Mohawk Industries Reports Record Q1 Results

Staff Report From Georgia CEO

Friday, April 28th, 2017

Mohawk Industries, Inc. announced 2017 first quarter record net earnings of $201 million and diluted earnings per share of $2.68, a 16.5% increase versus prior year. Excluding restructuring, acquisition expenses and other charges, net earnings were $203 million, and EPS was $2.72, a 14% increase over last year's first quarter adjusted EPS. Net sales for the first quarter of 2017 were $2.22 billion, up 2% versus the prior year's first quarter as reported and 4% applying constant days and currency rates. For the first quarter of 2016, net sales were $2.17 billion, net earnings were $172 million and EPS was $2.30; excluding restructuring, acquisition and other charges, net earnings were $177 million and EPS was $2.38.

Commenting on Mohawk Industries' first quarter performance, Jeffrey S. Lorberbaum, Chairman and CEO, stated, "Our sales and earnings per share set records for the first quarter with volume, mix and productivity adding approximately $60 million to operating income. Our operating margin for the quarter rose to 12.4%, a 110 basis point improvement over the prior year and the highest first quarter result in the company's history. Our first quarter sales grew as expected, with Flooring North America and Rest of the World outpacing Global Ceramic growth on a constant days and currency basis. This year around the world, we plan to invest more than $750 million to expand our production in most product categories. In addition, we are entering the European carpet tile and counter top markets as well as the Russian sheet vinyl business. In April, we completed the acquisition of two small ceramic manufacturers in Europe and a carpet nylon polymerization plant in the U.S.; in May, we anticipate purchasing a mine for our U.S. ceramic operations. We are initiating many price increases across our portfolio which should cover our material costs in the third quarter.

"For the quarter, our Global Ceramic Segment sales increased approximately 2% as reported and on a constant days and currency basis. Operating income for the segment rose approximately 16% as reported to a margin of 15%. In the period, the growth rate was lower due to customer inventory adjustments and postponed product transitions in North America, severe weather in Russia and Eastern Europe and a weaker Mexican Peso. Purchasing patterns have now returned to normal, and our sales growth is increasing. To recover increasing costs, we announced a general price increase in North America, which should be implemented by the end of the second quarter. Our recent investments in our North American ceramic business will propel our growth through the remainder of the year. Our new Tennessee facility is operating at planned volume and quality levels, and we are using the plant's advanced technology to introduce premium products, such as sophisticated metallic and glazed color body collections. In the U.S. this year, we are planning to open 18 to 20 new ceramic tile or stone centers to expand our distribution. Our ceramic sales in Mexico continue to outpace the growing market, and we are developing new collections and distribution to utilize the additional capacity when our Salamanca expansion becomes operational later this year. In Europe, our ceramic business increased our profitability as a result of improved product mix, productivity and equipment upgrades. With the investments we have made in Russia, our domestic ceramic collections with award-winning designs and large sizes up to ten-feet long are replacing premium imported products.

"During the quarter, our Flooring North America Segment's sales increased 4% as reported or 5% on a constant day's basis. Operating income grew 22% to a margin of 10% as reported. Our raw materials have risen, and we are increasing prices as necessary. Sales of our hard surface products continue to outpace our carpet category, with our LVT and premium laminate growing the fastest. Our residential carpet sales performed well in the period with ongoing strength from our proprietary SmartStrand franchise. During the quarter, we introduced SmartStrand Silk Reserve, the next generation of ultra-soft carpet, which has extended our leadership in premium carpet. We anticipate continued sales improvement with our new tufted, printed and woven commercial carpet technologies, and we are extending our design leadership in carpet tile.  With their superior design and performance, our flexible, rigid and commercial LVT collections are being well accepted across all channels of the market. Our sheet vinyl sales strategy has improved our position with Mohawk retailers, independent distributors and home centers. Sales of our laminate collections remained strong with our unique styling and performance features and our new production line should be operational in the fourth quarter. We have upgraded our wood offering to meet the growing demand for wider planks with rich textures and sophisticated colors. After implementing residential and commercial carpet price increases, we announced additional pricing actions in carpet and sheet vinyl in May due to unforeseen increases in our raw materials. We anticipate that these increases will cover our costs in the third quarter.

"For the quarter, our Flooring Rest of the World Segment's sales increased 1% as reported and 3% on a constant days and currency basis and operating margin was 15% as reported. The segment's operating margin was down versus prior year due to higher material costs and currency changes. We are increasing prices across most product categories to offset higher material costs, which should cover the costs in the third quarter. All of our LVT brands grew significantly during the period as we increased our production and expanded our distribution and product offering. Our new LVT product introductions are being well received across all channels due to their unique design and performance attributes. Our sheet vinyl sales lagged compared to last year as low inventories from earlier plant disruptions limited our service. We anticipate normalized sheet vinyl sales in the second quarter. Our laminate production in Europe is running at capacity, and we are preparing for the installation of new equipment that will give us additional capabilities to extend our lead in the category. Our insulation board sales continued to increase during the period, and our wood panel sales are growing with expanded margins as we improve our mix, capacity and efficiencies.

"We remain optimistic about the economy, the flooring industry and Mohawk's potential. Our second quarter sales growth should accelerate sequentially on a local basis, and our operating income should improve despite inflation, expiring patents and a weaker British Pound. We are implementing product price increases across the enterprise due to escalating material costs. Our capital investments and process improvements will continue to yield higher productivity. This quarter, we will finalize four acquisitions that will broaden our product offering, geographic penetration and competitive position. Taking all of this into account, our adjusted EPS guidance for the second quarter is $3.53 to $3.62, including our acquisitions. In the third quarter, higher pricing and productivity as well as lower currency headwinds should improve our results. As we stated last quarter, this year's sales growth, prior to acquisitions, will be similar to last year, and our adjusted operating margin will increase slightly. We are investing at record levels with upfront start-up and marketing costs this year to enhance our long-term growth and make Mohawk a more profitable company."