Mohawk Industries (MHK) 8-KMohawk Industries Reports Q3 Results

During the quarter, central banks around the world continued to raise interest rates to slow down their economies and reduce inflation. Their actions are affecting new construction and remodeling in both residential and commercial channels, postponing spending on new projects. In the U.S., mortgage rates have climbed to their highest level in more than two decades, which has suppressed the housing market and limited home renovation activity. In Europe, consumers are postponing large purchases like flooring as a result of higher energy costs, inflation and uncertainty due to the war in Ukraine. Our industry faces a greater impact from these pressures than other sectors given that most flooring purchases can be deferred. With the high fixed costs required to produce flooring, competition increases as the industry slows and participants attempt to increase their sales to maximize absorption. As a result, our average selling prices and mix have declined, with the impact offset by lower material and energy costs, restructuring benefits and process improvements.

The predicted timing of the housing sector recovery continues to be postponed, and we are managing the business to optimize our results and cash flow until it occurs. We are taking actions to increase our volumes while managing margins and operating expenses. We have launched differentiated collections, selectively introduced promotions and expanded our participation in the new construction channel. To further enhance our competitive position, we will shut down older ceramic production in Italy, and we are converting our U.S. rigid LVT production to a direct extrusion process. These restructuring initiatives will result in a non-recurring charge of approximately $55 million, of which $50 million is non-cash. When completed, these initiatives should improve our profitability by $30 million annually by enhancing our productivity, lowering our manufacturing costs and optimizing our production flexibility.

Our European expansions in insulation and porcelain slabs are currently in operation, and our U.S. premium laminate and LVT projects are continuing to start up. Expanded production in European laminate and U.S. quartz countertops should begin in the second half of 2024. As the integration of our acquisitions in Mexico and Brazil proceeds, we have consolidated general management, sales and administrative functions, while enhancing the companies’ product offering, operational efficiencies and customer base. While the Mexican and Brazilian markets are experiencing reduced demand and margins, we anticipate gaining additional benefits from our acquisitions as these markets recover.

For the third quarter, the Global Ceramic Segment reported a 0.5% decline in net sales as reported, or a 6.0% decline on a legacy and constant currency and days basis. The Segment’s operating margin was negative 32.5% as reported, or 8.0% on an adjusted basis, as a result of unfavorable price and product mix, temporary plant shutdowns, lower volumes and foreign exchange headwinds, partially offset by productivity gains. Our U.S. ceramic business outperformed due to our innovative product introductions and higher service levels. With this, we expanded our positions in the new home construction and commercial channels. Our investments in new decorating technology, polishing and mosaics are providing domestic alternatives to premium imported ceramic. To further expand our quartz countertop sales, we are introducing more stylized collections made utilizing new technologies that provide greater value. In Europe, retail traffic and new construction are being affected by economic uncertainty. To gain sales, we are responding with specific price promotions by geography and channel. Natural gas prices have declined more than 80% from their peak, and we have reset our pricing to align with energy costs. Sales of our premium porcelain slabs continue to grow, and we are optimizing our recent capacity expansion. In Latin America, we have reduced our cost structures to adapt to slower, more competitive markets, with Mexico being less affected. As we integrate our acquisitions, we are gaining customer commitments to expand sales across all channels and price points using the combined product portfolio.

In the third quarter, our Flooring North America Segment sales declined 11.7% as reported or 12.2% on a legacy basis. The Segment’s operating margin was negative 17.4% as reported, or 8.1% on an adjusted basis, as a result of unfavorable pricing and product mix, reduced volume and lower productivity due to the underutilization of plant assets, partially offset by lower inflation. Competition increased across all product categories, and, to enhance sales, we continued to invest in new products and merchandising systems to expand our retail presence. We also increased our participation in the new home construction channel with regional and national builders. We are implementing many projects to reduce costs, improve efficiencies and maximize material utilization. In residential carpet, to improve our mix, we are expanding our premium collections, which provide superior styling and features. For value conscious homeowners, we are increasing our environmentally friendly recycled polyester offering. Our sheet vinyl collections continue to perform well with budget-oriented consumers. As an alternative to PVC-based LVT products, we introduced a new resilient polymer core that is more environmentally friendly and scratch resistant. We are continuing to ramp up our West Coast LVT production and the new extrusion process in Georgia, with both expected to be substantially operational in the first quarter of 2024. We are expanding distribution of laminate in the retail and builder channels, and our new laminate collections have been well received as consumers seek premium visuals at accessible price points.

Historically, the flooring industry undergoes greater cyclical peaks and troughs than other building products due to its postponable nature. Our business fundamentals remain strong, and we will benefit from significant pent-up demand when the industry rebounds. Given the aging U.S. housing stock, more than 80% of homeowners who responded to recent JP Morgan surveys indicated they are planning renovation projects in the near term. In addition, after years of construction trailing demand, substantial new home building will be required for many years to come. Commercial activity will expand as the economic outlook improves. As the world’s largest flooring provider, Mohawk is well positioned to capitalize on these opportunities.”