Mohawk’s Global Ceramic Segment Sees Slight Sales Increase in Second Quarter of 2018
Volume improved but pricing weakened in North America for Mohawk’s Global Ceramic Segment in the 2018 second quarter.
Mohawk Industries, Inc. recently announced 2018 second quarter net sales of $2.6 billion, up 5% in the quarter and 3% on a constant currency basis. For the six months ending June 30, 2018, net sales were $5 billion, an increase of 7% vs. the 2017 first half as reported or 3% on a constant currency and legacy basis.
“Our results fell short of our expectations, and we are taking actions to improve the performance of our U.S. businesses,” said Jeffrey S. Lorberbaum, chairman and CEO. “With the overall economy, our results were negatively impacted by input inflation, higher transportation costs, a stronger dollar and a tight labor market. We were also affected by changing product mix, timing of price increases, lower production units, start-up of new projects and the delayed Godfrey Hirst closing. To address these, we are raising prices, expanding in growing channels and participating in new products and geographies. In the U.S. market, we are increasing our LVT production and sourcing, as LVT continues gaining market share.
“Our businesses outside North America showed significant improvement and our results improved more without start-up costs and expired patents. Although the economy in Europe slowed somewhat, the results in most of our non-U.S. businesses improved substantially with LVT, Russian ceramic, wood panels and insulation leading the growth. As the dollar strengthened during the period, the euro fell from $1.24 to $1.16, reducing our translated results in U.S. dollars.
“Our company and industry are absorbing significant inflation. This year, we have had two carpet price increases and recently followed those with a third increase to offset additional material and freight inflation. We are taking pricing actions in most product categories impacted by inflation, including our higher value ceramic products.
“During the quarter, our new expansion projects had start-up expenses of $15 million as we continued investing to broaden our product offering and geographic penetration. These investments will enhance our sales and profitability, with most of the impact occurring in 2019 and beyond.
“For the quarter, our Global Ceramic Segment sales increased 3% as reported and 2% on a constant currency basis. Operating margin was approximately 15% both as reported and on an adjusted basis, declining year over year due to inflation, product mix and start-up costs. During the period, our North American ceramic volume improved, with our average price weakening from growth in lower value products and channels. To increase our share of the ceramic market, we are delivering innovative products, enhancing our service and increasing our participation in the home center, builder and commercial channels. Our U.S. countertop growth is accelerating, and construction on our quartz countertop plant in Tennessee is on schedule, with production slated to begin by the end of this year. In Mexico, our sales increased as the quarter progressed, outpacing the market. We have doubled production at our Salamanca plant and introduced larger sizes to the market. European ceramic sales slowed slightly with the economy, while margins increased from improved price and mix and higher productivity. As we expand our Polish factory, we are preparing to realign manufacturing among our European plants to optimize our assets and improve our offering. Our Russian ceramic sales and margins remain strong, and we are expanding our porcelain floor and wall tile capacity.
“During the quarter, our Flooring North America Segment’s sales increased 2%. The segment’s operating margin was 9.5% as reported and 10% on an adjusted basis, absorbing inflation, lower than expected production and start-up costs. The realization of our price increases was later and our product mix declined more than we anticipated. As our raw materials and freight costs continue to escalate, we announced another price increase to recover. Our LVT sales in the period grew less than we forecast due to a delay in shipments of our sourced products. We anticipate a significant increase in LVT sales as our new U.S. production ramps up and the supply of sourced products increases in the third period. Our residential carpet improved led by the builder, multi-family and Main Street channels. Our new introductions in SmartStrand Silk Reserve, Air.O unified soft flooring and our luxury Karastan collections gained momentum in the market. Our new RevWood collections with water proof technology are growing rapidly in the retail and builder channels as an alternative to hardwood. Our commercial hard surface collections showed stronger growth, and our commercial carpet bookings strengthened as we progressed through the period.
“For the quarter, our Flooring Rest of the World Segment’s sales increased 16% as reported and 8% on a constant currency basis. The segment’s operating income increased 16% as reported, with an adjusted operating margin of 17%, as a result of improved price, product mix and productivity, offsetting inflation, start-up costs and expired patents. Our LVT sales were up dramatically and will increase more with our manufacturing expansion. Until now, we have been producing flexible LVT, and we have completed the initial production on rigid LVT, which will be launching in the third quarter. Our new premium laminate products utilizing unique technologies and water resistance are taking share and improving our mix. In Russia, we are introducing our latest European technology with our new laminate plant expansion. We are using our European sheet vinyl to build demand for our new Russian plant, which should start up by the end of this year. Our new carpet tile plant in Belgium is ramping up to penetrate the European commercial flooring market. Our wood panels and insulation products grew significantly from our manufacturing investments, better material supply and stronger market conditions. We completed the Godfrey Hirst acquisition on July 2, a month later than we had anticipated, and we are implementing strategies to become a total flooring provider in Australia and New Zealand as we have in the U.S.
“We are taking a comprehensive approach to improve our performance and profitability in the U.S. Our initiatives to improve pricing, increase sales in growing channels and reduce cost will benefit the remainder of the year. Given the impact of inflation, timing of price increases and other challenges, we do not anticipate that our actions in the U.S. will offset the pressures we are facing before next year. We expect continued strength in Europe and Russia, where inflation and shifting product preferences are less intense than in the U.S. Around the globe, we are entering new products and geographies as well as expanding constrained categories. Having closed Godfrey Hirst, we are already enhancing the largest flooring provider in Australia and New Zealand. In the U.S., we are investing in growing categories such as LVT and quartz countertops. If the recently announced Chinese tariffs are implemented, they will enhance our U.S. market position and results. Taking all of this into account, our EPS guidance for the third quarter is $3.54 to $3.64, excluding any one-time charges.
“We are passing through inflation, optimizing our new expansions and maximizing our LVT position to increase our profitability. Our talented organization, innovative products and strong balance sheet provide long-term advantages, and we continue to pursue acquisitions that bolt on or add new dimensions to expand the value of our company.”
Additional details are available at www.mohawkind.com.