Q4 2024 Mohawk Industries Inc Earnings Call
Speaker Change: Good day, and welcome to the Mohawk Industries fourth quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2.
Speaker Change: Please note, this event is being recorded. I would now like to turn the conference over to James Brunk, Chief Financial Officer. Please go ahead.
Speaker Change: Thank you Wyatt. Good morning everyone. Welcome to Mohawk Industries quarterly investor conference call. Joining me on the call is Jeff Lorberbaum, Chairman and Chief Executive Officer, and Chris Wellborn, our Vice Chairman.
Speaker Change: Today, we'll update you on the company's fourth quarter and full year performance.
Speaker Change: which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release.
Speaker Change: and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers.
Speaker Change: For a reconciliation of any non-GAAP-to-GAAP numbers, please refer to our Form 8K and press release in the Investor section of our website.
Speaker Change: I'll now turn the call over to Jeff for his opening remarks. Jeff? Thank you, Jim.
Speaker Change: Our fourth quarter results exceeded our expectations as sales actions, restructuring initiatives, and productivity improvements benefited our performance. Additionally, the sales impact from U.S. hurricanes was limited to approximately $10 million.
Speaker Change: Net sales for the quarter were approximately $2.6 billion, consistent with the prior year with two additional shipping days, partially offset by the strengthening U.S. dollar.
Speaker Change: While residential demand remains soft in our markets, our product introductions last year and our marketing initiatives contributed to our sales performance around the globe.
Speaker Change: Our adjusted EPS for the quarter was $1.95 in line with the prior year from productivity, additional shipping days, lower interest expense, offset by unfavorable pricing, product mix, and inflation.
Speaker Change: For the full year, our net sales were approximately $10.8 billion, down approximately 3% as reported, and on a constant basis, with an adjusted EPS of $9.70 as we progressed through the year.
Speaker Change: Our industry deteriorated from higher interest rates, lower housing turnover, and reduced remodeling.
Speaker Change: In response to these conditions, we took additional actions to optimize sales and launched initiatives to reduce overhead, enhance productivity and restructure operations to maximize our performance.
Speaker Change: Last year, 55% of our sales were in the U.S. and 45% were in other geographies with leading flooring positions on four continents.
Speaker Change: The fourth quarter environment was an extension of the conditions our industry faced throughout last year.
Speaker Change: Consumers continue to limit large discretionary purchases and consumer confidence remain constrained by cumulative inflation, economic uncertainty, and geopolitical tensions. During 24, home sales across the world saved, suppressed.
Speaker Change: While U.S. homeowners remained locked in place with low mortgages, an existing U.S. home sales fell to a 30-year low.
Speaker Change: Central banks in the US, Europe, and other regions lowered interest rates during the latter part of last year, though the impact on housing turnover was negligible in most regions.
Speaker Change: Consumers who did initiate remodeling were more affluent or completing essential projects.
Speaker Change: New home construction was also constrained around the world with higher home costs and interest rates impacting starts.
Speaker Change: Many U.S. builders increase sales by buying down mortgage rates to make monthly payments more affordable.
Speaker Change: Throughout the year, investments in the commercial sector slowed, though they remained stronger than residential remodeling.
Speaker Change: These factors reduced market demand and created heightened industry competition for volume. This also resulted in greater unabsorbed overhead and shutdown costs as we managed production and inventory.
Speaker Change: Given these conditions, we focused on stimulating sales with innovative new products, marketing actions, and promotional programs. Our product launches delivered style and performance at affordable prices, as well as unique premium products to incentivize remodeling.
Speaker Change: Last year, we initiated significant restructuring actions and operational improvements that are lowering our costs and will benefit our longer-term results. During 2024, we focused capital expenditures on projects driving sales, reducing costs, and maintaining our assets.
Speaker Change: Through these actions, we delivered a full year increase of approximately 6% in adjusted earnings per share in a soft market.
Speaker Change: For the year we generated free cash flow of $680 million and repurchased 1.3 million shares of stock for $161 million.
Speaker Change: We are taking actions in areas we control to optimize our current performance and improve sales and profits when volumes rebound.
Speaker Change: Now Jim will review our financial details. Thank you, Jeff. Sales recorded were just over $2.6 billion. That's a 1% increase as reported and 1% decrease on a constant basis.
Jim: Gross margin as reported was 23.6%, SG&A's percentage of sales was 18.6%, giving us an operating income margin, on a reported basis, of 4.6%.
Jim: with non-recurring charges of $38 million during the quarter, primarily related to previously announced restructuring actions across all three segments, which when completed will yield a cost savings of approximately $285 million.
Jim: Operating income on an adjusted basis was $160 million, or 6.1%, which is a decline of 60 basis points versus the prior year due to unfavorable price mix of $51 million, higher input costs of $20 million.
Jim: Partially offset by stronger productivity of 37 million and increased volume of 22 million, mainly due from the additional shipping days.
Jim: Interest expense was $10 million for the quarter, a decrease versus prior year due to a stronger free cash flow and lower overall debt levels.
Jim: Non-GAAP tax rate was 17.8% versus 21.3% in the prior year. Looking forward, we expect Q1 and the full year 2025 tax rate to be between 20% and 22%.
Jim: That gave us an earnings per share on a reported basis of $1.48 and an adjusted basis $1.95, in line with the prior year in a very difficult environment.
Jim: Returning to the segments, Global Ceramic had sales of just over $1 billion. That was a 1.5% increase as reported and 1.2% on a constant basis.
Jim: As a benefit, a favorable mix and the additional shipping days were only partially offset by pressures on pricing and FX headwinds.
Operating income on an adjusted basis was 5.3%.
That's a 50 basis point increase over the prior year.
Jim: With productivity gains of $17 million and increased volume of $8 million, we're only partially offset by unfavorable price mix of $12 million and increased shutdown costs.
Jim: In Florida and North America, sales were just over $930 million. That's a 2.8% increase as reported and declined 0.5% on a constant basis.
Jim: As positive volume gains in our laminate, residential soft, and LVT businesses were offset by continued pressure on price and mix.
Jim: Operating income on an adjusted basis was 5.7%. That's a decline of 120 basis points versus the prior year. As the impact of that price...
Jim: and Mixed Pressure of $25 million and higher input costs of $11 million were only partially offset by improved volume of $15 million and strengthening productivity of $11 million.
Jim: Finally, employing the rest of the world, sales were just shy of $700 million. That's a 2.1% decrease as reported.
Jim: and declined 4.8% on a constant basis as the strength of our laminate, LVT, and panels businesses are offset by weakness in insulation and sheet vinyl and continued price pressure across the segment.
Jim: Operating Margin on Adjusted Basis was 10%, declining 60 basis points versus the prior year, primarily due to the impact of unfavorable price and mix of $14 million and slightly higher input costs, only partially offset by improved productivity of $9 million.
Jim: Corporate Eliminations were $16 million for the quarter, as our corporate expenses were in line with our full year expectations of approximately $50 million.
Jim: Looking at the balance sheet, cash and cash equivalents were $667 million, with free cash flow of over $230 million in the quarter and $680 million for the full year.
In addition, in the quarter we repurchased approximately $74 million.
Jim: of shares in the period. Inventories were just over $2.5 billion and decreased approximately $40 million primarily due to FX.
Jim: as days increased to 134 days versus 130 in the prior year, primarily due to increases in source products with the potential of port strikes and tariffs.
Jim: And the company plans to invest approximately $520 million in 2025, primarily focused on product innovation and cost reduction projects.
Jim: The balance sheet overall remains very strong, with strong free cash flow, net debt of $1.6 billion, and leverage of 1.1 times.
Now Chris will review our Q4 operational performance.
Thank you, Jim.
Chris Wellborn: For the quarter, our global ceramics segment delivered solid results despite slow demand and industry competition impacting pricing across our regions.
Chris Wellborn: The segment's operating income benefited from improved productivity, partially offset by pricing and shutdowns.
Chris Wellborn: In a softer market, we increase distribution by expanding our customer base across sales channels, including residential builders, specifiers, and specialty retailers.
Chris Wellborn: In the quarter, we improved our mix with products launched in 2024, higher commercial sales, and expansion of premium collections.
Chris Wellborn: In the U.S., we are leveraging our ceramic service centers to grow contractor sales and increasing our position with kitchen and bath dealers nationwide.
Chris Wellborn: We are introducing new high-end quartz countertop collections in advance of our new U.S. production line opening later this year.
Chris Wellborn: In Europe, our Specifier team, showrooms for the A&E community, and premium products are driving commercial sales growth, and we are increasing export sales outside the region.
Chris Wellborn: In both Mexico and Brazil, the integration of our acquisitions has improved our product offering, sales organizations, and market strategies, and our Brazilian exports are strengthening as the currency weakens.
Chris Wellborn: Our Flooring Rested World segment saw improved sales of laminate, LVT, and panels versus the prior year, though insulation faced additional headwinds.
Chris Wellborn: Our margins were compressed due to competitive industry pricing and rising material and labor costs that were partially offset by productivity gains and lower energy expenses.
Chris Wellborn: Our restructuring initiatives in this segment are progressing and improving our cost position and productivity as we rationalize less efficient assets, streamline our product portfolio, and reduce administrative overhead.
Chris Wellborn: We also contain cost in the quarter by enhancing manufacturing and logistics efficiencies and continuing to manage inventory levels.
Chris Wellborn: In December, the European Union introduced tariffs of more than 40% on Chinese wood flooring, which should benefit our sales of laminate, LVT, and wood.
Chris Wellborn: We grew the sales and mix of our premium laminate and LVT collections through increased advertising that attracted consumers to our retailers.
Chris Wellborn: In addition, we increase product placement with our customers in Central Europe that will improve our LVT sales.
Chris Wellborn: In our panel's business, volumes held up as we took more aggressive promotional actions and our more differentiated decorative panels performed better given stronger non-residential projects.
Chris Wellborn: Our insulation business experienced weak demand and margin pressure from increased competition and material costs. In line with the market, we have announced price increases in insulation to partially offset rising material costs.
Chris Wellborn: In our panels and insulation businesses, we are investing to expand our geographic footprint and are developing new products to satisfy those markets.
Chris Wellborn: In our Flooring North America segment, we maintain sales in a declining market with benefits from our successful 2024 product launches and our fashion categories.
Chris Wellborn: Year over year, our margins were reduced by lower pricing in product mix and higher inflation, partially offset by higher volume, stronger productivity, and cost reduction actions.
During the quarter, we completed our LVT restructuring initiatives.
Chris Wellborn: which will enhance operations and provide significant savings. We focused on increasing volume across sales channels, optimizing our SG&A spend, and expanding both the home center and residential construction channels.
Chris Wellborn: In the quarter, our hard service sales grew in all channels as a result of increased distribution of our 2024 product introductions.
Chris Wellborn: Our residential carpet collections gain market share with the sales of our PET, Premier, polyester collections, and fashion categories leading our performance.
Chris Wellborn: In the commercial channel, our carpet tile products led our sales with their appealing designs and sustainable properties. Hospitality sales remained strong as new construction and renovation projects were completed.
Chris Wellborn: With that, I'll return the call to Jeff for his closing remarks.
Thank you, Chris.
Chris Wellborn: As a reminder, we announced Chris would be retiring from his position in February and has agreed to ensure a smooth transition in a consulting role. We appreciate Chris's many contributions to Mohawk's success over the past two decades.
Chris Wellborn: Under his leadership, Mohawk's ceramic business became the largest in the world with leading positions on three continents.
Chris Wellborn: We're pleased Chris will remain on our Board of Directors and will continue to benefit from his expertise.
Chris Wellborn: With Chris's retirement, Paul DeCock is taking over the role of Chief Operating Officer after serving as president of our Flooring North America segment for the past six years. Paul will focus on enhancing our sales and operating plans across the enterprise.
Chris Wellborn: Paul is presently in Europe working with our Flooring Arrested World team and he will deliver the operational reports next quarter.
Chris Wellborn: Now returning to the outlook, our industry has been in a cyclical downturn for multiple years and we are confident that our markets will return to historical levels though the inflection point remains unpredictable.
Chris Wellborn: We expect ongoing softness in our markets during the first quarter due to elevated interest rates and weakness in housing.
Chris Wellborn: Increased material and labor costs will reduce our margins in the quarter, as we can only partially pass through the higher costs to the market. Our businesses are finding additional ways to reduce expenses and improve processes, which will help to reduce the impact of inflation.
Chris Wellborn: We are restructuring our Mexican ceramic business to improve our operational performance, which will save approximately $20 million a year. Our cumulative restructuring actions will generate annualized savings of approximately $285 million when complete in 2026.
Chris Wellborn: Our capital expenditures this year are focused on maximizing sales, improving product mix, and reducing costs.
Chris Wellborn: As we indicated in our January 24th 8K filing, the Flooring North America segment implemented a new order management system which had more issues than anticipated. The conversion did not impact our manufacturing or financial systems.
Chris Wellborn: The majority of the system processes have been corrected, and our shipments are currently aligned with our order rates. Our invoicing was delayed, and we are addressing shipping and invoicing errors with customers that mainly occurred in the beginning of the implementation.
Chris Wellborn: At this point, we estimate the impact on the first quarter operating income from missed sales and extraordinary costs will be between $25 and $30 million.
Chris Wellborn: We are working closely with our customers to remediate any issues or concerns. We believe the impact of the extraordinary cost will be limited to the first quarter.
Chris Wellborn: It is difficult to estimate the sales impact on future periods, though we do not anticipate it will have a meaningful long-term impact on our customer relationships.
Chris Wellborn: The U.S. dollar has strengthened significantly, which will negatively impact our translated results this year.
Chris Wellborn: As a reminder, our first quarter is seasonally the lowest during the year, and it will have two fewer days compared to last year. Given these factors, we expect our first quarter adjusted EPS will be between $1.34 and $1.44, excluding any restructuring or other one-time charges.
Chris Wellborn: This includes an estimated EPS impact of $0.35 per share due to the flooring North America system issues.
Chris Wellborn: Historically, cyclical downturns in our industry are followed by strong rebounds as flooring demand returns to historical levels.
Chris Wellborn: All of our regions need increased home construction to address growing household formations, and aging homes will require significant updating after several years of postponed remodeling.
Chris Wellborn: As the economy strengthens, business investment will increase in commercial channels. As the world's largest flooring manufacturer, we're uniquely positioned due to our geographic scope, leading innovation, comprehensive portfolio, and financial strengths.
Chris Wellborn: When the industry recovers, higher volumes will leverage our manufacturing and overhead costs to enhance our results. Additionally, our product mix will improve, pricing will strengthen, and margins will expand.
Chris Wellborn: We are well prepared to manage through the short term and maximize our results as the category recovers.
We'll now be glad to take your questions.
Chris Wellborn: And in consideration of other participants, we ask that you please limit your queries to one question and one follow-up. Thank you.
Speaker Change: Our first question comes from Trevor Allenson with Wolf Research. Please go ahead.
Transcription by CastingWords
Trevor Allenson: Hi, good morning. Thank you for taking my questions and congratulations to Chris on the retirement.
Speaker Change: It appears 1Q earnings guidance looks like it's roughly in line with normal seasonal trends that you guys saw prior to the pandemic between 4Q and 1Q. You're excluding...
The impact of the order management system.
Speaker Change: As we think about the moving parts of this year moving forward, should we think that 1Q to 2Q then also exhibits normal seasonality moving forward, again, excluding any of the impacts from the order management system?
Speaker Change: The pressures from pricing, mix, and higher costs will continue in the second quarter. We're investing in new products and sales activities to improve both the mix and distribution.
Speaker Change: And as we said, we don't expect any additional costs from the flooring North America system, though it's difficult to estimate if any sales impact on the future periods at this point.
Speaker Change: Okay, it makes sense and that's helpful color. And then second on natural gas prices, they've come up pretty rapidly here in recent weeks. Can you talk about what you're expecting from a price cost standpoint in global ceramics specifically moving forward? And are you expecting to be able to
Speaker Change: Push enough pricing to offset those potential inflationary headwinds moving forward. Thanks
Speaker Change: Well, U.S. gas prices have increased with higher cost impact in Q1. In Europe, natural gas costs increased, though it's still dramatically lower than the peak. We've hedged a portion of it in Europe to limit our cost volatility.
Speaker Change: passing prices through in this environment. And just remember, as natural gas or energy or material costs change, it takes about a quarter to kind of flow through to the P&L based on their inventory returns.
Speaker Change: Okay, makes sense. Appreciate all the color. Good luck moving forward. Thank you.
Speaker Change: And the next question will come from Mike Dahl with RBC Capital Markets. Please go ahead.
Mike Dahl: Good morning. Thanks for taking my questions. Just sticking with the foreign North America issue, maybe it would help us if you could break out to the extent you can, like, if you call it 25 to 30 million.
Mike Dahl: hit on up income between the extraordinary costs and the sales impact. How much of that 25 to 30 is kind of this one-time cost versus the sales and sales leverage impact?
Speaker Change: Yes, Mike. So if you look, we said about $25 to $30 million. If you look at the extraordinary costs,
Speaker Change: involved with correcting the system, additional man hours to address issues.
Speaker Change: Manual Processes and such, we believe that's about $15 to $20 million.
Speaker Change: of the Impact, and we anticipate a sales impact, so a sales impact of about $25 to $50 million in the quarter.
Got it. Okay, that is that's helpful, Jim.
And then I appreciate kind of the context and
Speaker Change: Qualitative pieces around thinking beyond one cue I think it would
Speaker Change: It would probably be really helpful if there's any way, like there's always a lot of these moving pieces. When you add all this together, do you think you will be in a position to grow earnings on a year-on-year basis in 2Q?
Speaker Change: Well, as we look to the whole year, we start out with that the industry has really been in a down cycle longer than most in history. These downturns are typically followed by strong rebounds and flooring as demand returns and postponed projects are initiated.
Speaker Change: Just like you, we're unable to predict the inflection point, though we're confident over time that we will return to the historical levels.
Speaker Change: At this point, we haven't seen any signs in our markets that the rebound is starting or improving at this point.
Speaker Change: And we're taking a cautious approach about when the recovery will occur at this point.
Speaker Change: Given that, this year we're expecting mixed improvements, significant productivity initiatives, and specific pricing action where we can get them, should offset the negative pressures of rising costs and headwinds from the stronger dollar.
Speaker Change: And in absent of flooring North America change, we should see a slight improvement in overall earnings, given those assumptions.
Speaker Change: Yeah, and adjusting for the impact of the system conversion, if you look Q1 to Q2, I would look more at historical growth on sales and on margins.
It's a very typical normal seasonality.
Okay, appreciate that. Thank you.
Speaker Change: And the next question will come from Eric Bossart with Cleveland Research. Please go ahead.
Good morning. Thank you.
Speaker Change: You talked a bit about competition, Europe competition as a limiting factor competition and US tile as a limiting factor.
Speaker Change: And I know there's always competition in these markets, but I'm just curious, is there anything different from a competitive dynamic that is limiting either pricing or share, and then also add into this any influence of tariffs in consideration of that in the same vein?
Speaker Change: Well, first and just in terms of pressure, the underutilization in the category puts pressure on pricing.
Speaker Change: We've leveraged our ceramic service centers to grow contractor sales and increasing our position with kitchen and bath dealers, and our domestically produced quartz countertops are outperforming other work surfaces.
Speaker Change: Just to remind you that ceramic industry, a large part of the U.S. comes from around the world and these excess capacities from around the world are ending up in this market too.
Speaker Change: And the next question will come from Susan McElary with Goldman Sachs. Please go ahead.
Thank you. Good morning, everyone.
Good morning. Good morning, Jeff.
Taking a longer term...
Speaker Change: type of view. You've talked in the past about getting the business to a 10% margin and then
Speaker Change: Even moving higher from there. As you just think about all the cost actions and the things that you are driving in the business from both a product and a margin perspective, do you still think that you are on track to get to that? And can you get there even if things do remain a bit more challenged just given what's going on in the business fundamentally?
Speaker Change: Using the U.S., the housing sales are at the lowest point since 1995, which is creating the pressure on everything.
Speaker Change: And that the postponed Rottenberg remodeling, higher home sales, improved business investment at the time, will significantly improve the utilization of our assets, it'll increase the average mix of what we're doing. And then to remind you again,
Speaker Change: Flooring in general has a much higher correlation to home turnovers.
Speaker Change: because when people right before they remodel, right before they sell the home, they tend to remodel, or right after they move in, they tend to remodel. So we're getting our category is more impacted by that. On the other hand, when we come out of it, it's going to help us much more.
Speaker Change: At the same time, when a consumer purchases the product, they purchase higher quality products in the retail remodeling part of the business, which is the most impacted by the categories at the moment.
Speaker Change: If the leverage goes up, our manufacturing costs should drop and we should get leverage on our SG&A, which will help us get back to the higher margins that we want to be at.
Okay.
Speaker Change: That's helpful. And then turning to the cash flows and the balance sheet, it was nice to see you buying back stock again this quarter. The business has been generating approximately $700 million of free cash in the last two years, even with all the pressure that you've been under. Can you talk a bit about how you're thinking about the uses of cash going forward, how buybacks could fit into that, and how you're thinking about M&A as well, perhaps?
Alright, me and the others.
As we look at
Speaker Change: As the market improves, so take advantage and grow both from a product innovation, which kind of sets us apart in the marketplace, and also cost reductions.
Speaker Change: We should see more opportunities, as you just said, to acquire more businesses as the environment strengthens right now in M&A.
Speaker Change: activity in our sector at least is as very quiet as you would expect. And we'll continue to buy shares as we have in the past as part of our cash usage and our strategy as we move forward.
already.
Speaker Change: If you think about just one other point, you know, since...
Speaker Change: In 2020, we have purchased about 14% of our outstanding shares at a total cost above $1.6 billion, so we will continue to utilize that as part of our strategy.
Okay, that's helpful. Thank you. Good luck with everything.
Speaker Change: Next question will come from Stephen Kim with Evercore ISI. Please go ahead.
Speaker Change: Yeah, thanks very much guys appreciate all the color so far and best of luck Chris with everything
Stephen Kim: I guess my first question relates to the, you know, the outage that you experienced in foreign North America. I understood what you said about your...
Stephen Kim: But it sounds like you're sort of leaving the door open for perhaps a little bit of continued...
Stephen Kim: and better than normal, you know, sales cadence, you know, on the other side of it.
Let's see, a lot of the business...
is for immediate jobs.
Stephen Kim: and the question is, did you miss the immediate jobs that are there or is it going to be postponed? The customers who carry significant inventories
The amount of time that we were
Stephen Kim: behind was very limited, so we're back to normal. We are able to ship them whatever they want today.
So the real question is...
Stephen Kim: Did we lose any relationships that are there? We think that long-term we haven't, but it's only been a limited period of time to evaluate the actual what's going to happen, so we'll know better over the next couple of months.
Stephen Kim: All right, that's fine. And then a broader question. I know that we're all waiting for the turn and, you know, R&R and we've talked about in the past how that typically comes hand in hand with, you know, better mix because, you know, people tend to, those kinds of people tend to buy higher quality product.
Stephen Kim: But in the U.S., there's sort of an odd situation where you're seeing a lot of relatively greater strength in the move-up price points right now. I'm talking for houses.
Stephen Kim: and the entry level of the market is, you know, obviously very locked up.
Stephen Kim: because of the mortgage rates and at the lower price points, you know, the homeowners literally can't move up, you know, because they just can't afford that jump in mortgage rate. So I think the locked-in effect is probably more prevalent at the lower price point.
Stephen Kim: And so what I guess I'm saying is that if we were to see an improvement in existing home sales, might it be that you see more of an improvement in...
Stephen Kim: with consumers who actually are not going to be paying up as much for products and therefore you might actually not see the typical product mix, the positive product mix that you would normally expect to see when a cycle recovers.
Stephen Kim: Consider that if that's something you think is a valid thing. And then lastly, is this dynamic just simply a U.S. phenomenon, where you have sort of this relative, much greater relative weakness at the entry level rather than the move up?
Let's see, to take the question, we...
Stephen Kim: are seeing more strength at the bottom, at the top, which goes along with what you're saying as we see it.
Also that
Stephen Kim: The large home construction companies are trying to keep the prices of homes down, so that part of the market is using very low quality products.
to get by with as limited spending as they can.
Stephen Kim: We think that the consumer who owns the house has been postponing remodeling of it.
Stephen Kim: And usually, they don't go to the lower price point that you use in either some of the new construction or some of the multifamily things that have been doing well.
Stephen Kim: So when they come in, we think that it's going to come into the middle part of the market and some of the middle will trade up more than they're doing now, since they're concerned about the future. The people with money always have money, but the bottom end of that market, they tend to trade down too when they get concerned or postponed.
Stephen Kim: So we believe that we're still going to see an improvement in the mix as we come out of this.
Okay, great. That's helpful.
Great. Thanks very much, guys. Thank you.
Sam Reed: The next question will come from Sam Reed with Wells Fargo. Please go ahead.
Sam Reed: Awesome. Thanks so much. So I wanted to talk foreign North American margins here a little bit. It sounds like volumes were, again, positive in the segment, if I heard you guys correctly, but we did see a year-over-year margin pullback.
Sam Reed: I realize there's some input cost pressures that muddy the water here, but could you give us a sense as to where some of those incremental volumes that you're getting are coming from? It sounds like it's a function of kind of lower margin channels or in-markets.
Sam Reed: perhaps home builders and home centers, just want to understand, you know, sort of, you know, what those dynamics actually look like, you know, and sort of why, you know, incremental volumes aren't necessarily driving an improvement in F&A margins.
Sam Reed: volumes have gone up. But we've been more aggressive in the marketplace with pricing. We've been able to improve the mix somewhat, but the pricing and mix are more than offsetting the
The volume that's hanging in where it is in general.
Sam Reed: Also, remember that there were extra days in the period that you have to take to get it on an equalized basis.
Sam Reed: The other side, Sam, to consider, too, is you are seeing costs increase.
as well, which is
You know, we have strong productivity in the segment.
Sam Reed: But that's being really used or countered by increasing costs that we've seen in
Sam Reed: and materials start to flow through the P&L. So that's also putting pressure on those incremental margins that you're speaking of.
Sam Reed: That helps and maybe just switching gears, you know, talk a little bit about capacity utilization at a high level on the call already.
Sam Reed: But maybe just to put a finer point on that, you know, could you unpack where those utilization rates sit today, especially for, you know, some of these really important categories like U.S. carpet and U.S. ceramics?
Sam Reed: And then kind of the knock-on question there would be, you know, where would we need to see capacity utilization go before the category would be in a position to take price? Thanks.
Sam Reed: If you go to historically when the markets are operating like they have in recoveries or operating in ninety or more, is it so you get a lot of leverage out of the cost when that happens?
What was the other part of the question?
Sam Reed: And you'll get less pressure on pricing as utilization goes up because that means you have strengthening demand.
Sam Reed: The competitors and we are taking lower margins trying to operate and reduce the unabsorbed overhead costs, so that's compressing the margins. And then you have the other part, which is the lower mix, which the categories that are doing better are under more pressure.
Speaker Change: No, that helps. Thanks so much, guys. I'll pass it on. Thank you, Sam. The next question will come from Keith Hughes with Truist. Please go ahead.
Speaker Change: Thank you. Just wanted to ask about the $285 million of restructuring saves. How much of that was realized in 2024? Do you have a view of how much will be saved in 2025?
In terms of the restructuring plans across the business,
Grow to about a hundred million dollars
from a year-over-year perspective.
Speaker Change: Just to remind you, this is a segment where we're exiting.
Speaker Change: A combination of unprofitable products, you know, closing plants, taking out...
Speaker Change: Inefficient Assets, along with streamlining our distribution in warehouses, lowering administrative costs, and reducing product complexity, which is key to helping grow that productivity.
Speaker Change: Okay, just to make sure, the $100 million and $25 million is incremental, so it will be $180 million over the two years, is that what you're saying? That's what I'm saying, yes, and then, as we said, the projects will finish up by the end of, or during 2026.
Speaker Change: One question for you Jeff, you mentioned in 25, you thought you might have some more positive mix.
Speaker Change: I just want to make sure I heard that right, where do you think you would see that?
Jeff Lorberbaum: The positive mix is coming from the new introductions that we're putting out, and they have higher average selling prices and margins than the old ones. So the churning of the product line helps the mix.
Thank you very much. Thank you.
Speaker Change: And the next question will come from Michael Rau with J.P. Morgan. Please go ahead.
Michael Rau: Hi, good morning, everyone. Thanks for taking my questions. First, I just wanted to clarify an earlier comment. I think, Jim, that you made about 2Q seeing normal seasonality off of the first quarter, you know, in both sales and margins.
Speaker Change: does that kind of when you talk about normal seasonality sequentially is that off of the adjusted
Speaker Change: if you were to add back that $0.35 and the various impacts of that.
Speaker Change: Just trying to understand the baseline there. Absolutely, Mike. The baseline is absent any impact of the foreign North America system issue.
Speaker Change: I'm just doing an apples to apples, so if you set that aside and you look at the move from Q1 to Q2
Mike Dahl: What I'm saying is that I would expect that it would be in line with historical growth both on sales and from an EBIT margin perspective.
Speaker Change: Great, great. And then, you know, also thought it'd be pretty helpful if you could break out, if possible,
Speaker Change: What the impact on, you know, from currency and the natural gas costs that have kind of risen. How, you know, if there's any way to kind of quantify or roughly quantify what those impacts.
Speaker Change: are expected to be on first quarter and how those might persist over the next quarter or two.
Speaker Change: Yeah, so as I said before, you know, you'll see some some lag of that higher cost flowing through.
The P&L, so I would expect
I would see a ramp up of the cost impact.
And Quarters 2 and 3 right now would be...
Unknown Speaker A headwind.
Speaker Change: Also, material costs as as well from a currency standpoint, and, you know, it continues to evolve, as you well know, with the strengthening dollar, you know, but I would expect.
Speaker Change: That to continue to be a drag on operating income, it could be in the mid-single digits from our total earnings that we get outside of the U.S.
Speaker Change: So just to make sure I'm understanding, you're saying, I apologize, mid-single digits.
Speaker Change: Is that in the millions of dollars or is that an EPS number? And then also, in terms of the natural gas, you said that it would be likely higher in 2Q and 3Q.
Speaker Change: Again, just trying to get any type of quantification off of that and what might it be, both of these issues, again, impacting earnings in the first quarter guide.
Speaker Change: It's tough to, on the first quarter, it's, you know, it's difficult to...
Speaker Change: Absolutely quantify. Our assumption is that we'll have limited impact in the first quarter on energy. It'll be more in the second quarter as it floats through the P&L and on the
Speaker Change: The impact of FX, as I said, that would be an operating income level, so you could be in the high single digits of operating income, so somewhere around $7 and $10 million of an impact in the first quarter.
Okay, thank you
Speaker Change: Next question will come from Tim Woese with Baird. Please go ahead.
Tim Woese: Hey guys, good morning. Thanks for the details. I guess it's, you know, there's a lot of moving pieces, you know, kind of in the market and kind of underlying, but as you look,
Tim Woese: at the three segments as you report it, is there a way to kind of talk about what you think those markets grew on an underlying basis in 2024 relative to what you've reported from a growth perspective?
Tim Woese: Looking at each of, you know, it is difficult because you've got the influence of both the US market and outside of the US.
You know, we normally look at the U.S. that
Foreign Grows.
Tim Woese: kind of close to GDP, but it's been it's been so under pressure with with demand.
Tim Woese: What we've seen is our hard surface business, so laminate and LVT.
have grown at a much faster pace than soft surfaces.
Tim Woese: Ceramic, as Jeff indicated earlier, is very impacted by the imports in the U.S., you know, but we continue to, you know, maintain a very high level of share in the U.S.
outside the US and Europe, you know, this ceramic business.
Tim Woese: You know, it continues to improve from a mix perspective, even though pricing and demand is very much under pressure. So our porcelain slab business is doing well in helping that mix.
but the demand and pricing is certainly under pressure.
Tim Woese: And then as you go kind of south, Latin America is seeing that same price and mix pressure with their interest rates. Brazil actually increased their interest rates.
Tim Woese: I'm in the midst of this, so demand levels are very much constrained in those regions as well. The high interest rates around the world trying to reduce inflation impacted all the markets the same. The volumes all decreased.
Tim Woese: improving the mix to try to get the average price up, given that it's very difficult to get pricing in all the markets. So there's not a lot of difference in them.
Speaker Change: Okay. I mean, I guess my question was more around like, do you feel like you're gaining share in the majority of your markets? Or do you feel like you're growing more in line with the markets?
On
Speaker Change: And it's different by market. I think in most markets, we're either flat or gained a little.
Speaker Change: Okay, okay, good. And then just a quick one just in Florida, North America, just just like high level. Could you just give us a sense for how big hard surface versus soft surfaces right now?
We don't have those numbers in front of us.
Speaker Change: Running below soft surfaces, residential soft and commercial soft still are larger, but laminate and LVT combined are certainly catching up.
Okay, great. That's good. Thanks, guys.
Speaker Change: And the next question will come from John Lavalla with UBS. Please go ahead.
John Lavalla: Hey guys, thank you for taking my questions as well here. Maybe just from a high level, you know, obviously existing home turnover
John Lavalla: has been a headwind. You know, one of the things that's been interesting is that rates have been high, but the prime rate has come in a bit.
Well, you know, looking at interest rates,
John Lavalla: You know, central banks, you know, have cut rates, though we're really not seeing housing turnover, you know, improve that much. In the U.S., you're also seeing mortgage rate spreads increase, which is really offsetting some of the short-term.
declines.
John Lavalla: But certainly as the industry recovers, you know, we're going to see an increase in our utilization and the ability to expand our margins.
John Lavalla: At this point with our plans, we don't have a significant recovery showing up, but we're hoping it does.
Speaker Change: Gotcha. I mean, I guess I was wondering just about on the ability for folks to extract equity from their homes and use that as a catalyst for R&R. If you had any thoughts around that.
Speaker Change: When their confidence raises, they have significant money available to them, given the price of houses, and so it should help the recovery when it occurs.
Speaker Change: Okay, fair enough. And then maybe the second question is, you know, the flooring industry as you've mentioned has been
Speaker Change: In a tough spot here for a few years. Your balance sheet's in really good shape. I mean, it seems like it could create an opportunity for you guys to take advantage of the situation. I mean, how are you thinking about the ability to be a little bit more acquisitive in 2025? You know, to expand it into new products or regions or whatever it may be?
Unknown Speaker
Speaker Change: At this point, given the compression of the earnings, most people that are doing
Speaker Change: Okay, are not aggressively looking to sell. So usually as you caught coming out of these downturns and the margins start going up, more opportunities show up and we agree that we're well positioned to take advantage of them.
Okay, thank you guys.
Speaker Change: The next question comes from Phil Ng with Jefferies. Please go ahead.
Phil Ng: Hey guys, Jim, appreciate the color that the net gas impact will be more impactful from a P&L standpoint, 2Q, 3Q, but
Speaker Change: and in a way to size that up in terms of
Speaker Change: Gas input or just broader inflation in general and and certainly the million dollar question is around pricing
Speaker Change: Well, in terms of the gas impact, I'll just reiterate that in the U.S.,
Speaker Change: You know, we've seen the higher costs and we'll see some limited impact, you know, certainly as we get into the first quarter, you know, in Europe.
Speaker Change: The gas costs have increased, but still dramatically below the peak. We have, as we've said in the past, we do some pre-buying in Europe to try to help limit the volatility of that.
of those increases.
Speaker Change: Pricing, you're right, is very difficult and we're doing it in very strategic areas, maybe more on the higher end.
Speaker Change: But again, there's a lot of competition for volume because of where the demand is at this point. As we've said, we think that the mix improvements, productivity initiatives,
Speaker Change: help cover the rising costs and the headwinds from a stronger dollar.
Speaker Change: is that, and we think we're going to have to have some pricing to help us get the margins back where we want. The question is, will the market allow it or not this year?
Speaker Change: We're assuming it's going to be difficult to pass through most of it. I remember what Jeff said earlier on the calls that absent the impact of the system issue, we should see a slight improvement in overall earnings.
Speaker Change: And the only way we get there is the balance between productivity, offsetting, inflation, and then some...
favorability on the mix side.
Speaker Change: Okay, great. That's that's helpful color. In terms of tariffs, you know, appreciating it's a very fluid situation.
I guess, how do you see that happening?
Speaker Change: impacting your business, right? And when you look at your peers, you're competing with largely players, ex-carpet importing.
Speaker Change: Product in is that going to be a good guy from a pricing standpoint, you know It reminds us how you're set up from a Mexico exposure. You got an LBT facility ceramic as well So holistically tariffs that's proposed is this a good guy a price margin standpoint and then anything that we need be mindful from a operation and supply chain standpoint as well
Speaker Change: Well, let's start out that we have no idea what they're going to be, how they're going to be executed and what's going to happen. Other than that, we have a clear view. Presently,
Speaker Change: Breaking it down, we import products from Mexico where we make ceramic and LVT.
Speaker Change: Both of those were reviewing alternatives to move to other factories that we own, and we're also looking at potentially outsourcing them, as well as what you would be able to do with pricing if there were significant changes in it.
Speaker Change: In China, we have very limited, we buy out of China. And what we do, we're actually moving large pieces of it already to other places. And so
Speaker Change: You know, those are the big pieces. We think that when it occurs, if it occurs like it is, when it occurred with China a few years ago, you had also a change in the exchange rates. So it's possible that a part of it will be offset by
Speaker Change: exchange rates going on. And then depending upon what it is, we'll just have to react to it as it occurs. But it's impossible to know what to do at this moment.
Unknown Speaker 00.00.00
Speaker Change: Jeff, do you think it's net positive, neutral, or a modest headwind for you guys? Because your competitive landscape is largely important.
I think the
Speaker Change: The imports we're doing from Mexico, it'll be negative two. On the other hand, it might give us some positives in manufacturing, and U.S. should help some of those. And how it balances out is anybody's guess what's going to happen, since we don't even know what it is.
Appreciate the call, guys. Thank you.
Thank you.
Speaker Change: And the next question comes from Laura Champagne with Loof Capital. Please go ahead.
Laura Champagne: Thanks for taking my question. It's actually a follow up on what's called potential tariffs on North America. What percentage of your overall sales
Speaker Change: are imported from Mexico and then a little more far-fetched but totally possible. I know that you export product from the U.S. to Canada. What percentage of your sales is in that bucket?
Um,
Speaker Change: So we import somewhere around 300 million from Mexico, and we export approximately 200 million to...
Canada
Got it. Thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Jeff Lorberbaum for any closing remarks.
Speaker Change: We appreciate everyone joining us. The recovery is going to come and it will significantly improve our results as the market rebounds back to where it was historically. Thanks for joining us again and have a good day.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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