Q2 2022 Mohawk Industries Inc Earnings Call
Good morning, My name is Victoria and I'll be your conference operator today at this time I would like to welcome everyone to Mohawk English exactly.
Second quarter 2022 conference call.
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As a reminder, ladies and gentlemen District conference is being recorded today Friday July 29 at play Tonight.
2022, Thank you I would like to introduce Mr. James Bronc. Mr. Brown, you may begin your conference.
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 on the company's second quarter and provide guidance for the third 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, including but not limited to those set forth in our press release and our periodic filings with the securities.
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.
I'll now turn the call over to Jeff for his opening comments, Jeff Thanks, Jim.
<unk> second quarter sales rose to $3 2 billion up six 7% as reported or approximately 11, 1% on a constant basis sales grew in all our segments with our topline results benefiting from price increases enhanced product mix improvements in commercial and <unk>.
Contributions from our small acquisition.
As the quarter progressed, the global economic environment became increasingly challenging.
Organizations implemented additional actions to support our performance.
Our operating income for the quarter was in line with our expectations, even as material energy and transportation inflation remains a significant headwind in our translated results were impacted by the strengthening U S. Dollar.
Over the past 18 months all of our businesses faced extraordinary inflation.
And we have instituted multiple price increases to pass through these higher costs were also taking numerous operational actions, including cost controls productivity improvements mix and logistics enhancements across our markets inflation is causing changes in consumers' discretionary spending.
Housing sales have been impacted more than our other markets as mortgage rates have risen faster.
Unlike past economic cycles housing demand exceeds available supply and foreclosures are not an issue.
In Europe interest rates have not risen as much as the U S. So consumer discretionary spending is being eroded by energy and other inflation, which is impacting demand.
Volatility in natural gas supplies have caused a dramatic spike in near term prices and supplies and pricing remain uncertain.
European countries are considering strategies for alternative supply ways to ration gas and supply subsidies to support those most affected.
In most regions investments in commercial construction and remodeling remain solid both projects that were deferred due to the pandemic and new projects are being initiated in greater numbers as the commercial sector continues to strengthen.
As we navigate the near term market dynamics.
<unk> balance sheet provides many options for investments, including internal expansion acquisition and stock buybacks.
The second quarter, we announced approximately 440 million in new acquisitions.
Well the largest being an agreement to acquire <unk>, a leading ceramic manufacturer in Mexico.
In early July we completed the acquisition of fast floors, a leading U S needle punch flooring manufacturer.
In Europe , we are making excellent progress integrating our 2021 bolt on installation and panel acquisition.
We're contributing which are contributing to our results as expected.
We continue to explore additional acquisition opportunities.
Our expansion projects remain on schedule, including laminate L V T quartz countertops and European porcelain slabs.
<unk> will help us satisfy current and future demand as well as deliver our next generation of product innovation and operational efficiency.
Now Jim will review, our second quarter financial performance in greater detail.
Thank you Jeff sales for the quarter were just under $3.2 billion. That's a six 7% increase as reported or 11, 1% on a constant days and FX basis basis, representing our second consecutive record quarterly sales favorable sales and mix across all segments.
And benefit of our 2021 small acquisition offsetting softening volume and negative impact of FX.
Gross margin for the quarter was 27, 7% a decrease from prior year at 37% excluding charges, although the dollar amounts and impact of year over year inflation was primarily in raw materials and energy was more than offset by price and mix and productivity. It was not enough to negate the impact of the law.
Our unit volumes temporary shutdowns and FX headwinds on a percentage basis.
The actual detail amounts of these items will be included in the MD&A of our 10-Q, which will be filed after the call SG&A as a percentage of sales was 16% for the quarter as tight spending controls by the business drove a 90 basis points improvement versus the prior year, the immaterial increase in absolute <unk>.
<unk> was due to higher sales price mix and inflation, primarily offset by cost saving initiatives and the impact of FX.
Operating income as a percentage of sales was 11, 7%, which is 220 basis point decrease versus the prior year driven by lower volume as the business drove price mix and productivity initiatives to offset significant year over year inflation and the impact of temporary plant shutdowns.
Downs and FX interest expense for the quarter was $12 million slightly down from the prior year and other income other expense was income of $3 million.
Our non-GAAP tax rate was 22% versus 22, 5% in the prior year, we expect the full year tax rate to be between 21 and 22%.
That leaves us to an earnings per share as reported or $4.40 or excluding charges of $4 41.
Turning to the segments global ceramic sales just under $1 $2 billion. So it's 11, 5% increase as reported or 14, 6% on a constant days and FX basis, as pricing and mix actions more than offset the softening volume in the segment.
Operating income for the quarter, excluding charges was $154 million or 13, 3% that was an operating profit increase of 12, 5% versus the prior year, the favorable product mix pricing and productivity actions offset the impact of lower volumes and inflation, which is.
Merrily due to rising energy costs.
In flooring North America, our sales were $1 $1 billion for an increase of one 7% versus the prior year with pricing actions offsetting volume declines.
Both in commercial laminate and resilient products offset weakness in residential carpet and a significant adjustment and rug products during the quarter. The rug business is concentrated with major names national retailers, who dramatically cut orders to reduce their inventory levels now absent this adjustment.
Flooring, North American sales would have increased approximately six 5% in the quarter.
Operating margin as a percentage of sales was nine 1%, which is 210 basis point decrease versus prior year as improvements in price mix and productivity initiatives were unable to compensate for the lower overall volumes and increased input costs, primarily in raw materials due to year over year inflation.
And flooring rest of the world sales were $895 million or seven 7% increase as reported or 18, 8% on a constant FX basis.
<unk> and mix actions drove the improvement across all product lines.
Led by panels and installation along with a year over year benefit from the smaller acquisitions operating margin as a percentage of sales was 14, 1% with a decline of about 560 basis points versus prior year.
The main drivers of the decrease was higher inflation, mainly raw material unfavorable productivity with temporary plant shutdowns and lower volume, especially compared to the peak output in 2021, Q2, partially offset by favorable price and mix initiatives corporate.
And elimination costs were $10 million for Q2 with full year, corporate and elimination costs estimated to be between 40% and $45 million.
Turning to the balance sheet cash ending the quarter at $224 million with free cash flow relatively flat for the quarter, primarily due to increases in working capital driven by the impact of inflation and increasing sales receivables were just over $2 $1 billion with DSO slightly higher at <unk>.
Six days compared to 53 in the prior year inventories.
Inventories finished the quarter at just over $2 $8 billion, that's an increase of 36%.
From prior year or $740 million.
70%, which was inflation related and there was also an increase of about 12% versus Q1.
Inventory days finished the quarter at 116 days slightly up from Q1 at 111 days proper.
Property plant and equipment finished the quarter at just under $4 $6 billion with Capex of 151 million and depreciation and amortization of $142 million for the full year depreciation and depreciation and amortization are forecast at approximately $570 million.
Capex at $785 million.
Finally, our balance sheet is in a very strong position with overall $1 billion of liquidity and net debt to EBITDA at one one times, enabling our business to continue to grow through internal investments acquisitions and stock buybacks.
With that I'll turn the call over to Chris for our operational review.
Thank you Jim.
Of our three segments global ceramic delivered the best performance during the second quarter with significant year over year operating income improvement of which the greatest part came from the U S ceramic business Bill.
Builder sales remained strong in most of our ceramic markets and an increased number of commercial renovation and new construction projects were also initiated.
Most of our markets have seen some softening in residential activity as inflation and higher interest rates affected remodeling investments.
The cost of natural gas continue to rise across the world with European natural gas prices spiking again due to supply uncertainty as energy and raw material price increases across our ceramic business as we continue to implement new pricing actions.
Our U S ceramic business expanded its operating income to its highest level in four years, the commercial and new home construction sector showed the strongest growth with softening demand in residential remodeling in the home Center channel.
During the quarter, our mix and margins were enhanced by improved commercial sales or premium product introductions are gaining traction in the market as alternatives to hire plus European imports.
We continue to improve our sales and manufacturing cost with productivity initiatives and improved product discipline to offset higher energy material and transportation costs. We continue to implement price increases and freight surcharges, we've introduced new distribution strategies to mitigate the impact of rising fuel costs.
Our countertop sales are growing in the high end quartz porcelain and stone categories our.
Our quartz countertop plant is operating at maximum capacity and we are improving our mix by expanding our premium product offering.
To meet growing demand, we're sourcing products and expanding our countertop production.
Our European ceramic business improved sequentially during the quarter with higher sales and enhance mix.
Though our pricing actions during the quarter improved our margins they did not fully offset inflation versus the prior year.
We continue to invest in innovative new features to improve our mix and add capacity to satisfy growing demand for porcelain slab business.
Sales of our premium products increased during the quarter, while our low and medium priced category softened as they are more sensitive to price changes.
Our inventory levels remain historically low and are further limiting our overall sales.
Our R&D teams are reengineering body formulations with alternative materials and reducing the use of Ukrainian clays Reese.
We recently reduced supplies of natural gas have significantly increased energy prices across Europe .
Going forward, our volume and margins will be under greater pressure as our gas cost will be higher we are initiating restructuring actions to lower our cost and manage these market conditions.
And our other international ceramic markets sales growth was primarily driven by pricing and mix with commercial outpacing residential our results in these regions could have been stronger if our sales were not limited by production constraints and low inventory levels are.
Our pricing actions and improved mix are offsetting higher energy and material costs.
The impact of inflation on energy and materials in these regions has not abated and we have announced additional price increases to offset higher costs.
Across these regions, we're beginning to see softening in the residential sector as inflation and rising interest rates impact consumer spending and home purchases.
In June we agreed to acquire <unk>, a leading ceramic tile manufacturer in Mexico for 293 million. The company produces glazed ceramic porcelain mosaic and decorative tiles and has a broad distribution network.
<unk> operates four manufacturing facilities and had approximately 200 million in sales last year.
Ceramic is the primary flooring category in Mexico, and the market has grown even 11% per year in pesos over the last five years in.
In 2020, one that the Mexican ceramic tile market generated sales of $1 $7 billion or about $2 9 billion square feet.
During the past 10 years, we have significantly expanded our participation in the Mexican ceramic market by investing in state of the art manufacturing and developing world class operations and sales organization.
Together with better mix, we anticipate many opportunities to expand the product offerings distribution and efficiency of the combined enterprise.
In the quarter flooring rest of world sales rose year over year, primarily from price increases product mix and contributions from our small panels and installation acquisitions.
Inflation is increasing household cost and reducing consumer disposable income we're.
We are seeing a slowdown in retail traffic, which is reducing industry volume in most categories.
European energy prices are substantially higher than in other regions and are significantly impacting our raw material and electricity costs.
We have raised prices as inflation continue to rise and announced further increases as natural gas and chemical prices escalated at the end of the quarter.
Our wood costs are also rising as it is being increasingly utilized as a substitute for natural gas to provide heat and electricity.
Our flooring sales softened as we progressed through the quarter and our customers are reducing their inventories laminate L V T and sheet vinyl are all following similar demand trends.
In the period, our costs continue to escalate and material supply improve we implemented price increases during the quarter and have announced additional price increases for the third quarter. We are taking actions to address the changing environment, including cost reductions process improvement and postponing noncritical projects.
Our installation business continues to deliver excellent results with growth in volume as well as price we have pass through rising chemical costs and are integrating our recent acquisition, our new manufacturing plant is adding a second shift as we ramp up our sales and distribution.
A insulation products remained strong as they benefit from increasing investments to reduce energy costs.
Our panels business performed well the volume slowed as we progressed through the quarter, we continued to raise prices and improve our mix with higher value products. We're integrating the small French panels plant that we acquired last year and our improving its cost and output.
We are expanding the distribution of our higher end decorative panels.
And more durable H P. L products, our investments in energy production from waste wood are benefiting both our cost and the environment.
In the quarter in the for the quarter, our flooring North America segment growth was primarily driven by pricing gains stronger commercial sales and improved mix the commercial sector improve across all channels, while the residential market is softening as consumers face the pressure of household inflation.
And rising interest rates as our service levels improve customers reduced their inventory in the residential channel.
We continue to execute pricing actions to offset material and energy inflation, the lower plant volumes are reducing absorption and raising cost.
We are strategically investing to maximize our share in the fastest growing L. B T and premium laminate categories. We have launched numerous productivity initiatives to mitigate the impact of fuel freight energy and labor inflation.
Our L. B T cells continued to improve with our new products gaining traction in the market, we experienced fewer material disruptions in the quarter, which further operational improvements and benefited our margins our new West Coast L. B T plant has begun shipping to customers and we continue to refine processes to improve throughput.
Productivity and material costs.
Our east and West Coast operations will provide superior service to our customers and improve our transportation efficiencies.
Our premium laminate is mostly used in residential remodeling and inventory adjustments in home centers impacted our sales in the quarter. Our waterproof laminate collections are increasing our sales in the specialty retail and new construction channels as an alternative to L. B T.
Our new manufacturing line continues to ramp up to targeted production levels and is fulfilling demand for our next generation products.
So we have raised laminate prices, our raw material costs continue to increase substantially.
As the commercial sector rebounds sales and margins of our carpet tile and commercial L. B P collections are improving all channels continue to expand with the recovery in the hospitality and corporate sectors accelerating.
Based on the most recent architectural billing index commercial design activity remained strong with a pipeline of projects that support continued sales growth for the foreseeable future.
To offset raw material and transportation inflation, we're taking additional pricing actions as well as reducing cost across the business.
Okay.
Our residential carpet volumes declined due to softening markets and inventory reductions in the channel we are aligning capacity with demand reducing expenses and announcing additional price increases due to continued material and energy inflation.
Our rug business is concentrated with major national retailers and during the quarter. They all dramatically cut orders to reduce inventory as their sales forecast weekend.
With the impact of a 50 million dollar decline in rug purchases. The segment's sales would have increased to approximately six 5% versus prior year.
In July we closed the acquisition of bus floors are leading nonwovens flooring manufacturer or approximately $150 million.
<unk> adds a new product category to our portfolio that complements our existing lines and includes needle punch rugs carpet DIY tile and artificial tear.
Losses to 2022 sales have been strong with the present run rate of approximately 100 million.
To adapt to current conditions, we are taking actions to restructure our cost across the enterprise to improve our results. We are finalizing plans to rationalize older less efficient assets and optimize processes to lower cost there.
The most significant actions will be in our flooring, North America, Americas segment, including reducing some yarn assets and rug capacity.
And our flooring rest of World segment, we're consolidating installation products and streamlining our organization and in ceramic Europe , we are simplifying their administrative and manufacturing organizations. We estimate these initiatives will reduce our costs by $35 million to $40 million annually with an estimated cash cost of $15 million to $20 million with the <unk>.
It'll cost of $90 million to $95 million.
With that I'll return the call to Jeff.
Thanks, Chris.
During the first half of 2022, we delivered solid results. Despite the pressure of significant inflation rising interest rates and geopolitical instability.
In the U S rapidly rising interest rates are impacting housing sales and inflation is causing changes in consumer discretionary spending residential remodeling a softening as consumers postpone upgrading their homes.
New home and multifamily flooring channels remains strong.
And the commercial sector continues to improve as new and deferred projects are initiated.
So interest rates are lower in Europe dramatically higher natural gas prices and constrained supply are reducing economic growth.
Given these factors, we anticipate softening demand and increased pressure on our margins going forward.
We're taking targeted actions across the enterprise to adjust to these changing market conditions material and energy costs continue to rise and we're implementing further price increases in response.
Producing higher value products, and enhancing our service levels to expand sales, while reducing expenses and initiating new process improvements will.
We will be implementing multiple restructuring projects across the company to reduce our cost.
Also expect improvements in material supply and transportation as we go through the remainder of the year.
In the U S. We anticipate that rising interest rates will strengthen a dollar and reduce our translated results.
Given these factors, we anticipate our third quarter adjusted EPS to be $3 33.
The $3 43.
Excluding any restructuring charges.
Mark has successfully managed through economic cycles, many times before over the long term flooring grows at a faster rate than the overall economy around the world a deficit in housing stock requires additional construction in most regions in the U S housing demand exceeds supply by an estimated 5 million units.
Take years to satisfy.
In addition over 20 million homes are between 20, and 40 years old and in need of significant renovation.
Our business is well positioned to benefit from our long term growth in new home construction residential remodeling and commercial projects.
Strong balance sheet that supports growing the business through internal investments as well as the acquisitions and stock buybacks, we will enhance the performance of our acquisitions and will continue to seek opportunities in new products and geographies.
Remain optimistic about mohawks future and the actions, we're taking today will improve our results.
We'll now be glad to take your questions.
Yeah.
Yeah.
Thank you ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Management requests that you limit your questions to one primary and one follow up.
Our first question comes from Stephen Kim.
With Evercore ISI. Please go ahead.
Yeah. Thanks, very much guys, it's Steve Kim from Evercore.
Regarding your guidance. The <unk> guide does this assume that inputs are fully offset by price and mix are without any contribution from productivity.
And then I'm, hoping you can speak to how volume did as you moved through the quarter is it fair to think that the exit rate of volume growth was maybe you know 300 basis points lower than for the <unk> as a whole and has that worsened more in July .
Let's start with the order trends the order trends slowed as we went through the quarter.
And we exited with a lower order demand and we saw it at the earlier part when.
When you look forward into Q3, it's normally a slower than Q2 historically due to the seasonality. In addition last year, we ran at higher levels to improve our service.
Inflation is impacting discretionary spending and remodeling across the world and we have assumed is going to slow the business and demand out our view of European demand and cost is much more pessimistic today than it was a quarter ago.
We anticipate having lower production of the third quarter, which will raise our cost as we align it with demand in.
In addition don't forget the U S. Dollar has really strengthened especially against the euro since last year and will lower our translated results.
Okay.
Thanks, So I mean, it sounds like you're describing.
Volume is going to sort of stay low end entry queue, partly due to some seasonality, but you also mentioned that some of the what you saw in <unk> was due to inventory.
Talking I'm wondering is it fair to think that at least that portion could ease <unk> wondering how big it was.
And then lastly, your management reorganization. It seems if that's included in your you know 35 to 40 million savings program.
I'm, assuming that's mostly personnel, but no blocks, a pretty lean organization already and so I'm wondering how.
The management re org might affect the company's ability to take advantage of a meaningful rebound in demand should we actually see that you know in the next couple of quarters.
Let's start with your first question again Steven.
That was the inventory destocking is that portion meaningful and is it reasonable to think that that could eat and re queue.
We think it's possible we don't have a clear view into all of our customers inventory levels and it differs by product by category by country, but we believe that the reduced them in the second quarter and we think there could be some more reductions in the third quarter, but our visibility is limited at best.
Is it then a second part of it the restructurings.
We are not taking any meat out of the business. We are taking costs out in operations that are that we anticipate running less we are in Europe doing some organizational changes in both our rest of world business in our ceramic business in order to.
Get them aligned with how we see the future business is going to be in Europe .
Okay.
Alright, thanks, very much guys.
The next question comes from Susan Mcclary with Goldman Sachs. Please go ahead.
Thank you good morning, everyone and thanks for taking the questions good morning, Mike.
My first question is Jeff can you just help us think about.
Some of the seasonality factors combined with the slowing macro and how we should be thinking about the performance of the different segments. As we look past the third quarter, but think about later this year and then going into the early part of 'twenty three.
Let's see.
I'll just give you a broader then we'll try to get the details for you we anticipate softening demand as we just said before across all the different businesses. We're seeing the same changes in every geography, we see continued increases.
On the pressure of our margins given the slowing environment.
We haven't seen a significant change in our materials.
The residential remodeling is slowing with new construction commercial remaining strong.
Again in most of the geographies Europe at this time is being more affected by energy and well have a significant impact on our results, especially in our ceramic business. We're implementing pricing actions were introducing higher value products and we're improving service to try to maximize the sales we talk.
About the restructuring initiatives a minute go and we have we have.
Methods to reduce our expenses and all of the businesses going forward as we go through.
In each of the businesses.
The margins how can you help her on the segments a little bit.
From a segment standpoint, obviously, we're seeing pressure in the ceramic segment, mainly due to energy, but also remember in flooring rest of the world, It's not a consumption issue, but more in the raw materials. So the churn environment really in Europe is somewhat unpredictable with.
The geopolitical events.
<unk> seen some decline in consumer spending all the energy and chemical based materials are rising and are costly we continue though to.
Push increases in prices and we do have some advantages in our flooring rest of the world segment with investments that we've made and waste energy and wind mills as an advantage I would also say that with commercial being strong that helps the ceramic business in the U S and in Europe .
Also the flooring North American business as well.
Okay. That's very helpful color and then just following up on that on the restructuring actions, Jeff How do you think about the areas, where you're taking costs out and you know you mentioned carpet is one of the places where you are reducing some capacity relative to the areas, where you are continuing to invest in adding production and growing.
How are you thinking about the way the business will work as we come through this macro slowdown and get to the other side of it.
Let's see.
Well you asked a lot of questions and get through them all.
The restructuring plans are still being finalized that we talked about it's all in order to adapt to the conditions as we see them for the near term.
We talked about the restructuring.
The largest is in flooring North America, but in Europe , we expect a significant change in the environment we are.
Also changing it yet so that were right for it as for the near term.
E on.
On the expansion pieces.
The current expansion projects are really focused on the areas, where we have increasing sales opportunities <unk> capacity constraints.
So the areas where their focus there's laminate in the United States, which we're shipping all we can make we have a new production line going in and it's already all committed for we have a counter tops that we are oversold in a business, we're importing products from around the world to supplement it.
The Lv tea, we have the plant in Mexico, starting up we believe we have business expansion to use it and we also have a sourcing which we can modify it.
Economy and businesses don't.
Spanned as much as we had hoped and then we have premium ceramic outside where we have a slab business, which is also oversold and we're sourcing from other people. All of these are technologies that we use it in the past.
There's no significant changes, which should limit the startup costs in each one and then the other lower investments are focused on productivity and product features.
And we have postponed some investments until the visibility of everything improves.
Okay. Thank you very much for the color and good luck.
Okay.
The next question comes from David Macgregor with Longbow Research. Please go ahead.
Okay.
Good morning, everyone, Jeff just a question with respect to the commercial the strikes that you're seeing right. Now my recollection is that this is an area of your business, where you use undertaken some rationalization during slower times. So well just now require some additional investment in terms of feet on the street distribution capacity are you able to dimension that for us within the context of this 35.
The $40 million savings restructuring program.
There is nothing in that that is affecting the commercial business.
And in the past, we announced that we were going to consolidate a.
One operation in order to improve the productivity of it and it's well along the way.
We continue to invest in salespeople new products, we believe that the commercial business is going to stay strong we look at the the projects being worked on in the marketplace looks like Theres still a lot coming in.
And we see that hospitality and retail have increased and there is still recovering from the bottom point.
There are projects that were delayed that are being reinstated and in the category, we see hard surface growing faster than carpet tile and but in the whole category. Our margins are expanding with the improved mix as well as volume.
Good to hear.
And my second question, just with respect to maybe the residential business or just.
What you're experiencing here how.
How much margin recovery is achievable through the price increases that have been announced so far to date.
The.
Let's start out with first the our ability to project. The inflation is really poor our current businesses are facing extraordinary inflation and we're still managing some supply disruptions at this time we've.
We've increased prices during the second quarter, and we've announced additional price increases which are being implemented in this quarter where.
We're taking actions to control cost, we're taking actions to improve productivity. The businesses are trying to improve the mix and where restructuring in the different businesses that we've talked about where it's appropriate.
The energy and Europe remains a problem the pricing remains unknown and it will pressure our margins.
In the ceramic business as well as in the other businesses.
As it evolves and we have you know a.
Very limited view of how it's going to impact the demand there will have to all see together.
Okay. Thanks, very much good luck.
The next question comes from so and Jefferies. Please go ahead.
Hey, good morning, everyone.
Given the the Nat gas shortages in Europe , and so certainly prices have spiked assuming some incremental pressure in the winter months do you have enough prices it cover.
The cost headwind and when do you kind of expect to be caught up and then separately are you seeing some of your higher cost competitors in ceramic or flooring Europe alder facilities since it's not economical and how you're kind of managing that risk around gas rationing potentially later this year.
Well for natural gas is.
First of all the energy volatility in Europe is substantial.
Natural gas is significantly raising inflation and is affecting demand. It's also impacting the cost of many of our chemicals.
And materials that we use.
Okay. Your copper around getting gas, how you're kind of managing that in any of our competitors shutting down just given the economics currently.
Because of the cost of gas some smaller competitors in Italy are shutting down and so far we've been able to get gas, but we can't predict it for the future.
Okay.
And then on the productivity side and cost side. The team has obviously done a great job the last two years and at 182 million range.
From a productivity standpoint, which is Greg when we look out to 'twenty two 'twenty three and beyond outside of the 35 to 40 million cost out that you are calling out for restructuring in a declining environment and what's it like a realistic target on our productivity and when we look at your cost curve globally outside of some of the higher cost stuff, you're taking out of North America flooring, how does it look is it.
Pretty flat or is it still pretty steep where you still have some outliers where that could be opportunity if demand remains pretty depressed.
When you go into recessions.
A significant volume deterioration.
Usually it's difficult to take out costs and be prepared for coming out of it and not have the margins deteriorate and we would anticipate the same thing would happen now.
Okay alright, thank you.
The next question comes from Eric Foss Heart Cleveland Research. Please go ahead.
Thank you.
Two things first of all a follow up on the restructuring.
It sounds like Youre working through this real time I. Just wanted clarity is is this is there potentially more than what you've outlined today in terms of spend and savings.
Rents continue where they're going or does this consider scenarios you can see and this is what it is.
We don't have any major restructurings planned beyond this.
The business as we go through a downturn when it happens we cut back on inventories we cut back on production, we reduced investments in marketing and staffing.
<unk>.
We don't replace people that leave and we shrink the business.
Without destroying our ability to go back which is just you know.
I think about every eight to 10 years, we do this.
<unk> has a really strong history and the management team out in each of the segments is well prepared to do.
Or is there demand and the cost and match the cost appropriately and so this is something that we've gone through before and I think the teams are well prepared to take the challenge on again.
And just another note.
Going into this thing at this point, it's really different.
Housing demand.
It has been exceeding supply normally we've been overbuilt that has to get taken out of the system. The rental markets are really low vacancy rates and commercial still expanding and you have employment at high levels I mean.
This is a really unusual environment.
That's helpful perspective.
Remind you that you know the strength of the balance sheet that Mohawk funds yourself him with strong liquidity and low leverage certainly gives us a lot of flexibility.
And then secondly.
You've done a good job over the past four or five quarters of price and mix relative to raws and I guess, we'll see those numbers later today.
My question is is it in an environment pricing makes it easier in an environment, where the consumer wants to spend money than an environment, where the consumer is.
Retrenching, which appears now and so my question is what should we expect what are you expecting in regards to price and mix in an environment, where the consumer is is put in at least one foot on the brake.
We're trying to do everything with the businesses to maximize the mix and bring out products that customers will pay more however, and slowing environment that you're in.
Increasing price is always gets more difficult as demand slows.
The different all the players in the market or try to operate their assets and usually when you go through these environments to material costs also start declining.
So those would be typical.
Yeah.
Thank you.
Okay.
The next question comes from Kathryn Thompson with Thompson Research group.
Please go ahead.
Hi, Thank you for taking my questions today.
I wanted to follow up on the inventory question from earlier in the Q&A focusing in on flooring North America.
The industry isn't 10 minute three price increases this year fourth into works in a variety of categories.
We're hearing in the channel the order start to see a more meaningful slowdown and the last month. The court last three four weeks of Q2.
How do you how do you balance obscured inventory optics from retailers that are definitely buying ahead of price increases and construction cycles continue to be extended versus a fundamental slowdown and what are you building partner, saying in terms of tapping the brakes to wait for inflation state person is more fundamental.
Concerns about demand.
Hmm.
You have to put it in perspective of where they came from when the industry and us when our service levels were poor they were trying to maintain there.
Their operations so they raised their inventories because they couldnt depend on we and the rest of the industry to deliberate.
On time at the last minute so through that they raised inventories.
And the last quarter.
I speak for the industry, but R. R.
Our supply has gotten much better so their need to happen they have to take out and they don't have to have those investments.
As they go through remember in our business flooring as the as one of the last things you put in in a home when you build it because you don't want all the people walking through it.
The things they are scratching, yet and the owner comes in and doesn't like it. So we're the we're one of the last things that go in.
As you go through so it's a tale of it.
Yeah, that's a little bit and then yeah.
You had touched on this earlier that pulling the string a little bit more on squaring prior expansion projects with current restructuring initiatives.
Between the U S and Europe .
How do you really how do you focus on continuing those expansion projects and.
Really you're you're faced with a lot of uncertainty which is of course driven the.
The cutback.
How much do you press forward in this expansion project is really pretty important and why.
First you have to start out with that most of the expansion projects the big ones, where we've been discussing for for over a year. So the orders for the equipment are just now coming in and some of it won't even come in for them.
Till later, so these things take from when you start them to when you and them most of them take.
Minimum 18 months and could take two years or more.
Is it. So these are all long term pieces there have been some of them that you know we are in different stages with we've postponed the.
Investments were going to make in Brazil, and that business at the moment and we postponed the other smaller ones, but the big ones that are are three quarters through you can't stop the baby.
Yep understood.
Thank you best of luck.
The next question comes from Michael Rehaut with Jpmorgan. Please go ahead.
Yes.
Great. Thanks, good morning, everyone.
Wanted to just be clear on some earlier comments around price.
Price mix versus cost and.
You know.
Specifically just around number one.
During two Q, if you could just review briefly.
Across your three segments, if possible or on a consolidated basis whatever is easier.
You were in terms of price cost.
And do you expect re queue to be better than that or worse.
Or would you you know when would you expect to get to a positive stance.
If that's if that's not three Q would it be <unk> assuming.
You know stability in raw materials for for just an exercise point.
Well, Mike first of all as I said.
Released the Q after after the call. So we'll have all the detail, but I would share is the fact that so in Q1, we were about $11 million behind when you look at price mix versus total inflation or a little bit better than that in Q2.
So we've closed that gap again price mix versus total inflation as you look forward.
As we've said, it's a little bit more unpredictable with the rise of energy and in Europe , especially impacting both our consumption of natural gas and our chemicals. So we would expect a little bit spread any of that of that gap in Q3 and that was.
All considered in our guidance.
Okay I appreciate that.
And also just wanted to circle back to you know a couple of the topline headwinds.
Highlighted into Q the.
First some of the channel inventory reductions and then the the impact from the rug business.
It's it would be very helpful. If possible. If you can kind of give us a rough sense.
What the channel inventory reductions what type of headwind on it you know in terms of sales.
Sales growth what type of hit the sales growth that.
Cause.
And looking forward to three Q I assume you have some type of an assumption.
Handle inventory reductions as well as the rug impact and I was curious if if.
If you could share that with us as well.
As you would suspect.
We don't have exact.
Exact views of our customers. So most of it is in <unk>.
<unk> of what's going on rather than fact based and we and then given the size and variation of the pieces, there's a lot of differences between businesses and channels.
The retail business, where there are significant inventories we believe all of those are reducing their inventories as they see a pull back in demand and then many of them had escalated inventories because of the lower service levels, they've had the last year and a half. So we believe those are.
Pulling back.
Where they are and how much is there we don't have an exact view of it we believe theres some more to take out as we go through.
On the rug side, you know everything you read about the top.
10 retailers in countries. Those are are those are the customers and they're all over inventoried there all cutting back in.
All the things they can do to reduce their inventories and they are cutting back and things even that are.
Because other inventories are out of line. They are cutting back on a lot of things. So the decline of it was a huge amount. We think most of we think a big chunk of that runs out and we expect a moderate improvements in our rugs going forward.
Different than the others.
Okay. Thank you.
The next question comes from Keith <unk> with Truest. Please go ahead.
Thank you I had two questions on mix one you said in the prepared statement that mix in Europe .
Positive in the quarter.
Little bit more.
Some of the mixed pressure, we're seeing in North America.
Is there a lot of variation byproduct category, how much breath right.
You have some mix things in Europe .
I'm sorry can you repeat the last question that it was hard to hear you.
Yeah, the mix pressure, you're seeing in North America does vary by product category.
The severity or is it pretty uniform.
The first part of the question on <unk>.
Mix, especially in Europe , so ceramic Europe .
Again in the second quarter.
As we anticipated they did a very good job of.
Of really countering the energy.
Piece of.
Inflation in the quarter.
Terms of cross across the board the different product categories.
<unk> C is with commercial.
Increasing that helps the margin profile in ceramic and then North America as long with US Randy Europe , and many cases, what we're doing is trying to push the premium side of the products.
In the face of the rising inflation.
And in North America is already amongst.
Once the products in terms of the crusher downward broker.
I'm not sure there's that much difference between the categories at this point the carpet industry slowed down more so that's probably got more.
More impact.
Yes.
Okay. Thank you.
Yes.
The next question comes split comes with from Trump One Patterson with Wolfe Research. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
First just wanted hoping to get an update on the competitive dynamics for your our European ceramic business.
You know given the the Ukrainian a.
Mine are shut down but have your.
Competitors been able to bring a.
Related product to the market to get access to play et cetera, and have you all been able to reformulate your product as well.
Truman we've reformulated our body composition with alternative materials.
The majority of the products will change over in the third quarter and the balance will be changed.
As we get into the end of the year, we're not exactly sure where the rest of the group is but we've made a lot of progress in changing our material.
Oh, Okay, perfect and then.
You know as you guys mentioned the.
The commercial data points that we track are or have been really strong still sounds like you know retail U S has been soft but could you break out in North America, and maybe what your commercial sales were up year over year.
And how it compares to the U S residential R&R retail.
Sales during the quarter.
We don't.
Break it down at that detailed level, but commercial construction remodeling as you said and strengthen across all channels.
It's led by government workplace and health care channels.
We've seen the hospitality and retail increase and it hasnt recovered as much. So it's got a lot more to go versus the other channels.
Seeing projects that were delayed being reinstated.
And.
I think we said this earlier the hard surface businesses continue to grow faster than the carpet tile business and our business. The commercial has a higher margin than our residential business. So.
It's improving our mix and then within the commercial business.
As these larger projects that go go on they tend to use higher value products, which improves our mix part of it.
And I would say they are.
The concentration is higher in U S ceramic and.
As in flooring, North America as a percentage of sales.
Okay. Thanks, guys and good luck on the upcoming quarter.
Okay.
The next question comes from Adam Baumgarten with Zelman. Please go ahead.
Hey, good morning, everyone.
I apologize if I missed this but could you give us some more color on the temporary shutdowns in flooring, North America or sorry, the rest of world. So you guys noted in which maybe products as well.
Well in the quarter as we saw them.
Man a lesson in the environment become.
More unpredictable, we did pull back on some production to keep inventory aligned.
Was that in specific product categories out there or is it across the board.
I think it was more in the flooring the flooring category.
Is it but then also you have to remember that the vacations are coming up so we tend to build inventories and take it out during the vacations, we're planning on having higher.
More downtime this year last year, we were trying to minimize all the downtime to build inventories. This year, we will have more downtime as we go through the period.
And the vacation time frame.
Okay got it.
And then just maybe if you can give us an update on the European ceramic natural gas headwinds that you saw in the quarter and what Youre building in for <unk>.
Well I think the best way to look at that historically energies between 10, and 15% of our ceramic cost and.
And in Europe , now, it's 35% to 40%.
Recently gas prices have spiked again.
And we'll just have to see how market evolves, we have in that environment, we focused on the premium end of the market.
Where are we where energies are less a percent.
We've introduced more differentiated products and I expect we will lose a little share in the low end of the market.
The only other thing okay. Thanks, a lot.
Frankly, the gas prices stay where they are they will have a bigger impact in the fourth quarter as the inventory flows through.
Okay. Thanks Thats helpful.
[noise].
The next question comes from Matthew Bouley with Barclays. Please go ahead.
Hey, good afternoon, everyone and thank you for taking the questions I wanted to ask about the North American I guess competition versus imports specifically.
Now that ocean shipping might be loosening, a little bit clearly the U S. Dollar is getting stronger with sort of your sense for the competitive landscape evolving there versus imports and pricing power versus importers. Thank you.
Well in the quarter import pricing increased given energy and transportation costs.
Ocean freight availabilities, improving but the cost is still elevated.
Domestic manufacturing is well positioned with the premium collections and our commercial demand is improving we've.
We've seen the freight decline a little bit.
But it's still elevated.
Okay got it and then.
Secondly, and I apologize if I missed this but just just the free cash flow result in the quarter. You know you mentioned building inventory in the inflation around that but.
Speak to the outlook on working capital and an ability to sort of.
You know generate additional free cash flows as we move through the year. Thank you.
First of all you know the balance sheet again is very strong with liquidity by $1 billion and our leverage finished the quarter about one one times in terms of cash flow, where it was about flat for the quarter I think it really impacted by the increase in inflation and growth in sales along with some of the investment capital.
Projects, we do anticipate as we go through the year certainly to have a.
Strong positive cash flow.
Inventory, increasing mainly due to inflation improving service and some investment in <unk>.
Future projects, which will help our R going forward results and remember we've committed to two acquisitions at this point for approximately $440 million and the full year Capex is now about $785 million.
Alright, thanks very much.
The next question comes from Jon <unk> with UBS. Please go ahead.
Hey, guys. Thank you for fitting me in here, maybe just two quick ones on my end.
The first one is when do you anticipate hitting the full run rate of that $35 million to $40 million in targeted savings and how should we think about the cadence of the cash restructuring costs.
So as we said we're completing the plans on you should see most of the cost hit between Q3 and Q4.
Limited savings at the end of the year and then it will ramp up to the full amount during 2023.
Okay. That's helpful and then did.
Did you guys repurchase any stock in the quarter and do you would you anticipate the buybacks kind of ramping up here, given given where the valuation is.
We purchased a very little in the quarter with the announcement that we made of the two acquisitions for over $400 million, but based on the strength the balance sheet that I've talked about previously.
Additional acquisitions and stock buybacks will continue.
<unk> is as we go through Q3 and the end of the year.
Okay. Thank you guys.
Okay.
Thanks, There are no more questions I would like to turn the conference over to Mr. Bauer for closing remarks.
Again, thank you for joining us today, we're confident about our future and we're taking actions to improve our results have a good day.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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