the carpet business was weaker with the channels adjusting inventory as well as more normalization of the share of the different products.
<unk>.
The strategies that we're implementing over the last couple of years with all the changes we've made in improving our sales and service reducing our costs.
And then we continue.
Laminate business has been limited by our capacities and our LDP, we've been expanding the production rates that we're at we've been importing more for Seth.
Satisfy it and that we're starting up this new plant to get it if you look in.
And our Q you can look at different product categories in order to show you in broad terms that the volume in the different categories by product category.
And Youll see Keith.
Laminate wood.
And resilient categories.
Did grow is also supported by stronger commercial business.
Okay second question just on <unk> in North America.
Yes.
We've seen strong important numbers coming out I think youre still importing product here as well do you feel like more overall do you think you're growing in line or faster or below what <unk> is doing in North America.
Well first of all that number is hard to get.
No if you compare it versus imports for example are you growing faster than imports are coming in.
You also have in the first quarter or two.
Chinese.
The Asian shutdown, so people build inventories before it which I will show up in the first quarter, which is shipped in the fourth quarter coming in but I think we're I think we're growing.
As fast or faster than the marketplace.
Okay. Thank you.
Your next question comes from Michael Rehaut from Jpmorgan. Your line is now open.
Thanks, Good morning, everyone. Thanks for taking my questions good morning.
I just wanted to circle back to you.
Comments around.
Seasonality in the third quarter and fourth quarter.
Yeah.
Any any type of additional granularity would be helpful.
And specifically you know should we be thinking about the <unk> as a result, it is the high watermark.
From a quarter perspective for the year.
And anything.
And anything in terms of sales and margins relative to Q2 would be helpful.
I mean, if you go back and look at the last few years Youll see that the Q2 is the high watermark.
And that the what happens is that we take off vacations.
And shut down the plants in Europe , which impacts.
Sales and margins in the third quarter.
On the other hand, the U S businesses tend to to peak, so they offset a little bit as you go through and then the fourth quarter is always lower than.
In the third quarter because of vacations and people don't buy flooring products when they have their Christmas trees up.
As you go typically.
Jim you want to add anything to it.
As you look at the seasonality, Mike and other things to consider.
Terms of our projections were taken into account.
Pace of inflation the pricing.
We're implementing remember jeffs earlier comment on the comps in the first half so the sales expansion and the <unk>.
First half of the year should be more.
Mostly driven by sales price increases where the second half of the year, we would expect some normalization of price versus volume.
All things considered what we know today Jim to go over the FX impact from just the Euro where it is and the other point on the seasonality as Josh pointed out is.
Our FX exposure, especially to the euro from.
From a cost standpoint.
Last year in the second quarter, the euro was approaching a $1 $28 21 as you've seen.
<unk>, it's fallen to below a $1 six to $1 five even so that will have an impact on our translated results.
Right that's.
That's very helpful. Appreciate it appreciate the color there I guess secondly, I was interested in.
Your comments earlier around the clay inventory Ukrainian claim inventory.
And I believe.
If I heard it right it was Chris that kind of mentioned.
That you view the.
Supply.
I get sustainable.
In the in the near term and that perhaps in the medium to longer term you can work on alternative.
From an R&D perspective.
I just wanted to explore that a little bit.
Could you dive deeper into that just to understand.
If possible.
How long the claim reserves that you currently have would sustain production and.
<unk>.
What type of R&D alternatives could there be that.
Could easily be you know.
Used as a replacement.
Once those reserves.
Our depleted so let me start Chris will give you a detailed answer.
One point, we were trying to make is that we got more price in the first quarter than we had expected part of that was because the production by the industry was less because of that and enable the industry to push through more price faster than we expected. So that was one point.
Is that Chris had said was that our inventory levels are higher than everybody are higher than most people most other companies.
And so it didn't impact us as much and then we're covered through most of the year and then our people different than others. We have more worldwide insight into what's going on around the world and can find alternatives easier and we think that we also have an advent.
And our chemists and their abilities to swap, which should help us to help us make the transition Chris did I Miss anything.
No I would just add to that Michael that.
Especially in Spain, and Italy, but all Europe uses Ukrainian clay.
Mostly for particular products at the high end.
And so everybody is going to be the anticipation is that everybody is going to lose that supply of Ukrainian clay and everybody's going to have to substitute.
The amount we have gives us a longer time to transition and we think theres alternatives not just for us, but the industry to replace Ukrainian clay.
Yeah.
Great. Thank you. Thank you appreciate it yes.
Okay.
Our next question comes from Stephen Kim from Evercore ISI. Your line is now open.
Yeah. Thanks, a lot guys congrats.
Congratulations on that Ukrainian move that was up it sounds like you are out Fox to your competition there.
I wanted to ask a question a couple of questions on flooring North America, though.
First on the resi carpet side, you mentioned that that carpet services, improving and customers reducing inventory I just wanted to see if you could elaborate a little bit on that.
Why are the customers reducing inventory that's a business that right now we're seeing a lot of bottlenecks or extended construction cycle times I think most people who follow the homebuilding industry think that we're probably nearing Max you know.
You know that that situation is probably not going to get a lot worse from here I may improve so I was just wondering how you think that might improve affect the overall sales into the channel. So if you can just put your comment about reducing inventory by customers into the into context.
With that kind of an outlook.
What happened in the fall of last year and before our customers were taking everything they could do to the.
Due to the timing of the shipments which was unpredictable. So there was any availability they were taking it and most of them increase their warehouses in order to put it in order to have more consistent supply.
Over the last few months, we've been able to get the inventories in the service levels back almost to where they were prior to pre pandemic levels. So they don't require the same inventory levels to operate their business was.
It was the point.
Got it makes sense, okay. That's that's fine.
But I would imagine that to the degree that the builders are actually able to build more <unk>.
<unk>, then more and more completions that would be somewhat offsetting benefit to you.
Later in the year, perhaps correct me if I'm wrong.
So the volume is all dependent on how many <unk>.
Houses they build and it looks like it's going to be a good year it looks like the.
There were a lot of homes that were started last year.
Extended and their completion dates so flooring tends to be the last thing in them. So that should also help.
Yeah.
I would guess.
Speaking of that and the fact, you know how the installation of flooring, maybe different from some other products.
One of the things that we've been thinking about it that maybe you might see in this weird environment and housing a slower rate of existing home sales, even though new construction stays stronger and home prices, we think will be resilient, but if you see slower U S existing.
Existing home sales.
I'm curious.
Do you think that flooring is more exposed to there.
Kind of remodeling that's associated with our move where somebody moves versus remodeling to stay the thing I was thinking about was that to remodel a floor or a lot of times you got to like sort of clear the room out you know, it's a little bit invasive and that kind of thing it's kind of easier to do like you know when you're sort of switching houses so to speak and I was curious if you'd ever done.
Any work on that if you think there's any validity to that or if there is offsetting factors that I'm not thinking about.
Flooring is a.
Significant disruption to somebody's home, so typically they're larger projects and again when people do move that tend to be <unk>.
<unk> changes in the the flooring that goes in the homes.
It all doesn't get done on day, one so it takes usually a period of years for people to when they buy a home to upgrade it.
Which means there should be a lot of pent up demand from the last two or three years of really high existing home sales so of existing home sales slowed down you should have this demand leftover that everybody is still remodeling.
From the last few years, because most people don't have the money to do it all at once or the inclination.
Yeah, and then also probably contractor availability, probably delay things as well.
Other part people talk about is up to now people wanted to do projects and the labor was really restricted so I don't know how much has been postponed because the labor wasn't available.
Yeah, Okay, great. Thanks, a lot.
Thank you.
Our next question comes from Mike Dahl from RBC Capital markets. You May now proceed with your question.
Good morning, Thanks for taking my questions.
Just.
So another follow up on.
Clay and European.
Results is there any way you can quantify it does seem like you've had a temporary.
The advantage and I know your perspective on that could carry on for some time, but.
Vantage that you'd had given your decisions on supply can you can you quantify how much that contributed to <unk> and I guess the second part of the question.
To your point everyone's kind of rushing to reformulate have you ever experienced.
The situation like this where there's been kind of mass re formulation or and what is the timeline how long does it typically take especially since this is a.
Kind of a unique type of product.
It's targeting and any insight on kind of timeline for formulation for you or your peers.
It Hasnt happened like this before because usually if you want to make a change.
No. It's coming do you anticipate it and you look for other alternatives usually the change time takes months because youre running this thing at close to 2000 degrees.
Very small changes affect the flatness of the product and quality of the product.
And then you have to make multiple tests and then test it up so you usually go through a very systematic method of changeover presently depending upon where people are not going to have that.
That option, if they have low inventories.
And we know what happened with some competitors if they actually reduced their production already.
How long, it's going to take each one of them to react to it I can't answer I can tell you that with our worldwide views were looking all over the world and we have tests going on for the last month, all different products and categories and we think we're advantaged by that.
It's going to be harder for a smaller company to do all that research.
And they have a logistics to to change it for one and the other thing Ukrainian Clay is most important for high end products and for a company that has a broad range of products, it's going to have a less impact than if you were a small player just doing premium.
Alright, okay.
And then my second question is on on Russia, just can you give us an update on your Russian operations one.
Are you still operating two.
If so why are you still operating as other global companies have pulled out.
<unk> three is Russia at this point self contained or are you exporting any product from Russia to Europe .
Let's start out we're really concerned and saddened by what's going on there.
And the actions of Russia is a huge humanitarian crisis, our European team is supporting our Ukrainian employees, we're providing aid to refugees in Poland.
We go through.
While we have suspended new investments there we've reduced spending were following all sanctions.
In the marketplace.
And as far as just rationale for staying there longer term.
The second point being are you exporting any product from Russia to Europe or is it really just still all self contained there.
The export business.
Series, a limited portion of the business.
Most of our businesses. They are all set up to satisfy all of the local markets.
So we don't export much.
Yes.
Okay. Thanks.
Our next question comes from Phil Inc. From Jefferies. Your line is now open.
Guys.
Congrats on a really strong Gordon TQ guidance looks pretty encouraging.
Jeff I guess big picture.
Macro backdrop and consumer feels a little choppy or is there any ability to kind of slow down the ramp of some of the new capacity you bring on if we do see an air pocket later this year and I'm just trying to gauge how quickly can you pivot from growth mode to perhaps a more muted backdrop.
Let's just sort of focus on what the growth is the expansion projects are in areas, where we have.
Capacity constraints existing <unk>, the sales of the product categories or expanding so if you start and look through the different pieces.
In the U S. We have we're expanding the laminate business and the laminate business.
Have a new line going in and it's already sold up and committed.
And it's growing in market share as it takes us.
As it takes.
As it becomes a substitute and equal substitute for Lv tea and would.
Lv T.
We are increasing our production, we're sourcing a lot of product and so if it slows down we can reduce the amount of <unk>.
Source products and quartz countertops, we are.
<unk> sold in our U S plant, we're importing products. There. So this slows down as we put it in we can reduce the amount of imports there as we go through but the kept quartz countertop and <unk> businesses are also growing rapidly.
In Europe , we've reached the capacity of our laminate production and it's not coming until the end of next year.
So.
Again, we're growing our share in yet so we may have to slow it down for a little bit in the transition of things slow down, but we need it.
The porcelain slabs, we're putting in.
Again, we are oversold and sourcing products from yet and then we're spending money to create two to being able to.
Change the mix within the print the plants in Europe to upgrade the quality of the products and make more specialized pieces, which is which will help our mix and margins.
And finally, the ceramic in Brazil.
I mean, we've been oversold for over a year and we need to expand the capacity there in Mexico, we've already.
But in the expansion.
It's being utilized.
So beyond those things.
The major pieces are all in either bringing new product features to market oriented cost reduction. So I think we've made the right decisions, whether we can use it all as fast as we hoped or not as you hear a lot of the stuff as well.
We're sourcing and not and whatever the market is we will have to adjust to it.
Got you that's great color.
And then from some of the trade flow and supply chain nuances it sounds like you're pretty well positioned in North America.
On the ceramic side and <unk> side, it sounds like you're taking share can you kind of expand on that just given some of the logistical cost and whatnot and then separately you talked about how maybe inventory.
The customers are drawn down some of that for carpet are you seeing any of that dynamic elsewhere.
Well just on the we're talking about taking share in ceramic you've got important pricing has increased given energy and transportation Ocean freight is causing delays in increasing cost and then our domestic manufacturing is well positioned and our commercial demand is growing.
And the LPT there is more U S production being made because of logistics problems that go along with it. So we think we're well positioned there.
It's the right thing to do and I forgot the rest of your question to say the truth.
No problem.
You talked about.
On the carpet side some of your customers are drawing down inventory because there.
Replenished at this point are you seeing any of that in some of your other products.
Most of the other product categories, the inventories haven't gotten to the same level for the industry.
As the carpet carpet has we think carpets approaching a more normalized levels. The other ones are not quite there yet.
Okay Super Thank you.
Our next question comes from Truman Patterson from Wolfe Research Your line is open.
Hey, good morning, guys and thanks for taking my questions.
First.
From an enterprise level you all had really good cost control on the SG&A line really nice leverage there I'm, hoping that you can elaborate on some of the internal initiatives.
That were driving that leverage and also just the.
The potential.
Sustainability going forward as we as we move through the year.
Let me start and I'll, let Jim fill in where I Miss.
Going into the year.
We knew that.
There is a potential for the industry and volumes to change. So we went into the year.
Trying to optimize the SG&A spend we have.
Good controls everywhere, we are still investing in new products, but we're trying to to control the costs and spending and make sure that we're putting it in the right places.
And.
Just good controls through the business, we think that the other side of it is the topline is growing because of material and energy inflation.
And we don't have to.
The SG&A doesn't have the same all of this is.
The inflation is there, but it's not as high as the product so in general with that Youre going to have a lower SG&A cost.
As the two inflate at different rates.
Yes sure.
Chairman the focus really is on the <unk>.
Sales and marketing the product to try to advantage us as we as we move forward, we kept very strict controls.
Certainly on the administrative side, we will continue to see that.
Trends continue we will gain leverage against the sales increase and we expect the year over year percentage of sales to be lower versus last year.
Okay.
Jeff if I heard you correctly it sounds like you all are able to lever the <unk>.
Pricing revenue growth.
A bit more efficiently than volumes is that a good way to think of it.
I think so yes, yes. So you are not growing as all the way to the top line Youre doing it more in line with volume I just one other piece, okay. It's too with all the inflation, it's hard to get.
The normal margin on top of the inflation. So you have in a reverse of that same trend.
Youre not getting all of the normal margin on the <unk>.
The material and energy inflation.
Understood, Okay and then.
I'm, hoping you all can discuss the price cost in your European ceramics business.
Previously you had discussed some of your competitors being hedged and was going to take some time.
For for pricing to flow through but now we've had.
European Nat gas take another step higher just hoping to understand.
Are you getting that incremental traction on pricing in the region is it offsetting.
The spike in the European natural gas.
Well I'd just comment that the team over there is taking extraordinary steps to adapt to this inflationary environment.
Sales and margins in the quarter were higher than we anticipated the net.
The impact of energy was $26 million and we had anticipated it to be worse at $40 to $45 million.
So I would say we've done a really good job in implementing those price increases.
Yes sure Matt.
What we said before is that from.
From Q1 to Q2, we expect.
Some improvement in that.
Net impact energy versus price mix.
Q3, again, it should be closer to kind of parity in Q4 to be cost advantage. Everything has has risen. So we've had to do more pricing because to your point. The energy cost has increased so everything has increased but the story is really the same in terms of our outlook.
Sure.
Yeah.
Okay. Thank you for that and good luck on the upcoming year.
Thank you.
Your next question comes from my Channel Laval from UBS. Your line is open.
Hey, guys. Thank you for taking my questions.
First one is just on Russia again.
Keeping some of the sanctions that are in place.
Are you, having trouble getting money in and out of Russia.
We're not moving money in and out of Russia, I don't think so.
Russia itself pretty much self contained.
So they are risk based.
Clearly their cash flow supports their local business.
But are you repatriating any of any of the funds.
Yes.
Last year.
Year.
Last year, we moved a lot of money out of Russia.
Out of Russia, because we had generated a lot of cash and we didnt need the cash that we had there. So we took out the cash prior to all of this.
Okay. That's helpful.
And then on the.
Commercial.
<unk> that Youre seeing I think you mentioned some of the end markets are you seeing any improvement in office or hospitality retail any of those.
Yes.
We are seeing.
Improvement in the commercial is led by the government workplace and healthcare sectors presently.
We're starting to see.
More activity in the areas that still are way behind like travel hospitality and retail is starting to be some more activity in those across all of the all the commercial things there was a lot of projects postponed during COVID-19 and we see some of those things being initiated so we see continued improvement.
As far as we can see presently in the commercial side of.
Thanks, guys.
Okay.
Our next question comes from Adam <unk> from Cleveland Research. Your line is open.
Thanks, Bob first of all just a.
A follow up on Europe .
Europe ceramic price cost situation.
Six months ago, you had talked about the rise of natural gas and some competitors were hedged it may be in a better position to do.
And an expectation that net gas would improve in the first half of 'twenty two.
And it seems like it's played out was natgas has stayed difficult and you've done.
Materially better than you thought six months ago when all this started.
And I would just love a little more detail I. Appreciate the team is obviously executed well, but what what's turned out so much different in incrementally better than what you had anticipated six months ago.
The.
Let's see the marketplace.
Has increased prices more.
Okay.
I keep connecting it to the Ukrainian clay.
We were we are and we were and are disadvantaged among some competitors not all with our gas.
It's still exists today.
We are advantaged in the clay.
Which helped us but the clay also reduced the production, but you also made people more aggressive in raising park the marketplace and raising prices. So we were able to capture more price than we thought.
And in addition to that we were able to push our mix up at the same time because.
The lowest margin products, we have had the most percent of cost increase so we pushed more into the better quality products all of which gave us different results than we had expected.
Okay.
On the customer side, if we could start there and then get and then pan across the rest of the business from a.
The performance of the quarter it looks like it was.
Really upside price and then great execution, but from a consumer demand standpoint.
Appreciate the comparisons are more difficult in the first half, but from a consumer demand standpoint can you stay in that area in the Europe tile and talk about.
Consumer demand and how that's changing I appreciate what youre doing on your side, but our consumer demand is trending.
And then how consumer demand is elsewhere and does that translate into volume growth.
Year over year in the coming quarters.
I hope you can appreciate that with.
Let's take Europe .
Our price increase was put through the announcements of other price increases.
Really difficult for us to tell what is going through to the customer and what is changing in their inventory, which is why we said there was a possibility that there is.
They pull forward some of their purchases we can't we can't tell the difference.
Between the inventories in the channel.
Customer purchases.
I think the other thing is that the inventories have been low in the channel. So you saw customers going in to fill in those inventories.
Yeah.
Okay.
Okay, and then more broadly outside of Europe in terms of I guess, just North America specifically.
B, what you're seeing with consumer demand trends.
And then conviction that that flows through the volume growth for <unk> through the year.
<unk>.
Well.
We have the same pieces you do that.
Housing is still running at high levels.
Flooring is the last thing to go into it typically it takes anywhere from six.
The 18 months to build the house so.
<unk>.
So seeing good demand in the housing piece the existing home sales do influence as we talked earlier about the change in replacement, but again like we said it goes in phases. So we still see the demand in existing coming from existing homes over the last two years.
<unk> had been really on continuing.
And then the commercial part of the business is on an upswing and we don't see anything stopping yet at the moment.
Okay. Thank you.
Okay.
This concludes our Q&A session I will now turn the call back over to Mr. Lorber Baum for closing comments.
We are confident that we are taking the right steps.
To manage the short term and that we're in a good position for the long term, we're investing to maximize our business.
And cover the constrained areas and expand the X the growing product categories.
And we think we're in good shape.
We appreciate you joining us and thank you for participating.
This concludes today's conference call. Thank you everyone for participating you may now disconnect.
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