Earnings Call: Q3 2020

Oct 30, 2020

Good morning. My name is Megan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries Third Quarter 2020 Earnings 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 I would now like to introduce Mr. Frank Boykin. Mr. Frank Boykin, you may begin your conference. Thank you, Megan. Good morning, everyone, and welcome to Mohawk Industries' quarterly investor conference call. Today, we'll update you on the company's 3rd 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 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 ks and press release in the Investors section of our website. In addition to Jeff and Chris, joining us today on this call is Jim Brunk, our Corporate Controller. As we previously disclosed, we received subpoenas from the Department of Justice and the Securities and Exchange Commission related to allegations in a class action lawsuit filed against us. With the assistance of outside legal counsel, our audit committee completed a thorough internal investigation into these allegations of wrongdoing and concluded that they are without merit. We are cooperating fully with the ongoing governmental investigations and will continue to vigorously defend against the lawsuit, which we do not believe has merit. I'll now turn the call over to Jeff for his opening remarks. Jeff? Thank you, Frank. Our 3rd quarter results significantly exceeded our expectations with sales recovering and operating income substantially increasing from last year's levels. Under continued pandemic conditions, people all over the world are spending more time in their homes and working remotely. Globally, this trend increased investments in home remodeling as well as driving new home purchases. All of our businesses and geographies were stronger due to higher demand and customers increasing inventory in our distribution channels. Flooring Rest of World delivered the strongest results in the quarter as our Northern European, Russian and Australian businesses were less impacted by the pandemic. Our Global Ceramic and Flooring North America segments also improved substantially, while being more affected by COVID and postponed commercial projects. Our laminate, LVT and sheet vinyl outperformed our other categories and our new plants improved their output and efficiencies. Fluctuations in worldwide exchange rates negatively impacted our EBIT by about $7,000,000 with declines in most currencies offsetting the strengthening Europe. During the period, demand for our products exceeded our productions and inventory declined by about $80,000,000 as we ramped up plants across the world. Our increase in manufacturing in the period was limited by challenges with hiring, training and capacity. To cover higher operating material and logistics costs, we have announced selective price increases in some markets and product categories. We've made significant progress on our previously announced restructuring actions and are in line with our planned schedule and savings. Though in response to higher demand levels, we have postponed some restructuring projects while we assess future conditions. Our business has responded to the COVID crisis as our focus has remained on keeping our employees safe. Throughout our offices, operations and distribution systems, we've implemented procedures that exceed the public health guidelines. We're tracking all identified cases, testing all contacts and successfully containing the spread within our operations. Throughout the pandemic, our people have collaborated to protect each other and support our customers around the world. Even with our improved performance in the period, our visibility of the future remains very limited. As COVID cases increase, governments may expand restrictions on commerce and reduce stimulus activities. In addition, future consumer spending is uncertain. Business investments remain low and inventory growth in the channels could change. We continue to monitor health information and market trends to respond to the evolving conditions in our market. In the Q2, we took advantage of the favorable rate environment to pay off $1,100,000,000 of short term debt and prefund our future long term maturities. In the Q3, we generated about $530,000,000 of cash, bringing our cash balance to $1,200,000,000 at the end of the period. We will pursue additional investment opportunities, including internal growth, acquisitions and stock purchases as the pandemic and economies improve. We believe our stock represents an attractive investment and our Board of Directors recently approved a plan to repurchase $500,000,000 of the company stock. I'll turn the call over to Frank for a view of our Q3 financials. Thank you, Jeff. Sales for the quarter were $2,575,000,000 or up 2% as reported and on a constant basis with the Rest of World segment performing best. As a note, for next quarter, our sales will be impacted by 2 more days compared to the previous year. Our gross margin was 27.4% as reported or 28.3% excluding charges, increasing from 27.8% last year. The year over year increase was driven primarily by higher volume, productivity and lower inflation, partially offset by price mix. The actual amounts of these items will be included in the 10 Q filed later today. Our SG and A as reported was $443,000,000 or 17.2 percent of sales or 16.9% versus 17.8% in the prior year, both excluding charges. This was primarily impacted by favorable productivity of $21,000,000 Our restructuring charges were $32,000,000 for the quarter, of which $6,000,000 was cash. All of our restructuring and other savings are on track with our original plans. Our operating margin excluding charges was 11.5%, improving from 9.9% last year. The increase was driven by stronger volume, productivity and declining raw materials, partially offset by unfavorable price and mix. Interest expense was $15,000,000 and we expect interest next quarter to be approximately 16,000,000 dollars Our income tax rate was at 17% this year compared to 18% last year. We expect the 4th quarter to be approximately 5% and then returning to historical levels ranging from 20% to 21% next year. Our earnings per share excluding charges was $3.26 up 18% from last year. Turning to the segments. In the Global Ceramics segment, sales were $911,000,000 down 1% as reported, with business up almost 2% on a constant basis. The non U. S. Businesses turned in our best performances in this segment. Our operating margin, excluding charges, was 10.3%, up 110 basis points compared to the 9.2% last year. Our increase was from productivity and volume, partially offset by unfavorable price mix. In the Flooring North American segment, sales were $982,000,000 down 2% as reported, with growth all major categories except the more profitable commercial end market, which remains challenging with postponed projects and slower office and hospitality. Our operating margin excluding charges was 8.2% compared to 8.7% last year. The decrease in earnings was driven by lower margin and price mix partially offset by favorable productivity and lower inflation. In the Flooring Rest of World segment, sales were $681,000,000 up 13% as reported and increased by almost 10% on a constant basis. A lower exposure to our commercial end markets along with a larger presence in Northern Europe supported strong top line growth in this segment. Our operating margin excluding charges was 19.3%. That's up 4.80 basis points from 14.5% last year. The main drivers were higher volume, favorable productivity, lower and lower raw materials, partially offset by unfavorable price mix. In the Corporate and Eliminations segment, the operating loss excluding charges, was $10,000,000 We expect the total year to come in at a loss of about $40,000,000 Then jumping to the balance sheet, our receivables ended the quarter at $1,711,000,000 Our days sales outstanding improved to 56 from 61 days last year. Our inventories ended the quarter at $1,842,000,000 and dropped almost $500,000,000 or 21% from last year as all businesses saw significant reductions in inventory with production lagging sales. Our inventory days were at 100 versus 127 days last year. Fixed assets at the end of the quarter were $4,405,000,000 and included capital expenditures during the quarter of $69,000,000 and depreciation and amortization $151,000,000 We estimate the annual capital expenditures to be about $420,000,000 with D and A estimated at $595,000,000 And finally, the balance sheet and cash flow remains strong with total debt of $2,600,000,000 total cash and short term investments of almost $1,200,000,000 and leverage at 1.1 times to adjusted EBITDA. I'll now turn the call over to Chris to provide segment details of our Q3 performance. Chris? Thank you, Frank. For the quarter, our Global Ceramics segment sales increased 2% on a constant days and currency basis. Our operating income grew 11% with a margin of 10% excluding restructuring costs compared to last year. All of our ceramic businesses improved substantially in the 3rd quarter with low inventories limiting both our sales and service. The residential sector experienced a more significant rebound in the period, while commercial demand remains sluggish. Most of our plants have staffed up to run all of their capacity to meet present demand and increase inventories in the 4th quarter. Overall demand was solid, but our visibility is hampered by COVID, the sustainability of residential sales growth and postponed commercial projects. In the U. S, we are seeing increased traffic in our showrooms and galleries as well as our customers' retail shops. We have shifted sales focus from commercial to new home construction, which is expected to increase through next year. Commercial sales improved from the prior period but are still lagging. Our inventories decreased slightly during the quarter even as we increased our production levels. We have announced price increases to cover higher freight and operations costs. Our quartz countertop plan is performing as planned, and we are increasing our higher style collections to improve our mix. Our restructuring initiatives are being executed as we planned. We have closed 2 tile manufacturing facilities and consolidated distribution points. We've also reduced SG and A and labor costs and discontinued lower performing products. Our Mexican ceramic business is experiencing many of the same trends as the U. S. Our plants in Mexico are operating near capacity to reduce order backlogs, running shorter production quantities and optimizing our SKU offering. To replace higher end imports, we are manufacturing new porcelain collections in larger sizes. We are expanding our sales footprint with exclusive Daltile branded shops being opened by our customers. Our Brazilian ceramic business had its best quarter in its history with significant growth in both domestic and export markets. We are presently operating at full capacity and allocating production as consumer demand increase and inventories are rebalanced. To offset rising inflation, we have announced a price increase that will go into effect later this year. We are continuing our investments to upgrade our resilient assets, create higher value products and reduce our cost. Our European ceramic business delivered strong results in the period as residential sales improved and inventories in the channel are replenished. Our performance was hindered by substantial reduction in higher valued commercial category and lower exports for projects around the world. We achieved higher manufacturing levels by reducing the traditional August shutdown periods. As production rose during the period, our service improved, and we will continue to increase inventories to enhance our service. Increased pricing pressures during the period were offset by higher volumes and productivity, lower inputs and SG and A leverage. Our major markets in Europe are increasing restrictions due to recent spikes in COVID cases, which could impact future demand. Our Russian ceramic business recovered and is performing better than last year even with the political crisis in the Eurasian Union lowering our exports. The growth was driven by our strong results in the new construction channel and company owned retail stores. Like our other businesses, low inventories constrained our sales in the period. Our new sanitary wear plant is operating as planned and will support our premium strategy with products that coordinate with other offerings. During the quarter, our Flooring North America segment sales decreased approximately 2% as reported, with operating income margin exceeding 8%, excluding restructuring charges. The segment's performance improved substantially from the prior period due to improving residential sales. Revenue in the quarter were limited by our low inventory levels and difficulties increasing production due to staffing shortages and higher employee absentee rates. Commercial demand improved from the prior period but remains weak with the hospitality, retail and office impacted the most. Inventories in that period continued to fall, though we expect them to increase through the end of the year. As our production aligns with demand, our service levels are improving. Our restructuring programs are progressing and achieving the expected cost savings in manufacturing, logistics and SG and A. Our residential carpet business improved from the prior period with retail remodeling performing best. Our polyester products are outperforming other fiber categories, which is impacting our mix and average selling price. As we progress through the period, we achieved higher manufacturing rates, which improved our productivity and cost. Increased overtime and shorter runs improved our service but raised our production cost. To cover higher costs, we are implementing price increases in the market. Our rug sales increased as consumers use them as an easy way to update their home decor. In the period, we are allocating our rug production as demand increased and retailers restock their inventories. Commercial flooring remains depressed as businesses reduce remodeling and postpone construction projects. While our commercial sales improved from the deep second quarter decline, we anticipate a slower recovery in the sector. During the period, laminate had strong growth with expanding distribution and sales in all channels. The beauty of our waterproof laminate collections are attracting more consumer interest and has enhanced our mix. Even with our laminate operations running at full capacity, we are unable to satisfy demand and have postponed our new product introductions. To increase our laminate production and provide new features, we are installing a new line that should begin production in the Q4 of next year. We have reduced our commodity wood manufacturing and are repurposing our operations to produce premium wood collections with unique features. Sales of our residential LVT collections continue to expand at a rapid pace with rigid products increasing their share and our new product launches improving our mix. To compensate for higher tariffs on source collections, we implemented price increases in the period. We are continuing to make significant progress in our U. S. Manufacturing facilities. Output is increasing, although some of our productivity initiatives fell behind schedule due to COVID related interruptions in travel from Europe. We have recently relocated European engineers to the U. S. To implement enhanced LVT processes that are being used in our Belgian operations. Our sheet vinyl collections continue to take market share, and our cost in the category improved due to greater efficiencies. For the quarter, our Flooring Rest of World segment sales increased approximately 13% as reported. The segment's operating income grew 56% with a margin of 19% as reported. During the period, the segment outperformed in all of its geographies as home sales and remodeling expanded with people spending more time at home and reducing other discretionary spending. Our inventories remained low in all product categories as order rates exceeded our increasing production levels. To meet higher consumer demand, our plants took less time off in the August vacation period to maximize production levels and service. With higher service and lower marketing expenditures, we leveraged our SG and A cost across the business. Our Flooring Rest of the World segment has less participation in commercial end markets that more negatively affected our other two segments. Our laminate sales growth was limited by manufacturing capacity in Europe. We began shipping laminate from Russia to support higher demand in Europe. Our strong brands and industry leading innovations continue to attract the consumer and our differentiated products are improving our mix. We postponed new product launches and reduced our marketing and promotional activities in the period. During the quarter, sales of our LVT collections grew the most as our production levels, efficiencies and cost improved as we anticipated. We expect our productivity and cost to continue improving as we expand the utilization of our operations and enhance our material yields and efficiencies. The rigid LVT category is also growing faster in Europe, and we will be adding a weekend shift to support the increased demand. In the 4th quarter, we will begin shipping our next generation of rigid LVT products with new features that will strengthen our market position. Our sheet vinyl provides the best flooring value in the market, and our sales increased as our retail customers reopened. Higher production volumes positively impacted our cost and better leveraged our SG and A. Our Russian sheet vinyl plant performed well with higher utilization and margins. We're adding another shift in the plant to satisfy our expanding business. We completed the consolidation of our wood manufacturing operations in Malaysia and significantly reduced our cost. We have improved our output, allowing us to satisfy increasing demand. We are gradually lowering our material costs through our initiatives to vertically integrate. Our insulation products rebounded with increased volumes after our markets reopened. Even though our selling prices have declined, our margins remain strong as material costs were lower as well. Our raw material costs are now rising, and we have announced price increases to compensate. Our Board's business benefited from strong demand, improved product mix and lower material prices. We also reduced our cost with the investments we made in expanding our glue manufacturing and new energy plant. Our Australia and New Zealand business performed very well with strong sales growth, improved product margins and the success of our updated product offering. The company is well positioned with its strong branding in both carpet and hard surface. With that, I'll return the call to Jeff. Thanks, Chris. We entered the Q4 with improved sales and margin trends and have a solid order backlog across the enterprise. Residential Remodeling and New Home Construction are forecasted to remain strong as the pandemic has transformed our living spaces into schools and offices and as participation in other activities has fallen. The 4th quarter is slower for our industry due to normal seasonality and we expect lower growth in channel inventory levels. Our higher margin commercial channels will continue to be slow with completed projects likely to outpace new starts. We anticipate service improving with our inventories rising as production levels exceed sales. We are implementing our restructuring plans and are on track to reduce costs as expected. Our visibility continues to be limited by many uncertainties, including how government restrictions and demand will evolve. Assuming the current economic trends continue, we anticipate our 4th quarter EPS to be $2.75 to $2.87 with a non recurring tax rate of approximately 5% for the period. Our business has responded effectively to the COVID crisis, changing government restrictions and varying market conditions. Residential Remodeling and new construction are expected to improve next year. The commercial business should increase from its present low levels as economies recover going forward. Our strong balance sheet, cash generation liquidity will allow us to move from a defensive posture to a more aggressive growth strategy. With that, we'll be glad to take your questions. Your first question comes from Stephen Kim with Evercore ISI. Your line is open. Thanks very much guys. Thanks for all the info and congrats on the good results. A question regarding your share repurchase and your comments earlier about litigation, the litigation. There have been a lot of questions we've been getting from investors about if and when the company would step up its share repurchase activity, which you did address in today's release. And meanwhile, at the same time, there were some important changes, it looks like, to the language around the recent lawsuit in your press release. I'm wondering, is there any reason to think that there might be a relationship between the Board's conclusion of its internal investigation and the Board's authorization of the share buyback? Hey, good morning, Steve. This is Frank. That is a good question. And I'd like to make a couple of points, I think, about that. First, last quarter, we stated that the audit committee's investigation was substantially complete. This quarter, we added to our statement that the investigation is complete and that the audit committee has concluded that the allegations are without merit. I think the second point regarding the authorization, the Board's decision to authorize an additional $500,000,000 for stock Okay, great. My next question relates to, Okay, great. My next question relates to primarily Flooring North America and North American Ceramic. You indicated that you paused the restructuring as well. And it seemed like there were 2 main reasons for pausing the restructuring. 1, because demand surging and 2, because your inventories need to be rebuilt. So what I'm trying to understand is how big of a factor the inventory rebuild is. So let's say resi demand stays as strong as it is now. Let's say it just stays really strong. When do you think your inventories would get back to a comfortable level? Is that going to be like do you think you can do it in 4Q or do you think it's going to spill over into 1Q of next year? And once the inventories are in good shape and current demand, if it stays the same, would you be happy with your present capacity? Or would you likely restart your restructuring program to reduce your capacity further in that situation? So what we said was we postponed some of it. Actually reduced the cost of the restructuring by about $10,000,000 and I think the amount of savings by the same $10,000,000 is it. At this point, we haven't concluded. It's only a limited portion of the total. At this point, we have already executed about 25% of the savings through the 3rd quarter. As we said before, we expect about $15,000,000 to $20,000,000 a period going forward on a continuous basis. So we haven't changed the strategy on restructuring and cutting costs out of the business. It was just a limited portion of it. On the inventories, we're going to continue increasing the inventories between the Q4 and Q1. It's all dependent on how we see the demand evolving and the business changing as we go through. We'll keep adjusting the inventories up and down. We expect to be in reasonable shape coming out of the Q1 for the rest of the year. And in some cases where we have capacity limitations, you'll see us increasing inventories in the slower periods to take us through the peak periods in the middle of the year. Your next question is from Tim Wojs with Baird. Your line is open. Yes. Hey, guys. Just want to echo, nice job and in the quarter and the guidance here. Maybe just in my question, two things. So the first is on residential versus commercial, is there any way to parse out how residential performs from a growth perspective versus commercial in North America? And then maybe what the margin differential between the two business lines is? Let's just give you a higher level view of it. The commercial business is somewhere about 20% to 25% of our total business. In that, we have parts of the business that have very little and parts that have significant. The most significant pieces are in U. S. Carpet, U. S. Ceramic and our European ceramic have a much larger piece of the commercial businesses. All the commercial businesses are down substantially. Existing projects are being completed and new ones are more limited coming forward. We're anticipating a slow recovery over time with next year being better, but it could take multiple years to get back to where it was as we go through. Okay. Is it fair to say commercial down? The one other thing, Tim, I would like you to emphasize there too is with commercial down as it is, it is a much higher margin business in the residential side. Okay. And then I guess on LVT, is there any way to frame kind of where the rigid LVT margins in Europe are today? Are they in line with other flooring product margins in Europe? And just trying to get a sense of the types of improvement that we've seen in Europe, just given it still seems like there's improvement opportunities in the North American business. The LVT in Europe is operating much better. It's positively contributing to our results. The margins are not as high as the average of our business. We have specific actions on a continuing basis to continue to lower the cost and we expect the productivity and cost to further improve. In Europe, which is ahead of the U. S, we're actually bringing to market new innovative features to keep us ahead of the marketplace and going in the market now. In the U. S, as we've said, it's behind the other one by 3 to 4 months. We just recently brought engineers over, which we had trouble getting them to get in the United States, so we'd had them here earlier to and they're in the plants updating the pieces to align with it. I left out in Europe, we're in the process of adding a weekend shift to it to fill the increasing demand on the rigid products over there. And the U. S. Is following behind, and we think we're going to get to where we need to go. Okay. Okay. Well, nice job on the results and good luck on the rest of the year here. Thanks. Your next question is from Sam Darkatsh with Raymond James. Your line is open. Good morning, Jeff, Frank, Chris. How are you? Perfect. Good morning. Terrific. Two quick questions, if I might, on the Q4, specifically. It looks like your guidance implies a far more mild margin expansion year on year in the Q4 than what you saw in the Q3. I'm trying to figure beyond conservancy why that might be the case knowing that you're getting incremental pricing, that your production is going to be higher, that you have restructuring savings coming in? Why might we not see as much of a margin expansion in the 4th quarter as we did in the 3rd? In the third quarter compared to the last year, we had our European businesses ran a lot of the capacity through the vacation period, so our cost structures were lower and on a relative basis to each other as we go through. At the same time in the Q3, we cut back on a huge amount of our marketing activities and our costs with the capacities where they are, and we're going to have to take normalize the marketing expenses and pieces in the Q4 going forward. On a forward basis, when you look at the sales, it looks like residential will continue to be good, but you're listening to all the things about COVID. We're not sure what's going to happen with COVID and how it's going to impact our business. So far with the European businesses, it appears that our customers are going to stay open and they're considered essential, but I mean it's changing by the day. So that's good at the moment, but we can't tell what's going to happen. Our commercial businesses, we really don't know if they bottomed yet or not. You have the old things projects were put in place are coming to completion and they're completing. The new ones are slower trying to reflect all of those considerations. Helpful. Second question, if I might, Frank. Back to the envelope, I'm getting 4th quarter free cash flow somewhere in the breakeven to somewhat positive area, I guess, depending on the inventory ramp. Is that a fair representation of how you see free cash flow in the quarter? Yes, I think it's going to be in that range. Okay. Thank you. Be well, stay safe. Have a terrific weekend. Thanks, Your next question is from Mike Dahl with RBC Capital Markets. Your line is open. Hi, thanks for taking my questions and the details so far. I have two questions on Flooring North America specifically. The first, I'm curious if it's possible for 3Q. You went through a lot of the moving pieces and talked about, still seeing the strength in LVT, which is obviously consistent with the market. Your overall Flooring North America sales were down 2%. Excluding LVT, what was Flooring North America sales? We don't give out the information at that level. I can tell you that our sales were limited in Q3 with higher inventories and reduce them. So all the categories, the sales were limited by that. In the carpet one specifically, with the whole industry in the same area, the whole industry picked up, The whole industry had let the workforce decline because nobody could see where it is. So there's a huge pressure on the workforce in getting it staffed back up. And then the training and hiring impacted it significantly. So the business in Flooring North America has more restrictions on it than many of the other businesses. We are a long way down where we'd like to be, but we're still having training, absenteeism, COVID still impacts we're protecting the people inside the business. But when they come in with it, we then have to let people go home and the absenteeism goes up. So protecting all the people is impacting our ability to raise the production rates as high as we would have liked to have them. And I would just add too, Mike, that the single biggest headwind we had on sales in Flooring North America was commercial, as Jeff had talked about before. And on the margins. Yes. Right. Okay. That's helpful. And that kind of ties into my next question with just given the headwinds that you're still seeing in commercial and hopefully those are bottoming. But with the puts and takes there, within your Q4 guide, do you anticipate for North America sales to be positive or still under pressure? We're expecting more of the same. Okay. Thank you. Your next question is from Keith Hughes with Troy Securities. Your line is open. Thank you. Two questions. One back to the Flooring North America. As you look at your LVT growth in the segment, do you think you're at a point now where you're growing at the market? I know you've been underperforming for a while. I think that we're growing with the market. The numbers are really hard to get by because the numbers are based on the imports and the imports have been so erratic, you cannot and we have the same thing in ceramic. You can't take the imported volumes and assume that reflects what's going on in the marketplace. So it's really hard to estimate the sales at this point both for anything that's imported. That was my second question. The import numbers are erratic and have been particularly high too. Do you think that indicates LVT ramping its growth back up from some more limited growth in 2019 or is there just some inventory build ahead of this price increase? It's hard to tell. One is that the base continues to get bigger, the growth rate is not going to grow at the same rate it has been and the growth rate is going to slow. And I think it's still going to grow, but just at a lower growth rate. Okay. 2nd question or third question, I guess, within price mix and ceramic, you called out as a negative in the discussion and it's been negative for some time. With some of this reemergence of residential growth and some pricing you talked about, Is that something that could flip to the positive in the near term? Well, Keith, typically residential pricing would be less than commercial pricing. So I wouldn't expect help on pricing. Secondly, so far with the imports coming in, the pricing has been under pressure on those 2. So I don't wouldn't expect a whole lot of help from pricing. We are taking a price increase to offset transportation and other cost. But generally, I don't think the shift to residential is going to help us. The countries where the imported ceramic is coming from, most of the countries, their exchange rates have weakened in the past 6 months, which isn't helping things. Okay. Thank you. Thank you. Your next question is from Eric Bosshard with Cleveland Research. Your line is open. Thank you. On the U. S. Tile business, kind of the conversation you just had, I'd love to get a little bit more sense of where this goes from here. And specifically with less commercial volume, it seems like that would create some excess capacity in the industry. What's going on with currency seems like it could create a more aggressive pricing environment. And I understand your need to take price to offset costs. But as we look forward for the next 6 or 9 months, it seems like it could be a more competitive environment for pricing or for share. Am I missing something or am I looking at this wrong in the U. S. Tile business? Well, I think the tile business is going to remain competitive in the United States. As you may already know, we have implemented restructuring initiatives that are being executed as planned. In North America, we've closed 2 manufacturing facilities and consolidated distribution points, and we've reduced SG and A, manufacturing and also lower performing products. So I think we'll be in an environment where pricing is competitive, but we are reducing our cost at the same time. Okay. Are others, I guess, just a follow on within this, are is the rest of the industry putting through price increases as well? Or what's the trend across the industry in terms of pricing? Really, we don't know at this point. All we can we do know that the average price of imports have declined, and that we have recently implemented or in the process of implementing a price increase, but we don't know yet about the other competitors. The price increase is basically focused on the freight. If you look around the country, the freight rates are going up dramatically. The transportation systems are tight. And so all the costs of everybody who's moving anything are going to go up, not only us. Your next question is from Phil Ng with Jefferies. Your line is open. Hey, good morning, everyone. Congrats on a solid quarter. Outside of the commercial piece in the U. S, your international business seems to have snapped back much faster versus U. S. So just trying to get a better sense. It sounds like that's partly due to labor and maybe just lack of inventory. Should we expect that catch up dynamic playing out in the next few quarters as your operations improve here? The question give me the I'm not sure we heard the question real well on our end, so can you go through it one more time, please? Yes. Should we yes, no problem. It sounds like it looks like your results in international did much better than the U. S. Just trying to understand why international saw a quicker snapback. It sounds like it's partly due to labor inventory, lack of that in the U. S. Can you expand on that? And do you expect that catch up dynamic to play out as well in the U. S. Next few quarters? The first part of it is that the regions that they're in, the majority of our businesses are in Northern Europe, which performed better. 2nd is, they have a much higher percentage of residential sales, so they didn't have the same impact on the commercial volume and commercial margins. And the commercial margins in our businesses are higher than our residential businesses, so they also suffer. At the same time, we had the LVT performance over there is better. We have a new plant in Russia that turned profitable and is doing well. We're increasing the shifts in both LVT and sheet vinyl layer to satisfy demand. And then we also had the occurrence in our Australian business that the Australian business also performed really well. And we think a lot of it's because of pent up demand and we were better positioned than our competitors in the marketplace. Got it. That's helpful, Jeff. And then from a LVT standpoint in the U. S, any way to help us understand give us some remarks to look at going forward in terms of where you are in terms of that evolution of being profitable? Any color on where your capacity utilization levels are for the U. S. Lines? And where are you with that evolution on improving your mix? We think we're about 3 to 4, maybe 5 months behind the European. The European businesses are all profitable. And so the reason we're bringing over the people is to catch up. In addition, in Europe, they're 1 step ahead of us with new products and innovations in the marketplace. So their mix is a little higher, which we'll be introducing here as we catch up to them. Okay. Should we expect you getting closer to profitable early next year if you kind of close that 3 to 4 month gap? I think so. Okay. Thanks a lot. Appreciate the color. Your next question is from Kathryn Thompson with Thompson Research Group. Your line is open. Hi, thank you for taking my questions today. So our understanding from an industry standpoint at least in a pretty North American business that the time off around thanks Could you discuss how you're approaching time off around those 2 holidays this year compare against what was happening last year? And final point with that, given COVID and different ways you have to operate, also discuss how you approach potential multiple shifts? Thank you. So first, the holidays do fall on different timeframes. So one is it could have a positive impact on the volume due to the timing. On the business shifts and the closures of the holidays, they're all around the inventories and service levels that are required. We can increase or decrease them within some limits based on the business volume and get volunteers to work through some of the holidays if they usually there's a group that can. So if we need more capacity in our projections, we can increase the utilization of the plants and keep running them to raise inventories if we think we need to. Well, maybe more directly, are you taking less time off this year around the holidays versus last year? Well, to tell you the truth, we don't know how demand is going to be over the next 2 months with COVID. And so, we're leaving everything flexible because we have no idea what's going to happen to the volume at this minute. And we're working almost week to week trying to anticipate what's happening, but we don't know if governments are going to restrict us more or not restrict us more, and we don't know how the consumer is going to react. So, we're producing as necessary. The other side of that, too, is, as we've said several times, our inventories are below where they need to be, and we're running production as hard as we can to try to get caught up. But we're looking at it from now all the way through the Q1 of the pieces and trying to see how the thing works. And at the same time, we're trying to estimate next year's requirements, which is really hard to do. Yes. So I totally appreciate that. I was thinking all else equal if you were able to do that, would you? Okay, I guess that backdrop assuming that you continue, is it your assumption based on if demand remains as is right now with your current production levels? Just to be clear, do you believe you'll be able to meet sufficient by the end of Q1 with current production levels? Or is it the type of thing that would require a longer time period to catch up? We're going to catch up by the end of the year, the demand pieces we believe, but the inventories is the question, what level will they get to and where they are, and it's all dependent on how strong the demand is through November December relative to our production rates. And we're not sure normally seasonally, it falls off And we're expecting our inventories to go up in both the Q4 and the Q1 to get them to where we want them to be for next year. And then we're going to keep adjusting the strategy based on how we see the consumers reacting in COVID. Okay, great. Thank you very much. Your next question is from Susan Maklari with Goldman Sachs. Your line is open. Thank you. Good morning, everyone, and congratulations on a good quarter. My first question is going back to Europe, can you talk a little bit about some of the shutdowns that we're starting to see go into effect in some of those countries and how you're thinking about any differences there relative to what we saw back in the spring in March April? And maybe how you could react differently this time around relative to back then? To begin with, it's too early for us to feel. At this point, the cases have gone up, but it really hasn't we haven't seen any impact in either our demand relative to the new changes or to limitations they're putting on us. At the moment, they are limiting more social activities. They're limiting what time people go to bed, how they go out at night. They're limiting bars and restaurants. And so up to this point, we haven't seen it. So we're going to have to see how restricted do they get and what, if any, impact it's going to have on us. We went through this last time, too, Susan, with the definition of essential businesses, both in the U. S. And over in Europe back in March, April May, and we're going through the same exercise now. But so far, we're considered to be essential businesses. Okay. All right. That's helpful. Thank you. And then my next question is, you mentioned that you are starting to see some inflation, obviously, in your input costs. Can you give us some idea of the magnitude of that inflation and how we should be thinking about it as we get into next year? It's different by product, by category. I think as we ran through the earlier description, what you heard was we were raising prices in a number of categories. I'll try to run through some of them. U. S. Ceramic mostly based on freight, Brazilian ceramic, U. S. Carpet, U. S. LVT, European sheet with vinyl and LVT with vinyl costs going up and European insulation with the raw materials there. So all those are in process of being enacted. The oil prices are really difficult to predict. So how they're going to react and where they're going to go, we're going to have to follow them. There's also the supply and demand of the various places in between. So in vinyl in Europe, there's a really tight supply of it. So the prices are going up. So it's really hard to predict how all the supply and demands are going to work out, and we're reacting as appropriate. Your next question comes from John Lovallo with Bank of America. Your line is open. Hey, guys. Thank you for fitting me in here. Maybe starting, Frank, with SG and A. On a dollar basis in the second quarter, it was down year over year. I'm just curious the sustainability of that given some of the cost containment and productivity efforts on one side and then the increased marketing expense, hiring, etcetera, on the other side. I mean, should we see that begin to increase on a year over year basis, the dollar amount of SG and Right now, as Jeff said, that we did pull back in the Q3 on marketing expenses and we have to begin to normalize that in the Q4, but we continue to see benefits from our restructuring plans as well, which will help lower that cost. Okay. And then maybe just on Global Ceramic, you guys mentioned a shift in sales focus towards residential. Just curious what that actually involves? I mean, is that simply repositioning people or hiring new people? Or is it just saying, hey, look, we need you guys to focus more on this part of the business? I mean, maybe you could just walk us through that. Well, what's happened in as the commercial slowed down, we've taken resources out of that business. And at the same time, we've added resources in the residential business, both on the remodeling and the new construction. The and I think that residential business looks like it's got some legs on it for several months into next year and maybe beyond. Commercial, we think will come back. But for right now, there's not been a whole lot of projects started, and so we've pulled back in that area. Thanks, guys. Thank you. Your next question is from Matthew Bouley with Barclays. Your line is open. Hey, thank you for taking the questions. The Rest of World margin of 19%, could you maybe unpack a little bit what drove that margin strength? And I guess to what degree was that helped by, I think you mentioned producing a little more during August, the vacation period than you typically do. Just trying to understand what the profitability of that business should look like on a more normalized basis? Thank you. Well, I can take that. In Q3, our volume was higher as the economy rebounded in all areas. We had higher productivity with volume and we as you mentioned, we had lower vacation stops. We had lower material cost, but that was offset by price mix. LVT and Russian sheet improved performance. In Australia and New Zealand, we were better due to increased volume from deferred purchases. Q4 will be lower margins due to seasonality, higher cost and additional marketing investments. Got it. Thank you for that. Second one is the language you mentioned around pivoting more aggressive growth, I guess, in light of the improving balance sheet. Could you discuss kind of if there have been any areas that you felt I think it's you have to back up a little. The last 6 months, I mean, all focus has been on surviving an unknown future and trying to manage day to day, changing the strategies almost week to week. And so anything about future investments were put on hold. Any looking at acquisitions was put away. So we've gone through this period, and we didn't know what the demand in cash flows were going to be like. So at this point, we're getting comfortable that the business has improved significantly, and we have to go back and start looking at alternatives and pieces. And today, we still have a constriction on capital expenses where we postpone things that we think are good projects. But we have to decide what next year is going to look like and how aggressively to approach it. And then we are restarting at this point, looking at alternatives to grow the business, go into new product categories and potential acquisitions, but we're just starting to do that as the business has started to normalize. Got it. Thanks for the details. Your next question is from Michael Rehaut with JPMorgan. Your line is open. Thanks. Good morning, everyone. And I guess right now it's the afternoon. Congrats on the results. First, I just wanted to get a sense if possible, you had mentioned inventory build during the Q3. And just wanted to get a sense for what that contributed to the overall sales growth and if there were any segments where there were larger where it contributed more than others? Is the question of 3rd quarter or the 4th quarter? Well, both, if I could be so bold. But I'll settle for what the contribution was in the Q3, if you could give me on a relative basis. I know that you said for 4Q, there'll be a less of a growth from less of a contribution from inventory growth, but just want to hear your thoughts on again, what roughly was the percent sales growth contribution from the inventory restocking? Mike, I think First is in the 3rd quarter, the inventory of the whole business actually went down $80,000,000 So the inventories declined in the 3rd quarter even with all our efforts. Now as we went through the period, the inventory the production rates increased as we went through the period. And with that, we still have a lot of costs with training people, absenteeism, COVID across the different businesses. So we expect those things to get better going forward. But as the cases in the communities go up, we'll have to see what happens. And maybe just to make sure we understood your question. Yes. I'm not referring to the inventory decline at your own business. What I was referring to, and maybe I'm misunderstanding it, but what I thought you had said in the prepared remarks was that in the sales into the channel, there was some inventory restocking by your customers as demand rebounded as well. And so if that was the case, not what your own inventory balances did, but what the sales into the channel did, if you have any sense of what contribution to sales growth the inventory restocking by your customers was? We don't have perfect views into it. We know that coming out of the second quarter just like the rest of us that they all reduced their inventories not knowing what was going to happen. And they came into the 3rd period with low inventories. The sales improved in most of them. And so they tried to increase one is they tried to satisfy the demand and they've tried to get some of the inventories up in their own places. We think they're still low in most of the channel, but we're not sure because we have very poor views of what's going on through it. We know that in specific instances with some large customers, we know we have not been able to supply them the volume they wanted to increase their inventories. And we think there's going to be, in those parts, some inventory increases. Now what we can't tell is because we don't have the view is what's going to happen, which is why another piece in the demand, which we're uncomfortable with. We can't tell if some of it was to increase inventories and that they will reduce the orders as they get further in the period because they it won't help them if it doesn't get there in time. So there's a lot of moving parts in this thing that we really don't have good views of. I appreciate that. Thank you, Jeff. I guess, secondly, just going back to the share repurchase plan for a moment. Just want to understand and is this more of just a general authorization to be implemented over time? Or is this it sounded slightly different in terms of the language that this was something that maybe would be happening more immediately and over a shorter time period? And if that's the case, perhaps what type of time period are you looking at? Well, it's a general authorization. I think you had that was one of the descriptions you used. This is a general authorization for us to increase the amount of shares we can buy by up to another $500,000,000 So this is going to allow us to invest in our stock because we believe it's a good value going forward. And so we'll continue to look at different investment alternatives, including this one, capital expenditures and acquisitions, just like we said earlier. I would now like to turn the call back over to Loeb Verbaum for closing remarks. We're responding to the COVID crisis as required. As you can tell, our forward visibility is poor and we're going to have to keep reacting to it. The actions that we've been taking should improve our results next year, both in cutting costs and improving our sales. The commercial businesses, we expect next year to continue to improve. And our balance sheet is strong and will support moving to a more aggressive growth strategy. We appreciate the time you've taken to be with us. Thank you very much. This concludes today's conference. You may now disconnect.