Mohawk Industries Q2 2021 Earnings Call Transcript

Participants

Corporate Executives

• James F. Brunk, Chief Financial Officer
• Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer
• W. Christopher Wellborn, President and Chief Operating Officer

Analysts

• Eric Bosshard, Cleveland Research
• Mike Dahl, RBC Capital Markets
• Adam Baumgarten, Zelman & Associates
• Susan Maklari, The Goldman Sachs Group, Inc.
• Michael Rehaut, JPMorgan Chase & Co.
• Keith Hughes, Truist Financial Co.
• Stephen Kim, Evercore ISI
• Brian, Thompson Research
• Phil Ng, Jefferies Financial Group Inc.
• Laura Champine, Loop Capital
• Truman Patterson, Wolfe Research

Presentation

[Operator]

Good morning. My name is Towanda, and I will be your conference operator today. At this time, I would like to welcome everyone to Mohawk Industries' Second Quarter 2021 Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, July 30, 2021.

I would now like to introduce your speaker for today, Mr. James Brunk. Mr. Brunk, you may begin your conference.

[James F. Brunk, Chief Financial Officer at Mohawk Industries]

Thank you, Towanda. Good morning, everyone, and welcome to Mohawk Industries' quarterly investor call. Joining me on today's call are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's second 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 the discussion of non-GAAP numbers. For a reconciliation of non-GAAP to GAAP amounts, please refer to our Form 8-K and press release in the Investors section of our website.

Now I'll turn the call over to Jeff for his opening remarks. Jeff?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

Thank you, Jim. In the second quarter, we generated revenue of approximately $3 billion, the highest quarterly sales of any period in our company's history. Our sales increased significantly over last year when the pandemic interrupted the global economy. Our adjusted EPS of $4.45 was the highest on record for any quarter. Our success is the result of the extraordinary efforts of all of our team members across the world. They have shown their dedication and resilience to overcome the challenges that we have faced. We greatly appreciate what they have been able to achieve. Our second quarter results were significantly stronger than we had anticipated across all of our businesses with sales building on a momentum from our first period. In the quarter, our operating margin expanded to their highest level in the last four years as we leveraged our operational and SG&A expenses. The actions we have taken to simplify our product offering, enhance our productivity and restructure our costs are benefiting our results.

We've delivered almost $95 million of the anticipated $100 million to $110 million in savings for our restructuring initiatives. Across the enterprise, we continue to respond to rising material, energy and transportation costs by increasing prices and optimizing manufacturing and logistics. During the quarter, most of our manufacturing ran at capacity or we were limited by material supply and labor availability. Raw material constraints and many of our operations led to unplanned production shutdowns during the period. Overall, we've successfully managed interruptions that impeded our normal operations as well as regional manufacturing and customer closings related to COVID regulations in local areas. Our inventory levels increased slightly in the period, primarily reflecting higher material costs. Rising freight cost and limited shipping capacity impacted our material costs, availability of imported products, local shipments to customers and international exports.

Presently, we do not anticipate near-term abatement of these constraints. All of our markets continue to show strength, with robust housing sales and remodeling investments across the world. Commercial projects are increasing as the global economy improves and businesses gain confidence to expand and remodel. Inventory levels in most channels remain low, and our sales backlogs are above our historical levels. To improve our sales mix and efficiencies, we will introduce more new products with enhanced features and lower production complexity in the second half of the year. To alleviate manufacturing constraints, we have approved new capital investments of approximately $650 million to increase our production, with most taking 12 to 18 months to fully implement. In the second quarter, we purchased $142 million of our stock at an average price of $2.08 (sic) $208 for a total amount of approximately $830 million since we initiated the program. With our strong balance sheet and historically low leverage, we're reviewing additional investments to expand our sales and profitability.

Jim will now cover the second quarter financials.

[James F. Brunk, Chief Financial Officer at Mohawk Industries]

Thank you, Jeff. For the quarter, our sales were $2.954 million, an increase of 44% as reported and 38% on a constant basis. All segments showed significant year-over-year growth versus Q2 of 2020, which was a period we were most impacted by the pandemic shutdowns. Gross margin for the quarter was 30.5% as reported or 30.7%, excluding charges, increasing from 21.4% in the prior year. The increase in gross profit was a result of higher volume and productivity, improved price/mix, reduction of last year's temporary shutdowns due to the pandemic and favorable FX, partially offset by the increasing inflation. SG&A, as reported, was 16.9% of sales or 16.8% versus 19.7% in the prior year, both excluding charges as a result of strong leverage by the business on the sharp increase in volume. The absolute year-over-year dollar increase was primarily due to higher volume, normal operating costs previously curtailed by the pandemic, impact of FX, increased product development costs and inflation.

Operating margin as reported was 13.7%, with restructuring charges of approximately $7 million. Our restructuring savings are on track as we have recorded approximately $95 million of the planned $100 million and $110 million of savings. Operating margin excluding charges, 13.9%, improving from 1.7% in the prior year. The increase was driven by the stronger volume, improved price/mix, productivity actions, the reduction of the temporary shutdowns and favorable FX, partially offset by the higher inflation and increased product development costs. Interest for the quarter was $15 million. Other income, other expense was $11 million income, primarily a result of a settlement of foreign non-income tax contingency and other miscellaneous items. Income tax rate, as reported, was 16% and 22.5% on a non-GAAP basis versus a credit of 2.5% in the prior year. We expect the full year rate to be between 21.5% and 22.5%. That leads us to a net earnings as reported of $336 million or an earnings per share of $4.82.

Earnings per share excluding charges was $4.45 percent -- or $4.45, excuse me. Turning to the segments. The Global Ceramic segment had sales of just over $1 billion, an increase of 38% as reported or 34% on a constant basis, with strong geographic growth across our business led by Mexico, Brazil and Europe. Operating margin, excluding charges was 13.2%, a significant increase from the low point of 2020 at 0.5%. The earnings improvement was a result of strengthening volume and productivity, favorable price/mix and a reduction of temporary shutdowns, partially offset by increasing inflation. Flooring North America had sales of just under $1.1 billion for a 35% increase, driven by a strong residential demand with commercial channel continuing its growth versus prior year, but still below historic levels. The segment experienced solid growth across all product lines, led by residential carpet, LVT and laminate. Operating income, excluding charges, was 11.2% and similar to Global Ceramic, a significant increase from the 2020 margin trough.

The operating income improvement was also driven by the increase in volume, strengthening productivity, improvement in price/mix, with a reduction in temporary shutdowns, partially offset by higher inflation. Lastly, Flooring Rest of the World with sales of just over $830 million, a 68% improvement as reported or 50% on a constant basis, as continued strength in residential remodeling and new home construction drove improvement across all product groups, led by resilient, panels, laminate and our soft surface business in Australia and New Zealand. Operating margin, excluding charges of 19.7%, and similar to our other segments, was a significant increase from prior year's low point of 11.9%. And again, the main drivers were consistent in that they had higher volume, favorable impact from price/mix with a reduction of temporary shutdowns, favorable FX, partially offset by increasing inflation. Corporate and eliminations came in at $12 million and expect full year 2021 to be approximately $45 million.

Turning to the balance sheet. Cash and short-term investments are approximately $1.4 billion with free cash flow of $226 million in the quarter. Receivables of just over $2 billion, an improvement in DSO to 53 days versus 64 days in the prior year. Inventories for the quarter were just shy of $2.1 billion, an increase of approximately $160 million or 8% from the prior year or increasing $85 million or 4% compared to Q1 2021. Inventory days remain historically low at 99 days versus 126 in the prior year. Property, plant and equipment were just shy of $4.5 billion and capex for the quarter was $113 million with D&A of $148 million. Full year capex has been increased to approximately $700 million to strengthen future growth with full year D&A projected to be approximately $580 million. Overall, the balance sheet and cash flow remained very strong, with gross debt of $2.7 billion, total cash and short-term investments of approximately $1.4 billion and a leverage at 0.7 times to adjusted EBITDA.

And with that, I will turn it over to Chris Wellborn to cover our operational review.

[W. Christopher Wellborn, President and Chief Operating Officer at Mohawk Industries]

Thank you, Jim. For the period, our Flooring Rest of the World segment, sales increased 68% as reported and 50% on a constant basis. Operating margins expanded to 19.7% due to higher volume, pricing and mix improvements and a reduction of COVID restrictions, partially offset by inflation. Flooring Rest of the World outperformed our other segments with all our major product categories significantly as residential sales expanded in all regions. We have implemented multiple price increases in most product categories to cover inflation in materials and freight. Raw material supplies are problematic and have impacted our LVT production and sales the most. We anticipate material and freight challenges will continue to impact our business in the third quarter. Sales of our high-end laminate continue to grow dramatically as our proprietary products are being widely accepted as waterproof alternative to LVT and wood. We are beginning to introduce our next-generation of laminate at premium levels with collections featuring handcrafted visuals.

We are increasing our production in Europe, with new capacity coming online and further capacity expansion projects are being initiated. Our laminate business in Russia and Brazil are growing strongly as we enhance our offering and expand our distribution. We recently completed the acquisition of a laminate distributor in the U.K. that will improve our position in the market. Our LVT sales growth was strong during the period and would have been higher if material shortages had not interrupted manufacturing. To compensate for material inflation, we have increased prices and we expect further increases will be required as our costs continue to rise. We are significantly expanding sales of our rigid LVT collections with our patented water-tight joints that prevent moisture from penetrating the floor. Our manufacturing operations have made substantial progress improving throughputs, material costs and yields. Our production in the third quarter will continue to be limited by material availability.

Our sheet vinyl sales rebounded strongly as retail stores opened in our primary markets. Our sheet vinyl distribution in Russia has expanded, and we are maximizing production to meet the growing demand. Our wood plant in Malaysia has been idle since the government instituted lockdowns to address surging COVID rates. Wood is a small product category for us, so the sales impact in the third quarter will be limited. We are awaiting permits to complete the acquisition of a plant that reduces wood veneers to lower our cost. Our Australian and New Zealand flooring businesses delivered excellent results with sales and margins exceeding our expectations. The residential business was strong, with hard surface products leading the growth. Carpet sales are strengthening with our national consumer advertising, enhanced merchandising and the launch of a new high-end wool and triexta collections that improved our mix. Most of our facilities operated at a high level with increased volumes benefiting our results. As in all of our markets, commercial sales have not recovered to their pre-pandemic levels.

Though the Australian government has locked down specific regions to contain the spread of COVID, it has not meaningfully impacted our business. Our European insulation sales grew even though chemical shortages limited our production. Our margins are recovering after we implemented price increases to cover rising material costs. We have announced an additional price increase for the third quarter to offset further raw material inflation. We anticipate chemical supplies to remain tight and could impact our future sales. To expand our existing insulation business in Ireland and the U.K., we have signed an agreement to acquire an insulation manufacturer, which is pending government approval. Our panels business is running at full capacity, and so far, we've been able to manage material shortages without interruptions to our operations. We have raised prices and improved our mix with higher value decorative products. To enhance our results, we are expanding our offering of premium products as well as our project specification team.

To enhance our panel offering, we are commissioning a new line that creates unique surfaces and visuals to differentiate our offering in the market. For the period, our Flooring North America segment sales increased 35%, and adjusted margins expanded to 11.2% due to higher volume, productivity, pricing and mix improvements and fewer COVID interruptions, partially offset by inflation. Our business trends continued from the first quarter with sales growth being driven by residential remodeling and new construction. Commercial sales continued to improve, though the channel remains below pre-pandemic levels. Through the period, our order rate remains strong and our sales backlog remains above historical levels. We are maximizing output at our facilities to support higher sales and improve our service. During the quarter, our production levels were hindered by local labor shortages and material supply, particularly in LVT, sheet vinyl and carpet.

Ocean freight constraints delayed receipt of our imported products, impacting our sales, inventories and service levels. We implemented price increases as a material and transportation cost increase and we have announced additional pricing actions as inflation continues. Our restructuring initiatives are improving efficiencies as planned, and we should realize additional savings in the third quarter. Our residential carpet sales continued their growth trend across all channels with consumers investing in home improvement projects. Sales of our proprietary SmartStrand franchise expanded with our new collections being well accepted. Our EverStrand polyester collections are expanding by providing enhanced value, styling and environmental sustainability. Our carpet sales have been limited by personnel shortages in our operations, and we are implementing many actions to increase our staffing and productivity. We have improved our efficiencies by rationalizing low volume SKUs and streamlining our operational strategies. Our commercial sales have improved as businesses increased remodeling and new construction projects.

Both carpet, tile and hard surface products grew with health care, senior living, education and government recovering faster. Though down slightly from record levels, the June Architecture Billing Index had a fifth consecutive month of expansion, indicating the continued strengthening of new commercial development and renovation projects. With realistic visuals and waterproof performance, our premium laminate collections are growing substantially. To support higher demand, we have implemented many process improvements to maximize our U.S. production and are importing product from our global operations. Our laminate expansion remains on schedule and should be operational by the end of this year. Our new line will produce the next-generation of RevWood which is already being introduced in Europe. To support the growth of our laminate business, our U.S. MDF operation completed investments to increase our volume and lower our cost. Our new waterproof Ultrawood collections are being launched as a high-performance alternative to typical engineered wood floors. Our LVT and sheet vinyl sales continue to increase, with growth in the residential, retail and new construction channels.

Our LVT and sheet vinyl growth and plant productivity were impacted by disruptions in supply that stopped our operations and delays in imported LVT caused by transportation constraints. We have enhanced our LVT offering with more realistic visuals, proprietary water-tight joints and improve stain and scratch resistance. Our U.S. operations implemented process enhancements that have increased our speeds and throughput. When material availability increases, we should see further improvements in our domestic manufacturing, which will support our recent product launches. For the period, our Global Ceramic segment sales increased 38% as reported and 34% on a constant basis. Adjusted margins expanded to 13.2% due to higher volume, productivity, pricing and mix, improvements and fewer COVID disruptions, partially offset by inflation. Our ceramic businesses around the world have greatly improved with strength in the residential channel and increasing commercial sales.

All of them have low inventories, which impacted our sales growth and service levels. We have initiated expansion plans to increase our capacity in mix in Mexico, Brazil, Russia and Europe. Our ceramic businesses continue to raise prices to cover material, energy and transportation inflation. Our U.S. ceramic business is strengthening, and we are implementing price increases to cover material and freight inflation. We are improving our product mix with new shapes, sizes and service structures. We are reengineering our products to improve material cost and productivity. Our restructuring projects have been fully implemented and are growing the expected -- providing the expected benefits. Our countertop sales and mix continue to improve as we expand our premium offer with new technologies. In the period, a mechanical failure temporarily reduced production, which has been repaired. We have initiated the expansion of our plant to further grow our countertop business.

Our Mexican and Brazilian ceramic businesses are very strong, with our residential business in both regions at historically high levels and commercial still recovering. Due to capacity constraints, our facilities could not fulfill customer demand, so we are allocating our production. We have executed multiple price increases to offset energy and material inflation. We are expanding operations in Mexico this quarter, and we have initiated new investments to increase capacity in Brazil. Our European ceramic business delivered strong sales and profitability as pricing, product mix, and productivity improved our margins. We increased sales of our premium products, including slabs, small sizes, outdoor and antibacterial collections. Commercial sales trends are starting to improve though they remain below historical levels. We are selectively increasing prices to recover material, energy and freight inflation. During the period, our operations ran at high levels with improved efficiencies and increased throughputs.

We continue to rationalize low volume SKUs to optimize our operations. To support our sales of high-end collections, we have initiated expansion projects, some of which will take through next year to complete. Our ceramic sales in Russia were robust across all channels with our direct sales to customers through our own stores and new construction projects outperforming. We have announced price increases to cover rising inflation. During the period, our manufacturing operations ran at capacity to respond to accelerated sales with inventory remaining below historical levels. Due to present capacity limitations, we are focusing on optimizing our product mix. We have initiated expansion plans with new production expected in the second half of next year. Sales of our new sanitaryware products are expanding primarily through our owned and franchised retail stores as our manufacturing ramps up.

With that, I'll return the call to Jeff.

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

Thanks, Chris. The global economy should continue to improve due to low interest rates, government stimulus and the success of COVID vaccines. Around the world, flooring sales trends remain favorable, with residential remodeling and new construction at high levels and commercial projects strengthening. In the third quarter, we expect our strong sale to continue, with our typical seasonal slowing from the second quarter. We will expand the introduction of new products with additional features and increase our investments to enhance our future sales and mix. Material, energy and transportation inflation is expected to continue and will require further pricing actions to offset. Most of our facilities will operate at high utilization rates, though ongoing material and local labor constraints will limit our production. Our Global Ceramic and Flooring Rest of the World segments will observe the European vacation schedules in the third quarter, which reduces production and increases cost in the period.

In many countries, future government actions to contain COVID remain a risk and could impact our business. Given these factors, we anticipate our third quarter adjusted EPS to be between $3.71 and $3.81, excluding any restructuring charges. We entered this year with uncertainty about COVID, the economic recovery, home renovation and new construction. Our business is stronger than we had anticipated, and we are increasing investments to support additional growth and improve efficiencies. Longer term, housing sales and remodeling are expected to remain at historical high levels. Apartment renovation should accelerate as rent deferment expires, and investments in commercial projects should continue to strengthen. We're expanding our operations and introducing new innovations to maximize our results. Our balance sheet is strong, and we're exploring additional internal projects and acquisition opportunities.

We'll now be glad to take your questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from the line of Eric Bosshard with Cleveland Research. Your line is open.

[Eric Bosshard, Analyst at Cleveland Research]

Good Morning.

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

Good morning.

[Eric Bosshard, Analyst at Cleveland Research]

The -- wondering -- two things. First of all, in terms of the increased capital and the increased capacity investments that you talked about over the next 12 to 18 months, you've got some stuff that shows up at the end of this year, but in terms of product categories or regions where you have the most conviction, where are you adding capacity?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

It's -- we're adding capacity in the constrained parts of the business all over the world. So what we're adding -- our production has been -- but at the same time, one of the things -- we're still limited by constraints. So some of the limitations are labor and materials rather than capacity to fix to run it. And then we also have the problems with the delayed products from imports. The $650 million that we're going to put in, the biggest pieces are in laminate, ceramic and countertops, but there's a number of other areas that they include. And when you get through with that, the capital forecast for the year -- for this year is being raised to $700 million and $450 million of the $600 million will be in next year's.

[Eric Bosshard, Analyst at Cleveland Research]

Okay. That's helpful. And then secondly, in terms of the third quarter, the earnings guidance is helpful. Just wondering if you could help us at all in terms of the sales guidance. Your commentary of typical seasonal slowing, does that make -- does that suggest that we should look at 3Q revenues relative to 2Q revenues to reflect the normal 2Q to 3Q step-down? Or is there something that would change the way that, that path has traveled historically?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

So let's see. The third quarter, we expect sales trends to continue from the second quarter. The operations will still run strong. We're assuming that business and residential keep going and commercial improvement. Residential -- the European -- the non-U.S. business, especially Europe, always slow with the normal holiday period as we go through. And you might not know but -- the non-U.S. businesses over time have become a larger part of our results, and the holidays have become a bigger impact over many years as we keep expanding outside the U.S. So -- and with that, we still have material supply, labor, transportation that all are constraining the business.

We don't think the pricing actions we have are enough. Our inflation keeps coming so we expect to keep putting in more increases in prices in it. And then just to try other things. As you think of the third quarter, what you have is manufacturing costs in the United States are impacted by holiday in the 4th of July, which is in the third quarter rather than second. You have the holidays, which impacts not only the cost of not operating, but the sales also drop off as we go through. So that -- I mean that's the biggest pieces of it, the best I can lay out for thank you.

[Eric Bosshard, Analyst at Cleveland Research]

Thank you.

[Operator]

Our next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open.

[Mike Dahl, Analyst at RBC Capital Markets]

Hi. Thanks for taking my question. Jeff, first question, I wanted to follow-up on the capex and just clarify, I think you said $450 million of the $600 million. I don't know if you meant $450 million of the $650 million, but just trying to figure out that next -- I guess the question would be, when you look out to '22 between the carryover from these new investments and your normal capex, how should we be thinking about capex in '22? And to the point about not all these constraints are physical capacity, some of it's labor, some of it's materials. I guess, capex is a very long-term decision and these are potentially, in some cases, temporary constraints or even temporary demand tailwinds. How do you think about that balance and the conviction to add the capacity?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

The pieces that are temporary constraints, we're not increasing those. We are leaving those alone. The things we are increasing are things that we have exceeded our capacity. What happened is this year, the sales are much higher than we anticipated coming into the year. So with that, we hadn't planned on having the capacity to support the growth that we're having this year. And so to get to the money, first is the $650 million is in addition to the capital that we had in the plan for this year. So this year, the capital before was around $550 million, if I remember.

[James F. Brunk, Chief Financial Officer at Mohawk Industries]

Yes, that's correct.

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

So I'm not sure I got the number exactly right, but it was around $550 million. Of the $650 million that we raised this year to $700 million and then approximately, about $450 million of that -- of the $600 million will go over to next year. And then we're going to go through our final planning in the rest half of this year, we haven't finalized the budget for next year yet. So we'll have to decide with what we're going to add more or less than we've already done as we go through. And again, just all through the original presentation we made, we tried to lay out for you the different pieces and I'll name a few.

The ceramic businesses in Mexico, Brazil, Russia, Europe are all being increased. We have the laminate businesses in the United States and Russia -- I mean, in Europe are all being increased. We have the countertop business is being increased in the United States. And there's a number of other ones that are here. So we're putting the business in shape to grow more in the future and support what's going on in the world.

[Mike Dahl, Analyst at RBC Capital Markets]

Okay. That's really helpful. My second question, just back on the price cost. I guess your comments that the current pricing actions aren't quite enough given the escalation in costs and you're implementing more pricing. How should we think about the lag and what's embedded in guidance? Do you assume that it'll be price cost negative in 3Q before a catch-up in 4Q? Will you stay ahead of cost in 3Q? Or is it neutral? Just a little more color on kind of order of magnitude of cost and whether or when you'll be back to price cost-neutral or positive?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

Let's start out with the second quarter, we were able to cover the inflation, which you'll see in the numbers that we publish later. We've raised prices across the business. We keep announcing new increases. Our energy, materials, freight continue to rise. We don't know where it's going. Every week, we wake up with new increases. So we keep adjusting as required as we go through. And so we think we've announced enough for what we know about at this point. And the timing of them and how they work together, we've put all that into the estimate that we think we're going to get them close. And then with the mix thing, you do see, as we raise prices in the marketplace, some customers in both residential and commercial have budgets and when they have budgets, they start trading down, looking for something that stays in the budget. So that's just a normal process that occurs in all of this.

[Mike Dahl, Analyst at RBC Capital Markets]

Okay. Thanks, Jeff. Appreciate the color.

[Operator]

Our next question comes from the line of Adam Baumgarten with Zelman. Your line is open.

[Adam Baumgarten, Analyst at Zelman & Associates]

Hey. Good morning, everyone. Just maybe

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

Good morning

[Adam Baumgarten, Analyst at Zelman & Associates]

Just maybe touching on the laminate business. It appears there's been a really kind of meaningful surge in demand there over the last it seems like a year or so. How much of that is due to some of the technological advances that you've seen? And how much of that is due to maybe shortages in LVT supply?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

Let's start out with first. What happened is you had LVT growing dramatically, and one of the main features of it was waterproof. And what's happened is in the marketplace, there are multiple options. And if you go into retailers today, they start talking about waterproof flooring as a category when they start showing products, of which our laminate, with the technologies we have, is a good or better alternative than many other ones in the waterproof category. So that's causing it to grow. It's also been growing in -- going into different channels. It's being used -- if you watch any television shows, the remodeling pieces, they're using laminate and remodeling in new houses today, which they -- with a much higher rate than they have in the past. And then separate from all of that, we really do have unique technologies that give us differentiated features and visuals that separate our products from the market, and we have a much higher portion of the premium market because of it, both in the U.S. and Europe, as it.

[W. Christopher Wellborn, President and Chief Operating Officer at Mohawk Industries]

Which is the reason why we're adding the capacity at the end of this year in the U.S., and that's why we had it planned as part of the $650 million that Jeff talked about, both in the U.S. and in Europe in the future years.

[Adam Baumgarten, Analyst at Zelman & Associates]

Got it. And then just on that mix down comment you made, Jeff, are you seeing it more pronounced in certain categories over others?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

It's hard to tell. I mean it's all moving around. And some people just have budgets and they trade down. In other cases, you've seen the same thing. As people buy homes, the remodeling part of the business tends to be a higher value customer than new construction, where they're mass building homes. So -- and then the apartments are lower. So there's all kinds of mix changes going on.

[Adam Baumgarten, Analyst at Zelman & Associates]

Got it. Thanks.

[Operator]

Our next question comes from the line of Susan Maklari with Goldman Sachs. Your line is open.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Thank you. Good morning, everyone. My first question is, Jeff, I know you gave some third quarter guidance in your comments, but can you help us think about how the third quarter versus the fourth quarter may come together this year, just given the comps that we're facing and some of the seasonality that you talked about in the business? Any kind of color or guidance there for the next few quarters would be helpful.

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

Let's see. So again, the third quarter, we do expect the same sales trends to continue that operations are running again at high levels. With all the constraints, we don't know how they're going to happen in the third quarter. We've built in our best guesses of supply and labor and transportation, but it's a moving target, as it. As you go from there into the fourth quarter, it is typically softer as people go into the holidays. They don't tend to buy as much flooring during Christmas. And then this year, we have 6% less days and a 6% less days will impact the sales and the margins as we lose the absorption from the lower days in the period, as it.

Then this year versus last year, and this is a guess because we don't know what's going to happen, we're expecting at this point a more normal seasonality with more increased vacations, people taking, with lower holiday spending on remodeling and reduced utilization of the plants. But we're going to have to see how it happens at the end of the year compared to last year when we had the rebound that we did. But it's difficult to predict at this point. And then we also -- as we get to the end of the year, last year, we constrained the new products dramatically. And now we're going to invest more in new products and sales in order to enhance next year.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Okay. That's very helpful color. My follow-up question is, in the last few quarters, you have purchased about $400 million or almost $400 million of your stock. When you think about the capital allocation, the increased spend on capacity that you announced today, where do buybacks kind of fall within that? What's your appetite to continue buying back the stock at these levels?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

Well, given our balance sheet, we have a lot of options. And at the moment, we bought $140 million last quarter. I think we have about $170 million still open on the acquisition, but the primary pieces are where we started, the constrained businesses and reducing costs, which is the $650 million, we'll do more of that when we finalize the plan for next year, in the second half of this year to keep broadening the product offering innovation. We found a few bolt-on acquisitions, you saw. We'll see more of those. And then we're looking for other acquisitions to either step change the business or go into new markets or align product categories and then share back's one of the options now. With the balance sheet, we can do more than one thing.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Okay. All right. Thank you for that. Good luck.

[Operator]

Our next question comes from the line of Michael Rehaut with JPMorgan. Your line is open.

[Michael Rehaut, Analyst at JPMorgan Chase & Co.]

Hi. Thanks. Good morning, everyone.

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

Good morning.

[Michael Rehaut, Analyst at JPMorgan Chase & Co.]

Just wanted to clarify some of your earlier comments, Jeff, around how to think about the third quarter. You mentioned that you expect sales trends to continue, but at the same time, an increase in vacation time, particularly in Europe. I think there might be an ability to misinterpret those statements. If you say sales trends, it's a little bit more qualitative and maybe uneven on a year-over-year basis. But I think people are just trying to understand, on an absolute dollar basis -- are you suggesting that on an absolute dollar basis, 3Q revenue should be similar to 2Q? Or indeed, as I think you were trying to say, at least in Global Ceramic and Flooring Rest of the World, we should be modeling in some type of sequential dollar decline due to the big cases?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

I think what's confusing is, I'd say the sales trends are continuing, which means I believe the businesses have the same strength that will go like that. The second part is, there is a seasonality, which I'm not sure all of -- everyone understands, our European businesses have -- European and non-U.S. businesses have become a much larger part of our business. They impact the business more today than they did five years ago or before because of the acquisitions and enhancements of the business we've done. So when they step down, that whole category steps down, which will reduce the sales level in total from the third quarter and have a negative impact on the sales and margins, and it will be lower because of it as it has been in prior years. And it's not the business changing, it's the normal seasonality.

Now separate from that, last year was also unusual. And what happened last year with COVID, we -- and our plants and our facilities and our customers, we shut down a lot in the second quarter. And what happened is many of the people -- we have the people taking their vacations in the second quarter. So when the business started getting better in the third quarter, we didn't do the normal shutdowns because we used the vacation pays and things in the second quarter. And then the same thing happened, people didn't go on vacations like they did. So the third quarter was unusually high because the whole vacation structure of both our production, our customers, vacations for people was different. So the comparison is unusual in this third quarter last year to third quarter this year.

[Michael Rehaut, Analyst at JPMorgan Chase & Co.]

Okay. I think I understand. Second question, I just wanted to circle back also and clarify a little bit to the best possible on the capex outlook for '22. It sounds like you're basically saying that of the $650 million, $450 million is expected next year. So you're doing roughly $200 million of that this year. So that's a delta of another $250 million higher sequentially year-to-year. Are we going to take from that, that the total capex, all in, should be something closer to $900 million to $1 billion? Jim, I don't know if a better way to answer this is just kind of reviewing with us your basic maintenance capex. But I think we're looking at a decent range of outcome, I think as long -- at least as people are trying to figure this out. So any type of better range would be helpful.

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

You understand when we told you the plan next year -- what we did this year, we stopped in the middle of the year and said, this is not as we have planned, and we can't wait until our normal planning period in order to start changing the capacities to support our business. So we took everybody and we identified the things that we knew we wanted to do and went ahead and did it. We still have to go through the planning process to decide what we want to do more than that next year, and we haven't done it. There is the normal maintenance and safety, which is typically, call it, around $200 million, could be more or less, and then on top of that, we haven't decided yet. So we can't give any direction.

[Michael Rehaut, Analyst at JPMorgan Chase & Co.]

Okay. One last clarification on the tax rate, if I could. You guided to 21.5% to 22.5%. Does that include the benefit in the second quarter because that would kind of point you to a mid-20s tax rate? Or does it exclude that benefit?

[James F. Brunk, Chief Financial Officer at Mohawk Industries]

That excludes that benefit. So the non-GAAP rate in Q2 was 22.5%. The full year is the 21.5% to 22.5%. I would expect, based on seasonality of the tax rate, for Q3 to be slightly higher than Q4.

[Michael Rehaut, Analyst at JPMorgan Chase & Co.]

Okay. Thank you.

[James F. Brunk, Chief Financial Officer at Mohawk Industries]

You're welcome.

[Operator]

Our next question comes from the line of Keith Hughes with Truist. Your line is open.

[Keith Hughes, Analyst at Truist Financial]

Thank you. You had talked in the release about second quarter being a record quarter, which is correct. If you look within Flooring North America, your revenues are about or at slightly above the 2017 peak, the margins are still below. I guess my question is, what's the difference versus then? What do you need to do to get those back up to the historic peaks in operating margin?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

The margins did improve, as you said, from volume pricing and costs. There are things that are going on. So now the -- in the peak period, we had commercial sales, which are higher. We didn't have all this inflation we're fighting now. We didn't have labor shortages. We didn't have material shortages. We are running short runs in the factories, trying to keep the service as well as we can, which is causing -- we're jerking the factories around creating inefficiencies as we go through. And the -- in addition, in some of the markets, the competition is more fierce today than it was then.

[Keith Hughes, Analyst at Truist Financial]

Okay. Thank you.

[Operator]

Our next question comes from the line of Stephen Kim with Evercore. Your line is open.

[Stephen Kim, Analyst at Evercore ISI]

Thanks very much, guys. Nice results, and appreciate the outlook here. The capacity expansion program, I wanted to get a sense for how much of a sales opportunity you think that $650 million might offer you. And then as it does come in over the next 12 to 18 months, a lot of times, there's some start-up costs that come with that. And I just want to make sure we're thinking about that modest offset properly. I remember, just looking back from 2014 to '17, you kind of ran $10 million to $15 million a year, not a lot. And I just wanted -- I know you executed really well on -- during that period of time. I just want to make a -- get a sense for what the offset might be as this capacity comes online, is that a reasonable range to be thinking about?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

So the capacity -- the $650 million will translate into somewhere around 6% to 7% of our total business sales, round numbers to give you a high level direction. And yes, there's always start-up costs that come along with it. On the other hand, all of this is known technologies being put in existing facilities or existing businesses. It could be a building next door, not too far away. So we shouldn't have some of the learning curves that we had to pay for in the other ones.

[Stephen Kim, Analyst at Evercore ISI]

Yes. No, that's very helpful. Yes, it makes a lot of sense. I wanted to talk about Flooring Rest of the World. Obviously, it's been a big contributor to the upside -- positive upside, surprises we've been seeing. For about four quarters now, I think this business has been really the fastest grower. And I know this is an area that has many different business lines in it. I know you've called out a number of them. And I know that you've also added a lot of capacity there over the years. But the step-up that we've seen in the last four quarters was pretty significant. And so what I wanted to try to understand is, do you attribute the step-up we've seen in sales in Flooring Rest of the World, excluding the impact of acquisitions, but just the actual step-up being organic, to be the bringing on of certain capacity or certain business lines that were not there previously? Or do you see it as just post-COVID, there was this big surge in demand really pretty much across the business, and your capacity was there waiting for it and it just got still because of this generalized demand?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

As you said, the Rest of the World performance is strong. Sales and income are at high levels. The operations -- most of the operations are running near capacity, which is helping our cost structures. Our product mix is improving from actions we've been taking one after the other to improve the mix. We are aggressively trying to raise prices to align with the pieces as we go through. So then you have the different parts. So if you go back to some of the investments we've put in over the years, we put a new plant in Russia in sheet vinyl. Well, that plant is now running seven days a week. two years ago -- we'd start it up a few years ago. We bought the Australia/New Zealand business. We've been putting efforts to change their product line, upgrade their product offering. We -- they were just trying to get in hard surface. We have the hard surface business. We've put in all kinds of new product offerings and pieces, and we're growing our share dramatically in hard surface in that marketplace.

In sheet vinyl, we're the leader in sheet vinyl in the European marketplace. Most of our business is in the residential. It's doing well. We put a plant in Russia to make sheet vinyl, we talked about. And laminate -- our laminate business, we keep introducing new innovations. As we do that, we keep improving our mix. We also bought -- a few years when we bought IVC a few years ago, it's taken us a few years. They had a laminate business. We've been able to dramatically improve the sales and margins of it over the years, as it. The wood panel business that we have is running wide open. The margins are improving. It's at high levels because there's shortages in wood panels. So it's at a high level. Our insulation business, we've put in multiple plants. We've acquired other ones. So we have a strong insulation business, and it's doing well, even though we're chasing really high chemical costs. So we're benefiting from a lot of things.

[Stephen Kim, Analyst at Evercore ISI]

Yes. Really just sounds like the fulfillment of your longer-term plan that you've had there and been executing. As we go forward into the future, it seems like there's still a lot of growth opportunities for Flooring Rest of the World. Should we be expecting that segment to continue to outpace the other segments on a volume growth basis?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

It's going to be hard to keep up the growth rate they've been at, as it. I mean those are exceptional, what they're doing. We're investing in -- in the $650 million, we're putting a new laminate line, which will add about $125 million, $150 million of new capacity in laminate. We keep investing in the other pieces. We're trying to grow it as much as we can. I don't think it can stay at the growth rates of that. And then one more thing in all the businesses, just remember, commercial everywhere is low. Commercial is a higher-margin business for us. And as the commercial business comes back, the margins there are going to enhance the pieces and we have capacities that in some places, only make commercial products.

[Stephen Kim, Analyst at Evercore ISI]

Yes. No, for sure. Yes. We have that to look forward to. Thanks. Appreciate it.

[Operator]

Our next question comes from the line of Kathryn Thompson with Thompson Research. Your line is open.

[Brian, Analyst at Thompson Research]

Hey. It's actually Brian [Phonetic] on for Kathryn. I guess I wanted to start with, you mentioned that sales were significantly stronger-than-anticipated going into the quarter. I guess, is there any specific segment or product to call out here? Kind of is it a case of the strong getting stronger? Or was there kind of more than expected momentum in areas that had previously been weaker, like, say, commercial?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

I'm sure we're like everybody else in the world, given what's going on with COVID and what's happening, and then you have the huge uptick of people staying at home, huge housing lease sales. Projecting forward how strong it's going to be and not -- we projected what we thought it would be coming into the quarter, and it surprised us how strong it was and maintained itself in the United States and across the entire world. And the same thing going forward, estimating -- and we talk about it in the fourth quarter, we really don't know if the business will stay strong like last year or go back to historical ways and fall off. There's a big difference in what can happen depending on which we see, and our crystal ball is no better than yours.

[Brian, Analyst at Thompson Research]

I guess, would you characterize it as the residential side was stronger-than-expected? Or the commercial or a combination of the two?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

The residential is driving the whole thing, but commercial is improving quarter-to-quarter, and picking up. And I think it's -- the commercial is probably a little bit better than we had expected, but I mean we had anticipated it getting better.

[Brian, Analyst at Thompson Research]

Okay. Understood. And I guess second question, want to, I guess, ask about labor -- I guess, labor shortages and specifically on the installers. I guess we had a few of our contacts point to installers as their biggest concern for growth going forward. And how much of that is a concern for you guys, especially given the investments you're making to increase production? Understand there's demand level out there, but is there the -- is there going to be the labor force at the installer level to support that growth in a year or two?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

We sure hope so, but you have it right. Everybody has -- listen, labor is a problem with every company and every industry. If we could ship twice as much to our customers, they couldn't install it. So you're correct. There's limitations in the whole stream as it goes through. But for the most part, they're installing everything that we can ship them.

[Brian, Analyst at Thompson Research]

Got it. Thank you.

[Operator]

Our next question comes from the line of Phil Ng with Jefferies. Your line is open.

[Phil Ng, Analyst at Jefferies Financial Group]

Hey. Congrats on a really strong quarter and great execution, guys. Jeff, I guess, material shortages will certainly free up in time, so that will help. But you mentioned you're sold out in certain products. I'm just curious how much headroom do you have for growth next year as you kind of ramp up on this capacity?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

So let's see. It's different by different businesses and categories. As you said, presently, in some of the businesses, labor is a major problem. And others, it's transportation. We actually have stuff and can't get it moved around to the customers fast enough. In other cases, we have imported products that's delaying it. We have capacity in some businesses, other businesses. Pick one. Brazil, we're running wide open, and we're quoting dates months out, as it, as an example, as it. We're trying to improve our mix and we're trying to keep through passing the prices. But until we get the new capacity in, in the second half of next year, they're maxed out. And so we do have -- that's an example of one. We have pieces like that. We have other ones that if we can get people to show up for work, that we could increase our production dramatically, as it. These various ways of giving people money around the -- in the U.S. is disincentivizing people. And sometimes when they get the checks, they just don't show up for the next two days.

[Phil Ng, Analyst at Jefferies Financial Group]

Got it. That's super helpful. Jeff, I was curious to hear what you're seeing and hearing from your different channel partners. We've certainly seen the builders rein in orders lately. But -- and we've seen some normalization of trends in retail. So curious, how have orders patterns been tracking between these channels? And when we look out, is it going to have an impact on mix?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

We see that -- let's go through the pieces. We see the housing sales continuing at high levels. I know there's ups and downs in it. But relative to historical, it should continue at high levels. The houses that were purchased over the last year, they are all in various stages of remodeling. When you buy a new home, an existing home, you typically don't remodel the whole thing. It goes in stages. So that will take a while to play out going forward. You have some things with policies with the government. People who haven't been paying their mortgages. At some point, some of those houses are going to turn over, and that's going to increase the remodeling sales somewhat. You have people in the rentals that haven't been paying rents. At some point, some of those are going to change over, and they're going to have to remodel them for the next people.

You have the commercial parts of the business, companies are getting more confident or not, and they're starting to invest more. It takes time to put it in the budgets, time to start them. There's a void for a while on new construction that got stopped. So there's going to be a void to when it comes back and there's a lot of upside in it, and it's a more profitable business because the products are more unique and differentiated. So all the trends look good as far as we can see them. On the other side, short term, we don't know if we have enough materials to run the place tomorrow in some cases. And so we wake up and the materials are supposed to come in and something happens, we just shut the plant down. We have -- you come in and we have -- people just aren't showing up for work like they normally do, as it. The people we're hiring, it's more difficult to train and it takes longer and there's more turnover. So the -- a huge amount of moving parts and we're managing them all, but it makes day-to-day in the short term, hard to predict.

[Phil Ng, Analyst at Jefferies Financial Group]

Got it. That's great, Jeff. Appreciate it.

[Operator]

Our next question comes from the line of Laura Champine with Loop Capital. Your line is open.

[Laura Champine, Analyst at Loop Capital]

Thank you. Jeff, I really wanted to follow-up on the comments you just made. It seems like your inventories are tight in terms of units because of all these production complications. Do you have line of sight as to when you'll have your inventories and unit terms back where you want them? And what's the plan to offset these production difficulties?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

Let's see. First, we are struggling with the labor we talked about and the material flows. The -- what we expect to happen doesn't happen and so we're making as much as we can given those constraints, and we're taking actions that we can take to influence them as best we can. We need the inventories higher in order to hit the service levels, as you said. If the demand stays high, there's a chance that given all these constraints, we won't be able to build much inventory until we hit the end of the year, as it. Or it could be further, and it depends on the constraints and the availability. On the other hand, if something happens and the materials come in faster and we can get people to operate the facilities, we could increase the outputs.

On the other hand, there's a positive. We really can't tell how strong the demand is going to be. And as we -- in the earlier comments you heard me make, we don't know whether the end of the fourth quarter is going to look like last year and stay strong or it's going to go back to the normal seasonality that we see. So we're just -- we make plans month-to-month, and we keep changing them as they happen. And it's -- I can't give you a clear answer because that's the reality of the -- what we're living in.

[Laura Champine, Analyst at Loop Capital]

Do you think that gross margins are sustainable given that you've taken a lot of pricing and that's got to be a tailwind, but you've probably given up some in productivity, as you just mentioned. How should we think about your gross margin trajectory into next year?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

The goal is to improve the business at the top line and improve the margins as we go through. The margins this year will be up substantially with the higher demand and improved costs. The second quarter was a really high period because everything was running wide open. As we go out next year, we think it's going to improve, but it really depends on demand and material pricing and competitive environment, which is really hard to predict these days. We think we're going to do better. We're putting everything in place to do better. We are improving our own internal things that are under our control. We're investing in new things. We are expanding our production where everything is limited. And we're doing the right things to grow the business. If we get a little help from the world, we could be in a really good position.

[Laura Champine, Analyst at Loop Capital]

Got it. Thank you.

[Operator]

Our next question comes from the line of Truman Patterson with Wolfe Research. Your line is open.

[Truman Patterson, Analyst at Wolfe Research]

Hey, good morning and thanks for taking my question. First, just wanted to touch on M&A. Could you all discuss the environment and the potential pipeline there? And could you just possibly balance these thoughts with the organic or the decision to invest in organic capital investments of the $650 million? I imagine in the product categories you're expanding in, just -- there's not a lot out there, but wanted to get your updated thoughts.

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

The two are really not related. The internal investments are where we see the trends of our business, what we think the demand is going to be, our ability to sell it in a marketplace, and that's the basis of our investments. The acquisitions, we're continuing to investigate opportunities. The conditions are improving. There's a little less options at the moment because people perceive them the business improving, valuations are high. So it's a little more difficult in this environment. As we announced, we have agreements to acquire some smaller bolt-on businesses. We are ready to buy the other businesses, if we can identify the right ones at the right valuations that we think are good for our long term. And if you have any suggestions, call me.

[Truman Patterson, Analyst at Wolfe Research]

Fair enough. Any key geographies or products?

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

It's more around -- we get the most benefit out of ones that are in our present geographies that we can leverage between the two. Those give us the most benefit. For longer term, going into new geographies with the right group gives us a base to go into that business, and we can use it as a growth proposition to go into new markets. And then the same thing with new products. If we can find the right products into the same geographies that are related to us that tie in with what we know and how we do it, we can leverage them. And then we're still considering, at some point, we think we could add another leg to the business and go into another product category at some point to keep growing the business. So we have the right talent, we have the people and we have the money. We just have to find the right propositions.

[Truman Patterson, Analyst at Wolfe Research]

Okay. And I'm just hoping on this next question, you can just give us either a tour around the world or your product portfolio. We're hearing a very strong pricing power and incremental price hikes in the channels. Just hoping you can maybe quantify some of that by product or geography.

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

The pricing -- I'm trying to answer it generically. All of the businesses that we have are having dramatic increases in costs. Our competitors are in the same position as we are. We also have limited materials, and our competitors also have those same problem. So the market competition is in a spot where everybody is pushing it through more aggressively given those conditions across the world, as it. And how long it's going to last like that? I can't say, but as long as the business is like it is, that's what's enabling us to push through the pricing.

[Truman Patterson, Analyst at Wolfe Research]

Okay. Thank you for that.

[Operator]

Thank you. Ladies and gentlemen, in the interest of time, and I would now like to turn the call back over to Mr. Lorberbaum for closing remarks.

[Jeffrey S. Lorberbaum, Chairman and Chief Executive Officer at Mohawk Industries]

Business is in good shape. We think the conditions going forward are positive, and we're trying to take advantage of the opportunities. We appreciate you listening, and have a good day.

[Operator]

[Operator Closing Remarks]