Q3 2022 Mohawk Industries Inc Earnings Call
Yes.
Yeah.
Good morning, everyone. My name is Jamie and I'll be your conference operator today.
At this time I would like to welcome everyone to Mohawk Industries' third quarter 2022 conference call.
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As a reminder, ladies and gentlemen, this conference is being recorded today Friday October 28 2022. Thank you.
At this time I'd like to introduce Mr. James broke Mr. Brown, you may begin your conference.
Thank you Jamie good morning, everyone and welcome to Mohawk Industries quarterly Investor call.
Joining me on today's call are Jeff, Laura Bond, Chairman, and Chief Executive Officer, and Chris Wellborn, President and Chief operating Officer today, We will update you on the company's third quarter and provide guidance for the fourth 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 Securities and Exchange Commission.
This call May include discussion of non-GAAP numbers for a reconciliation of any non-GAAP to GAAP amounts. Please refer to our form 8-K and press release in the investors section of our website.
Now I'll turn it off the call over to Jeff, whereas opening remarks, Jeff.
Third quarter sales increased to $2 9 billion up three 6% as reported or approximately eight 3% on a constant basis, primarily from price increases and strength in the commercial sector. Our sales in the quarter were weaker than we anticipated as sales in our retail channel soften across.
All regions and product categories.
Strengthening dollar also negatively impacted our translated sales for the quarter by 117 million or four 1%.
Our operating income declined as lower volume resulted in higher unabsorbed cost in material energy and transportation inflation impacted our results are.
Our global organization responded to the economic challenges with additional actions to optimize cost productivity and inventory levels.
There are substantial differences in the economic conditions affecting our various global markets and product categories. Our businesses in Europe had been impacted more than others due to the unprecedented energy crisis and high inflation that has slowed the region's economy.
Recently spot gas prices in Europe have fallen drastically, though future prices have not correspond didn't decline.
Our costs have continued to rise and our pricing in Europe has not kept up with recent material and energy inflation, which has compressed our margins there.
The Italian government provided energy subsidies during the third quarter and additional actions from both the European Union in individual countries are being discussed the high cost of energy is force European consumers to concentrate on necessities and deferred discretionary purchases.
Our sales and margins and the market will remain under pressure until the region overcomes. These challenges these postponed purchases will increase demand when the economy rebounds, and enhance our results.
The U S is being more impacted by higher overall inflation and mortgage Reits that have risen from below 3% to approximately 7%.
The residential market, which is the most significant part of our business is expected to decline further before we see an inflection point remodeling has slowed and our product mix has been impacted as consumers trade down to options that better fit their budgets it.
It is estimated that the U S has a housing deficit of 5 million units and more than half of U S homes are over 50 years old.
Remodeling investments are expected to grow long term as U S housing stock ages and families with low mortgages choose to remain in their homes.
Up until this point, our other geographies have been less impacted by inflation and higher interest rates, our selling prices in those regions are better aligned with our cost and their margins remained strong even with their economies slowing.
While we manage through the current conditions. We're also investing in our businesses for the long term, we're expanding our capacity and growing product categories, including L. V T laminate, quartz countertops and premium ceramic and insulation.
These projects should satisfy strengthen demand as our markets recover we have recently completed a number of smaller acquisitions that will enhance our product offering and leverage our existing market positions and Europe . These include us sheet vinyl business, a mezzanine flooring company.
What's in your plan.
In the U S. We acquired our nonwovens flooring producer and a flooring accessories company.
We're awaiting government approval of our <unk> acquisition, which combined with our legacy business will make us the number two ceramic producer in Mexico, our strong balance sheet provides us with additional opportunities to enhance our business.
We recently published our 13th annual environmental Social and governance report, which highlights how doing what's right for the people and the planet is also benefiting our business are sustainable products excite both residential and commercial customers and our bottom line is enhanced by increasing recycled content.
Reducing waste and lowering our water and energy consumption.
Jim will review, our third quarter financial performance.
Thank you Jeff sales for the quarter, just we're just over $2 $9 billion Thats, a three 6% increase as reported or eight 3% on a constant basis.
Favorable impact of price and product mix, partially offset by declining volume and unfavorable FX gross margin for the quarter as reported was 24, 5% and excluding onetime items was 25, 6% versus 29, 8% in the prior year the year over year margin decrease.
This is due to lower demand, increasing temporary manufacturing shutdowns lower sales volume and FX headwinds, partially offset by productivity and pricing and mix were successfully offset the increase year over year inflation impact the actual detail amounts of these items will be included in our MD&A.
Of the 10-Q, which we filed after the call.
SG&A as reported was 17, 9% of sales and 16, 3%, excluding one time items and they adjusted absolute dollar expense was slightly favorable due to the impact of FX and cost containment actions, partially offset by inflation and price and mix.
Operating margin as reported was negative 17, 3% when excluding charges was nine 3% as the Companys current market capitalization, along with challenging economic conditions and higher discount rate resulted in a noncash goodwill and trade name impairment charge of 600.
$96 million in the quarter the nine 3%.
Operating margin excluding charges is 350 basis point decrease versus prior year, primarily driven by higher inflation temporary plant shutdowns, which accounted for $55 million of the decrease in operating income and lower volumes, which accounted for $45 million.
Of the decrease in operating income, partially offset by favorable price and mix.
And productivity gains as long along with net FX interest expense for the quarter was $14 million in line with prior year, reflecting the full benefit of paying off the 2021 Euro bond late in the fourth quarter of 2021.
Our non-GAAP tax rate was 17, 9% for Q3 versus 21, 4% in the prior year, we expect the Q4 tax rate to be approximately 20%, bringing the full year 2022 rate to approximately 21%.
That leads us to an earnings per share excluding charges of $3 34.
Now turning to the segments and global ceramic sales were just shy of $1 $1 billion. So that's a nine 8% increase as reported or 12, 4% on a constant basis favorable pricing and mix initiatives more than compensated for the volume declines in the quarter.
The sales growth was led by Europe U S and Brazil.
Operating income excluding charges was $132 million, increasing approximately 11% versus the prior year and adjusted operating margin improved 20 basis points to 12, 1% due to strong price and mix actions, which offset higher year over year inflation.
<unk> gains and net favorable FX, partially offset by lower volumes in flooring North America sales were just under $1 $1 billion as well as a three 7% increase year over year as reported the growth in commercial laminate and resilient.
Weakness in residential carpet and rugs.
Similar to Q2, excluding the decline in the major retailers rug demand the reduction of that demand net sales increased approximately 8% versus prior year.
Operating margin, excluding charges was 8% equating to a 340 basis point decline versus prior year due to the higher inflation, which was nearly offset by price and mix initiatives temporary plant shutdowns and lower sales volumes, partially offset by productivity gains.
Finally flooring rest of the world with sales of $731 million. That's a decrease of four 8% as reported but an increase of nine 4% on a constant basis with price and mix actions driving solid growth in panels oceana and the installation businesses.
Operating margin excluding charges was eight 5% a significant decrease versus prior year. The primary drivers of the decline were higher inflation, partially offset by the price and mix actions temporary plant shutdowns and related unfavorable productivity plus lower sales volumes.
Corporate elimination costs were $11 million for the quarter and expect the full year to be between 40% and $45 million.
Now turning to the balance sheet cash for the quarter ended at $327 million with free cash flow of $75 million in the quarter.
Receivables ended at just over $2 billion with DSO slightly higher at 58 days compared to 57 in the prior year.
Inventories for the quarter ended at $2 $9 billion, that's a 31% increase versus prior year, but a 3% increase versus the second quarter.
Year over year increase was primarily driven by inflation product, making up approximately 76% of the increase versus.
Versus prior year or prior quarter, excuse me inflation and acquisitions drive the increase Q3 inventory days stand at 131 days.
Property plant and equipment was just over $4 $5 billion with Q3 capital spending of $150 million and DNA of the $153 million.
To better align with the slowing demand we have aggressively reduced our full year capital plan by 20% to approximately $620 million, but being a projected at $559 million.
And finally, our balance sheet is a very strong position fluidity exceeding $1 $8 billion at the end of the quarter with the planned payout of our 2023 $600 million bonds in November and net debt to EBITDA at one two times, enabling us to manage through the current environment.
And optimize long term results and with that I will turn it over to Chris.
Thank you Jim.
Our global ceramic segment delivered the strongest performance during the quarter, even with substantial inflation headwinds in Europe sales and new home construction channel were solid in most geographies and the commercial channel showed resilience with new construction and remodeling projects continuing.
In most markets residential remodeling has slowed due to tightening consumer discretionary spending and higher interest rates, we are managing through pricing and mix to reduce the impact of material and energy inflation on our cost natural gas prices remain in a major headwind with volatile pricing in Europe significantly.
<unk> our results.
Recently European spot gas prices have declined significantly as available storage nears capacity.
Though the future pricing for the winter has not followed the decline across the segment, we continue to reduce SG&A spending operational cost and capital projects to align with market conditions.
Sales in our U S ceramic business expanded during the quarter with the greatest growth in the commercial and new home construction sectors residential remodeling demand continued to lag in the retail channel and customers are reducing orders to better align their inventories during the quarter, our margins were driven by our pricing actions.
And strong commercial sales improved our mix, we are gaining support with our new higher margin introductions that are an alternative to European imports.
To offset material inflation, we are identifying.
Further process improvements utilizing alternative materials and reformulate and glazes.
To align with seasonal demand and manage our inventory we are scaling back production in the fourth quarter and reducing sourced purchases. Our countertop sales grew during the quarter led by our high end quartz collections. Our courts manufacturing plant is operating at full capacity and we are sourcing products from around the world to satisfy demand.
We expect that our new <unk> production line will start up in early 2024 and will allow us to further expand our sales and improve our mix.
Our European ceramic results in the quarter exceeded our expectations due to our sales and pricing actions positive mix and Italian energy subsidies subsidies are approved through November and May extend further during the quarter sales of our premium collections remained strong while increased gas.
Prices impacted our outdoor and lower in products.
European consumers or postponing residential flooring investments is high energy cost squeezed their budgets.
Given lower spot gas prices and government subsidies were increasing production in the fourth quarter to raise inventory levels and improved service in the first quarter, we anticipate lower production rates with winter energy prices expected to peak our operations teams are adjusting our production across our European plants the optimized mix.
Cost and flexibility as demand evolves.
We have addressed the shortage of Ukrainian clay by reengineering formulations with material from alternative sources.
In our other markets third quarter sales grew primarily through pricing mix and strengthening the commercial channel Mexico's Central Bank has implemented additional interest rate increases, which is slowing the economy in ceramic sales in Brazil interest rates remain high and retail sales are slowing we are.
Increasing our activities in the A&D community and expanding our commercial product offering.
Our pricing actions improved mix and productivity gains enhanced results all businesses are reducing production in the fourth quarter, which will increase our cost.
Our team in Mexico has a detailed strategy to integrate our <unk> acquisition to optimize short term results. The combined organization will have a stronger product offering and our competitive position to address the $1 7 billion Mexican ceramic market government approval of the transaction may be finalized in the first quarter.
For the quarter flooring rest of world sales rose year over year, primarily from price increases and growth in our panels insulation and oceana businesses. This segment sales are mostly residential and we're more impacted by constrained consumer spending and.
In Europe inflation is reducing discretionary purchases. So we did not see the typical seasonal improvement after the summer holidays. The retail sector is reducing inventories and consumers are trading down in all categories. Our margins in the quarter were compressed by inflation lower sales volume and reduced production the week.
Turning markets are making additional price increases more difficult to implement natural gas prices in the period temporarily reached 12 times historical levels and governments are reviewing ways to assist industry.
Industry and consumers with the spike in gas and electricity prices.
Our wood supply and pricing is also being impacted.
As it is being consumed as an alternative source for both heat and electricity.
As flooring sales softened, we increased promotional activity to encourage consumers to trade up while our premium laminate in L. V. T face greater pressures are more value oriented sheet vinyl sales grew in the quarter, we implemented price increases that partially offset rising material and energy costs.
We anticipate sales volumes in the fourth quarter remain weak and we are reducing production substituting alternative materials implementing process improvements and postponing noncritical projects.
We completed the acquisition of a small Polish sheet vinyl producer that will expand our business in central and Eastern Europe .
Our urethane insulation products provide the highest thermal resistance as consumers seek ways to reduce energy costs, new building projects in Western Europe are beginning to slow and we are enhancing our distribution by expanding our customer base and exports.
Selling prices were slightly behind inflation, and we are reviewing alternatives to optimize our costs, our new insulation plant in the U K continues to ramp up as we increase our sales and distribution.
Our panels results weakened as demand softened and competition intensified our margins decline due to the impact of lower sales and production volumes from the weakening market the.
The French panels plant, we acquired last year is increasing sales and we have improved its productivity and operating expenses, we expanded the distribution of our higher end decorative panels and acquired a small mezzanine flooring company that will bolt onto our existing business.
Yeah.
In Oceana, our sales improved primarily from pricing and mix the Australian market is improving as the country relaxes Covid restrictions in New Zealand is more difficult with residential sales weakening.
Our increased pricing is covering inflation and inventories increased as imported material arrived faster than expected.
For the quarter, our flooring North America segment sales increased primarily from pricing the commercial sector was stronger than residential with hospitality, leading the other channels.
Hard surface products outperformed benefiting from technology and capital investments in premium laminate and L. D T.
The residential market softened as inflation impacted consumer discretionary spending and retailers reduced their inventories are pricing in the period offset material and energy inflation, the lower manufacturing volumes led to unfavorable absorption.
We managed our sales marketing and administration spending to.
To align with volumes and offset inflation, we are implementing our restructuring plans to lower both our fixed and variable costs by shedding higher cost assets, reducing staffing and aligning production with demand.
We are executing many projects to improve productivity reduce waste reengineer products and lower energy costs. We're also deferring nonessential capital projects to align with the present environment.
Our residential sales continued to improve with our strongest performance in the new home construction multifamily and commercial channels, we have introduced assortments tailored to regional preferences and optimized our portfolio to improve productivity and service our wet protect an antimicrobial technologies are being well accepted as desired.
Features by consumers sheet vinyl sales strengthen.
As inflation has increased in value oriented flooring options.
The first phase of our new West Coast ELV plant is operating at planned output levels, we are ramping up production and training the workforce, where additional lines that will be installed throughout next year, our east and West Coast operations will enhance service to our customers lower our cost and improve transportation efficiencies.
Demand for our premium laminate continued to grow as high performing value alternatives to other flooring sales of our waterproof collections and more realistic visuals are expanding in all channels.
Inflation and other materials have reduced our margins, though we are beginning to see some cost decline our new manufacturing line is operating at our targeted levels to satisfy increasing demand we have commitment to saturate, our current capacity and have initiated further expansion investments.
Market conditions for carpet softened in the third quarter more than we had anticipated and we reduced production, resulting in unabsorbed costs.
In the second quarter, we announced price increases that were implemented in the third quarter as inflation continued to rise with demand softening, we were not able to increase prices further to recover the inflation after the announcement.
We are seeing reductions in raw material costs that should align with our current pricing when our higher cost inventory is depleted to reduce our cost we are eliminating less efficient capacity streamlining operations and lowering marketing and administration costs as well as reducing production to lower inventories.
Our commercial business remains good and the architectural billing index reflects continued construction activity the hospital it hospitality channel grew.
The strongest as postponed projects and renovation are increasing demand.
Our margins remained strong as pricing and mix covered our inflation in the quarter, our commercial hard surface sales growth is outpacing carpet with flexible L. B T being a preferred option, our new more sustainable carpet tile eco flex one is gaining acceptance with its low carbon footprint recycled content and.
Take advantages to.
To complement our flooring accessories business, we acquired a small rubber manufacturer that produces tram primarily used with commercial installations. The acquisition expands our current accessories business, which produces laminate vinyl and wood trim.
In the quarter sales in our rug business were lower than last year as major national retailers continue to adjust inventories, we are taking restructuring actions to reduce our costs and lower our production with demand in July we completed the acquisition of a non woven rug and carpet business and the integration is delivering synergies.
With that I'll return the call to Jeff.
Thanks, Chris.
It's challenging to predict either the duration of the current economic conditions are the impact on our industry as central banks around the world continue to raise interest rates and inflation reduces discretionary expenditures, we expect our business to remain under pressure residential remodeling drives the majority of our sales and customers are different.
Foreign purchases and trading down in Europe gas and electricity prices, reducing demand and increased car manufacturing and material costs.
We anticipate that governments in Europe will take action to lower the impact on the economy businesses and consumers are focused on managing through the current environment, while investing to maximize our long term profitability.
We anticipate demand will slow further in the fourth quarter, and we will reduce production, resulting in greater unabsorbed overhead too.
Sales were increasing promotional activity, introducing differentiated collections and reacting to competitive actions.
We're executing restructuring actions lowering administrative and manufacturing costs and reducing investments in marketing.
Material prices spiked in the period and have begun softening in many categories and Europe flooring projects are being deferred compressing industry volumes and we are raising inventories of specific products ahead of higher energy costs. This winter.
After our second quarter U S pricing announcement, we incurred peak carpet material costs that will compress our margins until they flow through our inventory. We are postponing capital projects that do not impact our long term strategies, while completing those that are critical to near term performance of the business.
Finally, we expect the strengthening U S dollar will continue to reduce our translated results.
Given these factors, we anticipate our fourth quarter adjusted EPS to be $1 40 to $1 50, excluding any restructuring charges.
During the past decades, Mark has successfully managed through many challenging periods and industry recessions. The fundamentals of our business remains strong and flooring remains an eccentric component of all new construction and remodeling.
Mark has built leading positions in key markets around the globe with well known brands and extensive product offering.
During this period, we're investing for the market rebound that always occurs after our industry contracts.
We're expanding our higher growth categories of Lv T laminate quartz countertops premium ceramic and insulation, which will increase our revenue and profitability with the next growth cycle.
We've also made strategic bolt on acquisitions for our business that creates significant synergies that will enhance the combined results.
Mark has a strong balance sheet with low net debt of one two times EBITDA and available liquidity exceeding $1 8 billion to manage through the current environment and optimize our long term results.
I'll now be glad to take your questions.
Okay.
Ladies and gentlemen at this time, we will begin the question and answer session. If you'd like to ask a question. Please press the star and the number one on your telephone keypads Manley.
Management requests that you limit your questions to one primary and one follow up.
Our first question today comes from.
Susan Macquarie from Goldman Sachs. Please go ahead with your question.
Thank you and good morning, everyone.
Good morning.
My first question, Jeff is just thinking about demand at a high level can you talk about how things slowed during the quarter and then how do you think about the consumers' elasticity in flooring what is their willingness to re enter the market and how you're thinking about demand as we do move through a weaker global macro.
<unk>.
Uh huh.
But our sales in the period increased with pricing and mix as strength in the commercial sector. The sales were weaker in the residential channel soften across all regions and product categories and it got weaker as we went through the period.
The income was lower with a reduced sales and production levels and higher absorbed inflation, we had in the period.
In our global organization responded by changing our production managing inventories.
Finding more productivity and optimizing our costs.
Residential remodeling does drive the majority of our sales.
And as you know the residential remodeling unlike other product categories.
Our customers can defer them almost in desktop so when you have slowdowns or categories impacted more than most.
Interest rates and inflation are impacting their spending both in the U S as well as Europe .
Europe is in.
A crisis and people just pulling back from spending and they're going to have to get through it and there's all kinds of discussions going on how to help both the.
Consumers as well as businesses and we believe that something will come out of it some countries have already done things like Italy has already started.
Helping with the gas costs.
Let's see.
What else have I missed.
Okay.
Okay.
Susan.
Okay, and then you mentioned, obviously the balance sheet liquidity that you are generating you've got a better balance sheet going into this downturn than you probably just about has ever had in a downturn can you talk about what that will mean in terms of thinking about investing in the business in the long run and we're a mohawk will be as we eventually come through.
This in and what the profile of the business could look like.
Listen there's a lot of differences in this time versus other ones.
Yeah.
Other cycles employment wasn't strong like it is now we have wages, increasing we have housing remaining strong.
Have a.
Aging homes that'll help so this whole cycle is really different than the last couple we've been through where housing was major overbuilt and have had to adjust.
We have strong positions in all of our markets and we're continuing to invest in each of the different categories.
As I said before the major growth categories of the business are in L. V. T, which is the industry is continuing to grow laminate, which we have been able to take market share and expand the entire category.
Countertops is.
Taking share from all the other alternatives Witching, which includes stone in laminate countertops. So it's in a growth mode.
Premium laminate continues to grow in our insulation business in Europe .
As in a good position as people invest more to reduce their energy.
So we're in really good shape with those.
Also made strategic acquisitions, all of which bolt onto the business and every single one of them has dramatic synergies with our present business enhancing both the existing business isn't it.
So with all this we think we're taking the right actions in the short term and we think we're well positioned to grow and as always we would expect the volume to increase our margins to expand and we think we're in good shape to have a dramatic impact on the business.
As Jeff noted that this is not being driven by.
Really the housing market as well.
We're under built still on the U S, especially and have aging homes. So that should mean that you have a rebound with strong pent up demand.
That's release Youll get a higher EBITDA.
For the company and multiple expansion.
Okay. Thank you for the color and good luck. Thank you. Thank you.
Our next question comes from John Lovallo from UBS. Please go ahead with your question Greg.
Great. Thanks for taking my questions guys. The first one is.
How should we think about decremental margins here as we move through the quarter and maybe into 2023, just given the volume declines production cuts continued investment.
With the volume of declining in most businesses youre going to see.
Also pricing increasing due to inflation.
In the period.
I kind of pointed to in my prepared remarks, we had a negative impact from volumes of about $45 million and on.
Unabsorbed overhead about $55 million, we would expect.
The volumes to be lower and continuing into the fourth quarter and anticipate production.
Below sales in most areas and Unabsorbed overhead I would expect to see that increase a little bit in the fourth quarter.
Great that's helpful.
And then can you just maybe expand a little bit on some of these restructuring initiatives that you're initiating and what the cash costs will be.
So as we announced earlier in the year, we're implementing restructuring plans, we talked about 90% to $95 million of cost cash being about $15 million to $20 million is the largest.
Really in flooring, North America, where we're taking out high cost assets and reducing drug manufacturing in Europe , we're also reducing cost and overhead.
Accordingly.
Should generate savings somewhere between 35 and $40 million annually, starting with next year.
Great. Thank you guys.
And our next question comes from Michael Rehaut from Jpmorgan. Please go ahead with your question.
Thanks.
Morning, everyone. Thanks for taking my questions.
First I just wanted to circle back to some of the comments earlier around our capacity additions for next year.
How do you think about those in the face of softer demand backdrop and.
You know obviously, there's the big difference from perhaps what you did back in two.
2017, 2018, 2019, but can you just remind us with the <unk>.
On a rough basis, you know the capacity that's coming online next year from a revenue standpoint.
In terms of revenue capacity.
What that might mean in terms of startup costs.
And.
Theres any risk that you know the.
P&L impact might be a little more negative if demand remains where it is today.
So let's go through all the different ones that some of them aren't going to start up until 24 to tell you the truth.
So it depends on which one our laminate business.
Is growing in the U S. We have.
New capacity is put on we have commitments for all of that we have and we have been unable to satisfy the demand and laminate.
Taking it has really become an alternative as a waterproof option for every other product, including <unk> in the marketplace.
And it has some benefits it doesn't have so it's growing and we're continuing to invest in it.
Countertops that business has been sold up we're using imported products to support the business.
And that should start up in 'twenty, four enabling us to grow yet lv.
<unk> T is the expansion of the West Coast plant, which is probably about 30% done now and the rest of it will come in over time, we have.
Expanding commitments for it and we're also importing products from around the world, which also offer opportunities to use it.
We're investing in premium ceramic the biggest pieces in slabs in Europe . Its also oversold and we have been sourcing significant product from other people to support that business as it grows and then we have the installation business, which.
When we bought the <unk>.
When we bought an acquisition.
We're in the process of finishing the plant starting up and it has some regional advantages given where the locations of other ones are and we think that we can we're not we're expanding our customer base already and starting to fill it up so those are the biggest ones.
And really Mike and when you kind of take.
Take.
The combination of all of those activities.
Should lead us to sales opportunities above $800 million.
Great No that's.
That's helpful.
I guess just my follow up maybe just switching back to near term sales.
And the outlook for the fourth quarter, just wanted to be clear.
On a on a revenue basis, you know obviously.
Volume plus price and obviously price continues to be a big driver of results here, but on a on a consolidated revenue basis are you expecting sales to be down year over year in the fourth quarter and if so.
How much of that impact do you estimate is from <unk>.
Continued channel inventory reduction.
And if you could just remind us again I'm, sorry, if I missed it what.
That impact was on a net basis the <unk> sales.
So in terms of the year over year sales as we've talked about we are.
Highly exposed to residential remodeling I would anticipate.
Year over year basis.
Sales to be flat to down.
Given.
Given the decline, especially in Europe .
But across the business as well will reduce production, which is resulting in the unabsorbed overhead.
<unk> margins as well just wanted to make sure we pointed out we talked about the <unk>.
Carpet is material costs flowing through in the quarter that should impact the <unk>.
Florida, North American segment somewhere in the 30% to $35 million range. So most of that will come out in Q4 with.
A much smaller piece in Q1.
The Destocking, we get feedback from customers. They are all more pessimistic about the future.
The feedbacks, telling us that they are reducing inventories, but we really don't have a good way to quantify it.
We're hoping that the bottom is near us in the near term.
It will improve the future once it bottoms out, but we don't have good information to give you.
Thank you.
And our next question comes from Keith Hughes from Truest. Please go ahead with your question.
Thank you.
Questions on the carpet business you refer in the release.
The initial statement.
About some raw material inflation that was not covered given some of the weak volume.
Given how much input cost for that but I know it can be a big number can you give us any sort of feel for what impact that had in the third or the fourth quarter. So I was just saying Keith Mike is that in the fourth quarter that should impact us and included in our guidance was about $30 million to $35 million and then you'll have a much smaller piece carrying over.
In Q1.
Okay.
You had talked earlier about the.
Producing more in Europe right now.
Given where spot energy costs or are you still on your energy in Europe are you still running basically spot or are there some hedges in place.
And are the biggest part of it is in our ceramic business and we have we have hedged some of it.
But we're still on spot on on a large part of it too so and then they're both basically short term trying to minimize the spikes in the periods, where we are.
Okay. Thank you.
Yeah.
And our next question comes from ink from Jefferies. Please go ahead with your question.
Hey, guys.
Jackie catalyst highlighted you've seen a few cycles. So curious once you kind of work through the destock. How are you thinking about volumes going out to 2020, or maybe just to add marketing and thoughts with geographic exposure, whether its Europe , North America, Latam and if some of your indirect peers have called out mid single digit declines in R&R, maybe downturn in single family.
US unpack, how youre thinking about 2023 once you kind of worked through up till the inventory in the channel.
Listen that answer might be above my pay grade is it seriously theres really dramatic different scenarios that can play out next year and so if you go through the two we have an optimistic one which starts out with the assumption that Europe has limited problems with gas as they go through the winter.
And then they have adequate supplies going forward.
In the U S. The version would be that the interest rates peak and they start declining and we see a significant rebound in the second and third quarter as the economies start preparing themselves.
Alternative on the other one which we're also preparing for the European struggles with energy throughout the entire year.
And at the U S inflation remains high and escalated through 2023 and that scenario you get industry volume remaining low throughout the year and being pressured we are being pressured by unabsorbed overhead and a more competitive environment. So given where we are you can get to dramatically.
<unk>.
Conclusions to it.
<unk>.
Keep in mind that either way, we always enter a growth cycle. After the contraction because of all the postponed sales in our category.
Topline expands this time will have opportunities from the product expansions that we're doing as well as the acquisition investments.
Okay. That's helpful perspective.
In your press release.
Prepared Mark I think you alluded to some competitive activity given the weaker demand backdrop is that more on the price mix side of things more mix any slippage on.
Like for like pricing and in your ceramics business has held up really well just from a profitability standpoint.
Just given where imports.
Historically benefited from a stronger dollar ocean freight containers.
Some of those changes, how you think about pricing and competitive activity, particularly on the ceramic side.
Well on the ceramic side imported prices up until now imported prices have increased as we look forward, we could expect with a stronger dollar they could decrease but we're well positioned with our U S manufacturing and sourcing capability to handle that.
Okay.
The like for like slippage in some of the categories that youre seeing outside of ceramics.
Listen.
All the categories have had problems recovering the last increment of pricing because as the market softened and then at the same time you have material prices, peaking so all the businesses are under pressure with with the the last incremental pricing.
What else at the same time you know.
We started more promotional activities, where it makes sense to try to improve volume in some cases, we've tried to get people to trade up more in the business.
As the market as the cost flow through it should improve our margins.
Assess the key is the good news is we're seeing a reduction of the raw material costs and therefore, it's better aligned with our pricing and as you know is that that will improve the margins as as it turns through the inventory.
Okay. Thank you great color.
Our next question comes from Adam Baumgarten, Baumgarten from Zelman and Associates. Please go ahead with your question.
Hey, good morning, everyone.
Maybe just on commercial stood out as a bright spot I think you mentioned hospitality being one of the areas that was strong could you maybe walk through some of the other verticals maybe like office that are also maybe contributing.
The different channels and commercial yes.
The question.
Yeah, just maybe some color you'd called out hospitality, but are there any other areas within the broader commercial market that youre seeing strength.
For the most part.
Theres still a lot of activity across the board with planned projects coming in the projects that you get from the index. They still show that there is still running at a positive rate.
Have the hospitality is doing better because the hospitality quit spending money during COVID-19 and Theres a lot of projects that were postponed and you have to update those as they come through.
The office you have in some cases more of them coming back to work and things that are postponed in some cases people have to redo their offices for a different environment, where they are going through.
The.
The government projects are still coming through as they keep spending money.
And then also in the healthcare piece is still feeling okay. Yeah really if you think about what was commercial was led by the beginning was really government and health care with hospitality lagging as Jeff pointed out now.
Fatality and that includes you know the.
Hotels casinos airports anything along the route of travel is as consumers.
Move their spending from kind of a day to day and now more into the travel and entertainment area.
Hospitality is having to catch up because of those low investments over the last couple of years.
Got it thanks, and then just you called out the Italian energy subsidy subsidies that you received in the quarter and then it sounds like they're expected to continue at least partially through the fourth at this point can you maybe size the benefit there.
It's about $15 million a quarter, so far and I think they've been approved through November .
Just as a kind of the government in Italy is turning over so that.
They keep proving these things almost month by month.
Yeah, so you'll see a benefit of that in Q3, and Q4 and a little bit of carryover into Q1 as it turns through the inventory.
Great. Thanks.
Our next question comes from Mike Dahl from RBC Capital markets. Please go ahead with your question.
Hi, Thanks for taking my questions.
Just as a follow up can you quantify what the year on year headwind was for for European Nat gas in <unk>, what's that expectation.
For Q and if current spot prices hold.
How much would that change.
As you look out over.
Well.
As you know the cost are up dramatically year over year. When you look just specifically at the fourth quarter I think were roughly about 60% hedged.
Now, 60% to 70% hedged just for the fourth quarter.
Yeah in terms of the headwind.
I think a very good job.
Pushing price running to premium and of our products. So there's really.
Not a significant dip.
The difference between price mix and energy at this point any ceramic Europe .
But we don't have the just the energy cost in front of us at this point.
Right and just.
So just as a quick clarification, when it's kind of.
Neutral at this point is that inclusive.
Of the subsidies and my second question is Theres, some puts and takes around how you're managing production in European ceramic youre ramping production.
Into the fourth quarter.
To take advantage of the spot prices, Jeff I think you said or maybe Chris said.
One <unk>.
Sure.
It's a neutral impact, it's not where rate okay prices almost weekly monthly over there we have surcharges were changing we're walking away from product categories that.
The economics don't make any sense, we're moving products between different regions based on the cost of it we're starting and stopping the plants I mean week to week based on what the energy costs are in different countries and regions.
So I mean, it's a it's a full effort to manage through changing environments.
Yes, and I the comment about producing what we're deciding to do is produce more in the fourth quarter, where we anticipate having lower energy prices and then reducing it in the first quarter when we expect the prices to be significant.
Okay.
This is the future prices in Europe for somewhere in the one.
31, 40 range last time, I looked that might be lower than that right now I mean, they move around so much in any given week.
As you go through and then the spot prices today are.
We're under 40.
Yeah.
<unk>.
So I mean, nobody knows where it's going to end up.
Yeah.
Alright, Thank you I appreciate that.
Our next question comes from Laura Champine from Loop capital. Please go ahead with your question.
Thanks for taking my question, if I look at the inventory balance at the end of the quarter up 31% year on year, how much of that is a cost inflation versus how much your units up in that inventory number.
So the costs make up about 70, 576%. So in terms of the inflation. So it's by far the largest piece.
I remember when we came out of last year, the inventories were low and most of the businesses and the service was poor and most.
So what you also see Laura I think it's important to look at sequentially as well and you see that quarter over quarter, we definitely slowed the pace of that increase and really all of the the quarter over quarter increases inflation and then the added acquisitions.
<unk> is too.
<unk> continued to look at production levels in the fourth quarter and most of our areas to lower inventory as we ended the year.
Again, that's got it most of our areas with some exceptions, we've already talked about.
Okay. So where you are taking promotion is not the clear access for the most part it's because you're trying to drive sales and to a better mix of goods.
And we're trying to utilize the capacities of the equipment.
Thank you.
Thank you Laura.
Our next question comes from Stephen Kim from Evercore ISI. Please go ahead with your question.
Yeah. Thanks, very much guys I appreciate it a lot of interesting information you've given here just wanted to clarify a couple of things here when you talk about your.
The Destocking you said it was kind of hard to know how much destocking.
There is an in channels.
I guess outside of the retail I wanted to sort of press on that a little bit because I would think that particularly like in the North America, new construction residential sector there'll be certain skus that would be most susceptible you know when you do volume runs.
That would be most susceptible to destocking in the supply chain to volume builders and so my question is did you see that in the quarter are you assuming it worsens in your guide and then also regarding the guide when.
When you talk when you talk about price cost headwind for the whole company.
Do you anticipate that it'll worsen in <unk> from whatever would we see it as being in the third quarter.
I'll, let Jeff start with the demand question and then I'll address your price cost.
We know what we know what the buying is well we don't know is what our customers inventories are so we have indications that they are reducing their inventories, but I don't know I don't know if theyre at the bottom are there somewhere between or they are going to change them. Further. So we don't know that I only know us.
The business and we can't tell the difference between our shipments to them in their shipments to their customers.
And then on the price mix cost.
Equation in the fourth quarter, yes, especially because what we've called out the impact in flooring North America.
I expect the gap to widen in the fourth quarter as compared to the third quarter.
Yeah that makes sense.
In terms of the decremental margins I just wanted to clarify a couple of things you know.
You talked about the Italian energy benefit I'm curious do you think that you can maintain decremental margins in line with your historical incremental margin range, even taking out that Italian energy benefit.
And then regarding that Italian energy benefit it sounds like in the ceramic business, that's causing you to shift your production into the fourth quarter, but you also said that you might see those subsidies get extended beyond November if that happens.
Would you likely.
Diminish your four key production or would you merely keep your production higher for longer into <unk>.
Well I think the way to think about that is even if you are getting subsidies.
<unk>.
Cost of gas should be much lower in the fourth quarter than it will be in the first quarter. So that's why we're doing more.
Production in the fourth versus the first.
And in terms of debt correct.
Decremental margins, Steven you have to really watch theyre going to vary by each one of our business lines, depending on exactly how much production that we take out which is equates to your uncovered.
Overhead cost.
So it really varies across each of the businesses within the segments.
So I'm not sure if you can kind of just go on historical one.
Percentages at that point, just as a comment in the incremental it's much easier to hold your costs as the volume rises than it is to decrease the fixed cost or even the variable cost is the thing goes down and then longer term we have to make.
Short term, we have to make decisions how long is it going to last and where it is and how much you want to maintain even though the the volume decreasing so the length of the shutdown periods will definitely impact what that percentages.
Sure.
Thanks, guys.
Our next question comes from Truman Patterson from Wolfe Research. Please go ahead with your question.
Hey, good morning, guys. Thanks for taking my questions.
First Jeff you mentioned that.
The European consumers and a bit of a crisis, which I guess I'll extend to Russia as well, but in the rest of world segment I'm trying to understand how much volumes might have declined in the third quarter and since we're a month into <unk>.
Looking to understand.
How that's trending in the fourth quarter I'm really just trying to understand you know how much that consumer is pulling back.
Well, if you look at flooring rest of world sales were up 9% on a local basis, which was driven mainly by price increases and panels and.
Nation.
The segment sales are primarily residential and overall inflation is reducing retail purchases and.
When we came back from the holidays, we didn't see the normal increase in demand that we that we normally get our customers are reducing inventories and consumers are trading down in that market.
Okay, Okay Gotcha and.
Yeah.
You all mentioned some temporary manufacturing shutdowns in rest of world.
And I know you've previously mentioned some plant rationalization and cost initiatives, just any any any incremental initiatives.
To rightsize this business.
Well just talking about what happened in margins our margins were compressed by inflation lower sales and reduced production theres weakening markets are making our prices and difficult to implement.
We're assessing alternative sources to lower our material cost and in the market similar to Italy governments are reviewing ways to assist the industry and consumers with gas and electricity prices.
Alright, thanks, guys.
Thank you Sir.
And our next question comes from Kathryn Thompson from Thompson Research Group. Please go ahead with your question.
Alright, Thank you for taking my questions today.
Granted.
Candidly a lot of focus on reductions in production, then and along that line, but often in these times.
Economic stress that M&A opportunities.
Our eyes in.
In light of the two part question in light of.
I E a changing world.
D globalization and also changing consumer preferences.
As COVID-19.
How are you thinking about.
Growth opportunities from an M&A standpoint.
Geographic and a product standpoint.
<unk>.
Huge in past downturns.
<unk>.
Freshen up the earnings and the compression of the multiples.
Most companies don't try to sell unless they have to in this environment.
And so usually most of the transactions are done on the other side of it as you're coming out and the margins are expanding I would suspect that's where the opportunities are going to come. This time also.
Yes.
Okay.
And following that part of the question have you changed thinking from a geographic standpoint.
Where you would you would think about growth from M&A standpoint, so in other words less focus on Europe , greater focus in North America et cetera.
Uh huh.
I can't say that we've made a specific decision that you have to take each geography and each opportunity that comes and we evaluated given how we perceive the future at this point.
I mean Europe as you can tell we don't have a view for the next three four months, let alone. The next year. So in Europe under this circumstance, we would have to have much more something that.
Got us to do something immediately.
I would assume the rest of the world is in the same place we are.
At this point, we're really trying to.
Get ready for a slowdown and try to minimize things, but with a strict capital structure. We have if the right opportunity arises we would take it.
Okay, great. Thanks very much.
And our next question comes from Matt Bouley from Barclays. Please go ahead with your question.
Afternoon, everyone. Thanks for taking the questions.
Back on the topic of Decrementals.
Jim You mentioned volumes were up 45 million headwind and the Unabsorbed overhead was a $55 million impact and not to oversimplify, but if we kind of think of those two together is sort of a volume base decremental as we model should we assume that that kind of even or close to even split between the two.
Is how it will continue to look going forward as we model out the impact from volumes or at what point will you be able to kind of rightsize some of the fixed costs and maybe that split won't look the same how should we think about that kind of combination of the two will look.
In the short term.
Just looking at the fourth quarter and what we included in our guidance again, we expect the softening volume to continue and the.
Shutdowns all the related shutdowns also to occur.
We'll have a very similar pattern to what you saw in Q3.
And then I'll, let Jeff answer the longer term, but looking into 2023 as Jeff said, it really comes down to the two scenarios and we wanted to be well positioned for when this pent up demand comes back to us a big part of it is.
We think we're going to produce less and we're selling in most market place and reduce the inventories and as we go into next year, it's going to be really based on the demand.
Usually in the fourth quarter and first quarter, historically you'd be coming out of our high season in the piece and we'd actually be building inventories for next year. This year, we're going to not do that because we don't expect the demand require it so thats another pressure on just the short term.
Term.
But remember got it. Thank you keep the key point is how different this situation is and the fact that we're not overbuilt on housing and you have an aging inventory as well so both remodeling and new housing.
Still poised to have a strong rebound.
In the future.
Certainly do not want to get caught without the.
Our ability to produce the required products.
Understood.
That's helpful color guys and then just second one on the U S and markets.
You're saying sort of remodeling as weekend, but it sounded like you still had strong performance on the new construction channel in the U S.
Given the slowdown that's kind of going on there on the front end is that slowdown in new construction incorporated in your fourth quarter guidance or are you still kind of benefiting from sort of the prior backlogs of construction there on the new construction side. Thanks.
The answer is yes.
<unk> that it is built in.
That.
May or may not know that the flooring typically is at the end of the construction. So ours holds up a little bit longer than that.
The ones that are at the front end so right before they completed the use the flooring, but the number of housing is being started.
Going to impact our business until it turns.
Until it turns around in the future.
Got it well thanks, Jeff Thanks, everybody.
<unk>.
And our next question comes from David Macgregor from Longbow Research. Please go ahead with your question.
Yes, good morning, or good afternoon, as the case maybe.
For taking the questions I guess.
First of all just a.
Next question, just thinking across your various lines and various regional markets.
Globally, what percentage of your offering would you characterize as premium collections within their respective categories.
As more value position products.
I'm not sure we've ever added up like that across all the categories. We have some of the businesses only participate in the premium and some participate from bottom to top and it's different by product category and by region.
I believe that we would have a much larger position in the medium to high but I don't have a number to give you.
Right.
Across most of the businesses.
Okay Alright.
Alright. Thanks.
A follow up I guess, it's been a few questions here to date investing for the long run and I'm just thinking back to Jim's comments at the beginning of the call about taking the Capex guide down by 20%.
I guess the question is around kind of investment discipline at this point and if you think beyond maintenance Capex and just focus on kind of the growth Capex and acquisitions.
How do you think about the limits on what you are prepared to spend until you see convincing evidence of the pending recovery.
So the first part is.
The new capital investments most of them take anywhere from a minimum of a year to as much as two years to implement so the projects that are coming through now or agreed to the end of last the end of a year ago.
Yet.
And once you start them.
The ability to start from is almost none.
Is it you have to write off all the investment that is already there. So those are in place and moving forward.
Some of those will some of the cost of those will flow into next year.
And.
Theyre all in growth categories that we're going to need we may not need as much of it in the short term as we thought but we'll need it as soon as the business turns around and all of them as we go through so beyond those are cutting back on anything that doesn't impact the short term business and <unk>.
Managing through as we see the business today.
Yes.
You hit the work we have to stay very disciplined as we look into 'twenty three and go through our budgeting process as Jeff said, we've initiated a number of projects to have that carryover effect into 'twenty three.
But beyond that.
It really scrutinized.
Based on the demand levels.
Just another comment about the acquisitions all of the things that we've done recently.
I'll have huge synergies between the new business in the old business.
Connecting the two together not only.
Improves the margins of the acquired business, but also the existing business.
So that should help us as we get those together and get all the cost synergies out of them.
There's also product and sales synergies.
Really when you think about this collection of acquisitions, though being small if you if you add richer mix in which hopefully will close in the first quarter. The accumulation of additional sales that those are generating about $375 million on an annual basis.
So as you look at those bolt on ones. They are important to the ongoing business as well.
Okay. Thanks, very much gentlemen, good luck to you.
Thank you.
And ladies and gentlemen, we've reached the end of the allotted time for today's question and answer session I would like to turn the conference call back over to Mr. Lorber about for closing remarks.
We're taking the right steps to manage the existing conditions and we're adjusting as they change over time.
The volatile environment.
We're putting ourselves in a company in a really good position.
For when the economy improves and comes out.
We appreciate all of you joining us thank you very much.
Yeah.
Ladies and gentlemen that concludes today's conference call. We do thank you for attending today's presentation.
You may now disconnect your lines.