Mohawk Industries Q1 2022 Earnings Report

Mohawk Industries EPS Results

• Actual EPS: $3.78
• Consensus EPS: $2.89
• Beat/Miss: Beat by +$0.89
• One Year Ago EPS: $3.49

Mohawk Industries Revenue Results

• Actual Revenue: $3.02 billion
• Expected Revenue: $2.85 billion
• Beat/Miss: Beat by +$161.24 million
• YoY Revenue Growth: +13.00%

Mohawk Industries Announcement Details

• Quarter: Q1 2022
• Date: 4/28/2022
• Time: After Market Closes
• Conference Call Date: Friday, April 29, 2022
• Conference Call Time: 1:07PM ET

Mohawk Industries (NYSE:MHK) is a global manufacturer and distributor of flooring products. The company serves residential and commercial customers through a broad portfolio that includes carpet, rugs, ceramic and porcelain tile, laminate, hardwood, luxury vinyl tile and other resilient flooring products.

Mohawk markets its products under brands that include Mohawk, Karastan, Pergo, Quick-Step, Marazzi, Daltile, American Olean, IVC and Durkan. Its products are sold through home improvement retailers, independent flooring dealers, distributors, builders, commercial contractors and other channels.

The company was formed in 1988 through the merger of Mohasco Corporation and Aladdin Mills and is headquartered in Calhoun, Georgia. Mohawk Industries operates manufacturing facilities and distribution networks serving markets in North America, Europe and other international regions, including Latin America and Australia.

Mohawk Industries Q1 2022 Earnings Call Transcript

Key Takeaways

• Record Q1 Sales: Sales reached $3 billion, up 13 % y/y (17 % on a constant-currency and days basis), driven by higher pricing, ceramic segment growth, commercial sector demand, and small acquisitions.
• Inflation Response: The company implemented multiple unprecedented price increases to offset rapid material and energy cost escalations, while controlling SG&A, enhancing operational efficiencies, and managing labor and supply chain constraints.
• Strong Cash Flow & Buybacks: Mohawk generated strong cash flow, maintains low leverage (~1.1× adjusted EBITDA), and deployed $307 million in Q1 toward a recently approved $500 million share repurchase program, totaling 12 % of shares since 2020.
• Favorable Market Trends: Low housing inventory, robust new construction, rising home equity, and a rebound in commercial projects underpin expectations for continued residential remodeling and commercial flooring demand.
• Q2 Guidance & Long-Term Confidence: Q2 adjusted EPS is guided to $4.25–$4.35; the company remains optimistic about long-term growth supported by its balance sheet, innovation pipeline, and ongoing expansion projects.

Presentation

[Operator]

Good morning. My name is Charlotte, and I will be your conference operator today. At this time, I would like to welcome everyone to Mohawk Industries first quarter 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press Star, then the number one on your telephone keypad. To withdraw your question, please press the pound key. Should anyone need assistance at any time during this conference, please press Star then zero, and an operator will assist you. As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, April 29, 2022. Thank you. I would now like to introduce Mr. James Brunk. Mr. Brunk, you may begin your conference.

[James Brunk, CFO at Mohawk Industries]

Thank you, Charlotte. 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 first quarter performance and provide guidance for the second quarter. 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. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8-K and press release in the Investor section of our website.

[James Brunk, CFO at Mohawk Industries]

With that, I'll turn the call over to Jeff for his opening remarks. Jeff?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Thank you, Jim. Mohawk's performance in the first quarter exceeded our expectations. Sales in the quarter rose to an all-time record of $3 billion, up 13% as reported, or approximately 17% on a constant currency and days basis. Our sales momentum continued from the fourth quarter, reflecting higher pricing, growth in our ceramic businesses, an improving commercial sector, and benefit from our small acquisitions. Our operating income exceeded our forecast as strength in the global ceramic business offset rising European energy costs, improved operational efficiencies, enhanced Flooring North America's results, and our management of European market pressures benefited Flooring Rest of the World. During the quarter, we ran our operations at high levels in most markets to address order backlogs and replenish inventory. During the past year, rapid cost escalations have required multiple pricing actions to pass through.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

We've implemented these unprecedented increases across our markets and have also announced additional increases across the businesses as inflation continues to rise. We're also controlling SG&A spending, enhancing operational efficiencies, and introducing new features. Labor shortages persist, requiring enhanced training programs and process improvements to minimize impacts. Supply chain issues continued through the quarter, impacting specific products and markets. We managed material shortages by reengineering products, streamlining our SKUs, and improving production planning. Market conditions for flooring remain favorable, even as governments raise interest rates to combat inflation. Employment is at high levels, and wages are increasing in most of our markets. Millions of millennials in their late 20s and early thirties are forming households and desire homeownership. Unlike past cycles, U.S. housing inventory is historically low. More single-family homes are under construction, and the home deficit will take years to align supply with demand.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

New residential construction will continue at high levels and delayed 2021 home construction will increase flooring purchases this year. Remodeling should remain strong, supported by rising home equity and buyers of existing homes completing long-term projects they've initiated over the past few years. Aging housing stock and changing needs of those working from home also expand property updates. We continue to introduce differentiated products that inspire remodeling projects as families customize recently acquired homes. Commercial new construction and remodeling continues to strengthen as business conditions improve and projects that were delayed due to COVID are initiated. Commercial projects. Our commercial products create inviting environments for businesses, and we're deploying appealing new collections to capture pent-up commercial demand. In some markets, our growth in the quarter was limited by inventory and production constraints.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

We are executing multiple expansion projects so that we can satisfy demand for our higher growth products, create innovative new features, and improve operational efficiencies. The categories that we are expanding include U.S. laminate, LVT, and quartz countertops, European laminate, high-end porcelain slabs and specialty products, and ceramic tile in Brazil and Mexico. Our recent bolt-on acquisitions in Europe are enhancing our growing insulation and panels businesses. Sales of products remain strong and our design and features are bringing to the market, give us competitive advantages in all price points. Against the background of geopolitical tensions and rising inflation, Mohawk has continued to deliver sales growth, generate strong cash flow, and maintain historically low leverage. Given the undervaluation of our stock relative to our earnings, our board approved an additional $500 million share repurchase program in February.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

We acquired 2.1 million shares during the first quarter for a total of $307 million. Since the start of 2020, we've acquired 8.5 million shares, representing 12% of the outstanding balance, reflecting our confidence in Mohawk's long-term growth and profitability. Our strong balance sheet provides many alternatives for investments, including product extensions, geographic expansion, acquisitions, and further stock buybacks. Since becoming a public company, Mohawk has completed many transformational and bolt-on acquisitions, and we continue to explore additional options. Finally, I'm pleased that Jerry Burris has joined our board of directors. Jerry is the President and CEO of Midwest Can Company, and he brings unique strengths in business strategy and operations to our board. Now, Jim will cover our first quarter financial results in more detail.

[James Brunk, CFO at Mohawk Industries]

Thank you, Jeff. Sales for the quarter were just over $3 billion. That's a 13% increase as reported, and 17% on a constant basis, setting an all-time quarterly record. The year-over-year increase in sales was primarily driven by pricing actions in response to significant global inflation and volume growth in a number of our product categories compared to a strong unit expansion in Q1 of 2021. Gross margin for the quarter was 26.6% versus the prior year of 30.1% excluding charges. On an absolute dollar basis, gross earnings was flat versus prior year as pricing actions and productivity countered increased inflation offset by FX headwinds, higher temporary shutdowns due to material supply shortages, and limited unit volume growth.

[James Brunk, CFO at Mohawk Industries]

The actual detailed amounts of these items will be included in the MD&A of our 10-Q, which will be filed after this call. SG&A, as reported, was 16% of sales versus 17.7% in the prior year. The increase in SG&A dollars was due to the impact of product mix, inflation, and volume, partially offset by increased productivity and the impact of FX. Operating income, as reported, was $321 million. Excluding charges was $323 million or 10.7%, compared to 12.3% in the prior year. Adjusted operating income on a constant FX basis was $334 million compared to $329 million in the prior year.

[James Brunk, CFO at Mohawk Industries]

The year-over-year increase was a result of strong pricing actions and increased productivity, offsetting the higher inflation, negatively impacted by lower overall volume dollars and higher temporary shutdowns due to material shortages. Interest expense for the quarter was $11 million. The year-over-year decrease of approximately $4 million was mainly due to the settlement of our 2020 2% Eurobond in Q4 of 2021. Other income, other expense was an expense of $3 million. Our non-GAAP tax rate for the quarter was 22.3%, and we expect the full-year tax rate to be between 22% and 23% with possible quarterly variations. That leads us to an earnings per share on a GAAP and non-GAAP basis of $3.78.

[James Brunk, CFO at Mohawk Industries]

That's an increase of 13% versus the prior year on a GAAP basis and 8% on a non-GAAP basis. Turning to the segments. Global Ceramic had sales of just under $1.1 billion. That's an increase of 14.5% as reported or approximately 18.5% on a constant basis. The year-over-year increase in sales was primarily a result of segment-wide pricing actions with the strongest volume increase in Europe, Mexico, and with our US quartz countertops business. Operating margin excluding charges was 9.4% versus 9.6% in the prior year, and adjusted operating income on a constant basis was $103 million compared to $89 million last year. The year-over-year increase is due to pricing actions combined with productivity to offset inflation, even with the European energy crisis, in addition to favorable year-over-year volume.

[James Brunk, CFO at Mohawk Industries]

Flooring North America had sales also just shy of $1.1 billion. That's a 10.6% increase as reported or 12.3% on a constant basis. The year-over-year sales growth is due to aggressive pricing actions and volume strength in resilient, laminate, and the commercial business units, offset by softness in residential carpet. Operating margin excluding charges, 8.9% versus 9.3% in the prior year, and operating income was $95 million compared to $90 million last year. The segment increase in operating income dollars was due to pricing actions and increased productivity initiatives offsetting inflation, which was due primarily to rising material costs, lower overall volume, and shutdown costs caused by material shortages. Finally, in Flooring Rest of the World, sales were $879 million.

[James Brunk, CFO at Mohawk Industries]

That's an increase of 14.2% as reported, or 22% on a constant basis, driven by strong pricing actions across the segment and volume growth in laminate, panels, and installation businesses. The operating margin excluding charges was 15.5%. That's a decrease from our 20.9% in the prior year. Adjusted operating income on a constant basis was $145 million compared to $161 million last year. The year-over-year decrease was driven by significant inflation, primarily offset by pricing actions, in addition to unfavorable productivity and temporary shutdowns due to material shortages and material substitution. Corporate eliminations was $10 million this year, in line with prior year. Turning to the balance sheet.

[James Brunk, CFO at Mohawk Industries]

Cash and short-term investments were $541 million, with free cash flow being a use of cash of $75 million in the quarter, with a return to normal seasonality. Full-year cash flow is projected to approach prior year. Receivables for the quarter were just over $2 billion, with a DSO of 53.8 days, slightly down from the 54.4 days in the prior year. Inventories were just over $2.5 billion. That's an increase of $517 million or 26% from the prior year, with approximately 60% due to inflation and 40% due to unit growth. Inventory days were at 110.5 versus 105.6 in the prior year.

[James Brunk, CFO at Mohawk Industries]

Property, plant, and equipment was just over $4.5 billion, with CapEx for the quarter at $129 million versus a D&A of $141 million. Full-year CapEx is forecasted to be approximately $800 million, with D&A forecasted at $570 million. Finally, the balance sheet and free cash flow for the full-year remain very strong, with gross debt currently at $2.6 billion and leverage at 1.1x adjusted EBITDA. With that, I'll turn the call over to Chris for a review of our key operational areas.

[Chris Wellborn, President and COO at Mohawk Industries]

Thank you, Jim. Our U.S. ceramic business continues to improve its sales and margins. We are enhancing our product mix and implementing multiple price increases to cover inflation. During the quarter, the residential sector remained strong, while the commercial sector gained momentum as businesses initiated new projects and commenced deferred remodeling. Our sales should be positively impacted by providing alternatives to tile imports, which are increasing in price and experiencing shipping delays. We have enhanced our technology tools to make product selection, ordering, and pickup the fastest and easiest in the industry. Our quartz countertop sales are growing rapidly, and to satisfy demand, we have initiated construction to expand capacity at our Tennessee countertop facility. We see our position in the U.S. ceramic market improving, with new construction at high levels and strengthening commercial channels as we provide domestically produced options with outstanding visuals and features.

[Chris Wellborn, President and COO at Mohawk Industries]

The results of our ceramic business in Mexico and Brazil continue to be strong, even with our sales in the quarter being limited by low inventory levels. Our performance was supported by ongoing strength in residential construction and remodeling, with commercial projects improving. During the past year, we have responded to rising inflation and higher energy costs with multiple price increases, which both markets have accepted. We will continue to take pricing actions as inflation rises. Near term, we see strength in both markets continuing, though increasing interest rates and inflation may impact future demand. To relieve constraints, we have increased capacity in Mexico, and we are negotiating with government agencies for permits and incentives to construct a new porcelain facility in Brazil. In our European ceramic business, our management team is taking extraordinary steps to adapt to a uniquely challenging environment.

[Chris Wellborn, President and COO at Mohawk Industries]

Our sales in the first quarter grew as consumer demand strengthened and our customers increased inventory levels in anticipation of inflation. The ceramic industry production in Europe was interrupted when Ukrainian clay supplies to Western Europe ceased. Natural gas prices for the balance of the year have escalated from prior estimates, raising our future cost. We improved the results by increasing prices more than we expected, and we enhanced our product mix to improve our results. We anticipated the Ukrainian clay problems and increased our inventory levels before the invasion to avoid interrupting our production. Our clay inventory should provide sufficient time to reformulate products with alternative materials without disrupting our operations. There is more market uncertainty in the second half of 2022, with economic growth expected to slow and energy costs higher than earlier estimates. We are prepared to adjust our strategies as necessary based on market conditions.

[Chris Wellborn, President and COO at Mohawk Industries]

The Flooring Rest of the World segment delivered solid top-line growth as demand remained strong. Our management team took actions to manage rising energy costs, escalating material inflation, and volatile supply chains. Despite multiple price increases, we are lagging rapidly rising costs in Europe and have announced additional price increases in response to continuing inflationary pressures. Our continuous innovation and new features supports our market position and margins. Due to their unique visuals and water-resistant performance, demand for our premium laminate collections remains strong. Though material supply in the quarter limited production, our laminate sales increased, and we expected continued long-term growth as we expand the premium laminate category with new innovation in design and features. To maximize our distribution in laminate, we introduced our leading-edge innovations in the specialty channel under our Quick-Step brand and followed them up in other channels with premium features that add value utilizing unique brands.

[Chris Wellborn, President and COO at Mohawk Industries]

With this market strategy for our laminate, we are expanding our market share and adding new capacity to support in Belgium by the end of 2023. Sales in our LVT and sheet vinyl business were negatively impacted by material disruptions and low inventory levels. Our margins improved through the period, driven by increased production and prices. Raw material supply for both categories was especially challenging but improved as we went through the period. We are continuing to enhance our LVT processes and formulations to improve our sales and margins. Our rigid LVT sales are growing substantially as the category increases in consumer preference. Our two bolt-on acquisitions contributed to our top line during the quarter, and the integration of both is proceeding as planned. Our purchase of an insulation manufacturer with plants in Ireland and the U.K. increased our market share and sales of polyurethane insulation products.

[Chris Wellborn, President and COO at Mohawk Industries]

In one of the insulation plants we acquired, a new production line with state-of-the-art technology is presently starting up. Our new French MDF facility has enhanced our product offering and extended the geographic reach of our business. We will enhance the plant's operations by improving processes, expanding capacity, and generating energy from waste wood. Despite material constraints, our panel sales grew significantly in the quarter, including strong results in our mezzanine business, which is expanding with e-commerce demand. Our new high-pressure laminate line is performing well and extending our manufacturing into a new product category that coordinates with other wood panels. To deliver more sustainable panel products, we have introduced a new patented technology for reclaiming wood fiber from MDF boards that will reduce carbon emissions and our cost position. Our two energy plants fueled with waste wood lower our carbon emissions and significantly reduce our energy cost.

[Chris Wellborn, President and COO at Mohawk Industries]

Our Australian business had robust demand for flooring in the quarter following the loosening of COVID restrictions, while New Zealand remained difficult due to continued COVID restrictions. Price increases have been implemented in both countries in response to rising material and transportation costs. As in Flooring Rest of the World, Flooring North America is managing the greatest inflation we have ever experienced. The strategies we have been implementing during the past two years have improved our sales execution, cost structure, and service levels and enabled us to manage a difficult environment. Most of our manufacturing costs are related to oil and gas prices, and our suppliers continue to increase their margins given supply constraints. To offset, we have announced new price increases this year in addition to the multiple rounds of increases in 2021.

[Chris Wellborn, President and COO at Mohawk Industries]

Across the segment, we have initiated many projects to increase productivity, improve efficiencies, and upgrade our assets to enhance our results. Mohawk holds a leading share of the North American laminate market, and sales of our premium collections continued to grow in the quarter as our new production line ramped up. We anticipate achieving our targeted production levels as planned during the second quarter, which will expand the sales of our next-generation products. With realistic visuals and superior performance, our laminate has become an appealing, waterproof alternative to both wood and LVT in most channels, including new home construction. Escalating market demand in North America is absorbing our additional production as it comes online, and we are further expanding our U.S. laminate capacity next year to support continued growth.

[Chris Wellborn, President and COO at Mohawk Industries]

Our LVT sales continued to grow substantially in the first quarter as we benefited from an improved offering across all channels. Our margins were impacted by material disruptions that interrupted manufacturing, delays in sourced products, and higher ocean freight costs. Our legacy LVT operation has significantly improved its processes and is increasing line speeds and capacity. Our new West Coast LVT facility is initiating production and fine-tuning processes. When fully implemented, our East and West Coast operations will provide logistics and service advantages to our customers. We will continue to strategically utilize sourced LVT to round out our portfolio and maximize our business. Our sheet vinyl sales also increased, though material shortages stopped our operations and raised our cost in the period. We anticipate material supply for our resilient business normalizing during the second quarter, which will improve our sales and margins.

[Chris Wellborn, President and COO at Mohawk Industries]

Residential carpet service improved substantially and customers are lowering inventory, impacting sales. We are raising prices further to offset escalating material and energy costs. By reducing complexity, simplifying operations, and increasing efficiencies, we are improving costs. We are managing tight labor markets that are impacting staffing and productivity. Our commercial sales continued to rebound, led by strength in the government, workplace, and healthcare channels. Sales in both our carpet tile and commercial LVT collections are growing as new and deferred projects are being initiated. Commercial design activity continues to strengthen as reflected by the March Architecture Billings Index. This project pipeline will support future specification and sales growth of our commercial products. Our domestically produced LVT is being more widely specified due to its greater dimensional stability, superior performance, and preference for more consistent local supply.

[Chris Wellborn, President and COO at Mohawk Industries]

We are committed to becoming carbon neutral with our commercial flooring products and have introduced a new carpet tile that provides superior acoustics and comfort while achieving the highest level of sustainability certifications with half the carbon footprint. With that, I'll return the call to Jeff.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Thanks, Chris. Four months into 2022, we remain cautiously optimistic about industry growth this year despite inflation and interest rate pressures. We've announced additional price increases in most of our products and markets as inflation continues to rise. Housing supply is historically low, and rising mortgage rates are spurring families to purchase homes sooner. Remodeling should be supported by continued existing home sales, higher home equity, and the upgrading of homes purchased over the past two to three years. We anticipate the commercial sector will continue its rebound with people returning to pre-pandemic routines. We expect improvements in the supply of constrained materials, which should increase our production levels. Our capital investments, when completed, will relieve specific capacity constraints and increase our offering.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

This year, we are focused on optimizing our mix and margins by limiting the impact of inflation through price increases, controlling our spending, and initiating additional productivity actions, which should increase in our year-over-year earnings per share. Given these factors, we anticipate our second quarter adjusted EPS to be $4.25-$4.35, excluding any restructuring charges. We have confidence in the long-term future of our business despite near-term uncertainties. Globally, there is a structural deficit for housing that will take years to satisfy, and we should benefit from strong long-term trends in new home construction, residential remodeling, and commercial projects. Our brands are the most recognized in flooring and provide a comprehensive product portfolio that includes the industry's strongest collection of sustainable products.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

We're making it easier for our customers to grow their business through leading digital tools that generate customer leads, simplify ordering, and expedite deliveries. Through the innovation of our talented team, we continue to lead the industry in design, performance, and value. The strength of our balance sheet allows us to pursue both transformational and bolt-on acquisitions that complement our business. Over the next three to five years, these advantages should enhance Mohawk's sales and margin expansion. I'll now be glad to take your questions.

[Operator]

Ladies and gentlemen, at this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Management requests that you limit your questions to one primary and one follow-up. Your first question comes from the line of Tim Wojs with Baird. Your line's now open.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Hello.

[Tim Wojs, Senior Research Analyst at Robert W. Baird]

Maybe just first question on mix. I'm just kinda curious if you can maybe give us an update about what you're seeing, maybe broad strokes on the mix side. Have you seen any, you know, reaction to higher prices in any areas from a mix perspective? Then I guess from your own capacity, what is the opportunity to kind of mix up within your product, you know, within your product lines to improve margins? I guess, is that something you'd wanna do in the current environment or not?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

There is some trading down going on in the various markets with, as you increase prices. Some people have budgets, and it requires them to reduce the quality of the product. That is occurring in different pieces. It's probably more in the middle. The bottom end of the market, there's not much place to go. In the top end, the people are not squeezed. There is some of that coming. We think the industry will remain at high levels relative with volumes, with increases in average selling prices. We anticipate seasonality returning to normal versus prior year, the last year or so, and inflation slowing. We also anticipate the US dollar strengthening and negatively impacting our translated results this year.

[Tim Wojs, Senior Research Analyst at Robert W. Baird]

Okay. Okay. There's a little bit there. I guess on within your own capacity, I mean, just given the environment, would you look to mix up within the product lines just to improve margins, or are you okay with your kind of current mix?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Listen, we always try to improve the mix. In certain cases where, let's take our European ceramic business. On purpose, we have limited the sales of the low end given the rising inflation and pushed it up, which also helped our margins in our ceramic business. The goal, you know, each year is to introduce new products to enhance the mix of the business to help us improve the margins.

[Tim Wojs, Senior Research Analyst at Robert W. Baird]

Okay. Okay, good. I guess just for context, I mean, I know supply has been a challenge in certain of your businesses. I mean, if you had the necessary access to raw materials. I mean, what type of volume, you know, growth would you have been able to deliver if you got the right amount of raw materials?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Let's just say the operations, many of them were disrupted by materials, and it includes LVT and sheet vinyl in the U.S. and Europe, our laminate business, our panel business, and some of the others are all by lack of materials. There was also COVID restrictions in Australia and New Zealand. We had delays in imported products. As we went through the quarter, all the impacts reduced. We think the second quarter will be substantially better. What I would say from a cost perspective, we know it impacted us about $9 million in the quarter, but the sales loss is really hard to estimate.

[Tim Wojs, Senior Research Analyst at Robert W. Baird]

Okay. Okay, understood. I'll hop back in queue. Thanks, guys.

[Operator]

Our next question comes from the line of Matthew Bouley from Barclays. Your line is now open.

[Matthew Bouley, Senior Equity Research Analyst at Barclays]

Morning, everyone. Thank you for taking the questions. Just on supply, again, specifically the European clay supply, it sounds like you procured inventory ahead of disruption. I think I heard you say that, the inventory build is gonna allow you some extra time to reformulate materials. Could you just elaborate just on the supply picture for clay in Europe, and sort of what you and the industry are doing to address that? Thank you.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Well, as you mentioned, Ukrainian clay is widely used in Europe, and we did increase our inventories. I think we can have a sustainable advantage in this area because, one, we have a good supply for the transition, and we have really good R&D resources and logistics resources working on alternatives. I think we'll have an advantage versus many companies going forward.

[Matthew Bouley, Senior Equity Research Analyst at Barclays]

Okay. Thank you for that, Jim. I guess same topic, on European ceramic. You know, I think you mentioned that the volume was, I think you said strong, I guess in spite of the price increases. It sounded like some customers were building inventory ahead of inflation. Could you just speak to what that inventory build could mean for future volumes and just how you think about the elasticity of customer demand as these higher prices do come through? Thank you.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Well, we were able to take pricing, and we do believe that there was some early buy-in to those price increases. We don't really have a good judge as to just how much that volume was, but I would anticipate there was some pre-buy.

[Matthew Bouley, Senior Equity Research Analyst at Barclays]

All right. Well, thank you, Jim. Thanks, everyone.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Thank you.

[Operator]

Our next question comes from the line of, Susan Maklari from Goldman Sachs. You may now state your question.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Thank you. Good morning, everyone.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Good morning.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

My first question is, you know, you talked a lot about the ability to gain market share, just given a lot of these global dynamics, whether it's domestic or international, that are coming through. I guess as you look-forward, can you just comment on the ability to retain a lot of that market share? You know, anything that you are doing differently to make that perhaps a bit stickier than it has been in the past, and how we should be thinking about those, what that could mean for volumes as we go through the next couple quarters and maybe the supply chains incrementally improve.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

As we look forward, we're cautiously optimistic about what's gonna happen this year, despite the rising inflation, the interest rates. Given our international business, the strengthening dollar will reduce the translation of the EPS. Our basis is that the GDP will continue to grow, though at a lower rate. We see higher pricing continuing to raise it with increasing material costs, and we see that the availability of materials is gonna help us increase. We mentioned before that the commercial will continue improving, and we've announced other increases to cover the costs that we're facing. The other thing that's gonna benefit us going forward is this purchased stock we've done will continue to increase the EPS.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Just as a note while we're talking, the seasonality of the business. The Q2 is our strongest period of the year, and then Q3 is impacted by European vacations. Some of the models don't put that in it. The fourth quarter is typical with holidays and lower than the third quarter.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Okay, that's helpful. Actually, that sort of leads into my next question, Jeff, which is, you know, as we do look out to the rest of the year, can you just give us some commentary on how we should be thinking about the different puts and takes across the different segments, you know, given that some of these comps are still a little bit weird as we go through the next couple of quarters?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

When you look at last year, the first half of the year, we went into the year, and the industry was, the inventory and the channels were really low, the capacities were constrained, and but what happened is we shipped a lot in the first half of the year, seasonally high. The comps in the first half are harder than normal. In the second half, it should normalize, and then we should see the comps get easier versus last year.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Okay. That's helpful. Thank you. Good luck.

[Operator]

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

[Keith Hughes, Managing Director of Sell Side Equity Research at Truist Securities]

Thank you. Your Flooring North America growth was pretty impressive considering that carpet had its struggles in the quarter. Could you give us in some kind of magnitude of how much your hard surface grew within that segment to get this result?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Let's see, how I answer that one. The first quarter performance, you're right, the sales increased 12% on a constant basis, primarily due to pricing actions. You're right, the LVT and laminate had strong sales momentum while the carpet business was weaker with the channels adjusting inventory as well as, you know, more normalization of the share of the different products. The strategies that we're implementing over the last couple of years with all the changes we've made are improving our sales and service, reducing our costs. Our laminate business has been limited by our capacities. Our LVT, we've been expanding the production rates that we're at. We've been importing more to satisfy it, and we're starting up this new plant to get it.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

If you look in our Q, you can look at different product categories, and it'll show you in broad terms the volume in the different categories by product category.

[James Brunk, CFO at Mohawk Industries]

You'll see, Keith, the laminate wood and the resilient categories certainly did grow and also supported by a stronger commercial business.

[Keith Hughes, Managing Director of Sell Side Equity Research at Truist Securities]

Okay. Second question just on LVT and North America. We've seen strong import numbers coming in. I think you're still importing product here as well. Do you feel like Mohawk overall, do you think you're growing in line or faster or below what LVT is doing in North America?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Well, first of all, the number is hard to get.

[Keith Hughes, Managing Director of Sell Side Equity Research at Truist Securities]

Well, if you compare it versus imports, for example, are you growing faster than imports are coming in?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Well, you also have in the first quarter to the Chinese and the Asian shutdowns, so people build inventories before it, which all show up in the first quarter, which are shipped in the fourth quarter coming in. I think we're growing as fast or faster than the marketplace.

[Keith Hughes, Managing Director of Sell Side Equity Research at Truist Securities]

Okay. Thank you.

[Operator]

Your next question comes from, Michael Rehaut from, J.P. Morgan. Your line is now open.

[Michael Rehaut, Executive Director at JPMorgan]

Thanks. Good morning, everyone. Thanks for taking my questions.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Morning.

[Michael Rehaut, Executive Director at JPMorgan]

You know, first, I just wanted to circle back to your comments around, you know, seasonality in the third quarter and fourth quarter. You know, any type of additional granularity would be helpful, you know. Specifically, you know, should we be thinking about the 2Q EPS as a result, as the high watermark from a quarter perspective for the year? You know, anything in terms of, you know, sales and margins relative to 2Q would be helpful.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

I mean, if you go back and look at the last few years, you'll see that the Q2 is the high watermark, and that what happens is that we take our vacations and shut down the plants in Europe, which impacts the sales and margins in the third quarter. On the other hand, the U.S. businesses tend to peak, so they offset a little bit as you go through. The fourth quarter is always lower than the third quarter because of vacations, and people don't buy flooring products when they have their Christmas trees up as you go, typically. Jim, you wanna add anything to it?

[James Brunk, CFO at Mohawk Industries]

As you look at the seasonality, Mike, and the other things to consider, you know, in terms of our projection, we're taking into account the pace of inflation, the pricing that we're implementing. Remember Jeff's earlier comment on the comps in the first half. The sales expansion in the first half of the year should be mostly driven by sales price increases, where the second half of the year, we would expect some normalization of price versus volume, all things considered what we know today.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Jim, go over the FX impact from just the Euro, where it is.

[James Brunk, CFO at Mohawk Industries]

Yeah. The other point on the seasonality, as Jeff just pointed out, is our FX exposure, especially to the Euro, from a comp standpoint. Last year in the second quarter, the Euro was approaching $1.20, $1.21. As you've seen, recently, it's fallen to below $1.06, $1.05 even. So that will have an impact on our translated results.

[Michael Rehaut, Executive Director at JPMorgan]

Right. No, that's very helpful. Appreciate the color there. I guess secondly, I was interested in your comments earlier around the clay inventory, the Ukrainian clay inventory. I believe, if I heard it right, it was Chris that kinda mentioned, you know, that you view the supply, I guess, sustainable, in the near term, and that, you know, perhaps in the medium to longer-term, you can work on alternatives from an R&D perspective.

[Michael Rehaut, Executive Director at JPMorgan]

You know, I just wanted to explore that a little bit if you could dive deeper into that, just to understand, you know, if possible, how long the clay reserves that you currently have would sustain production and you know, what type of, you know, R&D alternatives could there be that, you know, could easily be, you know, used as a replacement, you know, once those reserves, you know, are depleted?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Let me start, and Chris will give you a detailed answer. One point we were trying to make is that we got more price in the first quarter than we had expected. Part of that was because the production by the industry was less because of that, and it enabled the industry to push through more price faster than we expected. That was one point. The second is that Chris had said was that our inventory levels are higher than most people's, most other companies, and so it didn't impact us as much. Then we're covered through most of the year, and then our people, different than others, we have more worldwide insight into what's going on around the world and can find alternatives easier.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

We think that we also have an advantage in our chemists and their abilities to swap, which should help us make the transition. Chris, did I miss anything?

[Chris Wellborn, President and COO at Mohawk Industries]

No, I'd just add to that, Michael, that especially in Spain and Italy, but all Europe uses Ukrainian clay mostly for particular products at the high end. The anticipation is that everybody's gonna lose that supply of Ukrainian clay, and everybody's gonna have to substitute. The amount we have gives us longer time to transition, and we think there's alternatives that not just for us, but the industry to replace Ukrainian clay.

[Michael Rehaut, Executive Director at JPMorgan]

Great. Thank you. Appreciate it.

[Chris Wellborn, President and COO at Mohawk Industries]

Yeah.

[Operator]

Our next question comes from Stephen Kim from Evercore ISI. Your line is now open.

[Stephen Kim, Senior Managing Director at Evercore ISI]

Yeah. Thanks a lot, guys. Yeah, congratulations on that Ukrainian move. That was, sounds like you outfoxed your competition there. I wanted to ask a couple of questions on Flooring North America, though. First on the resi carpet side, you mentioned that carpet service is improving and customers are reducing inventory. I just wanted to see if you could elaborate a little bit on that. You know, why are the customers reducing inventory? That's a business that right now we're seeing a lot of bottlenecks or extended construction cycle times. I think most people who follow the home building industry think that we're probably nearing max, you know, that situation is probably not gonna get a lot worse from here, it may improve.

[Stephen Kim, Senior Managing Director at Evercore ISI]

I was just wondering how you think that might affect the overall sales into the channel. If you can just put your comment about reducing inventory by customers into context with that kind of an outlook.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

What happened in fall of last year and before, our customers were taking everything they could due to the timing of the shipments, which was unpredictable. If there was any availability, they were taking it, and most of them increased their warehouses in order to have more consistent supply. Over the last few months, we've been able to get the inventories and the service levels back almost to where they were prior to pre-pandemic levels, so they don't require the same inventory levels to operate their business, was the point.

[Stephen Kim, Senior Managing Director at Evercore ISI]

Got it. Makes sense. Okay, that's fine. But I would imagine that to the degree that the builders are actually able to build more product and have more completions, that would be a somewhat offsetting benefit to you know, later in the year, perhaps. Correct me if I'm wrong.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

The volume is all dependent on how many houses they build, and it looks like it's gonna be a good year. It looks like there were a lot of homes that were started last year that are extended in their completion dates, so flooring tends to be the last thing in them, so that should also help.

[Stephen Kim, Senior Managing Director at Evercore ISI]

Yeah, I would guess. Speaking of that and the fact, you know, how the installation of flooring may be different from some other products, one of the things that we've been thinking about is that maybe you might see in this weird environment in housing a slower rate of existing home sales, even though new construction stays stronger and home prices, we think, will be resilient. But if you see slower U.S. existing home sales, I'm curious, do you think that flooring is more exposed to the kind of remodeling that's associated with a move, where somebody moves versus remodeling to stay? The thing I was thinking about was that to remodel a floor, a lot of times you gotta, like, sort of clear the room out, you know, it's a little bit invasive and that kind of thing.

[Stephen Kim, Senior Managing Director at Evercore ISI]

It's kinda easier to do, like, you know, when you're sort of switching houses, so to speak. I was curious if you'd ever done any work on that, if you think there's any validity to that, or if there's offsetting factors that I'm not thinking about.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Flooring is a significant disruption to somebody's home, so typically they're larger projects. Again, when people do move, there tend to be significant changes in the flooring that goes in the homes. Now, it all doesn't get done on day one, so it takes usually a period of years for people to, when they buy a home, to upgrade it, which means there should be a lot of pent-up demand from the last two or three years of really high existing home sales. If existing home sales slow down, you should have this demand left over that everybody's still remodeling from the last few years, because most people don't have the money to do it all at once or the inclination.

[Stephen Kim, Senior Managing Director at Evercore ISI]

Yeah. Also probably contractor availability delayed things as well.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

The other part people talk about is up to now, people wanted to do projects and the labor was really restricted, so I don't know how much has been postponed because the labor wasn't available.

[Stephen Kim, Senior Managing Director at Evercore ISI]

Yep. Okay, great. Thanks a lot.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Thank you.

[Operator]

Our next question comes from, Mike Dahl from RBC Capital Markets. You may now proceed with your question.

[Mike Dahl, Managing Director and Equity Research of Homebuilders and Building Products Analyst at RBC Capital Markets]

Good morning. Thanks for taking my questions. Just another follow-up on the clay and European results. Is there any way you can quantify it? It does seem like you've had a temporary advantage, and I know your perspective on that could carry on for some time, but the advantage that you had given your decisions on supply, can you quantify how much that contributed to 1Q and 2Q? I guess the second part of the question is, you know, to your points, everyone's kind of rushing to reformulate. Have you ever experienced a situation like this where there's been kind of mass reformulation and what is the timeline? How long does it typically take, especially since this is a kind of a unique type of product that it's targeting?

[Mike Dahl, Managing Director and Equity Research of Homebuilders and Building Products Analyst at RBC Capital Markets]

Any insight on kind of timeline for reformulation for you or your peers?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Well, it hasn't happened like this before, because usually, if you wanna make a change in it, you know it's coming, you anticipate it, and you look for other alternatives. Usually, the change time takes months because you're running this thing at close to 2,000 degrees, and very small changes affect the flatness of the product and quality of the product. Then you have to make multiple tests and then test it up. Usually, you go through a very systematic method of changeover. Presently, depending upon where people are, they're not gonna have that option if they have low inventories. We know it happened with some competitors that they actually reduced their production already. Now, how long it's gonna take each one of them to react to it, I can't answer.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

I can tell you that with our worldwide views, we're looking all over the world, and we have tests going on for the last month of all different products and categories, and we think we're advantaged by that.

[Chris Wellborn, President and COO at Mohawk Industries]

It's gonna be harder for a smaller company to do all that research, and have the logistics to change it, for one. The other thing, Ukrainian clay is most important for high-end products. For a company that has a broad range of products, it's gonna have a less impact than if you're a small player just doing premium.

[Mike Dahl, Managing Director and Equity Research of Homebuilders and Building Products Analyst at RBC Capital Markets]

Right. Okay. Thanks. My second question is on Russia. Jeff, can you give us an update on your Russian operations? You know, one, are you still operating? Two, you know, if so, you know, why are you still operating as other global companies have pulled out? Three, is Russia at this point self-contained, or are you exporting any product from Russia to Europe?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Well, let's start out, we're really concerned and saddened by what's going on there and the actions of Russia. It's a huge humanitarian crisis. Our European team is supporting our Ukrainian employees. We're providing aid to refugees in Poland as we go through. We have suspended new investments there. We've reduced the spending. We're following all sanctions in the marketplace.

[Mike Dahl, Managing Director and Equity Research of Homebuilders and Building Products Analyst at RBC Capital Markets]

As far as just rationale for staying there longer-term, and then the second point being, you know, are you exporting any product from Russia to Europe, or is it really just still all self-contained there?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

The export business is a very limited portion of the business. Like most of our businesses, they're all set up to satisfy the local markets, so we don't export much. That's it.

[Mike Dahl, Managing Director and Equity Research of Homebuilders and Building Products Analyst at RBC Capital Markets]

Okay, thanks.

[Operator]

Our next question comes from Phil Ng from Jefferies. Your line is now open.

[Phil Ng, Managing Director at Jefferies]

Hey, guys. Congrats on a really strong quarter, and 2Q guidance looks pretty encouraging. Jeff, I guess big picture, the macro backdrop and consumer feels a little choppier. Is there an ability to kind of slow down the ramp of some of the new capacity you'll bring on if we do see an air pocket later this year? I'm just trying to gauge how quickly can you pivot from growth mode to perhaps a more muted backdrop.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Let's just sort of focus on what the growth is. The expansion projects are in areas where we have capacity constraints existing and/or the sales of the product categories are expanding. If you start and look through the different pieces, in the U.S., we're expanding the laminate business. In the laminate business, we have a new line going in, and it's already sold up and committed, and it's growing in market share as it takes as it becomes a substitute, an equal substitute for LVT and wood. The LVT, we are increasing our production. We're sourcing a lot of product, and so if it slows down, we can reduce the amount of sourced products. In quartz countertops, we are oversold in our U.S. plant. We're importing products there.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

If this slows down as we put it in, we can reduce the amount of imports there as we go through. The quartz countertop and LVT businesses are also growing rapidly, isn't it. In Europe, we've reached the capacity of our laminate production, and it's not coming in till the end of next year. We're growing our share in it, so we may have to slow it down for a little bit in the transition if things slow down, but we need it. The porcelain slabs we're putting in, again, we are oversold and sourcing products from it, and then we're spending money to be able to change the mix within the plants in Europe to upgrade the quality of the products and make more specialized pieces, which will help our mix and margins.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Finally, the ceramic in Brazil is, I mean, we've been oversold for over a year, and we need to expand the capacity there. In Mexico, we've already put in the expansion, and it's being utilized. Beyond those things, the major pieces are all in either bringing new product features to market or into cost reduction. I think we've made the right decisions. You know, whether we can use it all as fast as we hoped or not, as you hear, a lot of the stuff is, we're sourcing and not, and whatever the market is, we'll have to adjust to it.

[Phil Ng, Managing Director at Jefferies]

Got you. That's great color. From some of the trade flow and supply chain nuances, it sounds like you're pretty well positioned in North America on the ceramic side and LVT side. It sounds like you're taking share. Can you kinda expand on that, just given some of the logistical costs and whatnot? Then separately, you talked about how maybe inventory from your customers are drawing down some of that for carpet. Are you seeing any of that dynamic elsewhere?

[Chris Wellborn, President and COO at Mohawk Industries]

Well, just on the, we're talking about taking share in ceramic. You've got import pricing has increased given energy and transportation, ocean freights causing delays and increasing costs. Then our domestic manufacturing is well positioned, and our commercial demand is growing.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

The LVT, there is more U.S. production being made because of the logistics problems that go along with it, so we think we're well positioned there, and it's the right thing to do. I forgot the rest of your question, to tell you the truth.

[Phil Ng, Managing Director at Jefferies]

No problem. You talked about, on the carpet side, some of your customers are drawing down inventory because they're replenished at this point. Are you seeing any of that, in some of your other products?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Most of the other product categories, the inventories haven't gotten to the same level for the industry as the carpet has. We think carpet's approaching more normalized levels. The other ones are not quite there yet.

[Phil Ng, Managing Director at Jefferies]

Okay, super. Thank you.

[Operator]

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

[Truman Patterson, Head Analyst of Housing Equity Research at Wolfe Research]

Hey, good morning, guys, and thanks for taking my questions. First, from an enterprise level, you all had really good cost control on the SG&A line, really nice leverage there. I'm hoping that you can elaborate on some of the internal initiatives that were driving that leverage and also just, you know, the potential sustainability going forward as we move through the year.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Let me start, and I'll let Jim fill in where I miss. Going into the year, we knew that there's a potential for the industry and volumes to change, so we went into the year, trying to optimize the SG&A spend. We have good controls everywhere. We are still investing in new products, but we're trying to control the costs and spending and make sure that we're putting it in the right places. You know, just good controls through the business. We think that the other side of it is the top line is growing because of material and energy inflation, and the SG&A doesn't have the same, all of the same, it's the inflation's there, but it's not as high as the product.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

In general, with that, you're gonna have a lower SG&A cost, as the two inflate at different rates.

[James Brunk, CFO at Mohawk Industries]

Yeah, Truman.

[Truman Patterson, Head Analyst of Housing Equity Research at Wolfe Research]

Okay.

[James Brunk, CFO at Mohawk Industries]

Truman, the focus really is, you know, on the sales, the marketing, the product side to try to advantage us as we move forward. We keep very strict controls, you know, certainly on the administrative side. We'll continue to see that trend continue. We'll gain leverage against the sales increase, and we expect the year-over-year percentage of sales to be lower versus last year.

[Truman Patterson, Head Analyst of Housing Equity Research at Wolfe Research]

Okay. Jeff, if I heard you correctly, it sounds like you all are able to leverage the pricing revenue growth a bit more efficiently than volumes. Is that a good way to think of it?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

I think so.

[James Brunk, CFO at Mohawk Industries]

Yes. You're not growing-

[Truman Patterson, Head Analyst of Housing Equity Research at Wolfe Research]

Uh-huh.

[James Brunk, CFO at Mohawk Industries]

It all the way to the top line. You're doing it more in line with volume.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Just one other piece.

[Truman Patterson, Head Analyst of Housing Equity Research at Wolfe Research]

Okay.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

is too, with all the inflation, it's hard to get the normal margin on top of the inflation. You have in reverse of that same trend, you know, you're not getting all of the normal margin on the material and energy inflation.

[Truman Patterson, Head Analyst of Housing Equity Research at Wolfe Research]

Understood. Okay. Then, I'm hoping you all can discuss the price-cost in your European ceramics business. You know, previously, you had discussed some of your competitors being hedged, and it was gonna take some time, you know, for pricing to flow through. But now we've had, you know, European nat gas take another step higher. Just hoping to understand, you know, are you getting that incremental traction on pricing in the region? Is it offsetting the spike in the European natural gas?

[Chris Wellborn, President and COO at Mohawk Industries]

Well, I'll just comment. The team over there is taking extraordinary steps to adapt to this inflationary environment. The sales and margins in the quarter were higher than we anticipated. The net impact of energy was $26 million, and we had anticipated it to be worse at $40-$45 million. I would say we've done a really good job in implementing those price increases.

[James Brunk, CFO at Mohawk Industries]

Yeah, Truman.

[Truman Patterson, Head Analyst of Housing Equity Research at Wolfe Research]

Oh.

[James Brunk, CFO at Mohawk Industries]

If you think about it, what we said before is that, you know, from Q1- Q2, we expect some improvement in that net impact energy versus price mix. Q3, again, should be closer to kind of parity, and then Q4 to be cost advantage. Now, everything has risen, so we've had to do more pricing because, to your point, the energy cost has increased. So everything has increased, but the story is really the same in terms of our outlook.

[Truman Patterson, Head Analyst of Housing Equity Research at Wolfe Research]

Okay. Thank you for that, and good luck on the upcoming year.

[James Brunk, CFO at Mohawk Industries]

Thank you.

[Chris Wellborn, President and COO at Mohawk Industries]

Thank you.

[Operator]

Your next question comes from John Lovallo from UBS. Your line is open.

[John Lovallo, Senior US Homebuilding and Building Products Equity Research Analyst at UBS]

Hi, guys. Thank you for taking my questions. The first one is just on Russia again. Given some of the sanctions that are in place, are you having trouble, you know, getting money in and out of Russia?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

We're not moving money in and out of Russia, I don't think.

[James Brunk, CFO at Mohawk Industries]

No. Russia is pretty much self-contained. Basically, their cash flow supports their local business.

[John Lovallo, Senior US Homebuilding and Building Products Equity Research Analyst at UBS]

Are you repatriating any of the funds?

[James Brunk, CFO at Mohawk Industries]

No.

[John Lovallo, Senior US Homebuilding and Building Products Equity Research Analyst at UBS]

Okay.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Last year, we moved a lot of money out of Russia because we had generated a lot of cash, and we didn't need the cash that we had there. We took out the cash prior to all of this.

[John Lovallo, Senior US Homebuilding and Building Products Equity Research Analyst at UBS]

Okay. That's helpful. On the commercial improvement that you're seeing, I think you mentioned some of the end markets. Are you seeing any improvement in office or, you know, hospitality, retail, you know, any of those end markets?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

Yeah. We are seeing continued improvement in the commercial. It's led by the government, workplace, and healthcare sectors presently. We're starting to see more activity in the areas that still are way behind, like travel, hospitality, and retail. There's starting to be some more activity in those. Across all the commercial things, there was a lot of projects postponed during COVID, and we see some of those things being initiated. We see continued improvement, you know, as far as we can see presently in the commercial side of it.

[John Lovallo, Senior US Homebuilding and Building Products Equity Research Analyst at UBS]

Thanks, guys.

[Operator]

Our next question comes from Eric Bosshard from Cleveland Research. Your line is open.

[Eric Bosshard, CEO and Consumer Industry Analyst at Cleveland Research Company]

Thanks. First of all, just a follow-up on the Europe ceramic price cost situation. Six months ago, you had talked about the rise in natural gas, and some competitors were hedged and maybe in a better position than you, and an expectation that nat gas would improve in the first half of 2022. It seems what has played out is nat gas has stayed difficult, and you've done materially better than you thought six months ago when all this started. I would just love a little more detail. I appreciate the team has obviously executed well, but what's turned out so much different and incrementally better than what you had anticipated six months ago?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

The marketplace has increased prices. I keep connecting it to the Ukrainian clay because we were and are disadvantaged among some competitors, not all, with our gas, and it still exists today. We are advantaged in the clay, which helped us, but the clay also reduced the production, which also made people more aggressive in raising prices in the marketplace. We were able to capture more price than we thought. In addition to that, we were able to push our mix up at the same time because the lowest margin products we have had the most percent of cost increase, so we pushed more into the better quality products, all of which gave us different results than we had expected.

[Eric Bosshard, CEO and Consumer Industry Analyst at Cleveland Research Company]

Okay. On the customer side, if we could start there and then pan across the rest of the business. From a, the performance of the quarter looks like it was really upside price and then great execution. From a consumer demand standpoint, I appreciate the comparisons are more difficult in the first half, but from a consumer demand standpoint, can you stay in that area in the Europe tile and talk about consumer demand and how that's changing? I appreciate what you're doing on your side, but how consumer demand is trending, and then how consumer demand is elsewhere, and does that translate into volume growth year-over-year in the coming quarters?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

I hope you can appreciate that with this take Europe, the amount of price increase we've put through, the announcements of other price increases, it's really difficult for us to tell what is going through to the customer and what is changing in their inventories. Which is why we said there was a possibility that there's, you know, they pulled forward some of their purchases. We can't tell the difference between the inventories in the channel and the customer purchases.

[James Brunk, CFO at Mohawk Industries]

I think the other thing is that the inventories have been low in the channel, so you saw customers going in to fill in those inventories.

[Eric Bosshard, CEO and Consumer Industry Analyst at Cleveland Research Company]

Okay. More broadly outside of Europe in terms of, I guess, just North America specifically, what you're seeing with consumer demand trends, and then conviction that that flows through to volume growth for you through the year?

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

We have the same piece as you do. The housing is still running at high levels. The flooring is the last thing to go into it. Typically, it takes anywhere from 6-18 months to build the house. You know, we're still seeing good demand in the housing piece. The existing home sales do influence, as we talked earlier, about the change in replacement. But again, like we said, it goes in phases, so we still see the demand coming from existing homes over the last 2 years, which have been really high, continuing. The commercial part of the business is on an upswing, and we don't see anything stopping it at the moment.

[Eric Bosshard, CEO and Consumer Industry Analyst at Cleveland Research Company]

Okay. Thank you.

[Operator]

This concludes our Q&A session. I will now turn the call back over to Mr. Lorberbaum for closing comments.

[Jeff Lorberbaum, Chairman and CEO at Mohawk Industries]

We are confident that we are taking the right steps to manage the short-term and that we're in a good position for the long-term. We're investing to maximize our business and cover the constrained areas and expand the growing product categories. We think we're in good shape. We appreciate you joining us, and thank you for participating.

[Operator]

This concludes today's conference call. Thank you everyone for participating. You may now disconnect.

Participants

Executives

• Chris Wellborn, President and COO
• James Brunk, CFO
• Jeff Lorberbaum, Chairman and CEO

Analysts

• Eric Bosshard, CEO and Consumer Industry Analyst at Cleveland Research Company
• John Lovallo, Senior US Homebuilding and Building Products Equity Research Analyst at UBS
• Keith Hughes, Managing Director of Sell Side Equity Research at Truist Securities
• Matthew Bouley, Senior Equity Research Analyst at Barclays
• Michael Rehaut, Executive Director at JPMorgan
• Mike Dahl, Managing Director and Equity Research of Homebuilders and Building Products Analyst at RBC Capital Markets
• Phil Ng, Managing Director at Jefferies
• Stephen Kim, Senior Managing Director at Evercore ISI
• Susan Maklari, Senior Equity Research Analyst at Goldman Sachs
• Tim Wojs, Senior Research Analyst at Robert W. Baird
• Truman Patterson, Head Analyst of Housing Equity Research at Wolfe Research