Earnings Call: Q1 2021

Apr 30, 2021

Good morning. My name is Natalia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries First Quarter 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, There will be a question and answer period. As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, April 30, 2021. Thank you. I would now like to introduce your speaker, Mr. James Brock. Mr. Brock, you may begin your conference. Thank you, Natalia. Good morning, everyone, and welcome to Mohawk Industries Quarterly Investor Conference Call. Joining me on today's call are Jeff Lorberbaum, Chairman and Chief Executive Officer and Chris Welborn, President and Chief Operating Officer. Today, we'll update you on the company's first quarter results. I'd like to remind everyone that our press release and statements that we make during this call may include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995, 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. Inc. 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. Now, I will turn the call over to Jeff for his opening remarks. Jeff? Thank you, Jim. In the Q1, we had all time record sales of almost $2,700,000,000 an increase of 17% as reported or 9% on a constant basis with adjusted operating income of $329,000,000 our highest ever first quarter EPS of $3.49 Our business continued to strengthen in the Q1 and did not reflect the industry's normal seasonality. Around the world, Consumers are continuing to invest in their homes, and new flooring plays a major role in most remodeling projects. We're also starting to see moderate improvement in commercial demand as global economies expand and businesses begin to invest in an anticipation of a return to normal. In most countries, construction is considered an essential business, so our sales have been less impacted by government restrictions, specific regions have interrupted our customers' businesses. Our Flooring Rest of the World segment continues to outperform with strong residential sales of our flooring, improved mix from our premium products and less exposure to commercial channels. The segment benefited from lower marketing expenses, product mix and increased days, which resulted in a greater margin in the Q1. Our other segments also performed well with strong growth in residential products and expanding operating margins. While their results were impacted by low commercial sales and severe storms in the United States. Market demand strengthened as the period progressed and our order backlog remains robust going into the Q2. Most of our businesses are running at high production rates, though inventories remain lower than we would like. Our production and operating costs were impacted in the period by supplying limitations in many of our markets as well as absenteeism, new employee training and severe winter weather in the United States. Our margins have benefited from stronger consumer demand, structure and productivity actions and leverage on SG and A costs. We've increased prices in most product categories and geographies, reflecting inflation in raw materials, labor, energy and transportation. Global transportation capacity has been limited, increasing our costs and delaying receipt of our imported products. We've seen similar constraints on local shipments and are increasing our freight rates to respond. The investments we've made in our U. S. Trucking fleet and local delivery systems have enabled us to provide our customers with more consistent service while improving our efficiencies. Even with COVID surges in some markets, we anticipate continued strengthening of economies around the world. Government actions and monetary policies are stimulating higher economic growth rates and stronger housing markets, and vaccination programs should reduce the risk of COVID related disruptions. Recent U. S. Stimulus actions as well as proposed infrastructure spending should further expand economic growth and employment level. Though government investments are lower than in the U. S, Other countries are beginning to see their economies expand, which should support ongoing demand in our product categories. We continue to implement our restructuring plans, which have achieved $75,000,000 of our anticipated $100,000,000 to $110,000,000 in savings. The balance of the savings will be spread over the next three quarters as specific projects are completed. In the Q1, we purchased program. Our balance sheet remains strong with net debt less short term investments of 1,300,000,000 Our leverage is now below one time adjusted EBITDA. Given our higher sales and operating levels, We are reviewing additional investment opportunities to expand our business and capacity. Jim, will you review the Q1 financials? Thank you, Jeff. Sales in Q1 2021 were $2,669,000,000 That's a 17% increase as reported and 9% on a constant basis. All segments showed positive volume growth with flooring rest of the world being the strongest. As a reminder, Q1 had 3 additional shipping days and Q4 will have 4 fewer days. Gross margin was 29 0.7% as reported or 30.1% excluding charges, increasing from 27.5% in the prior year. The year over year increase was driven primarily by higher volume and productivity, greater manufacturing uptime, improved price mix and favorable FX, partially offset by increased inflation. The actual detailed amounts of these items will be included in the MD and A section of our 10 Q, which we filed later today. SG and A as reported was 17.8% or 17.7 segment versus 20.3 in the prior year, both excluding charges, as we saw strong leverage on the increased volume and productivity actions, partially offset by inflation and FX. It gives us an operating income as reported of 11.9% of sales. Restructuring charges for the quarter were $11,000,000 and our savings, as Jeff said, are on track as we have recorded approximately $75,000,000 of the plan. Operating margin excluding charges of 12.3%, improving from 7.2% in the prior year or 5 10 basis points. Similar to gross margin, the increase was driven by stronger volume productivity actions, improved price mix and FX, greater manufacturing Time partially offset by the increased inflation. Interest expense of $15,000,000 includes the full impact of the 2020 bond offerings. Other income of $2,000,000 mainly the result of favorable transactional FX. Our non GAAP tax rate was 22% versus 20% in the prior year and we expect the full year to be 21.5% to 22.5%. Giving us an earnings per share as reported of $3.36 or excluding charges, dollars 3.49 which which is 110% improvement versus prior year. Now turning to the segments. Global Ceramic had sales of $930,000,000 a 10 percent, that's up 400 basis points versus prior year. And this improvement was from strengthening volume and price mix, increased manufacturing uptime and productivity, partially offset by unfavorable inflation. In Flooring North America, sales of $969,000,000 or a 14% increase as reported or 9% on a constant basis, driven by strong residential demand with commercial beginning to recover from its trough. Operating income excluding charges of 9.3 Inc. That's an increase of 4 10 basis points versus prior year. The improvement similar to Global Ceramic driven by increased volume and productivity, less temporary shutdowns, partially offset by higher inflation. And finally flooring rest of the world with sales of $770,000,000 That's an increase of 31% segment as reported or 15% on a constant basis, as our focus on the residential channel drove improvement across product, all our product groups led by laminate, LVT and soft surface business in Australia and New Zealand. The operating margin swing charge is of 20 0.9%, an increase of 7.40 basis points versus prior year, driven by the higher volume, favorable impact of price mix and productivity, partially offset by the increase in inflation. Corporate and eliminations came in at $11,000,000 and I expect for the full year 2021 to be approximately $40,000,000 to $45,000,000 Turning to the balance sheet, Cash and short term investments are approximately $1,300,000,000 with free cash flow in the quarter of 145,000,000 receivables at just over $1,800,000,000 giving us a DSO improvement to 54.4 days versus 50 7 days in the prior year. Inventories were just shy of $2,000,000,000 that's a decrease of approximately $200,000,000 or 9% from the prior year, with a marginal sequential increase of 4% in Q4 or approximately $80,000,000 Inventory days remain historically low at 105.5 days versus almost 130 in the prior year. Property, plant and equipment just over $4,400,000,000 with CapEx for the quarter of $115,000,000 versus D and A of $151,000,000 Full year CapEx is currently estimated at $620,000,000 with us reevaluating our plan and we will most likely see an increase from that level. Full year D and A is projected to be $583,000,000 And lastly, the overall balance sheet and cash We'll remain very strong with gross debt of $2,700,000,000 As I said, total cash and short term investments of over $1,300,000,000 giving us a leverage of 0.9x adjusted EBITDA. And with that, I'll turn it over to Chris for an operational overview of our Q1. Chris? Thank you, Jim. 1st quarter sales of our Flooring Rest of World segment increased 31% as recorded or 15% on a constant basis, exceeding our expectations. Sales across all our product categories and geographies were strong as housing and and Residential Renovation continued at a brisk pace. Margins expanded over last year to approximately 21% due to higher volume, favorable price and mix and positive leverage on SG and A, partially offset by inflation. During the period, most of our facilities ran at high levels, though some supply constraints limited our utilization. At this point, we anticipate some material shortages continuing into the Q2. Our backlog has increased as customer inventories remain low. We have raised prices across all product categories and have announced additional increases where material inflation has continued to expand. Our laminate business, the segment's largest product category, continues to record significant growth as consumers embrace our more realistic visuals and superior performance. Our leadership in premium laminate products and our higher volumes drove improved margins during the period. Our unique manufacturing methods create proprietary products that cannot be duplicated. Our next generation and laminate technology provides premium wood consumers with features that exceed traditional wood in beauty and durability. In the Q2, we are installing additional manufacturing assets to support future growth. During the period, our LVT sales rose substantially with significant growth in rigid LVT. Our margins expanded from enhanced formulations and operational improvements that increased our production speeds. In the period, our sales were restricted by material supply disruptions that caused unscheduled shutdowns. We anticipate continued improvement in our operations as the material supply normalizes and production increases to expand our new rigid LVT collections. Our sheet vinyl sales were limited in the period by COVID lockdowns of our retailers in Europe. We anticipate sheet vinyl sales improving as government restrictions are lifted and our customers reopen their shops. Our Russian sheet vinyl business continues to expand rapidly as we broaden our customer base and product offering. We have initiated a 3rd shift at the plant to support higher sales volumes. Our insulation business continues to grow as our panels provide the best option for energy conservation. Sales growth was robust in most of our geographies, Though COVID restrictions in Ireland impacted our plant operations and results, chemical supply problems have limited our production and dramatically increased our cost. We have announced our 3rd price increase to offset the continued inflation and chemical shortages are expected to last through the Q2. Our Wood Panels business delivered improved performance with our plant running full and operating margins expanding. As market demand for panels grows, we are allocating our production. We improved our mix during the period with increased sales of our higher value decorative products and mezzanine floors. We're installing a new melamine press to expand production of our higher value products and increase efficiencies. Our new plant that uses waste to create energy for the facilities is operating well and benefiting our results. Sales in both Australia and New Zealand increased significantly and margins expanded due to higher volume, improved productivity and favorable price mix, partially offset by inflation. Sales grew in soft and hard surfaces with a strong residential performance driven by high levels of remodeling and a solid housing market. Our updated carpet collections in Smart Strand and wool have enhanced our sales and mix. We increased our sales by leveraging our comprehensive soft and hard service collections, strong sales organization and industry leading service. The commercial performance was stronger, segment, primarily driven by projects that were postponed. For the period, our Flooring North America sales increased 14% as reported or 9% on a constant basis. Adjusted margins expanded to 9% due to higher volume, productivity gains and mix improvements, partially offset by inflation. Our performance was seasonally stronger than historical 1st quarters with consumers increasing investments in residential remodeling and new construction. Our commercial business continued to improve sequentially from its trough with growing investments in new projects. Our order rates remain strong and our backlog is higher than normal. We have increased prices as the material and transportation costs have escalated and will adjust further as required. All of our operations are maximizing their output to support higher sales and improve our service. In the period, we managed through interference from labor shortages and supply constraints, which impacted our production levels. Our inventories and service levels have also been impacted by delayed shipment of our imported products due to bottlenecks in ocean freight. We are continuing to execute our restructuring initiatives, which will provide ongoing benefit to our results as they are completed this year. Our residential carpet sales improved as consumers desire more comfortable, quieter spaces in their homes. Retail remodeling was our strongest channel, that offer superior design and performance. We have significantly reduced operational complexity by simplifying our yarn and product strategies and reducing low volume SKUs. To grow our workforce to meet higher market demand, we have implemented extensive training processes and our relocating assets to increase production where necessary. Our commercial sales are recovering as business remodeling increases along with economic improvement. We are also seeing increasing volume of higher value products as larger specified projects are commencing. The April Architectural Billing Index reflects the highest level of project inquiries since 2019. Team. We have increased carpet tile production in anticipation of the commercial markets improving. In our commercial LVT business. We are managing supply limitations and import delays. Our laminate sales are setting records as the appeal of our realistic visuals and waterproof performance expands across all channels. Through numerous process improvements, We have significantly increased our domestic production and are supplementing it with imports from our global operations. We are installing additional production at the end of this year to further expand our sales. Our new line will also produce facility to enhance our volume and cost. We are ramping up production of our premium ultra wood, the first waterproof natural wood flooring that also features industry leading scratch, dent and fade resistance. Ultra Wood is being well received as a superior alternative to traditional engineered wood flooring. Our LVT and sheet vinyl sales continue to increase in the new construction and residential retail channels. We are upgrading our LVT offering with enhanced visuals, unique watertight joints and improved stain and scratch resistance. Our local manufacturing has continued its improvement and production output increased as we implemented processes similar to those proven to work in our European operations. Our service has been impacted by material supply disruptions in the U. S. And delays in shipments of sourced products. We anticipate our supply will increase and we will see further improvements in our domestic offering and production output. In the quarter, our global ceramics sales rose 10% as reported and 5% on a constant basis, with sales increases in each of our markets driven by growth in residential remodeling and new construction. The segment's adjusted margin expanded to approximately 10% due to volume, price, mix and productivity gains, partially offset by inflation. Our Russian, Brazilian and Mexican ceramic businesses delivered strong results, Though they were limited by their capacities and are allocating production as necessary. All of our businesses are facing rising material, Energy and Transportation Costs, and we have taken pricing actions to offset. Our U. S. Ceramic residential sales grew from remodeling and new Construction and commercial sales are improving from their low levels. Our strongest growth was in new residential construction and we're seeing activity strengthen with contractors at our service centers. We are introducing higher value products, including polished, mosaic, decorative wall and antimicrobial collections to improve our mix. We are focusing on the fastest growing channels and implementing advanced technologies to make doing business with us faster, easier and more profitable for our customers. Across the business, our plants are running at higher levels, and we have increased our productivity with our restructuring actions. Escalating freight costs have hurt our margins, and we are raising prices to offset. Our quartz plant is improving its productivity, and we are introducing more sophisticated vein collections, which are increasing our mix and should enhance our margins. In the period, the ice storm that hit the Southwest temporarily stopped production at most of our manufacturing facilities by interrupting our electricity and natural gas supply. The facilities have all recovered and are operating as expected, improving our service. Our European ceramic business delivered a strong performance in the quarter, driven productivity, improving mix and greater Consumer Demand. Sales grew substantially in Southern Europe and in our export markets, led by robust residential business and with some improvement in commercial projects. Our operations are running at high rates to satisfy the greater demand and improve service, leveraging our cost and enhancing our results. We are increasing our production levels through improvements in our processes and equipment as well as optimizing product flows to support growth and enhance our mix. Our ceramic businesses Mexico, Brazil and Russia are all benefiting from lower interest rates and expanded credit, which are driving greater home remodeling and housing sales. In all three businesses, our order backlog is high, and we are allocating production as necessary. We have streamlined our product offering and enhanced our planning strategies to optimize service. Our inventory levels are low and we are maximizing our output by enhancing our manufacturing and scheduling processes. In Brazil and Mexico, we are increasing capacity this year to improve our sales and mix. In Russia, We are optimizing our tile production and ramping up our new premium sanitary ware plant to meet growing demand. Sanitary wear complements our floor and wall tile offering and allows our owned and franchised stores to provide a more complete solution to satisfy our customer needs. Given higher market demand and our increased sales, we are reviewing the expansion of our ceramic capacities. With that, I'll return the call to Jeff. Thank you, Chris. As we progress through the year, we anticipate that historically low interest rates, government actions and fewer pandemic restrictions should improve our markets around the world. Which foresee the present robust residential trends continuing with commercial sales slowly improving in the 2nd period. Across the enterprise, we will increase product introductions that provide additional features to strengthen our offering and margins. We're enhancing our manufacturing operations to increase our volume and efficiencies while executing our ongoing cost savings programs. Our suppliers indicate that material availability should improve from the first quarter, though some operations could still face supply constraints. We are managing challenging labor markets in some of our U. S. Community, and supplemental federal unemployment programs could interfere with staffing to maximize those operations. If raw materials, energy Our 2nd quarter adjusted EPS to be $3.57 to $3.67 excluding any restructuring charges. Currently, our strong backlog reflects the escalated levels of residential demand across the globe. We're introducing new product innovations to enhance our offering and optimizing our production to improve our service. We're preparing for an improvement in commercial projects, anticipating an economic expansion and a return to normal business investments. With strong liquidity and historically low leverage, We will increase our capital investments and take advantage of opportunities to expand. We'll now be glad to take your questions. Your first question is from the line of Keith Hughes with Truist. Thank you. I know you don't normally like to talk more than 1 quarter ahead, but it's kind of an unusual period, so I thought I'd give it a try in the second half of the Do you anticipate, despite some more difficult comps, increased volume in products year over year and also in margins, given you got even tougher margin comps, do you think you'll be able to push the ball forward on margins in the second half? Let's see if I can give you some qualitative views of things. We've already provided the Q2 guidance in which We believe the present trends will continue into the Q2. And then the Q2 also included expected supply limitations that are going on. We're raising our prices and we expect to run all the facilities at high rates. As you look into the second half, the third quarter, We think residential sales will continue to remain good. We think commercial demand will improve. Our production rates should continue to increase. Those sales in some areas could be constrained by capacity or supply that we talked about a few minutes ago. Last year, just to remind you, the market strengthened as it went in will make the comps higher in the Q3. Also remember, in Europe, people take summer vacations in the 3rd period, and it impacts Consumer behavior or other government actions with COVID. As you go into Q4, remember, we have 6 fewer days than last year, We do expect more normal seasonality this year and production levels than occurred last year. For the full year, if you look at it, we expect strong improvement sales and income. We see SG and A being leveraged and operational improvements also helping our margins. With the higher growth, we are evaluating raising the capital investments for both this year and next, and we're in the process of thinking it through. And the tax rate, as he said, will go up from last year to about 21.5% to 22.5%. That's it. Okay. And just final question. You've talked a lot about your laminate growth. I believe you used the phrase record setting in the release. That growth in laminate, is that taking share from other laminate producers? Or is this a case where it's Actually making a dent on LVT or other product sales. Keith, the market has become a clickable flooring market with LVT Laminate and Wood Alternatives. Our laminate is waterproof with better features and is expanding in all channels, And we're importing laminate from other plants and adding capacity to satisfy. So would that be it's just a clickable share gain? Is that a way to say it? It's really that people are looking at they go into the stores and I see them all and they're being presented all as the same as alternatives. Now the other part that's happening is we focus on the premium part. So we have a waterproof story that's equal with LVT and the visuals and things are equal better than the other products that they're offered. So it's really growing the category. The category is improving and then premium laminate is really being expanded and we're really limited by our capacity. This year, we've substantially increased our production in the U. S. Plants, and we're importing products from plants around the world, and we still can't satisfy the growth. By the end of the year, we'll have a new line that will be up and running, which will give us a lot more production. Okay. Thank you. Your next question is from the line of Phil Ng with Jefferies. Hey, guys. Jeff, I guess bigger picture, after seeing pretty noticeable declines in carpet for the last few years, Looks like you saw a really strong growth and then participate with the strength you're seeing in R and R and new construction. If we look out to 2022 and let's say if we see a mid single digit growth environment for R&R, for example. What type of growth could you see carpet and ceramic putting up? I think what you're seeing is the whole category of flooring is increasing. And so all the categories are growing. I still think that The carpet will lose share, but it's in a much higher growth market, which is causing it. At the other side, we still have the whole commercial carpet business, which is really at low levels. And as it picks up, we have higher margins in it because they're more differentiated products. And that's going to help as we go forward, both in it and as well as the ceramic categories as you go through. Got it. It's really helpful. Based on your 2Q guidance, it looks like your margins is holding up pretty well and certainly you've been Really proactive on pricing and may go out with more price increases. Based on what you have out there and the traction you're seeing, Do you feel pretty good that pricing alone should like fully offset inflation this year? And do you envision any at least timing mismatches throughout the year. Well, we're doing everything we can to keep it aligned. As you know, the materials, energy and transportation continue to rise. They're flowing through inventory and we're raising prices as we see it. We're having to react to the changing prices in our supply base. Every month, we get a different view of it than we had the month before. We are Trying to push through price increases to align with it, and so far, it looks like we're doing reasonably well at that. Some products we've actually increased 3 times already. And all we can do is keep reviewing what's going on and keep making adjustments. Okay. That's pretty encouraging. Appreciate it. Thank you. Your next question is from the line of Susan Maklari with Goldman Sachs. Good morning. My first question is around the LVT facility in the U. S. Can you give Some update on how that's coming through and how that's expected to kind of add to this demand that you're seeing there. Yes. So just a quick start out, the European operations are operating well and continue to improve our cost and margins. We have people in the United States over there on a continuous from Europe, and they're implementing the demonstrated processes that we have there, and we're improving our speeds and yields. It's been disrupted both in the U. S. And Europe at the moment. The PVC supply is limited both in the U. S. And in Europe. And we expect it to get better, but it's causing us to not to run the plants to optimize them at this minute. Okay. That's helpful. And then As a follow-up, you've obviously been making progress in terms of a lot of the cost cutting and the productivity initiatives that you set out last year. Can you give us some more color on where you are with that and how we should be thinking about that flowing through for the Q2? And then in the back half of the year as well, especially as we anniversary some of that. Okay, Susan. So, we have made significant progress. As we We've seen about $75,000,000 of the $100,000,000 $110,000,000 that we had planned. I'm starting to see See that impact favorably impact our cost and margins. We'll complete as we go through the balance of the year. I would expect that Q2 would have the most as we anniversary those restructuring actions from Q2 2020. And so if you look at the additive savings of somewhere between $25,000,000 $35,000,000 Those are included in our full year projections. Just remember that the $75,000,000 is embedded in last year in the prior quarters. So the comparisons already have it embedded in it, the first 75,000,000 Your next question is from the line of Tim Wojs with Baird. Yes. Hey, everybody. Good morning. Maybe just the first question is how you're thinking about investments and SG and A Has run a little bit lower than sales over the last couple of quarters. And so just as you think over the next 12 to 18 months, Where are some of the biggest opportunities for you guys to bring some SG and A investment back into the business? You're right, with the SG and A, it's been lower. We're going to have to start increasing the SG and A. But for the top line growth, the goal is to grow the SG and A lower than the growth rate at the top, so we get leverage out of it and still satisfy the need to bring new products to market and at the same time to support the expanding sales on the top. Okay. Okay. So you'll bring some back, but be able to leverage it. Okay. And then just on the M and A environment, I mean, your balance sheet is probably in the best shape It's been in years. Can you just give us an update on the M and A environment and kind of how that's progressing, if there's any sort of opportunities out there for you to take advantage of. As you said, the balance sheet is in good position With the ability to invest significant amounts of money, we're looking for the right opportunities at the right prices to make sure that we can get the returns we need over time. And you never know when those things are going to get through, an agreement that takes a while. But There are things available, and we're talking to people. Your next question is from the line of Stephen Kim with Evercore ISI. Thank you much, guys. Historically, Jim, you guys have given sort of the breakout input cost, volume, productivity in terms of the benefits of operating Comm. I was curious if you were able to give us the rundown on that. As I said, Stephen, you'll get and our MD and A because we will file our 10 Q later today. But was there one specific one that you were No, that's okay. We just no, that's fine. Well, I guess we'll have to wait. That's fine. Let me then ask you a question, if I could about your comment about making potentially more capital investments that you're evaluating some opportunities. Was curious If you could give us a hint at which segments you're evaluating the most opportunities in? And related to that, in laminate, you talked about just a tremendous amount of demand in North America where you're expanding capacity already. How much are you expanding that capacity, both in North America and Europe? And are you confident at this point that it's enough? Let's see if I can answer that one. To start out with the businesses, the pieces that have the most limitations right now would be U. S. Laminate, our European board businesses and our ceramic businesses outside the U. S. And Europe would be the ones that are the most constrained at this point. We have new capacity coming in this year to add to both the U. S. And European laminate. In the U. S, I think it's around $130,000,000 $140,000,000 of additional capacity. I don't remember the number in Europe. We have new equipment coming in to both Brazil and Mexican operations in ceramic, And we have a lot of ongoing optimization in our LVT production, which will increase it. And there's other things in that, but those are the big ones. Yes. No, that's very helpful. Thanks a lot for that. And then lastly for me is just margins. You mentioned that 1Q was a bit of an unusual quarter seasonally, and a lot of those things, I would imagine, benefited your margins in 1Q. Usually, margins rise sequentially into 2Q, and I'm wondering if you think that that is expected to happen again this year, Or would you potentially see margins down just because of some unusual seasonality that's happening this year? You're right. Q4 1 was seasonally stronger, which does temper the increase as you go through. The floor and rest of the world, which we said, the first quarter margins was positively affected by product mix, lower marketing expenses and increased days. So that one's going to that one's not going to stay at those levels. And then we have the Q1, remember, this year has 5% more days. So when you think about the historic relationship, The Q2 usually has more days than the Q1. This year, it's going to reverse. So it changes the relationship. So you have to keep all that in perspective when you're looking at the trend line. Yes. Got it. Thank you very much, guys. Thank you. Your next question is from the line of Eric Bossard with Cleveland Research. You've talked about relative to your original expectations for the quarter, the rest of the world was better. You didn't totally characterize the Flooring North America and ceramic. What I'm curious about is within those two businesses, Anything that notably limited the growth of those in the quarter that changes and the growth can accelerate in the coming quarters. I can speak to U. S. Ceramic. The U. S. Ceramic was stronger in residential, while our commercial is just starting to improve. And then in the Q1, we were negatively impacted by the storm, Which interrupted electricity and gas supply, and we estimate at least $15,000,000 to $20,000,000 sales impact. And we're raising prices to offset transportation going forward. In the other North American businesses. We did have limitations on the availability of product to satisfy You heard about the laminate we've been trying to do. The LVT was also impacted by lack of supply of PVC to run the plants as hard. The imported products are all coming in late, so we lost sales in those as we go through. And then in the carpet manufacturing, in some of the markets, we're having trouble finding the labor to run the plant. So our raw materials and some of our production is limited by labor, but we're trying to do everything we can to improve that, which includes training program on one side, and we've actually picked up and moved some equipment from one local market to another plant to show that have more labor availability. So all those things impacted it. And We've built that all into the projection in the Q2. On the other hand, we still believe we're going to have supply limitations The chemicals coming out of the Texas area are all in limited supply. We don't know exactly how long. We think that Supply is going to get better, but we'll have to see how it goes. Okay. That's helpful. And then secondly, just curious on your inventory situation and perhaps the channel inventory and as much as you have visibility to that, your sales are up And as much as you have visibility to that, your sales are up a good bit. Your inventories are down year over year on your balance sheet. How do you think about rebuilding inventory, your inventory or channel inventory? How important or relevant is that? And when do you think that might happen? So I'll start with the inventory sequentially. As I noted, we did increase by about $84,000,000 which is impacted by combination of volume inflation and PACS. And if you remember back in February, we talked about that we thought the inventory would increase somewhere between 5% and 10% from 2020 year end to 2021 year end. We would now expect that We do believe that the turns will stay higher than historic levels. In terms of The channel inventory, we do believe the inventory remains low with most of our customers, And this should actually help the near term demand. In addition, We are working, obviously, to try to improve and increase our service as we go through the quarter as well. I spoke to several of our large customers this week and their business is as strong as some have been in business for 40 years. It's as strong as I've ever The customers, some of them are being limited by their ability to install it, most of them. So in addition So we haven't been able to fill the channel like they would like in our service. Instead of being immediate, In some cases, it's taking a little while to get there. That's not impacting them that much because they couldn't install it if we could ship it all the more. So I think the point is that the backlogs are good, the demand is good, and we have to get them aligned and it It should be good through the Q2. And at this point, I can't see why the Q3 wouldn't be also good. Great. That's helpful. Thank you. Your next question is from the line of Truman Patterson with Wolfe Research. Hi, good morning guys and thanks for taking my question. Just wanted to follow-up on Flooring Rustle World margins, very strong op margin in 1Q at 21%. And Jeff, team. You suggested that we shouldn't use this kind of 21% as a new base going forward, right? But When I look at the Q2, it seems like you all should still be generating very strong leverage from the sales growth. So I'm just hoping you can help walk us through or frame some of the costs that might be coming back online in the back part of the year, the European vacations. Just seeing if you can give a little bit more color there. Okay. So the Q1, one is that the sales are stronger, just as we said at everything else coming into it. So We do see the sales and margins increasing all year for the flooring rest of world. As we said, it benefited from lower marketing expenses. So we're going to have to ramp up the marketing expenses as we go through the year The higher level, so that's going to impact it. You're going to have the product mix was really favorable in the Q1, and we don't see that Maintaining itself in the mix between different channels and products. And then the increased days also help by getting greater leverage through it as we go through. I mean, the margins for the year are going to be better than last year. They just won't be at that level as we go through. The Q3, if you go back historically and look at the business, you'll see that the rest of world margins and sales. The 2nd quarter is the highest usually for the year and it's because of those vacations. If you go back and look at historical, you'll See a trend line that you should use as a base to start. Okay. Okay. Thanks for that. And For clarity, you were specifically talking about margin expansion for the full year, not necessarily each quarter. On rest of world. Yes. That's correct, Truman. Yes. Okay. Okay. And then on LVT, Seems like you're making some pretty good progress on the internal manufacturing both at U. S. And Europe. But Could you remind us again how much capacity in dollar terms you think you'll be at when everything is running at full capacity? And Part B, just along with your 3rd party LVT imports, Any idea what your market share might be running at in LVT in the U. S? So our manufactured capacity is over $1,000,000,000 and we get it all optimized, and we're headed towards that. Place. We're reviewing long term what we do long term to go from here. We haven't concluded at this point. What else? I would say right now, Truman, we are growing with the market in the U. S. And even though we still have shared gain We're not 100% sure what the market is, but we think we're growing at least as fast as the market. Okay. Okay. Thank you and good luck on the upcoming quarter. Thank you. Your next question is from the line of Justin Speer with Zelman and Associates. Good morning. Thanks, guys. One question I had in terms of You're mapping out future plans. I know maybe you can't speak to details, but rewinding a few years, you Made the decision to do a lot of greenfield investment, internal investment, I guess, as opposed to going out and doing a lot of M and A. I guess, as you look at it today, How should we think about maybe prospective growth projects? And maybe give us a sense for the magnitude range of magnitude of potential CapEx Projects and or M and A in terms of capital priorities. I think you're ahead of us a little bit. We're in the middle of this study. Some of the things from the first time we put in new machinery that hadn't been run by anybody with a learning curve. We went into new markets and products like countertops we never made before. We went into new geographies. We put up plants in Russia and a new product category. We had no more customers. So So it took us longer to get them, but I mean, we put in ceramic countertops in Europe. It's in our plan to expand it. Our Russian vinyl plant, we just put a 3rd shift on. It's making as much money as anything else that we have in the business. So when we got them all together, it just took us longer. LVT, we're in the last steps a bit to get it up where we want to. When you greenfield new stuff outside the normal, it's going to take longer. We haven't put the plans together. So far, The plans are all around how to expand existing businesses and existing geographies, which an existing equipment is operating. So we don't anticipate having the same things to overcome. On the other side, We're also looking at what can we do to step change the business at the same time. So we haven't got far enough along on that one to decide. We really didn't The economies in the business to be doing as well this year, and we're really looking at things we planned in 'twenty two and 'twenty three and pulling them in. That's helpful. One other question I had is just, I think the topic that you are right now Across most of the earnings calls, there's been supply chain and commodity prices, input, transportation prices. Is there any context you can give us in terms of what your commodity basket It is up and maybe when you expect the most, I guess, extreme part of that year over year headwind to flow through your income statement. So I guess the two questions, how much is Your basket up and when do we start seeing the most extreme part of that at a lag into your P and L. So So we're just like everybody else. It started rising in the Q4. We have about 3.5 to 4 months of inventory, call it, round numbers, so it flows through then. So some of it's hitting in the Q1. The biggest part is going to show up in the 2nd quarter, which we're trying to get the prices aligned with it. And in the 3rd quarter, There's going to be more of it, and we still don't even know how high it's going to inflate as yet. So they're all working through, working through. We think we've got the pricing in the marketplace, the Time to hit when it's going to show up in the P and L, and we're doing everything we can to manage it as we go through. And last question, I'm sorry. The increase in the thing, we think we're raising things round numbers 3% to 8%, And there's something that are 25%. So it's all over the board. And Is the reception to these price increases consistent across all categories? The marketplace It's pushing prices through everywhere, all our competitors, and we have the same increases in raw materials. For the most part, as we said, the supply through the channels are low. So it's easier than the historical to push them through at this point. Perfect. Thank you, guys. Really appreciate it. Your next question is from the line of Michael Rehaut with JPMorgan. Thanks. Good morning, everyone. Thanks for taking my questions. First, I just wanted to Get a little better sense of price mix for the different businesses. And more specifically, thinking about mix here, Which has been an issue over the last year or 2, I would say particularly more in ceramic and flooring North America. Could Can you just give us a better sense? Obviously, when you talk about price mix on the whole, you've had certain price increases in the market and that influences the price part of price mix, but if you could give us a sense of how mix itself is going for both ceramic and flooring North America, and if that's changed at all so far this year versus the prior year or 2. Michael, I'll just comment on ceramic. One of the things that is impacting mix at the moment is we have a stronger residential business And the commercial business is just starting to come back. And typically, our pricing would be a little higher on the commercial side. So that's also impacting the other where we have large commercial businesses, the commercial is doing better, but it's still way below where it was. And in all the businesses, the commercial has higher margins because the products are more differentiated. So we have significant opportunity over the next, I don't know it's going to be year, year and a half as those move back to normal, Our higher margin products, the categories there, so that will help everything. Look, and I appreciate that. I mean, I guess Also what I'm thinking about here is within the residential sphere, over the last couple of years with LVP coming That's caused some mix challenges in your other flooring categories like carpet or ceramic, perhaps to better compete with LVT. So I was wondering within the residential product portfolio as well, Have you seen any change in mix for the better or worse or if it's stabilized? Let's see if I can answer that. It's much more complex. So what you have is things going on. So in the carpet business, you had polyester carpets, which are lower priced carpets growing as a share of the market. So that's impacting the mix. 2nd is, at the moment, you have Different channels growing. So the new construction business is growing rapidly, and it tends to use lower quality products in the remodeling part of the business. The remodeling part of the business is picking up and doing well, and that's helping the mix in the other direction. And then you have the commercial side, which has the highest margins of the versus it. And the sales are low, So it's impacting the mix as you go through it. They're all moving at the same time, and then, we just have to see how they evolve. No thoughts in terms of the overall net impact? We're expecting the mix to improve through the year. The question is the remodeling business comes. What happened is the remodeling is higher margin than the builder. The builder picked up earlier and the remodeling piece is doing better. So We're hoping that we're going to get a mix improvement as we go through the year. And couple that, Mike, with commercial improving, You'll get also the benefit of the favorable mix as well. Right. No, that's helpful. Just secondly, I guess, on the Q2 guidance, you talked a little bit about how you expect Rest of World Margins to maybe come in from this 21%. But in terms of sales versus margin, You've talked about increasing your production rates. There's still a lot of pent up demand out there. You won't be in the summer months that impact your European businesses. So is it fair to expect sales on an absolute dollar basis to be greater than in the second quarter, that the second quarter should be greater In the Q1, all those things considered? Yes. The second quarter should be higher than the Q1 I won't have the same differential on the piece because you have the 5% more days than the first one That you didn't have, so the comparisons versus historical aren't exactly the same. But we expect the sales At the same time, because the inventories are still low, we're limited to how much we can ship out. There's it also, but we're trying to get the capacities up. And then you throw on top of it, you have the supply piece, Your next question is from the line of Matthew Bouley with Barclays. Hey, good afternoon. Thank you for taking the questions. I actually wanted to follow-up on the last one Around seasonality, it was touched on earlier with the margins into Q2, given what you're implying. I appreciate everything you said, the unusual seasonal strength of Q1 and the shipping days issue. But is there anything else When talking about the margins that might be a greater sequential headwind and specifically I'm thinking of price cost is just being materially different in the Q2 versus what you got in the Q1. Thank you. I'll just comment on the again on Flooring Rest of World. Q1 benefited from lower marketing expenses, improved product mix and increased days, which caused a greater margin in that business. The SG and A and all the business is going to go up to support the higher level of sales. We're going to put more new products out. So it's going to go up where we should still get some leverage. We're trying to keep it below the volume increase, So we're trying to put enough in it to support not only this year, but to keep the business increasing in next year as When you compare to last year, we were more stingy in the investments we were making because we didn't know what the economy was going to be. So that's going to increase, you need to think about the margins. The cyclicality of the piece, You have to keep when you look at Q1 versus second, you almost have to take 5% off the Q1 to compare it, is it to get it in the same relationship before you start. And then I just keep reminding people that we've seen some of the models that they don't take into consideration European Vacations, which affect both the Rest of World and the Ceramic business in the 3rd quarter. And when you step back again for the full year, we expect strong improvement in sales and income. We'll see that leverage in SG G and A, and then we'll also get the operational improvements as well. Yes. No, that's great color, Understood. Second quick one is just on the production rates in the quarter, seemingly high and above normal seasonality. I'm just curious on how that might impact your fixed cost absorption this year relative to normal. Does that therefore mean that the incremental margins on volume might be higher than it typically is as you deliver on these inventories you're producing today? Thank you. It does help and it will continue to help. Now, we haven't talked about all this stuff going on even where we are With COVID and pieces, we still have higher absenteeism. The labor is not as so hard to manage. We're paying overtime to get people So there's other costs that are also impacting the business, trying to get as much volume through the place. And then the fall would really as we come out of the year, the question is going to be, last year, we ran hard all the way through the Q4, all the way to the end. And The question is going to be, what does business look like when we get there? It's too early to tell. I'm hoping it's going to be strong all the way through. Got it. Well, great. Thank you for the color. Your final question is from the line of Kathryn Thompson with Thompson and Research. Hi, thank you for taking my questions today. Focusing on the port congestion, which has been an issue for many companies along the value chain. Could you give us an update How you're managing this port congestion and more specifically, thoughts on, are you increasing inventory distribution space. How are you able to meet growing demand in light of the port congestion? And just help us understand the cost, increasing cost with the storage and transportation ability to plan for the future. Thank you. Like everyone else, the delays are there and the costs are there. In some cases, The freight costs are 4x higher than they were in what we call normal or where they were. So there's a huge impact on the cost that have to be added into the products. Then the delays are anywhere. It could be 4 weeks to 8 week delays in it. We are ordering things earlier to try to get them In line, it's getting a little better as the stuff starts landing from what we have, but we're Still chasing it as we go through. And at this point, we're assuming that the transportation is going to stay like this for quite a while, and we're Trying to align the purchases and the timing of it to get them here. We'll see how it works out. Are you have you stepped up and renegotiated rates? Because one of the things that we're hearing is You're going back, there's several different companies that are going back and renegotiating rates and that has allowed them to get more space on ships. Has that been your experience? I can't say that we're getting more space. We are We have put together orders and the orders are getting put through put on the ships with delays in them And we're adding the delays to the piece to try to align it. And the prices that we're paying are high. Okay. I'll follow-up on that later. And then a follow-up on just the ripple effect of the Texas freeze. Understand the key products, just resins, are significantly disrupted. Where do we stand today in terms of the resolution with that? From the supply side, we're still in the middle of it. We have things that we're buying. I mean, we're sending trucks out. It's coming off their lines, and we're picking it up and moving it to, I mean, the same day to try to keep the plants running. So I mean, the problems are still there. It affects anything that's a chemical From glues in one business to resins in another. And The indications are that it's getting better. What the hard part is, all the customers like us are ordering more, so the capacities are constrained even though they're getting better. And it's difficult to tell whether you're going to get what percent of what you're going to get, when you're going to get. And we're just playing as it goes and begging for everyone we can get. Okay, great. Thanks very much. We appreciate you being on the call. The markets are strong. We're improving our performance of our businesses. We're well positioned In the business, and we're managing all the disruptions as best as possible. And we think we're going to have a good year, But we have to manage through all these things, which makes it a little more unpredictable because of the supply base and all the things we've been talking about. We appreciate you joining us, and have a good day. This concludes the Mohawk Industries First Quarter 2021 Conference Call. Thank you for your participation. You may now disconnect.