On Friday, July 28, 2023, Mohawk Industries held their second quarter earnings conference call, with CEO Jeffrey Lorberbaum, COO Chris Wellborn, and President James Brunk present. The conference call discussed the company's second quarter performance and provided guidance for the third quarter of 2023. The net sales for the second quarter were reported to be $2.95 billion, down 6.4% as reported or 9.6% on a constant and legacy basis due to pressure on residential remodeling.

This paragraph discusses the financial results of the company, including their EPS and free cash flow generation, as well as the impact of higher interest rates and inflation on flooring sales. The company is taking steps to manage the downturn, such as restructuring and integration actions that will save $35 million annually, limiting capital investments, and increasing sales through promotions, retailer incentives, and selective product launches. They are also preparing for the rebound that historically follows cyclical declines in the industry by expanding their manufacturing capabilities. Finally, they note that the commercial sector is performing better than the residential sector, which is facing headwinds due to lower home sales and deferred improvement projects.

Price competition is increasing due to limited housing supply, high interest rates, and inflation. This is impacting flooring shipments, but Mohawk is benefitting from lower energy prices and their investments in renewable energy production. USA Today recently recognized Mohawk as the only flooring company to have made the greatest reductions in global emissions over the past three years. Bernard Thiers, President of Flooring Rest of World, is stepping down next year but will remain with the company in a Senior Advisory role.

Mohawk Industries has assembled a strong leadership team with Wim Messiaen joining in October and becoming President of Flooring Rest of World in February. In the second quarter, sales exceeded $2.9 billion, but gross margin declined due to softening volume, temporary plant shutdowns, unfavorable price mix, higher inflation, and the net impact of FX. SG&A expense increased due to higher inflation and the net impact of acquisitions. Operating income as reported was 5.2%.

In the quarter, the company took restructuring and integration actions to lower costs and strengthen results, resulting in an annual savings of $35 million. Operating margin excluding charges was 8.3%, down from the prior year due to lower sales volume and higher inflation, but it saw significant margin expansion sequentially due to seasonal volume. Interest expense increased due to higher interest rates, while the non-GAAP tax rate was 19.5%. Earnings per share as reported were $1.58 and excluding charges were $2.76. The Global Ceramics segment had sales just shy of $1.2 billion, which was basically flat as reported and a decrease of 6.7% on a legacy and constant basis due to weaker volume and unfavorable FX, partially offset by positive price and mix.

In the quarter, the flooring industry was impacted by higher interest rates, inflation, and lower volumes, leading to decreased sales and plant shutdowns. Flooring North America saw a decrease in sales of 8.9% as reported and 12% on a legacy basis, with the most significant weakness in residential soft surface businesses. Flooring Rest of the World saw a decrease in sales of 11.4% as reported and 10.2% on a legacy basis, with the most significant weakness in laminate and wood businesses, as well as the deferral of new projects. Operating margins excluding charges were 8.6%, 6%, and 12.1% for the Global Ceramic, Flooring North America, and Flooring Rest of the World segments respectively. Corporate expenses are expected to be around $45 million for the full year.

In Q2, the company had $571 million in cash and cash equivalents, free cash flow of $147 million, receivables of just shy of $2.1 billion, inventories of $2.6 billion, and property and plant and equipment of just shy of $5 billion. CapEx and D&A for the quarter were $117 million and $157 million respectively, and gross debt was just shy of $3.1 billion with leverage at 1.8x adjusted EBITDA. Global Ceramic segment results improved from the first quarter due to increased sales, higher production, and lower energy costs, though competition and lower mix impacted selling prices. Energy costs remain volatile.

The company has acquired businesses in Brazil and Mexico, and is realigning their organizations, defining new sales and product strategies, and executing cost reductions. In the US, the ceramic business has benefited from increased participation in commercial and new construction channels, as well as enhanced styling and service. Energy and freight costs have declined, leading to increased competition, so the company is introducing higher style products and expanding their customer base to offset the weakness in residential remodeling. In Europe, residential remodeling remains slow, but the company is benefiting from sales of premium residential collections, commercial products, and exports. To utilize their new porcelain slab capacity, they are broadening their portfolio with innovative visuals and manufacturing products they have been outsourcing, while focusing on cost containment.

The Latin American Ceramic businesses are being pressured by higher interest rates, and the company is attempting to leverage sales and integrate acquisitions to offset the weakening market. Mexico is performing better than Brazil due to lower interest rates, but Brazil has recently announced subsidies for low interest mortgages to help the economy. The Flooring Rest of World segment is also struggling due to low consumer spending, low manufacturing utilization, and declining input costs, leading to lower sales and earnings. The company is attempting to manage lower volumes by pursuing additional sales, reducing costs, and aligning production with demand. Sheet vinyl collections are outperforming due to consumers trading down to lower price alternatives.

Sheet vinyl production is being increased to meet rising demand, and laminate and LVT production is being managed to align with present demand. The panels business is seeing fewer projects being initiated and industrial use has decreased due to slower market conditions. The insulation business has long-term prospects due to increasing energy conservation and government regulations, but presently demand is declining. In Australia and New Zealand, housing markets have softened due to inflation and higher interest rates, resulting in lower volumes and mix in residential channels. New products and selective promotions are being introduced to increase sales volume.

The Flooring North America segment faced challenging conditions due to inflation, high interest rates, and more conservative lending practices. To control costs, productivity was enhanced and administrative functions streamlined. Weak residential remodeling and tighter inventory management have impacted demand. Energy and raw material costs have decreased, leading to increased market competition. New single family home starts have increased, and the U.S. commercial sector has proven more resilient. To increase sales, the company is providing new product options, initiating promotional activity, and introducing consumer friendly displays. The Hospitality and Main Street channels performed best in the quarter, and the company is leveraging its relationships to increase product sales of its certified carbon neutral products.

In the second quarter, Mohawk saw a sequential improvement in sales and production in residential carpet, with cost reductions leading to improved margins. The company also saw higher sales in its Pergo and Karastan collections, thanks to its Signature Technology. Additionally, Mohawk has integrated its non-woven acquisition and is now offering incentives to retailers to grow volumes. To remain competitive, Mohawk has also introduced new rigid LVT products with updated visuals and WetProtect and antimicrobial technologies. The company's West Coast LVT plant is also ramping up production. Overall, the company is managing the current market conditions while preparing for the rebound in demand.

Central banks have raised interest rates to reduce inflation and are signaling additional rate hikes are possible. This has led to an increase in builder confidence and housing starts in the US, however, employment remains strong and remodeling and existing home sales are being delayed due to limited housing availability, higher interest rates, and inflation. Mohawk is taking steps to manage current challenges while preparing for future opportunities, and when central banks shift to a more balanced approach, the industry is expected to recover and create higher growth for flooring. Mohawk's investments in capacity expansions and acquisitions will further enhance their results.

Jeffrey S. Lorberbaum discusses the cycle of purchasing flooring and how it is affected by economic downturns. He believes that when central banks move to a more balanced approach, the pent-up demand from postponed purchases will expand the volume of flooring sales. He also believes that their new investments and expansion will allow them to increase the categories of the business that are growing the most. Finally, he is optimistic about the long-term, but has not yet seen an increase in orders for the R&R side of things.

James F. Brunk and Philip Ng discuss the state of inventory in their region. Inventory decreased from Q1 to Q2, due to both lower volume and lower cost. They anticipate further inventory decreases this year, in order to keep inventory low and improve plant operations. They are still curtailing production in the back half of the year, taking into account seasonal shutdowns in Europe and the holidays.

Jeffrey S. Lorberbaum discussed that while consumer demand in Europe had not yet improved, lower energy prices were expected to have a positive impact. James F. Brunk added that lower input costs and deflation from Q1 to Q2 had helped to expand margins, and that as the company goes through the second quarter to third quarter, they expect to see the same phenomena of lower input costs and deflation helping to offset the price mix.

Jeff Lorberbaum commented on the price mix pressure from consumers or customers, noting that it is caused by low utilization rates and the participants trying to maximize volume to cover overhead. He also mentioned that the retail market has higher margins and as it declines, it impacts the margins and average prices. He concluded by mentioning signs of a bottom and hoping for a bottom.

Jeffrey S. Lorberbaum and Eric Bosshard discuss the current state of the housing market, noting that new starts are increasing and that the commercial sector is still holding up. They suggest that consumer confidence is a good indicator of when people will start spending more money, and that the billing index for architects has not yet shown a decline, though one is anticipated in the fall.

Jeffrey S. Lorberbaum and James F. Brunk explain that the third quarter will be impacted by lower industry volumes, no catalyst for remodeling, lower material and energy costs, and currency changes. Flooring Rest of the World will have a margin decline, Global Ceramic could be flat to slightly down, and Flooring North America will have margin expansion.

Jeffrey S. Lorberbaum does not know when the global macroeconomic situation will improve, but he believes that when it does, Mohawk Industries will benefit from increased volume, higher selling prices, and improved margins due to cost reductions and restructuring. Additionally, Mohawk will have more capacity in areas of high growth potential.

Laura Champine from Loop Capital asked James F. Brunk about the ceramic business and product cost inflation. Brunk explained that energy costs had started to come down and that most of the inflation would be finished after the third quarter. Brunk also discussed the CapEx budget for the year, noting that they are focused on investments that will optimize the future of the business and quick return projects. He added that they are currently looking ahead to next year's budget and being diligent about it, but it is too early to give a first look.

Truman Patterson asked Jeffrey S. Lorberbaum and James F. Brunk to discuss the increased pricing competition globally, specifically in product categories and regions, and how it has changed throughout the year. Lorberbaum discussed the declining import prices in the U.S. and the aggressive pricing in Europe, while Brunk discussed the benefit of lower costs in raw materials and energy in North America.

James F. Brunk of Flooring North America discussed the cost and price mix of the company for the second and third quarters. Sequentially, there will be a benefit from lower costs, but the pressure on price mix will continue for the third and fourth quarters. There will be $17 million in restructuring charges that will generate $35 million in annual savings, which may be related to headcount.

James F. Brunk and Michael Rehaut are discussing the potential savings that will come from headcount reductions and the consolidation of distribution points. They note that while the cost savings will be seen in the third and fourth quarters, the pressure on price and mix will lessen as the year progresses. They also note that while cost savings will help, historical seasonality suggests that margins will decline in the third quarter compared to the second.

James F. Brunk and Jeffrey S. Lorberbaum discussed the possibility of a consistent margin contraction in the fourth quarter due to seasonally lower production and pricing pressure. They also discussed the potential benefit of new home construction and restructuring, as well as the Italian subsidies which could provide a benefit of $15-20 million per quarter until the end of the second quarter. Energy costs have also dropped substantially, meaning the difference in costs without the subsidies will not be dramatic.

Michael Dahl asked James F. Brunk about the price cost in the fourth quarter and whether it would be flat or slightly negative. Brunk responded that it is difficult to say, but the lower costs should be more substantial in the fourth quarter. Dahl then asked about the LVT import dynamics and the Forced Labor Act, to which Brunk responded that the supply chains have shifted and product has been able to get to ports, though it is difficult to say for sure.

Christopher Wellborn and Jeffrey S. Lorberbaum discussed the impact of the Forced Labor Act on their operations, such as reduced service levels and halted product introductions. Michael Dahl asked Stephen Kim of Evercore about the potential benefits of a return to higher volumes, such as increased productivity and fewer shutdowns. Kim asked if it was reasonable to expect positive productivity year-on-year even with rising volumes, and if the reduced shutdowns would provide an EBIT benefit.

Jeffrey S. Lorberbaum and Christopher Wellborn discuss the benefits of increased utilization of factories, and the reduction of fixed overhead costs and sales costs, as well as the potential to raise prices. They also explain that their investments in Latin America are primarily for the Latin American markets, although some is shipped to the U.S. They mention that India currently has an advantage in freight rates, but that the company has done work on mid and premium products to reduce the impact of imported products.

Jeffrey S. Lorberbaum answered a question from Matthew Bouley of Barclays about whether they were seeing signs of weakening orders in the commercial end market and how this might affect volume and price. James F. Brunk added that the savings actions from the $35 million would be split between Q3 and Q4, with the run rate being seen in Q4. Finally, Adam Baumgarten asked for more information on the negative mix impacts across products and geographies.

Jeffrey S. Lorberbaum reports that the restructuring actions announced in the second and fourth quarters of 2022, totaling $60 million, were mainly split between Flooring North America and Flooring Rest of the World. He also states that the current action is spread between Flooring North America and Global Ceramic. When asked about the health of the smaller independent dealers in the US, Lorberbaum reports that most of them are in good shape, having been able to pass through costs and higher labor installation rates, with some even seeing margin expansion.

Jeffrey S. Lorberbaum discussed the demand elasticity to price, noting that when prices decline, companies typically pass through most of the lower cost to customers. He also noted that the competitive environment in Europe might be more aggressive than historical due to the higher costs. He concluded by thanking everyone for joining the conference and expressing his commitment to managing the short-term and positioning the business for long-term growth and earnings.

This summary was generated with AI and may contain some inaccuracies.