Mohawk Industries, Inc. MHK - Q4 2021 Earnings Conference Call - Full Transcript
Jim Brunk: Good
morning, everyone, and welcome to Mohawk Industries Quarterly Investor
Conference Call.
Joining me on today’s call are Jeff Lorberbaum,
Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief
Operating Officer. Today, we’ll update you on the company’s fourth quarter and
full year 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 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 a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form
8-K and press release, in the Investors section of our website.
With that, I’ll turn the call over to Jeff for his
opening remarks. Jeff?
Jeff Lorberbaum: Thank
you, Jim. For the full year, Mohawk’s business improved significantly.
In 2021, net sales grew more than 17% as reported
versus the prior year to $11.2 billion, and our operating margins rose
dramatically to approximately 12%.
Our 2021 adjusted operating income approached $1.4
billion with adjusted EBITDA exceeding $1.9 billion. In addition, versus our
2019 pre-pandemic results, we also achieved 12% organic sales growth and
improved our adjusted margins by 270 basis points.
We ended the year with a historically strong balance
sheet. And during the fourth quarter, we purchased approximately 2.4 million
additional shares of stock for a total of approximately 4.9 million shares
purchased during the full year.
In February, the board of directors approved an additional
authorization for share repurchases of $500 million based on our confidence in
the company’s strength and to enhance shareholder return.
All of our segments performed well and responded
effectively to the complexities that occurred during the year. Throughout 2021,
our regions benefited from strong housing markets supported by rising home
prices, favorable interest rates and accelerated home purchases by millennials.
Changing lifestyles encourage shift from rental to own
property, movement to larger homes and remodeling upgrades to adapt to work and
school at home.
Among home improvement projects, new flooring is one
of the most frequent upgrades. All of our product categories have benefited
from this trend, which is projected to continue throughout 2022.
The commercial sector continued its improvement over
the prior year, but has not yet reached pre-pandemic levels. While we thought
COVID would be behind us in 2021, the pandemic continued to impact our markets
to varying degrees throughout the year.
Surges in some countries kept people voluntarily at
home and government restrictions in other regions temporarily hindered our
operations and customers. We continue to maintain precautions in our facilities
to mitigate risk to our employees.
Moving forward, we will benefit from bolt-on
acquisitions we completed in 2021. These include an MDF manufacturer in France,
and an Irish insulation company, which will be accretive to earnings in 2022.
When integrated, they will enhance our present operations, expand our markets and
reduce our costs.
Our performance in 2021 illustrated the fundamental
strength of our business as we maximize our results and strong market
conditions, as well as those where the pandemic impacted our industry.
We delivered product innovation around the world,
leveraged our logistics strength as a competitive advantage and executed
multiple price increases to pass-through material, energy, and transportation
inflation across all products and geographies.
We managed labor shortages with enhanced training,
process improvements and strategic automation, where possible. We creatively
addressed material supply shortages through product reengineering, SKU
rationalization and improved production planning.
The negative impact from inflation, supply chain
disruptions and labor shortages, along with a stronger US dollar, increased as
the year progressed.
Sales in the fourth quarter remained strong, rising
4.5% as reported or approximately 12% on a constant currency and days basis to
approximately $2.8 billion. With a return to more normal seasonality for the
industry and 6% fewer days in the period compared to the prior year.
Our adjusted EPS for the quarter was $2.95 per share,
with benefits from price mix and productivity, offset by increased inflation
and lower volume from fewer days in the period.
As raw material, energy and other costs continue to
rise, we implemented price increases in most products during the quarter.
European natural gas prices have been the most volatile, substantially
increasing our energy costs as well as material costs and we have raised our
selling prices significantly.
We ran our operations at high levels through the end
of the year in an effort to improve inventories, so staffing, material supply
and transportation challenges impacted our costs.
Outside the US, government restrictions on business
operations in some regions lowered retail sales during the quarter. Commercial
sales improved in the quarter even with some deferral of projects due to COVID
and government actions.
During the fourth quarter, we released our annual
environmental sustainability and governance report. The report showcases how
Mohawk is fostering innovative products that lay the foundation for healthier,
more inspiring spaces where people live and work. We also highlight how we are
maintaining a safe, respectful workplace, reducing and repurposing waste and
conserving natural resources. The entire document is available on our website.
Jim will now review our fourth quarter and full year financials.
Jim Brunk: Thank
you, Jeff. Sales for the quarter were just shy of $2.8 billion. That’s a 4.5%
increase as reported or 11.8% on a constant days and FX basis, setting a new
fourth quarter record. Year-over-year, growth was driven by price mix initiatives
across the business to attack rising costs, partially offset by the fewer
shipping days and a more normal seasonality.
For the full year, Mohawk also set sales record on a
consolidated basis and in each segment, with total sales of $11.2 billion, 17%
increase versus prior year as reported.
Gross margin for the quarter was 26.7% as reported or
26.8%, excluding charges, decreasing from 28.8% in the prior year. The
year-over-year decrease was primarily driven by inflation of $257 million,
lower volume of $49 million with fewer shipping days and a more normal
seasonality, partially offset by improved price mix of $242 million and
productivity gains of $40 million.
SG&A as reported was 17.5%. On an absolute dollar
basis, the increase versus prior year is a result of a return to a more normal
selling and marketing activity, compared to the prior year of $19 million,
inflation of $7 million, unfavorable impact of price mix and volume of $5
million, partially offset by a net FX gain of $5 million.
Operating income as reported was a margin of 9.2% and
excluding charges 9.4%, compared to 11.6% in the prior year. The year-over-year
decrease was driven by inflation of $264 million, especially in raw material
and energy, unfavorable volume of $51 million primarily due to the fewer
shipping days, partially offset by strong price mix actions of $240 million,
productivity gains of $21 million and a net FX gain of $8 million.
On a full year basis, adjusted operating margin of
12.1% significantly increased, exceeding prior year by 370 basis points and
2019 by 270 basis points driven by strong volume, productivity and price mix
actions, offsetting increased inflation.
Interest expense for the quarter was $12 million, down
slightly from prior year. Our non-GAAP tax rate for the quarter was 18.9%
versus 14.8% in the prior year, which was favorably impacted by the CARES Act. We
expect 2022’s tax rate to be between 22% and 23%, with quarterly variations.
Our EPS as reported was $2.80. And on an adjusted
basis was $2.95, a decrease of 17%, primarily due to the volume effect of fewer
shipping days and the pace of inflation, especially in Europe.
On a full year basis, EPS of $14.86 was an all-time
record, increasing 68% versus prior year, and 48% versus 2019’s pre-pandemic
level.
Now turning to the segments. Global Ceramic had sales
of $950 million for the quarter, a 3.2% increase as reported or 9.8% on a
constant FX and days basis. The year-over-year sales growth is driven by
pricing actions with Brazil, Europe, Mexico and our US countertop business
showing the strongest growth.
Operating margins excluding charges was 6.4% compared
to 9.5% in the prior year. The segment has been impacted by the ongoing energy
crisis in Europe with total inflation increasing by $87 million versus prior
year as well as the fewer shipping days driving lower volume of $13 million,
partially offset by strong price mix actions of $65 million, favorable
productivity of $7 million and net FX gain of $2 million.
Flooring North America had sales of just over $1
billion. That’s a 5.4% increase as reported or 12.2% on a constant basis. With
the resilient and laminate product categories having the strongest results,
along with our commercial business, which continues to show improvement.
Operating margin excluding charges was 9.1% as
compared to 9.5% in the prior year. The year-over-year margin decrease was
driven by inflation of $88 million, primarily due to raw materials, offset by
continued price mix actions of $85 million, a decrease in volume primarily due
to fewer shipping days of $20 million, offset by increased productivity
initiatives of $22 million and less temporary shutdowns of $4 million.
And finally, Flooring Rest of the World had sales of
$796 million. That’s a 4.9% increase as reported or 13.9% on a constant days
and FX basis, with the strongest growth in our panels and insulation business
as LVT and laminate were negatively impacted by supply and labor constraints.
Operating margins excluding charges came in at 14.8%
as compared to 18.2% in the prior year. The year-over-year margin decrease is
due to unfavorable volume of $18 million driven by fewer shipping days and
labor and material constraints, which also negatively impacted productivity by
$8 million.
In addition, we have seen escalating inflation of $89
million in the fourth quarter, but were able to offset with price mix actions
of $90 million. Lastly, there was a slight increase in start-up costs of $2
million offset by net FX gains of $6 million.
In the fourth quarter, our corporate eliminations were
$12 million, in line with the prior year.
Turning to the balance sheet. Cash and short-term
investments were $592 million. Now due to the increase in inventory and the
timing of CapEx, we recorded a use of cash in the quarter of $89 million, but
had a strong full year free cash flow of $633 million.
Receivables ended the year at just over $1.8 billion
and DSOs were very strong at 56 days as compared to 59 in the prior year.
Inventories were just shy of $2.4 billion. That’s an
increase of approximately $479 million or 25% from the prior year, due
primarily to increasing inflation. Inventory days finished at 112 days versus
103 in the prior year.
Property, plant and equipment was just over $4.6
billion. Now, based on the timing of our new projects, CapEx for the quarter
was $301 million with D&A of $143 million.
For the full year, CapEx came in at $676 million and
D&A at $592 million.
For 2022, we are forecasting CapEx to be approximately
$800 million, and D&A to be approximately $600 million.
Now, overall, the balance sheet and ongoing cash flow
remained very strong with gross debt of just over $2.3 billion, and a leverage
at 0.9 times to adjusted EBITDA.
And with that, I will turn it over to Chris to review
our operations.
Chris Wellborn: Thank
you, Jim. For the quarter, our Flooring Rest of World segment sales increased
5% as reported or approximately 14% on a constant days and currency basis.
Adjusted operating margin was 14.8% as a result of
pricing and mix gains offset by inflation, and lower volume due to fewer
shipping days and supply chains interruptions during the quarter. Sales were
strong in the quarter as demand for our residential products maintained its
momentum even with delays in shipments due to transportation constraints.
Beginning in the third quarter, our material costs
began escalating at an unpredictable pace as many suppliers utilize natural gas
in their manufacturing process.
Based on our cost estimates, we raised prices on our
product lines in the fourth quarter, and again in the beginning of this year.
Despite multiple pricing actions, we are still lagging inflation because of
these increases.
We have announced further price increases based on
current costs, and it will take time for our actions to offset these
extraordinary circumstances. We will continue to monitor closely, and we’ll
take further actions as required.
During the quarter, our premium laminate collections
continued to perform well in Europe and Russia due to our unique visuals and
water-resistant technologies. Though we expected improved material availability
for our LVT business, we continued to experience shortages, which impacted our
production and sales in the quarter.
We are continuing to enhance our LVT processes,
particularly in our higher value rigid collections. As we expand our customer
base and product offering, we are growing our sheet vinyl sales in Russia and
Europe. We installed a new production line for high-pressure laminates, which
is sold as a complementary product to our panels and is used on surfaces that
require higher performance levels such as furniture cabinetry and wall
treatments.
We are enhancing our panel visuals with new
technologies from our laminate flooring. Our mezzanine flooring business also
grew significantly in the period as demand for e-commerce warehouses space
expanded.
Throughout 2022, we will integrate the bolt-on
acquisitions we completed last year to expand our position and further
differentiate Mohawk from our competition.
Our new French MDF facility will complement our
existing operations, enhance our product offering and strengthen our regional
position. The purchase of an insulation manufacturer with plants in Ireland and
the UK, complements our existing operations in those countries and will
increase our share in the polyurethane insulation category.
The purchase of a wood veneer producer to be finalized
in the first quarter will improve the cost and quality of our engineered wood
floors and make our operations more sustainable. To enhance these operations,
we will upgrade their assets and refine their processes.
Our Rest of World segment has a proven foundation for
growth based on delivering product innovation through value-added features that
consumers prefer.
The unique style and performance of our premium
laminate has made us the market leader. Our waterproof laminate collections are
popular across all sales channels and we have seen growing demand as home
renovation has increased during the pandemic.
To maximize our premium laminate sales, we expanded
our press capacity last year. We are executing our next laminate expansion in
Belgium, which will support additional sales of approximately $150 million when
the production is fully operational at the end of 2023.
In the fourth quarter, our Global Ceramic segment
sales increased 3% as reported, and 10% on a constant days and currency basis.
Adjusted operating margin was 6% as a result of productivity, and pricing and
mix improvements, offset by European energy crisis, inflation, and a return to
more normal seasonality.
Mexico, Brazil and Russia outperformed in the period
even though sales in those regions were constrained by capacity limitations.
Our US ceramic products are gaining momentum as
imported ceramic service levels have become less reliable and landed cost have
increased. Residential remodeling and new construction drove sales growth in
the quarter with commercial improving, though still below pre-pandemic levels.
We grew sales and improved mix with our innovative
floor, wall and mosaic offerings as well as expanding our position in exterior
products such as our outdoor porcelain pavers.
We have introduced a variety of new sizes and unique
shapes and expanded our polished and [rectified]
collections with enhanced performance features.
Our quartz and porcelain slab sales continue to grow,
improving our mix and margins. Inflation in material, labor and energy,
continue to impact all of our markets and we are taking additional pricing
actions to recover.
Last year, in Europe, natural gas prices accelerated
at an unprecedented pace due to supply shortages and are presently about 5 times
to 6 times higher than last year.
Most European ceramic industry participants are
implementing price increases to offset these extraordinarily high energy costs.
We anticipate our prices aligning in the second half of the year.
Due to uncertain availability this winter, we are
forecasting continued energy volatility, which will impact our first quarter
results. Future prices will depend on stability in the region, and whether
Russia increases supplies beyond its contractual obligations.
Mohawk is the world’s largest producer of ceramic
tile, and we have many opportunities to leverage that position and grow our
long-term sales and profits. We are well positioned for significant growth in
markets such as Russia, Brazil and Mexico, where ceramic tile is the dominant
residential and commercial flooring.
In Russia, we are expanding our porcelain tile
capacity with a new production line that should be operational later this year
and an additional line that will be completed in 2023.
In Brazil, we are constructing a new porcelain tile
facility that should be operating fully by the end of next year. In Mexico, we
are expanding our production of mosaics and specialty products while allocating
more of our ceramic production to the local market.
In Europe, we are adding capacity to expand our
porcelain slab business and enhance our successful outdoor and specialty tile
business.
In the US, we are investing in our quartz countertop
production to keep pace with rapidly increasing demand.
Collectively, these expansions will support additional
sales of approximately $300 million, when all of the lines are fully
operational.
This year is the 20th anniversary of Mohawk’s entry
into ceramic tile manufacturing through the acquisition of Daltile.
In the past two decades, we have grown our legacy
sales and expanded into new markets through major acquisitions. Ceramic tile is
the primary flooring in many large markets where industry consolidation has not
yet taken place, providing significant opportunities for expansion.
In the quarter, our Flooring North America segment
sales increased 5% as reported or 12% on a constant basis and operating margin
was 9% as a result of productivity, pricing, and mix improvements, partially
offset by inflation and a return to normal seasonality.
The robust US housing market supported sales growth
with both remodeling and new construction remaining strong, particularly in the
Sun Belt. The success of our differentiated products benefited our mix, though
some consumers traded down to maintain their budgets.
The commercial sector continued to slowly improve,
with COVID concerns still deferring some projects. In the period, we increased
prices due to higher energy and material inflation. We improved our service
levels, though our production costs increased with greater energy expenses,
absenteeism and training of new hires.
Some product manufacturing was constrained by raw
material shortages, limiting operations and increasing costs. We are expanding
our manufacturing capacity in LVT, laminate, commercial, carpet tile and floor
mats to increase our sales.
We expect continued improvement in the residential
markets for the foreseeable future. Commercial will continue to recover as
business confidence grows and new projects are initiated.
Mohawk is the leader in US laminate market and we have
reinvigorated the product category with improved visuals and waterproof
performance. All sales channels are expanding the use of our premium laminates
and we are increasing our capacity to support $300 million of additional sales.
The first expansion phase is starting up this quarter
with the second phase following in 2023. The new production lines will have
capabilities to produce the next generation of proprietary laminates to extend
our leadership in the category.
LVT remains the fastest growing floor product in the
market and our LVT business delivered strong growth in the fourth quarter as we
continued to improve production at our existing facility.
We are starting up new LVT operation to support sales
of over $160 million. The plant’s first equipment is being installed now and
the project will be completed in phases through the second half of 2023. Once
all planned lines are fully operational the site can be expanded further as
needed.
To provide more value to our customers, we are
incorporating unique technical features utilizing proprietary technology
developed for our laminate business. In addition to these capacity increases,
we also have many cost saving investments, including fiber manufacturing and
transportation projects that will improve productivity and profitability within
the segment.
With that, I’ll return the call to Jeff.
Jeff Lorberbaum: Thanks,
Chris. After a record-setting 2021, we are enthusiastic about Mohawk’s future
growth and profitability. This year GDP is expected to grow 3% to 5% in most of
our markets with residential sales remaining strong and commercial improving.
Interest rates will likely rise, but should remain
historically favorable and support continued home sales and remodeling. During
the year, we anticipate inflation moderating and constraints in labor, material
and energy, declining.
We are selling all of our capacity in many product
categories and are optimizing our mix and margins this year. We’ve initiated
multiple expansion projects to increase our sales in this growing area this
year and beyond.
Significant short-term material, energy and
transportation inflation is affecting all of our businesses and we are
reengineering formulations, reducing spending and improving efficiencies to
offset.
We’re presently implementing price increases, have
announced additional ones across products and geography. We will continue to
adjust our pricing as necessary to recover our margins over time.
In Europe, energy costs have dramatically accelerated
and have also affected the cost of our materials. Our European ceramic business
has been the most impacted, which we anticipate will create a $40 million to
$45 million headwind net of price increases in the first quarter. Given these
factors, we anticipate our first quarter adjusted EPS to be $2.90 to $3,
excluding any restructuring charges.
In the second half, we expect our margins to improve
as capacity expands, inflation moderates and pricing align. Based on the
strength of our company, our product and geographic diversity, investments in
growing categories and potential acquisitions, our long-range outlook is for
higher sales growth and margin expansion.
Flooring is an essential part of new construction
remodeling. And as the world’s largest flooring manufacturer, Mohawk has built
leading positions in major flooring markets around the globe. We expect our
business to benefit from strong demand through this economic cycle.
Given today’s low inventory of existing homes, new
residential construction and remodeling should remain strong for many years.
Mohawk’s sustainable products appeal to today’s environmentally conscious end
users, which gives us an added advantage in our markets and enhances our bottom
line. In time, we expect the commercial sector to return to its historical
growth, with pent-up demand representing a significant opportunity.
In addition to expanding capacity, we continue to
invest in our organization’s talent and state-of-the-art technology to deliver
exceptional design, value and service to our customers.
Over the next three years, we anticipate higher sales
and margins as we implement our product, manufacturing and marketing
initiatives. We will continue to leverage our strong balance sheet to pursue
acquisitions that further our geographic reach and product offering while
growing our sales and profitability.
We’ll now be glad to take your questions.
Q&A
Operator: Your
first question comes from the line of Truman Patterson of Wolfe Research. Line
is open.
Truman Patterson: Hey,
good morning, everyone. Thanks for taking my questions.
Jeff Lorberbaum: [Indecipherable]
Truman Patterson: Good
morning. First, just wanted to look at this first quarter EPS guidance, A, just
trying to understand if a higher tax rate is embedded in it compared to the
fourth quarter. And then, also, when I look at the 1Q guide, historically, op
margins consolidated normally fall about 200 basis points quarter-over-quarter.
Is it safe to assume that you’re expecting first quarter op margins to
outperform that historical decline? And are there any segments maybe to call
out when we look at it sequentially?
Jim Brunk: Okay. Well,
I’ll take the first part of that. On the tax rate, Truman, as I said, for the
full year looking at 22% to 23%, I would expect it to be maybe a little bit
lower than the bottom end of that in the first quarter. And then as I said, it’s
going to vary as we go through the year.
Jeff Lorberbaum: I
think also the difference in days in the fourth quarter is also impacting the
comparison between the two abnormally. And then, we also have last year you
have – as we’re going out of last year, it was seasonally stronger than it is.
This year, it’s more normal and same thing in the
first part of the year, the customers were behind in their purchases and
inventory levels, the channels were behind, so the demand was different. So, there’s
a lot of differences in the seasonality between the two.
Truman Patterson: Okay.
Okay. In the press release and the prepared comments, you all have discussed
some cost-saving initiatives in North America, especially the fiber
manufacturing and transportation projects. I’m hoping, can you give a little
more detail on each of those initiatives, and is there any way you can help us
quantify those over the long-term?
Jeff Lorberbaum: Some
of it is in the asset purchases we’ve done with the investments. We upgraded
various assets in the fiber and yarn manufacturing to put in lower-cost assets
based on how the business has changed over the years.
Some of it is in the transportation. We have put in
new processes and systems to trying to optimize the transportation systems, which
were getting higher weights on the trucks and we are improving the way we
charge for the business or charge for the transportation relative to the market
rates as we go through. So, they’re all benefiting the business.
Jim Brunk: [Indecipherable] Truman, is the completion of the
actions that we started back in 2020, where we had got out of older assets and
optimized the plant flow, which eliminate – it’s going to help on the material
side and the labor side on productivity basis.
Truman Patterson: Alright.
Thank you, guys.
Jim Brunk: Yeah.
Operator: Thank
you. And your next question comes from the line of Eric Bosshard of Cleveland
Research. Your line is open.
Eric Bosshard: Thanks.
Jeff Lorberbaum: Yeah.
Eric Bosshard: Jeff,
curious if you could talk about where you think we are in the life cycle of LVT?
And thinking over the last five years, LVT was all of the industry growth for a
period of time and felt like it was taking share from ceramic tile. It actually
was. And laminate was doing okay.
I’m just curious as you think about over the next three
or four years how those three categories are behaving relative to each other, I
guess, largely in the US, but also globally.
Jeff Lorberbaum: In the
US, LVT has now grown to approximately 20% of the flooring category. With that the
size has gotten where it is. The rate of growth is going to slow down. We think
that the other categories are going to still show volume growth, so we don’t
believe it’s going to take all of the growth going forward as you go through.
There’s been a change in the laminate business where
it was perceived as a cheap alternative. And with all the advances we’ve made
in it, it’s now being seen as an equal opportunity versus, both LVT and wood.
Because, on one side we’ve added the waterproof technology.
On the other side, we’ve made it visually as pretty as
real wood and can’t tell the difference on the floor. So, it’s in a midst of a
changing piece and we’re investing to support it.
When you go to Europe, Europe laminate is a much
larger part of the industry than it is in the US, and it’s not growing at the
same level.
On the other hand, our premium is. LVT as a category
is probably less than half the size it is in the United States as the market
hasn’t accepted it at the same rate as the US has.
Eric Bosshard: Okay.
That’s helpful. And then one follow-up, if I could. The competitive position of
your US business, you referenced it in the prepared remarks. But as you look at
your cost position, I guess this is a hard surface-focused question, but your
cost position relative to imports and the incremental transportation costs they’re
dealing with. I’m just curious how you think that influences the performance of
the business over the next couple of years and what that means for you.
Jim Brunk: If I
can comment on that, in the ceramic side, as the ceramic industry strengthened,
the import prices have increased. The ocean freight constraints are causing
delays and increasing cost, so I think we’re well positioned on the ceramic
side in the United States to take additional share.
Jeff Lorberbaum: And
the other piece is I think we’re in good position. The LVT, we’re still – in the
original plan, we’re still improving the costs. In the fourth quarter of last
year, the costs were actually impacted by a lack of supply and we had to slow
down on machines in order just to keep the plant running.
We expect the productivity and the cost to continue to
improve. We’re investing in a new plant, which we think will be cost-advantaged
versus imports. And we think we’re in a good position to grow with the market.
We’re also importing a lot of products. So it’s not in lieu of the other.
Eric Bosshard: Great.
Thank you.
Operator: And your
next question comes from the line of Adam Baumgarten of Zelman.
Adam Baumgarten: Hey,
good morning, everyone. I guess, maybe sticking with Flooring North America.
When you talk about trade down in the segment, is that primarily related to
carpet or you’re seeing it also in some of the other areas like LVT?
Jeff Lorberbaum: Every
time you go through significant inflation in the industry, some of the
consumers start looking to hold the value of what they’re going to spend or the
prices, and so it’s a normal course of events. And as you see significant
inflation, there’s some trading down in all the categories.
Adam Baumgarten: Got
it. And maybe switching gears to ceramic, you talked about the net headwind
from the European natural gas cost increases. Is that net of all price in the
segment or is that just net of European ceramic pricing?
Chris Wellborn: That’s
net of European ceramic pricing.
Adam Baumgarten: Okay.
Got it. Thank you.
Operator: And
your next question comes from the line of Susan Maklari of Goldman Sachs. Your
line is open.
Susan Maklari: Thank
you. Good morning, everyone. Sticking, I guess, again, with Flooring North
America, I want to focus a little bit more on the margin side. You, obviously, are
coming off a year where you’ve gotten [net] margin
back to the low double-digit range. As you think about the initiatives that are
going on in that segment, can you talk about where you think that that can go
over time, what the trajectory of it is and how does that maybe compare to
where we’ve been in the past in that segment, from a profitability perspective?
Jeff Lorberbaum: The
margins in the business have come back. They’re still below where they were at
the peak a few years ago. There has been – in the carpet industry, there’s been
a trading down to polyester at lower prices and different pieces, so those
margins will probably not get back to the peaks they were at.
On the other hand, we have investments in LVT and
laminate, but those margins we think have room to grow as we improve the mix
and put more investments in as we go through.
Impacting the whole thing in all categories, you have
also the commercial sales are still behind the pre-pandemic levels.
Our estimates depends on which product category and
which channel. They could be 10% to 20% below the pre-pandemic levels and those
are higher-margin products and sales. So, as those come back, those are going
to improve the margins also.
Susan Maklari: Okay.
That’s helpful color. And then, when you think about all the initiatives that
you have going on globally across the business, can you talk about how we
should think of growth going forward over time, the ability to sort of capture
what is going on out there and where do you think growth will really be led
from within this business in terms of products or even geographies? And what
are some of the areas that you’re really thinking about and looking to
incrementally further capture?
Jeff Lorberbaum: What’s
happened to us is that, as the business went through COVID, we pulled back on
all the investments in the various categories. And then when we came out of it,
we found that many of the categories have grown in one year what we had
expected in multiple years. So, you see us trying to catch up with the
investments that we’re putting in.
We’re investing about $800 million this year, which
will add roughly about $800 million worth of sales, which is all going in this
year and next year in the high-growth categories. The other categories that the
business still have additional capacities to support increased sales going into
the next year or two. We think we’re taking the right steps to optimize the
business.
One is, we don’t – we probably don’t get enough credit
for is the portfolio of the products that we have. We manufacture in five
different continents. In the different markets, we have the leading brands and
market positions.
We sell them into over 170 different countries. And so
with this, with a strong balance sheet you have, you see us investing heavily
to reduce our costs and broaden our product offering. We believe there are
going to be more acquisition opportunities. We’re talking to several at the
moment. We’ll have to see how they evolve. We think there’s more going to come
into the marketplace over the next year or two. We’re well positioned with our
balance sheet to take advantage of those.
You hear us continuing to invest in leading
technologies to give us differentiation to improve the margins. And then with
all that, we see the – we think we’re probably in the mid-cycle part of it.
Usually, the economy and the industry, keep growing as we start raising rates
at this point.
The residential markets are running at high rates and
what normally you have when you get towards the cycle, we’ve overbuilt the
residential housing. This time, we’re still chasing it. So it seems like there’s
plenty of room to grow. We’ve talked about the commercial improving. So, we
think we’re in the right position for higher growth and margin expansion over
the next few years.
Susan Maklari: That’s
great color. Thank you, Jeff, and good luck with everything.
Jeff Lorberbaum: Thank
you.
Operator: Thank
you. And our next question comes from the line of Mike Dahl of RBC Capital
Markets. Your line is open.
Mike Dahl: Good
morning. Thanks for taking my questions.
Jeff Lorberbaum: Good
morning.
Mike Dahl: I
wanted to follow-up on a couple of areas. The first is on kind of the European
ceramic and the nat gas environment. In the opening remarks, in addition to the
headwinds that you outlined in terms of the $40 million to $45 million, I think
you did say that at this point, most competitors are raising prices to adjust. Can
you elaborate a little more? Because last quarter, it was that some of your
competitors were hedged, so they weren’t acting as quickly. Can you talk more
about what you’re seeing in terms of the competitive dynamics and the pricing
environment and whether competition is raising price enough at this point?
Chris Wellborn: Well,
everybody in the market is raising prices, including us. You’re right, some are
hedged and that’s probably causing them to raise prices a little less fast than
they need to be, but everybody is raising prices.
We expect the energy volatility through the winter,
due to lower European reserves and uncertain availability, but the short-term,
the headwind should peak in Q1, and then progressively get better after that
for a couple of reasons. One is, you’ve got – you’re getting into the summer
months, where gas is naturally cheaper. And also as we look at the forward
contracts, they are lower than what we’re experiencing now.
Mike Dahl: Got
it. Okay. And my second question, it’s around market share. And going back to
North America, you’ve made some comments around how you’ve positioned your
product. And I think you’re in a position to take share in a variety of
categories.
If I look at the fourth quarter data and I adjust for
your days’ headwind, it still seems like from a total value and a volume
standpoint – and correct me if I’m wrong, but it seems like volume was kind of
flattish on a days adjusted basis, maybe up slightly or down slightly. But the
market industry data would still seem to suggest that industry growth in
volumes has been, call it, high-single digits and in value, maybe closer to
20%.
So, that data would seem to suggest maybe there’s still
some share slippage. So can you just speak to that and talk about how you think
your share performance evolved kind of through the quarter and what your
expectations are for this year?
Jim Brunk: Let me
unbundle a little bit what you said there, Mike. So first of all, in the fourth
quarter, you’re right, as we look across the segments, I would say the volume
piece adjusting for days and everything else, the business volume was
relatively flat to slightly down. And if you think about that that makes sense
compared to fourth quarter of 2020, when you had unusual demand levels and so
really abnormal seasonality. So that kind of straightened itself out in the
fourth quarter. Also, in the fourth quarter of this year, we had the material
and labor constraints, which impacted not only our production, but our sales in
various product categories. So, that definitely impacted that volume.
Chris Wellborn: Yes.
The other thing I would add that when you look at the data on the ceramic
market it’s really hard to read, because you’ve got the imports coming in. And
the volume, the way they’re measuring that is the imports coming into the
country which we think most of the competitors were building inventory during
that time. But when we go out and look at the customers we’re getting and the
progress we’re making in the marketplace, we think we’re doing really well.
Jeff Lorberbaum: The
industry data on the carpet shows the carpet industry was down in units. And,
again, we think it’s because of the seasonality differences between the two. On
the other side, we are probably indexed higher on the commercial business,
which is still 10% to 20% below where it was before the pre-pandemic pieces. We
also have a lower percentage of the LVT, but we’re growing our business there.
Mike Dahl: Okay. All
of that makes sense. Thank you for that color.
Jeff Lorberbaum: Thank
you.
Operator: Your
next question comes from the line of Michael Rehaut of JPMorgan. Your line is
open.
Mike Rehaut: Hi.
Good morning, everyone. A few clarification questions before I get into, I
guess, a bigger-picture question. If you could just kind of be more explicit just
to make sure we understand.
Number one, the second half margin improvement that
you’re talking about in 2022, we’re talking about year-over-year expansion when
you say improvement. And also, the net of price impact in the European ceramic
of $40 million to $45 million. That $40 million to $45 million is kind of the
same number that you were referring to last quarter, when you were saying off
of the $25 million headwind in 4Q, that could approach doubling. I mean we’re
not changing the definition of the of that $40 million to $45 million relative
to last quarter. Just want to make sure that that’s clear.
Jeff Lorberbaum: Let me
start with the ceramic piece. The ceramic piece, the number’s still the same.
However, we’re getting there a little different. We’re actually going to get
more price than we thought. On the other hand, the gas prices were actually
higher, so they net back down to about the same thing, but both are different.
Jim Brunk: But
the definition is the same, Mike. So, we didn’t – the $25 million compared to
the $40 million to $45 million, the definition is the same.
Chris Wellborn: Mike,
what happened in the…
Mike Rehaut: Okay.
Chris Wellborn: …as we
produced in the fourth quarter, you may have seen the gas prices. But in some
cases, they spiked to [170, 200], which is very
high. And, of course, as that inventory rolls off in the first quarter, you see
that impact.
Jeff Lorberbaum: Yeah. And
then as we think about the year, we’re starting from a premise that the present
trends, the economy, housing and business investments are going to continue as
we all expect and all the projections from everybody. And what we see is, our
margins after the first quarter should improve as the price and costs get
aligned better and continue throughout the rest of the year. And don’t forget,
when we get into the fourth quarter, we shouldn’t have the same energy
headwinds that we had last year.
Mike Rehaut: So
just to be clear, again, when you talk about second half margins improving,
again, we’re talking that maybe on a consolidated basis, second half margins
higher than second half 2021? Is that fair to say?
Jim Brunk: Yes.
When we’re looking at that sentence, that we’re saying is that year-over-year.
And now I would say really, it depends upon how inflection plays out in the
first half as well. And then, the economic trends continuing as most expect into
the second half. That is what we’re addressing.
Mike Rehaut: Right.
Okay. Good. Secondly, you talked about also in the press release this outlook
for 3% to 5% GDP growth across most of your markets. Usually, companies have a
goal of at least meeting that GDP growth.
So, when you think about your full year sales growth
for 2022, particularly given the price increases that you’ve put into place in
the back half of 2021 – in early 2022, should we be expecting a revenue growth
kind of in the mid-single-digit range mostly driven by price, is that the right
way to think about it?
And also, sorry, one more granular question. If there’s
any variation in shipping days by quarter for 2022 versus 2021, that would also
be helpful for modeling.
Jeff Lorberbaum: Let’s
see. Let’s start out with the – you’re correct that you have the increase in
the inflation is going to increase the piece in the volume assumptions you have
seem reasonable, is it?
Just to put in at the comparisons will be more
difficult in the first half as the customers last year were replenishing
inventories. And we don’t see – we’ll see the same thing. We’ll be back at a
more normal seasonality this year.
And then also in the first half, you’ll see a bigger
impact from price increases in the first half than you will in a second. As we
go into the second half, we think we’ll see some stronger volume growth due to
better inventories on our part, so we can service the business better as well
as a lower impact from pricing.
One more thing just to not forget, at least the
estimates by everybody show that this year, the dollar is expected to be
stronger than last year and that stronger dollar would have a reduction in our
translated results.
Jim Brunk: And in
terms of days, Mike, there’s one less day in the first quarter, and the other three
are the same.
Mike Rehaut: Great.
Thanks a lot.
Jeff Lorberbaum: Thank
you.
Operator: And
our next question comes from the line of Phil Ng from Jefferies. Your line is
open.
Phil Ng: Hey,
guys. You mentioned that supply chain labor impacted your results in the fourth
quarter, and certainly that was very pronounced in your Rest of the World business.
So curious, how is that kind of shaping up in 1Q. Should you expect that to
kind of improve or it’s going to take a little more time, call it, a 2Q even?
Jeff Lorberbaum: We’re
still having problems with supply. We’re still having problems with labor, and
it’s still impacting our business. Probably the bigger part of it’s in our LVT
business, both in the US and Europe.
For instance, we’re running lines at lower speeds to
keep them running instead of stopping and starting them. We have other suppliers
and pieces that have – we’ve had to stop the plants. And then with COVID, we’ve
had people not showing up for work and just having to shut the places down
and/or having to run places different. In most areas, we’re seeing some
improvements, but we’ll have to see how it works.
Phil Ng: Got
it. Okay. That’s helpful. So, marginally better. It’s going to take a little
time. And then from a capital project standpoint, you got a lot of exciting new
stuff coming on, whether it’s LVT, ceramics and your laminate product as well.
Can you kind of remind us how that kind of ramps up
through the year? And then, appreciating there are start-up costs and there’s a
learning curve component to that, is there a good way to think about the EBITDA
contribution this year? I know a few years back when you had a big ramp up, you
had some headwinds to kind of come out of the gates.
Jeff Lorberbaum: I
think if you go back to the introductory remarks, we tried to put what points
in time they would come in because some of them are in the middle of next year,
and some of them are this year. They’re all through it. If you go through that,
I think you get a sense of the timing of it.
Our current expansion projects, different than the
earlier time we did it are in markets and products that we already have in the
marketplace with increasing sales. The last time we went into new products and
new markets that we had to start at zero and there was significant marketing
costs upfront.
This time, the investments are focused on our existing
laminate business in the US and Europe, ceramic outside the US where the
markets are sold up and – where we sold up. We’re expanding our countertop
business in the US and Europe in our LVT business.
So, the markets are there for where they are, which
should reduce the impact of selling up the assets as we start them up. And then
the same thing, we’re using technologies that are proven which we have
operating in all the places, which has also limit the start-up costs as we get
through. In addition, there are other projects on both productivity and
efficiencies, which should immediately enhance our business.
Truman Patterson: Got
it. So it’s – sorry, go ahead, Jim.
Jim Brunk: I was
just going to say timing-wise, if you look – so we launched the first laminate the
new laminate line in the fourth quarter. So, you’ll see some benefit in 2022 of
that, limited benefit on the LVT launch. But most of the others, echoing what
Jeff said, will impact into 2023 more so than 2022.
Phil Ng: Okay.
But you’re expect it to be additive rather than any big headwinds, right? So it’s
more of a good guide than anything?
Jim Brunk: Yes.
Phil Ng: Okay.
Great. Thank you.
Operator: And
our next question comes from the line of Keith Hughes of Truist. Your line is
open.
Keith Hughes: Thank
you. Question on Flooring North America, if we look at the revenue growth,
excluding the days was up a good bit. Compare that to some of the numbers
coming out of the carpet industry even adjusting for days, you seemed well
ahead. And I know that’s about laminates and LVT. So, my question is, could you
put a little bit more of a magnitude on how much those products grew in the
fourth quarter versus the average in the segment and also for the year as well?
Jim Brunk: We
normally don’t get to that level of granularity, Keith. You’re right that the –
certainly in that segment, laminate and the resilient business grew more than
carpet. And so they really drove the growth along with, I would say, the
pricing actions that we put in place really kind of dwarfed anything around
volume.
Keith Hughes: Okay.
And then second question on Global -- within Global Ceramic, the North American
business. If you could talk about what its growth looked like versus the
segment average and what the puts and takes on that are.
Chris Wellborn: Well,
first, on US ceramic, our products are gaining momentum as imported products
are less reliable and landed costs have increased. Our pricing actions have
offset inflation, keeping margins in line with prior year. We introduced
several products at floor, wall and mosaic offerings that were offered this
year. And then to improve mix, we’ve introduced new sizes and shapes.
As you look into 2022, we believe the US will grow in
both, volume and price as residential remained strong and commercial
strengthens. Brazil, Russia and Mexico will have to optimize mix given their
capacity limitations. And we think the EU volume will be under pressure just
given natural price increases from natural gas.
Keith Hughes: Okay.
Thank you.
Jeff Lorberbaum: Okay.
Operator: And
your next question comes from the line of Stephen Kim of Evercore ISI. Your line
is open.
Steve Kim: Yeah.
Thanks very much, guys. Just wanted to clarify to start off some of the
capacity that you talked about bringing on in Flooring North America.
The $300 million in laminate capacity, you talked
about two phases. I just want to make sure that the $300 million encompasses
both phases. And then, the LVT plan of $160 million, which I think is going to
be done over the next 18 months to 24 months. I guess my question is it seems
like that line is quite a bit smaller, maybe as much as half the size, maybe
half as small or half as large, as your first line.
So, when you talk about the site being expanded – or
able to be expanded as needed, I was curious, how quickly could you bring on
additional capacity within that site? And where is that site located?
Chris Wellborn: Okay.
Well, first of all, just in terms of the production, the original lines were
designed for high volume long runs and our new production lines are designed
for more differentiated products and smaller runs.
And you talked about the location. To optimize our US
LVT manufacturing, we’ll now have both, an east coast and a west coast
operation. This should provide us service, logistics and cost advantage and this
plant will be in Mexico, and it’s adjacent to one of our other factories.
Jeff Lorberbaum: And
then I think the other questions were around laminate. The laminate, each line
does about $150 million each. The first one is in start-up right now, and
should be operating in the middle of the second quarter close to its potential.
And then, the next line will come in the middle of next year sometime.
Jim Brunk: And
just to clarify, Steve, what we’ve said is, up to this point, we have, globally,
we have about $1 billion of sales capacity in LVT, and that’s across five
lines. So the $160 million on the new line is not really totally different
versus the other lines.
Steve Kim: Yeah.
Yeah, I know you have a couple of smaller lines in Europe and so forth. Okay.
That’s helpful.
Second question relates specifically to productivity.
I mean, as we look at your EBIT walk and the year-over-year growth in EBIT.
From productivity specifically, you had a couple of really good years now. I
mean, it was strong in 2020. It was strong in 2021.
I’m curious, with all the moving pieces, and
particularly like labor inefficiency and absenteeism and whatnot, I would think
the productivity could start to become a benefit to your EBIT from other pieces
like maybe labor. And so I’m curious, could you – would you expect another
strong year of productivity in 2022? And how might that flow in from a timing
or a segment perspective?
Jeff Lorberbaum: We’ll have
to find out what happens to supply and to labor around the world in different
places. Presently, we’re still struggling with the pieces. Our assumptions are
that it gets better through the year, but to tell you the truth we haven’t seen
it yet –as yet.
At the same time, all of these new facilities and
things we’re going to start bringing up, show up some negative productivity
offsetting some of the other positive productivity we have during the year.
Steve Kim: Okay. That’s
helpful. Alright. Great. Thanks very much, guys.
Operator: And
your next question comes from the line of Laura Champine of Loop Capital. Your
line is open.
Laura Champine: Thanks
for taking my question. It’s a follow on to your comments about inflation being
lower in the back half. I heard the answer about gas prices in Europe, but are
there any other elements in your thoughts, where you can see or provide the basis
for inflation to be lower back half versus first half this year?
Jim Brunk: There
is significant shortages that have been causing the raw materials to be at
historically high prices. We’re assuming that some of that lines up this year
and some of the pressure from capacity versus demand offsets. And then, it
depends on what happens with the oil and gas prices around the world.
Laura Champine: Does
that imply that your expectations are that units for the industry will be down
year-on-year, thus freeing up more capacity, or do you think there’s more
capacity coming to market, broadly this year?
Jim Brunk: We
think that there’s more capacity to support some of the product categories that
we’re in. For instance, in Europe with the high gas prices, our wood prices are
up because they’re starting to burn wood as an energy source, is it – it’s at
unusually high levels. We’re assuming that some of that starts to balance out
next year as the energy prices come down, for instance.
There are other places where we’re seeing more supply
come into the marketplace, and we’re assuming there’s going to be a better
balance to it than there was the last six months.
Laura Champine: Got it
thank you.
Operator: And
your next question comes from the line of Matthew Bouley of Barclays.
Matt Bouley: Hey,
good afternoon everyone. Thanks for taking the questions here. So just on
natural gas in the European ceramic market. I think I heard, Chris, you
mentioned earlier that you expect some volume pressure in European ceramic as a
result of these level of price increases that you and competitors are
implementing, so any more color on the elasticity that you expect there as you
lift prices materially? And, is there an impact to the mix side of it as well?
Chris Wellborn: I
mean, so far, we haven’t seen – our volumes in Europe have still been strong, so
we haven’t seen it. But we just anticipate with the pricing that’s being taken
there that it would make sense that it could put pressure on the market, but so
far we haven’t seen it.
Matt Bouley: Right.
Okay. That’s helpful. And then, I guess, same topic just on the overall
European ceramic market. Have you seen any, I guess, changes competitively
within the market?
That was a great comment you just gave, Jeff, on
people burning wood. Are ceramic manufacturers limiting production at all or is
this impacting exports from Italy or Spain to the US? Are there any other way
the market is adapting to the severity beyond just the pricing side?
Chris Wellborn: Well,
we know some of the – on one end you have some of the smaller producers that
have cut way back or shut down.
And then, on the other end of the market, you have
some of the bigger players that were hedged. But I would say, in general, the
competitors are in the market are trying to cover the cost as much as they can not
to let it impact the market too much and so it’s a balance. As you could expect
of covering inflation and not killing your demand.
It’s got, too, though, put pressure between the
increased gas prices. The increased freight cost. It’s got to put pressure on
those exports. And that’s why we think in the United States, we’re going to be
in a good position.
Matt Bouley: Got
it. Well, thanks for the color and good luck.
Jeff Lorberbaum: Thank
you.
Operator: And
your next question comes from the line of Deepa Raghavan of Wells Fargo
Securities. Your line is open.
Deepa Raghavan: Hi. Good
afternoon. Thanks for taking the question. I’ll switch gears and ask about
commercial business trends. Are you able to share how much this business grew
in 2021? Looks like you’re expecting an acceleration in 2022. But it also
appears the hospitality industry recovery has been further pushed out. So, essentially,
the drivers to your commercial business growth is offices and maybe some institutions
like schools, et cetera. Are these the primary drivers that would actually
accelerate your growth in 2022? Am I thinking about the moving pieces within
the commercial verticals correctly?
Chris Wellborn: Well,
I think it also depends on the category. Like in ceramic, hospitality is doing
well. Hospitals, schools, it’s still not back to pre-pandemic levels, but it’s
certainly been strengthening.
Jim Brunk: Yeah.
It’s been really led by the healthcare government area. And then, some of the
other channels have been slower to respond. But, again, we had good strong
growth in 2021 versus 2020. But as Chris said, it’s not back to the 2019
levels.
Deepa Raghavan: Okay.
Just curious on just the interest rate concerns out there with the backdrop.
You’re still calling for R&Rs. How are you thinking about the R&R spend
in the US We were up at the [IBIS]. And, obviously,
we’re looking at some of the ceramic manufacturers, the larger format stones
are in.
So, obviously, the industry is continuing to invest in
product innovation, bringing out new products. It doesn’t seem like the interest
rate concerns are impacting the industry as such, but any comparisons? What are
your thoughts, first of all, on that? Should we be concerned in any comparisons
to 2018? You could help us draw and say, this time, it’s different because of
certain items.
Jeff Lorberbaum: Where
we are with it presently, we’re assuming we’re in the midpoint of the cycle
that you’re going to still see unemployment decreasing. You’re going to still
see incomes rising. We expect the economy to keep growing like it does in the
mid-part of the cycle. The mortgage rates are still historically relatively
low. And unlike the end of cycles, there’s still demand for housing is
exceeding the supply and it supporting new construction. You have increased
home values that should support continued remodeling as you go through.
Typically, existing home sales, when someone buys a
home, it takes multiple – they don’t do all of the remodeling in the first
year. It takes multiple years to do it. So, you have all of these homes that
were sold over the last two years that should continue to get remodeled.
And then you still have commercial, that’s still below
the pre-pandemic levels and there should be pent-up demand to help it increase.
So, unless they move the rates up way higher than we expect, we’re expecting to
continue improving the category.
Deepa Raghavan: That’s
great. Thanks for the color and good luck.
Jeff Lorberbaum: Thank
you.
Operator: Thank
you. And there are no further questions on queue. I will turn the call back
over to Mr. Lorberbaum for closing comments.
Jeff Lorberbaum: So, we
appreciate you joining us today. We are really optimistic about our long-term
performance. We’re investing to support growth and margin expansion and we
believe that we’re in the right spot to optimize our business over the long-term.
Thank you for joining us.
Operator: And
this concludes today’s conference call. Thank you for participating. You may
now disconnect.
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