Global flooring manufacturer Mohawk has reported a decline in third quarter sales.
According to its latest trading update, Q3 2023 sales fell 5.2% to $2.8bn from $2.9bn in 2022. Net losses widened to $760m from $534m, due to the impact of non-cash impairment charges of $876m.
Commenting on the Company’s third quarter results, Chairman and CEO Jeff Lorberbaum stated: “Our results for the quarter were in line with our expectations as our industry faced continued pressures across all regions, primarily due to constrained residential investments and further tightening of consumer discretionary spending. Our third quarter performance was seasonally impacted by vacations in Europe, which reduced our sales and earnings versus the prior quarter.
“Lower material and energy costs offset the decline in both price and mix. We also faced foreign exchange headwinds of approximately $20 million on operating income or $0.25 on EPS. Across the business, we benefited from cost reductions, productivity initiatives and lower input costs. We are managing our working capital and generated strong free cash flow of $385 million in the quarter and $660 million for the year to date.
“During the quarter, central banks around the world continued to raise interest rates to slow down their economies and reduce inflation. Their actions are affecting new construction and remodelling in both residential and commercial channels, postponing spending on new projects. In the U.S., mortgage rates have climbed to their highest level in more than two decades, which has suppressed the housing market and limited home renovation activity.
“In Europe, consumers are postponing large purchases like flooring as a result of higher energy costs, inflation and uncertainty due to the war in Ukraine. Our industry faces a greater impact from these pressures than other sectors given that most flooring purchases can be deferred. With the high fixed costs required to produce flooring, competition increases as the industry slows and participants attempt to increase their sales to maximize absorption. As a result, our average selling prices and mix have declined, with the impact offset by lower material and energy costs, restructuring benefits and process improvements.
“The predicted timing of the housing sector recovery continues to be postponed, and we are managing the business to optimize our results and cash flow until it occurs. We are taking actions to increase our volumes while managing margins and operating expenses. We have launched differentiated collections, selectively introduced promotions and expanded our participation in the new construction channel.
“To further enhance our competitive position, we will shut down older ceramic production in Italy, and we are converting our U.S. rigid LVT production to a direct extrusion process. These restructuring initiatives will result in a non-recurring charge of approximately $55 million, of which $50 million is non-cash. When completed, these initiatives should improve our profitability by $30 million annually by enhancing our productivity, lowering our manufacturing costs and optimizing our production flexibility.
“Our European expansions in insulation and porcelain slabs are currently in operation, and our U.S. premium laminate and LVT projects are continuing to start up. Expanded production in European laminate and U.S. quartz countertops should begin in the second half of 2024. As the integration of our acquisitions in Mexico and Brazil proceeds, we have consolidated general management, sales and administrative functions, while enhancing the companies’ product offering, operational efficiencies and customer base. While the Mexican and Brazilian markets are experiencing reduced demand and margins, we anticipate gaining additional benefits from our acquisitions as these markets recover.
“During the third quarter, our Flooring Rest of the World Segment’s net sales decreased by 2.6% as reported, or 5.0% on a legacy and constant currency basis. The Segment’s operating margin was negative 22.4% as reported, or 10.9% on an adjusted basis, improving over prior year as it benefited from raw materials, energy and less downtime, offsetting unfavourable price, mix and foreign exchange. Sheet vinyl continues to outperform other flooring categories, and we have increased production to meet the higher demand.
“Our laminate and LVT sales are under pressure in the softer market, and we are introducing new products, merchandising and select promotions to optimize volumes. We have executed the restructuring to support the conversion of our residential LVT offering from flexible to rigid cores, which is positively impacting sales. Our panels business has slowed due to a decline in remodelling activity, construction projects and industrial demand. Sales of our higher margin HPL panel collections are growing as our customer base expands
“In the third quarter, our Flooring North America Segment sales declined 11.7% as reported or 12.2% on a legacy basis. The Segment’s operating margin was negative 17.4% as reported, or 8.1% on an adjusted basis, as a result of unfavourable pricing and product mix, reduced volume and lower productivity due to the underutilization of plant assets, partially offset by lower inflation.
“Competition increased across all product categories, and, to enhance sales, we continued to invest in new products and merchandising systems to expand our retail presence. We also increased our participation in the new home construction channel with regional and national builders. We are implementing many projects to reduce costs, improve efficiencies and maximize material utilization.
“In residential carpet, to improve our mix, we are expanding our premium collections, which provide superior styling and features. For value conscious homeowners, we are increasing our environmentally friendly recycled polyester offering. Our sheet vinyl collections continue to perform well with budget-oriented consumers. As an alternative to PVC-based LVT products, we introduced a new resilient polymer core that is more environmentally friendly and scratch resistant.
“We are continuing to ramp up our West Coast LVT production and the new extrusion process in Georgia, with both expected to be substantially operational in the first quarter of 2024. We are expanding distribution of laminate in the retail and builder channels, and our new laminate collections have been well received as consumers seek premium visuals at accessible price points.”
