Sales Essentially Flat for Mohawk Global Ceramic Segment in 2018 Third Quarter; Eliane Acquisition to Close by Year’s End
Mohawk’s Global Ceramic Segment is looking to overcome challenges through various strategies, including the acquisition of Brazil-based Eliane.
Mohawk Industries, Inc. recently announced 2018 third quarter net sales of $2.5 billion, up 4% in the quarter and 5% on a constant currency basis. For the nine months ending September 29, 2018, net sales were $7.5 billion, an increase of 6% vs. the prior year as reported or 2% on a constant currency and legacy basis.
“Our third quarter results fell short of our expectations,” said Jeffrey S. Lorberbaum, chairman and CEO. “Sales growth in all segments was lower than our estimates, price increases had less impact and we experienced more inflation than predicted. Transportation costs continued to rise due to the limited availability of common carriers and higher fuel prices. Additional manufacturing reductions were required during the period to control our inventory levels. Our LVT sales were up significantly but were still constrained by internal production. Our margins were further impacted by a decline in product mix from customers trading down, import competition due to the strengthening U.S. dollar and higher volumes in channels that use lower value products. Most of our markets have experienced weakening demand, inflation and pricing pressures. In the period, the acquisition of Godfrey Hirst added revenues of approximately $70 million, even as the Australian market slowed due to higher mortgage rates, lending restrictions and reduced exports to China. For the period, start-up costs related to new capital projects were $20 million, in line with our plan.
“In the U.S., we continue to execute additional pricing actions across most product categories to offset ongoing inflationary pressures. Our LVT sales are expanding from greater internal production and sourcing programs. We announced price increases on products that we import from China to pass through the new tariffs and other inflation. We are increasing our internal trucking to enhance service to our customers and control costs. In our regions outside the U.S., most are experiencing softer demand and increased inflation and currency pressure. We are increasing prices as conditions permit, introducing innovative products, expanding our distribution and reducing costs.
“We have many investments in new products and geographies in various stages of completion that have a combined sales potential of $1.2 billion, which should contribute margins similar to our existing businesses when optimized. The projects already starting up are rigid LVT and premium laminate in the U.S., ceramic tile in Mexico, and rigid LVT, carpet tile, porcelain slabs, technical tile and premium laminate in Europe. Other projects under construction include quartz countertops in the U.S., porcelain tile in Poland, and sheet vinyl and premium laminate in Russia.
“We are confident about Mohawk’s position in the global market, and our board of directors has approved a new plan to repurchase $500 million of our company’s stock. While we continue to see opportunities for investments and M&A, we believe our shares represent an attractive opportunity.
“For the quarter, our Global Ceramic Segment sales decreased 1% as reported and increased 1% on a constant currency basis. Operating margin was approximately 13%, declining year over year due to inflation, pricing pressures and lower growth in most of our markets. Our U.S. ceramic volume expanded, while margins were pressured by price, mix and higher transportation costs. Increased competition from imports due to a stronger dollar and the growth of LVT continued to impact the U.S. ceramic industry. We have announced a price increase to recover freight and are taking other actions to improve our mix and margins. We are expanding our larger size tiles, increasing our technical porcelain collections and growing our porcelain slab products. We are introducing commercial LVT into Dal-Tile's offering, and we are testing a number of new innovations that could be significant, including a patented technology to reduce the time and cost of ceramic installation and a patented porcelain roof tile system. During the period, our North American countertop sales increased 15%, with quartz growing substantially more. Our quartz countertop manufacturing in Tennessee is preparing to start up in the fourth quarter. Tariffs and duties on quartz countertops from China have increased to 44%, and we have found alternative suppliers in other countries. Even with the Mexican ceramic market declining this year, our sales have increased as we expanded our distribution and introduced innovative products. Margins in our European ceramic business have been under pressure due to lower industry demand and pricing as well as increased inflation. To manage this, we have introduced more differentiated collections and expanded our commercial offering to improve our mix. In our Russian ceramic business, sales and volume improved but were partially offset by higher inflation. In the period, our growth in Russia was limited by our capacity, which we are increasing.
“On October 15, we executed an agreement to purchase Eliane, one of the largest ceramic tile companies in Brazil, for approximately $250 million. Brazil is the world’s third-largest ceramic tile market, where Eliane is a leader in premium porcelain with annual sales of approximately $215 million. We anticipate the acquisition closing in the fourth quarter.”
Additional details are available at www.mohawkind.com.