Earnings Call: Q2 2020

Aug 7, 2020

Good morning. My name is Erica and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries' Second 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 and gentlemen, this conference is being recorded Friday, August 7, 2020. Thank you. I would now like to introduce Mr. Frank Boykin. Mr. Boykin, you may begin your conference. Thank you, Erica. Good morning, everyone, and welcome to Mohawk Industries' quarterly investor conference call. Today, we'll update you on the company's 2nd 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 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. With regards to our recent litigation and related investigations, our audit committee with assistance from outside legal counsel and forensic accountants has substantially completed its internal investigation. The company has appropriately filed its Form 10 Q for the 2nd quarter. The company continues to cooperate fully with the government inquiries. Beyond that, we refer you to the disclosure in the 10 Q and remind you we cannot comment further. I'll now turn the call over to Jeff for his opening remarks. Jeff? Thank you, Frank. For the Q2, at the height of the COVID disruption, our sales were down 21% as reported or 19% on a constant currency basis. Adjusted operating income for the period was $36,000,000 or 2% of sales and our adjusted EPS was $0.37 During the period, our cost reduction initiatives, working capital reductions and lower capital spending generated free cash flow of almost $500,000,000 Those sales trends have improved significantly since government restrictions were lifted. The current environment is the most unpredictable in the history of our business as the pandemic has affected our markets and operations around the world. During the quarter, all of our businesses were dramatically impacted with most of our customers and facilities operating either in a limited capacity or completely shut down for some time. Residential remodeling was impacted by retail shops closing and consumers staying at home. Commercial has declined as business have postponed projects due to economic uncertainty. U. S. Housing starts and homebuilder confidence improved sharply in June as the market rebounded. In the period, our operations were curtailed or stopped by government mandates, employee concerns and lack of demand. We responded to these challenges by keeping our workforce safe, cutting expenses and investments and furloughing employees. In the U. S, government programs provided tax credits to our business. Federal unemployment supplements have made attracting workers more difficult. Outside the U. S, many government subsidized businesses to keep workers employed and others required companies to continue paying employees that were not working in full. After the company sales bottomed in April, our May June results appreciably improved across the segments as stay at home restrictions were gradually lifted, consumers initiated remodeling projects, stores reopened and construction increased. Through the period, our markets improved more than we expected and our shipments exceeded our production rates, reducing our inventories. Our manufacturing levels were impacted by government restrictions, COVID disruptions and employee absenteeism across the enterprise. At this time, our visibility of the future continues to be uncertain due to persistent COVID spread, the unknown strength of the economic recovery. Some near term factors represent a potential upside, including historically low interest rates, rising remodeling activity, consumer discretionary funds being shifted to home improvements and increasing home purchases. Alternately, potential changes in government policies, consumer and business spending and higher COVID infection rates could reduce demand around the world, particularly the governments increase restrictions. Given these factors, our business plans must remain flexible to quickly adjust our production levels. We are restructuring the business to enhance our results and future performance. We're reducing SG and A, our headcount and lowering performing and lower performing products and SKUs. We are closing less efficient operations and investing in more productive equipment. The largest of these changes are in the United States, where LVT sales growth and a strong dollar have impacted many of our businesses. We anticipate these actions will deliver annual savings of approximately $110,000,000 to $120,000,000 with an estimated cost of $170,000,000 of which $44,000,000 will be in cash. Many of these actions are currently being executed with those affecting our manufacturing costs having to flow through our inventory. It will take much of next year to complete these initiatives and capture the full benefit. Our business is well positioned with a strong balance sheet and deep liquidity. We've recently issued over $1,000,000,000 of new bonds to enhance our ability to strategically invest and better position Mohawk for the long term. We're taking the right steps to manage through the pandemic and we remain focused on delivering innovative products, exceptional value and superior service. Our talented people are devoted to making Mohawk the best flooring supplier to our customers, improving our business in all areas and maximizing our results. With that, I'll turn the call over to Frank for our Q2 results. Thank you, Jeff. Sales for the quarter were $2,050,000,000 down 21% as reported, but decreased 19% on a constant basis as the pandemic and related recession significantly impacted our business. Our gross margin was 18% as reported or 21.4% excluding charges compared to 28.8% last year. The year over year decrease was driven primarily by lower volume, shutdown cost, negative price mix and unfavorable productivity, offset by deflation. The actual amounts of all of these items is included in the 10 Q that was filed yesterday. SG and A as reported was $431,000,000 or 21% of sales and 19.7% compared to 18.1%, both of which exclude charges. It was down $63,000,000 or 13% excluding charges, primarily from savings in furloughs, layoffs and government support. Other unusual charges were $97,000,000 of which $29,000,000 was cash, primarily related to the $170,000,000 cost reduction initiative that Jeff just mentioned. We are adjusting our capacity by closing inefficient operations as well as consolidating some others, reducing the workforce and streamlining our SKUs. We estimate annual savings of approximately $110,000,000 to $120,000,000 when complete. Our operating margin excluding charges was 1.7% compared to 10.7% last year. The decline was driven by weaker volume, shutdown costs and unfavorable price mix, partially offset by productivity and deflation. Our decremental margin was 45% for the quarter and resulted from sales dropping faster than cost. Our Q3 operating margin is expected to improve sequentially from the Q2, but will be lower than last year with pressure on pricing and product mix along with higher manufacturing costs. Looking at income taxes, on a non GAAP basis, we had no tax expense in the 2nd quarter. Going forward, the rate could vary significantly in the next two quarters between 16% 22% due to changes in profit before tax and or geographic dispersion of income. Our earnings per share excluding charges came in at $0.37 compared to $2.89 last year. Turning to the segments. In the Ceramics segment, we had sales of $753,000,000 down 21% as reported, with the business down 19% on a constant basis. The Russian business performed best with new construction and owned retail shops driving performance. Our operating margin excluding charges was 0.5% compared to 12.3% last year. The decline was driven by higher shutdown cost and unfavorable volume and price mix, offset by increased productivity. In ceramic, we expect the cost of our restructuring initiative to be $80,000,000 In the Flooring North American segment, sales were $800,000,000 down 19% as reported, as laminate performed best with its waterproof features and DIY installation appealing to consumers. Our operating loss margin excluding charges was a negative 2.2% compared to 6.7% last year. The decrease in earnings was driven by lower volume and productivity as well as shutdown costs, offset partially by deflation. We are estimating restructuring costs of $54,000,000 in this segment as we consolidate production and distribution assets, close high cost plants and reduce our workforce. In the Rest of World segment, sales were $496,000,000 down 23% as reported and decreased by 20% on a constant basis. Sales in the segment declined more rapidly in April, but improved more quickly later in the quarter. Our operating margin excluding charges was 11.9% compared to 16.4% last year. The main drivers were lower volume and shutdown costs, partially offset by productivity and deflation. As we streamline our product offering and reduce staffing levels over the next few quarters, we will incur cost of $36,000,000 in this segment. Our Corporate and Elimination segment had an operating loss of $10,000,000 and we are expecting a total loss for the year of $39,000,000 Jumping to the balance sheet. Cash for the quarter was $738,000,000 and includes the remaining proceeds from the 2 bond offerings earlier this year after paying down outstanding commercial paper. Receivables were $1,586,000,000 with days sales outstanding at 64 days compared to 50 9 last year. Inventories were $922,000,000 and dropped almost $450,000,000 or 19% from last year as all businesses made significant cuts to their inventory. Inventory days were flat with last year at 126 days. Our fixed assets were $4,435,000,000 included in the quarter capital expenditures of $81,000,000 and depreciation and amortization of $154,000,000 In the second quarter, we cut our estimated annual estimated capital expenditures by $150,000,000 to $400,000,000 We're in the process of evaluating the amount going forward based on changing economic conditions. Our D and A is estimated for the full year at $585,000,000 Going to long term debt, the balance sheet and cash flow both remain strong with total debt at 2 point $7,000,000,000 and leverage at 1.6 times net debt to adjusted EBITDA. Our ratings all remain unchanged at BBB plus or Baa1. I will now turn the call over to Chris to go through the segment results in more detail. Chris? Thank you, Frank. In the Global Ceramics segment, all of our businesses around the world were impacted by government reactions to the pandemic. Within the segment, Southern Europe and Mexico implemented the most dramatic regulations, suspending commerce and our operations for extended periods of time. To improve our performance, we are reducing our cost and complexity and aligning production with demand. While all of our businesses have improved, future demand is uncertain and we will respond as conditions change. In the U. S. Ceramic market, many of our retail customers were closed for some time. While construction continued in most markets, the Northeast and Midwest regions were most impacted during the period due to greater state restrictions. For example, our ceramic manufacturing in Pennsylvania was closed for an extended time along with most of our customers in that region. To manage the situation, we reduced cost across the business, including furloughs to decrease our overhead, cutting marketing activity, deferring product introductions and controlling manufacturing and distribution cost. Demand increased faster than we anticipated, and our inventories declined as we ramped up production. Presently, all of our U. S. Plants are operating and our service level is improving. Our new click ceramic tile is being delivered to our customers and sales should increase throughout the year. Our new countertop facility in Tennessee has become profitable and will improve with higher volume and mix. We have begun producing higher value products with more stylized colors and veining. Our new B2B systems are making product selection, ordering and picking up faster and safer for our customers and employees. We have implemented measures that exceed CDC guidelines to keep our workforce safe. Given pressures on the U. S. Ceramic industry, we are consolidating manufacturing into our most advanced facilities and closing our least efficient assets. We are combining some of our sales service centers where they overlap in local markets. With lower commercial activity, we are refocusing our sales efforts to broaden our position in new home construction. We are taking out lower volume SKUs to reduce complexity and improve our cost. We have made permanent staffing reductions to reduce our fixed cost and align with current demand. The Mexican economy has declined significantly, impacting employment, retail and construction. Our manufacturing operations in Mexico are currently running, but were limited during the Q2 under government orders. During this time, we were required to pay our workforce without any government assistance. All of those plants are currently running and most of our customers are open for business. To reduce our cost, we are rationalizing our current product offering and aligning our production and workforce with demand. As the peso is weakened, we are increasing our position in the premium market to replace imported ceramic and introducing promotional products to increase our sales. The Brazilian economy is contracting as the COVID pandemic reduces business activity. Interest rates are at historical lows and government programs to stimulate housing sales are being introduced. Our sales are improving as retail stores reopen in Brazil's major cities. Our exports have expanded as the local currency has weakened. With inventories low, we are increasing our production to support local sales and improve our service. We are further improving our cost structures and reducing our workforce. Our Southern European ceramic business was impacted during the period by severe lockdowns, especially within Italy, which was the epicenter of the COVID crisis. Both our customers and our plants were completely shut down for extended periods. Presently, we have limited cases of the virus due to safety measures in the local communities and our facilities. As the countries opened up, our sales dramatically improved, our Eastern European operations were less affected and demand has improved significantly. Our European exports to other continents are down substantially as major projects have been postponed around the world. All of our plants in Europe are ramping up to satisfy and service levels should soon approach our target. Continued government subsidies are being used to manage our ongoing costs. We are introducing fewer SKUs this year and are paring down less productive ones. As with the last downturn, we anticipate higher rates of business failures in some of our markets due to their weak economies. In Russia, our ceramic business declined significantly when the country locked down. Our strong position in new construction and our owned and franchised retail stores provided us with better market access and benefited our business. Sales improved through the quarter and our plants are now operating at similar rates to last year. We are placing a greater emphasis on the new construction channel, which the government is investigating to support the economy. Our Flooring North America segment sales declined substantially in April and then improved throughout the quarter as government restrictions were lifted and consumers started shopping and remodeling their homes. With most home centers remaining open, products such as our premium laminate outperformed as homeowners took undertook new DIY projects. Our inventories declined as sales improved faster than our manufacturing ramped up. Many of our operations are facing challenges increasing production due to local health concerns in our communities. To enhance the segment's performance, we are reducing our overhead cost and lowering our SG and A. We are taking out higher cost manufacturing assets and consolidating distribution points. We are streamlining our product offering and investing in more efficient assets to reduce cost. Our LVT sales improved as government restrictions were gradually lifted across the country. A significant part of our LVT distribution is through specialty stores, many of which were closed for periods of time. As our LVT sales improved in the quarter, we are increasing our production, though the spread of the COVID is creating challenges. We have improved our manufacturing speeds and processes. However, our progress was slowed because European technicians were unable to travel to the U. S. We are upgrading our manufactured and sourced LVT offering to provide enhanced visuals and features while reducing complexity of our collections. In residential carpet, the new home construction channel performed best with housing improving through the period. The remodeling category slowed as retail and installations activities were suspended in some regions. Our mix and pricing declined as the higher value remodeling channel was more impacted and lower priced polyester performed better. We are increasing our production to meet greater demand and improve our service levels. The commercial sector continues to be challenged as many businesses are postponing new investments. The education and government sectors were impacted less and the hospitality channel contracted the most. We're providing both virtual and local outdoor events to support architects and designers working remotely. We believe commercial projects will continue to be delayed and the sector will take longer to recover. Our rug business was severely impacted during April as many of our retail customers were completely shut down and their inventories were not replenished. As the period progressed, home centers and mass merchants rebounded first as consumers used our rugs as an easy way to enhance their homes. E commerce continues to grow in its importance as a sales channel for our rug collections. We are increasing our production to improve our service and meet our customers' needs. Our laminate business outperformed our other categories as consumers increased DIY projects while at home. We are operating all of our laminate capacity to satisfy this increased demand. Our unique technology provides waterproof solutions and superior visuals as alternatives to other hard surfaces. We are expanding our laminate manufacturing to support our growing market and introduce the next generation of technology, which we are presently selling in Europe. Flooring Rest of World results continue to outperform our other segments. We were able to take advantage of more flexible government support as well as cut our expenses across the business. Our laminate and LVT categories performed the best in the period. As LVT production in China has recovered, our patent licensing business has followed. As we went through the period, we saw strong improvement in sales as stores reopened and replaced their inventories. In the segment, we have a much greater presence in the residential remodeling, which is performing better than the commercial category. Our Australian and Russian businesses held up better than Europe due to different government approaches to the pandemic. Across the segment, we have reduced our overhead cost and are consolidating lower volume SKUs. We are now increasing production to meet emerging demand while protecting our employees' health. Our laminate business outperformed our other products as our waterproof collections and new introductions are increasing consumer preference for our products. Through our Internet presence, we are supporting our retailers by expanding their online sales. In Russia, our laminate sales declined less, and we are increasing the plant's production to satisfy demand in other regions. Our flexible and rigid LVT sales improved as we progressed through the period as retailers reopened in our key markets. Our manufacturing plants were also impacted and are increasing production to satisfy growing sales. Our residential sales have recovered more than commercial as businesses have deferred projects. In Europe, we manufacture almost all of our LVT and is positively contributing to our results. We are continuing to modify our processes to expand our capacity, reduce our cost and introduce new features into the market. In Europe, our sheet vinyl is sold primarily through retailers and sales were significantly reduced by store closures, especially in France and the U. K. As in other categories, our business has recovered and we are expanding our production to satisfy our customers. In Russia, our new sheet vinyl plant contributed positively to our results, and we have broadened our product offering to increase our market share. Our insulation business was primarily impacted with COVID, with our markets in Ireland and the U. K. Affected the most. When restrictions were lifted, the category rebounded in June as contractors completed projects already underway. We are expanding our customer base and the geographic reach of our products. Our wood boards faced similar plant disruptions, which impacted both our sales and margins. We introduced a new virtual showroom and products to improve our mix. The start of our new waste to energy plant was delayed due to the pandemic and is in now full operation. The COVID crisis was handled differently in Australia and had a less detrimental impact on our performance. The Australian market has largely recovered, and we are seeing improved residential carpet sales. Our European LVT collections were introduced during the period and are expanding our hard surface sales in the region. This month, we implemented price increases in Australia to offset cost increases. New Zealand's government enforced 1 of the comprehensive lockdowns in response to the pandemic, resulting in significant sales declines during the quarter. New Zealand's economy is now open and the virus is currently contained and our sales are improving. Now I'll return the call back to Jeff. Thanks, Chris. Since April, we have seen substantial improvement in all of our segments and markets. The residential remodeling and new construction channels have recovered more than commercial where businesses are maintaining a cautious approach to investment. Some areas, particularly in the U. S, Brazil and Russia, are experiencing an increasing level of COVID cases, which are impacting our operational costs and production levels. Across the business, we're decreasing costs by rationalizing assets, minimizing SG and A, reducing our workforce and managing our product offering and working capital. Much uncertainty remains around all of our markets regarding government policies, business confidence and consumer spending. Our sales in July were approximately flat compared to the prior year, but we cannot predict how the sales will evolve going forward. Given this, we are unable to provide guidance for the Q3. Though we anticipate a significant improvement on our results from the Q2. We managed through the challenging Q2 while generating significant cash flow, strengthening our balance sheet and issuing over $1,000,000,000 in bonds. We're taking substantial actions to navigate the changing environment and position Mohawk for the future. We'll now be glad to take your questions. Your first question comes from Keith Hughes with Truist Securities. Mr. Hughes, your line is open. Yes, thank you. In the second quarter, the reduced capacity the big hit obviously in the number is 2nd largest. What do you capacity look like for the 3rd given what you've seen in July? You could do that dollars year over year, whatever the best way to describe it is. I'm sorry, the question is what's the capacity? Yes. I mean, what kind of capacity rate are you going to be running at? You cut a lot in the second quarter to get inventory down. What's it going to look like in the 3rd compared to 2nd? The 3rd quarter, we're running the business at a much higher rate than we were. We're actually trying to increase the inventories because they decrease too much, but we're having difficulties getting them up given the labor issues, vacations in Europe and other things. So they're going to run at much higher rates. Will you equal the rates in the Q3 of last year? It depends on business sector pieces. They're all over the place. One of the end markets, Keith, is not performing as well as you know is commercial. So to the extent we've got commercial capacity, it's going to be running at lower rates than the others. And I guess final question. You talked in the intro about margins being up in the 3rd from the second, but down year over year. Is capacity curtailments the major driver why it's going to be down year over year or is there something else? Well, we've got several things that we think are going to be impacting us. We'll have pressure on pricing We're going to have pressure on product mix. Volumes are also going to be an issue for us. And I think like Jeff mentioned, even as we're trying to get our inventories up now, we are going to have higher manufacturing costs due to COVID labor issues and shorter product runs as we try to rebalance our inventories. Okay. Thank you. Your next question is from Justin Speer with Zelman and Associates. Thanks guys. Just one quick question on the trends. You mentioned flattish trends in the July. Are there any major distinctions by the segments? Or are they all trending similarly into July? Yes. We said July was basically flat compared to last year and improved more than we had anticipated. And overall, Rest of World did better than the other 2 segments. And then the other thing, just in terms of the phasing of the benefits to profits from the restructuring efforts that you've already taken, because how should we think about that phasing in the back half? And then as we think about I know that you mentioned annualizing it in 2021, but in the back half, that should be an offset, we would I would assume to some of the other headwinds that you're seeing. But you're saying that the other headwinds will be more than that? Sorry, your question is on the savings, how are they going to phase in? Was that your question? Right. And so you're I just kind of following on Keith's question about the year over year change in margins being maybe pressured from some of the actions, labor issues, shorter productivity runs. I guess those will not those will more than offset any kind of benefit from the phasing to restructuring. I was just curious if you could quantify some of the tailwinds from just the restructuring efforts that you announced and took the $100,000,000 charge that you took in the second quarter? Yes. What happened when we started out was based on our experience from 2,008 and 2009, we decided if the business was going to slow down, we're going to take more aggressive actions earlier to improve our position. With that, we're cutting SG and A, reducing the workforce, we're streamlining our product offering, we're closing less efficient plants, investing more efficient assets, which we got to the $110,000,000 to $120,000,000 of savings. It will take through next year to complete those and capture the full benefit. The manufacturing savings, don't forget, will have to flow through inventory, which will be 3 to 5 months later depending upon what it is and where it is. We estimate just at a really high level that the savings will range from about $15,000,000 to $25,000,000 per quarter until we achieve the results that we expect. And then just as a comment, remember that the margins for everything are really dependent on the future sales. And in the short term, COVID is affecting it and we're really not sure where they're going to be. Well, that makes sense. If I could speak one more in on this subject, just thinking about the broader trends, thinking about the actions that you're taking in terms of capacity rationalization. I guess how much of your non LVT businesses are going to be rationalized from these efforts? And are these adjustments just reconciling for the relative share loss to LVT that's already taken place? Or are these accommodating for maybe potential further erosion to LVT in the future? We are setting the business up at a level we think that it will be needed to be at for the future. We've made the adjustments in the ceramic capacities. We've consolidated some of the higher cost assets in the floor and rest of world I mean in the floor of North America. And then we've taken cost down in every part of the business in every segment anticipating that it's not going to be a V straight up and stay there. Thank you very much guys. Okay. Thank you. Your next question is from Mike Dahl with RBC Capital Markets. Hi, thanks for taking my questions. The first question is really around from a channel standpoint in the U. S. Can you remind us how much of your business goes into specialty and both in foreign North America and Global Ceramic? And then given the relative restrictions on specialty versus home centers in the quarter, how do you think about the share shift dynamic and whether or not that's just kind of accelerated share shift towards home centers over the medium term or whether your specialty channel can kind of play catch up to that? Well, yes, a lot of different questions. The specialty channel, the home center channel in most of the markets stayed open through this piece. So what happened is the specialty stores were shut down and the only place for customers to buy our products were in the home centers in many markets. Over the period that changed, so that's a temporary change in the business. In total, over the past 15, 20 years, the home centers have continued to expand their participation in the market and take share and it's different by product categories. The larger the category is in do it yourself and or some of the different contracting businesses depends on where it ends up and which channel it's in. So I don't see this being a significant change in the short term, but just the same continuation they've been on. Okay. Got it. Thanks, Jeff. And second question, just back on the restructuring. I understand there's been spare capacity and then probably some underperforming SKUs in terms of things that are getting either consolidated or rationalized. Is there any sales impact we should be thinking about though when you take out this much capacity and you take out some of the SKUs? Do you think there is a corresponding sales impact or is this really the you're going to be able to replace any lost sales with other kind of productivity measures? We're being more aggressive in getting rid of low volumes SKUs. We have alternatives to the products to offer the customers, but there's always risks of trying to transition one to the other. The goal is to end up with more businesses with more consolidated offer. Okay. Thanks. Your next question is from Eric Bosshard with Cleveland Research. Two questions. First of all, throughout the segments, you talked about price and mix pressure. Curious if you could just expand on that a little bit, where you're seeing that and what is driving that? And then also the kind of ongoing outlook for price and mix? It's occurring in all the different categories. First is that commercial businesses tend to be higher margin than the residential businesses. The commercial businesses have taken a bigger hit and are coming back slower and we're not sure how they're going to evolve over time. Within the other pieces, the more promotional products are tending to sell more than the other during the downturn, some because the higher end shops and stores that sell them, the people that had it pulled back in the market more, we're going to have to see how that evolves going forward. It's a little early to tell what the if it's going to be a permanent change or not. We're just assuming that the market is going to be more difficult and we're going to have to respond to competitive positions all around the world. And then going forward, I mean, we as we've said numerous times, we have a really hard time looking out beyond just a few weeks in this environment. But we would anticipate that we will continue to see price mix pressure going forward through the rest of this year. And then a follow-up on restructuring. It sounds like you've outlined a good program. I'm just curious when considering what's taken place in the industry, especially in the U. S. The last number of years and the contraction in operating profit of the company in total. If you had considered a larger program aimed at generating more cost out, more cost savings, or is that just unreasonable with how the business is set up or how you view the market? Just curious if there was a program that could have netted $200,000,000 or $300,000,000 of savings or if that's just not reasonable? It all starts with how you perceive the market is going to be in the future and what you need to satisfy it. At the moment, we believe that the changes we made are set up for how we believe the best guess of the business is going to be for the next few years. But we'll have to see what happens. Okay. Fair enough. Thank you. Your next question is from Matthew Bouley with Barclays. Hey, thanks for taking the question. A lot of discussion around the costs that are being cut, But I think, Jeff, you mentioned in the opening remarks that the $1,000,000,000 in bonds that there were some intention around strategic investments there. I guess just if you could outline some of the areas that are sort of top of mind for investment? Listen, we're always looking at acquisitions to go through. At this point, it's a little hard to aggressively do acquisitions given that you don't know the environment in cases, but we're always talking to different people in acquisitions. On the business, we're trying to minimize the capital investments for the moment, but we believe there'll be greater visibility in the not distant future and we'll start changing it. If you go back 1.5 months ago, the directive was stop everything you could stop. And we really haven't moved from that at this moment, but we're trying to decide what it should be. And every week, we get a better view of the market and what we should do. Okay. Got it. And then just as my follow-up in U. S. Ceramic, I you mentioned something about refocusing on new construction. Could you talk about what the exposure is now and what you want to get that to and kind of the implications on price mix there? Well, what we're seeing in the U. S. Ceramic just like the others, commercial is slowing. We are they are finishing existing projects, but we anticipate that slowing. But we also think there's a significant opportunity in remodeling and new construction. So we're taking advantage and moving our sales and assets in that direction. Okay. Thank you. Your next question is from Michael Reut with JPMorgan. Hi, thanks. Good morning. And it's Mike Rehaut. Thanks for taking my question. So I just wanted to circle back for a moment to the cost savings. And I believe, Jeff, you had said or Frank that you were kind of looking at a $15,000,000 to $20,000,000 a quarter. I wasn't sure if that was something that you would expect would kick in, in the Q3. Obviously, you've talked about there being a lag in terms of the manufacturing benefit that we might not see that impact until, let's say, the Q1 of 2021. I was just really hoping to get a sense of the $110,000,000 to $120,000,000 dollars of overall annualized savings, how much is expected to be realized in 2020 and specifically 3Q and 4Q? Thanks. We're expecting, like Jeff said, to average between $15,000,000 to $25,000,000 of savings a quarter. We're expecting to start realizing savings in the Q3. But we're also saying that as we go forward, we expect that margins are going to be impacted by volumes still and that's a big question mark, right, in terms of how the volume returns or not, as well as short term labor impact from the COVID virus, how that might impact the workforce and productivity as we continue to rebuild our inventory and get it back to where it needs to be. And the $15,000,000 to $25,000,000 that would be kind of proportional along the lines of the restructuring cost per charge breakdown that you had said before the $80,000,000 for ceramic, etcetera? No, not necessarily. How should we think about the breakdown by segments then? Yes. We weren't going to disclose that one. All right. Maybe just kind of shifting gears a second to the sales side. Obviously, kind of a strong decline across the board in a pretty tight range in the Q2. Frank, you mentioned that for July, rest of world did a little better than the other two segments. Obviously, if you're flat, that would kind of imply a little bit of growth, let's say, for Rest of world and maybe a little bit of a decline for the other two segments. Any type of directional thoughts around the degree of magnitude for each would be helpful. And you're seeing a better ramp, let's say, in one segment versus the other in terms of what you've seen throughout 2Q emerge would also be very helpful. It's Mike. It's hard, like we've said, to give a lot of guidance on how things are developing over a very long period of time. And we right now, what we're seeing is rest of world is coming back more quickly. I think as I mentioned, they went down more quickly, but have come back more quickly as well in the Q2. Also, in rest of world, they have more of their business in residential as opposed to commercial. Commercials, as Jeff had mentioned, was being impacted more by this and has not come back as much as residential. They in addition, they have more of their business in both laminate and LVT and those two categories have also performed well. And the business is really obscured because right now in the Europe business and the rest of world, we can't tell whether the orders we're seeing now are filling the pipeline and the channel and they're trying to get ahead due to what they didn't pick up that they normally do going into the vacation season or whether this is a view of ongoing business. And that same question we have in everything we're doing. The business has improved. The orders are improving, but we can't tell what is projects that were started in April, May that are postponed to now and are they going to continue at that rate or is there a bubble. We can't tell, what's going to happen with businesses investing in the business. And all through the piece, we can create dramatic scenarios in either direction. And the reason we're not giving guidance is we don't know which one is going to probable. Your next question is from Stephen Kim with Evercore ISI. Thanks very much guys. Just wanted to ask a question longer term about Flooring North America. I guess just start, I was a little surprised that you mentioned that the improvement, you did generally better than you expected. Mostly it sounded like in Flooring Rest of World, not Flooring North America. So I just wanted to clarify, did the USA operations in general exceed your expectations as well? But a more longer term question about margins in Flooring North America too. One thing that investors are concerned about is the idea that F and B margins maybe artificially high a few years ago as inventories were rising and that maybe there's a fear that some of these lower margins that we're dealing with more recently are more reflective of the margins going forward. But obviously, there's a lot of near term things that are weighing down the margin. So I'm wondering what you think the longer term margin structure in Flooring North America looks like. Is it reasonable to think we can get back to where we were a few years ago, mid to high teens, or once these discrete challenges are behind you? Or do you think that the longer term margin structure is maybe a little lower than it was at that time? Well, let's start with the first question, which was what's different than our projection, everything. I mean, when we went into it, we were projecting the market to be much more difficult and not to rebound as much as it has. So on our pieces, we were preparing for a much longer slower recovery than we've seen at this point. Now how it's going to go on from here is anybody's guess. That's the first one. We can the Flooring North America, we changed management a little over a year ago. We're continuing to put different processes in place to improve our operations and run them better, improve our margins and profitability in the business. And we have a huge amount of activities going on to do that. We expect the margins to improve. We'll see how far we can get them. Okay. Thanks a lot guys. Your next question is from Sam Darkatsh with Raymond James. Good morning, Jeff. Good morning, Frank. How are you? Good morning. Good. Two questions and hopefully they're quick, so I'll be allowed to ask them. In light of your being under inventoried at the end of the second quarter, I'm guessing that included stockouts. So your July sales results being flat, I'm wondering how much of a benefit July saw from shipping unfilled orders from Q2 and how much of it really is truly current demand? I'm trying to get a sense of the sustainability of that July trend. The order backlogs are still we haven't been able to push the backlog down because the sales have been going up. So we still need to get the inventories up and we haven't gotten them up high enough to achieve the service levels we want on one side, but it goes back to the prior comments. We're not sure how much of this is a bubble from before and how much is inventory in the channels. So to answer your question, you need both those and we don't have it. And my last one would be given FIFO, should we expect input cost benefits to accelerate going forward in the P and L? I'm not sure they're going to accelerate. We're going to continue when you say input cost, you mean, deflation in materials? Yes, the benefits from input cost, yes. Yes. I think you we will continue to see benefits going forward, but I wouldn't say they're going to benefits is going to increase sequentially. And some of the businesses are in different businesses, the price mix is offsetting the decrease in raw materials in many cases. Very helpful. Thank you. Your next question is from Phil Ng with Jefferies. Hey, good afternoon, everyone. I'm just curious where are you with your journey optimizing your LVT facilities in North America in terms of breaking even? Looks like the exemptions on imports are at least going away for now. Do you have that ability to kind of meet that demand as your capacity ramps up this back half? Is that a nice windfall for you guys? Let's start. What he's talking about is there were duties on CLIP LVT that were withdrawn a year ago for a year. I think it was yesterday, the government has reinstated the duties on those products. With that, what we think is going to happen is the reverse of what happened last year is that the industry will have to increase prices to cover the tariffs, which should increase the value of our manufacturing as we go through. With the businesses, the European operations are ahead of our U. S. Operations in their improvements. The European operation is profitable today and it's going to continue to improve as we continue to enhance the operations and take costs out. The U. S. Improvements are following. But again, I think we said it before, we had expected to have multiple engineers over here all through the Q2 helping the group do the same thing we've already done. I don't know if you know that you can't travel between the 2. So all of that's been postponed. But we are with or without increasing the production speeds and processes in all of them. And at the same time, we're introducing new products and styling to help the business as we go through. So I think it should help us. I think we're getting better at it and we're turning the corners. Okay. Thanks a lot. Your next question is from Tim Wojs with Baird. Hey guys, good morning. I just had one question on ceramic. Is there a way just with the restructuring that you could frame for us in maybe percentage terms, the structural capacity that you're reducing within the ceramic business? Yes. We're only reducing capacity in the U. S. We're taking out our least efficient assets, which is about 10% to 15% of the total. And that will improve our costs, but yet support our future needs. Okay, great. Thank you. Your next question is from Laura Champine with Loop Capital. It's about, a disclosure in your 10 Q that says that earlier this week, your audit committee completed an investigation of certain allegations. Is it fair to say that if material restatements were deemed necessary, those would have been taken in this quarter? Or is that the wrong read? Like we've said earlier in my intro, we outlined basically what we could say and talk about with regards to that. If you're asking if the financial statements are correct, yes, the financial statements are correct. But beyond that with regards to the investigation, like I said, we really can't comment. Understood. And then if I can get a quick follow on on to a previous question. Have you disclosed the utilization rate in your LVT plants in the U. S. Right now just to give us a sense of how much volume you can serve as hopefully demand picks up there? We haven't, but what's happening is the capacity is increasing as the productivity and efficiencies are going up. So we can service business significantly greater than we have. Understood. Thank you. Your next question is from Susan Maklari with Goldman Sachs. Thank you. Good morning. My question is around the mix shift. You commented that you're seeing that as an ongoing pressure in the business. But in the U. S, as we have seen that consumers are perhaps shifting some of their spend more to home improvement, how are you seeing that that's driving any benefit in terms of the mix? And then I guess when you kind of think about the mix shift that you are seeing there, how does that compare to past recessions? And how much of that is due to maybe underlying shifts in the industry as we've gotten this growth in LVT and some of these newer product categories that have come through? Each different product category is different from each other. And carpet is an ongoing trend of polyester selling more. You also have a mix in channels. So, the homebuilder channel, the new home construction channel is a lower mix than our retail channel. So as retail didn't do as well as the new home construction, that also impacted what you go through. So there's channel mix as well as customer mix going on. In the different businesses, they're all different. In my ceramic business and my laminate business, we basically participate in the mid- to high end of the business and it's growing in its use as alternatives to other hard surfaces. It's being used in both the retail and the new construction business much more so, and our products are outperforming in those creases. The ceramic business, the mix has decreased somewhat because some of the product categories are impacted by LVT using some of the higher end stuff. And then you have the commercial mix, which is much higher in all the businesses in it. So there's product changes, consumer changes and channel changes all at the same time. Okay. Thank you. Your next question is from Kathryn Thompson with Thompson Research. Hi. Thank you for taking my questions today. Just on revisiting the news from yesterday on the tariffs, if you could give a little bit more clarity in terms of are there any timeframes? So in other words, there are certain tariffs that have a certain end date to them. Is this, as we know, indefinite? And then what does this mean more specifically for your operations, not just in the U. S, but also in terms of global sourcing? Thank you. The tariff that there were tariffs put on originally 25 percent on all products. A year ago, they took the tariffs off, clicked LVT only and they did it for a 1 year period and it came back for renewal. The renewal was turned down, So the 25% starts, I don't have the date in front of me. I don't know if it's today, yes, it may start today. I'm not sure is it. And so we'll all have to start paying it and then we're going to have to get the prices up in order to cover it. I'm not sure I got the whole question. Really, it's a stair stepping in terms of you answered one part, but then the second is what's the real impact and you have some good precedence from previous tariffs in terms of your expectations and how it will impact that particular product category and profitability? Well, the when the tariffs went down, the industry dropped prices somewhere in the 15% to 20% range. So I'm And anytime that anything that we're manufacturing outside of China will be better off than it was before. Okay, great. Thank you very much. Your final question comes from Truman Patterson with Wells Fargo. Hi, good morning guys. Thanks for taking my question. So your CapEx, you guided toward $400,000,000 which you said you're evaluating. I think a portion of this, you have capacity projects that are probably partially unfinished in your pipeline. Just how much additional capacity do you think you're going to bring online in the back half of the year and into 2021? And can you just remind us what products those are and possibly geographies? We stopped all increases in capacity when this thing started. So whatever was already started, we continued. The biggest one that I remember off the top of my head is we are expanding our laminate production in the United States with a new production line with new capabilities that will be in next year. We're running all of the capacity that we have now and we're looking at importing some from our overseas businesses to support the business in the short term is that we had some capacity increase this year in the Russian business. And I think there was a Russian ceramic business and I think there was some in the Eastern European ceramic business, both of which are running at fairly high rates and we expect to use them all in limited ways. The bigger pieces were new businesses. So we said that the sheet vinyl business would put a new line in Russia. It's turned profitable. And it the LVT lines in Europe have turned profitable. In it. The carpet tile lines in Europe, we are investing all the cash we have, we're investing back and expanding our sales force to expand the distribution of it as we speak. And then going forward, we're going through a strategic planning process now to determine what the right level is and where to invest in. I'm assuming most of it's going to be in enhancing the product mix and enhancing the product offerings with new features and benefits versus large capacity expansions at this point. Okay. So just for clarity, the only line or product that you might be bringing online over the next year, year and a half, is really just a laminate line in the U. S? Everything else has already been open? Yes. At this minute. Okay. Thank you. Thank you for your questions. I will now turn the call back over to Mr. Lorberbaum for closing comments. The business and the environment has gotten much better than we expected. We're taking actions to manage through the changing environment. We're continuing to manage our cost structures and we'll continue adjusting as needed. Thank you for your time and joining us today. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.