Mohawk Industries, Inc. (MHK) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning. My name is Twanda, and I will be your conference operator today. At this time, I would like to welcome everyone to Mohawk Industries Second Quarter 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, July 30, 2021. James Brunk: Thank you, Twanda. Good morning, everyone, and welcome to Mohawk Industries' quarterly investor 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 second quarter results. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities 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 the discussion of non-GAAP numbers. For a reconciliation of 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? Jeffrey Lorberbaum: Thank you, Jim. In the second quarter, we generated revenue of approximately $3 billion the highest quarterly sales of any period in our company’s history. Our sales increased significantly over last year when the pandemic interrupted the global economy. Our adjusted EPS of $4.45 was the highest on record for any quarter. Our success is the result of the extraordinary efforts of all of our team members across the world that shown a dedication and resilience to overcome the challenges that we have faced. We greatly appreciate what they have been able to achieve. Our second quarter results were significantly stronger than we had anticipated across all our businesses with sales building on the momentum from our first period. In the quarter, our operating margin expanded to their highest level in the last four years as we leveraged our operational and SG&A expenses. The actions we have taken to simplify our product offering, enhance our productivity and restructure our costs are benefiting our results. We have delivered almost $95 million of the anticipated $100 million to $110 million in savings from our restructuring initiatives. Across the enterprise, we continue to respond to rising material, energy and transportation costs by increasing prices and optimizing manufacturing and logistics. During the quarter, most of our manufacturing ran at capacity or we were limited by material supply and labor availability. Raw material constraints in many of our operations led to unplanned production shutdowns during the period. Overall, we successfully managed interruptions that impeded our normal operations as well as regional manufacturing and customer closings related to COVID regulations in local areas. Our inventory levels increased slightly in the period, primarily reflecting higher material costs. Rising freight costs and limited shipping capacity impacted our material costs, availability of imported products, local shipments to customers and international exports. Presently, we do not anticipate near-term abatement of these constraints. James Brunk: Thank you, Jeff. For the quarter, our sales were $2.954 billion, an increase of 44% as reported and 38% on a constant basis. All segments showed significant year-over-year growth versus Q2 of 2020, which was the period we are most impacted by the pandemic shut downs. Gross margin for the quarter was 30.5% as reported or 30.7% excluding charges, increasing from 21.4% in the prior year. The increase in gross profit was a result of higher volume and productivity, improved price mix, reduction of last year's temporary shut downs due to the pandemic and favorable FX partially offset by the increasing inflation. SG&A as reported was 16.9% of sales or 16.8% versus 19.7% in the prior year, both excluding charges as a result of strong leverage by the business on the sharp increase in volume. The absolute year-over-year dollar increase was primarily due to higher volume, normal operating costs previously curtailed by the pandemic, impact of FX, increased product development costs and inflation. Operating margin as reported was 13.7% with restructuring charges of approximately $7 million. Our restructuring savings are on track as we have recorded approximately $95 million of the planned $100 million and $110 million savings. Operating margin excluding charges of 13.9%, improving from 1.7% in the prior year, the increase was driven by the stronger volume, improved price mix, productivity actions, the reduction of the temporary shut downs and favorable FX, partially offset by the higher inflation and increased product development costs. Christopher Wellborn: Thank you, Jim. For the period, our Flooring Rest of the World segment sales increased 68% as reported and 50% on a constant basis. Operating margins expanded to 19.7% due to higher volume, pricing and mix improvements and a reduction of COVID restrictions, partially offset by inflation. Flooring Rest of the World outperformed our other segments with all their major product categories improved significantly as residential sales expanded in all regions. We have implemented multiple price increases in most product categories to cover inflation in materials and freight. Raw material supplies are problematic and have impacted our LVT production and sales the most. We anticipate material and freight challenges will continue to impact our business in the third quarter. Sales of our high-end laminate continue to grow dramatically as our proprietary products are being widely accepted as a water-proof alternative to LVT and wood. We are beginning to introduce our next-generation of laminate at premium levels with collections featuring handcrafted visuals. We are increasing our production in Europe with new capacity coming online and further capacity expansion projects are being initiated. Our laminate business in Russia and Brazil are growing strongly and as we enhanced our offering and expand our distribution. We recently completed the acquisition of a laminate distributor in the UK that will improve our position in the market. Our LVT sales growth was strong during the period and would have been higher if material shortages had not interrupted manufacturing. To compensate for material inflation, we have increased prices and we expect further increases will be required as our costs continue to rise. We are significantly expanding sales of our rigid LVT collections with our patented water-tight joints that prevent moisture from penetrating the floor. Our manufacturing operations have made substantial progress, improving throughputs, material costs and yields. Our production in the third quarter will continue to be limited by material availability. Jeffrey Lorberbaum: Thanks, Chris. The global economy should continue to improve due to low interest rates, government stimulus and the success of COVID vaccines. Around the world, flooring sales trends remain favorable with residential remodeling and new construction at high levels and commercial projects strengthening. In the third period, we expect our strong sales to continue, with our typical seasonal slowing from the second quarter. We will expand the introduction of new products with additional features and increase our investments to enhance our future sales and mix. Material, energy and transportation inflation is expected to continue and will require further pricing actions to offset. Most of our facilities will operate at high utilization rates though ongoing material and local labor constraints will limit our production. Our Global Ceramic and Flooring Rest of the World segments will observe their European vacation schedules in the third quarter, which reduces production and increases costs in the period. In many countries, future government actions to contain COVID remain a risk and could impact our business. Given these factors, we anticipate our third quarter adjusted EPS to be between $3.71 and $3.81, excluding any restructuring charges. We entered this year with uncertainty about COVID, the economic recovery, home renovation and new construction. Our business is stronger than we had anticipated, and we are increasing investments to support additional growth and improve efficiencies. Longer term, housing sales and remodeling are expected to remain at a historical high level, apartment renovation should accelerate as rent deferment expires and investments in commercial projects should continue to strengthen. We are expanding our operations and introducing new innovations to maximize our results. Our balance sheet is strong, and we are exploring additional internal projects and acquisition opportunities. We'll now be glad to take your questions. Operator: Thank you. Our first question comes from the line of Eric Bosshard with Cleveland Research. Your line is open. Eric Bosshard: Good morning. Jeffrey Lorberbaum: Good morning. Eric Bosshard: Wondering – two things, first of all, in terms of the increased capital and the increased capacity investments that you talked about over the next 12 to 18 months, you've got some stuff that shows up at the end of this year. But in terms of product categories or regions, where you have the most conviction, where are you adding capacity? Jeffrey Lorberbaum: We are adding capacity in the constrained parts of the business all over the world. So we're adding – our production has been – but at the same time, one other thing – we're still limited by constraints. So some of the limitations are labor and materials rather than capacity to fix to run it and then we also have the problems with the delayed products from imports. The $650 million that we're going to put in, the biggest pieces are in laminate, ceramic and countertops, but there is a number of other areas that they include. And when you get through that, the capital forecast for this year is being raised to $700 million and $450 million of the $600 million will be in next years. Eric Bosshard: Okay. That's helpful. And then secondly, in terms of the third quarter, the earnings guidance is helpful. Just wondering if you could help us at all in terms of the sales guidance, your commentary of typical seasonal slowing, does that suggest that we should look at 3Q revenues relative to 2Q revenues to reflect the normal 2Q to 3Q step down? Or is there something that would change the way that that path has traveled historically? Jeffrey Lorberbaum: In the third quarter we expect sales trends to continue from the second quarter. The operations will still run strong. We're assuming the business in residential keep going with commercial improvement. The European – the non-U.S. business, especially Europe always slow with a normal holiday period as we go through. And you might not know, but some of the non-U.S. businesses over time have become a larger part of our results and the holidays have become a bigger impact over many years as we keep expanding outside the U.S. And with that we still have material supply, labor, transportation that all are constrained with business. We don't think the pricing actions we have are enough. Our inflation keeps coming. So we expect to keep putting in more increases in prices in it. And then just to try to – other things, as you think of the third quarter, what you have is manufacturing costs in the United States are impacted by holiday in the July 4, which is in the third quarter rather than second. You have the holidays, which impacts not only the cost operating, but the sales also drop off as we go through. So that – I mean that's the biggest pieces of it, best I can lay out for you. Eric Bosshard: Thank you. Operator: Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open. Michael Dahl: All right. Thanks for taking my questions. Jeff, first question, I wanted to follow-up on the CapEx and just clarify, I think you said $450 million of the $600 million. I don't know if you meant $450 million of the $650 million, but just trying to figure out that. Next, I guess the question would be when you look out to 2022 between the carryover from these new investments and your normal CapEx. How should we be thinking about CapEx in 2022? And to the point about not all of these constraints are physical capacity, some of it’s labor, some of it’s materials. I guess, CapEx is a very long-term decision, and these are potentially in some cases temporary constraints or even temporary demand tailwinds. How do you think about that balance and the conviction to add the capacity? Jeffrey Lorberbaum: The pieces that are temporary constraints, we're not increasing those. We are leaving those alone. The things that we are increasing, the things that we have, exceeded our capacity. What happened is, this year the sales are much higher than we anticipated coming into the year. So with that, we hadn't planned on having the capacity to support the growth that we're having this year. And so to get to the money, first is the $650 million is in addition to the capital that we had in the plan for this year. So this year, the capital before was around $550 million, if I remember. James Brunk: Yes, that's correct. Jeffrey Lorberbaum: So I'm not sure I’ve got the number exactly right, but it was around $550 million. Of the $650 million that will raise this year to $700 million and then approximately about $450 million of that of the $600 million will go over to next year. And then we're going to go through our final planning in the rest half of this year, we haven't finalized the budget for next year yet. So we'll have to decide what we're going to add more or less than we've already done as we go through. And again, just all through the original presentation we made, we tried to lay out for you the different pieces. The ceramic businesses in Mexico, Brazil, Russia, Europe are all being increased. We have the laminate businesses in the United States and Russia, I mean, Europe are all being increased. The countertop business is being increased in the United States. And there's a number of other ones that are here. So we're putting the business in shape to grow more in the future and support what's going on in the world. Michael Dahl: Okay. That's really helpful. Thanks for the additional detail. My second question, just back on the price cost. I guess your comments that the current pricing actions aren't quite enough given the escalation and costs and you're implementing more pricing. How should we think about the lag and what's embedded in guidance? Do you assume that will be price cost negative in 3Q before a catch-up in 4Q? Will you stay ahead of costs in 3Q or is it neutral? Just a little more color on kind of order of magnitude of cost and whether or when you'll be back to price cost neutral or positive? Jeffrey Lorberbaum: Well, let's start out with the second quarter. We were able to cover the inflation, which you'll see in the numbers that he publishes later. We’ve raised prices across the business. We keep announcing new increases. Our energy, materials, freight continue to rise. We don't know where it's going. Every week we wake up with new increases, so we'll keep adjusting as required as we go through. And so we think we've announced enough for what we know about at this point, and the timing of them and how they work together. We put all that into the estimate that we think we're going to get them close. And then with a mix thing, you do see as we raise prices in the marketplace, some customers in both residential and commercial have budgets – and have budgets. They start trading down looking for something that stays in the budget. So that's just a normal process that occurs in all of this. Michael Dahl: Okay. Thanks, Jeff. Appreciate the color. Operator: Thank you. Our next question comes from the line of Adam Baumgarten with Zelman. Your line is open. Adam Baumgarten: Hey. Good morning, everyone. Jeffrey Lorberbaum: Good morning. Adam Baumgarten: Just maybe touching on the laminate business. It appears there's been a really kind of meaningful surge in demand there over the last – it seems like year or so. How much of that is due to some of the technological advances that you've seen and how much of that is due to maybe shortages in LVT supply? Jeffrey Lorberbaum: Let's start out with first. What happened is you had LVT growing dramatically. And one of the main features of it was waterproof. And what's happened is in the marketplace, there are multiple options. And if you go into retailers today, they start talking about waterproof flooring as the category and they start showing products of which our laminate with the technologies we have is a good or better alternative to many other ones in the waterproof category. So that's causing it to grow. It's also been growing and going into different channels, it's being used. If you watch any television shows, the remodeling pieces, they are using the laminate and remodeling in new houses today, which they buy at a much higher rate than it had in the past. And then separate from all of that, we really do have unique technologies that give us differentiated features and visuals that separate our products from the market, and we have a much higher portion of the premium market because of it, other than the U.S. and Europe. James Brunk: Which is the reason why we're adding the capacity at the end of this year in the U.S and that's why we had a plan as part of the $650 million that Jeff talked about both in the U.S. and in Europe in the future years. Adam Baumgarten: Got it. Thanks. And then just on that mix down comments you made Jeff, are you seeing it more pronounced in certain categories over others? Jeffrey Lorberbaum: It's hard to tell. I mean, it's not moving around and some people just have budgets and they trade down. In other cases, if you've seen the same thing and people buy homes, the remodeling part of the business tends to be a higher value customer in new construction, whether mass building home and then the apartments are lower. So there is all kinds of mixed changes going on. Adam Baumgarten: Got it. Thanks. Operator: Thank you. Our next question comes from the line of Susan Maklari with Goldman Sachs. Your line is open. Susan Maklari: Thank you. Good morning, everyone. My first question is, Jeff, I know you gave some third quarter guidance in your comments. But can you help us think about how the third quarter versus the fourth quarter may come together this year just given the comps that we're facing and some of the seasonality that you talked about in the business. Any kind of color or guidance there for the next few quarters would be helpful. Jeffrey Lorberbaum: So again, in the third quarter, we do expect the same sales trends to continue. Operations are running again at the high levels. With all the constraints, we don't know how they're going to happen in the third quarter, we built in our best guesses of supply and labor and transportation. But it's a moving target. As you go from there into the fourth quarter, it is typically softer. As people go into the holidays, they don't tend to buy as much flooring during Christmas. And then this year we have 6% less days and a 6% less days will impact the sales and the margins as we lose the absorption from the lower days in the period. Then this year versus last year and this is a guess, because we don't know what's going to happen. We're expecting at this point a more normal seasonality with more increased vacations people taking with lower holiday spending on remodeling and reduced utilization of the plants. But we're going to have to see how it happens at the end of the year compared to last year when we had the rebound that we did. But it’s difficult to predict at this point. And then we're also – as we get into the end of the year, last year, we constrained the new products dramatically, and now we're going to invest more in new products and sales in order to enhance next year. Susan Maklari: Okay. That's very helpful color. Thank you. My follow-up question is, in the last few quarters, you have purchased about $400 million or almost $400 million of your stock. When you think about the capital allocation on the increased spend on capacity that you announced today, where do buybacks kind of fall within that? What's your appetite to continue buying back the stock at these levels? James Brunk: Well, given our balance sheet, we have a lot of options. And at the moment, we bought $140 million last quarter. I think we have about $170 million still open on the acquisition, but the primary pieces are where we started the constraint businesses and reducing costs, which is the $650 million. We'll do more of that when we finalize the plan for next year and the second half of this year to keep broadening the product offering innovation. We found a few bolt-on acquisitions. We'll see more of those. And then we're looking for other acquisitions to either step change the business or go under new markets or align product categories and then share facts, one of the options now. For the balance sheet, we can do more than one thing. Susan Maklari: Okay. All right. Thank you for that. Good luck. Operator: Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Your line is open. Michael Rehaut: Hi. Thanks. Good morning, everyone. Just wanted to clarify some of your earlier comments, Jeff, around how to think about the third quarter and you mentioned that you expect sales trends to continue, but at the same time, an increase in vacation time, particularly in Europe. I think there might be an ability to misinterpret those statements. If you say sales trends, it's a little bit more qualitative and maybe even on a year-over-year basis. But I think people are just trying to understand on an absolute dollar basis, are you suggesting that on an absolute dollar basis 3Q revenue should be similar to 2Q or indeed as I think you’re trying to say at least in Global Ceramic and Flooring Rest of the World, we should be modeling in some type of sequential dollar decline due to the vacations. Jeffrey Lorberbaum: I think what's confusing is I say the sales trends are continuing, which means I believe the business has the same strength that will go like that. The second part is there is a seasonality, which I'm not sure all of – everyone understands, our European businesses – European and non-U.S. businesses become a much larger part of our business. They impact the business more today than they did five years ago or before because of the acquisitions and enhancements of the business we've done. So when they stepped down their whole category steps down, which will reduce the sales level and total from the third quarter and have a negative impact on the sales and margins, and it will be lower because of it as it has been in prior years. And it's not the business changing, it's the normal seasonality. Now separate from that, last year was also unusual. And what happened last year with COVID, we and our plants and our facilities and our customers, we shutdown a lot in the second quarter. And what happened is many of the people – we have the people taking their vacations in the second quarter. So when the business started getting better in the third quarter, we didn't do the normal shutdowns because we use the vacation phase and things in the second quarter. And then the same thing happened. People didn't go on vacations like they did. So the third quarter was unusually high because the whole vacation structure of our production, our customers, vacations for people was different. So the comparison is unusual in this third quarter last year, the third quarter of this year. Michael Rehaut: Okay. I think I understand. The second question, I just wanted to circle back also and clarify a little bit to the best possible on the CapEx outlook for 2022. It sounds like you're basically saying that of the $650 million, $450 million is expected next year. So you're doing roughly $200 million of that this year. So that's a delta of another $250 million higher sequentially year-to-year. Are we either take from that, that the total CapEx all-in should be something closer to $900 million to $1 billion? Jim, I don't know a better way to answer this is just kind of reviewing with us your basic maintenance CapEx, but I think we're looking at a decent range of outcome I think at least as people are trying to figure this out. So any type of better range would be helpful. James Brunk: You understand when we told you. The plan next year – what we did this year, we stopped in the middle of the year and said, this is not as we have planned. And we can't wait until our normal planning period in order to start changing the capacities to support our business. So we took everybody and we identify the things that we knew we wanted to do and what I hadn't did it. We still have to go through the planning process to decide what we want to do more than that next year and we haven't done it. There is the normal maintenance and safety, which is typically, call it around $200 million, it could be more or less. And then on top of that, we haven't decided yet, so we can't give any direction. Michael Rehaut: Okay. One last clarification on the tax rate, if I could. You guided to 21.5% to 22.5%, does that include the benefit in the second quarter because that would kind of point you to a mid-20s tax rate or does it exclude that benefit? Jeffrey Lorberbaum: Excludes that benefit, so the non-GAAP rate in Q2 was 22.5%, the full-year is the 21.5% to 22.5%. I would expect based on seasonality of the tax rate for Q3 to be slightly higher than Q4. Michael Rehaut: Great. Thank you. Jeffrey Lorberbaum: You're welcome. Operator: Thank you. Our next question comes from the line of Keith Hughes with Truist. Your line is open. Keith Hughes: Thank you. You had talked in the release about second quarter being a record quarter, which is correct. If you look within Flooring North America, your revenues are bad are at slightly above the 2017, but margins are still below. Just my question is what's the difference first then? What do you need to do to get those back up to the historic peaks and operating margin? Jeffrey Lorberbaum: The margins did improve, as you said, from volume pricing and costs. The things that are going on, so now the – in the peak period, we had commercial sales, which are higher. We didn't have all this inflation we're fighting now. We didn't have labor shortages. We didn't have material shortages. We are running short runs in the factories trying to keep the service as well as we can, which is causing the factories around creating inefficiencies as we go through. And in addition, in some of the markets, the competition is more fierce today than it was in. Keith Hughes: Okay. Thank you. Operator: Thank you. Our next question comes from the line of Stephen Kim with Evercore. Your line is open. Stephen Kim: Thanks very much guys. Nice results. And appreciate the outlook here. The capacity expansion program, wanted to get a sense for how much of a sales opportunity you think that $650 million might offer you? And then, as it does come in over the next 12 to 18 months a lot of times there's some startup costs that come with that. And just want to make sure we're thinking about that modest offset properly. I remember just looking back from 2014 to 2017, you kind of ran $10 million to $15 million a year, not a lot. And I just wanted – I know you executed really well during that period of time. Just want to make – get a sense for what the offset might be as this capacity comes online, is that a reasonable range to be thinking about? Jeffrey Lorberbaum: The $650 million will translate into somewhere around 6% to 7% of our total business sales, round numbers to give you a high level direction. And yes, there's always a start-up costs that come along with it. On the other hand, all of this is known technologies being put in existing facilities or existing businesses could be a building next door, not too far away. So we shouldn't have some of the learning curves that we had to pay for the other ones. Stephen Kim: Yes. That's very helpful. Yes, it makes a lot of sense. When we talk about Flooring Rest of the World, obviously it's been a big contributor to the positive upside enterprises, we've been seeing – for about four quarters now, I think this business has been really the fastest grower. And I know this is an area that has many different business lines in it. I know you've called out a number of them. And I know that you've also added a lot of capacity there over the years. But the step-up that we've seen in the last four quarters is pretty significant. And so what I wanted to try to understand is do you attribute the step-up we've seen in sales, in Flooring Rest of the World excluding the impact of acquisitions, but just the actual step-up in organic. To be – the bringing on of certain capacity or certain business lines that were not there previously or do you see it as just post-COVID, there was a big surge in demand really pretty much across the business and your capacity was there waiting for it, and it just got still because of this generalized demand. Jeffrey Lorberbaum: As you said, the Rest of the World performance is strong. Sales and income are at high levels. The operations – most of the operations are running near capacity, which is helping our cost structures. Our product mix is improving from actions we’ve been taking one after the other to improve the mix. We are aggressively trying to raise prices to align with the pieces as we go through. Then you have different parts. So you go back to some of the investments we put in over the years. We put a new plant in Russia in sheet vinyl. Well, that plant is now running seven days a week. Two years ago – it started up a few years ago. We bought the Australian, New Zealand business. We've been putting efforts to change their product line, upgrade their product offering. They were just trying to get in hard surface. We have the hard surface business. We put in all kinds of new product offerings and pieces, and we're growing our share dramatically in hard surface in that marketplace. In sheet vinyl, we are the leader in sheet vinyl in the European market place. Most of our businesses in residential, it's doing well. We put a plant in Russia to make sheet vinyl, we talked about. And laminate, our laminate business we keep introducing new innovations. As we do that, we keep improving our mix. We also bought – when we bought IDC a few years ago, it's taken us a few years. They had a laminate business. We've been able to dramatically improve the sales and margins a bit over the years. The wood panel business that we have is running wide open. The margins are improving. It's at high level because there are shortages in wood panels. So it's at a high level. Our insulation business, we've put in multiple plants, we've acquired other ones. So we have a strong insulation business. And it's doing well, even though we're chasing really high chemical costs. So we're benefiting from a lot of things. Stephen Kim: Yes. Really just sounds like the fulfillment of your longer-term plan that you've had there and then executing. As we go forward into the future, it seems like there's still a lot of growth opportunities for Flooring Rest of the World. Should we be expecting that segment to continue to outpace the other segments on a volume growth basis? Jeffrey Lorberbaum: It's going to be hard to keep up the growth rates they've been at. Those are exceptional, what they're doing. We are investing in – the $650 million we're putting a new laminate line, which will add about $125 million to $150 million of new capacity in laminate. We keep investing in the other pieces. We're trying to grow it as much as we can. I don't think we can stay at the growth rates of that. And then one more thing in all the businesses is just to remember, commercial everywhere is low. Commercial is a higher margin business for us. And as the commercial business comes back, the margins in there are going to enhance the pieces and we have capacities that in some places only make commercial products. Stephen Kim: Yes. Not for sure. Yes, we have that to look forward to. Thanks. Appreciate it. Operator: Thank you. Our next question comes from the line of Kathryn Thompson with Thompson Research. Your line is open. Brian Biros: Hey, it’s actually Brian on for Kathryn. Thanks for taking my questions. I just wanted to start with – you mentioned that sales were significantly stronger than anticipated going into the quarter. I guess, is there any specific segment or product to call out here? Kind of is it a case that strong getting stronger? Or was there kind of more than expected momentum in areas that had previously been weaker, like say commercial? Jeffrey Lorberbaum: I'm sure we're like everybody else in the world given what's going on with COVID and what's happening and then have the huge uptick of people staying at home, huge housing resales, projecting forward how strong it's going to be or not. We projected what we thought it would be coming into the quarter and it surprised us how strong it was and maintained itself in the United States and across the entire world. And the same thing going forward, estimating and we talk about it in the fourth quarter. We really don't know if the business will stay strong like last year or go back to historical ways and fall off. There's a big difference in what can happen depending on which we see and our crystal ball is no better than yours. Brian Biros: I guess would you characterize it as the residential side was stronger than expected or the commercial or a combination of the two? Jeffrey Lorberbaum: The residential is driving the whole thing, but commercial is improving quarter-to-quarter and picking up. And I think the commercial is probably a little bit better than we had expected, but we had anticipated to getting better. Brian Biros: Okay. Understood. And I guess, second question. When I asked about labor, it’s labor shortages, and specifically on the installers, I guess we had a few of our contacts point to installers as their biggest concern for growth going forward. And how much of that is a concern for you guys, especially given the investments you're making to increase production? Understand, there's the demand level out there, but is there going to be the labor force at the installer level to support that growth in a year or two? Jeffrey Lorberbaum: We sure hope so, but you have it right. Everybody has – listen, labor is a problem with every company and every industry. If we could ship twice as much to our customers, they couldn't install it. So you're correct. There is limitation in the whole stream as it goes through. But for the most part, they're installing everything that we can ship. Brian Biros: Got it. Thank you. Operator: Thank you. Our next question comes from the line of Phil Ng with Jefferies. Your line is open. Philip Ng: Hey, congrats on a really strong quarter and great execution guys. Jeff, I guess, material shortages will certainly free up in time, so that will help. But you mentioned, you're sold out in certain products. So just curious how much headroom do you have for growth next year as you kind of ramp up some of this capacity? Jeffrey Lorberbaum: It's different by different businesses and categories. As you said presently in some of the businesses labor is a major problem and others it's transportation. We actually have stuff and can't get it moved around to the customers fast enough. In other cases, we have imported products that’s delaying it. We have capacity in some businesses – other businesses, pick one, Brazil, we're running wide open and we’re quoting dates, months out as an example. We're trying to improve our mix and we're trying to keep through passing the prices. But until we get the new capacity in the second half of next year, they're maxed out. And so we do have – that's an example of one. We have pieces like that. We have other ones that if we could get people to show up for work, that we could increase our production dramatically. These various ways of giving people money around in the U.S. is disincentivizing people. And sometimes when I get the checks that just don't show up for the next two days. Philip Ng: Got it. That's super helpful. Jeff, I was curious to hear what you're seeing and hearing from your different channel partners. We've certainly seen the builders ran orders lately and we've seen some normalization of trends in retail. So curious how have orders patterns been tracking between these channels and when we look out, is it going to have an impact on mix? Jeffrey Lorberbaum: Let's go through the pieces. We see the housing sales continuing at high levels. I know there is ups and downs in it, but relative to historical, it should continue at high levels. The houses that were purchased over the last year, they're all in various stages of remodeling. When you buy a new home – an existing home, you typically don't remodel the whole thing that goes in stages. So that'll take a while to play out going forward. You have some things with policies with the government. People who haven't been paying their mortgages, at some point some of those houses are going to turn over and that's going to increase the remodeling sales somewhat. You have people in the rentals that haven't been paying rents, at some point some of those are going to change over and they're going to have to remodel them for the next people. You have the commercial parts of the business. Companies are getting more confident on that, and they're starting to invest more. It takes time to put it in a budget, it’s time to start them. There's a void for awhile on new construction that got stopped. So there's going to be a void until it comes back. And there's a lot of upside in it. And it's a more profitable business because the products are more unique and differentiated. So all the trends look good. As far as we can see them on the other side, short-term, we don't know if we have enough materials to run the place tomorrow in some cases. And so we wake up and the materials are supposed to come in and something happens and we just shut the plant down. You come in and we have – people just aren't showing up for work like they normally do. The people we're hiring, it's more difficult to train and it takes longer and there's more turnover. So there are huge amount of moving parts and we're managing them all, but it makes day-to-day in the short-term hard to predict. Philip Ng: Got it. That's great color, Jeff. Appreciate it. Operator: Thank you. Our next question comes from the line of Laura Champine with Loop Capital. Your line is open. Laura Champine: Thank you. Jeff, I really wanted to follow-up on the comments you just made. It seems like your inventories are tight in terms of units because of all these production complications. Do you have line of sight as to when you'll have your inventories in unit terms back where you want them and what's the plan to offset these production difficulties? Jeffrey Lorberbaum: First, we are struggling with the labor we talked about and the material flows. What we expect to happen doesn't happen. And so we're making as much as we can given those constraints. And we're taking actions that we can take to influence them as best we can. We need the inventories higher in order to hit the service levels as you said. If the demand stays high, there's a chance that given all these constraints, we won't be able to build much inventory until we hit the end of the year or could be further. And it depends on the constraints and the availability. On the other hand, if something happens and the materials come in faster and we can get people to operate the facilities, we could increase the outputs. On the other hand, there's a positive, we really can't tell how strong the demand is going to be. And in our earlier comments, you heard me make, we don't know whether the end of the fourth quarter is going to look like last year and stay strong or it's going to go back to the normal seasonality that we see. So we make plans month-to-month, and we keep changing them as they happen. And I can't give you a clear answer because that's the reality of what we're living in. Laura Champine: Do you think that gross margins are sustainable given that you've taken a lot of pricing and that's got to be a tailwind, but you've probably given up some in productivity you've just mentioned? And how should we think about your gross margin trajectory into next year? Jeffrey Lorberbaum: The goal is to improve the business at the topline and improve the margins as we go through. The margins this year will be up substantially with the higher demand and improved costs. The second quarter was a really high period because everything was running wide open. As we go out next year, we think it's going to improve, but it really depends on demand, material pricing and competitive environment, which is really hard to predict these days. We think we're going to do better, but putting everything in place to do better. We are improving our own internal things that are under our control. We're investing in new things. We are expanding our production, where everything is limited and we're doing the right thing to grow the business. And if we get a little help from the world, we could be in a really good position. Laura Champine: Got it. Thank you. Operator: Thank you. Our next question comes from the line of Truman Patterson with Wolfe Research. Your line is open. Truman Patterson: Hey, good morning, and thanks for taking my question. First just wanted to touch on M&A. Could you all discuss the environment and the potential pipeline there? And could you just possibly balance these thoughts with the organic or the decision to invest in organic capital investments of the $650 million I imagine in the product categories you're expanding and just there's not a lot out there, but wanted to get your updated thoughts. Jeffrey Lorberbaum: The two are really not related. The internal investments are where we see the trends of our business, what we think the demand is going to be our ability to sell it in a marketplace and that's the basis of our investments. The acquisitions, we're continuing to investigate opportunities. The conditions are improving. There is a little less options at the moment because people perceive them that the business improving valuations are high so it's a little bit more difficult in this environment. As we announced, we have agreements to acquire some smaller bolt-on businesses. We are ready to buy the other businesses if we can identify the right ones at the right valuation that we think are good for our long-term. And if you have any suggestions, call me. Truman Patterson: Fair enough. Any key geographies or products? Jeffrey Lorberbaum: It's more around – we get the most benefit out of the ones that are in our present geographies that we can leverage between the two. Those give us the most benefits. For a longer term, going into new geographies with the right group, gives us a base to go into that business and we can use as a growth proposition to go into new markets. And then the same thing with new products. If we can find the right products in the same geographies that are related to us, that tie-in with what we know and how we do it, we can leverage them. And then we're still considering at some point, we think we could add another leg to the business and go on to another product category at some point to keep growing the business. So we have the right talent, we have the people and have the money, we just have to find the right propositions. Truman Patterson: Okay. Thanks for that. I'm just hoping on this next question that you can just give us either a tour around the world or your product portfolio. We're hearing a very strong pricing power and incremental price hikes in the channels. Just hoping you can maybe quantify some of that by product or geography. Jeffrey Lorberbaum: The pricing, let me try to answer it generically. All of the businesses that we have are having dramatic increases in costs. Our competitors are in the same position as we are. We also have limited materials and our competitors also have those same problem. So the market competition is in a spot where everybody is pushing it through more aggressively, given those conditions across the world. And how long it's going to last like that? I can't say, but as long as the businesses like it is, that's what's enabling us to push through the pricing. Truman Patterson: Okay. Thank you for that. Operator: Thank you. Ladies and gentlemen, in the interest of time, I would now like to turn the call back over to Mr. Lorberbaum for closing remarks. Jeffrey Lorberbaum: Business is in good shape. We think the conditions going forward are positive and we're trying to take advantage of the opportunities. We appreciate you listening and have a good day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.MHK Ratings Summary
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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.
