Mohawk Industries, Inc.

Good morning. My name is Tawanda, and I will be your conference operator today. At this time, I would like to welcome everyone to Mohawk Industries' second quarter 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press the pound key. Should anyone need assistance at any time during this conference, please press star, then zero, and an operator will assist you. As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, July 30, 2021. I would now like to introduce your speaker for today, Mr. James Brunk. Mr. Brunk, you may begin your conference.

Thank you, Tawanda. Good morning, everyone, and welcome to Mohawk Industries' quarterly investor call. Joining me on today's call are Jeff Lorabom, Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's second quarter results. 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 Allegation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include the discussion of non-GAAP numbers. For a reconciliation of non-GAAP to GAAP amounts, please refer to our Form 8K and press release in the Investor section of our website. Now I'll turn the call over to Jeff for his opening remarks.

Jeff? Thank you, Jim. In the second quarter, we generated revenue of approximately $3 billion, the highest quarterly sales of any period in our company's history. Our sales increased significantly over last year when the pandemic interrupted the global economy. Our adjusted EPS of $4.45 was the highest on record for any quarter. Our success is the result of the extraordinary efforts of all of our team members across the world. They have shown their dedication and resilience to overcome the challenges that we have faced. We greatly appreciate what they have been able to achieve. Our second quarter results were significantly stronger than we had anticipated across all of our businesses with sales building on a momentum from our first period. In the quarter, our operating margin expanded to their highest level in the last four years as we leveraged our operational and SG&A expenses. The actions we have taken to simplify our product offering, enhance our productivity, and restructure our costs are benefiting our results. We've delivered almost $95 million of the anticipated $100 to $110 million in savings for our restructuring initiatives. Across the enterprise, we continue to respond to rising material, energy, and transportation costs by increasing prices and optimizing manufacturing and logistics. During the quarter, most of our manufacturing ran at capacity, or we were limited by material supply and labor availability. Raw material constraints in many of our operations led to unplanned production shutdowns during the period. Overall, we successfully managed interruptions that impeded our normal operations, as well as regional manufacturing and customer closings related to COVID regulations in local areas. Our inventory levels increased slightly in the period, primarily reflecting higher material costs. Rising freight costs and limited shipping capacity impacted our material costs, availability of imported products, local shipments to customers, and international exports. Presently, we do not anticipate near-term abatement of these constraints. All of our markets continue to show strength with robust housing sales and remodeling investments across the world. Commercial projects are increasing as the global economy improves and businesses gain confidence to expand and remodel. Inventory levels in most channels remain low, and our sales backlogs are above our historical levels. To improve our sales mix and efficiencies, we will introduce more new products with enhanced features and lower production complexity in the second half of the year. To alleviate manufacturing constraints, we have approved new capital investments of approximately $650 million to increase our production, with most taking 12 to 18 months to fully implement. In the second quarter, we purchased $142 million of our stock at an average price of $2.08 for a total amount of approximately $830 million since we initiated the program. With our strong balance sheet and historically low leverage, we're reviewing additional investments to expand our sales and profitability. Jim will now cover the second quarter financials.

Thank you, Jeff. For the quarter, our sales were $2,954,000,000, an increase of 44% as reported and 38% on a constant basis. All segments showed significant year-over-year growth versus Q2 of 2020, which was the period we were most impacted by the pandemic shutdowns. Gross margin for the quarter was 30.5% as reported, or 30.7%, excluding charges, increasing from 21.4% in the prior year. The increase in gross profit was a result of higher volume and productivity, improved price mix, reduction of last year's temporary shutdowns due to the pandemic, and favorable FX partially offset by the increasing inflation. SG&A has reported with 16.9% of sales or 16.8% versus 19.7% in the prior year of both excluding charges as a result of strong leverage by the business on the sharp increase in volume. The absolute year-over-year dollar increase was primarily due to higher volume, normal operating costs previously curtailed by the pandemic, impact of FX, increased product development costs, and inflation. Operating margin as reported was 13.7%, with restructuring charges of approximately $7 million. Our restructuring savings are on track as we have recorded approximately $95 million of the planned $100 and $110 million of savings. Operating margin excluding charges was 13.9%, improving from 1.7% in the prior year. The increase was driven by the stronger volume, improved price mix, productivity actions, the reduction of the temporary shutdowns, and favorable FX, partially offset by the higher inflation and increased product development costs. Interest for the quarter was $15 million. Other income, other expense was $11 million income, primarily the result of a settlement of foreign non-income tax contingency and other miscellaneous items. Income tax rate as reported was 16% and 22.5% on a non-GAAP basis versus a credit of 2.5% in the prior year. We expect the full year rate to be between 21.5% and 22.5%. an earnings per share of $4.82. Earnings per share excluding charges was $4.45. Turning to the segments, the global ceramic segment had sales of just over $1 billion, an increase of 38% as reported, or 34% on a constant basis, with strong geographic growth across our business, led by Mexico, Brazil, and Europe. Operating margin excluding charges was 13.2%, a significant increase from the low point of 2020 at 0.5%. The earnings improvement was a result of strengthening volume and productivity, favorable price mix, and a reduction of temporary shutdowns, partially offset by increasing inflation. Florian North America had sales at just under $1.1 billion for a 35% increase. driven by a strong residential demand, with commercial channel continuing its growth versus prior year, but still below historic levels. The segment experienced solid growth across all product lines, led by residential carpet, LVT, and laminate. Operating income excluding charges was 11.2%, and similar to global ceramic, a significant increase from the 2020 margin dropped. The operating income improvement was also driven by the increase in volume, strengthening productivity, improvement in price mix, with the reduction in temporary shutdowns partially offset by higher inflation. Lastly, flooring the rest of the world, with sales at just over $830 million, a 68% improvement as reported, or 50%, on a constant basis, as continued strength in residential remodeling and new home construction drove improvement across all product groups led by Resilient, Panels, Laminate, and our soft surface business in Australia and New Zealand. Operating margin excluding charges of 19.7%, and similar to our other segments, was a significant increase from prior year's low point of 11.9%. And again, the main drivers were consistent in that they had higher volume, favorable impact from price mix with the reduction of temporary shutdowns favorable FX partially offset by increasing inflation. Corporate eliminations came in at $12 million and expect full year 2021 to be approximately $45 million. Turning to the balance sheet, cash and short-term investments are approximately $1.4 billion with free cash flow of $226 million in the quarter. Receivables at just over $2 billion and an improvement in DSO to 53 days versus 64 days in the prior year. Inventories for the quarter were just shy of $2.1 billion, an increase of approximately $160 million or 8% from the prior year or increasing $85 million or 4% compared to Q1 2021. Inventory days remain historically low at 99 days versus 126 in the prior year. Property, plant, and equipment were just shy of $4.5 billion, and CapEx for the quarter was $113 million, with DNA of $148 million. Full-year CapEx has been increased to approximately $700 million to strengthen future growth, with full-year DNA projected to be approximately $580 million. Overall, the balance sheet and cash flow remain very strong, with gross debt of $2.7 billion, total cash and short-term investments of approximately $1.4 billion, and a leverage at 0.7 times to adjusted EBITDA. And with that, I'll turn it over to Chris Wellborn to cover our operational review.

Thank you, Jim. For the period, our Flooring Rest of World segment sales increased 68% as reported and 50% on a constant basis. Operating margins expanded to 19.7% due to higher volume, pricing, and mix improvements and a reduction of COVID restrictions partially offset by inflation. Flooring Rest of World outperformed our other segments with all their major product categories significantly improved. as residential sales expanded in all regions. We have implemented multiple price increases in most product categories to cover inflation in materials and freight. Raw material supplies are problematic and have impacted our LVT production and sales the most. We anticipate material and freight challenges will continue to impact our business in the third quarter. Sales of our high-end laminate continue to grow dramatically as our proprietary products are being widely accepted as waterproof alternative to LVT and wood. We are beginning to introduce our next generation of laminate at premium levels with collections featuring handcrafted visuals. We are increasing our production in Europe with new capacity coming online and further capacity expansion projects are being initiated. Our laminate business in Russia and Brazil are growing strongly as we enhance our offering and expand our distribution. We recently completed the acquisition of a laminate distributor in the UK that will improve our position in the market. Our LVT sales growth was strong during the period and would have been higher if material shortages had not interrupted manufacturing. To compensate for material inflation, we have increased prices and we expect further increases will be required as our costs continue to rise. We are significantly expanding sales of our rigid LVT collections with our patented watertight joints that prevent moisture from penetrating the floor. Our manufacturing operations have made substantial progress, improving throughputs, material costs, and yields. Our production in the third quarter will continue to be limited by material availability. Our sheet vinyl sales rebounded strongly as retail stores opened in our primary markets. Our sheet vinyl distribution in Russia has expanded, and we are maximizing production to meet the growing demand. Our wood plant in Malaysia has been idle since the government instituted lockdowns to address surging COVID rates. Wood is a small product category for us, so the sales impact in the third quarter will be limited. We are awaiting permits to complete the acquisition of a plant that reduces wood veneers to lower our cost. Our Australian and New Zealand flooring businesses delivered excellent results with sales and margins exceeding our expectations. The residential business was strong with hard surface products leading the growth. Carpet sales are strengthening with our national consumer advertising, enhanced merchandising, and the launch of a new high-end wool and tri-exta collections that improved our mix. Most of our facilities operated at a high level with increased volumes benefiting our results. As in all of our markets, commercial sales have not recovered to their pre-pandemic levels. Though the Australian government has locked down specific regions to contain the spread of COVID, it has not meaningfully impacted our business. Our European insulation sales grew even though chemical shortages limited our production. Our margins are recovering after we implemented price increases to cover rising material costs. We have announced an additional price increase for the third quarter to offset further raw material inflation. We anticipate chemical supplies to remain tight and could impact our future sales. To expand our existing insulation business in Ireland and the UK, we have signed an agreement to acquire an insulation manufacturer, which is pending government approval. Our panels business is running at full capacity and so far we've been able to manage material shortages without interruptions to our operations. We have raised prices and improved our mix with higher value decorative products. To enhance our results, we are expanding our offering of premium products as well as our project specification team. To enhance our panel offering, we are commissioning a new line that creates unique surfaces and visuals to differentiate our offering in the market. For the period, our Flooring North America segment sales increased 35% and adjusted margins expanded to 11.2% due to higher volume, productivity, pricing and mix, improvements and fewer COVID interruptions partially offset by inflation. Our business trends continued from the first quarter with sales growth being driven by residential remodeling and new construction. Commercial sales continued to improve though the channel remains below pre-pandemic levels. Through the period, our order rate remains strong and our sales backlog remains above historical levels. We are maximizing output at our facilities to support higher sales and improve our service. During the quarter, our production levels were hindered by local labor shortages and material supply, particularly in LVT, sheet vinyl, and carpet. Ocean freight constraints delayed receipt of our imported products, impacting our sales, inventories, and service levels. We implemented price increases as our material and transportation costs increased, and we have announced additional pricing actions as inflation continues. Our restructuring initiatives are improving efficiencies as planned, and we should realize additional savings in the third quarter. Our residential carpet sales continued their growth trend across all channels with consumers investing in home improvement projects. Sales of our proprietary SmartStrand franchise expanded with our new collections being well accepted. Our EverStrand polyester collections are expanding by providing enhanced value, styling, and environmental sustainability. Our carpet sales have been limited by personnel shortages in our operations. and we are implementing many actions to increase our staffing and productivity. We have improved our efficiencies by rationalizing low-volume SKUs and streamlining our operational strategies. Our commercial sales have improved as businesses increase remodeling and new construction projects. Both carpet tile and hard surface products grew with health care, senior living, education, and government recovering faster. Though down slightly from record levels, the June architectural billing index had a fifth consecutive month of expansion, indicating the continued strengthening of new commercial development and renovation projects. With realistic visuals and waterproof performance, our premium laminate collections are growing substantially. To support higher demand, we have implemented many process improvements to maximize our U.S. production and are importing product from our global operations. Our laminate expansion remains on schedule and should be operational by the end of this year. Our new line will produce the next generation of RevWood, which is already being introduced in Europe. To support the growth of our laminate business, our US MDF operation completed investments to increase our volume and lower our cost. Our new waterproof UltraWood collections are being launched as a high-performance alternative to typical engineered wood floors. Our LVT and sheet vinyl sales continue to increase with growth in the residential, retail, and new construction channels. Our LVT and sheet vinyl growth and plant productivity were impacted by disruptions in supply that stopped our operations and delays in imported LVT caused by transportation constraints. We have enhanced our LVT offering with more realistic visuals, proprietary watertight joints, and improved stain and scratch resistance. Our U.S. operations implemented process enhancements that have increased our speeds and throughput. When material availability increases, we should see further improvements in our domestic manufacturing, which will support our recent product launches. For the period, our global ceramic segment sales increased 38% as reported and 34% on a constant basis. Adjusted margins expanded to 13.2% due to higher volume, productivity, pricing and mix, improvements, and fewer COVID disruptions partially offset by inflation. Our ceramic businesses around the world have greatly improved with strength in the residential channel and increasing commercial sales. All of them have low inventories, which impacted our sales growth and service levels. We have initiated expansion plans to increase our capacity and mix in Mexico, Brazil, Russia, and Europe. Our ceramic businesses continue to raise prices to cover material, energy, and transportation inflation. Our U.S. ceramic business is strengthening, and we are implementing price increases to cover material and freight inflation. We are improving our product mix with new shapes, sizes, and surface structures. We are reengineering our products to improve material cost and productivity. Our restructuring projects have been fully implemented and are growing the expected providing the expected benefits. Our countertop sales and mix continue to improve as we expand our premium offer with new technologies. In the period, a mechanical failure temporarily reduced production, which has been repaired. We have initiated the expansion of our plant to further grow our countertop business. Our Mexican and Brazilian ceramic businesses are very strong, with our residential business in both regions at historically high levels and commercial still recovering. Due to capacity constraints, our facilities could not fulfill customer demand, so we are allocating our production. We have executed multiple price increases to offset energy and material inflation. We are expanding operations in Mexico this quarter, and we have initiated new investments to increase capacity in Brazil. Our European ceramic business delivered strong sales and profitability as pricing, product mix, and productivity improved our margins. We increased sales of our premium products, including slabs, small sizes, outdoor, and antimaterial collections. Commercial sales trends are starting to improve, though they remain below historical levels. We are selectively increasing prices to recover material, energy, and freight inflation. During the period, our operations ran at high levels with improved efficiencies and increased throughputs. We continue to rationalize low-volume SKUs to optimize our operations. To support our sales of high-end collections, we have initiated expansion projects, some of which we'll take through next year to complete. Our ceramic sales in Russia were robust across all channels with our direct sales to customers through our own stores and new construction projects outperforming. We have announced price increases to cover rising inflation. During the period, our manufacturing operations ran at capacity to respond to accelerated sales, with inventory remaining below historical levels. Due to present capacity limitations, we are focusing on optimizing our product mix. We have initiated expansion plans with new production expected in the second half of next year. Sales of our new sanitary wear products are expanding primarily through our owned and franchised retail stores as our manufacturing ramps up. With that, I'll return the call to Jeff.

Thanks, Chris. The global economy should continue to improve through the low interest rates, government stimulus, and the success of COVID vaccines. Around the world, foreign sales trends remain favorable, with residential remodeling and new construction at high levels and commercial projects strengthening. In the third quarter, we expect our strong sales to continue with our typical seasonal slowing from the second quarter. We'll expand the introduction of new products with additional features and increase our investments to enhance our future sales mix. Material, energy, and transportation inflation is expected to continue and will require further pricing actions to offset. Most of our facilities will operate at high utilization rates, though ongoing material and local labor constraints will limit our production. Our global ceramic and flooring rest of the world segments will observe the European vacation schedules in the third quarter, which reduces production and increases costs in the period. In many countries, future government actions that contain COVID remain a risk and could impact our business. Given these factors, we anticipate our third quarter adjusted EPS to be between $3.71 and $3.81, excluding any restructuring charges. We entered this year with uncertainty about COVID, the economic recovery, home renovation, and new construction. Our business is stronger than we had anticipated, and we are increasing investments to support additional growth and improve efficiencies. Longer-term housing sales and remodeling are expected to remain at historical high levels. Apartment renovation should accelerate as rent deferment expires, and investments in commercial projects should continue to strengthen. We're expanding our operations, and introducing new innovations to maximize our results. Our balance sheet is strong, and we're exploring additional internal projects and acquisition opportunities. We'll now be glad to take your questions.

Thank you. Ladies and gentlemen, at this time, if you would like to ask a question, please press star, then the number one key on your telephone keypad. management request that you limit your questions to one primary and one follow-up. Our first question comes from the line of Eric with Cleveland Research. Your line is open.

Good morning.

Good morning.

I'm wondering two things. First of all, in terms of the increased capital and the increased capacity investments that you talked about over the next 12 to 18 months, You've got some stuff that shows up at the end of this year, but in terms of product categories or regions where you have the most conviction, where are you adding capacity?

We're adding capacity in the constrained parts of the business all over the world. So we're adding our production, but at the same time, we're still limited by constraints. So some of the limitations are labor and materials rather than capacity to fix to run it. And then we also have the problems with the delayed products from imports. The $650 million that we're going to put in, the biggest pieces are in laminate, ceramic, and countertops, but there's a number of other areas that they include. And when you get through with that, the capital forecast for this year is being raised to $700 million, and $450 million of the $600 million in next year's.

Okay, that's helpful. And then secondly, in terms of the third quarter, the earnings guidance is helpful. Just wondering if you could help us at all in terms of the sales guidance. Your commentary of typical seasonal slowing, does that suggest that we should look at 3Q revenues relative to 2Q revenues to reflect the normal 2Q to 3Q step-down? or is there something that would change the way that that path has traveled historically?

Well, let's see. The third quarter, we expect sales trends to continue from the second quarter. The operations will still run strong. We're assuming the business and residential will keep going and commercial improving. Residential, the European, the non-U.S. business, and especially Europe, always slow with a normal holiday period. as we go through. And you might not know, but the non-US businesses over time have become a larger part of our results. And the holidays have become a bigger impact over many years as we keep expanding outside the US. And with that, we still have material supply, labor, transportation, and all are constraining the business. We don't think the pricing actions we have are enough. Our inflation keeps coming, so we We expect to keep putting in more increases in prices in it. And then just to try to other things, as you think of the third quarter, what you have is manufacturing costs in the United States are impacted by a holiday in the Fourth of July, which is in the third quarter rather than the second. You have the holidays, which impacts not only the cost of operating, but the sales also drop off as we go through. So that's the biggest pieces of it, best I can lay out for you.

Thank you.

Thanks. Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open.

Hi, thanks for taking my questions. Jeff, first question, I wanted to follow up on the CapEx and just clarify. I think you said 450 of the 600. I don't know if you meant 450 of the 650, but just trying to figure out the next, I guess the question would be, when you look out the 22, between the carryover from these new investments and your normal CapEx, how should we be thinking about CapEx in 22 and, you know, to the point about not all of these constraints our physical capacity, some of its labor, some of its materials. I guess CapEx is a very long-term decision, and these are potentially, in some cases, temporary constraints or even temporary demand tailwinds. How do you think about that balance and the conviction to add the capacity?

The pieces that are temporary constraints, we're not increasing those. We are Leaving those alone, the things we are increasing are things that we have exceeded our capacity. What happened is this year, the sales are much higher than we anticipated coming into the year. So with that, we hadn't planned on having the capacity to support the growth that we're having this year. And so to get to the money, first is the $650 million is in addition to the capital that we had in the plan for this year. So this year the capital before was around 550, if I remember. Yes, that's correct. So I'm not sure I got the number exactly right, but it was around 550. Of the 650, that will raise this year to 700. And then approximately about 450 of that, of the 600, will go over to next year. And then we're going to go through our final planning the rest half of this year. We haven't finalized the budget for next year yet. So we'll have to decide what we're going to add more or less than we've already done as we go through. And again, just all through the original presentation we made, we tried to lay out for you the different pieces. And I'll name a few. The ceramic businesses in Mexico, Brazil, Russia, Europe are all being increased is it. We have the laminate businesses in the United States and Europe are all being increased. We have the countertop business that's being increased in the United States. There's a number of other ones that are here. We're putting the business in shape to grow more in the future and support what's going on in the world.

Okay, that's really helpful. Thanks for the additional detail. My second question is, Just back on the price cost, I guess your comments that the current pricing actions aren't quite enough given the escalation in cost and you're implementing more pricing. How should we think about the lag and what's embedded in guidance? Do you assume that there'll be price costs negative in 3Q before a catch-up in 4Q? Will you stay ahead of costs in 3Q or is it neutral? Just a little more color on kind of order of magnitude of cost and whether or when you'll be back to price-cost neutral or positive?

Let's start out with the second quarter. We were able to cover the inflation, which you'll see in the numbers that he publishes later. We've raised prices across the business. We keep announcing new increases. Our energy, materials, freight continue to rise. We don't know where it's going. Every week we wake up with new increases, so we keep adjusting as required as we go through. And so, you know, we think we've announced enough for what we know about at this point. And the timing of them and how they work together, we've put all that into the estimate that we think we're going to get them close. And then with a mixed thing, you do see as we raise prices in the marketplace, some customers in both residential and commercial, you know, have budgets and and they have budgets, they start trading down looking for something that stays in the budget. So that's just a normal process that occurs in all of this.

Okay. Thanks, Jeff. Appreciate the call.

Thank you. Our next question comes from the line of Adam Bumgarten with Zillman. Your line is open.

Hey, good morning, everyone. Just maybe touching on the laminate business, it appears there's been a really kind of meaningful surge in demand there over the last It seems like a year or so. How much of that is due to some of the technological advances that you've seen, and how much of that is due to maybe shortages in LVT supply?

Let's start out with first, what happened is you had LVT growing dramatically, and one of the main features of it was waterproof. And what's happened is in the marketplace, there are multiple options, and if you go into retailers today, they start talking about waterproof flooring as a category. when they start showing products of which our laminate with the technologies we have is a good or better alternative than many other ones in the waterproof category. So that's causing it to grow. It's also been growing in going into different channels. It's being used, if you watch any television shows, the remodeling pieces, they're using laminate and remodeling in new houses today. which they at a much higher rate than they have in the past. And then separate from all of that, we really do have unique technologies that give us differentiated features and visuals that separate our products from the market. And we have a much higher portion of the premium market because of it, both in the US and Europe.

Which is the reason why we're adding the capacity at the end of this year in the US. And that's why we had a plan. and in Europe in the future years.

Got it. Thanks. And then just on that mixed down comment you made, Jeff, are you seeing it more pronounced in certain categories over others?

It's hard to tell. I mean, it's all moving around. Some people just have budgets and they trade down. In other cases, you're seeing the same thing as You know, people buy homes, the remodeling part of the business tends to be a higher value customer than the new construction where they're mass building homes. And then the apartments are lower. So there's all kinds of mixed changes going on.

Thanks.

Thank you. Our next question comes from the line of Susan McCleary with Goldman Sachs. Your line is open.

Thank you. Good morning, everyone. My first question is, Jeff, I know you gave some third quarter guidance in your comments, but can you help us think about how the third quarter versus the fourth quarter may come together this year, just given the comps that we're facing and some of the seasonality that you talked about in the business? Any kind of color or guidance there for the next few quarters would be helpful.

Let's see. So, again, in the third quarter, we do expect the same sales trends to continue. that operations are running, again, at high levels. All the constraints, we don't know how they're going to happen in the third quarter. We've built in our best guesses of supply and labor and transportation, but it's a moving target. As you go from there into the fourth quarter, it is typically softer as people go into the holidays. They don't tend to buy as much flooring during Christmas. This year, we have 6% less days, and the 6% less days will impact the sales and the margins as we lose the absorption from the lower days in the period. Then this year versus last year, and this is a guess because we don't know what's going to happen. We're expecting at this point a more normal seasonality with more increased vacations people taking, with lower holiday spending on remodeling and reduced utilization of the plants. But we're going to have to see how it happens at the end of the year compared to last year when we had the rebound that we did. But it's difficult to predict at this point. And then we're also, as we get to the end of the year, last year we constrained the new products dramatically, and now we're going to invest more in new products and sales in order to enhance next year.

Okay, that's very helpful, caller. Thank you. My follow-up question is, you know, in the last few quarters, you have purchased about $400 million, or almost $400 million of your stock. When you think about, you know, the capital allocation, the increased spend on capacity that you announced today, where do buybacks kind of fall within that? What's your appetite to continue buying back the stock at these levels?

Well, given our balance sheet, we have a lot of options, and At the moment, we bought $140 million last quarter. I think we have about $170 million still open on the acquisition. But the primary pieces are where we started, the constrained businesses and reducing costs, which is the 650. We'll do more of that when we finalize the plan for next year and the second half of this year to keep broadening the product offering innovations. We found a few bulk on acquisitions you saw. We'll see more of those. And then we're looking for other acquisitions to either step change the business or go into new markets or align product categories. And then share back is one of the options now. For the balance sheet, we can do more than one thing.

Okay. All right. Thank you for that. Good luck.

Thank you. Our next question comes from the line of Michael Reholt with J.P. Morgan. Your line is open. Your line.

Hi, thanks. Good morning, everyone. Good morning. Just wanted to clarify some of your earlier comments, Jeff, around how to think about the third quarter. And you mentioned that you expect sales trends to continue, but at the same time, an increase in vacation time, particularly in Europe. I think there might be an ability to misinterpret those statements you know, if you say sales trends, it's a little bit more qualitative and, you know, maybe even on a year-over-year basis. But, you know, I think people are just trying to understand, you know, on an absolute dollar basis, are you suggesting that on an absolute dollar basis, 3Q revenue should be similar to 2Q? Or indeed, as I think you were trying to say, you know, at least in global ceramic and flooring rest of the world, we should be modeling in some type of sequential dollar decline due to the vacations.

I think what's confusing is, I say that sales trends are continuing, which means I believe the business has the same strength that will go like that. The second part is, there is a seasonality which I'm not sure everyone understands. Are European businesses... Now European and non-US businesses have become a much larger part of our business. They impact the business more today than they did five years ago or before because of the acquisitions and enhancements of the business we've done. So when they step down, that whole category steps down, which will reduce the sales level in total from the third quarter and have a negative impact on the sales margins. And it will be lower because of it as it has been in prior years. And it's not the business changing, it's the normal seasonality. Now separate from that, last year was also unusual. And what happened last year with COVID, we and our plants and our facilities and our customers, we shut down a lot in the second quarter. And what happened is many of the people, we had the people taking their vacations in the second quarter. So when the business started getting better in the third quarter, we didn't do the normal shutdowns because we used the vacation pays and things in the second quarter. And then the same thing happened. People didn't go on vacations like they did. So the third quarter was unusually high because the whole vacation structure of both our production, our customers, vacations for people was different. So the comparison is unusual in this situation. third quarter last year to third quarter this year.

Okay. I think I understand. Second question, I just wanted to circle back also and clarify a little bit to the best possible on the CapEx outlook for 22. You know, it sounds like you're basically saying that, you know, of the 650, you know – 450 is expected next year. So you're doing roughly 200 million of that this year. Um, so that's a Delta of another, uh, you know, uh, 250 million higher sequentially year to year. Are we to take from that, that, you know, the total CapEx all in should be something closer to 900 million to a billion. Um, Jim, I don't know if a better way to answer this is just kind of reviewing with us your basic maintenance capex. But I think we're looking at a decent range of outcome, I think, at least as people are trying to figure this out. So any type of better range would be helpful.

You understand what we told you. plan next year. What we did this year, we stopped in the middle of the year and said, this is not as we had planned. And we can't wait until our normal planning period in order to start changing the capacities to support our business. So we took everybody and we identified the things that we knew we wanted to do and we went ahead and did it. We still have to go through the planning process to decide what we want to do more than that next year and we haven't done it. There is the normal Maintenance and safety, which is typically, call it around $200 million, could be more or less. And then on top of that, we haven't decided yet, so we can't give you any direction.

Okay. One last clarification on the tax rate, if I could. You guided to $21.5 to $22.5. Does that include... the benefit in the second quarter because that would kind of point you to a mid-20s tax rate, or does it exclude that benefit?

It excludes that benefit. So the non-GAAP rate in Q2 was 22.5. The full year is the 21.5 to 22.5. I would expect, based on seasonality of the tax rate, for Q3 to be slightly higher than Q4. All right.

Thank you.

You're welcome.

Thank you. Our next question comes from the line of Keith Hughes with Truish. Your line is open.

Thank you. You had talked in the release about second quarter being a record quarter, which is correct. If you look within Flooring North America, your revenues are slightly above the 2017 peak. The margins are still below. My question is, what's the difference versus then what do you need to do to get those back up to the historic peaks and operating margin?

The margins did improve, as you said, from volume pricing and cost. The things that are going on, so now in the peaking period, we had commercial sales, which are higher. We didn't have all this inflation we're fighting now. We didn't have labor shortages. We didn't have material shortages. We are running short runs in the factories, trying to keep the service as well as we can, which is causing we're jerking the factories around, creating inefficiencies as we go through. And in addition, in some of the markets, the competition is more fierce today than it was then.

Okay, thank you.

Thank you. Our next question comes from the line of Stephen Kim with Evercore. Your line is open.

Thanks very much, guys. Nice results, and appreciate the outlook here. The capacity expansion program, wanted to get a sense for how much of a sales opportunity you think that 650 might offer you, and then As it does come in over the next 12 to 18 months, you know, a lot of times there's some startup costs that come with that. And I just want to make sure we're thinking about that modest offset properly. You know, I remember just looking back from 2014 to 17, you know, you kind of ran 10 to 15 million a year, not a lot. Right. And I know you executed really well during that period of time. I just want to get a sense for what the offset might be as this capacity comes online. Is that a reasonable range to be thinking about?

So the 650 will translate into somewhere around 6% to 7% of our total business sales round numbers to give you a high-level direction. And yes, there's always... Startup costs that come along with it. On the other hand, all of this is known technologies being put in existing facilities or existing businesses. It could be a building next door, not too far away. So we shouldn't have some of the learning curves that we had to pay for in the other ones.

Yeah, no, that's very helpful. Yeah, it makes a lot of sense. I want to talk about flooring rest of the world. Obviously, it's been a big contributor to the positive upside surprises we've been seeing. For about four quarters now, I think this business has been really the fastest grower. And I know this is an area that has many different business lines in it. I know you've called out a number of them. And I know that you've also added a lot of capacity there over the years. But the step-up that we've seen in the last four quarters is pretty significant. And so what I wanted to try to understand is, do you attribute the step-up we've seen in sales and flooring the rest of the world, excluding the impact of acquisitions, but just the actual step-up in organic, to be the bringing on of certain capacity or certain business lines that were not there previously? Or do you see it as just Post-COVID, there was this big surge in demand really pretty much across the business, and your capacity was there waiting for it, and it just got still because of this generalized demand.

As you said, the rest of the world performance is strong. Sales and income, you know, are at high levels. The operations, most of the operations are running near capacity, which is helping our customers. cost structures. Our product mix is improving from actions we've been taking one after the other to improve the mix. We are aggressively trying to raise prices to align with the pieces as we go through. Then you have different parts. You go back to some of the investments we've put in over the years. We put a new plant in Russia in sheet vinyl. Well, that plant's now running seven days a week. Two years ago, we started up a few years ago. We bought the Australia and New Zealand business. We've been putting efforts to change their product line, upgrade their product offering. They were just trying to get in hard surface. We have the hard surface business. We put in all kinds of new product offerings and pieces and We're growing our share dramatically in hard surface in that marketplace. In sheet vinyl, we're the leader in sheet vinyl in the European marketplace. Most of our business is in the residential. It's doing well. We put a plant in Russia to make sheet vinyl we talked about. In laminate, our laminate business, we keep introducing new innovations. As we do that, we keep improving our mix. We also bought IBC a few years ago. It's taken us a few years. They had a laminate business. We've been able to dramatically improve the sales and margins of it over the years. The wood panel business that we have is running wide open. The margins are improving. It's at high levels because there's shortages in wood panels. So it's at a high level. Our insulation business, we've put in multiple plants. We've acquired other ones. So we have a strong insulation business. And it's doing well, even though we're chasing really high chemical costs. So we're benefiting from a lot of things.

Yeah. It really just sounds like the fulfillment of your longer-term plan that you've had there and been executing. As we go forward into the future, it seems like there's still a lot of growth opportunities for flooring rest of the world. Should we be expecting that segment to continue to outpace the other segments on a volume growth basis?

It's going to be hard to keep up the growth rates they've been in. Those are exceptional what they're doing.

Sure.

They're investing in You know, within the 650, we're putting a new laminate line, which will add about $125, $150 million of new capacity and laminate. You know, we keep investing in the other pieces. We're trying to grow it as much as we can. I don't think it can stay at the growth rate to that. And then one more thing in all the business is just remember, commercial everywhere is loads. commercial is a higher margin business for us, and as the commercial business comes back, the margins in it are going to enhance the pieces, and we have capacities that in some places only make commercial products.

Yeah, no, for sure. Yeah, we have that to look forward to. Thanks. Appreciate it.

Thank you. Our next question comes from the line of Catherine Thompson with Thompson Research. Your line is open.

Hey, it's Zachary Bryan. I'm for Catherine. Thank you for taking my questions. I guess I wanted to start with, you mentioned that sales were significantly stronger than anticipated going into the quarter. I guess, is there any specific segment or product to call out here? Kind of, is it a case of the strong getting stronger or was there kind of more than expected momentum in areas that had previously been weaker, like say commercial?

I'm sure we're like everybody else in the world, given what's going on with COVID and what's happening and then You have the huge uptick of people staying at home, huge housing resales, projecting forward how strong it's going to be and not. We projected what we thought it would be coming into the quarter, and it surprised us how strong it was and maintained itself in the United States and across the entire world. The same thing going forward, estimating, and we talked about it in the fourth quarter, We really don't know if the business will stay strong like last year or go back to historical ways and fall off. There's a big difference in what can happen depending on which we see, and our crystal ball is no better than yours.

I guess would you characterize it as the residential side was stronger than expected or the commercial or a combination of the two?

The residential is driving the whole thing. but commercial is improving quarter to quarter and picking up. And I think it's, the commercial is probably a little bit better than we had expected, but I mean, we had anticipated it getting better.

Okay. Understood. And I guess a second question, one I asked about labor, I guess labor shortages and specifically on the installers. I guess we had a few of our contacts point to installers as their biggest concern for growth going forward. And how much of that is a concern for you guys, especially given the investments you're making to increase production? I understand there's the demand level out there, but is there going to be the labor force at the installer level to support that growth in a year or two?

We sure hope so, but you have it right. Everybody has – listen, labor is a problem with every company and every industry. You know, if we could shift twice as much to our customers – They couldn't install it. So you're correct. There's limitations in the whole stream as it goes through. But for the most part, you know, they're installing everything that we can ship them.

Yeah, thank you.

Thank you. Our next question comes from the line of Phil Ng with Jefferies. Your line is open.

Hey, congrats on a really strong quarter and great execution, guys. Jeff, I guess material shortages will certainly free up in time, so that will help. But you mentioned you're sold out in certain products. I'm just curious how much headroom do you have for growth next year as you kind of ramp up some of this capacity?

So, let's see. It's different by different businesses and categories. As you said, presently, In some of the businesses, labor is a major problem. In others, it's transportation. We actually have stuff and can't get it moved around to the customers fast enough. In other cases, we have imported products that's delaying it. We have capacity in some businesses. Other businesses, pick one. Brazil, we're running wide open, and we're quoting dates months out. That's an example. We're trying to improve our mix, and we're trying to keep through passing the prices, but until we get the new capacity in the second half of next year, they're maxed out. That's an example of one. We have pieces like that. We have other ones that if we could get people to show up for work, that we could increase our production dramatically. various ways of giving people money around in the U.S. is disincentivizing people, and sometimes when they get the check, they just don't show up for the next two days.

Got it. That's super helpful. Jeff, I was curious to hear what you're seeing and hearing from your different channel partners. We've certainly seen the builders rain in orders lately, and we've seen some normalization of trends in retail. So, How have orders patterns been tracking between these channels? And when we look out, is it going to have an impact on mix?

Let's go through the pieces. We see the housing sales continuing at high levels. I know there's ups and downs in it, but relative to historical, it should continue at high levels. The houses that were purchased over the last year, they're all in various stages of remodeling. When you buy a new home, an existing home, you typically don't remodel the whole thing. It goes in stages. That will take a while to play out going forward. You have some things with policies with the government. People who haven't been paying their mortgages. At some point, some of those houses are going to turn over and that's going to increase the remodeling sales somewhat. You have People in the rentals that haven't been paying rents, at some point, some of those are going to change over, and they're going to have to remodel them for the next people. You have the commercial parts of the business. Companies are getting more confident or not, and they're starting to invest more. It takes time to put it in a budget. It's time to start them. There's a void for a while on new construction that got stopped, so there's going to be a void until it comes back. and there's a lot of upside in it, and it's a more profitable business because the products are more unique and differentiated. So, you know, all the trends look good, you know, as far as we can see them. On the other side, short term, we don't know if we have enough materials to run the place tomorrow in some cases. And so, you know, we wake up and – The materials are supposed to come in and something happens and we just shut the plant down. You come in and we have people just aren't showing up for work like they normally do. The people we're hiring, it's more difficult to train and it takes longer and there's more turnover. There are a huge amount of moving parts And we're managing them all, but it makes day-to-day in the short term hard to predict.

Got it. That's great color, Jeff. Appreciate it.

Thank you. Our next question comes from the line of Laura Champagne with Luke Capital. Your line is open.

Thank you. Jeff, I really wanted to follow up on the comments you just made. It seems like your inventories are tight in terms of units because of all these production complications. Do you have line of sight as to when you'll have your inventories and unit terms back where you want them? And what's the plan to offset these production difficulties?

Let's see. First, we We are struggling with the labor we talked about and the material flows. What we expect to happen doesn't happen. And so we're making as much as we can given those constraints. And we're taking actions that we can take to influence them as best we can. We need the inventories higher in order to hit the service levels, as you said. If the demand stays high, there's a chance that given all these constraints, we won't be able to build much inventory until we hit the end of the year. Or it could be further. And it depends on the constraints and the availability. On the other hand, if something happens and the materials come in faster and we can get people to operate the facilities, we could increase the outputs. On the other hand, there's a possibility we really can't tell how strong the demand is going to be. And in the earlier comments you heard me make, we don't know whether the end of the fourth quarter is going to look like last year and stay strong or it's going to go back to the normal seasonality that we see. So we make plans month to month, and we keep changing them as they happen. And I can't give you a clear answer because that's the reality of what we're living in.

Do you think that gross margins are – sustainable given that you've taken a lot of pricing and that's got to be a tailwind, but you've probably given up some in productivity as you just mentioned. How should we think about your gross margin trajectory into next year?

The goal is to improve the business at the top line and to improve the margins as we go through. The margins this year will be up substantially with a higher demand and improved costs. The second quarter was a really high period because everything was running wide open. As we go out next year, we think it's going to improve, but it really depends on demand and material pricing and competitive environment, which is really hard to predict these days. We think we're going to do better. We're putting everything in place to do better. We are improving our own internal things that are under our control. We're investing in new things. We are expanding our production where everything is limited. And we're doing the right things to grow the business. If we get a little help from the world, we could be in a really good position.

Got it. Thank you.

Thank you. Our next question comes from the line of Truman Patterson with Wolf Research. Your line is open.

Hey, good morning, and thanks for taking my question. First, just wanted to touch on M&A. You know, could you all discuss the environment and the potential pipeline there, and could you just possibly, you know, balance these thoughts with the, you know, organic or the decision to invest in, you know, organic capital investments of the $650 million, I imagine, in the the product categories you're expanding in. There's not a lot out there, but wanted to get your updated thoughts.

The two are really not related. The internal investments are where we see the trends of our business, what we think the demand is going to be, our ability to sell it in a marketplace, and that's the basis of our investments. The acquisitions, we're continuing to investigate opportunities. The conditions are improving. There's a little less options at the moment because people perceive that the business is improving. Valuations are high. So it's a little more difficult in this environment. As we announced, we have agreements to acquire some smaller bolt-on businesses. We are ready to buy the other businesses if we can identify the right ones. at the right valuations that we think are good for our long term. And if you have any suggestions, call me.

Fair enough. Any key geographies or products?

It's more around we get the most benefit out of ones that are in our present geographies that we can leverage between the two. Those give us the most benefit. For a longer term, going into new geographies with the right group gives us a base to go into that business and we can use as a growth proposition to go into new markets. And then the same thing with new products. If we can find the right products in the same geographies that are related to us, that tie in with what we know and how we do it, we can leverage them. And then, you know, we're still considering at some point, you know, we think we could add another leg to the business. and go into another product category at some point to keep growing the business. So we have the right talent, we have the people, and we have the money. We just have to find the right propositions.

Okay. Thanks for that. And, you know, I'm just hoping on this next question that you can just, you know, give us either a tour around the world or, you know, your product portfolio. You know, we're hearing of very strong pricing power and incremental growth you know, price hikes in the channels, just hoping you can maybe quantify some of that by product or geography.

The pricing, let me try to answer it generically. All of the businesses that we have are having dramatic increases in costs. Our competitors are in the same positions we are. We also have limited materials, and our competitors also have those same problems. So the market competition is in a spot where everybody is pushing it through more aggressively given those conditions across the world. And how long it's going to last like that, I can't say, but as long as the business is like it is, that's what's enabling us to push through the pricing.

Okay, thank you for that.

Thank you. Ladies and gentlemen, in the interest of time, I would now like to turn the call back over to Mr. LeBron for closing remarks.

Business is in good shape. We think the conditions going forward are positive and we're trying to take advantage of the opportunities. We appreciate you listening and

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.