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spk09: Good morning, my name is Charlotte, and I will be your conference operator today. At this time, I would like to welcome everyone to Mohawk Industries' first quarter 2022 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, April 29, 2022. Thank you. I would now like to introduce Mr. James Brunk. Mr. Brunk, you may begin your conference.
spk02: Thank you, Charlotte. Good morning, everyone, and welcome to Mohawk Industries' quarterly investor call. Joining me on today's call are Jeff Lohrbaum, Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's first quarter performance and provide guidance for the second quarter. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. For reconciliation of any non-GAAP to GAAP amounts, please refer to our form 8K and press release in the investor section of our website. With that, I'll turn the call over to Jeff for his opening remarks. Jeff? Thank you, Jim.
spk16: Mark's performance in the first quarter exceeded our expectations. Sales in the quarter rose to an all-time record of $3 billion, up 13% as reported, or approximately 17% on a constant currency and days basis. Our sales momentum continued from the fourth quarter, reflecting higher pricing, growth in our ceramic businesses, an improving commercial sector, and benefit from our small acquisitions. Our operating income exceeded our forecast as strength in the global ceramic business offset rising European energy costs, improved operational efficiencies, enhanced flooring North America's results, and our management of European market pressures benefited flooring rest of the world. During the quarter, we ran our operations at high levels in most markets to address order backlogs and replenish inventories. During the past year, rapid cost escalations have required multiple pricing actions to pass through. We've implemented these unprecedented increases across our markets and have also announced additional increases across the businesses as inflation continues to rise. We're also controlling SG&A spending, enhancing operational efficiencies, and introducing new features. Labor shortages persist, requiring enhanced training programs and process improvements to minimize impacts. Supply chain issues continue through the quarter, impacting specific products and markets. We manage material shortages by reengineering products, streamlining our SKUs, and improving production planning. Market conditions for flooring remain favorable, even as governments raise interest rates to combat inflation. Employment is at high levels, and wages are increasing in most of our markets. Millions of millennials in their late 20s and early 30s are forming households and desire home ownership. Unlike past cycles, US home housing inventory is historically low. More single family homes are under construction, and the home deficit will take years to align supply with demand. New residential construction will continue at high levels, and delayed 2021 home construction will increase flooring purchases this year. Remodeling should remain strong, supported by rising home equity and buyers of existing homes completing long-term projects they've initiated over the past few years. Aging housing stock and changing needs of those working from home also expand property updates. We continue to introduce differentiated products that inspire remodeling projects as families customize recently acquired homes. Commercial new construction and remodeling continues to strengthen as business conditions improve and projects that were delayed due to COVID are initiated. Our commercial products create inviting environments for businesses, and we're deploying appealing new collections to capture pent-up commercial demand. In some markets, Our growth in the quarter was limited by inventory and production constraints. We are executing multiple expansion projects so that we can satisfy demand for our higher growth products, create innovative new features, and improve operational efficiencies. The categories that we are expanding include U.S. laminate, LVT, and quartz countertops, European laminate, high-end porcelain slabs, and specialty products, and ceramic tile in Brazil and Mexico. Our recent bolt-on acquisitions in Europe are enhancing our growing insulation and panels businesses. Sales of products remain strong, and our design and features are bringing to the market give us competitive advantages in all price points. Against the background of geopolitical tensions and rising inflation, HAWC has continued to deliver sales growth generate strong cash flow, and maintain historically low leverage. Given the undervaluation of our stock relative to our earnings, our board approved an additional 500 million share repurchase program in February. We acquired 2.1 million shares during the first quarter for a total of $307 million. Since the start of 2020, we've acquired 8.5 million shares, representing 12% of the outstanding balance reflecting our confidence in Mohawk's long-term growth and profitability. Our strong balance sheet provides many alternatives for investments, including product extensions, geographic expansion, acquisitions, and further stock buybacks. Since becoming a public company, Mohawk has completed many transformational and bolt-on acquisitions, and we continue to explore additional options. Finally, I'm pleased that Jerry Burris has joined our board of directors. Jerry is the president and CEO of Midwest Can Company, and he brings unique strengths in business strategy and operations to our board. Now, Jim will cover our first quarter financial results in more detail.
spk02: Thank you, Jeff. Sales for the quarter were just over $3 billion. That's a 13% increase as reported and 17% on a constant basis, setting an all-time quarterly record. The year-over-year increase in sales was primarily driven by pricing actions, in response to significant global inflation and volume growth in a number of our product categories compared to a strong unit expansion in Q1 of 2021. Gross margin for the quarter was 26.6% versus a prior year of 30.1% excluding charges. On an absolute dollar basis, gross earnings was flat versus prior year as pricing actions and productivity countered increased inflation offset by FX headwinds, higher temporary shutdowns due to material supply shortages, and limited unit volume growth. The actual detailed amounts of these items will be included in the MD&A of our 10-Q, which will be filed after this call. SG&A, as reported, was 16% of sales versus 17.7% in the prior year. The increase in SG&A dollars was due to the impact of product mix, inflation, and volume partially offset by increased productivity and the impact of FX. Operating income as reported was $321 million. Excluding charges was $323 million or 10.7% compared to 12.3% in the prior year. Adjusted operating income on a constant FX basis was $334 million compared to $329 million in the prior year. The year-over-year increase was a result of strong pricing actions and increased productivity, offsetting the higher inflation, negatively impacted by lower overall volume dollars, and higher temporary shutdowns due to material shortages. Interest expense for the quarter was $11 million. The year-over-year decrease of approximately $4 million was mainly due to the settlement of our 2022 2% Euro bond in Q4 of 2021. Other income, other expense was an expense of $3 million. Our non-GAAP tax rate for the quarter was 22.3%, and we expect the full-year tax rate to be between 22% and 23%, with possible quarterly variations. That leads us to an earnings per share on a GAAP and non-GAAP basis of $3.78. That's an increase of 13% versus the prior year on a GAAP basis and 8% on a non-GAAP basis. Turning to the segments, global ceramic had sales at just under $1.1 billion. That's an increase of 14.5% as reported or approximately 18.5% on a constant basis. The year-over-year increase in sales was primarily a result of segment-wide pricing actions with the strongest volume increase in Europe, Mexico, and with our U.S. quartz countertop business. Operating margin excluding charges was 9.4% versus 9.6% in the prior year, and adjusted operating income on a constant basis was $103 million compared to $89 million last year. The year-over-year increase is due to pricing actions combined with productivity to offset inflation, even with the European energy crisis, in addition to favorable year-over-year volume. Florian North America had sales also just shy of $1.1 billion. That's a 10.6% increase as reported, or 12.3% on a constant basis. The year-over-year sales growth is due to aggressive pricing actions and volume strength in resilient, laminate, and the commercial business units, offset by softness and residential carpet. Operating margin excluding charges, 8.9% versus 9.3% in the prior year, and operating income was $95 million compared to $90 million last year. The segment increase in operating income dollars was due to pricing actions and increased productivity initiatives, offsetting inflation, which was due primarily to rising material costs, lower overall volume, and shutdown costs caused by material shortages. And finally, in flooring rest of the world, sales were $879 million. That's an increase of 14.2 percent as reported, or 22 percent on a constant basis, driven by strong pricing actions across the segment and volume growth in laminate, panels, and insulation businesses. The operating margin excluding charges was 15.5%, that's a decrease from our 20.9% in the prior year. Adjusted operating income on a constant basis was $145 million compared to $161 million last year. The year-over-year decrease was driven by significant inflation, primarily offset by pricing actions, in addition to unfavorable productivity and temporary shutdowns due to material shortages and material substitution. Corporate eliminations was $10 million this year in line with prior year. Turning to the balance sheet, cash and short-term investments was $541 million, with free cash flow being a use of cash of $75 million in the quarter with a return to normal seasonality. Full-year cash flow is projected to approach prior year. Receivables for the quarter were just over $2 billion, with the DSO at 53.8 days, slightly down from the 54.4 days in the prior year. Inventories were just over $2.5 billion. That's an increase of $517 million, or 26 percent from the prior year, with approximately 60 percent due to inflation and 40 percent due to unit growth. Inventory days were at 110.5, versus 105.6 in the prior year. Property plant equipment was just over $4.5 billion, with CapEx for the quarter at $129 million versus a DNA of 141 million. Full-year CapEx is forecasted to be approximately $800 million, with DNA forecasted at 570 million. And finally, the balance sheet and free cash flow for the full year remaining very strong with gross debt currently at $2.6 billion and leverage at 1.1 times adjusted EBITDA. And with that, I'll turn the call over to Chris for a review of our key operational areas.
spk15: Thank you, Jim. Our U.S. ceramic business continues to improve its sales and margins. We are enhancing our product mix and implementing multiple price increases to cover inflation. During the quarter, the residential sector remained strong, while the commercial sector gained momentum as businesses initiated new projects and commenced deferred remodeling. Our sales should be positively impacted by providing alternatives to tile imports, which are increasing in price and experiencing shipping delays. We have enhanced our technology tools to make product selection, ordering, and pickup the fastest and easiest in the industry. Our quartz countertop sales are growing rapidly, and to satisfy demand, we have initiated construction to expand capacity at our Tennessee countertop facility. We see our position in the US ceramic market improving, with new construction at high levels and strengthening commercial channels as we provide domestically produced options with outstanding visuals and features. The results of our ceramic business in Mexico and Brazil continue to be strong. even with our sales in the quarter being limited by low inventory levels. Our performance was supported by ongoing strength in residential construction and remodeling with commercial projects improving. During the past year, we have responded to rising inflation and higher energy costs with multiple price increases, which both markets have accepted. We will continue to take pricing actions as inflation rises. Near term, we see strength in both markets continuing, though increasing interest rates and inflation may impact future demand. To relieve constraints, we have increased capacity in Mexico, and we are negotiating with government agencies for permits and incentives to construct a new porcelain facility in Brazil. In our European ceramic business, our management team is taking extraordinary steps to adapt to a uniquely challenging environment. Our sales in the first quarter grew as consumer demand strengthened. and our customers increased inventory levels in anticipation of inflation. The ceramic industry production in Europe was interrupted when Ukrainian clay supplies to Western Europe ceased. Natural gas prices for the balance of the year have escalated from prior estimates, raising our future costs. We improved the results by increasing prices more than we expected, and we enhanced our product mix to improve our results. We anticipated the Ukrainian clay problems and increased our inventory levels before the invasion to avoid interrupting our production. Our clay inventory should provide sufficient time to reformulate products with alternative materials without disrupting our operations. There is more market uncertainty in the second half of 2022 with economic growth expected to slow and energy costs higher than earlier estimates. We are prepared to adjust our strategies as necessary based on market conditions. The foreign rest of the world segment delivered solid top line growth as demand remained strong. Our management team took actions to manage rising energy costs, escalating material inflation, and volatile supply chains. Despite multiple price increases, we are lagging rapidly rising cost in Europe and have announced additional price increases in response to continuing inflationary pressures. Our continuous innovation and new features supports our market position and margins. Due to their unique visuals and water-resistant performance, demand for our premium laminate collections remains strong. Though material supply in the quarter limited production, our laminate sales increased, and we expected continued long-term growth as we expand the premium laminate category with new innovation in design and features. To maximize our distribution in laminate, we introduced our leading-edge innovations in the specialty channel under our Quick-Step brand and follow them up in other channels with premium features that add value utilizing unique brands. With this market strategy for our laminate, we are expanding our market share and adding new capacity to support in Belgium by the end of 2023. Sales in our LBT and sheet vinyl business were negatively impacted by material disruptions and low inventory levels. Our margins improved through the period, driven by increased production and prices. Raw material supply for both categories was especially challenging, but improved as we went through the period. We are continuing to enhance our LVT processes and formulations to improve our sales and margins. Our rigid LVT sales are growing substantially as the category increases in consumer preference. Our two bolt-on acquisitions contributed to our top line during the quarter, and the integration of both is proceeding as planned. Our purchase of an insulation manufacturer with plants in Ireland and the UK increased our market share and sales of polyurethane insulation products. In one of the insulation plants we acquired, a new production line with state-of-the-art technology is presently starting up. Our new French MDF facility has enhanced our product offering and extended the geographic reach of our business. We will enhance the plant's operations by improving processes, expanding capacity, and generating energy from waste wood. Despite material constraints, our panel sales grew significantly in the quarter, including strong results in our mezzanine business, which is expanding with e-commerce demand. Our new high-pressure laminate line is performing well and extending our manufacturing into a new product category that coordinates with other wood panels. To deliver more sustainable panel products, we have introduced a new patented technology for reclaiming wood fiber from MDF boards that will reduce carbon emissions and our cost position. Our two energy plants fuel with waste wood lower our carbon emissions and significantly reduce our energy costs. Our Australian business had robust demand for flooring in the quarter following the loosening of COVID restrictions while New Zealand remained difficult due to continued COVID restrictions. Price increases have been implemented in both countries in response to rising material and transportation costs. As in flooring rest of world, Flooring North America is managing the greatest inflation we have ever experienced. The strategies we have been implementing during the past two years have improved our sales execution, cost structure, and service levels, and enabled us to manage a difficult environment. Most of our manufacturing costs are related to oil and gas prices, and our supplies continue to increase their margins given supply constraints. To offset, we have announced new price increases this year in addition to the multiple rounds of increases in 2021. Across the segment, we have initiated many projects to increase productivity, improve efficiencies, and upgrade our assets to enhance our results. Mohawk holds a leading share of the North American laminate market, and sales of our premium collections continue to grow in the quarter as our new production line ramped up. We anticipate achieving our targeted production levels as planned during the second quarter, which will expand the sales of our next generation products. With realistic visuals and superior performance, our laminate has become an appealing, waterproof alternative to both wood and LVT in most channels, including new home constructions. Escalating market demand in North America is absorbing our additional production as it comes online, and we are further expanding our U.S. laminate capacity next year to support continued growth. Our LVT sales continued to grow substantially in the first quarter as we benefited from an improved offering across all channels. Our margins were impacted by material disruptions that interrupted manufacturing, delays in source products, and higher ocean freight costs. Our legacy LVT operation has significantly improved its processes and is increasing line speeds and capacity. Our new West Coast LVT facility is initiating production and fine-tuning processes. When fully implemented, our East and West Coast operations will provide logistics and service advantages to our customers. We will continue to strategically utilize sourced LVT to round out our portfolio and maximize our business. Our sheet vinyl sales also increased, though material shortages stopped our operations and raised our cost in the period. We anticipate material supply for our resilient business normalizing during the second quarter, which will improve our sales and margins. Residential carpet service improved substantially, and customers are lowering inventory, impacting sales. We are raising prices further to offset escalating material and energy costs. By reducing complexity, simplifying operations, and increasing efficiencies, we are improving costs. We are managing tight labor markets that are impacting staffing and productivity. Our commercial sales continue to rebound, led by strength in the government, workplace, and healthcare channels. Sales in both our carpet tile and commercial LVT collections are growing as new and deferred projects are being initiated. Commercial design activity continues to strengthen as reflected by the March Architectural Billing Index. This project pipeline will support future specification and sales growth of our commercial products. Our domestically produced LBT is being more widely specified due its greater dimensional stability, superior performance, and preference for more consistent local supply. We are committed to becoming carbon neutral with our commercial flooring products and have introduced a new carpet tile that provides superior acoustics and comfort while achieving the highest level of sustainability certifications with half the carbon footprint. With that, I'll return the call to Jeff.
spk16: Thanks, Chris. Four months into 2022, we remain cautiously optimistic about industry growth this year despite inflation and interest rate pressures. We've announced additional price increases in most of our products and markets as inflation continues to rise. Housing supply is historically low, and rising mortgage rates are spurring families to purchase homes sooner. Remodeling should be supported by continued existing home sales, higher home equity, and the upgrading of homes purchased over the past two to three years. We anticipate the commercial sector will continue its rebound, with people returning to pre-pandemic routines. We expect improvements in the supply of constrained materials, which should increase our production levels. Our capital investments, when completed, will relieve specific capacity constraints and increase our offering. This year, we are focused on optimizing our mix and margins by limiting the impact of inflation through price increases, controlling our spending, and initiating additional productivity actions which should increase in our year-over-year earnings per share. Given these factors, we anticipate our second quarter adjusted EPS to be $4.25 to $4.35, excluding any restructuring charges. We have confidence in the long-term future of our business despite near-term uncertainties. Globally, there is a structural deficit for housing that will take years to satisfy, and we should benefit from strong long-term trends in new home construction, residential remodeling, and commercial projects. Our brands are the most recognized in flooring and provide a comprehensive product portfolio that includes the industry's strongest collection of sustainable products. We are making it easier for our customers to grow their business through leading digital tools that generate customer leads, simplify ordering, and expedite deliveries. Through the innovation of our talented team, we continue to lead the industry in design, performance, and value. The strength of our balance sheet allows us to pursue both transformational and bolt-on acquisitions that complement our business. Over the next three to five years, these advantages should enhance Mohawk sales and margin expansion. We'll now be glad to take your questions.
spk09: Ladies and gentlemen, at this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Management requests that you limit your questions to one primary and one follow-up. Your first question comes from the line of Timos with Baird. Your line is now open.
spk13: Hello? Maybe just first question on mix. I'm just kind of curious if you can maybe give us an update about what you're seeing, maybe broad strokes on the mix side and Have you seen any reaction to higher prices in any areas from a mixed perspective? And then I guess from your own capacity, what is the opportunity to kind of mix up within your product and within your product lines to improve margins? And I guess is that something you'd want to do in the current environment or not?
spk16: There is some trading down going on in the various markets with as you increase prices. Some people have budgets, and it requires them to reduce the quality of the product that is occurring in different pieces. It's probably more in the middle. The bottom end of the market, there's not much place to go, and the top end, the people are not squeezed. So there is some of that coming. We think the industry will remain at high levels relative with volumes. with increases in average selling prices. We anticipate seasonality returning to normal versus prior year, the last year or so, and inflation slowing. We also anticipate the US dollar strengthening and negatively impacting our translated results this year.
spk13: Okay. Okay. So there's a little bit there. I guess within your own capacity, I mean, Just given the environment, would you look to mix up within the product lines just to improve margins, or are you okay with your kind of current mix?
spk16: We always try to improve the mix. In certain cases where, let's take our European ceramic business. On purpose, we have limited the sales of the low end given the rising inflation and pushed it up, which also helped our margins in our ceramic business. And the goal... you know, each year is to introduce new products to enhance the mix of the business, help us improve the margins.
spk13: Okay. Okay, good. And then I guess just for context, I mean, I know supply has been a challenge in certain of your businesses. I mean, if you had the necessary access to raw materials, I mean, what type of volume, you know, growth would you have been able to deliver if you got the right amount of raw materials?
spk16: The operations, many of them were disrupted by materials, and it includes LVT and sheet vinyl in the U.S. and Europe, our laminate business, our panel business, and some of the others were all by lack of materials. There was also COVID restrictions in Australia and New Zealand. We had delays in imported products. As we went through the quarter, all the The impact's reduced. We think the second quarter will be substantially better.
spk02: And then what I would say from a cost perspective, we know it impacted us about $9 million in the quarter, but the sales loss is really hard to estimate.
spk14: Okay. Okay, understood. I'll hop back in queue. Thanks, guys.
spk09: Our next question comes from the line of Matthew Bully from Barclays. Your line is now open.
spk07: Morning, everyone. Thank you for taking the questions. Just on supply, again, specifically the European clay supply, it sounds like you procured inventory ahead of disruption. I think I heard you say that the inventory build is going to allow you some extra time to reformulate materials. Could you just elaborate on Just on the supply picture for clay in Europe and sort of what you and the industry are doing to address that. Thank you.
spk15: Well, as you mentioned, Ukrainian clay is widely used in Europe and we did increase our inventories. I think we can have a sustainable advantage in this area because one, we have a good supply for the transition. And we have really good R&D resources and logistics resources working on alternatives. And I think we'll have an advantage versus many companies going forward.
spk07: Okay. Thank you for that, Jim. I guess same topic on European ceramic. I think you mentioned that the volume was huge. I think you said strong. I guess in spite of the price increases, it sounded like some customers were building inventory ahead of inflation. Could you just speak to what that inventory build could mean for future volumes and just how you think about the elasticity of customer demand as these higher prices do come through? Thank you.
spk15: Well, we were able to take pricing And we do believe that there was some early buy-in to those price increases. We don't really have a good judge as to just how much that volume was, but I would anticipate there was some pre-buy.
spk07: All right. Well, thank you, Jim. Thanks, everyone. Thank you.
spk09: Our next question comes from the line of Susan McClary from Goldman Sachs. You may now state your question.
spk01: Thank you. Good morning everyone. Good morning. My first question is, you know, you talked a lot about the ability to gain market share just given a lot of these global dynamics, whether it's domestic or international, that are coming through. And I guess as you look forward, can you just comment on the ability to retain a lot of that market share Anything that you are doing differently to make that perhaps a bit stickier than it has been in the past and how we should be thinking about what that could mean for volumes as we go through the next couple of quarters and maybe the supply chains incrementally improve?
spk16: As we look forward, we're cautiously optimistic about what's going to happen this year despite the rising inflation, the interest rates. And given our international business, the strengthening dollar will reduce the translation of the pieces. Our basis is starting as the GDP will continue to grow, though at a lower rate. We see higher pricing continuing and continue to raise it with increasing material costs. And we see that the availability of materials is going to help us increase. We mentioned before that the commercial will continue improving. and we've announced other increases to cover the cost that we're chasing. The other thing that's going to benefit us going forward is this purchase stock we've done will continue to increase the EPS. And just as a note while we're talking, the seasonality of the business, the Q2 is our strongest period of the year, and then Q3 is impacted by European vacations. Some of the models don't put that in it. And then the fourth quarter is typical with holidays and lower than the third quarter.
spk01: Okay, that's helpful. And actually, that sort of leads into my next question, Jeff, which is, you know, as we do look out to the rest of the year, can you just give us some commentary on how we should be thinking about the different puts and takes across the different segments You know, given that some of these comps are still a little bit weird as we go through the next couple of quarters?
spk16: When you look at last year, the first half of the year, we went into the year and the industry was, the inventory and the channels were really low. The capacities were constrained. But what happened is we shipped a lot in the first half of the year, seasonally high. So the COPs in the first half are harder than normal, and then in the second half, it should normalize, and then we should see the COPs get easier versus last year.
spk01: Okay. That's helpful. Thank you. Good luck.
spk09: Our next question comes from the line of Keith Hughes from Truist. Your line is now open.
spk11: Thank you. Flooring North America growth was pretty impressive considering that carpet had its struggles in the quarter. Could you give us some kind of magnitude of how much your hard surface grew within that segment to get this result?
spk16: Let's see how to answer that one. The first quarter performance, you're right, the sales increased 12% on a constant basis, primarily due to pricing actions. And you're right, the LVT and laminate had strong sales momentum while the carpet business was weaker with the channels adjusting inventory as well as, you know, more normalization of the share of the different products. The strategies that we're implementing over the last couple of years with all the changes we've made are improving our sales and service, reducing our costs. And then we continue to, our laminate business has been limited by our capacities. In our LVT, we've been expanding the production rates that we're at. We've been importing more to satisfy it. And then we're starting up this new plant to get it. If you look in our queue, you can look at different product categories, and it will show you in broad terms the volume in the different categories by product category.
spk02: And you'll see, Keith, the laminate wood and your resilient categories certainly did grow and also supported by a stronger commercial business.
spk11: Okay. Second question, just on LVT and North America. We've seen strong import numbers coming in. I think you're still importing product here as well. Do you feel like overall you think you're growing in line or faster or below what LVT is doing in North America?
spk16: Well, first of all, the number is hard to get.
spk11: Well, if you compare it versus imports, for example, are you going faster than imports are coming in?
spk16: Well, you also have in the first quarter to the Chinese and the Asian shutdowns, the people build inventories before it, which all show up in the first quarter, which are shipped in the fourth quarter coming in. But I think we're growing as fast or faster than the marketplace.
spk03: Okay. Thank you.
spk09: Your next question comes from Michael Reholt from J.P. Morgan. Your line is now open.
spk10: Thanks. Good morning, everyone. Thanks for taking my questions. Good morning. You know, first, I just wanted to circle back to your comments around, you know, seasonality in the third quarter and fourth quarter. You know, Any type of additional granularity would be helpful. And specifically, should we be thinking about the 2Q EPS as a result, as the high watermark from a quarter perspective for the year? And anything in terms of sales and margins relative to 2Q would be helpful.
spk16: I mean, if you go back and look at the last few years, you'll see that the Q2 is the high water mark, and that the, what happens is that we take off vacations and shut down the plants in Europe, which impacts the sales and margins in the third quarter. On the other hand, the U.S. businesses tend to peak, so they offset a little bit as you go through. And then the fourth quarter is always lower than the third quarter, because of vacations and people don't buy flooring products when they have their Christmas trees up, as you go typically.
spk02: Jim, you want to add anything to it? As you look at the seasonality, Mike, and the other things to consider in terms of our projection, we're taking into account the pace of inflation, the pricing that we're implementing. Remember Jeff's earlier comment on the comps in the first half. So the sales expansion in the first half of the year should be mostly driven by sales price increases, where the second half of the year we would expect some normalization of price versus volume, all things considered, what we know today. Jim, go over the FX impact from just the euro where it is. The other point on the seasonality, as Jeff just pointed out, is our FX exposure, especially to the Euro. From a comp standpoint, last year in the second quarter, the Euro was approaching $1.20, $1.21. As you've seen recently, it's fallen to below $1.06, $1.05 even. So that will have an impact on our translated results.
spk10: Right. That's very helpful. Appreciate the color there. I guess, secondly, I was interested in your comments earlier around the clay inventory, Ukrainian clay inventory. And I believe, if I heard right, it was Chris that kind of mentioned that you view the supply, I guess, sustainable... in the near term and that perhaps in the medium to longer term you can work on alternatives from an R&D perspective. I just wanted to explore that a little bit if we could dive deeper into that just to understand if possible how long the clay reserves that you currently have would sustain production and what type of R&D alternatives could there be that could easily be used as a replacement once those reserves are depleted?
spk16: Let me start and then Chris will give you a detailed answer. One point we were trying to make is that we got more price in the first quarter than we had expected. Part of that was because that production by the industry was less because of that, and it enabled the industry to push through more price faster than we expected. So that was one point. The second is that Chris had said was that our inventory levels are higher than everybody, are higher than most people's, most other companies, and so it didn't impact us as much, and then we're covered through most of the year, and then our people... different than others, we have more worldwide insight into what's going on around the world and can find alternatives easier. And we think that we also have an advantage in our chemists and their abilities to swap, which should help us make the transition. Chris, did I miss anything?
spk15: No, I just add to that, Michael, that especially in Spain and Italy, but all Europe uses Ukrainian clay products mostly for particular products at the high end. And so everybody's going to be, the anticipation is that everybody's going to lose that supply of Ukrainian clay and everybody's going to have to substitute. We, the amount we have gives us a longer time to transition. And we think there's alternatives that not just for us, but the industry to replace Ukrainian clay.
spk10: Great. Thank you. Thank you. Appreciate it. Yeah.
spk09: Our next question comes from, uh, Steven Kim from Evercore ISI. Your line is now open.
spk08: Yeah. Thanks a lot guys. Uh, yeah. Congratulations on that Ukrainian move. That was, uh, sounds like you, uh, outfoxed your competition there. Um, I wanted to ask a question, a couple of questions on flooring North America though. Um, First, on the resi carpet side, you mentioned that carpet service is improving and customers are reducing inventory. I just wanted to see if you could elaborate a little bit on that. Why are the customers reducing inventory? That's a business that right now we're seeing a lot of bottlenecks or extended construction cycle times. I think most people who follow the home building industry think that we're probably nearing max you know, that that situation is probably not going to get a lot worse from here. It may improve. So I was just wondering how you think that might affect the overall sales into the channel. So if you can just put your comment about reducing inventory by customers into context with that kind of an outlook.
spk16: What happened in the fall of last year and before, our customers were taking everything they could due to the timing of the shipments which was unpredictable, so if there was any availability, they were taking it. And most of them increased their warehouses in order to put it, in order to have more consistent supply. Over the last few months, we've been able to get the inventories and the service levels back almost to where they were prior to pre-pandemic levels, so they don't require the same inventory levels to operate their business. was the point.
spk08: Got it. Makes sense. Okay, that's fine. But I would imagine that to the degree that the builders are actually able to build more product and have more completions, that would be a somewhat offsetting benefit to you later in the year, perhaps. Correct me if I'm wrong.
spk16: So the volume is all dependent on how many houses they build, and it looks like it's going to be a good year. It looks like the... There were a lot of homes that were started last year that extended in their completion dates, so flooring tends to be the last thing in them, so that should also help.
spk08: Yeah, I would guess. Speaking of that and the fact, you know, how the installation of flooring may be different from some other products, one of the things that we've been thinking about is that maybe you might see in this weird environment in housing a slower rate of existing home sales, even though new construction stays stronger and home prices we think will be resilient. But if you see slower U.S. existing home sales, I'm curious, do you think that flooring is more exposed to the kind of remodeling that's associated with a move, where somebody moves, versus remodeling to stay? The thing I was thinking about was that to remodel a floor, a lot of times you've got to clear the room out. It's a little bit invasive and that kind of thing. It's easier to do when you're switching houses, so to speak. I was curious if you'd ever done any work on that, if you think there's any validity to that, or if there's offsetting factors that I'm not thinking about.
spk16: Flooring is a significant disruption to somebody's home. Typically, they're larger projects and Again, when people do move, there tend to be significant changes in the flooring that goes in the homes. Now, it all doesn't get done on day one, so it takes usually a period of years for people to, when they buy a home, to upgrade it, which means there should be a lot of pent-up demand from the last two or three years of really high existing home sales. So if existing home sales slow down, you should have this demand left over that everybody's still remodeling from the last few years because most people don't have the money to do it all at once or the inclination.
spk08: Yeah. And then also probably contractor availability probably delayed things as well.
spk16: The other part people talk about is up to now people wanted to do projects and the labor was really restricted. So I don't know how much has been postponed because the labor wasn't available.
spk08: Yeah. Okay, great. Thanks a lot. Thank you.
spk09: Our next question comes from Mike Dahl from RBC Capital Markets. You may now proceed with your question.
spk03: Good morning. Thanks for taking my questions. Just another follow-up on the clay and European results. Is there any way you can quantify – it does seem like you've had a temporary – Chris Price- Advantage and I know your perspective on that could carry on for some time, but the advantage that you had given your decisions on Chris Price- Supply. Can you, can you quantify how much that contributed to one Q and two Q. And I guess the second part of the question is, to your points, everyone's kind of rushing to reformulate. Have you ever experienced a situation like this where there's been kind of mass reformulation, and what is the timeline? How long does it typically take, especially since this is kind of a unique type of product that it's targeting? Any insight on kind of timeline for reformulation for you or your peers?
spk16: It hasn't happened like this before because usually if you want to make a change in it, you know it's coming, you anticipate it, and you look for other alternatives. Usually the change time takes months because you're running this thing at close to 2,000 degrees, and very small changes affect the flatness of the product and quality of the product. And then you have to make multiple tests and then test it up. So you usually go through a very systematic method of changeover. Presently, depending upon where people are, They're not going to have that option if they have low inventories. And we know what happened with some competitors is they actually reduced their production already. How long it's going to take each one of them to react to it, I can't answer. I can tell you that with our worldwide views, we're looking all over the world, and we have tests going on for the last month of all different products and categories, and we think we're advantaged by that.
spk15: It's going to be harder for a smaller company to do all that research and have a logistics to change it, for one. And the other thing, Ukrainian clay is most important for high-end products. And for a company that has a broad range of products, it's going to have a less impact than if you're a small player just doing premium.
spk03: Right. Okay. Thanks. Thanks. And then my second question is on Russia. Jeff, can you give us an update on your Russian operations? One, are you still operating? Two, if so, why are you still operating as other global companies have pulled out? And three, is Russia at this point self-contained or are you exporting any product from Russia to Europe?
spk16: Well, let's start out with really concerned and saddened by what's going on there. And the actions of Russia, it's a huge humanitarian crisis. Our European team is supporting our Ukrainian employees. We're providing aid to refugees in Poland as we go through. We have suspended new investments there. We've reduced the spending. We're following all sanctions in the marketplaces.
spk03: And as far as just rationale for staying there longer term, and then the second point being, are you exporting any product from Russia to Europe, or is it really just still all self-contained there?
spk16: The export business is a very limited portion of the business. Like most of our businesses, they're all set up to satisfy the local markets, so we don't export much.
spk09: Our next question comes from Phil Ng from Jefferies. Your line is now open.
spk12: Hey, guys. Congrats on a really strong quarter, and the TQ guidance looked pretty encouraging. Jeff, I guess big picture, the macro backdrop consumer feels a little choppier. Is there an ability to kind of slow down the ramp of some of the new capacity you bring on if we do see an error pocket later this year? I'm just trying to gauge how quickly can you pivot from growth mode to perhaps a more muted backdrop?
spk16: So let's just sort of focus on what the growth is. The expansion projects are in areas where we have capacity constraints existing and or the sales of the product categories are expanding. So if you start and look through the different pieces, in the U.S., we're expanding the laminate business, and the laminate business We have a new line going in, and it's already sold up and committed, and it's growing in market share as it becomes an equal substitute for LVT and wood. The LVT, we are increasing our production. We're sourcing a lot of product, and so if it slows down, we can reduce the amount of sourced products. In quartz countertops, We are oversold in our US plant. We're importing products there. So if it slows down as we put it in, we can reduce the amount of imports there as we go through. But the quartz countertop and LVT businesses are also growing rapidly. In Europe, we've reached the capacity of our laminate production, and it's not coming in until the end of next year. Again, we're growing our share in it, so we may have to slow it down for a little bit in the transition if things slow down, but we need it. The porcelain slabs we're putting in, again, we are oversold and sourcing products from it, and then we're spending money to be able to change the mix within the plants in Europe to upgrade the quality of the products and make more specialized pieces, which will help our mix and margins. And then finally, the ceramic in Brazil is, I mean, we've been oversold for over a year, and we need to expand the capacity there. In Mexico, we've already put in the expansion, and it's being utilized. So beyond those things, major pieces are all in either bringing new product features to market or into cost reduction. So I think we've made the right decisions, you know, whether we can use it all as fast as we hoped or not. As you hear, a lot of the stuff is we're sourcing and not, and whatever the market is, we'll have to adjust to it.
spk12: Gotcha. That's great color. And then from some of the trade flow and supply chain nuances, it sounds like you're pretty well positioned in North America on the ceramic side and LVT side. It sounds like you're taking share. Can you kind of expand on that, just given some of the logistical costs and whatnot? And then separately, you talked about how maybe inventory from your customers are drawing down some of that for carpet. Are you seeing any of that dynamic elsewhere?
spk15: Well, just on the, we're talking about taking share in ceramic, you've got import pricing has increased given energy and transportation, ocean freight's causing delays and increasing costs, and then our domestic manufacturing is well positioned, and our commercial demand is growing.
spk16: In the LVT, there is more U.S. production being made because of the logistics problems that go along with it, so we think we're well positioned there, and and it's the right thing to do. I forgot the rest of your question to tell you the truth.
spk12: No problem. You talked about on the carpet side, some of your customers are drawing down inventory because they're replenished at this point. Are you seeing any of that in some of your other products?
spk16: Most of the other product categories, the inventories haven't gotten to the same level for the industry as the carpet has. We think carpet's approaching more normalized levels. The other ones are not quite there yet.
spk12: Okay, super. Thank you.
spk09: Our next question comes from Truman Patterson from Wolf Research. Your line is open.
spk05: Hey, good morning guys and thanks for taking my questions. First, from an enterprise level, You all had really good cost control on the SG&A line, really nice leverage there. I'm hoping that you can elaborate on some of the internal initiatives that were driving that leverage and also just the potential sustainability going forward as we move through the year.
spk16: Let me start, and I'll let Jim fill in where I missed. Going into the year... We knew that there's a potential for the industry and volumes to change. So we went into the year trying to optimize the SG&A spend. We have good controls everywhere. We are still investing in new products, but we're trying to control the costs and spending and make sure that we're putting it in the right places. And just good controls through the business. We think that the other side of it is the top line is growing because of material and energy inflation, and we don't have to – the SG&A doesn't have the same – all of the – the inflation is there, but it's not as high as the product. So in general, with that, you're going to have a lower SG&A cost as the two inflate at different rates.
spk02: Chairman, the focus really is on the sales, the marketing, the product side to try to advantage us as we move forward. We keep very strict controls, certainly on the administrative side. We'll continue to see that trend continue. We'll gain leverage against the sales increase, and we expect the year-over-year percentage of sales to be lower versus last year.
spk05: Okay, and Jeff, if I heard you correctly, it sounds like you all are able to lever the pricing revenue growth a bit more efficiently than volumes. Is that a good way to think of it?
spk02: I think so. Yes, so you're not growing all the way to the top line. You're doing it more in line with volume.
spk16: Just one other piece is, too, with all the inflation, it's hard to get – the normal margin on top of the inflation. So you have in reverse of that same trend, you know, you're not getting all of the normal margin on the material and energy inflation.
spk05: Understood. Okay. And then... I'm hoping you all can discuss the price cost in your European ceramics business. You know, previously you had discussed some of your competitors being hedged, and it was going to take some time, you know, for pricing to flow through. But now we've had, you know, European nat gas take another step higher. Just hoping to understand, you know, are you getting that incremental traction on pricing in the region? Is it offsetting the spike in the European natural gas market?
spk15: Well, I just comment that the team over there is taking extraordinary steps to adapt to this inflationary environment. The sales and margins in the quarter were higher than we anticipated. The net impact of energy was 26 million, and we had anticipated it to be worse at 40 to 45 million. So I would say we've done a really good job in implementing those price increases.
spk02: Male Speaker 1 Yeah, and Truman, if you think about what we said before is that, you know, from Q1 to Q2, we expect some improvement in that net impact energy versus price mix. Q3, again, should be closer to kind of parity, and then Q4 to be cost advantage. Now, everything has risen, so we've had to do more pricing because, to your point, the energy cost has increased. So, everything has increased, but the story is really the same in terms of our outlook.
spk05: Okay. Thank you for that and good luck on the upcoming year.
spk02: Thank you.
spk05: Thank you.
spk09: Your next question comes from John Lovell from UBS. Your line is open.
spk06: Hi, guys. Thank you for taking my questions. The first one is just on Russia again. Given some of the sanctions that are in place, Are you having trouble getting money in and out of Russia?
spk02: We're not moving money in and out of Russia, I don't think. Russia is pretty much self-contained, so basically their cash flow supports their local business.
spk06: But are you repatriating any of the funds?
spk02: No.
spk16: Last year... Last year we moved a lot of money out of Russia because we had generated a lot of cash and we didn't need the cash that we had there. So we took out the cash prior to all of this.
spk06: Okay. That's helpful. And then on the commercial improvement that you're seeing, I think you mentioned some of the end markets. Are you seeing any improvement in office or hospitality, retail, any of those markets?
spk16: Yes, so we are seeing continued improvement in the commercial. It's led by the government, workplace, and healthcare sectors presently. We're starting to see more activity in the areas that still are way behind, like travel, hospitality, and retail areas. There's starting to be some more activity in those. Across all the commercial things, there was a lot of projects postponed during COVID, and we see some of those things being initiated. So we see continued improvement, you know, as far as we can see presently in the commercial side of it.
spk06: Thanks, guys.
spk09: Our next question comes from Eric Bashard from Cleveland Research. Your line is open.
spk04: Thanks. First of all, just a follow-up on the Europe ceramic price-cost situation. Six months ago, you had talked about the rise in natural gas, and some competitors were hedged and maybe in a better position than you, and an expectation that NatGas would improve in the first half of 22. It seems what's played out is NatGas has stayed difficult, and you've done materially better than you thought six months ago when all this started. And I would just love a little more detail. I appreciate the team has obviously executed well, but what's turned out so much different and incrementally better than what you had anticipated six months ago?
spk16: The marketplace has increased prices more. I keep connecting it to the Ukrainian clay because we are and will We were and are disadvantaged among some competitors, not all, with our gas. And it still exists today. We are advantaged in the clay, which helped us, but the clay also reduced the production, which also made people more aggressive in the marketplace and raising prices. So we were able to capture more price than we thought. And in addition to that, we were able to push our mix up at the same time because the lowest margin products we have had the most percent of cost increase, so we pushed more into the better quality products, all of which gave us different results than we had expected.
spk04: Okay. On the customer side, if we could start there and then get and then pan across the rest of the business. The performance of the quarter looks like it was really upside price and then great execution, but from a consumer demand standpoint, I appreciate the comparisons are more difficult in the first half, but from a consumer demand standpoint, can you stay in that area in the Europe tile and talk about consumer demand and how that's changing? I appreciate what you're doing on your side, but how consumer demand is trending and then how consumer demand is elsewhere, and does that translate into volume growth year over year in the coming quarters?
spk16: I hope you can appreciate that with, let's take Europe, the amount of price increase we've put through, the announcements of other price increases, it's really difficult for us to tell what is going through to the customer and what is changing in their inventories. which is why we said there was a possibility that they pulled forward some of their purchases. We can't tell the difference between the inventories in the channel and the customer purchases.
spk15: I think the other thing is that the inventories have been low in the channel, so you saw customers going in to fill in those inventories.
spk04: Okay, and then more broadly outside of Europe in terms of, I guess, just North America specifically, what you're seeing with consumer demand trends and then conviction that that flows through to volume growth for you through the year?
spk16: We have the same piece as you do. The housing is still running at high levels. The flooring is the last thing to go into it. Typically, it takes anywhere from six to 18 months to build the house. So, you know, we're still seeing good demand in the housing piece. The existing home sales do influence, as we talked earlier, about the change in replacement. But again, like we said, it goes in phases, so we still see the demand in existing homes coming from existing homes over the last two years, which have been really high, continuing. And then the commercial part of the business is on an upswing, and we don't see anything stopping it at the moment.
spk03: Okay. Thank you.
spk09: This concludes our Q&A session. I will now turn the call back over to Mr. Lorberbaum for closing comments.
spk16: We are confident that we are taking the right steps to manage the short term and that we're in a good position for the long term. We're investing to maximize our business and cover the constrained areas and expand the growing product categories. And we think we're in good shape. We appreciate you joining us and thank you for participating.
spk09: This concludes today's conference call. Thank you everyone for participating. You may now disconnect.
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