Q3 2024 Mohawk Industries Inc Earnings Call
Good day and welcome to the Mohawk Industries third quarter 'twenty 'twenty four earnings conference call.
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Speaker Change: I would now like to hand, the call to James Brown. Please go ahead.
James Brown: Thank you Andrea good morning, everyone welcome to the Mohawk Industries quarterly Investor Conference call. Joining me on today's call are Jeff, Florida bombed Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief operating Officer today, We will update you on the company's third quarter performance and provide guidance for the fourth quarter.
James Brown: There are 2024, 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 our peer.
James Brown: I filings with Securities and Exchange Commission.
James Brown: This call May include discussion of non-GAAP numbers for a reconciliation of any non-GAAP to GAAP amounts. Please refer to our form 8-K and press release in the investors section of our website with that I'll turn the call over to Jeff.
James Brown: Yeah.
Jeff Florida: Good morning, everyone.
Jeff Florida: We delivered a solid third quarter performance and soft market conditions, but the earnings per share of $2.90, an increase of approximately 7%, which reflects the positive impact of our sales initiatives productivity and restructuring actions and lower input costs, partially offset by pricing and mix.
Pressure.
Jeff Florida: Our net sales for the quarter were $2 7 billion down approximately 2% compared to last year.
Jeff Florida: Due to our increased earnings and management of working capital, we generated free cash flow of approximately 204 million in the quarter.
Jeff Florida: For a total of approximately 443 million year to date.
Jeff Florida: This year, we're investing approximately 450 million in capital projects that are focused on growth, reducing cost and asset maintenance.
Jeff Florida: And all of our regions market conditions were slower than anticipated given the high interest rates lingering inflation and lower consumer confidence.
Jeff Florida: Pricing remained under pressure as industry demand in the third quarter continued to decline due to a slowing in both residential and commercial activity.
Jeff Florida: Our sales initiatives delivered volume gains in many product categories offset by pricing pressures and negative mix.
Jeff Florida: So the commercial channel has lost some momentum as the year progressed it continued to outperform residential.
Jeff Florida: Our market and our market central banks are shifting from a restrictive policy to a more balanced approach to stimulate their economy, which should benefit our industry as consumer and business spending expand.
Jeff Florida: We expect the recent interest rate cuts in U S Europe, and Latin America will strengthen the housing markets and increased flooring sales as we progress through next year.
Jeff Florida: In the U S. The fed decreased rates by half a percent in September and appears committed to further rate cuts to reduce restrictions on the economy and.
Jeff Florida: In all our markets residential construction has failed to keep pace with household formations and immigration and additional units must be built to satisfy growing needs in the U S. Higher home values have significantly increased equity in homes, which should support increased remodeling projects that were postponed over the past few years.
Jeff Florida: Yes.
Jeff Florida: In Europe. Some governments have introduced program to provide financial support for home remodeling to enhance the aging housing stock.
Jeff Florida: All of this will support improvements next year in existing home sales remodeling and new construction.
Jeff Florida: We remain focused on managing the controllable aspects of our business to enhance our results with gross margins under pressure from weaker industry demand all of our businesses are implementing strategies to maximize volume and plant utilization.
Jeff Florida: The increased sales, we're implementing new product launches marketing initiatives and promotional activities.
Jeff Florida: We are enhancing productivity and exercising disciplined cost management in all aspects of the business.
Jeff Florida: Our teams are executing the $100 million of restructuring initiatives that we announced last quarter, including idling capacity rationalizing assets streamlining distribution and reducing administrative costs.
Our businesses are making additional cost reductions in SG&A operations and logistics.
Jeff Florida: These actions will continue throughout next year to achieve our planned savings.
Now Jim will review, our third quarter results. Thank you, Jeff sales for the quarter with just over $2 $7 billion. That's a 1.7% decrease as reported and two 1% on an adjusted basis as continued unfavorable price and mix offset the volume growth in a number of our product categories Cross.
The company, especially seen in their flooring North American segment gross.
Jeff Florida: Gross margin for the quarter was 25, 5% as reported or 26, 2% on an adjusted basis versus 26, 6% in the prior year.
Jeff Florida: The impact of the unfavorable price and mix pressured by the Underutilization of assets in our industry offset the accretion of our productivity actions and lower input costs.
Jeff Florida: SG&A as a percentage of sales was 17, 7% as reported or 17, 3%.
Jeff Florida: Adjusted basis versus 18% in the prior year with benefits from our year over year restructuring and cost containment actions.
Jeff Florida: Gives us an operating income has reported of $212 million or seven 8%.
Jeff Florida: Nonrecurring charges for the quarter were $28 million, primarily due to our previously disclosed restructuring actions, which on a cumulative basis should generate cost reductions of over $250 million when completed.
Jeff Florida: That gives us an operating income on an adjusted basis of $240 million or eight 8%. That's a 40 basis points improvement versus eight four in the prior year as the benefit of our productivity initiatives of $44 million lower input costs of 15 million and the combined.
Jeff Florida: Increased unit volume and lower shutdown costs of approximately $18 million.
Jeff Florida: The continued weakness in price and mix, which was $70 million in the quarter.
Jeff Florida: Interest expense for the quarter was $11 million a decrease over last year due to impart to the strong cash flow and resulting lower death.
Jeff Florida: Our non-GAAP tax rate was 19, 8% versus 27% in the prior year, we expect the Q4 rate to be between 17, and 18%, giving us a full year rate of approximately 20%.
Jeff Florida: It gave us an earnings per share as reported of $2.55 or on an adjusted basis of $2 90, an increase of approximately 7%.
Turning to the segments global ceramic had sales of just under $1 $1 billion. That's a three 1% decrease as reported and two 2% on adjusted basis market conditions, and our industry mean difficult with consumer confidence under pressure and the deferral of larger remodeling projects.
Jeff Florida: The strength in our sales we are leveraging our industry, leading design and finishing technology to create differentiated collections.
Jeff Florida: Operating income on an adjusted basis was $91 million or eight 6%. That's a 60 basis point increase versus last year as our productivity actions of 22 million offset the unfavorable price mix of $15 million and lower year over year net sales volume in addition.
Our total year over year input costs were basically flat with increases in wages and benefits offsetting the deflation and material and energy.
Jeff Florida: In flooring North America, we had sales of just over $970 million, that's a one 2% increase as reported.
Jeff Florida: Due to a combination of our product innovation and sales initiatives, we saw growth in both our residential and commercial soft surface and hard surface collections led by our resilient and laminate product offerings.
Jeff Florida: We are seeing strength in both our premium and value oriented products, even though repair remodeling continues to lag new construction and commercial activity.
Jeff Florida: Our operating income on adjusted basis was $89 million or nine 1%, that's 100 basis point improvement versus the prior year. The margin expansion was due to productivity gains of $14 million deflation of $12 million and increased sales volume of 11 million offsetting the unfavorable.
Jeff Florida: Price mix of $28 million as pressure and our product category continues.
Jeff Florida: Finally flooring rest of the world sales of just over $680 million. That's a three 5% decrease as reported and six 3% on adjusted basis with weak consumer sentiment and remodeling projects trailing prior year, we did not experience the normal bounds post the summer holiday period in <unk>.
Jeff Florida: Europe, we continued to execute promotional activities and advertising actions to boost traffic in the retail channel, but year over year, we did see a weakening volume in our flooring and installation product categories in the period.
Jeff Florida: Operating income unadjusted basis in flooring rest of the world was $72 million or 10, 5%. That's a 40 basis point decrease versus the prior year as the resulting price and mix weekend approximately $28 million offset the combined gains we experienced an increased productivity.
Jeff Florida: <unk> lower shutdown and net input cost deflation of approximately $19 million corporate and eliminations was $11 million in the quarter in line with the prior year and the full year 2024 is expected to be approximately $48 million.
Jeff Florida: Turning to the balance sheet cash and cash equivalents were just over $420 million with free cash flow for the quarter over $200 million, bringing us to a year to date of $440 million inventory was just over $2 $6 billion with inventory days at 130.
Jeff Florida: One on a year over year basis inventory increased approximately $90 million due to a combination of higher production volume and impact of FX partially off.
Offset by net lower input costs.
Jeff Florida: Property plant and equipment was just over $4.7 billion with Capex at $115 million and D&A of $156 million. The company plans to invest approximately $450 million in 2024 with D&A for the full year of just over $600 million.
Jeff Florida: Given the current conditions, we have again tightened our annual capex for the balance of the year limiting our spending to higher return projects along with required maintenance.
Jeff Florida: Overall, the balance sheet again remains in a strong position with net debt of $1 8 billion and leverage at one two times.
Speaker Change: And with that I will turn it over to Chris to review, our Q3 operational performance.
Chris Wellborn: Thank you Jim.
Chris Wellborn: In global ceramic competition in our markets remains intense as decreased industry utilization continues to impact pricing during.
Chris Wellborn: During the quarter, the segment's margins expanded due to increased productivity by a lower material and energy costs offset labor and freight inflation.
Chris Wellborn: In addition to our restructuring projects, we are executing many cost containment initiatives across the segment, including product re formulations process enhancements and improved administrative efficiencies.
Chris Wellborn: To grow sales and enhance our mix, we're leveraging industry, leading printing polishing and rectifying technology to deliver a floor and wall tile collections with differentiated visuals.
Chris Wellborn: The U S Department of Commerce expects the preliminary anti dumping decision relative to ceramic tile from India to be rendered in November 24, with tariffs potentially retroactive to August 24.
Chris Wellborn: Other ceramic markets are at various stages of pursuing similar anti dumping actions against Indian manufacturers.
Chris Wellborn: In the U S. We increased our partnership with builders by providing a complete product offering with superior service.
As the commercial sector has begun to slow we are focusing on the education health care and hospitality channels, which were expected to be more active in 2025.
Chris Wellborn: Our domestically produced quartz countertops are outperforming other work surfaces, and we will start up our new production line next year as the market strengthens.
Chris Wellborn: In Europe, our volumes exceeded their prior year, even as market demand remains soft pricing pressures remained a headwind partially offset by product mix from advanced technologies and expanded participation in the commercial channel.
Speaker Change: In Latin America, the Mexican Central Bank lowered rates in September and is expected to make further cuts this year in Brazil, the central bank cut rates multiple times and is monitoring inflation determining next steps.
Speaker Change: We have announced targeted price increases in Mexico and volume in Brazil has began to strengthen in both markets, we're implementing sales and operational improvements introducing updated collections and expanding our distribution to improve our results.
Speaker Change: This year, our flooring rest of World segment did not see as usual sales improvement in Europe. After the summer holidays due to continued weakness in the economy. After six quarters of declines European building permits have recently increased.
Speaker Change: And the job market remained strong with record employment levels.
Last month, the European Central Bank reduced its key interest rate by an additional 25 basis points to 3.25% as installation further slowed in.
Speaker Change: In response to current conditions, we are reducing operational and administrative costs, simplifying ex ku complexity and enhancing logistics operations.
Speaker Change: To optimize volumes, we executed promotional activities, which pressured both our pricing and mix, partially offset by lower input costs.
Speaker Change: We are increasing consumer advertising for our premium laminate products to boost traffic for our retail customer.
Speaker Change: And slowing markets, our installation and panels business faced increased competition as new industry capacity came online impacting pricing at all.
Speaker Change: Australia, and New Zealand, we improved pricing and mix in our carpet collections the volumes remain under pressure our operations delivered productivity gains with improved efficiencies across the business. The New Zealand Central Bank recently cut rates 50 basis points to stimulate their economy.
Speaker Change: And our flooring North America segment, we believe we're outperforming the overall market in a difficult environment with sales and margins improving over the prior year and increased volume, partially offset by lower pricing and mix.
Our margins benefited from lower raw material costs restructuring projects and productivity gains in our manufacturing administrative and sales operations.
Speaker Change: With existing home sales at multi decade lows residential remodeling remains under significant pressure.
Speaker Change: We are retiring high cost equipment and exiting underperforming product categories, while investing in capital projects that have short paybacks, we continue to improve our participation in the homebuilder channel with our comprehensive product offering.
Speaker Change: We are supporting our residential product launches with marketing initiatives to connect consumers with our retail partners well.
Speaker Change: While overall U S home sales are down higher income consumers are purchasing our premium products sales of our value oriented carpet collections are also improving building on the success of our leading polyester offering.
Speaker Change: L V T in laminate collections delivered sales growth as consumers embraced our new introductions with enhanced performance features we continued to deliver product innovation with a new resilient plank flooring technology that is environmentally friendly and provides greater stability and performance.
Our commercial sales were led by our carpet tile collections that offer industry, leading sustainability and award winning designs inspired by nature. Our results also benefited from increased sales of flooring accessories that coordinate with our hard surface products. We continue to pursue additional opportunities in the hospitality channel which has shown.
Speaker Change: More resilient in the current environment now I'll return the call to Jeff for closing remarks.
Jeff Florida: Global conflicts political uncertainty and inflation are weighing on consumer confidence and discretionary spending around the world short term macroeconomic conditions remain unpredictable and we don't anticipate an industry improvement this year.
Jeff Florida: The demand trends remain weak in each of our product categories and markets face unique economic situations.
Jeff Florida: Our mix is impacted by consumers trading down and buy new construction outpacing the higher valued remodeling channels.
Jeff Florida: We are responding with sales and restructuring actions operational improvements and cost containment initiatives to strengthen our results. We continue to pursue volume through innovative introductions marketing programs and promotional activity to leverage our fixed cost structure.
Jeff Florida: And some products, we're seeing inflation on materials that will increase our costs in the period.
Jeff Florida: As we end the year, we expect to reduce our manufacturing levels to manage our inventory increasing our unabsorbed overhead.
Jeff Florida: In the period, we anticipate the recent U S Hurricanes will negatively impact our sales by $25 million to $40 million.
Jeff Florida: Well the offsetting benefit from rebuilding next year.
Given these factors and the effect of seasonality, we anticipate our fourth quarter adjusted EPS to be between $1 77, and $1 87, excluding any restructuring or one time charges.
Jeff Florida: We remain confident in the fundamentals of our business and our strategy to improve our results in 2025, we anticipate demand in all our markets improving as interest rates decline in consumer spending in the category accelerates across the world.
Jeff Florida: Elevated home equity values will provide property owners the resources to renovate their residence all of our regions require significant new home construction and we've grown our participation in the channel <unk>.
Jeff Florida: Commercial construction or remodeling should also expand as financing becomes more affordable and investment returns increase as.
Jeff Florida: As our markets recover we will leverage the extensive improvements that we implemented to maximize our sales and margins as.
Jeff Florida: Well now be glad to take your questions.
Jeff Florida: [noise].
We will now begin the question and answer session.
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Speaker Change: We ask that you please limit yourself to one question and one follow up.
If you have further questions you may reenter the question queue.
Speaker Change: At this time, we will pause momentarily to assemble the roster.
Speaker Change: Okay.
Speaker Change: [laughter].
Speaker Change: And our first question will come from Tim Weiss of Baird. Please go ahead.
Tim Weiss: Hey, everybody good morning.
Tim Weiss: Maybe just first question just you know I mean.
Speaker Change: Yeah, I know the dynamics kind of going into fourth quarter with shutdowns and.
Speaker Change: Things are still broadly weak, but you have kind of talked about 2025 recovering.
Speaker Change: And I guess, just as you think about next year.
Speaker Change: Do you need lower rates and in kind of a normalization in housing turnover to see that recovery or do you think there's enough just pent up demand in the home value equity that can kind of get us back to a growth situation.
I think it's going to take a combination of both.
Speaker Change: Take the interest rates across the world are going to decline.
Speaker Change: It should improve the demand in our markets.
The.
Speaker Change: Consumers need to be more positive about the future.
Speaker Change: If they are they can start doing remodeling immediately so the interest rates are really more to change the confidence level of both businesses and.
Speaker Change: Individuals to make it on the other hand, we expect the lower interest rates to come and make housing more affordable and all of our markets across the world and we are anticipating to see that as we start from next year sometime.
Speaker Change: Okay, and I guess, if that doesn't happen do you feel like you just keep slugging.
Speaker Change: Slugging it out as things kind of bottomed is that kind of the other side.
Speaker Change: I really can't see a scenario, where we stay where we are I mean, the interest rates are everywhere coming down all the banks are continuing to the central banks are saying, they're going to continue lowering them.
Speaker Change: Still in restrictive territory based on historical.
Speaker Change: Levels that you think about so well.
Speaker Change: We'll have to see how it goes.
Speaker Change: Okay. Okay, and then just my second question.
Speaker Change: Do you have any figures or numbers just around how much L. B T capacity is based in North America, both both your own and just the overall industry.
Speaker Change: Well I don't have it now.
Speaker Change: Yeah.
Speaker Change: They basically Tim what the latest data showed that.
L E T.
Speaker Change: Market is over 30% of the U S market.
Speaker Change: But there is still limited manufacturing capacity in the U S. Most of it is certainly it's still an important story.
Speaker Change: Okay. Okay sounds good. Thank you guys looked at the rest of the year.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: The next question comes from John Lovallo of UBS. Please go ahead.
John Lovallo: Good morning, guys. Thanks for taking my questions as well Jim I think you know the prior expectation from a revenue standpoint in the fourth quarter was for global ceramic and flooring rest of world to be up sort of low single digits year over year, and I think for North America to be sort of flattish curious if if those have changed it seems like it might be a little bit of downside too.
So any thoughts on that would be helpful.
Speaker Change: Yeah, certainly as you know John we have no.
Speaker Change: Guidance from an EPS perspective, so obviously that was assumption people were making as you look at Q4.
Speaker Change: As Jeff talked about we anticipate.
Speaker Change: Limited industry.
Speaker Change: Improvement in the demand does remain weak.
Speaker Change: The events.
Speaker Change: The terrible events that happened with the back to back Hurricanes, certainly have impacted the southeast and it hurts.
Speaker Change: The U S ceramic business and our Florida, North American business, so that that weighs into our.
Speaker Change: Our outlook for the fourth quarter season.
Speaker Change: Seasonally and of course, the volume declines in Q4, and we do have a significant shutdowns as well so at this point.
Speaker Change: Those factors weigh into the sales and our guidance for the fourth quarter.
Speaker Change: Understood and then maybe taking it one step further to the margins I mean, it appears that there was a lapping of the lower material and energy costs are you Gonna turn price mix productivity negative here I mean, how should we sort of think about the cadence of margins by segment as we move into the fourth quarter.
Speaker Change: Well, what I would say is first.
Speaker Change: On the.
Speaker Change: Inflation deflation story of of this year you know unlike the first three quarters, where we did enjoy it through the P&L of the benefits of lower material and energy costs, which offset the.
The increased wages and benefits, we now have lapped that.
Speaker Change: That period of time, so in the fourth quarter.
We do have inflation, which basically is driven by wages and benefits and price mix. Although it has stepped down from Q2 from Q2's level to Q3, it's still remains as a headwind with the under utilization in the industry certainly.
The positive news is the strength of the productivity that we've had as I just reported it was over $44 million in the quarter and I would expect to see a similar if not greater productivity in the fourth quarter. So all the businesses are taking.
Speaker Change: Necessary actions in the quarter.
Speaker Change: Okay. Thank you guys.
Speaker Change: The next question comes from Susan Mcclary of Goldman Sachs. Please go ahead.
Susan Mcclary: Thank you good morning, everyone.
Susan Mcclary: My first question is talking a little bit more about those company specific efforts that you did see come through in the third quarter, you mentioned productivity and the cost savings can you talk a bit more about how those did come together and help to offset some of the broader demand weakness and how do you build upon those as you look to 'twenty.
Susan Mcclary: 25, and maybe even further out from there.
Well in the third quarter, we benefited from all of our initiatives in sales productivity cost containment as well as the restructuring actions we took.
Speaker Change: Demand in the third quarter started out stronger and as we went through the period it slowed in most channels and geographies.
Speaker Change: We still have commercial outperforming residential.
Speaker Change: Pricing continue to remain under pressure given a slow markets and low utilization that we saw through.
Speaker Change: As we look towards 25, we think as we discussed a minute ago that interest rates around the world will continue to decline we believe that demand in all our markets will both industries.
It's impossible to predict the exact inflection point given all the variables that make up in the different markets that we're in.
Speaker Change: We think the changes in interest rates will have a positive impact on the confidence of both consumers and businesses and that will increase our volume and help our mix, what you'll end up improving our sales and our margins.
Speaker Change: Next year. We're also believes it will have an improved mix both the channel mix as well as product mix, we see volume increasing at some point.
Speaker Change: And we see the asset utilization increasing.
Speaker Change: At the same time, we're anticipating limited inflation given the environment we're in.
Speaker Change: All the activities that we've been talking about will benefit our are from our restructuring will have lower cost and we expect to have higher productivity.
Speaker Change: And then we continue to introduce new innovative products, which we think will help us pull through.
Speaker Change: Just to remind everybody you know historically as we exited downturn give.
Speaker Change: Given the compression at the industry goes through you'll have several years of above industry average growth as these postponed projects are initiated and they all leverage all our fixed costs.
Speaker Change: With that you know, we anticipate our results improving as we go through 'twenty five.
Speaker Change: Okay. That's very helpful color and then maybe digging in a little bit more to that product mix. It sounds like you are getting some momentum as you're building into some of these faster growing categories exiting some of the underperforming areas.
Speaker Change: Gaining share in there can you talk about how that is coming through in <unk> and the progress and how youre thinking about that over the next several years.
Speaker Change:
Speaker Change: We continue to invest in areas that we think we're going to have.
Speaker Change: The most.
Speaker Change: Increase in sales.
Speaker Change: We have invested in our ceramic business in certain categories, where the ceramic slabs, which are growing category, we're investing and countertop imports, which was going to increase further and other areas that we have.
Limitations on.
Speaker Change: As we go through it over the next.
Speaker Change: We expect the price and mix to turn on us.
Speaker Change: Cause the retail consumer who buys their own products.
Speaker Change: Tries to buy the best thing they can afford and so with the existing home sales down across the world that consumer isn't spending money like they haven't postponing it with inflation. So we believe we're going to have a natural increase in margins and mix as we go through.
Speaker Change:
Speaker Change: What else can I tell you.
Jeff Florida: I don't know that that was good color Jeff. Thank you that's helpful.
Speaker Change: Good luck with everything.
Jeff Florida: Yeah.
Speaker Change: The next question comes from Matthew Bouley of Barclays. Please go ahead.
Matthew Bouley: Good morning, everyone. Thanks for taking the questions.
Matthew Bouley: I just wanted to ask on the on the Hurricane impact of 25 to 40 million historically or typically what do you. What do you usually see with that kind of rebuild you know and in the year after or kind of can you recoup all of it and typically what would be the kind of timing of recouping some of that.
Matthew Bouley: Thank you.
Thank you Matt.
In terms of the.
Speaker Change: The impacted areas.
Speaker Change:
Speaker Change: Certainly.
That's going to take a while for our customers and the locations that were closed after the storms.
To reopen and for consumers to initiate new projects, new projects or ramp up.
This current situation.
Speaker Change: The damaged properties, obviously has to be repaired.
Speaker Change: And remember flooring is the last product.
Speaker Change: Product to really be installed so the timing of of really the rebuild from our perspective, yes.
Speaker Change: It'd be pushed through 2025, it really depends on the pace of the pace of the recovery.
Speaker Change: Okay. Thanks for that Jim and then secondly.
Speaker Change: Secondly, the the plant shut down that you're guiding to in Q4. I mean is this kind of just a Q4 thing given the sort of state of demand here and you know maybe channel inventories.
Speaker Change: Or is the expectation from what you could tell today that you may still be looking to reduce inventories and in early 2025 as well. Thank you.
Speaker Change: Well as we said in my prepared remarks inventory was slightly up in the quarter.
Speaker Change: We do expect to decrease the inventory was shut down in Q4. Our goal right. Now is that total inventory should end the year relatively from a dollar basis relatively flat.
Speaker Change: From previous year as well.
Speaker Change: If you look at the industry, certainly a slower than expected.
Speaker Change: We've talked about the seasonality of Q4 as well.
Speaker Change: The impact of the Hurricanes only.
Speaker Change: Reduce that further in terms of demand in the quarter.
Speaker Change: So reducing the inventory.
Speaker Change: It is a prudent thing to do at this point and it's best for the business to do it during the holiday shutdown time.
Alright, Thanks, Jim Thanks, everyone. Good luck.
Speaker Change: Yeah.
Speaker Change: The next question will come from Phil <unk> of Jefferies. Please go ahead.
Speaker Change: Hey, guys.
Speaker Change: Ocean freight prices have started to move higher do you called out inflation.
Speaker Change: That said price mix is still challenged and weighing on your margins in the fourth quarter are you seeing any ability to kind of raise price as we look out to 2025 and have you seen price increases from some of your competitors that import goods.
Speaker Change: Separately I think one of your larger competitors in carpet announced some capacity closure on the feedstock side and I think Ah. Another player now some today on nylon and polymer so kind of help us think through it.
Speaker Change: Is this a needle mover in terms of capacity tightening up in North America, and as you brought your ability broadly to get price to offset a more inflationary environment.
Speaker Change: There has been <unk>.
Speaker Change: Some capacity taken out of the industry. There is still the industry is still at a huge deficit to where we were running before so we still have excess capacity.
Speaker Change: Ocean freight is increasing the cost of lending imported products and those imported products will have to go up to.
Speaker Change: To pay for the increased ocean freight at some point.
Speaker Change: Our ability to raise prices is limited given everybody is trying to.
Speaker Change: Keep their assets running on the other hand, if you have significant inflation, everyone has to push it through.
Speaker Change: Yes.
Speaker Change: Okay.
And then Jeff you expressed confidence that demand will be up across the board.
It all your segment.
Speaker Change: Timing this is not.
Speaker Change: Not easy, but I guess my question is when do you kind of expect how how do you kind of expect you gotta shape out first half back half and then some of the fourth quarter headwinds you know whether it's a curtailment.
Speaker Change: The hurricane and hopefully that gets flushed out do you have enough levers to kind of grow EBITDA and EPS, because you're growing EBITDA at UBS.
Speaker Change: The first three quarters of this year. So just wanted to get a level set of the shape of the year for 2025, and then your ability to drive earnings EBITDA higher next year.
Speaker Change: The drivers that we have are too.
Speaker Change: Reduce our cost structure, which we announced the other restructuring.
Speaker Change: Not long ago that'll take us through most of next year to get it Jim I believe earlier gave the dollar amount he expected the flow through in the period.
Speaker Change: Predicting of the inflection point given all the moving parts in any single economy around the world is impossible to anticipate.
Speaker Change: All of the different markets are projected to have significant growth in housing and remodeling across the world in all the different markets as the capacity gets utilized we get leverage from the fixed cost that come up we get leverage out of the mix change as higher quality products work.
Speaker Change: And we expect to have higher margins with it now the moment in time. It occurs is anybody's guess.
Speaker Change: Well I appreciate the color. Thank you.
Speaker Change: Okay.
Speaker Change: The next question comes from Laura Shatman of Loop capital. Please go ahead.
Speaker Change: Hi, guys Lewis Shampine question follow up question on Hurricane I really appreciate the quantification of disruption like 25 to 40 million I think you called out when we think about your ability.
Speaker Change: Ability to assist folks and repairing should we be thinking about a benefit through next year multiples of that or can you help us frame up based on on prior storms of this size or how much of a revenue lift we should get next year.
Speaker Change: We don't have a good way of estimating it what happens first is it depends on the damage to the house. So as you know are the the building.
Speaker Change: Typically it takes a significant amount of time just to get the insurance companies to agree what to do then what happens is where you have limited damage of a few broken windows in the water you can replace it as you go through and then if you have major damage.
Speaker Change: You have to rebuild the house dry out everything.
Speaker Change: It could take nine to 12 months or more and then if it's depending upon how much there is in the geography, there's not enough labor to do it so it could drag out over a couple of years, depending upon how much there is and how broad it is the impact in our or is it just going to get distributed over the quarters and it's going to.
Speaker Change: Hard to see in any given moment.
Speaker Change: Got it.
On the European business, which seems to be kind of taken another leg down in terms of demand should we expect that to recover on a lagging basis relative to your other geographies or would that be reading too much into this Q4 softness.
Speaker Change: Well you know, it's really start with just kind of looking at conditions outside the U S.
You look higher interest rates are really similarly impacted our category.
Speaker Change: We expect differences in the recovery of the pace of the recovery and the timing.
Speaker Change: It's hard to predict with any precision at this point.
In addition, he has the political uncertainties in Europe that may impact the timing of the recovery now the good news is that the central banks in Europe at least are on their third interest rate cut and lowering those rates is an effort to hopefully stimulate them.
Speaker Change: More activity, which would benefit our category as well.
Speaker Change: Got it thank you.
Speaker Change: Okay.
Speaker Change: The next question.
Speaker Change: And then comes from Keith Hughes of Truest. Please go ahead.
Keith Hughes: Thank you in the release you talk about the $100 million.
Keith Hughes: Hmm cost reduction plans been around awhile. It looks like you might be talking a little bit more than that so I guess my question is what kind of magnitude are we looking at and how about your ability to realize with goldcorp.
Keith Hughes: So in the Ah.
The plan that we announced in the second quarter.
Keith Hughes: You know, we originally announced it was about $100 million savings.
Keith Hughes: Each of the segments.
Keith Hughes: Desk those plans, we should get a little bit more than that again, we'll see about $20 million to $25 million.
Keith Hughes: This year with the majority of it probably two thirds of it and 25, a little bit on the longer projects will carryover.
Keith Hughes: 226.
Keith Hughes: But so far the projects are being initiated.
Keith Hughes: By each of the segments and we're on schedule.
Speaker Change: Okay. That's helpful. Thank you.
Speaker Change: The next question comes from Michael Rehaut of Jpmorgan. Please go ahead.
Speaker Change: Hi, everyone.
Speaker Change: Mike Thank you for taking my questions.
Speaker Change: I just wanted to ask maybe in flooring rest of the world given some of those production have caused the five skus.
Speaker Change: Is it how large of a net impact are you expecting there.
Speaker Change: Or is it relatively small.
Speaker Change: Well in flooring rest of world.
Speaker Change: Our sales volumes Didnt pick up as we expected after the holidays the market conditions remained challenging and we executed additional promotional activities.
Speaker Change: Pricing and mix headwinds continue given the weak demand, but declining inflation led to L. E C. B the lower interest rates with additional cuts are expected.
Speaker Change: Got it thanks.
Speaker Change: And then maybe an L V tends to limit it seems things are going well.
Speaker Change: I wanted to see if you could expand on on kind of the growth you expect to see.
Speaker Change: Next year and how the how that.
Speaker Change: It's going to play out going forward. Thanks.
Speaker Change: Well I can address L D T.
Speaker Change: Our sales are under pressure and pricing has declined but we believe we outperformed the market our margins have benefited from productivity and lower material costs, we're launching a new wood plank with recycled content and better performance.
Speaker Change: Our west Coast Operation is increasing production in our Georgia restructuring is being executed to further improve results.
Speaker Change: And then Europe, we've changed our residential L. B T from flexible to rigid we're expanding our volumes, which will leverage our fixed costs.
Speaker Change: We're executing productivity and restructuring initiatives to improve the results.
Speaker Change: On the left hand side in the U S. Our volume increased over last year.
Speaker Change: Being more accepted by the different channels.
Speaker Change: Including the new construction.
Speaker Change: Home business, which didn't use it in the past.
Speaker Change: Taking share as it's a waterproof alternative with superior performance to L. T.
In the period, we had some cost benefits that were offset by price and mix and we continue to start up new production to satisfy the increasing demand.
Speaker Change: I appreciate that color. Thank you gentlemen, good luck. Thank.
Speaker Change: Thank you.
Speaker Change: The next question comes from Adam Baumgarten of Zelman. Please go ahead.
Adam Baumgarten: Hey, Good morning, guys. Just curious if you saw any benefit to shipments in September for maybe some customer inventory stocking ahead of the port strike, which obviously in hindsight was resolved, but but in September did you see any bump in shipments.
It's hard to it's hard to measure, what's going where we believe that our customers took on some more in anticipation of potential problems just a strike.
Adam Baumgarten: But it's hard to quantify.
Adam Baumgarten: Yeah.
Speaker Change: Okay got it.
Speaker Change: Commercial you talked about demand slowing any specific verticals you'd call out as being weaker than they had been maybe earlier in the year.
Well from a channel perspective, as we've said.
Speaker Change: On the flip side hospitality government and education are actually the ones.
Speaker Change: Outperforming and that's where we're really focusing our attention on.
Speaker Change: The good news on commercial as well is that pricing is more resilient.
Speaker Change: The more differentiation, which helps from a from a margin perspective, but commercial does take longer to respond to economic changes. So it has a longer tail as you go down and then the flip side as you recover it normally it takes longer to start back up.
Speaker Change: Okay. Thanks best of luck.
Speaker Change: Yeah.
Speaker Change: Yeah.
The next question comes from Eric Bossard of Cleveland Research. Please go ahead.
Speaker Change: Thanks, a follow up and then a question if I could on the.
Speaker Change: Commercial conversation.
Speaker Change: Jim Your comment that I think it's still growing but entering a period, where it's probably going to contract is this a pressure point for mix for the business and in 25, I know theres some optimism about better price mix is slowing commercial and offset to that and to what magnitude how should we think about that.
Speaker Change: But commercial is generally a higher margin product than the residential pieces. So and we are anticipating that it slows if you look at the.
Speaker Change: The architectural index, it's been negative for a significant amount of time and the question is is it going to come back in time. So we don't have a significant dip in that.
Speaker Change: The commercial channel, but in our plans we are expecting it to slow down.
Speaker Change: The good news Eric is.
Speaker Change: Taking that into.
Speaker Change: Into account is the commercial across our whole business you know it was roughly 25% obviously the majority in the the key spot is the remodeling.
Speaker Change: And that's almost probably half of our business. So as Jeff said earlier when you get that.
Speaker Change: Inflection on remodeling uptick.
Speaker Change: Ill kick in and mix and volume.
Speaker Change: We get the benefit from the contribution of volume contribution on higher mix and also the more steady production levels and asset utilization.
Speaker Change: So as you look at 25.
Speaker Change: That is really what we're focused on and normally in these cycles is the first thing that comes back out is the remodeling.
Speaker Change: As consumer confidence.
Is really heightened.
Speaker Change: It should be significant pent up demand I mean, we're at a cyclical bottom existing home sales are at the lowest point since 1995.
Speaker Change: To remind everybody flooring tends to have a higher correlation to home sales because people tend to remodel more either right before they sell it to get more right after they move into it.
As they go through.
Speaker Change:
Speaker Change: So we think theres a huge recovery coming the question is when.
Speaker Change: Okay. That's helpful. And then secondly, I just wanted to clarify as well, Jeff you commented earlier about expecting demand to improve in 'twenty five.
Speaker Change: And I think most companies, including Mohawk expected demand to improve in the second half of 'twenty, four and that obviously hasnt taken place and so is your comment like demand improves in 'twenty five is there something you're seeing in the business that gives you conviction in that or is this a like eventually demand is going to improve I just want to understand the point you're trying to make.
Speaker Change:
Speaker Change: Listen I've been through a lot of these cycles in my career and I haven't seen one when interest rates fell dramatically that the housing industry didn't pick up.
Speaker Change: From the pent up demand that was his people could afford to buy them and I would be highly surprised if it didn't occur this time as well.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Our next question comes from Stephen Kim of Evercore ISI. Please go ahead.
Stephen Kim: Yeah. Thanks, very much guys wanted to maybe just start off with a couple of housekeeping items. First did you did you repurchase any shares in the quarter and Jim can you share with us what the benefit of volume was to sales in three Q by segment.
Speaker Change: No we did not repurchase shares in the quarter.
Speaker Change: We will continue to be opportunistic.
Speaker Change: The buyback of stock.
Speaker Change: Certainly the positive side as well.
We have continued to have strong free cash flow.
Speaker Change: And liquidity provides us options, including internal investments acquisitions and stock repurchase.
Speaker Change: And then what was your second question Steven.
Steven: The benefit of volume to sales across the segments.
Speaker Change: And.
Speaker Change: In terms of terms of volume really across.
Speaker Change: Across the segments on sales.
Speaker Change: You had anywhere between.
Speaker Change: 15, and 15 million to $20 million and.
Speaker Change: Ceramic and flooring rest of the world.
Speaker Change: And probably double that in flooring North America, just speaking of volume.
Speaker Change: Yeah. That's yeah, okay, great. That's helpful. So I wanted to touch on this benefit the volume the pickup in volume in flooring, North America, a little bit more because I think that's probably one of the most you know interesting areas that investors are focusing on.
Speaker Change: Because this is a I mean, obviously the European environment as it is is a it's a headwind but it looks like you've sort of you know you're really kind of bottoming I guess I would say in flooring North America, you talked about L. P. T. A you feel like you're gaining share of laminate, you're gaining share obviously I know the laminates.
Speaker Change: Driven by a lot of innovation L V T. I I guess its off a kind of a lower base as well, but could you talk a little bit more about your confidence that you're gaining share in flooring North America is it limited to those two categories are you seeing signs of something broader in flooring North America, I'm, specifically talking about you relative to the <unk>.
Speaker Change: Industry.
Speaker Change: And is there anything youre doing that that is a particularly worth calling out either on the distribution side or the merchandising that's different from what you have been doing over the last call it year or two.
Speaker Change: We're seeing improvement in most of the different product categories not just in those two.
Speaker Change: It's come from more aggressive approach.
Speaker Change: Try to pick up volume to keep the plants running on the other side, we're giving up some price and margin to do it. So they are offsetting each other a little bit, but we think we're gaining share and mark.
Speaker Change: Really when you look at it.
Speaker Change: Very proud of the product features that we continue to bring to the market.
Speaker Change: You know with <unk> for example, introducing a recycled polymer core which is PVC free laminate next generation of aesthetics.
Speaker Change: Those products and along with that.
Speaker Change: In ceramic looking at increasing textures using <unk> surfaces.
Enhanced printing technologies are amazing.
Speaker Change: When you look at the new projects that are coming out both in ceramic and on the countertop side.
Speaker Change: As well and a carpet you know looking at.
Speaker Change: More Super premium collection of in terms of stain resistant softness.
And the ability.
Speaker Change: To help the consumer.
Speaker Change: You know Jim you just mentioned there are something that caught my ear, which was you said in ceramic you talked about the visualization technology are what you feel is the competitive advantage I recall that this was definitely something that you know more than several years back was a real moat around your ceramic business you know your visualization technology.
Speaker Change: It feels like we went through a period, where that became a little bit more commoditized is what you're describing here with the three D visualization technology something like the the advantage that you had back then.
Speaker Change: Absolutely I think the technology that we're using.
Speaker Change: Across the ceramic business led by our business in Italy.
Speaker Change: <unk> is making really great strides and that's also being.
Speaker Change: Helping out the porcelain slabs business the innovation, that's going into that porcelain slabs.
Speaker Change: His industry, leading so I feel pretty good about it and also the ability to take that technology and push it through all of our divisions across the globe is an advantage for us.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [laughter].
Speaker Change: The next question comes from Trevor Allinson of Wolfe Research. Please go ahead.
Speaker Change: Yes.
Trevor Allinson: Hi, Good morning. Thank you for taking my question first the presidential election is less than two weeks away you can clearly elevated tariff rates have been a big topic, depending on the outcome of that election should we see significantly higher rates on imported L. V. T. Do you have a sense for how large of a tailwind that could be for you not only from your <unk>.
Trevor Allinson: <unk> L. B T production, but also your premium Atlanta premium laminate and then you guys have also brought on some land that capacity recently can you remind us the size of that capacity add and what the current utilization of it.
Trevor Allinson:
Speaker Change: Higher tariffs would increase the prices of all important if if it's broad based would increase.
The price of imported products the amount of it would have a dramatic impact depending on if it's larger small.
Speaker Change: To change the different marketplaces, we'll have to see what happens in the future.
Speaker Change: We have.
Speaker Change: Change the technology inside of our plant in Georgia, and we are most of the way through starting up the plant and Mac and Mexico next to the California border.
Speaker Change: And both are.
Speaker Change: Running and with continuing to improve the productivity and production in both.
Speaker Change: Okay got you that's helpful. And then can you talk about the M&A environment in the M&A process, given lower utilization rates right now are there opportunities to acquire weaker players and consolidate the market and then maybe how does do those opportunities compare.
Air inside and outside of the U S.
Speaker Change:
Speaker Change: When the industry is at a low point earnings are low.
Speaker Change: People.
Speaker Change #100: Typically don't want to sell their businesses and want to wait until the business turns around so at the moment there are limited transactions given those circumstances.
We expect over the next 12 to 18 months.
Speaker Change #100: Significant changes the industry improves.
Speaker Change #101: That makes sense. Thanks, a lot good luck moving forward. Thank.
Speaker Change #101: Thank you.
Speaker Change #101: Yes.
Speaker Change #103: The next question comes from Sam Reed of Wells Fargo. Please go ahead.
Sam Reed: Awesome. Thanks, so much I wanted to circle back on the Hurricane impact kind of a two part question. So first could you just walk us through the math you use to get to the $25 to $40 billion estimate it's very precise I just want to understand that and then looking back in time I don't think you've called out hurricane impacts.
Sam Reed: In past quarters, even after some of the activities you might've seen in 2022, which was arguably more damaging so just wanted to understand what's different about this hurricane cycle versus prior cycles.
First of all the numbers anything but precise.
Speaker Change #105: We took the regions that were impacted.
Speaker Change #105: We've been following the.
Speaker Change #105: Sales since they occurred and as you would suspect when it first occurred everything went to zero.
Speaker Change #105: Yeah, and then we've been tracking how they've been coming back and based on that we've made an estimate they could come back faster or slower than the estimate as we go through.
Speaker Change #105: So what was the other part of the question.
Just in terms of Oh boy comparing the other hurricanes. So I mean, you know the devastation and you really need to step back and make sure we recognize and.
Speaker Change #106: Sure our sympathies with the families and businesses have been impacted.
Speaker Change #106: It's kind of a unprecedented to have back to back hurricanes in the span of three weeks plus a little bit unprecedented for it to go.
Speaker Change #106: The direction it went where it really went into not only Georgia, and South Carolina, but into North Carolina.
Speaker Change #106: I think the difference, Florida, obviously was hit twice as well so that whole southeast region.
Was more impacted certainly.
Speaker Change #106: This time around than in past.
Speaker Change #106: <unk> represents a meaningful piece of <unk>.
Speaker Change #106: Both our flooring North America, and our U S ceramic business.
Speaker Change #107: No. That's really helpful. Thanks, both and then wanted to follow up on the M&A question I don't want to read too much into you not repurchasing shares in the third quarter, but with one interpretation of that be that you're potentially taking up firepower for M&A as the category.
Speaker Change #107: Or are you potentially recovers just thinking about the emanate from that angle.
Speaker Change #108: I can just to answer the question that we've talked about M&A before there are limited options at this point, we assume that there's going to be more coming but you can't make bets on things that arent here.
Speaker Change #109: No. It makes total sense. Thanks, so much.
Speaker Change #108: Okay.
Speaker Change #108: Yeah.
Speaker Change #110: This concludes our question and answer session I'd like to turn the call back over to Jeff Burbank for any closing remarks.
Jeff Burbank: We appreciate your taking time and joining us we're well positioned for the recovery that we believe is going to start soon.
Jeff Burbank: The industry should see the impact of it next year. We appreciate you taking the time with us and have a nice weekend.
Speaker Change #112: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Speaker Change #112: Yeah.
Speaker Change #112: [music].
Speaker Change #112: Yeah.
Speaker Change #112: Yeah.
Speaker Change #112: [music].