Q2 2023 Mohawk Industries Inc Earnings Call
Good morning, My name is Ellen and I will be your conference operator today at this time I would like to welcome everyone to the Mohawk Industries second quarter 2023 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question. During this time simply press Star then the.
Number one on your telephone keypad to withdraw your question. Please. Please press Star then the number two should anyone need assistance at any time. During this conference. Please press Star then zero and an operator will assist you as a reminder, ladies and gentlemen. This conference is being recorded today Friday, the 28th of July 2023, I would like now to.
Introduce Mr. James Brunk, Mr. <unk>, you may begin your conference.
Good morning, everyone welcome to the Mohawk Industries quarterly Investor Conference call. Joining me on today's call are Jeff, Laura Barnes, Chairman, and Chief Executive Officer, and Chris Wellborn, President and Chief operating Officer.
They will update you on the company's second quarter performance and provide guidance for third quarter of 2023, 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 by the private Securities Litigation Reform Act of 1995, which are subject to very.
These risks and uncertainties, including but not limited to those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call May include discussion of non-GAAP numbers for a reconciliation of any non-GAAP to GAAP amounts. Please refer to our form 8-K and press release.
In the investors section of our website.
With that I'll turn over the call to Jeff for his opening remarks, thanks, Jim Bob.
Second quarter net sales were $2 95 billion down approximately six 4% as reported or nine 6% on a constant on a legacy basis, primarily due to continued pressure on residential remodeling across all of our regions.
Our adjusted EPS was $2 76.
As our margins across the enterprise expanded sequentially. There was a seasonal improvement increased production productivity initiatives and lower input costs, we generated over 145 million of free cash flow during the quarter further strengthening our financial position.
Typical of housing recession is higher interest rates and inflation are significantly impact on Florida sales around the world to manage we are selectively investing to increase sales and reducing expenses by enhancing productivity consolidating distribution points and improving administrative efficiencies in the quarter we.
<unk> restructuring and integration actions that will save $35 million annually at a cost of approximately $17 million. We anticipate approximately half of the estimated savings should be realized in the current year, partially offsetting the weak residential remodeling activity.
In addition, we're limiting future capital investments to those delivering significant sales margin and operational improvements in all of our regions. We're taking actions to increase sales, including promotions retailer incentives and selective product launch at the end.
<unk> of our recent acquisition is progressing.
We combined strategies and enhance their manufacturing and product offering while managing the lower market demand. We are preparing for the rebound that historically follows cyclical declines in our industry.
R. L B T premium laminate quartz countertop porcelain slab and installation manufacturing expansion should deliver the greatest growth as the market recovers.
Across our regions, we continue to see strong results in our commercial sector than in <unk>.
Residential residential remodeling remains the industry's greatest headwind due to lower home sales and deferred improvement projects. We believe channel inventories have declined and could be at a bottom.
Price competition is increasing with declining industry volume mix and input costs.
In the U S housing markets remain under pressure due to limited supply high interest rates and continued inflation.
<unk> homeowners are not moving at historical levels to maintain a low mortgage rates.
In Q2, New home starts increased to 1.45 million showing the first quarterly increase since the beginning of last year.
We believe the trend in housing starts will continue and will positively impact flooring shipments in the future.
In our regions home sales and remodeling are also declining due to inflation and interest rates in Europe energy prices have continued to decline the persistent inflation in other categories as limiting consumer remodeling.
In the quarter, we benefited from lower energy prices that flowed through our P&L, our investments in biomass solar and wind energy production reduce our operational expenses and carbon footprint positively impacting our performance.
During the second quarter, the Italian government provided energy subsidies at a reduced level and the program will not be continued in.
In May USA today, right Mohawk as one of Americas businesses that made the greatest reductions in our global emissions over the past three years.
Mark was the only flooring company recognized reinforcing our position as a global leader in sustainability.
Earlier this month went out to Bernard tiers will be stepping down as president of flooring rest of World next year, and we will continue with the company in a senior advisory role to support a smooth transition.
Bernard has made many important contributions to the success of the business since we acquired <unk> in 2005. He has led the flooring rest of World segment for the past 14 years and delivered profitable growth by expanding our product offering entering new geographies and bring in new product innovation to the market.
I'm proud of the exceptional team that Bernard has assembled across this segment.
Meciar who'll be joining Mohawk in October after he completes his contractual notice period, he will become president of flooring rest of world on February 1st.
Jim has more than 30 years of leadership experience with multinational packaging building products and flooring manufacturers in Europe Asia and Australia.
He has considerable experience driving both growth organically and through acquisition.
When will complement our strong leadership team with a passion for innovation strong customer focus and our commitment to sustainability.
Jim will now cover our financial performance for the second quarter.
Thank you, Jeff sales exceeded $2 $9 billion for the quarter. That's a six 4% decrease as reported and nine 6% of our legacy and constant basis as global inflation higher interest rates significantly impacted the flooring industry volumes, especially in residential remodeling channel.
Our global ceramic business had the strongest year over year sales performance in part due to a greater exposure to commercial and new home construction, which outperformed residential remodeling.
Margin for the quarter was 24, 8% as reported and excluding one time items was 25, 9% versus 27, 7% in the prior year year over year decline is due to softening volume temporary plant shutdowns unfavorable price mix higher inflation and the net impact.
FX, partially offset by productivity gains.
Actual detailed amount of these items will be included in the MD&A of our 10-Q, which will be filed after this call.
SG&A expense as a percentage of sales was 19, 6% as reported and excluding one time items was 17, 6% versus 16% in the prior year.
The increase in SG&A expense was primarily attributable to higher inflation and the net impact of acquisitions, partially offset by productivity gains operating income as reported was five 2% restructuring integration and other items were $91 million for the quarter comprised of.
Legal settlements and reserves as disclosed in our quarterly filings.
Costs associated with restructuring actions announced in 2022 and acquisition and integration costs, primarily for our ceramic acquisitions in Mexico and Brazil.
Also in the quarter, we have taken additional actions across the enterprise to lower our cost and strengthen our results. The total cost of these actions is $17 million for an annual savings of approximately $35 million once completed.
Operating margin excluding charges was eight 3% for the quarter a decline year over year was primarily driven by the lower sales volume and higher inflation, along with temporary plant shutdowns negative price mix and the unfavorable net impact of FX, partially offset by productivity gains.
Sequentially, though we saw significant margin expansion as seasonal volume helped strengthen our quarterly sales and reduce our manufacturing shutdowns and lower costs, especially in raw material and energy combined with increased productivity.
Said weakening price and mix.
Interest expense for the quarter was $23 million increasing from the prior year, mainly due to the higher interest rates.
non-GAAP tax rate was 19, 5% versus 22% in the prior year.
Our forecast of Q3 tax rate is between 18 and 19% in the full year rate is forecasted to be 19% to 20%.
Earnings per share as reported were $1.58 and excluding charges were $2 76.
Turning to the segments Global ceramic segment had sales just shy of $1 $2 billion that was basically flat as reported and a decrease of six 7% on a legacy constant basis weaker volume and unfavorable FX were only partially offset by.
Positive price and mix.
Compared to the prior year, our business in the U S held up the strongest in the quarter led by its performance gain commercial and new construction.
Operating margin excluding charges was eight 6% as higher interest rates and inflation are impacting the flooring industry across our regions to varying degrees, leading to lower volumes and increased plant shutdowns, partially offset by productivity gains and positive price mix and the favorable impact of <unk>.
X.
Turning to flooring North America sales just exceeded $1 billion that was an eight 9% decrease as reported and 12% on a legacy basis, especially in the residential remodeling channel and negative impact of price mix, along with the lower volume.
In the quarter the year over year weakening conditions were felt the most in our residential soft surface businesses.
Operating margin excluding charges was 6%.
Current economic conditions with reduced inventory volumes and increased competition is driving negative price mix lowering sales volume and creating more temporary plant shutdowns, partially offset by decreasing input costs. It.
It should be noted that sequentially, we saw strong margin expansion in both global ceramic and flooring North American segment.
Lastly, flooring rest of the world sales at just over $790 million, that's down 11, 4% decrease as reported and 10, 2% on a legacy constant days basis.
The decrease was primarily attributable to lower volume negative price mix and unfavorable FX the weakness in residential remodeling was felt the most in our laminate and wood businesses. In addition, our installation of panels business was negatively impacted by the deferral of new projects.
Operating margin excluding charges was 12, 1% as consumer spending in our category is not improved at this point in market competition increases were negatively impacted by the lower volume temporary plant shutdowns and unfavorable net impact of FX, partially offset by productivity gains.
Corporate and eliminations was $12 million for the quarter and on a full year basis corporate expenses should be approximately $45 million.
Turning to the balance sheet cash and cash equivalents were $571 million for the quarter with free cash flow of $147 million in Q2 versus a use in the prior year free cash flow year to date is over $275 million.
Receivables were just shy of $2 $1 billion with a DSO of 58 days versus 56 in the prior year and prior quarter.
Inventories for the quarter finished at just over $2 $6 billion and excluding the impact of acquisitions inventories decreased $277 million versus Q2 of 2022 inventory days are at 120 days versus 116 in the prior year, but again <unk>.
Greece from the 128 days in the prior quarter.
Property plant and equipment was just shy of $5 billion Q2, Capex was $117 million with DNA of $157 million for the full year forecast includes capex of approximately $600 million with DNA of $595 million.
Finally, gross yet finished just shy of $3 $1 billion with leverage at 1.8 times adjusted EBITDA. This provides us the flexibility and strength as we look forward to the rebound in our industry.
Now Chris will review, our Q2 operational performance.
Thank you Jim.
Our global ceramic segment's result improved from the first quarter with increased sales higher production and lower energy costs.
Round, the globe high interest rates and inflation are reducing housing sales and remodeling investments to varying degrees based on local conditions. We believe that most of our customers have now align their inventory levels with market conditions are.
Our asset utilization remained low with compressed demand and we further reduced our inventory and working capital.
Our P&L benefited from lower materials and energy flowing through the inventory.
This reduction was partially offset by greater market competition, and a lower mix, which impacted our selling prices.
While energy cost around the world have substantially decreased they continue to be highly volatile and our acquisitions in Brazil, and Mexico, we are realigning the organization.
Finding new sales and product strategies and executing cost reductions.
Our U S ceramic business benefited from a greater participation in the commercial and new construction channels enhanced styling and more consistent service.
As energy and freight cost decline in industry volumes weaken the market is becoming more competitive.
We are introducing higher styled products to improve our mix and are focusing on stronger sales channels. We.
We've expanded our customer base, which is helping to offset the weakness in residential remodeling.
In the quarter, we further reduced our inventory while maintaining high service levels. The decline in energy prices will improve our cost as it flows through our inventory.
We have taken cost reduction actions in response to increased competition and other inflation as we prepare for the start of the additional countertop capacity, we are enhancing our product portfolio and expanding our kitchen, and Bath channel with complementary tile and countertops selections.
Our ceramic business in Europe remains under pressure as residential remodeling remained slow.
Our volumes in the quarter improved sequentially and our results benefited from sales of premium residential collections commercial products and exports.
Competition is becoming more intense in all channels due to low industry volume and declining energy cost, we are adjusting to the changing environment and using promotional activities to deliver additional volume.
To utilize our new porcelain slab capacity, we are broadening our portfolio with innovative visuals and were manufactured products, we had been outsourcing.
We continue to focus on cost containment, including overhead reductions productivity projects and alternative formulations.
As with our other regions, our Latin American ceramic businesses are also being pressured by higher interest rates, which have compressed residential remodeling.
We are making progress integrating our existing businesses and new acquisitions, and we have begun to leverage sales of our total product portfolio to expand our distribution.
The combined synergies we are realizing are partially offsetting the weakening market conditions.
By the end of the year, we should complete the migration of our acquisitions onto our existing information systems, which will facilitate further sales and cost opportunities.
Of the two regions, Mexico is performing better due to the economy and lower interest rates, while Brazilian ceramic industry is now being more impacted by economic conditions after holding up longer.
We are taking additional sales and operational actions to manage the softening environment. The Brazilian government has recently announced that it will subsidize low interest rate mortgages to support new home construction and help the economy.
Our flooring rest of World segment continues to successfully manage a difficult environment consumer spending has not improved as we expected.
Confidence confidence remaining low given inflation higher interest rates and the war in Ukraine.
Sequentially, our sales volume and production rates improved from the first period.
With low manufacturing utilization and declining input costs industry pricing and mix continues under pressure.
During the quarter energy and raw material cost decline, partially offsetting weakening conditions.
To manage lower volumes, we're pursuing additional sales reducing cost and aligning production with demand. The segment's third quarter is seasonally impacted by extended vacations, which will reduce our sales and earnings in the period.
There are flooring sales are under pressure our sheet vinyl collections are outperforming as consumers trade down to lower priced alternatives to minimize project cost to.
To meet rising demand across our regions, we are increasing our sheet vinyl production the integration of our eastern European sheet vinyl acquisition has significantly progressed.
We have enhanced its offering with higher performance products set up its operations and added another manufacturing shift to support growing volume.
We are managing production of laminate and <unk> to align with present demand and are introducing new products merchandising and specific promotions to expand sales volumes.
We have begun to transition our residential L. B T offering from flexible rigid cores and are executing the previously announced restructuring to support this conversion.
And our panels business for your projects are being initiated in industrial use has decreased due to slower market conditions. We are increasing sales of our higher margin decorative H b L products as we expand our customer base.
Our plant utilization remains low and our selling prices are declining partially offset by lower material costs.
Prove productivity and our Green energy production we.
We've made considerable progress integrating our small board and mezzanine acquisitions, including enhancing their operations aligning sales strategies and combining administrative functions.
Long term prospects for our insulation business remained strong supported by increasing energy comfort the conservation and government regulations present.
Presently demand is declining as residential and commercial investments are being deferred and new industry capacity is increasing competition in some of our markets.
Industry pricing is declining as input costs fall and we are reducing expenses to address market conditions.
Similar to our other regions, the Australia, and New Zealand housing markets have softened due to inflation and higher interest rates our results for the quarter were impacted by lower volumes and mix in our residential channels and we are introducing new products and selective promotions to increase sales volume.
Our commercial sales in New Zealand were stronger and we are leveraging our innovative collections to capture larger projects.
Our flooring North America segment has faced the same challenging conditions as inflation high interest rates and more conservative lending practices have impacted the U S housing market and our industry.
As we anticipated the segment's margins sequentially expanded in the quarter due to seasonality and lower costs flowing through the inventory to control cost we have enhanced productivity streamline administrative functions and initiated restructuring actions.
With weak residential remodeling and softer mix retailers continued to tightly manage their inventory levels further impacting demand in the quarter.
With energy and raw material cost declining market competition is increasing.
New single family home starts have begun to increase with some builders subsidizing interest rates to attract buyers.
In retail, we are providing new product options to trade up consumers and value alternatives for those with budget constraints.
The increased sales, we are initiating selective promotional activity enhancing our product offering and introducing more consumer friendly displays.
The U S commercial sector has proven more resilient as businesses continue to invest in new construction and remodeling projects.
I architectural billing index reflected a stable environment for new projects, we are experiencing some mixed pressure in commercial as customers seek to maintain budgets the hospitality and main street channels performed best in the quarter and we are expecting our participation in the health care channels.
Our unique products, which are certified carbon neutral are growing as they deliver superior performance with a negative carbon footprint.
Our commercial accessories acquisition is performing well as we leverage our relationships to enhance its product sales.
Mohawk is the leading producer of premium laminate due to a more realistic visuals and waterproof performance. We continue to see a broader adoption of our redwood products in both retail and builder channels, we've increased our offering of our revolutionary signature technology, which enhances the richness of our purgo in Paris and collection.
We are aligning production with current conditions implementing cost reductions and managing pricing and mix to optimize our results.
And residential carpet, we've seen a sequential improvement in sales and production along with a decline in input costs, which improved our margins from the first quarter.
We have enhanced our luxury care standing Godfrey Hirst collections and are providing retailer incentives to grow volumes are expanded solution dyed polyester carpet portfolio is increasing our position with multifamily developers and single homebuilders negatively impacting our product mix, we have integrated our recent Nonwoven Act.
<unk> and our improving its sales and operations.
With the decline in ocean freight costs market pressure for L. B T are increasing in the U S Force Labor Protection Act is impacting some shipments higher cost inventory reduced our margins as we adapted to the changing market, our new rigid LBP introductions with updated visuals wet protect an antimicrobial technologies.
Differentiate us in the market and our sheet vinyl sales rose as consumers selected more affordable options.
Our West Coast LBP plant will continue to ramp up throughout the rest of the year.
With that I'll return the call to Jeff.
Thanks, Chris.
Our second quarter performance reflected the positive impact from the many initiatives we are executing across our business. We're managing the current market conditions, while preparing for the rebound in demand that follows cyclical downturns.
Banks have raised interest rates to reduce inflation and are signaling additional rate hikes are possible in the U S. We've seen a rise in builder confidence and housing starts will increase our residential new construction business.
We expect the commercial sector to outperform that residential category through this year, even with continued weakness in the office category.
So employment remains strong remodeling an existing home sales are being delayed due to limited housing availability higher interest rates on flight.
Historically, when the economy recovers these postponed remodeling projects fueled greater industry growth.
Our new restructuring initiatives could say $35 million per year.
And our recent acquisitions will add greater benefit to our results as we optimize their performance in this competitive market. We expect continued pressure on pricing and mix, partially offset by the flow through of lower material and energy costs are.
Our third quarter seasonally weakest due to summer holidays, lower consumer spending and lower production in Europe . Given these factors, we anticipate our third quarter adjusted EPS to be between $2 62.
And $2 72.
Excluding any restructuring acquisition and other charges.
And Mark we are taking the necessary steps to manage today's challenges while preparing for tomorrow's opportunity.
With Central Bank shift their focus to a more balanced approach our business will accelerate as the industry recovers and all of our regions housing is in short supply aging homes are in need of remodeling and businesses will invest to grow and more favorable conditions.
These factors will create higher growth for flooring and our investments in capacity expansion and our recent acquisitions will further enhance our results will now be glad to take your questions.
Ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad management requests that you limit your questions to one primary and one follow up.
Your first question comes from Phil <unk> of Jefferies Go ahead.
Hey, guys.
Jeff you've been in the business for some time now you've talked about potentially down.
The R&R cycle turning.
Any color on the bidding activity you've seen through the last few months and then when you look at past cycles.
What are some of the things that youre looking to kind of inform your view that it's inflicting is that existing homes turning rates coming down any color on that front would be really helpful.
I guess as you look at the cycles.
What happens is as we go through these downturns.
All the activity is postpone or product category.
<unk> flooring nothing has to be replaced.
As you.
From either breakeven or anything else, so when people get uncomfortable it gets postponed.
This cycle goes not really typical of the other ones as you go through.
We believe as it was central banks changed to a more balanced approach youll see.
All the pent up demand from these postponed purchases coming through and that will expand the volume at the same time the mix improves as retail increases the retail channel tends to have higher margins because customers pick higher value products and it's most effective now so is that terms again in <unk>.
Increase in yet and then the use of the asset goes up and reduces the.
Cost per unit and the margins expand at the same time. This time, we think also that.
Our new investments in expansion will allow us to increase the categories of the business that are growing the most and we should see our.
Acquisitions help us position us.
As we come out of this because we should have them integrated about the time the things starts coming together. So we're optimistic about the long term.
Okay got you have you seen the order activity for the R&R side of things at least flatten out here or it's still TBD free.
We're hoping it's at a bottom.
Consumers when they have inflation and they start managing their budgets again, our categories more postponing. The most so we're hoping it's going to get better, but I can't say that we've seen it yet.
If you look at also the fill the inventories in the channel across our region customers did reduce inventory and did become more conservative. We believe most channels have largely aligned with the current conditions.
That's that's perfect Segway to my next question it sounds like inventory flushed out of the channel what about your inventory is your inventory at a good spot. The reason why I ask is because you started curtailing production pretty heavily last.
Last year, and you're starting to lap that it was a pretty negative headwind. So does that flip positive are you at a pretty good spot.
Any color there would be really helpful.
So from a year over year perspective, you heard that certainly inventory is down for the quarter.
It is key to US is sequentially from Q2 from Q1 to Q2, the inventory decreased about $110 million about 60% of that was volume and 40% was the lower cost we do anticipate further inventory decreases this year.
Certainly depending on demand and inflation, but what we're doing is we're keeping inventory low you get their churn and the plant operations, which helps with that unabsorbed overhead.
But youre still curtailing production in the back half is that what you're saying Jim on a year over year basis.
Yes.
You look at you have to consider the seasonality as well. So you have certain shutdowns in the third quarter, mostly associated with Europe , and and the shutdowns and then obviously in the fourth quarter. You will also have shutdowns associated with holidays now in the fourth quarter, though we would expect.
That.
The shutdowns would be less than in the prior year.
Okay. Thank you I appreciate the color guys.
Yeah.
Our next question comes from Keith Hughes of Truest go ahead.
Thank you you've made some comments on Europe .
At the banner.
Be confusing the geographies if you could just go back over.
Where you think particularly European consumer demand is trending during the quarter and if you're here in July .
We had expected when we came out of the first quarter.
The decline in energy prices, which was a huge burden on the consumer that we had expected it to come down and that the consumer would be positively impacted.
At this point, we haven't seen that demand is flooring reflect debt like here there are more vacations being taken in other things experiences theyre doing but in our category, we haven't seen an improvement yet.
Okay, and you talked about lower input costs lower energy costs.
Hi.
Are you seeing any more sequential declines as we head into the second half of the year on those those calls.
So Keith if you step back.
Sequentially, if you look Q1 to Q2 inflation or deflation.
It was about $55 million from Q1 to Q2, which offset the reduction in price and mix of about $36 million, which helped us expand the margins.
As the cost declines.
I would expect to see as we go through.
The second quarter to third quarter also that same phenomena of lower input costs lower inflation, helping offset the price mix again from a sequential standpoint.
Okay. Thank you.
Our next question comes from Eric Bosshardt of Cleveland Research go ahead.
Thank you.
First of all if we could just circle back on that comment that the path forward on cost getting better in price getting worse as did I interpret what you just said to say that.
The.
Savings and input more than paid for that.
The impact or pressure from price mix am I, saying that right. Yes sequentially is what I was focused on is from Q1 to Q2, you saw that from Q2 to Q3.
We expect the same to occur.
But again Thats sequentially, it's very it's an interesting year, where you're looking at sequential changes are actually more important you can see that flow through quicker at the lower cost material and energy.
Offsetting the pressure on price mix.
Okay.
And then secondly, I guess related to that and somewhat answered within that statement.
Jeff you talked a good bit kind of globally about.
Price mix pressure either related to demand are influenced by what's going on with inputs.
In terms of what youre seeing from consumers or your customers.
Is that path.
A steady one.
Per the comment that was just made.
Is it increasing is it stabilizing just trying to figure out what the slope of that curve looks like.
I mean, its being caused by.
The low utilization rates.
Different depending on geography and product category.
To remind you the industry all the different pieces are tend to be highly capital in test with high fixed costs.
The participants tend to try to maximize volume to cover the overhead.
But the energy and material.
Declining and we're tending to pass through the majority of that to the customers at the same time you have a mix change that's going on with it as we said before the retail has higher margins and as the retails declining more it's impacting the margins in average prices as well.
Okay and then the last Jeff you spoke to it today than it was in the release about.
Signs of a bottom.
And then hoping for a bottom as well and I guess I look at the channel the retailers taking inventory out.
Suggests there position more conservative.
In normal cycles do.
Historically, we would look to see that inventories would increase and mix would get better and that would be a sign of a more bullish consumer.
What should we be watching for if its not inventories and price mix to suggest.
More bullishness from either your customers are the end consumers about better demand.
I guess to begin with we're hoping that the demand is might be at a bottom.
For the cycle, but as you said the cycle is not exactly a typical of prior ones unusual have the employment remaining strong and our categories be so pressured.
It is this time the whole housing market is totally different than prior ones and so youll see right now that housing is starting to the new starts are going up and it's going to take Florida nine months for us to see that depending upon which house and how long it flows through before we see that.
On the longer term side when people's confidence.
Historically, the consumer confidence is also a good indicator of when they start spending more money because as that goes up.
Start taking these postpone projects that they have and doing them.
So far.
The commercial is still holding up we're assuming it's going to weaken as we go through the fall, but we'll have to see how it goes so far the.
Index of the billing index for the architects doesn't short declining yet, but we're anticipating it's going to get weaker.
Thank you.
Our next question comes from Susan Mcclary from Goldman Sachs Go ahead.
Thank you good morning, everyone.
Good morning Dara.
To start with when we think about your third quarter Guide can you help us walk through each of the segments and how we should be thinking about the sequential changes coming through from the seasonality perspective in terms of the top lines as well as the margin.
Yes, I think Jim and I think both of us to do that one for you in the third quarter.
Everybody didn't look like they built in the European declined that we always have and given the vacations they take our volumes over there drop.
Our.
Margins dropped as well we expect.
Lower industry volumes will continue pressuring pricing and mix across the whole industry.
And at this time, we're not building in any catalyst for remodeling to improve at some point it will but we don't have it in any of our expectations at this point.
The period will continue to benefit from lower material and energy costs as well as our restructuring actions, we're going to keep controlling the inventory relative to the demand.
We've talked a few times about the retail margins impacting our mix and then we also think that the currency changes have been going on it could have an impact of another $5 million to $15 million.
And the currency changes, Jim you want to sort of give up between the different segments and so at flooring rest of world. Obviously is most exposed to European holidays. So from again sequentially from Q2 to Q3, you would expect to see a margin decline.
And their business global ceramic has some exposure to.
To Europe , but the largest component and piece of that segment is the U S.
Margins from Q2 to Q3 could be flat to slightly down and then in flooring North America, usually Q3 is one of their strongest quarters. So we expect to see margin expansion from Q2 to Q3.
Okay. That's very helpful color and then perhaps as we think about 2024 and as that approaches.
Getting that it's hard to understand where the global macros will go in some of these demand doctors now when you think about all the cost actions that you've taken across the business in the last call. It three or four years, you think about some of the capacity changes that you've made in there as well.
Jeff on how the business can perform across the different end markets and segments that you have.
And at some sort of a level.
First I don't think I'm capable of calling the turn I don't know when it's going to happen it will happen.
Usually follows the interest rates, peaking and I'm starting to fall.
And I don't know if thats going to happen in the end of this year sometime the end of next year or anywhere between with that.
<unk>.
Next year.
All of the things you mentioned is right. We should have as we talked about before the volume should should jumped significantly.
Usually you have.
A significant increase in the industry volume, making up for the decreases that we've had as you come out we think.
The margins will expand in all of the businesses typically are.
The sales also go up further because our suppliers start raising our costs and we pass those through so those helped the top line further.
And you have an expansion of the volume and expansion of selling prices and then you have the margins expanding as the.
Leverage in the business Cisco. This time, we also have more capacity than what we think are going to be the high growth areas for our business and then again, we should have.
There's going to be very limited.
<unk> and the acquisitions until the business turn but when it turns we should have the cost take out we should have restructured the product portfolios.
And those should be ready to expand so we're expecting a significant improvement as we come out of this.
Okay. Thank you for the color and good luck with everything.
Thank you Susan.
Yeah.
Our next question comes from Laura Champine from Loop capital go ahead.
Thanks for taking my question first on the ceramic business your press release calls out inflation yeah.
I'm, assuming that's year on year is that just flowing through the higher cost inventories are you still seeing product cost inflation for that segment.
No energy and energy has started to come down so what you're seeing in the third quarter is the flow through or the higher cost inventory that we had.
And is this the last quarter or two where you would expect to see that impact.
I think most of it will be finished through this after the third quarter.
After the third quarter got it and then on Capex, There's language in the press release about so we're being careful on projects of needing a.
Serious return however, the budget doesn't seem to have shifted so maybe what did change if anything this quarter versus last on your Capex plans.
Well, we're very focused on investing to optimize the future of the business the growth investments that we've talked about they make up about almost about $250 million of the 2023 budgets, depending on timing maintenance capex for the business is roughly.
200 $250 million as well now we're also focused the balance really is on the quick return projects on cost reductions our focus on product innovation and then also some projects on acquisitions, what we're <unk>.
Peaking about is now looking forward into next year about being very very.
I guess diligent looking at the Capex budget for next year.
Got it and is it too early to give us kind of a first look on the direction. There, yes, it's a little bit early but we're working with all the teams as we speak.
Thank you.
Our next question comes from Truman Patterson with Wolfe Research go ahead.
Hey, good morning, everyone. Thanks for taking my questions.
Clearly you all have been pretty open about increased pricing competition globally.
Do you think you could discuss just some of the big buckets, where you're seeing this occur either product category or region.
As well as perhaps how this has evolved versus your expectations through the year.
Sure.
So in the U S you have.
With the declining import prices, which affect both the LPT and ceramic.
So those are moving down and we're adjusting as we have two two.
To do those some of that is impacting our margins as we have higher cost inventory.
In.
Our European business, our ceramic businesses.
They've been at very low levels. So the marketplace is getting very aggressive trying to run the assets that are there. So the market pricing there is under pressure.
In.
Our flooring business in Europe .
It's more of a mixed problems in a pricing problem on the other hand, you have growth in the lower cost product categories. So we're pulling people down rather than lowering prices and then our panels and installation businesses tend to go up and down with the material and energy prices.
And those are being passed through as they occur.
Okay perfectly and then.
In North America with oil coming down.
Quite a bit.
Understood if I look at your margins kind of sequentially it seems like that raw material deflation.
Versus pricing benefit probably occurred in North America, a little bit more than some of the other regions, but could you help us think through whats built into your third quarter guide.
Regarding raws in the North American segment specifically.
Well in flooring North America.
Over to the.
Other segments from Q1 to Q2, Youre absolutely right, we started to see sequentially the benefit of the lower cost coming through not only raw materials, but in energy as well.
In our view of Q2 to Q3.
We still see some of that maybe a slower pace sequentially, but you still get a benefit.
Lower cost and raw material energy and also freight as you look in the U S as well so.
Those are the assumptions around Florida North America.
Alright, thanks for taking my questions.
The next question comes from John Lovallo of UBS. Please go ahead.
Hey, guys. Thank you for taking my questions just want to make sure I have the cadence right here on the input cost inflation price mix. So in terms of the input cost inflation. It looks like sequentially, we will see improvement in the third quarter should we expect sort of a leveling off as we move into the fourth quarter and should the third.
Order in fourth quarter on a year over year basis be improved.
In terms of price mix are we still expecting sequential deterioration as we move through the third quarter and the fourth quarter.
Yes.
John you kind of.
Two different time periods. There so let me tackle sequentially first so again sequentially.
From Q1 to Q2, we benefit where you had lower cost versus the impact of lowering price and mix.
I would expect a similar occurrence.
Albeit maybe less impact, but a similar occurrence in Q2 to Q3 and also and.
Q3 to Q4 again thats sequentially no year over year, you're absolutely right. What we've said is that we have a tailwind in the back half of the year and year over year from lower materials and lower energy.
But.
Price mix and the pressure on both.
We will continue.
In the third and fourth quarter, the gap from a year over year perspective will close.
By the end of the year, but it will still exist.
Premise from a little bit.
Okay. That's helpful and then on the $17 million in restructuring charges that will generate the $35 million in annual savings are those related to head count I'm just curious how quickly it sounds like the savings are going to come through pretty quickly here.
That is the case I mean are you at all concerned that.
It could negatively impact your ability to react if activity does pick up a little faster than anticipated.
Now this these actions really focused around.
Head count reductions as you said in both administrative and manufacturing functions, along with some consolidation of distribution points.
So most of that cash is.
Will.
We will occur in the third fourth quarter.
This year.
Yeah.
Got you. Thank you.
Our next question comes from Michael Rehaut of Jpmorgan go ahead.
Great. Thanks, very much so just wanted to make sure I understood right in terms of your prior comments, if you kind of think about.
No.
Price mix versus cost.
Just wanted to make sure I'm understanding that it sounds like Youre, saying.
<unk> will be negative.
In the next two quarters, but perhaps that negative gap moderating or lessening as you get to the fourth quarter versus the third is that the right way to think about it.
Youre speaking about it from a year over year perspective.
That that is that is a correct statement.
The benefit in <unk>.
The lower cost compared to the pressure on price and mix that differential will lessen and we anticipate as we move through the <unk>.
Balance of the year and that's why it Mike I think sequentially is so important to look at because you see more in real time, the benefit of the lower cost offsetting the impact of price mix.
Right and.
And then but at the same time it sounds like you know at least for the third quarter, you've pointed to that historical seasonality kicking in where.
On a.
Broad basis inclusive of even you know price cost, but on a broad basis youre looking for margins to decline.
On a consolidated basis in <unk> versus <unk> and it would sound that even if the.
Bright spot gap is narrowing and <unk> on a year over year.
I'd assume youre still expecting again, consistent with the typical seasonality or you're expecting in the <unk>.
Further sequential margin contraction in <unk> is that fair to say.
Well, Mike It really first of all it depends on that demand cycle.
What we talked about and.
A fourth quarter perspective, yes, you'll have seasonally lower production with Christmas vacations, the industry volume so maybe at a bottom so pricing pressure could continue.
Higher cost inventory by then should relatively be consumed as Chris indicated earlier, we do have a bump as you will heard and seen on new home construction, which could help us increase flooring sales, we have the restart restructuring that's going to benefit our cost.
<unk> and last year as I noted earlier, we included much more shutdowns than normal.
So that should help us in the fourth quarter as well.
We're also as we've said before anticipating commercial the weaken somewhat as we go through the year.
That will have to see hopefully we're wrong.
Yeah.
Right, maybe just one last quick one.
Italian.
Subsidies are does that end right on June at the end of <unk> and if you could just quantify what that meant on a quarterly basis.
Yes, so as we've said before it's about $15 million to $20 million per quarter. The government did stop it at the end of the second quarter, but it will flow through my inventory.
My P&L, so I'll get some benefit at a lower level in Q3, and then by Q4, it's basically gone.
But the energy prices have continued to drop.
Without those so as they were making up for high energy costs of the energy costs have dropped substantially so the difference will not be dramatic.
So with that lower costs, we are expecting to be aligned with the competition.
As well.
Okay, great appreciate it thank you.
Okay.
The next question comes from Mike Dahl of the Royal Bank of Canada go ahead.
Hi, Thanks for taking my questions.
Alright to sorry to beat the horse a little bit on.
Pricing comments.
You know it seems like the.
<unk>.
The sequential versus year on year is obviously a bit weird just given the magnitude of all the changes.
But it would seem like on a year on year basis, your cost tailwind should step up significantly in fourth Q.
First is <unk> again on a year on year basis.
I just want to make sure I heard correctly that even in <unk>, you're still assuming that the price cost is slightly.
Negative and then I guess, how do we think about that.
Of an exit rate do you think you'll get back to.
The neutral by by year end as you as you think about kind of 24 plan anywhere.
Because it seems to imply it filled some sequential price decline through the year.
We're accelerating declines through or I should say, so let me kick that off.
Like so you're absolutely right the benefit year over year perspective.
It should peak in terms of this year should peak in the fourth quarter, that's why I said the gap.
We will close significantly between.
The inflation and price mix.
It's very difficult at this point to say, it's going to be is can be flat to slightly negative.
But we'll have to see is as the pricing evolves and the mix over the balance of the year, but.
Certainly the inflation.
Or the lower cost flowing through the P&L.
It gets much more substantial in the fourth quarter.
Got it okay.
And then my second question just related to kind of the LPT import dynamics and some of the puts and takes around of course Labor Act can you. Just you mentioned in the opening comments, but just elaborate a little bit more on how you've seen that evolve.
Whether it's supply chain, but shifted enough and you've gotten product on port or competition has gotten product.
And the poor it's just what's the update on that.
Yes, we're seeing a market pressures, increasing with lower volumes and declining freight.
The higher cost inventories, reducing our margin as it flows through.
Okay.
We also have our west coast operations will be in startup phase at the end of the year, but that forced Labor Act is still impacting some of the sales and timing of our new introductions.
It is staffing product from coming in.
Seem to be doing it on a individual business.
Supplier base.
They keep adding to it over time it has stopped shipments from coming in.
We in particular that stopped hours, it's impacted our service level on existing.
And existing sales and it's also impacted our new product introductions, which got stopped.
It is difficult to tell how it's going to evolve.
Got it okay. Thanks.
Our next question comes from Stephen King Stephen Kim of Evercore. Please go ahead.
Yeah, Thanks, guys I appreciate it.
My line cut out a couple of times.
Apologies. If this was asked I don't think it was but I wanted to ask you about.
The.
Okay.
Benefit we could anticipate.
Ultimately returns I know youre, not giving a specific time frame for when will be when it does occur inevitably.
I'm curious about what we might see.
Productivity.
Now in particular.
Regarding productivity, we've usually seen positive feedback.
EBIT from productivity when volumes are rising, but recently you actually generated positive productivity.
Going down.
So I'm curious when volume ultimately end up.
Is it reasonable to think that we could still get positive productivity year on year.
And then similarly with temporary shutdowns.
You mentioned I think that in fourth Q.
You shut down you have shutdowns.
In the prior year, what I'm interpreting that to be is that youre going to get an EBIT benefit year on year.
That would reduce shutdowns.
Move forward in volume picks up I assume you won't have any shutdowns and so that should also be a benefit.
On top of whatever volume benefit you would get.
Wanted to make sure that both of those.
Our true.
Yes, they are all true as the.
Utilization of the factories goes up.
That will reduce the fixed overhead costs, usually the productivity at the plants also increases as well we usually get.
Leverage in the sales.
Sales cost as well as at all terms.
And somewhere along the line as it goes well.
We will start raising prices as our suppliers start trying to expand their margins as we go forward. So all those things occur.
Yeah great.
Great.
Yes.
Good day.
Alright, so the second question for me.
In ceramic we seen over the years or so we've seen a pretty big rise in ceramic imports from India.
Yeah.
Obviously.
Latam pretty significantly, Brazil, Mexico et cetera.
And I'm curious if you could help us.
Understand are the salient differences either in product quality, our other cost of doing business.
No.
Okay.
Latin America for Us.
The import for you.
Yes.
Or ship products to the U S.
Versus other parts of Asia.
Just as a comment before he answers that one.
Our investments in Latin America are primarily for the Latin American markets.
We do ship some into the United States, but the majority of it is for the local markets, Chris you want to answer the rest.
The other thing I would say Steven is that the.
From India right now their freight rates are really low, which we don't think are sustainable.
But in the U S. We've done a lot of work on our mid and premium product.
To reduce the impact of the changes in that imported product.
Alright, right now India does have an advantage with Frank.
Okay.
Gotcha.
Okay, great. Thanks, very much guys.
Our next question comes from Matthew Bouley of Barclays Go ahead.
Good afternoon. Thank you for taking the questions. I think you mentioned a few times that commercial has been outperforming but that you expected a commercial to weaken.
Later this year I guess, how is that dynamic evolving for you specifically youre actually starting to see signs of I dunno weakening orders are in the commercial end market and just how might you expect that to play out from a volume and price perspective.
First you have to go back to other cycles I've never seen a cycle, whereas the commercial business didn't fall off and it usually falls off about a year. After the other one so it's possible you get through this without it but hard to believe so there is some indications of some weakening new.
Projects being started and it and new orders. So we're going to have to see how it how it evolves there is a chance it could keep going through it but at least in our expectations. We're assuming there's going to be some weakening show up.
Got it okay. That's helpful.
And then secondly on the $35 million of savings actions.
You know I think you said half would be realized this year I mean should we assume that you know you're kind of reaching the run rate really in Q4 or are you already starting to realize a lot of that in Q3 or how does that kind of phase between the next two quarters. Thank you.
It's fairly split between Q3, and Q4 I would say by the run.
Our run rate.
Correct as you will see it as we get through Q4.
Alright, Thanks, guys. Good luck.
Okay.
The next question comes from Adam Baumgarten from Zelman go ahead.
Hey, good afternoon, everyone.
I'm just curious if you could walk through where you're seeing the biggest negative mix impacts across the various products and geographies.
Right now in the second quarter.
The price mix was unfavorable from a year over year perspective, and the largest part in in the second quarter was in flooring North America.
America, Lv tea with the pricing declines driven by imports.
Okay got it and then just as we think about the restructuring actions, maybe how to think about that across the various segments.
Spread it across the different businesses.
If you back up a little bit so we announced.
In 2022 in Q2 and Q4 restructuring.
Our restructuring actions.
I'd say it as we go through this year into next about $60 million that was mainly split between flooring North America flooring rest of the world as they took out higher cost assets.
Around reducing gross production phasing out the residential flexible lv tea in Europe as well as some other initiatives and then this.
Current action that we just announced.
It's fairly spread between.
Flooring, North America and global ceramic.
Okay, great. Thanks best of luck.
Yeah.
The next question comes from Ralph Yeah, Trizec of Bank of America. Please go ahead.
Yes.
Hi, good afternoon, Thanks for taking my question.
When you look at the dealers that you sell through in the U S sort of the smaller independent ones.
Just can you talk about the health of that sort of network, obviously like the industry sales have been under pressure and I'm sure they're sitting on some where they were sitting on some high cost inventory and prices have come down.
How is it like the health of that retail channel for you already seeing any consolidation there.
Okay.
Most of the retailers have been April two.
He can go through the last year, they were able to pass through the cost that we're able to pass through the higher labor installation rates.
And in some cases many of them their margins expand.
So for the most part most of them are in fairly good shape at this point.
Yeah.
Okay. That's good to hear and then.
The second question was just on.
<unk>.
As pricing comes down with the lower input cost like you're like you're talking about in the second half year.
What have you historically seen in terms of volumes with lower pricing.
What is the demand elasticity to price do you ever get it uptick in volumes because because the pricing is lower.
Usually in these environments, we're lowering prices in reaction to the marketplace and to <unk>.
People start taking.
Trying to take isolated pieces and increasing their share and then as you would suspect the other participants are trying to hold their share so.
So typically as prices decline.
Has through much of the <unk>.
Much of the lower cost to our customers as we're all trying to run assets.
Is this pricing competitive environment different than other doubts.
Kind of a similar bubble that you would've anticipated like more competitive less competitive than what you've seen historically.
I think it's probably typical the.
Difference will be in Europe .
Have a much.
Lower environment, and so I think in Europe , it might be more aggressive than historical.
But also the costs were up higher much higher in Europe too. So you have both dynamics.
Okay.
Makes sense, that's very helpful. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Jeff <unk> for any closing remarks.
I would like to thank everyone for joining us.
We are focused on managing the short term and we think we're well positioning the business to maximize the long term growth in earnings. Thank.
Thank you again.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].