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Investing Aggressively in Growth

After several years of record-breaking performance, we entered 2016 on an optimistic note and exceeded even our own expectations. The numbers speak for themselves: we reported sales of $9.0 billion, operating income of $1.3 billion, with an operating margin of 14.3 percent, and EBITDA of $1.7 billion — all record highs. This performance represents compounded sales growth of 12 percent and compounded operating income growth of 36 percent over the past four years.

The story of this exceptional performance begins with the aggressive growth strategy that we embarked upon four years ago. From 2013 to 2015, as the flooring industry recovered from recession, Mohawk invested $4.8 billion in capital expenditures and acquisitions and grew adjusted EBITDA from $677 million in 2012 to $1.7 billion in 2016.

About $3.4 billion of these investments funded nine acquisitions across the world that extended our geographic reach and marked our entry into new categories. These acquisitions expanded our ceramic business in the U.S., Mexico, Europe and Russia; our laminate and wood business in the U.S., Europe and New Zealand; our vinyl and luxury vinyl tile (LVT) business in the U.S. and Europe; and our insulation and panels businesses in Europe. Much of the past year has been focused on further integrating these newly acquired businesses by sharing best practices, optimizing manufacturing technologies and processes, and enhancing product offerings.

The remaining $1.4 billion of these investments have been directed toward capital expenditures. In 2016, we increased internal investments to about $672 million, the highest in our history. That figure will rise again in 2017 to an estimated $750 million. Though these investments are spread across every region and every category in which we operate, they fall into three primary themes: capacity expansion, process improvement and product innovation.

Meeting Increased Demand

Our outlook for increased flooring demand remains optimistic, and we are dedicating the largest share of our 2017 investments to expand our manufacturing capacity and advance our product innovations across all categories.

A particular area of focus is luxury vinyl tile (LVT), one of the flooring industry’s newest and fastest-growing products. Noted for its durability, affordability and realistic visuals, LVT represents a major growth opportunity for Mohawk. At present, sales of LVT are outpacing our manufacturing capacity. That’s why by the end of 2017, we will expand our U.S. and European LVT capacity to further extend our leadership in this category.

Other capacity investments to support new and popular products include increased ceramic manufacturing in all markets, led by our new state-of-the-art plant in Tennessee; new engineered wood capacity in the U.S.; and new premium laminate capacity in the U.S., Europe and Russia. In 2017, we will break ground on a new carpet tile facility in Belgium to enter the €500 million European market. We also will begin construction on a new sheet vinyl facility in Russia to extend our product offering into one of the most popular categories in the country, currently a $600 million market. As these extensions come online, we will be able to optimize our growth in these markets.

Working Smarter

Constantly looking for ways to work better and smarter is foundational to our organization. In 2016 alone, process improvements, product re-engineering and equipment upgrades positively impacted our productivity by $140 million. These savings are the result of hundreds of projects enhancing productivity through process innovation, state-of-the-art equipment, improved freight logistics, more efficient use of materials and a best-in-class distribution system.

While some process improvements require investments, we’ve learned that productivity is not always capital-driven. It is also a matter of ingenuity, such as when we give our manufacturing operations real-time feedback to correct anomalies. Or when we provide our sales force with more detailed information that allows them to help customers make better choices for what products to display on their sales floor.

Our people are an important part of this equation. This year, we expanded our investments in sales personnel and marketing resources, supporting sales teams with greater sampling, merchandising and retail training. We have driven thousands of qualified leads to our retail partners during the past two years, and in late 2016 we launched Omnify, an innovative online marketing tool that will help our retailers more effectively drive consumer education and decision making. We are also rolling out paperless sales and operation processes to improve customer service and enhance efficiencies in our service centers.

Mohawk is committed to optimizing our information systems as well as our physical processes — and applying these insights to maximize efficiencies. We have used data to provide faster delivery times, more accurate delivery dates and improved online tools that enhance transactions and information flow. We will continue to apply data to work smarter and serve our customers more effectively.

Extending Category Leadership

As consumer desires evolve and manufacturing technology advances, we are introducing innovative new products that are revolutionizing the flooring industry.

For example, we continue to leverage the market-leading position of our proprietary SmartStrand^® brand. In 2016, we introduced SmartStrand Naturals™, which has the look of wool but is softer, more luxurious and easier to maintain. The longstanding success of our SmartStrand collections was underscored in 2016 by winning all three major dealer awards at national trade shows. In 2017, we are further extending SmartStrand’s leadership in the super soft carpet category with SmartStrand Silk Reserve™, which elevates softness to unprecedented levels.

Product innovations are also helping Mohawk build leadership in categories that were unheard of just 20 years ago. Luxury vinyl tile, wood plastic composite (WPC), fiberglass-backed sheet vinyl, carpet tile, ceramic wood planks and patterned carpet are all new flooring categories — and Mohawk is increasing market share in each of them. Other initiatives include launching more products at different price points to broaden our consumer reach, as well as making investments in fiber, tufting and backing technologies for carpet and rugs, locking and rigid LVT and porcelain slabs.

What’s Ahead

As we look to the future, we’re encouraged by favorable economic trends across the globe. The U.S. economy is benefiting from years of solid job creation and low interest rates, while forecasts for GDP growth in Europe and Mexico are upbeat. Higher U.S. home values and improving existing home sales are encouraging greater levels of remodeling, and new flooring remains one of the most popular home upgrades.

We’ll be ready. Many of our investments will begin impacting the business positively in 2017, 2018 and beyond. This will set the stage for further growth and help offset a decrease in licensing laminate patents that expire in mid-2017.

With our strong balance sheet and liquidity, Mohawk is positioned to continue funding both acquisitions and internal investments. Among our priorities are bolt-on acquisitions to further expand our European ceramic business. Already in 2017, we have entered into agreements to purchase two ceramic companies in Italy and Poland that will extend our position in the northern and central European markets.

As we’ve already noted in this report, Mohawk is in the best position in our history. That’s not a statement we make lightly, nor is it one filled with complacency. For us, success is not about celebrating what we did yesterday, but about what we can achieve tomorrow.

Today, Mohawk delivers one in four floors in the U.S. In the future, we aspire to deliver 25 percent of all floors, everywhere in the world. That’s the kind of thinking that made 2016 a record year, and it’s the kind of thinking that will ensure more great years ahead.

Thank you for your continued support.

Jeffrey S. Lorberbaum
Chairman and Chief Executive Officer