Mohawk Industries, Inc. (MHK) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning. My name is Natalia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries First Quarter 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, April 30, 2021. Thank you. I would now like to introduce your speaker, Mr. James Brunk. Mr. Brunk, you may begin your conference. James Brunk: Thank you, Natalia. 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 first quarter results. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 and 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. Now I will turn the call over to Jeff for his opening remarks. Jeff? Jeff Lorberbaum: Thank you, Jim. In the first quarter, we had all-time record sales of almost $2.7 billion, an increase of 17% as reported or 9% on a constant basis with adjusted operating income of $329 million, our highest ever first quarter EPS of $3.49. Our business continued to strengthen in the first quarter and did not reflect the industry's normal seasonality. Around the world, consumers are continuing to invest in their homes and new flooring plays a major role in most remodeling projects. We're also starting to see moderate improvement in commercial demand as global economies expand and businesses begin to invest in an anticipation of a return to normal. In most countries, construction is considered an essential business, so our sales have been less impacted by government restrictions. Those specific regions have interrupted our customers' businesses. Our Flooring Rest of World segment continues to outperform with strong residential sales of our flooring, improved mix from our premium products and less exposure to commercial channels. The segment benefited from lower marketing expenses, product mix and increased days, which resulted in a greater margin in the first quarter. Our other segments also performed well with strong growth in residential products and expanding operating margins, while their results were impacted by low commercial sales and severe storms in the United States. Market demand strengthened as the period progressed, and our order backlog remains robust going into the second quarter. Most of our businesses are running at high production rates, though inventories remain lower than we would like. Our production and operating costs were impacted in the period by supply limitations in many of our markets as well as absenteeism, new employee training and severe winter weather in the United States. James Brunk: Thank you, Jeff. Sales in Q1 2021 were $2,669 billion. That's a 17% increase as reported and 9% on a constant basis. All segments showed positive volume growth with Flooring Rest of the World being the strongest. As a reminder, Q1 had three additional shipping days and Q4 will have four fewer days. Gross margin was 29.7% as reported or 30.1% excluding charges, increasing from 27.5% in the prior year. The year-over-year increase was driven primarily by higher volume and productivity, greater manufacturing uptime, improved price mix and favorable FX, partially offset by increased inflation. The actual detailed amounts of these items will be included in the MD&A section of our 10-Q, which will be filed later today. Chris Wellborn: Thank you, Jim. First quarter sales of our Flooring Rest of World segment increased 31% as reported or 15% on a constant basis, exceeding our expectations. Sales across all our product categories and geographies were strong as housing and residential renovation continued at a brisk pace. Margins expanded over last year to approximately 21% due to higher volume, favorable price and mix and positive leverage on SG&A, partially offset by inflation. During the period, most of our facilities ran at high levels, though some supply constraints limited our utilization. At this point, we anticipate some material shortages continuing into the second quarter. Our backlog has increased as customer inventories remain low. We have raised prices across all product categories and have announced additional increases where material inflation has continued to expand. Our laminate business, the segment's largest product category continues to record significant growth as consumers embrace our more realistic visuals and superior performance. Our leadership in premium laminate products and our higher volumes drove improved margins during the period. Our unique manufacturing methods create proprietary products that cannot be duplicated. Our next-generation laminate technology provides premium wood consumers with features that exceed traditional wood in beauty and durability. In the second quarter, we are installing additional manufacturing assets to support future growth. Jeff Lorberbaum: Thank you, Chris. As we progress through the year, we anticipate that historically low interest rates, government actions and fewer pandemic restrictions should improve our markets around the world, which we see the present robust residential trends continuing with commercial sales slowly improving in the second period. Across the enterprise, we will increase product introduction to provide additional features to strengthen our offering and margins. We're enhancing our manufacturing operations to increase our volume and efficiencies while executing our ongoing cost savings programs. Our suppliers indicate that material availability should improve from the first quarter though some operations could still face supply constraints. We are managing challenging labor markets in some of our U.S. communities and supplemental federal unemployment programs could interfere with staffing to maximize those operations. If raw materials, energy and transportation costs continue to rise, further price increases could be required around the world. Given these factors, we anticipate our second quarter adjusted EPS to be $3.57 to $3. 67 excluding any restructuring charges. Currently, our strong backorder -- backlog reflects the escalated levels of residential demand across the globe. We're introducing new product innovations to enhance our offering and optimizing our production to improve our service. We're preparing for an improvement in commercial projects, anticipating an economic expansion and a return to normal business investments. With strong liquidity and historically low leverage, we will increase our capital investments and take advantage of opportunities to expand. We'll now be glad to take your questions. Operator: Your first question is from the line of Keith Hughes with Truist. Keith Hughes: I know you don't normally like to talk about the one quarter ahead, but we kind of an unusual period, something I'd give it a try and can . Do you anticipate despite some more difficult comps, increased volume and products year-over-year? And also in margins, given you got even tougher margin comps, do you think you'll be able to push the ball forward on margins in the second half? Jeff Lorberbaum: Listen, I can give you some qualitative views of things. We've already provided the second quarter guidance in which we believe the present trends will continue into the second quarter. And the second quarter also included the expected supply limitations that are going on. We're raising our prices, and we expect to run all the facilities at high rates. As you look into the second half, the third quarter, we think residential sales will continue to remain good. We think commercial demand will improve. Our production rates should continue to increase. Those sales in some areas could be constrained by capacity or supply that we talked about a few minutes ago. Last year, just to remind you, that market strengthened as it went in, it will make the comps higher in the third quarter. Also remember, in Europe, people take summer vacations in the third period, and it impacts both our resident -- both our Rest of World and ceramic segments, sales and margins as historical. Sales could also be impacted by changing consumer behavior or other government actions with COVID. As you go into the fourth quarter, remember, we have 6 fewer days than last year, and we do expect more normal seasonality this year and production levels that occurred last year. For the full year, if you look at it, we expect strong improvement in sales and income. We see SG&A being leveraged and operational improvements also helping our margins. With the higher growth, we are evaluating -- raising the capital investments for both this year and next, and we're in the process of thinking it through. And the tax rate, as we said, will go up from last year to about 21. 5% to 22.5%. That is it. Keith Hughes: Okay. Then just final question. You talked a lot about your laminate growth. I believe you used the phrase, record setting in the release. That growth in a minute, is that taking share from other laminate producers? Or is this a case where it's actually making a dent on LVT or other product sales? James Brunk: Keith, the market has become a clickable flooring market with LVT, laminate and wood alternatives. Our laminate is waterproof with better features and is expanding in all channels, and we're importing laminate from other plants and adding capacity to satisfy. Keith Hughes: So would that be -- it's just an applicable share gain? Is that a way to say? Jeff Lorberbaum: It's really that people are looking at -- they go into the stores and they see them all, and they're being presented all as the same as alternatives. Now the other part that's happening is we focus on the premium part. So we have a waterproof story that's equal with LVT. And the visuals and things are equally -- are better than the other products that they're offered. So it's really growing category, the category is improving and then premium laminate is really being expanded, and we're really limited by our capacity. This year, we've substantially increased our production in the U.S. plants, and we're importing products from plants around the world, and we still can't satisfy the growth. By the end of the year, we'll have a new line that will be up and running, which will give us a lot more production. Operator: Your next question is from the line of Phil Ng with Jefferies Phil Ng: Jeff, I guess, bigger picture, after seeing pretty noticeable declines in carpet for the last few years, it looks like you saw a really strong growth and the participated with the strength you're seeing in R&R and new construction. If we look out to 2022 and let's say, if we see a mid-single-digit growth environment for R&R, for example, what type of growth could you see carpet and ceramic putting up? Jeff Lorberbaum: I think what you're seeing is the whole category of flooring increasing. And so all the categories are growing is that I still think that the carpet will lose share, but it's in a much higher growth market, which is cause. But the other side, we still have the whole commercial carpet business, which is really at low levels. And as it picks up, we have higher margins in it because they're more differentiated products, and that's going to help as we go forward both in and as well as the ceramic categories as you go through. Phil Ng: Got it. That's really helpful. Based on your 2Q guidance, it looks like your margin is holding up pretty well. And certainly, you've been really proactive on pricing and may go out with more price increases. Based on what you have out there and the traction you're seeing, do you feel pretty good that pricing alone should like fully offset inflation this year? And do you envision any, at least, timing mismatches throughout the year? Jeff Lorberbaum: Well, we're doing everything we can to keep it aligned. And as you know, the materials, energy and transportation continue to rise, they're flowing through inventory, and we're raising prices as we see it. We're having to react to the changing prices in our supply base. Every month, we get a different view of it than we had the month before. We are trying to push through price increases to align with it. And so far, it looks like we're doing reasonably well with that. Some products, we've actually increased 3x already is that -- and all we can do is keep reviewing what's going on and keep making adjustments. Operator: Your next question is from the line of Susan Maklari with Goldman Sachs. . Susan Maklari: My first question is around the LVT facility in the U.S. Can you give us some update on how that's coming through and how that's expected to kind of add to this demand that you're seeing there? Jeff Lorberbaum: Yes. So just to put a start out, the European operations are operating well and continue to improve our cost and margins. We have people in the United States over there on a continuous from Europe and they're implementing the demonstrated processes that we have there, and we're improving our speeds and yields. Has been disrupted both in the U. S. and Europe at the moment, the PVC supply is limited both in the U.S. and in Europe. And we expect it to get better, but it's causing us not to run the plants to optimize them at this minute. Susan Maklari: Okay. That's helpful. And then as a follow-up, you've obviously been making progress in terms of a lot of the cost-cutting and productivity initiatives that you set out last year. Can you give us some more color on where you are with that? And how we should be thinking about that flowing through for the second quarter? And then in the back half of the year as well, especially as we anniversary some of that? Jeff Lorberbaum: Okay, Susan. So we have made significant progress. As we said, we've seen about $75 million of the $100 million and $110 million that we had planned, starting to see that impact, favorably impact our cost and margins. We'll complete as we go through the balance of the year, I would expect that Q2 would have the most anniversary those restructuring actions from Q2 2020. And so if you look at the additive savings of somewhere between $25 million and $35 million. Those are included in our full year projections. James Brunk: Just remember that the $75 million is embedded in last -- in the prior quarters, so the comparisons already have it embedded in it the first $75 million. Operator: Your next question is from the line of Tim Wojs with Baird. Tim Wojs: Yes. everybody. Maybe just a first question is how you're thinking about investments? And SG&A has run a little bit lower than sales over the last couple of quarters. And so just as you think over the next 12 to 18 months, where are some of the biggest opportunities for you guys to bring some SG&A investment back into the business? Jeff Lorberbaum: You're right with the SG&A, it's been lower. We're going to have to start increasing the SG&A, but with the top line growth, the goal is to grow the SG&A lower than the growth rate at the top, so we get leverage out of it and still satisfy the need to bring new products to market and at the same time, to support the expanding sales on the top. Tim Wojs: Okay. Okay. So you'll bring some back but be able to leverage it. Okay. And then just on the M&A environment, I mean your balance sheet is probably in the best shape it's been in years. Can you just give us an update on the M&A environment and kind of how that's progressing, if there's any sort of opportunities out there for you to take advantage of? Jeff Lorberbaum: As you said, the balance sheet is in good position with the ability to invest significant amounts of money. We're looking for the right opportunities at the right prices to make sure that we can get the return to the need over time. And you never know when those things are going to get through an agreement it takes a while. But there are things available and we're talking to the people. Operator: Your next question is from the line of Stephen Kim with Evercore ISI. Stephen Kim: Historically, Jim, you guys have given the sort of the breakout input cost, volume, productivity in terms of the benefits of operating income. I was curious if you were able to give us the rundown on that. James Brunk: Well as I said, Stephen, you'll get it in our MD&A because we will file our 10-Q later today, but was there one specific one that you were looking for? Stephen Kim: No, that's okay. We just -- no, that's fine. Well, I guess we'll have to wait. That's fine. Let me then ask you a question, if I could, about your comment about making potentially more capital investments that you're evaluating some opportunities. I was curious if you could give us a hand at which segments you're evaluating the most opportunities in. And related to that, in laminate, you talked about just a tremendous amount of demand in North America, where you're expanding capacity already. How much are you expanding that capacity both in North America and Europe? And are you confident at this point that it's enough? Jeff Lorberbaum: Let's see if I can answer that one. To start on with the businesses, the pieces that have the most limitations right now would be U.S. laminate, our European board businesses and our ceramic businesses outside the U.S. and Europe, would be the ones that are the most constrained at this point. We have new capacity coming in this year to add to both the U.S. and European laminate. In the U.S., I think it's around $130 million, $140 million of additional capacity. I don't remember the number in Europe. We have new equipment coming in to both Brazil and Mexican operations in ceramic, and we have a lot of ongoing optimization in our LVT production, which will increase it. And there's other things in that, but those are the big ones. Stephen Kim: And then lastly for me is just margins. You mentioned that 1Q was a bit of an unusual quarter seasonally. And a lot of those things, I would imagine, benefited your margins in 1Q. Usually, margins rise sequentially into 2Q. And I'm wondering if you think that, that is expected to happen again this year? Or would you potentially see margins down just because of some unusual seasonality that's happening this year? Jeff Lorberbaum: You're right, quarter one was seasonally stronger, which does temper the increase as you go through. The Flooring Rest of the World, which we said, the first quarter margin was positively affected by product mix, lower marketing expenses and increased days. So that one is going to -- that was -- that one is not going to stay at those levels. And then we have the First quarter, remember, this year has 5% more days. So when you think about the historic relationship, the second quarter usually has more days in the first quarter. This year, it's going to reverse. So it changes the relationship. So you have to keep all that in perspective when you're looking at the trend line. Operator: Your next question is from the line of Eric Bosshard with Cleveland Research. Eric Bosshard: You talked about relative to your original expectations for the quarter, the rest of the world was better, you didn't totally characterize the Flooring North American ceramic. What I'm curious about is within those two businesses, anything that notably limited the growth of those in the quarter that changes and the growth can accelerate in the coming quarters? Chris Wellborn: I can speak to U.S. ceramic. The U.S. ceramic was stronger in residential while our commercial is just starting to improve. And then in the first quarter, we were negatively impacted by the storm, which interrupted electricity and gas supply, and we estimate at least $15 million to $20 million sales impact. Our margins improve with productivity and restructuring, and we're raising prices to offset transportation going forward. Jeff Lorberbaum: In the other North American businesses, we did have limitations on the availability of the product to satisfy the pieces you heard about the laminate we've been trying to do. The LVT was also impacted by lack of supply of PVC to run the plants is hard. The imported products are all coming in late. So we lost sales on those as we go through. And then in the carpet manufacturing, in some of the markets, we're having trouble finding the labor to run the plant. So our raw materials and some of our production has been limited by labor, but we're trying to do everything we can to improve that, which includes training program on 1 side, and we've actually picked up and moved some equipment from 1 local market to another plant to have more labor availability. So all those things impacted it. And we've built that all into the projection in the second quarter. On the other hand, we still believe we're going to have supply limitations, the chemicals coming out of the Texas area all in limited supply we don't know exactly how we think the supply is going to get better, but we'll have to see how it goes. Eric Bosshard: Okay. That's helpful. And then secondly, just curious on your inventory situation and perhaps, the channel inventory and as much as you have visibility to that, your sales are up a good bit. Your inventories are down year-over-year on your balance sheet. How do you think about rebuilding inventory, your inventory or channel inventory? How important or relevant is that? And when do you think that might happen? James Brunk: I'll start with the inventory sequentially. As I noted, we did increase by about $84 million, which is impacted by a combination of the volume inflation and FX. And if you remember back in February, we talked about that we thought the inventory would increase somewhere between 5% and 10% from 2020 year-end to '21 year-end, we would now expect that to actually be more than 10% with the combination of the higher sales and inflation even though that we do believe that the turns will stay higher than historic levels. In terms of the channel inventory, we do believe the inventory remains low with most of our customers, and this should actually help the near-term demand. In addition, we are working, obviously, to try to improve and increase our service as we go through the quarter as well. I spoke to several of our large customers this week, and their businesses is as strong as some have been in business for 40 years. It's as strong as I've ever seen it as it. The customers, some of them are being limited by their ability to install at most of them. So in addition, so we haven't been able to fill the channel like they would like. And our service, instead of being immediate, in some cases, it's taking a little while to get there. It's not impacting them that much because they couldn't install it if we could ship it all the more. So I think the point is that the backlogs are good, the demand is good. And we have to get them aligned and it should be good through the second quarter. And at this point, I can't see why the third quarter wouldn't be also good. Operator: Your next question is from the line of Truman Patterson with Wolfe Research. Truman Patterson: Just wanted to follow up on Flooring Rest World margins. Very strong op margin in 1Q at 21%. And Jeff, you suggested that we shouldn't use this kind of 21% as a new base going forward, right? But when I look at the second quarter, it seems like you all should still be generating very strong leverage from the sales growth. So I'm just hoping you can help walk us through or frame some of the costs that might be coming back online in the back part of the year, the European vacations. Just seeing if you can give a little bit more color there. Jeff Lorberbaum: Okay. The -- for the first quarter, one is that the sales are stronger, just as we said or everything else coming into it. So -- but we do see the sales and margins increasing all year Flooring Rest of World. As we said, it benefited from lower marketing expenses. So we're going to have to ramp up the marketing expenses as we go through the year to higher levels. So that's going to impact it. You're going to have product mix was really favorable in the first quarter, and we don't see that maintaining itself in the mix between different channels and products. And then the increased days also helped by getting greater leverage through it as we go through. But I mean the margins for the year are going to be better than last year. They just won't be at that level as we go through. The third quarter, if you go back historically and look at the business, You'll see that the Rest of World margins and sales, the second quarter is the highest usually for the year, and it's because of those vacations. If you go back and look at historical, you'll see a trend line that you should use as a base to start. Truman Patterson: And for clarity, you were specifically talking about margin expansion for the full year, not necessarily each quarter? Jeff Lorberbaum: On rest of world. Yes. That's correct, Truman. Truman Patterson: And then on LVT, it seems like you're making some pretty good progress on the internal manufacturing, both the U. S. and Europe. But could you remind us again how much capacity in dollar terms you think you'll be out when everything is running at full capacity? And Part B, just along with your third-party LVT imports, any idea what your market share might be running at in LVT in the U. S.? James Brunk: So our manufactured capacity is over $1 billion, and we get it all optimized and we're headed towards that is at. We're using imported supply to give us additional capacity that we need and broaden the marketplace. We're reviewing long term, what we do long term to go from here, we haven't concluded at this point. What else? James Brunk: I would say right now, Truman, we are growing with the market in the U. S. And even though we still have shared gain. Jeff Lorberbaum: We're not 100% sure what the market is, but we think we're growing at least as fast as the market. Operator: Your next question is from the line of Justin Speer with Zelman & Associates. Justin Speer: One question I had in terms of mapping out future plans. I know maybe you can't speak to details, but rewinding a few years. You've made the decision to do a lot of greenfield investment, internal investment, I guess, as opposed to going out and doing a lot of M&A. I guess as you look at it today, how should we think about maybe prospective growth projects? And maybe give us a sense for the magnitude -- range of magnitude of potential CapEx projects and/or M&A in terms of capital priorities? James Brunk: I think you're ahead of us a little bit. We're in the middle of this study. Some of the things from the first time we put in new machinery that hadn't been run by anybody was a learning curve. We went into new markets in products like countertops we never made before. We went into new geographies. We put up plants in Russia in a new product category, we had no more no customers. So it took us longer to get them. But I mean we put in port -- ceramic countertops in Europe. It's in our plan to expand it. Our Russian vinyl plant, we just put a third shift on, just making as much money as anything else that we have in the business. So when we got them all together, it just took us longer. LVT, were in the last steps of it to get it up where we want to. So when you greenfield do stuff outside the normal, it's going to take longer. We haven't put the plans together. So far, the plans are all around how to expand existing businesses in existing geographies with an existing equipment that's operating. So we don't anticipate having the same things to overcome. On the other side, we're also looking at what can we do to step change the business at the same time. So we haven't got far enough along on that under the side. We really didn't expect the economies in the business to be doing as well this year, and we're really looking at things we've planned in '22 and '23 and pulling them in. Justin Speer: That's helpful. One other question I had is just that I think the topic that you are right now across most of the earnings calls has been supply chain and commodity prices and put transportation prices. Is there any context you can give us in terms of what your commodity basket is up and maybe when you expect the most, I guess, extreme part of that year-over-year headwind to flow through your income statement? So I guess the two questions, how much is your basket up? And when do we start seeing the most extreme part of that at a lag into your P&L? James Brunk: So we're just like everybody else has started rising in the fourth quarter. We have about 3.5 to 4 months of inventory, call it, round numbers, so it flows through then. So some of it hitting in the first quarter. The biggest part is going to show up in the second quarter, which we're trying to get the prices aligned with it. And in the third quarter, is going to be more of it, and we still don't even know how high it's going to inflate is it. So they're all working through. We think we've got the pricing in the marketplace, the time to hit when it's going to show up in the P&L, and we're doing everything we can to manage it as we go through. Justin Speer: And last question -- I'm sorry. James Brunk: The increase in the thing -- we think we're raising things around numbers, 3% to 8%, and there's some things that are 25%. So it's all over the board. Justin Speer: And is the reception to these price increases consistent across all categories? James Brunk: The marketplace is pushing prices through everywhere, all our competitors, and we have the same increases in raw materials. For the most part that we said, the supply through the channels are low. So it's easier than the historical to push them through at this point. Operator: Our next question is from the line of Michael Rehaut with JPMorgan. Michael Rehaut: First, I just wanted to get a little better sense of price mix for the different businesses. And more specifically, thinking about mix here, which has been an issue over the last year or two, I would say, particularly more in Ceramic and Flooring North America. Could you just give us a better sense? Obviously, when you talk about price mix on the whole. You've had certain price increases in the market and that influences the price part of price/mix. But if you just give us a sense of how mix itself is going for both Ceramic and Flooring North America? And if that's changed at all so far this year versus the prior year or two? Chris Wellborn: Michael, I will just comment on ceramic. One of the things that is impacting mix at the moment is we have a stronger residential business and the commercial business is just starting to come back. And typically, our pricing would be a little higher on the commercial side. James Brunk: So that's also impacting the other -- where we have large commercial businesses, the commercial is doing better, but it's still way below where it was. And in all the businesses, the commercial has higher margins because the products are more differentiated. So we have significant opportunity over the next, I don't know it's going to be 1 year, 1.5 years as those move back to normal, our higher-margin product categories there. So that will help everything. Michael Rehaut: Look, and I appreciate that. I mean, I guess, also what I'm thinking about here is within the residential spear, over the last couple of years with LVT coming on, that's caused some mixed challenges in your other flooring categories like carpet or ceramic perhaps to better compete with LVT. So I was wondering within the residential product portfolio as well, if you've seen any change in mix for the better or worse or if it's stabilized? James Brunk: I'll see if I can answer that. It's much more complex. So what you have is things going on. So in the carpet business, you had polyester carpets, which are lower-priced carpets growing as a share of the market. So that's impacting the mix. Second is at the moment you have different channels growing. So the new construction business is growing rapidly, and it tends to use lower quality products than the remodeling part of the business. The remodeling part of the business is picking up and doing well, and that's helping the mix in the other direction. And then you have the commercial side, which has the highest margins of the -- versus it. And the sales are low, so it's impacting the mix as you go through it. They're all moving at the same time, and then we'll just have to see how they evolve. Michael Rehaut: Okay. But just no thought in terms of the overall net impact? Jeff Lorberbaum: We're expecting the mix to improve through the year. There's a question is the remodeling business comes because what happened is that the modeling is higher margin will build it. The builders picked up earlier and the remodeling piece is doing better. So we're hoping that we're going to get a mix improvement as we go through the year. Chris Wellborn: And couple that, Mike, with commercial improving, you'll get also the benefit of the favorable mix as well. Michael Rehaut: Right. No, that's helpful. Just secondly, I guess, on the second quarter guidance, you've talked a little bit about how you expect the Flooring Rest of World margins to maybe come in from this 21%. But in terms of sales versus margin, you've talked about increasing your production rates. There's still a lot of pent-up demand out there. You won't be in the summer months that impact your European businesses. So is it fair to expect sales on an absolute dollar basis to be greater in the second quarter -- at the second quarter should be greater than the first quarter, all those things considered? Jeff Lorberbaum: Yes, the second quarter should be higher than the first quarter. I won't have the same differential on the piece because you have the 5% more days than the first one that you didn't have sort of comparisons versus historical are exactly the same as it. But we expect the sales to go up at the same time because the inventories are still low. We're limited to how much we can ship out. There's it also, but we're trying to get the capacities up. And then you throw on top of it, you have the supply piece, which we're not 100% sure how much we're going to get. Other than that, it's easy. Operator: Your next question is from the line of Matthew Bouley with Barclays. Matthew Bouley: I actually wanted to follow up on the last 1 around seasonality. It was touched on earlier with the margins into Q2, given what you're implying. I appreciate everything you said, the unusual seasonal strength of Q1 and the shipping days issue. But is there anything else when talking about the margins that might be a greater sequential headwind? And specifically, I'm thinking of price cost is just being materially different in the second quarter versus what you got in the first quarter. Chris Wellborn: I'll just comment on the -- again, on Flooring Rest of World, Q1 benefited from lower marketing expenses, improved product mix and increase days, which -- caused a greater margin in that business. Jeff Lorberbaum: For the SG&A and all the business is going to go up to support the higher level of sales, we're going to put more new products out. So it's going to go up where we should still get some leverage. We're trying to keep it below the volume increase, but we're trying to put enough in it to support not only this year but to keep the business increasing in next year as we go through. When you compare to last year, we were more stingy in the investments we were making because we didn't know what the economy was going to be. So that's going to increase, you need to think about the margins. The cyclicality of the piece, you have to keep -- when you look at first quarter versus second, you almost have to take 5% off the first quarter to compare it is it to get it in the same relationship before you start. And then I just keep reminding people that we've seen some of the models that they don't take into consideration, the European vacations, which affect both the Rest of the World and the Ceramic business in the third quarter is it. Chris Wellborn: And when you step back again for the full year, we expect strong improvement in sales and income, we'll see that leverage in SG&A, and then we'll also get the operational improvements as well. Matthew Bouley: Understood. Second quick one is just on the production rates in the quarter, seemingly high and above normal seasonality. I'm just curious on how that might impact your fixed cost absorption this year relative to normal? Does that therefore mean that the incremental margins on volume might be higher than it typically is as you deliver on these inventories you're producing today? Jeff Lorberbaum: It does help, and it will continue to help. Now we haven't talked about all the stuff going on even where we are with COVID in pieces. We still have higher absenteeism. The labor is not as so hard to manage. We're paying overtime to get people in. So there's other costs that are also impacting the business, trying to get as much volume through the place. And then the fall was really as we come out of the year, the question is going to be last year, we ran hard all the way through the fourth quarter, all the way to the end. And the question is going to be, what does business look like when we get there. It's too early to tell. I'm hoping it's going to be strong all the way through. Operator: Your final question is from the line of Kathryn Thompson with Thompson Research. Kathryn Thompson: Focusing on the port congestion, which has been an issue for many companies along the value chain. Could you give us an update how you're managing this port congestion? And more specifically, thoughts on, are you increasing inventory or distribution space? How are you able to meet growing demand in light of the port congestion? And just help us understand the cost, increasing costs with the storage and transportation ability to plan for the future. Jeff Lorberbaum: Like everyone else, the delays are there and the costs are there. In some cases, the freight costs are 4 times higher than they were in what we call normal or where they were. So there's a huge impact on the cost pieces that have to be added into the products. Then the delays are anywhere could be four weeks to 8-week delays in it. We are ordering things earlier to try to get them in line the -- it's getting a little better as the stuff starts landing from what we have, but we're still chasing it as we go through. And at this point, we're assuming that the transportation is going to stay like this for quite a while, and we're trying to align the purchases and the timing of it to get them here. Let's see how it works out. Kathryn Thompson: Are you -- have you stepped up in renegotiated rates? Because one of the things that we're hearing is you're going back -- there's several different companies that are going back and renegotiating rates, and that has allowed them to get more space on ships. Has that been your experience? Jeff Lorberbaum: I can't say that we're getting more space. We are -- we have put together orders and the orders are getting put through -- put on the ships with delays in them, and we're adding the delays to the piece to try to align it, and the prices that we're paying there high. Kathryn Thompson: Okay. I'll follow up on that later. Then a follow-up on just the ripple effect of the Texas freeze. I understand the key products just resins are -- were significantly disrupted, where do we stand today in terms of the resolution with that? James Brunk: From the supply side, we're still in the middle of it. We have things that we're buying. I mean we're sending trucks down. It's coming off their lines and we're picking it up and moving it to in the same day to try to keep the plants running. So I mean, the problems are still there. It affects anything that's the chemical from glues in one business to resins in another. And the indications are that it's getting better. What the hard part is, all the customers like us are ordering more so the capacities are constrained even though they're getting better. And it's difficult to tell whether you're going to get what percent of what you're going to get, when you're going to get is it? And we're just playing as that it goes and begin for everyone we can get. Jeff Lorberbaum: We appreciate you being on the call. The markets are strong. We're improving our performance of our businesses. We're well positioned in the business, and we're managing all the disruptions as best as possible. And we think we're going to have a good year, but we have to manage through all these things, which makes a little more unpredictable because of the supply base and all the things we've been talking about. We appreciate you joining us, and Have a good day. Operator: This concludes the Mohawk Industries first quarter 2021 conference call. Thank you for your participation. You may now disconnect.MHK Ratings Summary
MHK Quant Ranking
Related Analysis
Truist Financial Analyst Projects Significant Growth for Mohawk Industries
Truist Financial Analyst Sets New Price Target for Mohawk Industries (MHK:NYSE)
Keith Hughes of Truist Financial recently made headlines by setting a new price target for Mohawk Industries (MHK:NYSE) at $140, a significant jump from its current trading price of $116.84. This adjustment suggests a strong belief in the company's potential for growth, with an anticipated upside of nearly 19.82%. This optimistic outlook was shared on Monday, April 29, 2024, and has caught the attention of investors and market watchers, as reported by TheFly. This new price target comes in the wake of Mohawk Industries' first quarter 2024 earnings conference call, which provided valuable insights into the company's financial health and future prospects.
During the earnings call held on April 26, 2024, key figures from Mohawk Industries, including James Brunk, the Chief Financial Officer, Jeff Lorberbaum, the Chairman and Chief Executive Officer, and Chris Wellborn, the President and Chief Operating Officer, presented the company's financial results and strategic direction. The call was attended by analysts from prestigious financial institutions such as Barclays, Baird, and Goldman Sachs, highlighting the significant interest in Mohawk Industries' performance and future. This level of engagement from the financial community underscores the relevance of the information shared during the call for both investors and analysts.
Mohawk Industries is currently trading at $116.86, reflecting a modest increase of $1.41 or approximately 1.22%. This trading activity took place within a range of $115.65 to $117.275 for the day. Over the past year, the stock has seen fluctuations between $76.02 and $131.19, indicating a volatile yet upward trajectory in its market value. With a market capitalization of around $7.44 billion and a trading volume of 25,975 shares, Mohawk Industries stands as a significant player on the New York Stock Exchange (NYSE).
The company's performance, as discussed during the earnings call and reflected in its current market position, provides a solid foundation for the revised price target set by Keith Hughes. The involvement of analysts from top financial institutions in the earnings call, along with the detailed financial metrics shared, offers a comprehensive view of Mohawk Industries' financial health and growth potential. This backdrop of positive financial indicators and strategic insights likely contributed to the optimistic price target adjustment, signaling confidence in the company's future performance and value to investors.
Mohawk Industries Earns an Upgrade at Deutsche Bank
Mohawk Industries (NYSE:MHK) shares rose nearly 2% pre-market today after Deutsche Bank analysts upgraded the company to Buy from Hold, increasing their price target significantly to $152 from $98, following the company’s reported Q4 earnings last week.
The analysts’ commentary highlighted that the firm's 2024 outlook report from December had pointed to the first quarter of 2024 as a potential pivotal moment for Mohawk Industries, especially if there was a significant improvement in visibility. Given the company's confirmation that demand is expected to pick up in the second half of 2024, coupled with new details on profit growth drivers, the analysts now see a more favorable risk-reward scenario warranting a Buy rating.
Additionally, the company's outlook for neutral price-cost dynamics, positive volume and leverage, and the possibility of more efficient production rates lead the analysts to anticipate double-digit EPS growth in fiscal years 2025 and 2026, following a stabilization of earnings in 2024.
Mohawk Industries Earns an Upgrade at Deutsche Bank
Mohawk Industries (NYSE:MHK) shares rose nearly 2% pre-market today after Deutsche Bank analysts upgraded the company to Buy from Hold, increasing their price target significantly to $152 from $98, following the company’s reported Q4 earnings last week.
The analysts’ commentary highlighted that the firm's 2024 outlook report from December had pointed to the first quarter of 2024 as a potential pivotal moment for Mohawk Industries, especially if there was a significant improvement in visibility. Given the company's confirmation that demand is expected to pick up in the second half of 2024, coupled with new details on profit growth drivers, the analysts now see a more favorable risk-reward scenario warranting a Buy rating.
Additionally, the company's outlook for neutral price-cost dynamics, positive volume and leverage, and the possibility of more efficient production rates lead the analysts to anticipate double-digit EPS growth in fiscal years 2025 and 2026, following a stabilization of earnings in 2024.
