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Mohawk Industries Inc (NYSE:MHK)
Q2 2020 Earnings Call
Aug 7, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Operator: Good morning. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded Friday, August 7, 2020. Thank you.

And I would now like to introduce Mr. Frank Boykin. Mr. Boykin, you may begin your conference.

Frank Hubbard Boykin -- Chief Financial Officer

Thank you, Erica. Good morning, everyone, and welcome to Mohawk Industries Quarterly Investor Conference Call. 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 discussion of GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8-K and press release in the Investors section of our website. With regards to our recent litigation and related investigations, our Audit committee with assistance from outside legal counsel and forensic accountants, has substantially completed its internal investigation. The company has appropriately filed its Form 10-Q for the second quarter. The company continues to cooperate fully with the government inquiries. Beyond that, we refer you to the disclosure in the 10-Q and remind you, we cannot comment further.

I'll now turn the call over to Jeff for his opening remarks. Jeff? Thank you, Frank. For the second quarter, at the height of the COVID disruption, our sales were down 21% as reported or 19% on a constant currency basis. Adjusted operating income for the period was $36 million or 2% of sales, and our adjusted EPS was $0.37. During the period, our cost-reduction initiatives, working capital reductions and lower capital spending generated free cash flow of almost $500 million. Those sales trends have improved significantly since government restrictions were lifted. The current environment is the most unpredictable in the history of our business as the pandemic has affected our markets and operations around the world. During the quarter, all of our businesses were dramatically impacted, with most of our customers and facilities operating either in a limited capacity or completely shut down for some time. Residential remodeling was impacted by retail shops closing and consumers staying at home. Commercial has declined as business have postponed projects due to economic uncertainty. U.S. housing starts and homebuilder confidence improved sharply in June as the market rebounded. In the period, our operations were curtailed or stopped by government mandates, employee concerns and lack of demand. We responded to these challenges by keeping our workforce safe, cutting expenses and investments and furloughing employees. In the U.S., government programs provided tax credits to our business. Federal unemployment supplements have made attracting workers attracting workers more difficult. Outside the U.S., many governments subsidize businesses to keep workers employed and others required companies to continue paying employees that were not working in full. After the company sales bottomed in April, our May and June results appreciably improved across the segments as stay-at-home restrictions were gradually lifted, consumers initiated remodeling projects, stores reopen and construction increased. Through the period, our markets improved more than we expected, and our shipments exceeded our production rates, reducing our inventories. Our manufacturing levels were impacted by government restrictions, COVID disruptions and employ absenteeism across the enterprise. At this time, our visibility of the future continues to be uncertain due to persistent COVID spread, the unknown strength in the economic recovery. Some near-term factors represent a potential upside, including: historically low interest rates, rising remodeling activity, consumer discretionary funds being shifted to home improvements and increasing home purchases. Alternately, potential changes in government policies, consumer and business spending and higher COVID infection rates could reduce demand around the world, particularly with government's increased restrictions. Given these factors, our business plans must remain flexible to quickly adjust our production levels. We are restructuring the business to enhance our results and future performance. We're reducing SG&A, our headcount and lowering performing products and SKUs. We are closing less efficient operations and investing in more productive equipment. The largest of these of these changes are in the United States, where LVT sales growth and a strong dollar have impacted many of our businesses. We anticipate these actions will deliver annual savings of approximately $110 million to $120 million, with an estimated cost of $170 million, of which $44 million will be in cash. Many of these actions are currently being executed with those affecting our manufacturing costs having to flow through our inventory. It will take much of next year to complete these initiatives and capture the full benefit. Our business is well positioned with a strong balance sheet and deep liquidity. We've recently issued over $1 billion of new bonds to enhance our ability to strategically invest and better position Mohawk for the long-term. We're taking the right steps to manage through the pandemic, and we remain focused on delivering innovative products, exceptional value and superior service. Our talented people are devoted to making Mohawk the best flooring supplier to our customers, improving our business in all areas and maximizing our results. With that, I'll turn the call over to Frank for our second quarter results. Thank you, Jeff. Sales for the quarter were $2.5 billion, down 21% as reported, but decreased 19% on a constant basis as the pandemic and related recession significantly impacted our business. Our gross margin was 18% as reported or 21.4%, excluding charges, compared to 28.8% last year. The year-over-year decrease was driven primarily by lower volume, shutdown cost, negative price/mix and unfavorable productivity, offset by deflation. The actual amounts of all of these items is included in the 10-Q that was filed yesterday. SG&A as reported was $431 million or 21% of sales, and 19.7% compared to 18.1%, both of which exclude charges. It was down $63 million or 13%, excluding charges, primarily from savings in furloughs, layoffs and government support. Other unusual charges were $97 million, of which $29 million was cash, primarily related to the $170 million cost reduction initiative that Jeff just mentioned. We are adjusting our capacity by closing inefficient operations as well as consolidating some others, reducing the workforce and streamlining our SKUs. We estimate annual savings of approximately $110 million to $120 million, when complete. Our operating margin, excluding charges, was 1.7% compared to 10.7% last year. The decline was driven by weaker volume, shutdown costs and unfavorable price/mix, partially offset by productivity and deflation. Our decremental margin was 45% for the quarter and resulted from sales dropping faster than cost. Our third quarter operating margin is expected to improve sequentially from the second quarter, but will be lower than last year with pressure on pricing and product mix along with higher manufacturing cost. Looking at income taxes. On a non-GAAP, we had no tax expense in the second quarter. Going forward, the rate could vary significantly in the next two quarters between 16% and 22% due to changes in profit before tax and/or geographic dispersion of income. Our earnings per share, excluding charges, came in at $0.37 compared to $2.89 last year. Turning to the segments. In the Ceramics segment, we had sales of $753 million, down 21% as reported, with the business down 19% on a constant basis. The Russian business performed best, with new construction and owned retail shops driving performance. Our operating margin, excluding charges, was 0.5% compared to 12.3% last year. The decline was driven by higher shutdown cost and unfavorable volume and price/mix, offset by increased productivity. In Ceramic, we expect the cost of our restructuring initiative to be $80 million. In the flooring North American segment, sales were $800 million, down 19% as reported as laminate performed best with its waterproof features and DIY installation appealing to consumer. Our operating loss margin excluding charges, was a negative 2.2% compared to 6.7% last year. The decrease in earnings was driven by lower volume and productivity as well as shutdown cost, offset partially by deflation. We are estimating restructuring costs of $54 million in this segment as we consolidate production and distribution assets, closed high-cost plants and reduce our workforce. In the rest of World segment, sales were $496 million, down 23% as reported and decreased by 20% on a constant basis. Sales in the segment declined more rapidly in April, but improved more quickly later in the quarter. Our operating margin, excluding charges was 11.9% compared to 16.4% last year. The main drivers were lower volume and shutdown costs, partially offset by productivity and deflation. As we streamline our product offering and reduce staffing levels over the next few quarters, we will incur cost of $36 million in this segment. Our Corporate and Eliminations segment had an operating loss of $10 million, and we are expecting a total loss a total loss for the year of $39 million. Jumping to the balance sheet. Cash for the quarter was $738 million and includes the remaining proceeds from the two bond offerings earlier this year after paying down outstanding commercial paper. Receivables were $1.586 billion, with days sales outstanding at 64 days compared to 59 last year. Inventories were $1.922 billion and dropped almost $450 million, or 19%, and from last year as all businesses made significant cuts to their inventory. Inventory days were flat with last year at 126 days. Our fixed assets were $4.435 billion and included in the quarter, capital expenditures of $81 million and depreciation and amortization of $154 million. In the second quarter, we cut our estimated annual, estimated capital expenditures by $150 million to $400 million. We're in the process of evaluating the amount going forward based on changing economic conditions. Our D&A is estimated for the full year at $585 million. Going to long-term debt, the balance sheet and cash flow both remained strong with total debt at $2.7 billion and leverage at 1.6 times net debt to adjusted EBITDA. Our ratings all remain unchanged at BBB+ or Baa1. I will now turn the call over to Chris to go through the segment results in more detail. Chris?

W. Christopher Wellborn -- President, Chief Operating Officer & Director and President

Thank you, Frank. In the Global Ceramic segment, all of our businesses around the world were impacted by government reactions to the pandemic. Within the segment, Southern Europe and Mexico implemented the most dramatic regulations suspending commerce and our operations for extended periods of time.

To improve our performance, we are reducing our cost and complexity and aligning production with demand, while all of our businesses have improved future demand is uncertain, and we will respond as conditions change. In the U.S. ceramic market, many of our retail customers were closed for some time. While construction continued in most markets, the Northeast and Midwest regions were most impacted during the period due to greater state restrictions. For example, our ceramic manufacturing in Pennsylvania was closed for an extended time, along with most of our customers in that region.

To manage this situation, we reduced cost across the business, including furloughs to decrease our overhead, cutting marketing activity, deferring product introductions and controlling manufacturing and distribution costs. Demand increased faster than we anticipated, and our inventories declined as we ramped up production. Presently, all of our U.S. plants are operating and our service level is improving. Our new click ceramic tile is being delivered to our customers and sales should increase throughout the year. Our new countertop facility in Tennessee has become profitable and will improve with higher-volume and mix.

We have begun producing higher-value products with more stylized colors and veining. Our new B2B systems are making product selection, ordering and picking up faster and safer for our customers and employees. We have implemented measures that exceed CDC guidelines to keep our workforce safe. Given pressures on the U.S. ceramic industry, we are consolidating manufacturing into our most advanced facilities and closing our least-efficient assets. We are combining some of our sales service centers where they overlap in local markets.

With lower commercial activity, we are refocusing our sales efforts to broaden our position in new home construction. We are taking out lower-volume SKUs to reduce complexity and improve our cost. We have made permanent staffing reductions to reduce our fixed cost and align with current demand.

The Mexican economy has declined significantly, impacting employment, retail and construction. Our manufacturing operations in Mexico are currently running, but were limited during the second quarter under government orders. During this time, we were required to pay our workforce without any government assistance. All of those plants are currently running, and most of our customers are open for business.

To reduce our cost, we are rationalizing our current product offering and aligning our production and workforce with demand. As the peso has weakened, we are has weakened, we are increasing our position in the premium market to replace imported ceramic and introducing promotional products to increase our sales.

The Brazilian economy is contracting as the COVID pandemic reduces business activity. Interest rates are at historical lows and government programs to stimulate housing sales are being introduced. Our sales are improving as retail stores reopen in Brazil's major cities. Our exports have expanded as the local currency has weakened. With inventories low, we are increasing our production to support local sales and improve our service. We are further improving our cost structures and reducing our workforce.

Our Southern European ceramic business was impacted during the period by severe lockdowns, especially within Italy, which was the epicenter of the COVID crisis. Both our customers and our plants were completely shut down for extended periods. Presently, we have limited cases of the virus due to safety measures in the local communities and our facilities.

As the countries opened up, our sales dramatically improved, our Eastern European operations were less affected and demand has improved significantly. Our European exports to other continents are down substantially as major projects have been postponed around the world. All of our plants in Europe are ramping up to satisfy demand and service levels should soon approach our target. Continued government subsidies are being used to manage our ongoing costs. We are introducing fewer SKUs this year and are paring down less productive ones. As with the last downturn, we anticipate higher rates of business failures in some of our markets due to their weak economies.

In Russia, our ceramic business decline significantly, when the country lockdown, as strong position in new construction our owned and franchised retail stores provided us with better market access and benefited our business. Sales improved through the quarter, and our plants are now operating at similar rates to last year. We are placing a greater emphasis on the new construction channel which the government is investigating to support the economy.

Our flooring North America segment sales declined substantially in April and then improved throughout the quarter as government restrictions were lifted and consumers started shopping and remodeling their homes. With most home centers remaining open, products such as our premium laminate outperformed as homeowners took -- undertook new DIY projects. Our inventories declined as sales improved faster than our manufacturing ramped up. Many of our operations are facing challenges, increasing production due to local health concerns in our communities.

To enhance the segment's performance, we are reducing our overhead cost and lowering our SG&A. We are taking out higher-cost manufacturing assets and consolidating distribution points. We are streamlining our product offering and investing in more efficient assets to reduce cost. Our LVT sales improved as government restrictions were gradually lifted across the country. A significant part of our LVT distribution is through specialty stores, many of which were closed for periods of time. As our LVT sales improved in the quarter, we are increasing our production, though the spread of the COVID is creating challenges. We have improved our manufacturing speeds and processes, however, our progress was slowed because European technicians were unable to travel to the U.S. We are upgrading our manufactured and sourced LVT offering to provide enhanced visuals and features while reducing complexity of our collections.

In residential carpet, the new home construction channel performed best with housing improving through the period. The remodeling category slowed as retail and installation activities were suspended in some regions. Our mix and pricing declined as the higher-value remodeling channel was more impacted and lower-priced polyester performed better. We are increasing our production to meet greater demand and improve our service levels. The commercial sector continues to be challenged as many businesses are postponing new investments. The education and government sectors were impacted less and the hospitality channel contracted the most. We're providing both virtual and local outdoor events to support architects and designers working remotely. We believe commercial projects will continue to be delayed and this sector will take longer to recover.

Our Rug business was severely impacted during April as many of our retail customers were completely shut down and their inventories were not replenished. As the period progressed, home centers and mass merchants rebounded first as consumers used our rugs as an easy way to enhance their homes. E-commerce continues to grow in its importance as a sales channel for our Rug collections. We are increasing our production to improve our service and meet our customers' needs.

Our laminate business outperformed our other categories, as consumers increased DIY projects while at home. We are operating all of our laminate capacity to satisfy this increased demand.

Our unique technology provides waterproof solutions and superior visuals as alternatives to other hard surfaces. We are expanding our laminate manufacturing to support our growing market and introduce the next-generation of technology, which we are presently selling in Europe.

Flooring rest of world results continue to outperform our other segments. We were able to take advantage of more flexible government support as well as cut our expenses across the business. Our laminate and LVT categories performed the best in the period. As LVT production in China has recovered, our patent licensing business has followed. As we went through the period, we saw a strong improvement in sales as stores reopened and replaced their inventories.

In this segment, we have a much greater presence in the residential remodeling, which is performing better than the commercial category. Our Australian and Russian businesses held up better than Europe due to different government approaches to the pandemic. Across this segment, we have reduced our overhead costs and are consolidating lower-volume SKUs. We are now increasing production to meet emerging demand while protecting our employees' health.

Our laminate business outperformed our other products as our waterproof collections and new introductions are increasing in consumer preference for our products. Through our Internet presence, we are supporting our retailers by expanding their online sales. In Russia, our laminate sales declined less, and we are increasing the plant's production to satisfy demand in other regions. Our flexible and rigid LVT sales improved as we progress through the period as retailers reopened in our key markets. Our manufacturing plants were also impacted and are increasing production to satisfy growing sales. Our residential sales have recovered more than commercial as businesses have deferred projects.

In Europe, we manufacture almost all of our LVT and is positively contributing to our results. We are continuing to modify our processes to expand our capacity, reduce our cost and introduce new features into the market.

In Europe, our sheet vinyl is sold primarily through retailers and sales were significantly reduced by store closures, especially in France and the U.K. as in other categories, our business has recovered, and we are expanding our production to satisfy our customers.

In Russia, our new sheet vinyl plank contributed positively to our results, and we have broadened our product offering to increase our market share. Our insulation business was primarily impacted with COVID, with our markets in Ireland and the U.K. affected the most. When restrictions were lifted, the category rebounded in June as contractors completed projects already under way. We are expanding our customer base and the geographic reach of our products.

Our wood boards face similar plant disruptions, which impacted both our sales and margins. We introduced a new virtual showroom and developing specialty products to improve our mix. The start of our new waste-to-energy plant was delayed due to the pandemic and is now full operation.

The COVID crisis was handled differently in Australia and had a less detrimental impact on our performance. The Australian market has largely recovered, and we are seeing improved residential carpet sales.

Our European LVT collections were introduced during the period and are expanding our hard surface sales in the region. This month, we implemented price increases in Australia to offset cost increases. New Zealand's government enforced one of the most comprehensive lockdowns in response to the pandemic resulting in significant sales declines during the quarter. New Zealand's economy is now open, and the virus is currently contained, and our sales are improving.

Now I'll return the call back to Jeff.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Thanks, Chris. Since April, we have seen substantial improvement in all of our segments and markets. The residential remodeling and new construction channels have recovered more than commercial, where businesses are maintaining a cautious approach to investment. Some areas, particularly in the U.S., Brazil and Russia, are experiencing an increasing level of COVID cases, which are impacting our operational costs and production levels.

Across the business, we're decreasing costs by rationalizing assets, minimizing SG&A, reducing our workforce and managing our product offering and working capital. Much uncertainty remains around all of our markets regarding government policies, business confidence consumer spending.

Our sales in July were approximately flat compared to the prior year, but we cannot predict how the sales will evolve going forward.

Given this, we are unable to provide guidance for the third quarter, though we anticipate a significant improvement in our results from the second quarter. We managed through the challenging second quarter, while generating significant cash flow, strengthening our balance sheet and issuing over $1 billion in bonds. We're taking substantial actions to navigate the changing environment and position Mohawk for the future.

We'll now be glad to take your questions.

Keith Hughes -- Analyst

Yes. Thank you. In the second quarter, the reduced capacity was a big hit, obviously, in the number, second largest. What do capacity look like for the third, given what you've seen in July? Do that dollars year-over-year, whatever the best way to describe it?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Sorry, the question is, what's the capacity?

Keith Hughes -- Analyst

Yes. I mean, what kind of capacity rate are you going to be running at? You cut a lot in the second quarter to get inventory down. What's it going to look like look like in the third compared to second?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

The third quarter, we're running the businesses at a much higher rate than we were. We're actually trying to increase the inventories because they decreased too much, but we're having difficulties getting them up, given the labor issues, vacations in Europe and other things. So they're going to run at much higher rates.

Keith Hughes -- Analyst

Will you equal the rates in the third quarter of last year?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

It depends on business sector pieces, they're all over the place. One of the end markets, Keith, is not performing as well, as you know, it's commercial. So to the extent we've got commercial capacity is to be running at lower rates than the others.

Keith Hughes -- Analyst

And I guess, final question, you talked in the intro about margins being up in the third from the second, but down year-over-year. Is capacity curtailments the major driver, why it's going to be down year-over-year? Or is there something else?

Frank Hubbard Boykin -- Chief Financial Officer

We've got several things that we think are going to be impacting us. We'll have pressure on pricing and we're going to have pressure on product mix. Volumes are also going to be an issue for us. And I think like Jeff mentioned, even as we're trying to get our inventories up now, we are going to have higher manufacturing costs due to COVID labor issues and shorter product runs as we try to rebalance our inventories.

Keith Hughes -- Analyst

Okay. Thank you.

Operator

Your next question is from Justin Speer with Zelman Associates.

Justin Speer -- Analyst

Thanks guys. Just one quick question on the trends. You mentioned flattish trends in July. Are there any major distinctions by the segments? Or are they all kind of trending similarly into July?

Frank Hubbard Boykin -- Chief Financial Officer

Yes. We said July was basically flat compared to last year and improved more than we had anticipated. And overall, rest of the world is better than the other two segments.

Justin Speer -- Analyst

And then the other thing, just in terms of the phasing of the benefits to profits from the restructuring efforts that you've already taken? How should we think about that phasing in the back half? And then as we think about-I know that you mentioned annualizing it in 2021. But in the back half, that should be an offset we would-I would assume, some of the other headwinds that you're seeing. But you're saying that the other headwinds will be more than that?

Frank Hubbard Boykin -- Chief Financial Officer

So, your question is on the savings, how are they going to phase in. Was that your question?

Justin Speer -- Analyst

Right. And so your-just kind of following on Keith's question about the year-over-year change in margins being maybe pressured from some of the actions, labor issues, shorter productivity runs. I guess, those will not-those will more than offset any kind of benefit from the phasing to restructuring. I was just curious if you could quantify some of the tailwinds from just the just the restructuring efforts that you announced and took the $100 million charge that you took in the second quarter?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Yeah. What happened, we started out was basically on our experience from 2008 and 2009, we decided if the business was going to slow down, we're going to take more aggressive actions earlier to improve our position. With that, we're cutting SG&A. We're reducing the workforce for streamlining our product offering. We're closing less efficient plants, investing more efficient assets, which would add to the $110 million to $120 million of savings. It will take through next year to complete those and capture the full benefit.

The manufacturing savings don't forget, will have to flow through inventory, which will be three to five months later, depending upon what it is and where it is. We estimate just at a really high level that the savings will range from about $15 million to $25 million per quarter until we achieve the results that we expect. And then just as a comment, remember that the margins for everything are really dependent on the future sales. And in the short term, COVID's affecting it, and we're really not sure where they're going to be.

Justin Speer -- Analyst

That makes sense. If I could sneak one more in on this subject. Just thinking about the broader trends thinking about the actions that you're taking in terms of capacity rationalization. I guess, how much of your non LVT businesses are going to be rationalized from these efforts? And are these adjustments just reconciling for the relative share loss to LVT that's already taken place? Or are these accommodating for maybe potential further erosion to LVT in the future?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

We are setting the business up at a level we think that it will be needed to be at for the future. We've made the adjustments in the ceramic capacities. We've consolidated some of the higher-cost assets in the flooring rest of world-I mean, in the for North America. And then we've taken costs down in every part of the business in every segment, anticipating that it's not going to be going to be a V, going to be going to be up and stay there.

Justin Speer -- Analyst

Thank you very much, guys.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Okay. Thank you.

Operator

Your next question is from Mike Dahl with RBC Capital Markets.

Mike Dahl -- Analyst

Hey, thanks for taking my questions. A question-the first question is really around-from a channel standpoint in the U.S. Can you remind us how much of your business goes into specialty and both in flooring North America and global ceramic? And then given the relative restrictions on specialty versus home centers in the quarter, how do you think about the share shift dynamic and whether or not that's just kind of accelerated share shift toward home centers over the medium-term? Or whether your specialty channel can kind of play catch-up to that?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

You asked a lot of different questions. The specialty channel, the home center channel and most of the markets stayed open through this piece. So what happened is the specialty stores were shut down and the only place for customers to buy our products were in the home centers in many markets. Over the period, that changed. So that's a temporary change in the business.

In total, over the past 15, 20 years, the home centers have continued to expand their participation in the market and take share, and it's different by product categories. The larger the category is in do-it-yourself and/or some of the different contracting businesses depends on where it ends up and which channel it's in. So I don't see this being a significant change in the short-term, but just the same continuation they've been on.

Mike Dahl -- Analyst

Okay. Got it. Thanks, Jeff. And second question, just back on the restructuring. Understand there's been spare capacity and then probably some underperforming SKUs in terms of things that are getting either consolidated or rationalized. Is there any sales impact we should be thinking about, though, when you take out this much capacity and you take out some of the SKUs. Do you think there is a corresponding sales impact? Or is this really the -- you're going to be able to replace any lost sales with other kind of productivity measures?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

We're being more aggressive in getting rid of low-volume SKUs. We have alternatives to the products to offer the customers, but there's always risks of trying to transition one to the other. The goal is to end up with more businesses with more consolidated offer.

Mike Dahl -- Analyst

Okay. Thanks.

Operator

Your next question is from Eric Bosshard with Cleveland Research.

Eric Bosshard -- Analyst

Hi. Two questions. First of all, throughout the segments, you talked about price and mix pressure, curious if you could just expand on that a little bit where you're seeing that and what is driving that? And then also the kind of ongoing outlook for price and mix.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

It's occurring in all the different categories. First is that commercial businesses tend to be higher-margin than the residential businesses. The commercial businesses have taken a bigger hit and are coming back slower, and we're not sure how they're going to evolve over time. Within the other pieces in the more promotional products are tending to sell more than the other during downturn, some because the higher end shops and stores or sell them, the people that had it pulled back to the market more. We're going to have to see how that evolves going forward. It's a little early to tell what the -if it's going to be a permanent change or not. We're just assuming that the market is going to be more difficult and we're going to be to respond to competitive positions all around the world. And then going forward, I mean, we- as we've said numerous times, we have a really hard time looking out in just a few weeks in this environment. But we would anticipate that we will continue to see price/mix pressure going forward through the rest of this year.

Eric Bosshard -- Analyst

And then a follow-up on restructuring. It sounds like you've outlined a good program. I'm just curious when considering what's taking place in the industry, especially in the U.S. The last number of years and the contraction in operating profit of the company in total, if you had considered a larger program aimed at generating more cost out, more cost savings. Or is that just unreasonable with how the business is set up or how you view the market? Just curious if there was a program that could have net $200 million or $300 million of savings, or if that's just not reasonable.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

It all starts with how you pursue the market is going to be in the future market and what you need to satisfy it, we believe that the changes we made are set up for how we believe the best guess that the business is going to be for the next few years. But we'll have to see what happens.

Eric Bosshard -- Analyst

Okay. Fair enough. Thank you.

Operator

Your next question is from Matthew Bouley with Barclays.

Matthew Bouley -- Analyst

Hey. Thanks for taking the question. A lot of discussion around the costs that are being cut. But I think, Jeff, you mentioned in the opening remarks that the $1 billion in bonds, that there was some intention around strategic investments there. I guess, just if you could outline some of the areas that are sort of top of mind for investment.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

We're always looking at acquisitions to go through. At this point, it's a little hard to aggressively do acquisitions, given that you don't know the environment in cases. But we're always talking to different people on acquisitions. On the business, we're trying to minimize the capital investments for the moment, but we believe there will be greater visibility in the not distant future, and we'll start changing it. If you go back a month and half ago, the directive was stopped everything, he could stop, and we really haven't moved from that at this moment, but we're trying to decide what it should be. And every week, we get a better view of the market and what we should do.

Matthew Bouley -- Analyst

Okay. Got it. And then just as my follow-up. In U.S. ceramic, I think you mentioned something about refocusing on new construction. Could you talk about what the exposure is now and what you want to get that to? And kind of the implications on price/mix there.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Well, what we're seeing in the U.S. ceramic, just like the others, commercial is slowing. We are-they are finishing existing projects, but we anticipate that slowing. But we also think there's a significant opportunity in remodeling and new construction. So we're taking advantage and moving our sales and assets in that direction.

Matthew Bouley -- Analyst

Okay. Thank you.

Michael Rehaut -- Analyst

Hi. Thanks. Good morning, and its Mike Rehaut. Thanks taking my question. So I just wanted to circle back for a moment to the cost savings. And I believe, Jeff, you had said or Frank, that you were kind of looking at a $15 million to $20 million a quarter, I wasn't sure if that was something that you would expect would kick in, in the third quarter. Obviously, you've talked about there being a lag in terms of the manufacturing benefit that we might not see that impact until, let's say, the first quarter of 2021. I was just really hoping to get a sense of, get a sense of, of the $110 million, $120 million of overall annualized savings, how much is expected to be realized in 2020 and specifically 3Q and 4Q? Thanks.

Frank Hubbard Boykin -- Chief Financial Officer

We're expecting, like Jeff said, to average between $15 million to $25 million of savings a quarter. We're expecting to start realizing savings in the third quarter, but we're also saying that as we go forward, we expect that margins are going to be impacted by volume still, and that's a big question mark, right, in terms of how the volume returns or not. As well as short-term labor impact from the COVID virus, how that might impact the workforce and productivity as we continue to rebuild our inventory, get it back to where it needs to be.

Michael Rehaut -- Analyst

And the $15 million to $25 million, that would be kind of proportional along the lines of the restructuring cost or charge breakdown down that you had said before, the $80 million for ceramic, etc?

Frank Hubbard Boykin -- Chief Financial Officer

No, not necessarily.

Michael Rehaut -- Analyst

Okay. How should we think about the breakdown by segment then?

Frank Hubbard Boykin -- Chief Financial Officer

Yes. We weren't going to disclose that.

Michael Rehaut -- Analyst

All right. Maybe just kind of shifting gears a second to the sales side. Obviously, kind of a strong decline across the board, it's in a pretty tight range in the second quarter. Frank, you mentioned that for July, rest of world did a little better than the other two segments. Obviously, if you're flat, that would kind of imply a little bit of growth, let's say, for rest of world and maybe a little bit of a decline for the other two segments. Any type of directional thoughts around the degree of magnitude for each would be helpful. And if you're seeing a better ramp, let's say, in one segment versus the other in terms of what you've seen throughout 2Q emerge would also be very helpful.

Frank Hubbard Boykin -- Chief Financial Officer

It's -Mike, it's hard, like we've said, to give a lot of guidance on how things are developing over a very long period of time. And we -- right now, what we're seeing is rest of world is coming back more quickly. I think as I mentioned, they went down more quickly but have come back more quickly as well in the second quarter.Also, in rest of world, they have more of their business in residential as opposed to commercial. Commercial, as Jeff had mentioned, was being impacted more by this and has not come back as much as residential. They -- in addition, they have more of their business in both laminate and LVT. And those two categories have also performed well.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

The business is really obscured because right now, in the Europe business and the rest of world, we can't tell whether the orders we're seeing now are filling the pipeline in the channel and they're trying to get ahead due to what they didn't pick up that they normally do going into the vacation season, or whether this is a view of ongoing business. And that same question, we have in everything we're doing. The business has improved, the orders are improving, but we can't tell what is projects that were started in April, May that are postponed to now, and are they going to rate? Or is there a bubble? We can't tell what's going to happen with businesses investing in the business. And all through the piece, we can create dramatic scenarios in either direction. And the reason we're not giving guidance is, we don't know which one is going to probable.

Operator

Your next question is from Stephen Kim with Evercore ISI.

Stephen Kim -- Analyst

Thanks very much, guys. Just wanted to ask a question longer-term about flooring North America, I guess just to start, I was a little surprised that you mentioned that the improvement you did generally better than you expected. Mostly, it sounded like in flooring rest of the world not flooring North America, so I just wanted to clarify, did the U.S.A. operations in general, exceed your expectations as well? But a more longer-term question about margins in flooring North America, too. One thing that investors are concerned about is the idea that FNA margins were maybe artificially high a few years ago as inventories were rising, and that maybe there's a fear that some of these lower margins that we're dealing with more recently are more reflective of the margins going forward. But obviously, there's a lot of near-term things that are weighing down the margin. So I'm wondering, what you think the longer-term margin structure in flooring North America looks like? Is it reasonable to think we can get back to where we were a few years ago, mid to high teens? Or once these discrete challenges are behind you? Or do you think that the longer-term margin structure is maybe a little lower than it was at that time?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Let's start with the first question, which was what's different than our projection? Everything. I mean, when we went into it, we were projecting the market to be much more difficult and not to rebound as much as it has. So on our pieces, we were preparing for a much a much longer, slower recovery than we've seen at this point. Now how it's going to go on from here is anybody's guess. Is it? So that's the first one. We can -the flooring North America, we changed management a little over a year ago. We're continuing to put different processes in place to improve our operations and run in the improve our margins and profitability in the business, and we have a huge amount of activities going profitability in the business, and we have a huge amount of activities going on to do that. We expect the margins to improve. We'll see how far can get them.

Stephen Kim -- Analyst

Okay. Thanks a lot, guys.

Operator

Your next question is from Sam Darkatsh with Raymond James.

Sam Darkatsh -- Analyst

Good morning, Jeff. Good morning, Frank. How are you?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Good.

Sam Darkatsh -- Analyst

Two questions, and hopefully, they're quick, so I'll be allowed to ask them. In light of your being under inventoried at the end of the second quarter, and I am guessing that included stock outs. So your July sales results being flat. I'm wondering how much of a benefit July saw from shipping unfilled orders from Q2, and how much of it really is truly current demand. I'm trying to get a sense of the sustainability of that July trend.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

On the order backlogs are still-we haven't been able to push the backlog down because the sales have been going up. So we still need to get the inventories up, and we haven't gotten enough high enough to achieve the service levels we want on one side. But it goes back to the prior comments, we're not sure how much of this is a bubble from before and how much is inventory in the channels. So to answer your question, you need both those, and we don't have it.

Sam Darkatsh -- Analyst

And my last one would be, given FIFO, should we expect input cost benefits to accelerate going forward in the P&L?

Frank Hubbard Boykin -- Chief Financial Officer

Not sure they're going to accelerate. We're going to continue-when you say input costs, you mean deflation materials?

Sam Darkatsh -- Analyst

Yes, the benefits from input cost? Yes.

Frank Hubbard Boykin -- Chief Financial Officer

Yes, I think we will continue to see benefits going forward, but I wouldn't say they're going to -- the benefits is going to increase sequentially. And some of the businesses are -in different businesses, the price/mix is offsetting the decrease in raw materials in many cases.

Sam Darkatsh -- Analyst

Very helpful. Thank you.

Operator

Your next question is from Phil Ng with Jefferies.

Phil Ng -- Analyst

Hi. Good afternoon everyone. I'm just curious, where are you with your journey optimizing your LVT facilities in North America in terms of breaking even? It looks like the exemptions on imports are at least going away for now. Do you have that ability to kind of meet that demand as your capacity ramps up this back half? Is that a nice windfall for you guys?

Frank Hubbard Boykin -- Chief Financial Officer

Let's start. What he's talking about is there were duties on click LVT that was drawn a year ago for a year. I think it was yesterday, the government has reinstated the duties on those products. With that, what we think is going to happen as the reverse of what happened last year is that the industry will have to increase prices to cover the tariffs, which should increase the value of our manufacturing as we go through.

With the businesses, the European operations are ahead of our U.S. operations in their improvements. The European operation is all this is profitable today. And it's going to continue to improve as we continue to enhance the operations and take costs out.

The U.S. improvements are following. But again, I think we said it before, we had expected to have multiple engineers over here all through the second quarter helping the group do the same thing we've already done. I don't know if you know that you can't travel between the two. So all of that's been postponed. But we are, with or without increasing the production speeds and processes in all of them. At the same time, we're introducing new products and styling to help the business as we go through it. So I think it should help us. I think we're getting better at it, and we're turning the corner.

Phil Ng -- Analyst

Okay. Thanks a lot.

Operator

Your next question is from Tim Wojs with Baird.

Tim Wojs -- Analyst

Hey, guys. Good morning. I just had one question on ceramic. Is there a way just with the restructuring that you could frame for us in maybe percentage terms, the structural capacity that you're reducing within the ceramic business?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Yes. We're only reducing capacity in the U.S. We're taking out our least-efficient assets, which is about 10% to 15% of the total. And that will improve our cost, but yet support our future needs.

Tim Wojs -- Analyst

Okay. Great. Thank you.

Operator

Your next question is from Laura Champine with Loop Capital.

Laura Champine -- Analyst

Thanks for taking my question. It's about a disclosure in your 10-Q that says that earlier this week, your Audit committee completed an investigation of certain allegations. Is it fair to say that if material restatements were deemed necessary, those would have been taken in this quarter? Or is that the wrong read?

Frank Hubbard Boykin -- Chief Financial Officer

Like we've said earlier in my intro, we outlined basically what we could say and talk about with regards to that. If you're asking if the financial statements are correct, yes, the financial statements are correct. But beyond that with regards to the investigation, like I said, we really can't comment we really can t comment.

Laura Champine -- Analyst

We haven't. But what's happening is the capacity is increasing as the productivity and efficiencies are going up. So we can service business significantly greater than we have.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

We haven't. But what's happening is the capacity is increasing as the productivity and efficiencies are going up. So we can service business significantly greater than we have.

Laura Champine -- Analyst

Understood. Thank you.

Operator

Your next question is from Susan Maklari with Goldman Sachs.

Susan Maklari -- Analyst

Thank you. Good morning. My question is around the mix shift. You commented that you're seeing that as an ongoing pressure in the business. But in the U.S., as we have seen that consumers are perhaps shifting some of their spend more to home improvement. How you seeing that's driving any benefit in terms of the mix? And then I guess when you kind of think about the mix shift that you are seeing there, how does that compare to past recession and how much of that is due to maybe underyling shifts in the industry as we've got this growth LVT and some of these new products categories that have come through?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Each different product category is different from each other and carpet is an ongoing trend of polyester selling more. You also have a mixing channel so the home builder channel. The new home construction channel is a lower mixed in our retail channel so as retail didn't do as well as-as the new home construction that also impacted that you go through. So there's channel mix as well as customer mix going on, in the different businesses, they're all different in my ceramic business, and my laminate business. We basically participate in the mid to high end of the business, and it's growing. It's growing in its use as alternatives to other hard surfaces. It's being used in both the retail and the new construction business much more so and our products are outperforming in those creases. The ceramic business on the mix, has decreased somewhat, because some of the product categories are impacted by LVT using some of the higher end stuff. And then you have the commercial the commercial mix which is much higher and all the businesses in it so this product changes, consumer changes and channel changes all at the same time.

Susan Maklari -- Analyst

Okay. Thank you.

Operator

Your next question is from the Kathryn Thompson with Thompson Research.

Kathryn Thompson -- Analyst

Hi. Thank you for taking my questions today. Just on revisiting the news from yesterday on the tariffs, if you could give a little bit more clarity in terms of, are there any timeframes. So in other words, there is certain tariffs that have a certain end date to them is just as we know in definites, and then what does this mean more specifically for your operations, not just in the U.S. but also in terms of global sourcing? Thank you.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

The tariffs they were tariffs put on originally 25% on all products. A year ago, they took the tariffs off, click LVT only. And I did it for a one year period, and it came back for renewal, the renewal was turned down. So the 25% starts -- I don't have the date in front of me, I don't know if it's today, yes, it may start today. I'm not sure is yet. And so we'll all have to start paying it. And then we're going to have to get the prices up in order to cover it. I'm not sure I've got the whole question.

Kathryn Thompson -- Analyst

And really is the stair stepping in terms of you entered one part but then the second is what's the real impact and you have some good presidents from previous tariffs in terms of your expectations and how it will impact that particular product category and profitability.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Well, the- when the tariffs went down the industry dropped prices somewhere in the 15 to 20% range. So I'm assuming that the prices are going to go up in the 15% to 20% range, as it. And any time that anything that we're manufacturing outside of China, will be better off than it was before.

Kathryn Thompson -- Analyst

Okay. Great. Thank you very much.

Truman Patterson -- Analyst

Hi. Good morning guys. Thanks for taking my question. So your capex, you guided toward $400 million, which you said you're evaluating. I think a portion of this, you have capacity projects that are probably partially unfinished in your pipeline. Just how much additional capacity do you think you're going to bring online in the back half of the year and into 2021? And can you just remind us what products those are and possibly geographies?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

We stopped all increases in capacity when this thing started. So whatever was already started, we continued. The biggest one that I remember off the top of my head is, we are expanding our laminate production in the United States with a new production line, with new capabilities that will be in next year. We're running all of the capacity that we have now, and we're looking at importing some from our overseas businesses to support the business in the short-term, as it.

We had some capacity increase this year in Russian business. I think there was a Russian ceramic business, and I think there was some in the Eastern European ceramic business, both of which are running at fairly high rates, and we expect to use them all as it in limited ways.

The bigger pieces were new businesses. So we said that the sheet vinyl business would put a new line in Russia, it's turned profitable. And the LVT lines in Europe have turned profitable, and it. The carpet tile lines in Europe, we are investing all the cash we have. We're investing back and expanding our sales force to expand the distribution of it as we speak.

And then going forward, we're going through a strategic planning process now to determine what the right level is and where to invest in -- I'm assuming most of it's going to be in enhancing the product mix and enhancing the product offerings with new features and benefits versus large capacity expansions at this point.

Truman Patterson -- Analyst

Okay. So just for clarity, the only line or product that you might be bringing online over the next year and year and half, is really just a laminate in the U.S. everything else has already been opened.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Yes. At this minute

Truman Patterson -- Analyst

Okay. Thanks. Okay. Thank you.

Operator

Thank you for your questions. I will now turn the call back over to Mr. Lorberbaum for closing comments.

Truman Patterson -- Analyst

The business and the environment has gotten much better than we expected. We're taking actions to manage through the changing environment. We're continuing to manage our cost structures, and we'll continue adjusting as needed. Thank you for your time and joining us today

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 64 minutes

Call participants:

Frank Hubbard Boykin -- Chief Financial Officer

W. Christopher Wellborn -- President, Chief Operating Officer & Director and President

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Keith Hughes -- Truist Securities. -- Analyst

Justin Speer -- Zelman Associates -- Analyst

Mike Dahl -- RBC Capital Markets -- Analyst

Eric Bosshard -- Cleveland Research. -- Analyst

Matthew Bouley -- Barclays -- Analyst

Michael Rehaut -- JPMorgan -- Analyst

Stephen Kim -- Evercore ISI. -- Analyst

Sam Darkatsh -- Raymond James. -- Analyst

Phil Ng -- Jefferies -- Analyst

Tim Wojs -- Baird -- Analyst

Laura Champine -- Loop Capital. -- Analyst

Susan Maklari -- Goldman Sachs. -- Analyst

Kathryn Thompson -- Thompson Research. -- Analyst

Truman Patterson -- Wells Fargo. -- Analyst

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