Operator:

Good morning, everyone, and welcome to the Mohawk Industries Second Quarter 2024 Earnings Conference Call. [Operator Instructions]. At this time, I'd like to turn the floor over to James Brunk. Please go ahead.

Jeffrey Lorberbaum:

Thanks, Jim. Our second-quarter performance reflected our focus on the controllable factors of our business, including sales initiatives, cost containment, and restructuring actions. Our net sales for the quarter were $2.8 billion, down 5.1% compared to last year. Our adjusted earnings per share were $3, up 9% year over year as a result of productivity initiatives and restructuring, as well as lower energy and material costs, partially offset by market pressures on pricing and mix and foreign exchange headwinds. We generated free cash flow of approximately $142 million during the quarter for a total of $239 million year to date. In the quarter, we purchased 755,000 shares or 1.2% of our stock for approximately $90 million. We remain optimistic about the future of our business and confident that in time, our worldwide markets will recover. Our second-quarter results exceeded our expectations despite soft market conditions around the globe. The commercial channel continues to outperform residential, although some softness in the category is occurring. While the long-term demand for our products is strong, residential purchases across our geographies remained weak. During the quarter, the actions we've taken to improve volumes in many product categories helped us though the gains were offset by consumers trading down and competitive pricing. Residential remodeling is under the greatest pressure as consumers defer large discretionary purchases due to inflation and uncertainties about the future. In addition, flooring remodeling is significantly influenced by housing turnover rates which remains suppressed due to elevated mortgage rates, high home prices, and the locked-in effect on homeowners. To reduce costs and align our business with current conditions, we're initiating additional restructuring actions across all our segments that would generate annualized savings of approximately $100 million, of which $20 million to $25 million will be recognized this year. The cash cost of these actions is about $40 million with a total cost of approximately $130 million. The execution time line will vary by project, with some extending throughout 2025 and into '26. In our global ceramics segment, we will optimize manufacturing by idling some less productive operations and aligning production to increase efficiency. We'll consolidate regional warehouses, further reduce product complexity, and leverage technology to lower administrative costs. We'll rationalize some of our Flooring North America manufacturing to enhance plant utilization, retire less efficient equipment, and simplify our offering. And Flooring Rest of World will lower our administrative and operating costs, streamline our product portfolio and distribution, and decommission inefficient assets. These actions will complement our previous restructuring initiatives that will reduce costs by approximately $60 million in 2024. Along with these, our teams are implementing many measures to manage current conditions, including enhancing sales opportunities, increasing productivity, and managing our overhead and working capital. Economists had anticipated that the Federal Reserve would lower rates this year to stimulate the US housing sector. While central banks in some of our markets have already begun to reduce rates, the Fed has indicated it intends to wait until inflation and economic activity sufficiently slow before taking actions. After the US Consumer Price Index dropped in June, many are predicting a September rate cut. If the Fed begins to lower rates at that time, we anticipate our industry should benefit next year as pent-up consumer demand increases flooring purchases. In April, US Today once again named Mohawk one of America's climate leaders, given our reduction in greenhouse gas emissions over the past four years. On July 16, we pushed our 15th annual sustainability report, which can be found online at mohawksustainability.com. Now, Jim will review our financial performance for the second quarter.

Chris Wellborn:

Thank you, Jim. In global ceramic, our markets remain highly competitive as reduced industry utilization continues to impact pricing and margins. Our mix is weaker given soft residential remodeling activity and consumers trading down to lower price points. In the quarter, the impact of labor and freight inflation was offset by decreases in material and energy costs. In addition to our restructuring initiatives, we are implementing numerous cost reduction projects across the segment, including product reengineering, process improvements, and streamlining administrative functions. To improve our mix, we are investing in product differentiation with leading-edge printing, polishing, and rectifying technologies. These assets allow us to create floor and wall tile collections with superior visuals and higher-value sizes, styles, and formats. On May 10, the US Department of Commerce announced the commencement of anti-dumping and countervailing duty investigations of ceramic tile imported from India. The US tile trade organization believes this could lead to tariffs between 400% and 800%. Given India's widespread dumping, Mexico has increased import duties and other markets are currently investigating similar options. In the US, our high-end design capabilities, domestic manufacturing, and extensive distribution infrastructure are enhancing our participation in the builder and commercial sectors. In Europe, our unit sales exceeded last year as we leveraged our manufacturing and styling advantages to create higher value products. Our porcelain slab expansion has enhanced our offering as demand continues to increase across the flooring, furniture, and countertop markets. European energy prices declined from last year, which should help increase consumer discretionary spending. Markets in Latin America remain difficult despite central banks initiating interest rate cuts. In Mexico, we have announced price increases to offset inflationary pressures and import duties. In Mexico and Brazil, we are initiating additional sales and operational improvements to maximize the performance of our acquisitions. In both countries, we have restructured the organization and implemented new product and distribution strategies. In our Flooring Rest of World segment, market conditions remained slow with constrained consumer discretionary spending. Declining inflation led the European Central Bank to lower key rates on June 6 and additional cuts may follow. In this challenging environment, we focused on actions to drive sales, such as enhancing our product offering, executing promotions, and implementing strategic marketing campaigns. As a result of these sales initiatives, our volumes in laminate, LVT, and panels improved from prior year low levels. Pricing and mix remained under pressure, partially offset by lower input costs. In addition to our restructuring actions, we are launching many projects to improve productivity, enhance yields, and lower labor costs. We are consolidating regional flooring distribution centers and reducing logistics costs to align with present conditions. We are completing the conversion of our residential LVT program from flexible to rigid products, and we're improving our mix in our sheet vinyl category. Our laminate volumes grew as we expanded our customer base and enhanced sales with existing customers. The margins of our insulation and panels businesses have declined as fewer projects are being initiated and industry competition escalates. In Australia and New Zealand, our results were stronger given our actions to improve price and mix through new products and retail promotions. Increased manufacturing volume and associated productivity gains contributed to margin improvement in our business. In Flooring North America segment, despite challenging market conditions, volumes improved year over year in some markets and channels, though partially offset by price and mix dynamics. Our margins benefited from productivity gains driven by operational improvements, lower input costs, logistics efficiencies and restructuring. This year, we have expanded our relationships with larger US homebuilders who are increasing the share of the market. Residential remains weak with home sales turnover at the lowest level since 2008 and consumers continuing to delay remodeling projects. Both of our luxury carpet collections and our value-oriented polyester products are accelerating. Sales of our LVT and laminate collections were stronger in the retailer and builder channels. Our recent laminate expansion is ramping up to satisfy higher demand for our waterproof flooring. The commercial sector continues to outperform residential, with hospitality, government, and education channels leading though fewer projects are being initiated. Jeff, I'll return the call to you for closing remarks.

Operator:

[Operator Instructions]. Our first question today comes from Eric Bosshard from Cleveland Research.

Jeffrey Lorberbaum:

Well, when we're looking at the market where it is now, we think there'll still be some time before we see a significant recovery into next year. And so we're trying to work through how we're going to optimize the profits both in the short term and the long term. And we believe that taking more costs out will position us better in the second half, and it will also increase our profitability as the market recovers.

Jeffrey Lorberbaum:

As we think about next year, we think that we're going to start seeing the cycle move from what the low point is at. Demand for housing today remains strong, and we think there's pent-up demand in the remodeling markets. Though we can't predict the timing of it, the decline of inflation, the change in interest rates will positively impact consumer confidence, housing sales, home remodeling, commercial activity, which all should have a significant impact on our category. As it improves, we think we'll get the leverage in these cost structures and our product mix. On an individual business, we have the -- we put investments in the areas where we thought we would have the most growth rate in the pieces. And those -- the businesses that we're putting this stuff in is the laminate business, the countertop business with quartz, the slab business in Europe, and the insulation businesses. We believe those have the most opportunities for higher growth, and we have invested in those. So we're ready to take advantage of the next few years as they improve.

David MacGregor:

Yes, good morning. Thanks for taking my question. I guess just thinking while we're on the topic of restructuring and the cost reductions, can you just talk about how the anticipated savings, which I think you shared some aggregate numbers on that, how that would fall across the three reporting segments?

David MacGregor:

Thank you for that color. And just as a follow-up, I wanted to get you to talk a little more about the commercial business where you're seeing a little more strength than you are in residential. And you noted some softness, though, is now starting to creep into this business through fewer projects being initiated. Just talk about what you're seeing there? And is there a difference between the Main Street commercial versus institutional business? And what level of growth should we anticipate through the second half of the commercial?

David MacGregor:

And can you talk about what the growth is for the second half, what you think you might see there?

Operator:

Our next question today comes from Susan Maklari from Goldman Sachs.

Jeffrey Lorberbaum:

Sure. In the new products, one is we've continued to invest in putting them out in the marketplace and bringing new products, and every category is participating. In ceramic, we put in new assets that can make tiles with different color intensity, textures, three-dimensional surfaces, different shapes, and sizes. In LVT, we've taken actions that we can actually enhance the coloration and textures. And we've also introduced a different core, we call it a renewable polymer core, as another category. In laminate, we've introduced features that will impact both the durability and the sound acoustics with it as we go through. And even in the different countertop businesses -- in our quartz countertop, we're introducing higher-value veining technologies in the mid-price points. And every product category has features like this that we're doing as we come out. What's happened is the biggest part of the market that's been affected. The bottom end is doing better and the high end -- the middle part, which goes through retail, is the most affected. And these features and benefits will have a lot of positive impact when the retail business picks up as consumers come back in the marketplace and get more confident.

Jeffrey Lorberbaum:

I think you've probably answered my question for me. We're more confident that we are reaching the end of the cycle. We have taken additional actions to manage the short-term pressures by taking additional costs out. We're confident that the markets are going to recover. We can't predict the moment, but we know they're going to recover. So it's a good time to buy shares.

Jeffrey Lorberbaum:

Well, our balance sheet, as you know, is strong. In past cycles, we've had multiple opportunities coming out of these things as the industry recovers with acquisitions, and we'll continue to evaluate share repurchases as part of our capital allocation strategy.

Mike Dahl:

Hi. Thanks for taking my questions. I think the prior question around second-half growth, it sounded like that was specific to commercial. Maybe could we zoom out and just -- you've been organically down mid-single digits from a top-line standpoint in the first half. Can you talk about what's embedded from a top-line standpoint for 3Q and how you're thinking about that into 4Q as well?

Mike Dahl:

Got it. Okay, that's really comprehensive. Thank you for that. As a follow-up question -- so top line in the near term sounds like status quo. I guess your guide then implies that I think the operating margin sequentially is still flattish, which, to your point, you have some normal seasonality. But there's obviously puts and takes around seasonality, but then some of the actions that you're taking. So can you speak to I guess the ability to continue to improve margins from here in the back half of the year despite these top line pressures?

Operator:

Our next question today comes from Keith Hughes from Truist.

Jeffrey Lorberbaum:

LVT and laminate, the volumes have improved. We've improved some of the margins in those businesses as we go through. You have to remember, last year, there was all kinds of also negative pressures in the comparisons. So laminate is gaining share, and we're doing our self-help actions. And LVT is helping those.

Keith Hughes:

Units were up in both? Okay, great. And your earlier comment to the last question that -- I think you said half of your product categories are up in volume. It's a remarkable statement if I heard it correctly. That feels like share gain, I don't think your markets are that strong. Is that fair to say?

Operator:

Our next question today comes from Michael Rehaut from JPMorgan.

Jeffrey Lorberbaum:

The 3Q guide, as I just said, has got the assumption that the present conditions in the second quarter continue into the third quarter. It had, don't forget, Europe. I mean, you have to know that when they go on vacation, people quit spending money. And whatever is happening, it takes a huge dip in a different -- the holidays are different in every country. So it pulls down our period. The pressures on pricing and mix, I can't emphasize enough. I mean, the markets -- when you have industries with huge capital investments running at low throughputs, everybody is trying to optimize the marketplaces. And our aggressiveness in trying to bring new markets, satisfy people different, expand our distribution are helping this, but it's difficult.

Michael Rehaut:

Okay. No, I appreciate that. Secondly, just wanted to get your sense in terms of how to think about the top line in the back half of the year. Currently, we're looking for a slight decline on a consolidated sales basis for both 3Q and 4Q. I was wondering if that is similar to how you're thinking about the business, particularly in the fourth quarter, where there is an easier comp? And then just technically, if I could just throw in an additional technical question. The share count really didn't move that much. The average share count didn't really move that much in 2Q. You had the share buyback though. Should we expect to see that fully reflected in the share count in 3Q or is there any offset share issuance that might still keep the share count around $64 million?

Operator:

Our next question today comes from Phil Ng from Jefferies.

Chris Wellborn:

Well, I'll just comment that the increased ocean freight and potential tariffs should improve or should benefit our manufacturing, domestic manufacturing.

Phil Ng:

But Jeff, are you not hearing any rumblings? Importers are looking to raise prices at this point.

Phil Ng:

And then maybe this is a tough question to ask because you mentioned a few times that it's hard to predict timing. But let's say, if we do get rate cuts this fall, whether it's the US, in Europe, how does that kind of ripple through? Could you see the uplift as soon as spring next year? Like, I want to get a sense of what the lag works and how different parts of your end markets just kind of shake out. Do we need to actually see existing home sales turn or rate cuts coming down provides that confidence and maybe it unlocks you up? Just kind of help us unpack what it means from a rate cut standpoint and how the lag and how it impacts different parts of group portfolio.

Phil Ng:

But you would expect your R&R side to come back first. Is that fair, particularly in North America?

Operator:

Our next question today comes from Matthew Bouley from Barclays.

Jeffrey Lorberbaum:

We have to manage the circumstances we're in. We know that market is going to turn in the future. We don't know the timing it's going to turn. We know that -- our view was that the second half of the year will continue to be difficult, so we encouraged all of our businesses to find ways to improve their margins to get through the near term without hurting our long-term potential in the future. And all of them put together projects to improve their productivity, to utilize the assets. In some cases, we've idled some assets that we can start back up. And in other cases, we've shut down some higher cost ones. We've taken costs out with people. We are managing the product portfolios aggressively to have them in the best shape we can have in. And we think we're doing all the right things to take advantage of when this thing turns and -- don't forget, when it turns, it's going to take several years -- typically, the industry runs at slightly over GDP. And when this thing turns, you typically have multiple years of above-industry growth to get us back to the trend lines.

Matthew Bouley:

Got. it, okay. That's helpful. And then secondly, zooming into the near term. I think the difference between price and cost got a little wider in Q2 than in Q1. And I think as we look forward, clearly, the year-over-year comparisons are very different on price and cost as we get into Q3. I mean, is the expectation that you would still stay a little bit negative on price cost? Or any additional color on how that would play out over these next few months. Thank you.

Operator:

Our next question today comes from Adam Baumgarten from Zelman & Associates.

Jeffrey Lorberbaum:

Prices have been fairly stable. I mean, we buy a lot of pieces. So there are some that are going up. We'll have to see how they evolve and where they're going to go. But again, as you come out of these cycles, they're all going to go up. And so we have to manage our way out of it when it occurs.

Adam Baumgarten:

Okay, got it. And then maybe switching gears to laminate that's been a good part of the story. I guess, what are you seeing from an end market perspective, the most adoption there or penetration? Is it in single-family new construction or home improvement or both, I guess? Just some more color there would be helpful.

Operator:

Our next question today comes from Kathryn Thompson from Thompson Research Group.

Jeffrey Lorberbaum:

We've been aggressive in the marketplace, like everybody else is being in the market. We have good relationships with people. We are bringing products and value propositions are different. We've been investing through the downturn in our sales and marketing activities. We continue to provide merchandising and promotions to help them maximize their business, and I think we're being rewarded in some places for that and increasing our distribution. We have things like -- with the freight and all the parts, our ceramic business, we have been able to satisfy the high-end market of ceramic, for instance, in the commercial channels where there's been disruptions and timing. We've improved our styling and offerings. So we've become alternatives for higher-end Italian tile, for instance. So we're taking the right actions in each product category. While, at the same time, we're managing our costs and cutting our costs. And the management is really doing an excellent job.

Jeffrey Lorberbaum:

Just some more in Europe. In Europe, when gas prices were , the material prices were high. I mean our ability to compete was really hurt. We didn't hedge any of our gas prices, so we were paying premium prices for everything. So I mean there's a huge change in our capacity to compete in the marketplace today in Europe, for instance, than there was a year ago.

Jeffrey Lorberbaum:

AI, we're all looking at trying to find ways to use it. We're in initial stages of understanding it. We're going through training programs with different parts of our organization to try to utilize it. We think it's going to help to much more in-depth analysis and see trends that we haven't seen before. So we're investing in it, but we're really at the front end and the opportunities are significant. The general business is we continue to improve our internal information systems. And we keep using them to reduce our administrative structures and respond rapidly.

Jeffrey Lorberbaum:

There's ideas, but I can't say that they have made a major change in the cost structures up to this point.

Rafe Jadrosich:

Hi. Good morning. Thanks for taking my questions. I just wanted to follow up on some of the productivity gains that you've spoken about, how that carries into the remainder of this year and into next year. If we see volume continue to decline and let's say it's flattish next year, do you think your productivity gains are still enough to drive margin expansion? And then within that, can you just talk about versus that $50 million you talked about in the second quarter, how do we think about the gains in 3Q and into 2024?

James Brunk:

Certainly, volume is a story, Rafe. As you look for volume to pick up, you also are able to run the facilities at a more steady state. Therefore, you have less interruption and less shutdown costs, which certainly helps from an unabsorbed overhead perspective. From a productivity view, going through this year into next, we expect all the businesses are continuing to bring ideas forward on cost reductions. As I talked about CapEx, for example, about 45% of the capital spending is around cost reductions and product innovation. So those will continue to evolve as we go into next year. And as I pointed out, on the restructuring savings, of the $100 million we just announced, only $20 million to $25 million will be really recognized this year. And we'll still have a little bit of a carryover from the $150 million that we originally announced last year.

James Brunk:

I would -- not yet. The competitors know -- on your sequential question. So the biggest move was from Q4 to Q1. Q1 to Q2, though, there are some declines mostly in the price area. But it's certainly moderating as you go sequentially through the year, but you're still seeing some declines.

James Brunk:

Yes.

Laura Champine:

Thanks for taking my question. It's just a follow-on to the last one, which in mix, is mix getting -- and I know it's negative year on year. But sequentially, is it getting worse or better in your three major segments?

Jeffrey Lorberbaum:

Just as we said, we think we're going to see -- the condition is we don't see a significant change as we go from second quarter into third quarter and even in the fourth quarter this year.

Jeffrey Lorberbaum:

We're confident in the long-term fundamentals of our industry. We are well positioned to take advantage of the recovery of the housing market. And we expect there to be some different timing of how they come out, but they're all going to come out and go back to more normal things in the next few years. Thank you for taking your time and spending it with us.

Operator:

Good morning, everyone, and welcome to the Mohawk Industries First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please also note this event is being recorded. At this time, I'd like to turn the floor over to James Brunk. Please go ahead.

Jeff Lorberbaum:

Thank you, Chris. The Flooring industry appears to be at the bottom of this cycle, and we are managing controllable aspects of our business to improve our results. We continue to reduce our fixed and variable costs through ongoing restructuring and additional productivity initiatives. We're aligning production with market demand to control working capital, which increases our unabsorbed overhead to enhance sales and margins, we're upgrading our product offering with unique features and investing in new merchandising.

Operator:

[Operator Instructions] Our first question today comes from Matthew Bouley from Barclays.

Jeff Lorberbaum:

The recent comments by the Fed that interest rates will stay higher could somewhat impact housing sales and the flooring industry improvement as we go through the year. The industry has been running at extremely low levels and eventually buyers and sellers have to do transactions. People who are not moving should increase remodeling over time and housing sales are expected to increase from their very low levels. At the same time, we anticipated commercial would slow significantly. It's possible it could be better than we expected given the stronger economies at this time. We still anticipate improvement in the second half and exceed the results this year.

James Brunk:

Well, first of all, just to remind you, our forecast this year is somewhere between $480 million and $500 million. That's below D&A of about $600 million about 45% of that is really focused on cost reductions and product innovation. 15% is relatively to complete those growth investments that you just mentioned. And the remaining 40% or so is on the maintenance of the business. Going forward into next year, given the completion of the capacity projects.

Operator:

Our next question comes from Tim Wojs from Baird.

James Brunk:

Let me start with some of the assumptions around Q2, that give us a baseline. As we enter Q2, we are seeing some signs of increasing volume, but are seeing continued price and mix pressure we expect seasonality to be more aligned with historical levels. We continue to invest in innovative products, process improvements and cost reduction to try to control our costs still anticipate that FX will continue to be a headwind as well. In terms of material costs in Q2 we would anticipate the benefits from lower costs from a year-over-year perspective to be offset by that price and mix pressure with the Flooring Rest of the world continuing to be under the most pressure.

William Christopher Wellborn:

I think the panels business is going to be under pressure all during this year.

Operator:

Our next question comes from Susan Maklari from Goldman Sachs.

Jeff Lorberbaum:

Let's start out with the general view by different channels. In the residential flooring sales always rebound from the low level that they're at Consumer confidence improves, housing improves. You have to postpone remodeling that hasn't been done in the last couple of years as they were pressured by inflation.

Jeff Lorberbaum:

When we start out with the -- we think we're going to have the normal seasonality, which means typically in the U.S., the peak of the year tends to be the end of the second quarter into the third quarter, and we think it's going to be more normalized. At the moment, which we've said the demand still is weak with continued pressure on pricing. So until the volume gets back, we think there'll still be the pressure there, along with the mix.

John Lovallo:

The first one, maybe just focusing on the second quarter. It seemed I think that previously, you had expected sort of on a year-over-year basis, energy cost reductions this offset negative price mix and that productivity would offset wage and benefit inflation. I guess the question is, is that the expectation still for the second quarter? And did that happen in the first quarter only in North America?

James Brunk:

Yes, John, it is the right way to think about it. What I would anticipate, as you start to lap the prior year price/mix will become less of a headwind. Again, we're speaking about year-over-year. But you're also right, I'm going to start to also lap the lower cost. And so that will become less impactful as well. Really what it's going to turn into is, as we anticipate volume getting a little bit stronger, you'll get a pickup in volume, but you also get a benefit and less shutdown costs as well. And so that will be the focus as we go into the second half of the year.

Collin Verron:

This is actually Collin on for Phil. I just wanted to start on the commercial piece. You know that the commercial continued to outpace residential that's slowing. Are volumes higher year-over-year in that commercial business? And then how are you thinking about your commercial flooring volumes as we move through the end of 2024. And then maybe just remind everyone of the size of that commercial business for each of your segments?

Collin Verron:

Okay. That's helpful color. And then I guess I just wanted to touch on the India ceramic tile tariffs. Can you just talk about the price point of those Indian imports, how you're positioned versus that price point? And what percentage of your portfolio would really benefit from the tariff on the Indian tile?

Jeff Lorberbaum:

They tend to be more focused in the low to mid-end of the marketplace to answer that part of the question.

Keith Hughes:

Your comments around business improving earlier in the call, I know that was highlighted in the release. Have you also seen some volume improvements in Flooring North America.

Keith Hughes:

Okay. So no sequential movement in those 2 is what you're saying.

James Brunk:

I was speaking from a year-over-year perspective as well.

William Christopher Wellborn:

Well, generally, the commercial business in ceramic, I would say, it's been flat. It hasn't decreased as much as we thought it would. But as Jeff said, we expect that to soften as we go through the year.

Keith Hughes:

And within commercial, I assume office is weaker, but what areas are offsetting is that right?

William Christopher Wellborn:

Yes, like hospitality, the medical schools, those things have still been strong.

Operator:

Our next question comes from Michael Rehaut from JPMorgan.

James Brunk:

Given right now, the low housing sales industry volumes are still down significantly, we think price/mix remains under pressure especially given the high fixed cost of operations. The industry will start to rebound as you start to see consumer confidence and housing activity certainly increase. But we do believe we should start to get towards the bottom of the cycle, but I would anticipate price/mix being that headwind for the balance of the year.

Michael Rehaut:

Right. Okay. I guess the margins on commercial, though, are also a little bit higher. So that would be depending on how much commercial slows a little bit of an offset as well? Or is that the right way to think about that?

Michael Rehaut:

Right. Second question, would love to get your thoughts. You do a continuous amount of productivity, restructuring adjustments to your footprint. I know there's a lot of moving pieces there, but I would love to try and get a sense for what benefits of cost-saving benefits your restructuring actions contributed to the second quarter in aggregate. And if that type of contribution or benefit that you're seeing right now on a quarterly pace would increase into the back half of the year or just kind of stay consistent with what you're seeing this past quarter?

Operator:

Our next question comes from Mike Dahl from RBC.

Jeff Lorberbaum:

We were trying to remind everybody that the European business is on a different cycle as well as we have some South American businesses here in the middle of their winter is that -- so everybody doesn't always consider the non-U.S. businesses. And we just -- as you're putting through the models, we just wanted to remind you.

James Brunk:

So if you're looking -- it's a little early to tell that while it depends on the rebound. And if we start to see that volume increase, like we talked about earlier. But the real point was that Europe tends to peak in the second quarter from a historic standpoint.

Kathryn Thompson:

So you talked about the move for tariffs on services in the U.S. But we do acknowledge that, and we've gotten some feedback about the Chinese tariffs have rolled off last year and are hearing just more of dumping activities, particularly for LVT since the end of last year. What are your thoughts or updates on potential reinstatement of tariffs or better yet, what are you seeing in terms of trends in Europe for your products?

Jeff Lorberbaum:

There hasn't been any announced actions against dumping on LVT at this point. That's the answer to the other question.

William Christopher Wellborn:

I mean it's a very competitive environment, but the products that we are putting in the market tend to be at the higher end and are actually doing pretty well.

Jeff Lorberbaum:

We're calling on the designers, the architects, the building owners and the contractors all at the same time. We are participating in the planning of the different projects and we've been able to position ourselves well in the marketplace. And our comment, I guess, are agreeing with you that it's holding up a little stronger than we anticipated but we still think it's going to continue to slow, and we're being aggressive in our calling on and offerings to the marketplace.

Laura Champine:

My question is on excess capacity. I think that you've quantified sort of ballpark running at 75% utilization in the not too recent past, where is that now? And where can -- how high can you -- how high would you like to get it with your current restructuring initiatives assuming volumes stay where they are today?

James Brunk:

As we said on CapEx, really, our focus is more on the cost reduction and product innovation as we just complete the growth investments that we had talked about before.

Jeff Lorberbaum:

It hasn't changed.

Stephen Kim:

Earlier in the call, I think you talked about the fact that your obviously targeting to get to a 10% operating margin and then look to take it further. But that 10% number just kind of was -- I just wanted to explore that a little bit. I was curious what kind of volume growth do you think is needed to reach that target on an annualized basis relative to kind of like where we are from where we are here?

Jeff Lorberbaum:

I'm not sure I have the number to give you. We have our models out for the next 3 years and we see ourselves reaching that with the different models we've done, and I don't recall the volume changes that are built into it. The timing, like you know, it's impossible to define the moment in time it changes, we think we're going to see some of it this fall, and we should see significantly more next year as we come out of this.

Stephen Kim:

Yes. I mean, clearly, I mean, that's the one thing, obviously, that's outside of your control. I mean, it sounds like you're doing everything you can certainly on the cost side and even on the product side. But at the end of the day, that's the part that the market is going to determine for you. And so -- but it sounds like you're looking for something fairly material.

James Brunk:

Yes. Stephen, the numbers that you're talking about are not unusual as you come out of a downturn, even if you go back to the last one, that first year, you get in kind of accelerated top in the sales as remodeling starts to come back, new home construction is stronger. So it's not unusual to get a multiyear benefit from the rebound before you get more back into a normal growth, which in flooring could be GDP plus type numbers.

Operator:

Our next question comes from Sam Reid from Wells Fargo.

Jeff Lorberbaum:

In general, the retail business is under a lot of pressure. You have the home centers that, in general, have a lower income level buying on average from our specialty retailers. So they've been impacted more than the other channel at this point.

Richard Reid:

No, that makes sense. And then maybe switching gears, just quickly talking tile here. Your Tile Delta business had a pretty impressive display at the Kitchen and Bath show this year, at least I was impressed by it and that was in Vegas, obviously. I wanted to see, though, any wins that you've gotten from that event or kind of any feedback? Just sort of curious kind of what the outcome was there.

Eric Bosshard:

Yes, 2 things, if I could. First of all, what was better than expected in the quarter? I think the earnings were a little bit better and even the 2Q guy is a little bit better than consensus. I know that's not your number. But what's better than expected?

James Brunk:

No. The commercial channel, again, keeps outperforming residential at this point. But as Jeff said, probably the biggest gains for the quarter were around the productivity that the segments through us.

Jeff Lorberbaum:

And we're seeing the normal seasonality improvements through the first quarter and going into the second that we would expect. And we don't have any definitive information that you don't have.

Operator:

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Jeff Lorberbaum for any closing remarks.

Operator:

And ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.

Operator:

Good day, and welcome to the Mohawk Industries Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to James Brunk. Please go ahead, sir.

Jeff Lorberbaum:

Thanks, Jim. Our fourth quarter results were ahead of our expectations, with net sales for the quarter of approximately $2.6 billion, down 1.4% as reported or 4.1% on a constant and legacy basis. Lower demand in residential remodeling and new construction continued to impact our results. Our adjusted EPS for the quarter was $1.96, with benefits from cost containment, productivity and lower input costs. Pricing and product mix declined offset by lower raw material and energy costs during the quarter. Foreign exchange had an impact of approximately $22 million on operating income, or $0.27 on EPS. Turning to our full year results. Mohawk's net sales were approximately $11.1 billion, down approximately 5% as reported or 7.7% on a constant basis with adjusted EPS of $9.19. Last year, interest rates increased creating challenges for our industry, which is highly sensitive to rate fluctuation. Even though we have a diversified geographic footprint, all of our markets were impacted by similar conditions. During '23, existing home sales declined substantially, remodeling projects were postponed and consumers traded down. New home construction was also constrained as rising interest rates and a weak housing market reduced home starts. Throughout the year, the commercial sector remained stronger than residential though investments began to slow as interest rates increased in lending types. These factors reduced industry demand across our business, creating unabsorbed overhead and shutdown costs. As a result, our industry reduced selling prices and we pass through declining cost in energy and materials. Under these conditions, we focused on optimizing our revenues and lowering our costs through restructuring actions and manufacturing enhancement. We aggressively managed inventory levels, which reduced our working capital by over $300 million, excluding acquisitions. We also invested in sales resources, merchandising in new products with innovative features to inspire consumers to purchase flooring. As we integrate our recent acquisitions around the world, we are investing to improve their operations and product offering. In 2023, we completed two acquisitions in Latin America that extended our position as the world's largest ceramic tile producer and solidified our leadership in the region. In the year, we focused our capital expenditures on product innovation and cost reduction, as well as product categories that should have the highest growth as the economy improves. In Europe, our porcelain slab and installation expansions are now fully operational, while in North America our premium laminate LVT projects are progressing. During the second half of this year, we anticipate completing expansion of laminate in Europe and quartz countertops in the United States. We closed the year with debt leverage of 1.5 times, free cash flow of $716 million, and available liquidity of $1.9 billion. We are retiring a term loan of approximately $900 million in quarter one, which has a higher interest rate. We are well-positioned to manage current conditions and emerge stronger from this economic cycle when the rebound occurs. Finally, in January, Newsweek recognized Mohawk as one of America's greatest workplaces for diversity. Our talented people are our most valuable asset and we are proud that our teams mirror the communities in which we operate. And now, Jim will provide an overview of our fourth quarter financials.

Chris Wellborn:

Thank you, Jim. In our Global Ceramic segment, industry volume remains low, which is compressing prices and margins. All of our geographies are experiencing similar competitive conditions and the industry passed through declining energy costs. We're managing our production to align with demand and have significantly reduced inventory throughout the year. To enhance our mix, we are introducing stylized products in large and small sizes, tailored to each market. To contain costs, we have increased productivity, reduced overhead and implemented alternative formulation. In the US, we are expanding our distribution through our local service centers and offering new collections with premium Italian styling to improve our product mix. We're expanding our quartz countertop business with innovative new introductions and increasing our participation in the retail kitchen, bath and DIY channel. We've integrated Vitromex in Mexico and Elizabeth in Brazil and are enhancing our sales, marketing and operational strategy. In both countries, demand significantly declined last year due to rising interest rates and slowing economic conditions which reduced our results. Combined with our legacy businesses, these acquisitions give us leading positions in Brazil and Mexico. In Europe, gas prices have continued to decline and are improving our competitive position. We are optimizing our recent expansion of premium porcelain slabs in Italy to meet growing demand in both the residential and commercial channels. In our Flooring Rest of the World business, our improved results in the quarter were driven by lower input cost and productivity gains, offsetting pricing pressure and foreign exchange. The European building product category remains under stress, with consumers remaining cautious and retailers reducing their inventory levels. We are investing in new products for 2024, while implementing tight cost control. We are reenergizing our flagship Quick-Step brand with interactive displays. We are completing the transition to rigid LVT and we have decommissioned our residential flexible line. As material and energy costs decline, we've reduced prices across our product categories in response to the competitive market. In insulation, we have recently experienced material increases and are raising our prices accordingly. Our wood panels performance has declined during the year from typically high pricing to a more competitive environment with excess capacity. We continue to implement restructuring actions and enhance our smaller bolt-on acquisitions in insulation, MDF boards, sheet vinyl, and mezzanine flooring. In Flooring North America, fourth quarter profitability improved significantly over last year with benefits from decreased input costs, restructuring, and productivity gain. Reduced market volumes led to low industry utilization rate and aggressive competition in the marketplace. We are continuing to invest in sales and marketing initiatives to expand our distribution and improve our long-term growth. To enhance our business, we are making capital investments to increase our differentiated features and lower our manufacturing costs. In each product category, we are introducing innovative new collections, which are being well-accepted. We have already begun installing our new displays with retailers around the country to accelerate the sales of these product launches. We have created the next generation of LVT with our SolidTech premier collection featuring new technology that enhances visuals with higher definition color and texture. We've also introduced a new flooring category called PureTech which is PVC-free. It is an alternative to LVT made from renewable polymer core that is waterproof and made with 70% recycled content. The commercial channel outperformed our expectation led by the hospitality sector. We are leveraging our customer relationships to expand our needle punch flooring and trim acquisitions. With that, I'll return the call to Jeff for his closing remarks.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Susan Maklari with Goldman Sachs. Please go ahead

Jeff Lorberbaum:

Good morning.

Jeff Lorberbaum:

Let's start with last year. The interest rates increased throughout the year and our business declined with lower investments in housing and commercial projects. This year, we anticipate the reverse to occur. We are starting with the industry starting out slower and improving with consumer confidence and interest rates throughout the year. The US mortgage rates have declined from their peak and Brazil has already started to lower their rates. We anticipate Europe to lag given geopolitical risks, energy prices, and slower economies in the rest of our markets. We believe the business will strengthen in second half from these improved results from last year. We should also see an improvement in product mix as remodeling grows, we expect an extended period of higher demand as the economy recovers and our investments in new products, cost reductions, and expansion project should benefit our future result.

Jeff Lorberbaum:

Sure. The segments we see -- that we think we're going to see more improvement in Flooring North America and the Ceramic businesses with remodeling in each category leading the way, we think Europe will take longer to improve where they're going to be pricing pressures, continuing in more in the flooring and panels business in the other categories that we have.

Jeff Lorberbaum:

Just to remind everybody in Europe, they still have the higher energy costs, and the regulations make it a less dynamic marketplace, may get through. And then at the same time, their wages have increased more than the rest of the world impacting inflation.

Jeff Lorberbaum:

Thank you.

Phil Ng:

Hey guys. Certainly, your business has been hard hit with rates being elevated on the R&R side. When it comes down, is the bigger driver we should be looking at is tied to housing turnover or rates coming down just kind of improving consumer confidence that it's going to drive demand. So just trying to gauge, what are the things that we should look at? And when we do see, and how quickly that could kind of unleash that pent-up demand?

James Brunk:

And so Phil, you also have two key points. One is that in most of our geographies, new homes are really underbuilt so the inventory is low. And then, it's also an aging inventory so it's kind of in prime position as we start to come out for remodeling to increase which puts us in a very strong position.

James Brunk:

Well, a couple of things are important there. So, you're right that utilization rates, which right now are anywhere between 70% and 80%, differing, of course, based on geography and business, is driving some shutdowns, which certainly impacted us in 2023. As we look at 2024, lower inventory reductions and improving volumes through the year should reduce that impact. And as you look further in terms of demand increasing, incremental margins could be anywhere from 25% to 35% depending on segment and the product category, and also whether you're in the premium or more in the commodity product line.

Operator:

Our next question today comes from Eric Bouchard with Cleveland Research. Please go ahead.

Jeff Lorberbaum:

Yeah. As we went through 2023 and the rates started going up, the commercial business slowed down. We expect it to continue to be slower. We think there is going to be a lag time between projects getting started, giving how tight the markets are for borrowing money, and the costs of borrowing money. And then what I described earlier was when the interest rates start falling, the projects will come in, but then the time it takes to start them before we actually feel it could be a year to a year and a half or more.

Jeff Lorberbaum:

We're expecting the growth in the residential business to offset the decline in commercial, and so to have a growth in it even though the commercial is weaker.

James Brunk:

Sure. As I noted in prepared remarks, our forecast for 2024 is about $480 million. About 50% of that is going to be focused on cost reductions and product innovation. 20% will be to complete the growth initiatives that we've identified around laminate, quartz countertops, LVT, porcelain slabs, and insulation. And then about 30% is for maintenance and other items in the year.

Operator:

Thank you. And our next question comes from Stephen Kim with Evercore. Please go ahead.

James Brunk:

So, what we believe is that pricing is generally at the bottom, more near the bottom, and so you should continue to see that trend through the year. From a comparable standpoint from year-over-year, you certainly still see the pressure. We anticipate, though, that lower material and energy basically to align with price and mix, and then other inflation items, such as wages and benefits and insurances and those types of items, to be more covered by productivity and restructuring actions. In the EU, Europe remains still weak with pricing pressures and lower production rates. But as Jeff pointed out, as we go through the second half of the year and that improvement should drive improved year-over-year results.

James Brunk:

I'm sorry, Stephen, you're going to have to repeat that.

Operator:

Mr. Kim, this is the operator. We're not able to make out what you're saying. I'm going to clear the question. If you can dial back in, we'll get you back in the queue, sir. Our next question comes from Timothy Wojs with Baird. Please go ahead.

Jeff Lorberbaum:

So, I don't know how to predict the future, but in the past, what's happened is that when you get with low margins in the businesses, that the expectations of the sellers are high and the expectations of the buyers are low and you can't get together. So, as you start coming out and the margins start going back up, it's easier to align with valuations. So, anybody who has wanted to sell or wants to get out, it typically comes as you're in the first couple of innings of the coming out of it, and I would expect the same thing is going to happen this time.

Chris Wellborn:

I can just comment that we're ramping up our West Coast production and our new extrusion process in Georgia. We've also got unique technologies to provide improved visuals and surfaces. And so, we've got a lot -- and we're also introducing a new renewable polymer core as an alternative.

Timothy Wojs:

Okay. Any feedback preliminarily from the channel or is it just kind of too early?

Timothy Wojs:

Okay. Very good. Thanks, everybody.

Operator:

And our next question today comes from Keith Hughes at Truist. Please go ahead.

Jeff Lorberbaum:

All we can do is get feedback. One is, we know our own volumes. We get feedback from our customers of how they see it. They're all pretty optimistic at this point about next year getting better, but there's no way to actually measure where the piece is and what's going to change it other than the things that impacted our consumer sentiment seem to have bottomed. So that helps as people gets the higher prices on homes and things. There is people have been postponing it. So it really comes down to gaining confidence in the pieces and it's not that much different than the other regions, if you want to know the truth. They're all in similar places.

James Brunk:

You're right. They are they are starting to fade away, I anticipate that. Those continue to see lower energy and materials flow-through from a comparison standpoint, and at least through the first half of the year on a year-over-year basis in terms of raw material and energy, which kind of aligns with where price and mix are in that same time period.

James Brunk:

Yes, because there is that much less to kind of flow out of the inventory through the P&L.

Operator:

And our next question today comes from Michael Rehaut with JPMorgan. Please go ahead.

James Brunk:

The margins in this segment are still low. As the plant utilization goes up, the stoppages of the plant, you're going to get decreased costs, you're going to get leverage on the SG&A, as it goes up as we are going to try to hold the SG&A barely flat and the volume goes up. So we will get leverage there and those things will expand the margins. And we think you'll see continued margin growth as it occurs over the next few years.

James Brunk:

Part of the magnitude is in the -- you can see it in the SG&A costs which relative to historical high we made conscious choices to maintain our sales organizations to continue investing in products, continue investing in merchandising in order to set us up for the long-term. So you can see it in the higher level of SG&A as a percent of sales, which will come down as the volume comes up.

Andrew Azzi:

Thanks a lot, guys. Good luck on the next quarter.

Joe Ahlersmeyer:

Yeah. Thanks very much, guys. Good morning. Jim, you are talking here about the price mix, sort of offsetting the deflation benefits that you're seeing. And then on the other side of it, the productivity sort of offsetting the other bad guys here. I mean, it sounds like you are to the place where you've been trying to get to, which is that improvement in EBITDA is just going to be a function of volume. And if we are talking about a back half improvement, it seems like maybe what you're suggesting is that we could see flattish EBIT in the front half, which you're already kind of guiding to on the first quarter and then EBIT up in the second half to potentially EBIT up for the year. Are you willing to kind of less that?

Jeff Lorberbaum:

This is a comment as the -- if the business picks up as historical with remodeling, the mix also improves because they sell better products to home homeowners.

Joe Ahlersmeyer:

Right. This was actually my second question on the shutdowns because it feels like you've had if we are just looking at the back half, that the most recent two back half they are sort of negative on negative, and the way I've always understood this is there are positives once you lap them. So if you're getting volume growth and you're lapping these that would kind of be a double positive. But just wondering kind of the timing around decision to improve production. Do you have to do that in anticipation of the improvement in demand in the back half, or is it more flexible for you?

Joe Ahlersmeyer:

All right. Understood. Thanks. Good luck, guys.

Operator:

And our next question today comes from John Lovallo with UBS. Please go ahead.

James Brunk:

So if you look from a segment perspective in the first quarter, we believe Flooring North America margins should improve from last year with increased productivity and lower costs, some of which coming from the restructuring actions. Ceramic and Flooring Rest of World are more impacted by a lower mix or a weaker mix and lower volumes with Flooring Rest of World being impacted more given so much of its market right now is in Europe and lower prices and wood panels and the laminate categories compressing margins.

James Brunk:

Are you speaking of just in the first quarter versus the prior year?

James Brunk:

So fourth quarter -- why don’t you…

James Brunk:

Follow-up on that one.

Jeff Lorberbaum:

We haven't decided to do it yet. We can change whenever we determine at the short-term, we still see uncertainties in difficult financing conditions. We decided to pay off $900 million of debt in the first quarter. So we haven't decided to -- again, buying back stock at this moment.

Operator:

Thank you. And our next question comes from Laura Champine with Loop Capital. Please go ahead.

Jeff Lorberbaum:

So, the -- in the Flooring North America, the earnings did improve from lower costs, offsetting pricing, restructuring as well as productivity gains in the period. Then we continue to invest in all these different marketing activities and new product collections to drive business. We think it's going to carry over into the first quarter and continue on with the margins.

Laura Champine:

Got it. But any more granularity you can give me on how much the negative impact was on the acquired revenues to the margins in Q4?

Laura Champine:

Got it. Thank you.

Matthew Bouley:

Hi. Good morning. Thank you for taking the questions. Just zooming into Global Ceramic, obviously, price cost was positive for the entire enterprise, but it was still negative in ceramic. Any color on how you're expecting price versus cost to play out sequentially into Q1 in ceramic? Thank you.

Jeff Lorberbaum:

And I would say sequentially, so from -- if that's what you're seeking in, from Q4 to Q1, I think you've seen a lot of that [bottoming] (ph) out, and it should actually slightly improve again sequentially.

Jeff Lorberbaum:

So, we focused in the restructuring actions late over the last 18 months of trying to take out high cost assets, aligning our capacity, and implementing other lower cost processes really across all three of the segments. Collectively, there are about $150 million of cost reductions that we should garner from these actions. Almost half of that has been realized in 2023. So, you get the remaining portion to flow through 2024. Of course, you're seeing some of that in 2023 being offset by other factors. We'll continue to evaluate the current situation and take actions as necessary to continue trying to drive improved results.

Operator:

And our next question today comes from Kathryn Thompson with Thompson Research Group. Please go ahead.

Jeff Lorberbaum:

Let's start out with all the businesses are underutilized the capacities that we have. So, the goal is to drive the utilization of the present product categories and operations that we have as the business improved. On the other ones -- on the other product that we're investing in are the areas where before we went into this slowdown that were more constrained, and we're investing in those. Those include the LVT category, which we've -- in the process of changing the plants over and they should be filled up as we go through this year. We're introducing a new LVT renewable polymer core structure, that's going into the marketplace and being well accepted. In laminate, we're introducing new technologies and acoustics and durability to improve the use of those assets. Ceramic, we've putting products in that have differentiated color intensity, textures and three dimensional surfaces. Countertops -- but it's in every product category. So, the main objective is to use the assets that we own and drive them up as we go through. On the acquisition side, there are no pending acquisitions sitting at this moment that we're ready to close, is that we're always in the market to look at opportunities. But there's a large difference between buyers and sellers at the moment, which we discussed before. So, there's nothing immediate waiting to be closed at this point.

Jeff Lorberbaum:

The -- was that an acquisition question or an investment question?

Jeff Lorberbaum:

We just -- in Latin America, we completed two acquisitions. They are basically fully integrated. And so, there's nothing more to do in those. Those managements are taking care of those. We have a number of bolt-on acquisitions that we're finishing up and improving that we haven't got all the benefits across the world, which we've gone through at earlier points. Those are going through. We really don't have a specific piece that we need to drive. I guess, if I had to pick one, we have our insulation business, which the insulation business is growing. So, I would say that investing in additional assets in it would be done sooner than other ones to expand capacities in an additional area. And then on the acquisition side, it's really more where do we find the right acquisition that fits in with a business. We prefer bolt-on ones, because of the advantages you get by putting them together. But we would go into new geographies if we found the right product and the right management to drive it.

Jeff Lorberbaum:

Thank you.

Adam Baumgarten:

Hey, good morning. Just, Jeff, to confirm, do you expect residential markets to outperform commercial in 2024? And if that is the case, would that have a negative impact on mix and maybe margins?

Chris Wellborn:

You have to remember, Adam, when you say residential is kind of split, right, new construction, and remodeling as we've talked about as consumer sentiment improves, you should -- that leads to higher remodeling, more higher ticket items, which then leads to enough mix for our business. So that can be -- that can also help.

Jeff Lorberbaum:

The whole category is under pressure as the volumes have dropped. As you would suspect in each category, the more commoditized products have more pressure than the differentiated ones. The carpets under pressure with both pricing and mix. The LVT prices have declined as the prices -- the import prices have come down, and there's also less volume being sold in the categories. So those might be a little worse than the others.

Jeff Lorberbaum:

Thank you.

Rafe Jadrosich:

Hi, good morning. It's Rafe. Thanks for taking my question. I wanted to ask if container rates have moved up recently? I'm wondering is that helping your business or reducing competition either in Europe or the US? And if container rates were continue to rise could that lead to less pricing competition on the LVT or ceramic side?

Rafe Jadrosich:

If container rates stay where they are today for the next quarter or two quarters, do you think that would start to have an impact to pricing and you'd see some price either stabilization or actual improvement?

Rafe Jadrosich:

Great. And then where do you compete most against imported product? Is that in the US, or is that in Europe and the context is, obviously, with some of the disruptions in the Red Sea? Does that, like could you Europe business start to benefit from fewer imports from Asia?

Rafe Jadrosich:

Thank you. Very helpful.

Jeff Lorberbaum:

Thank you very much. We appreciate your interest in Mohawk. We believe we are well-positioned for the recovery that's going to come in the United States. Thank you for joining the call. Have a good day.

Operator:

Good morning, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to Mohawk Industries Third Quarter 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, October 27, 2023. Thank you. I would now like to introduce Mr. James Brunk. Mr. Brunk, you may begin your conference.

Jeff Lorberbaum:

Thank you, Jim. In the third quarter, our net sales were $2.8 billion, down approximately 5.2% as reported or 8.1% on a constant and legacy basis, in line with our expectations as our industry faced continued pressures across all regions primarily due to constrained residential investments and tightening of consumer discretionary spending. Our adjusted EPS for the quarter was $2.72 with our margins across the business benefiting from cost reductions, productivity initiatives and lower input costs. Our third quarter performance was seasonally impacted by vacations in Europe, which reduced our sales and earnings versus the prior quarter. Our lower material and energy costs offsets the decline in both price and mix. We also faced FX headwinds of approximately $20 million on operating income or $0.25 on EPS. We are managing our working capital and generated strong free cash flow of $385 million in the quarter and $660 million on a year-to-date basis. 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 remodeling 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 deferring large purchases such as 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 are deferrable. 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 partially offset by lower material and energy costs, restructuring benefits and process improvements. Expected 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 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. 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 the general management, sales and administrative functions while enhancing the company’s 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. In September, we released our 14th Annual Sustainability Report and for the first time we provided Scope 3 emissions. Institutional Shareholder Services is right Mohawk is one of the top companies for environmental quality in the durable goods and apparels category. We have significantly exceeded our 25 goals related to decarbonization, waste reduction and water conservation. We are lowering our carbon footprint by using more recycled content, increasing our green energy production and expanding our product circularity. We recently received the Susan G. Komen Promise Award for our two decades of partnership in the fight against breast cancer. We have also formalized a Board of Directors selection policy as part of our ongoing commitment to diversity. To learn more, you can read the report online at mohawksustainability.com. I will turn the call over to Jim for a review of our third quarter financial performance.

Chris Wellborn:

Thanks, Jim. In Global Ceramic, our business outperformed due to our innovative product introductions and higher service levels. With this, we expanded our positions in the new home construction and commercial channels. Residential remodeling was slower due to lower home sales and postponed projects. Our investments in new decorating technology, polishing and mosaics are providing domestic alternatives to premium imported ceramic. We are expanding our sales to regional builders, as well as kitchen and bath retailers with our coordinated tile and countertop collections. To further expand our quartz countertop sales, we are introducing more stylized collections, utilizing tech -- new technologies that provide greater value. We have lowered our distribution cost by shipping more product directly from our plants and bypassing our regional warehouses. In our European Ceramic business, retail traffic and new construction are being affected by economic uncertainty. In Southern Europe where our business is concentrated, the economies are under greater pressure. Across all channels, low industry volume is creating more intense competition and we are responding with specific price promotions by geography and channel to gain additional sales. Natural gas prices have declined by 80% from their peak and we have reset our pricing to align with energy costs. While volumes have declined across most product types, sales of our premium porcelain slabs continue to grow and we are optimizing our recent capacity expansion. We continue to adjust inventory and production to align with changing market conditions. To contain cost, we have increased productivity, reduced overhead and implemented alternative formulations. In Latin America, we have reduced our cost structures to adapt to slower more competitive markets with Mexico being less affected. Our margins are being impacted by lower industry pricing, partially offset by declining energy costs. Inflation in both Mexico and Brazil is receding and central banks are beginning to lower interest rates in response with further reductions expected this year. We are integrating our acquisitions in both countries and making significant progress in executing our sales, product and manufacturing synergies. To increase our distribution, we are gaining customer commitments to expand sales across all channels and price points using the combined product portfolio. In each country we are utilizing the assets of our legacy business and acquisitions to broaden our product offering. We have completed the information systems conversion in Mexico and the system consolidation in Brazil will be completed by the end of the year, enabling further operational improvements. In Flooring Rest of World, our margins benefited from declines in energy and raw material costs, partially offset by lower price and mix. Sheet vinyl continues to outperform other categories as it provides a lower cost alternative and we have increased production to meet higher demand. With operational improvements underway, our Eastern European sheet vinyl acquisition is delivering higher style products and increased sales. 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 our results. We are pursuing additional flooring sales, reducing costs and aligning production with demand to manage the current conditions. Our panels business has slowed due to a decline in remodeling activity, construction projects and industrial demand. Lower industry sales are affecting both our selling prices and volumes. Our material costs are declining and we are also benefiting from improved productivity and green energy production. Sales of our higher margin HBO collections are growing as our customer base expands. Our sales and operational synergies are progressing in both our board and mezzanine acquisitions. Our insulation business position is positioned for longer term growth as governments require greater energy conservation for new construction and remodeling. Insulation is less impacted than our other product categories as consumers and businesses invest to minimize their energy costs. Industry pricing has declined, along with input costs with regional variation caused by new plants coming online. In the third quarter, our volume improved and our margins were in line with the prior year. In Australia and New Zealand, the industry slowed during the quarter and our sales in both countries were down slightly. Our results were impacted by mix pressure in the residential channels as consumers sought lower cost flooring options to maintain their project budgets. To increase sales and protect our margins, we are introducing enhanced collections across fiber categories, elevating the market of our high-end products and implementing targeted promotions to meet evolving demand. Commercial sales in New Zealand remains strong and our broad product offering is helping us secure larger specified projects. In our Flooring North America segment, pricing and mix were under additional pressure as competition increased across all product categories. The impact on our results was partially offset by lower input costs, restructuring and productivity initiatives. To expand our retail presence in all flooring categories, we continue to invest in both products and merchandising systems. We are increasing our participation in the new home construction channel with regional and national builders. Across the segment, we are implementing many projects to reduce costs, improve efficiencies and maximize material utilization. We are reengineering products with alternative materials and increasing recycled content. We have completed many of our restructuring initiatives to lower our cost and better align with current conditions. In residential carpet, to improve our mix, we are expanding our premium collections, which provide superior styling and features for the more discerning consumer. For the value conscious homeowners, we are increasing our environmentally-friendly recycled polyester offering. We have completed the integration of our non-woven flooring acquisition and are expanding their customer relationships. In resilient, our sheet vinyl collections continued to perform well as a preferred choice for budget oriented consumers. As an alternative to PVC-based products, we introduced a new resilient polymer core that is more environmentally-friendly and scratch resistant. In the third quarter, our imported LVT sales were disrupted by U.S. customs actions and to satisfy customer orders we substituted higher cost alternatives. We anticipate an increase in LVT inventories in the fourth quarter to improve service. We are continuing to ramp up our West Coast LVT production and the new extrusion process in Georgia. We anticipate both projects will be substantially operational in the first quarter. In addition, the proprietary technology we are implementing in these plants will enable us to introduce unique styling and features to the market. We are expanding our distribution of laminate in the retail and builder channels, our RevWood collections are being more widely accepted as waterproof flooring alternative with superior visuals. Our new laminate product launches have been well received as consumers seek premium visuals at accessible price points. We are offering selective promotions to improve volumes in a soft market. Our trim and stair accessories business is growing as we broadened the range of our re-patented products across all channels. Though U.S. commercial activity slowed in the quarter as financing became more difficult, our commercial performance is holding up better than residential, led by the hospitality sector. Our carbon-neutral product collections with industry-leading recycled content provide superior performance and design options to architects and designers. Our EcoFlex ONE carpet tile technology is gaining rapid adoption in the specifier community due to its acoustics, comfort and ease of installation. We are expanding the sales and distribution of our recent flooring accessories acquisition through our existing commercial partners. Our business development group has leveraged our product and service advantages to cultivate new relationships with major retail, healthcare, senior living and real estate development customers. I will return the call to Jeff for his closing remarks.

Operator:

[Operator Instructions] Our first question today comes from Matthew Bouley from Barclays. Please go ahead with your question.

James Brunk:

Thank you, Matt. Yeah. Let me frame that. So the cost started gradually falling in late 2022 and it takes usually three months to six months to flow through our P&L. In Q3 and I will provide some numbers here that will also be in our 10-Q, lower costs led by material and energy totaled $112 million, offsetting the weaker price mix of $106 million. Now sequentially, cost declined $65 million, exceeding the lower price mix of $29 million. In the fourth quarter, we would anticipate lower costs should continue to flow through the P&L.

Jeff Lorberbaum:

Well, the -- you are correct that the cost for gas has come down a lot, but in Europe, the business continues to face pressure with declining retail traffic and new construction. We are responding to conditions with promotions and we also have premium slabs continue to grow and we are optimizing our new slab line. We are also initiating restructuring actions to eliminate older assets and improve our cost and utilization. And then we will just have to see how the gas levels out, it’s definitely a lot lower than last year.

Jeff Lorberbaum:

Thank you.

John Lovallo:

Good morning, guys. Thank you for taking my questions. Maybe just following up on Matt there, did the lower material and input costs offset the declines in price mix across segments in the quarter. I am more curious, I guess, about Global Ceramic there specifically. And then as we move into the fourth quarter, how should we think about margins by segment, is there anything outside of normal seasonality that we should consider there.

John Lovallo:

Got it. And then any factors we should consider on margin in the fourth quarter outside of sort of normal seasonality?

Jeff Lorberbaum:

The higher volumes in the quarter deleverage the margins as we pick up later, sorry, that’s not this quarter. In the quarter, you have got it right, I am sorry.

James Brunk:

It’s really timing. As we end the quarter, in terms of 2023 -- between 2023 and 2024, our focus continues to be investing and optimizing the future of the business with the growth investments that we have talked about really making up $200 million to $250 million. Of that maintenance CapEx would be another $250 million and then the balance of that budget for the year are on cost reductions, product innovation and acquisitions.

Operator:

Our next question comes from Joe Ahlersmeyer from Deutsche Bank. Please go ahead with your question.

Jeff Lorberbaum:

Good morning.

Jeff Lorberbaum:

We look forward at it or the flooring industry has actually been in a downturn since mid-2022. We believe that we are going to see an improvement in the middle of the year as inflation moderates and financing improves. When these occur we think consumer confidence will improve and the industry has started to get better. So we see the first half basically as a continuation of where we are with improvement as we go through the year and then depending upon how strong when it occurs, we will determine what the volume is versus this year.

Jeff Lorberbaum:

At the moment, there’s still a lot of economic uncertainty in the world. The financing conditions are still difficult, there’s regional conflicts that can affect everything. So we believe that at the moment having excess capacity is preferred. But we are continuing to review it and would consider buying stock as our visibility improves from where it is today.

Operator:

Our next question comes from Susan Maklari from Goldman Sachs. Please go ahead with your question.

James Brunk:

Good morning,

Susan Maklari:

Jeff, maybe just building off of Joe’s question, as you think about 2024, you are going to go into the year with some excess capacity. I know you mentioned that you think the market can improve in the middle of the year. But how do you think about the company’s specific efforts that you detailed in your remarks around cost cutting in new products and how those will be layered in over the course of 2024 and what they could mean for Mohawk?

Susan Maklari:

Okay. That’s helpful color. And then, as part of that, you have mentioned the macro in some of these markets, especially some of your newer markets is hopefully maybe taking a bit of a turn for the better next year. As you think about the opportunities in some of those areas and those categories, anything that is interesting to you that we should be thinking about over the next year and a half or so?

Susan Maklari:

Okay. Thank you for the color and good luck with everything.

Operator:

Our next question comes from Stephen Kim from Evercore. Please go ahead with your question.

Jeff Lorberbaum:

Well, the cyclicality is based on the -- they are really two things, one is, how sensitive we are to interest rates, and then the other part is, these high capital fixed cost that the industry, including our company, our competitors and we tend to move up and down trying to minimize these things. I think if you are going to stay in the industry it’s part of it as if. Now we are getting into other things like the insulation business that we are in Europe. It doesn’t have as much -- the fixed costs are much less for instance and the margins hold up better in it. So we are in different business and different categories that react differently today.

Jeff Lorberbaum:

For the first two years or three years after this thing is over, the pent-up demand for houses -- for housing, for improvements and remodeling that hasn’t been done, we don’t lose it, it just comes back later.

Jeff Lorberbaum:

Let’s start with the first part. The inventory levels are based on two things, one is what the market is and other is in our ability to respond. Given the low volume rates we are at presently, we have a significant upside in capacity to react to it and so we probably won’t build much inventory until we see it coming and then we think we have the ability to utilize the capacity that we already have to solve it to satisfy it as it goes up. On the other side, the different regions. I think that is possible, Latin-America will come out of this first and then Europe is a little hard to know. I would guess Europe may trail, the U.S. If I had to pick Latin-America may come out of it earlier, U.S. in the middle and maybe Europe a little later, would be my present guests, but we will have to see how it evolves.

Stephen Kim:

Okay.

Stephen Kim:

Okay. Yeah. It makes sense. Thanks very much guys.

Keith Hughes:

Thank you. Question on the -- you changed your LVT product rigid to direct expansion, in terms of the direct extrusion. Can you talk a little bit more about that, what kind of cost savings and how long it’s going to take to do the conversion?

Keith Hughes:

And it -- will this change all of your rigid LVT production to this method versus the partial conversion?

Keith Hughes:

Okay. And does -- what -- does this drive just more efficient machine time or how do you get the savings from it?

Keith Hughes:

Q1. Okay. All right. Thank you very much.

Phil Ng:

Hey, guys. Energy prices have kind of bounced off the bottom. Are you starting to see any upward pressure on your input costs more broadly? I know it’s somewhat tied to oil, presumably there’s a lag. And have you started seeing your price mix in your different respective business stabilize here or there is still some pressure as we kind of look forward?

Phil Ng:

Okay. That’s helpful. And then a few more questions on LVT. With the investment you are making in extruding side and with Mexicali coming online early next year, how does your product stack up from a cost and quality standpoint versus imports coming out of Asia? And does your LVT manufacturing business now at this point, early next year stack up from a margin standpoint versus North American Flooring, is it accretive, neutral, still a headwind? How should we think about all those things?

Jeff Lorberbaum:

The pricing has declined substantially to import prices with both lower freight, as well as lower material costs. Our U.S. manufacturing costs are also coming down with it. We still have other things going on like service disruptions from China, given the U.S. in different pieces and so next year our margins should expand and we expect the profitability of the business to improve.

Phil Ng:

Okay. And some of the friction, you mentioned in terms of imports coming in from Asia, how does that position Mohawk, especially as you ramp up some of those domestic capacity. Is it a good guy or just broadly your cost goes up, because at the end of day, you are still importing from Asia, maybe not directly from China.

Phil Ng:

Okay. I appreciate all the great color. Thank you.

Andrew Harvey:

Hi, guys. This is Andrew Harvey on for Mike. Thanks for taking my question. I appreciate you guys show yourself in your press release. I just wanted to ask maybe from a pricing standpoint, any markets in particular that you have concerns for that prices will fall more significantly or maybe even vice-versa.

Andrew Harvey:

Thanks, Jeff. I guess in terms of lower input costs and energy costs, are you seeing any further sequential declines into next quarter and maybe any thoughts on next year and how quickly pricing has been aligning with energy crisis?

Andrew Harvey:

Thanks. I appreciate it.

Adam Baumgarten:

Hey, guys. Just one from me. Good morning. Just wondering if the recent [inaudible] carpet payment terms and the removal of some of the discounts you guys have historically had as an industry will have a positive impact on the Flooring North American segment going forward?

Adam Baumgarten:

Okay. Got it. Thank you.

Kathryn Thompson:

Hi. Thank you for taking my question today. Just focusing on the commercial end-markets, we looked at some resi focused stocks traded better on less bad news this year, early this year and then you have past for this week you had more commercial focused sewing manufacturer also trade up on less bad news in the commercial space, relatively less bad news. What are you seeing in terms of your pipeline of your business in North America with commercial end-market and what have you done to shift your business and focus towards certain end-markets that are performing relatively better than the traditional office and retail? Thank you.

Kathryn Thompson:

Okay. Yeah. I have a full understanding of the timing difference between residential and non-res, it was really -- it was helpful to some extent, but just we are getting a better understanding of that mix shift for you and now, certainly, importantly, what does it look like going forward because, for instance, we are having industry contacts you are saying, listen, we are starting to see projects being not just postponed, but canceled, but we are able to shift mix to adjust. One other follow-up question, as you have obviously made a lot of efforts over the past trailing 12 months to right-size operations and to make various restructuring charges, but stepping back and looking at the bigger picture, from a long-term standpoint what is the industrial logic for having the global footprint, as you mentioned, the business going forward. What’s the argument for keeping the global footprint as it is currently? Thanks very much.

Kathryn Thompson:

Okay. Great. Thank you.

Truman Patterson:

Hey. Good morning, everyone, and thanks for taking my questions. First, whenever I am looking at the fourth quarter EPS guidance sequentially versus 3Q, it implies a bit worse than normal seasonal decline. I am just hoping you could help us discuss from a high level, the buckets that got worse throughout the quarter that really led to that guide. And then also I believe you mentioned Brazil, Australia, but are there any areas, product categories, pricing, et cetera, where you are perhaps seeing some stability, if you will?

James Brunk:

Yeah. So sequentially, that gap that you are talking about, if you look back over time, from 2018 forward, you got mid-20% difference from Q3 to Q4. It’s a little bit more this year and in our implied in our guidance. And I’d say the additional shutdowns and the foreign exchange certainly are two headwinds that maybe a little bit unusual than prior years.

Truman Patterson:

Okay. Thanks for that. And then just wanted to follow-up on kind of a prior question. You all have been generating a lot of cash flow this year, $2.6 billion in debt. It seems pretty manageable. And Jeff, I think you mentioned earlier that, that, perhaps you might not step into share repurchase today. I am just hoping you could discuss potential for M&A, any geographies or product categories of focus, as well as how you might balance that with your own current valuation of your share price, balance M&A in lieu of share repurchases?

Truman Patterson:

Asked another way, any M&A deals flowing across your desk, are those valuations more attractive than your current valuation for Mohawk?

Truman Patterson:

Okay. Perfect. Thank you.

Laura Champine:

Thanks for taking my question. You called out in your press release the negative impact on Europe from the conflict in Ukraine. Can you give us more information on the Russian business, what are your plans for that and is that business a material hit to earnings this year?

Jeff Lorberbaum:

Remember, that’s -- Russia is less than -- all the Russian businesses together are less than 5% of our business.

Operator:

Our next question comes from Eric Bouchard from Cleveland Research. Please go ahead with your question.

Jeff Lorberbaum:

First is the pricing decreases are following the material costs, the material costs we believe are at a bottom. So we believe that will change the pricing from falling significantly more going forward. And then what was the other part of the question?

Jeff Lorberbaum:

I guess that -- we don’t have a crystal ball any more than you do. We are making the assumption that the present circumstances continue, we believe we have line of sight into the first quarter. After that, given the dynamics that’s going on in the world that anything could happen.

Eric Bouchard:

Okay. And then, secondly, the goodwill write-off is a component of that or I am just curious, the catalyst for this, is there some component of this relates to a reduced future earnings of the business or are there other dynamics that explain right after they start…

Eric Bouchard:

Okay. Thank you.

Rafe Jadrosich:

Hi. Thanks for taking my questions. That’s great. The first thing I wanted to ask, just what are you seeing in terms of industry capacity, particularly in the U.S. Are you seeing other competitors start to pull back in any of the segments or are you seeing any foreign competition continuing to add capacity?

Rafe Jadrosich:

Are you seeing any of the foreign competitors opening capacity in the U.S., is there any incremental capacity investments there and then are the domestic manufacturers reducing capacity on categories like carpet or hardwood?

Jeff Lorberbaum:

In ceramic one, probably, about 50% -- in excess of 50% is imported. So there is some of the foreign companies are opening some capacity here, which he is talking about. LVT would be similar to the same situation where there’s some of the ones have opened up capacity here, trying to find ways to optimize their service levels from where they are. And then some of the other product categories, there have been some capacities taken out of the industry.

Jeff Lorberbaum:

Not sure I have those numbers in front of me. The new construction, homebuilding, I think, it’s around 20%, 25% of our business. I don’t have the number in front of me, the multifamily piece.

Jeff Lorberbaum:

It’s either in the new construction number or it’s in the remodeling number as it gets replaced as we go forward.

Jeff Lorberbaum:

Multifamily typically is lower. They typically use lower quality products than the single-family home construction. On the other hand, the multifamily gets replaced much more frequently, typically after they change over tenants in it. It depends on where they are and what it could be replaced every few years where the home newbuilding could be a seven-year to 10-year cycle. So there’s a big difference in replacement cycles, as well as the quality of products going into each.

Jeff Lorberbaum:

The other thing you mentioned the multifamily, the new starts are coming but the typical multifamily takes minimum of a year and a half and could be two and a half years to finish. There is a huge number of projects that are coming through that haven’t been finished yet and our product category is last one to go in.

Rafe Jadrosich:

Okay. Got it. So there’s still a backlog there.

Rafe Jadrosich:

That’s very helpful. Thank you.

Operator:

And ladies and gentlemen, at this time we will be concluding today’s question-and-answer session. I’d like to turn the floor back over to Mr. Lorberbaum for closing remarks.

Operator:

And ladies and gentlemen, with that we will conclude today’s conference call. We thank you for attending today’s presentation. You may now disconnect your lines.

Operator:

Good morning, my name is Alan and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries’ Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions]. As a reminder, ladies and gentlemen, this conference is being recorded, today Friday, 28 July, 2023. I would like now to introduce Mr. James Brunk. Mr. Brunk, you may begin your conference.

Jeffrey S. Lorberbaum:

Thanks, Jim. Mohawk’s second quarter net sales were $2.95 billion, down approximately 6.4% as reported or 9.6% on a constant and legacy basis, primarily due to continued pressure on residential remodeling across all of our regions. Our adjusted EPS was $2.76, as our margins across the enterprise expanded sequentially due to seasonal improvement, increased production, productivity initiatives and lower input costs. We generated over a [$145 million] (ph) of free cash flow during the quarter, further strengthening our financial position. Typical of housing recessions, higher interest rates and inflation are significantly impacting flooring sales around the world. To manage, we are selectively investing to increase sales and reducing expenses by enhancing productivity, consolidating distribution points and improving administrative efficiencies. In the quarter, we initiated restructuring and integration actions that will save $35 million annually at a cost of approximately $17 million. We anticipate approximately half of the estimated savings should be realized in the current year, partially offsetting the weak residential remodeling activity. In addition, we are limiting future capital investments to those delivering significant sales, margin and operational improvements. In all our regions, we are taking actions to increase sales, including promotions, retailer incentives and selective product launches. The integration of our recent acquisitions is progressing, as we combine strategies and enhance their manufacturing and product offering. While managing lower market demand, we're preparing for the rebound that historically follows cyclical declines in our industry. Our LVT, premium laminate, quartz countertop, porcelain slab and insulation, manufacturing expansion should deliver the greatest growth as the market recovers. Across our regions, we continue to see stronger results in the commercial sector than in residential. Residential remodeling remains the industry's greatest headwind due to lower home sales and deferred improvement projects. We believe channel inventories have declined and could be at a bottom. Price competition is increasing with declining industry volume, mix and input costs. In the U.S, the housing markets remain under pressure due to limited supply, high interest rates and continued inflation. Existing homeowners are not moving at historical levels to maintain their low mortgage rates. In Q2, new home starts increased to 1.45 million, showing the first quarterly increase since the beginning of last year. We believe the trend in housing starts will continue and will positively impact flooring shipments in the future. In our regions, home sales and remodeling are also declining due to inflation and interest rates. In Europe, energy prices have continued to climb though persistent inflation in other categories is limiting consumer remodeling. In the quarter, we benefited from the lower energy prices that flowed through our P&L. Our investments in biomass, solar and wind energy production reduce our operational expenses and carbon footprint, positively impacting our performance. During the second quarter, the Italian government provided energy subsidies at a reduced level, and the program will not be continued. In May, USA Today write Mohawk is one of America's businesses that made the greatest reductions in the global emissions over the past three years. Mohawk was the only flooring company recognized reinforcing our position as a global leader in sustainability. Earlier this month, we announced that Bernard Thiers, will be stepping down as President of Flooring Rest of World next year, and will continue with the company in a Senior Advisory role to support a smooth transition. Bernard has made many important contributions to the success of the business since we acquired Unilin in 2005. He has led the Flooring Rest of World segment for the past 14 years, and delivered profitable growth by expanding our product offering, entering new geographies and bringing new product innovation to the market. I'm proud of the exceptional team that, Bernard, has assembled across this segment. Wim Messiaen, will be joining Mohawk in October after he completes his contractual notice period. He'll become, President Flooring Rest of World, on February 1. Wim has more than 30 years of leadership experience with multinational packaging, building products and flooring manufacturers in Europe, Asia and Australia. He has considerable experience driving both growth organically and through acquisitions. Wim will complement our strong leadership team with a passion for innovation, strong customer focus and a commitment to sustainability. Jim, now cover our financial performance for the second quarter.

Christopher Wellborn:

Thank you, Jim. Our Global Ceramic segments result improved from the first quarter with increased sales, higher production and lower energy costs. Around the globe, high interest rates and inflation are reducing housing sales and remodeling investments to varying degrees based on local conditions. We believe that most of our customers have now aligned their inventory levels with market conditions. Our asset utilization remained low with compressed demand and we further reduced our inventory and working capital. Our P&L benefited from lower materials and energy flowing through the inventory. This reduction was partially offset by greater market competition and lower mix which impacted our selling prices. While energy costs around the world have substantially decreased, they continue to be highly volatile. And our acquisitions in Brazil and Mexico, we are realigning the organizations, defining new sales and product strategies and executing cost reductions. Our U.S. Ceramic business benefited from a greater participation in the commercial and new construction channels, enhanced styling and more consistent service. As energy and freight cost decline and industry volumes weaken, the market is becoming more competitive. We are introducing higher style products to improve our mix, and are focusing on stronger sales channels. We've expanded our customer base, which is helping to offset the weakness in residential remodeling. In the quarter, we further reduced our inventory while maintaining high service levels. The decline in energy prices will improve our cost as it flows through our inventory. We have taken cost reduction actions in response to increased competition and other inflation. As we prepare for the start of the additional countertop capacity, we are enhancing our product portfolio, and expanding our kitchen and bath channel with complementary tile and countertop selections. Our ceramic business in Europe remains under pressure as residential remodeling remain slow. Our volumes in the quarter improved sequentially, and our results benefited from sales of premium residential collections, commercial products and exports. Competition is becoming more intense in all channels due to low industry volume and declining energy cost. We are adjusting to the changing environment and using promotional activities to deliver additional volume. To utilize our new porcelain slab capacity, we are broadening our portfolio with innovative visuals and will manufacture products we have been outsourcing. We continue to focus on cost containment, including overhead reductions, productivity projects and alternative formulations. As with our other regions, our Latin American Ceramic businesses are also being pressured by higher interest rates, which have compressed residential remodeling. We are making progress integrating our existing businesses and new acquisitions, and we have begun to leverage sales of our total product portfolio to expand our distribution. The combined synergies we are realizing are partially offsetting the weakening market conditions. By the end of the year, we should complete the migration of our acquisitions onto our existing information systems, which will facilitate further sales and cost opportunities. Of the two regions, Mexico is performing better due to the economy and lower interest rates, while Brazilian Ceramic Industry is now being more impacted by economic conditions after holding up longer. We are taking additional sales and operational actions to manage the softening environment. The Brazilian government has recently announced that it will subsidize low interest rate mortgages to support new home construction and help the economy. Our Flooring Rest of World segment continues to successfully manage a difficult environment. Consumer spending has not improved as we expected, confidence remaining low given inflation, higher interest rates and the war in Ukraine. Sequentially, our sales volume and production rates improved from the first period. With low manufacturing utilization and declining input costs, industry pricing and mix continues under pressure. During the quarter, energy and raw material cost declined, partially offsetting weakening conditions. To manage lower volumes, we're pursuing additional sales, reducing costs and aligning production with demand. The segment's third quarter is seasonally impacted by extended vacations which will reduce our sales and earnings in the period. Our flooring sales are under pressure our sheet vinyl collections are outperforming as consumers trade down to lower price alternatives to minimize project costs. To meet rising demand across our regions, we are increasing our sheet vinyl production. The integration of our Eastern European sheet vinyl acquisition has significantly progressed. We have enhanced its offering with higher performance products, sped up its operations and added another manufacturing shift to support growing volume. We are managing production of laminate and LVT to align with present demand and are introducing new products, merchandising and specific promotions to expand sales volumes. We have begun to transition our residential LVT offering from flexible to rigid cores and are executing the previously announced restructuring to support this conversion. In our panels business, fewer projects are being initiated and industrial use has decreased due to slower market conditions. We are increasing sales of our higher margin decorative HPL products as we expand our customer base. Our plant utilization remains low and our selling prices are declining, partially offset by lower material costs, improved productivity and our green energy production. We have made considerable progress integrating our small board and mezzanine acquisitions including enhancing their operations, aligning sales strategies and combining administrative functions. Long-term prospects for our insulation business remain strong, supported by increasing energy conservation and government regulations. Presently, demand is declining as residential and commercial investments are being deferred and new industry capacity is increasing competition in some of our markets. Industry pricing is declining as input costs fall and we are reducing expenses to adjust market conditions. Similar to our other regions, the Australia and New Zealand housing markets have softened due to inflation and higher interest rates. Our results for the quarter were impacted by lower volumes and mix in our residential channels, and we are introducing new products and selective promotions to increase sales volume. Our commercial sales in New Zealand were stronger and we are leveraging our innovative collections to capture larger projects. Our Flooring North America segment has faced the same challenging conditions, as inflation high interest rates and more conservative lending practices have impacted the U.S. housing market and our industry. As we anticipated, the segment's margins sequentially expanded in the quarter due to seasonality and lower costs flowing through the inventory. To control cost, we have enhanced productivity, streamlined administrative functions and initiated restructuring actions. With weak residential remodeling and softer mix, retailers continued to tightly manage their inventory levels, further impacting demand in the quarter. With energy and raw material cost declining, market competition is increasing. New single family home starts have begun to increase with some builders subsidizing interest rates to attract buyers. In retail, we are providing new product options to trade up consumers and value alternatives for those with budget constraints. To increase sales, we're initiating selective promotional activity, enhancing our product offering and introducing more consumer friendly displays. The U.S. commercial sector has proven more resilient as businesses continue to invest in new construction and remodeling projects. The July Architectural Billing Index reflected a stable environment for new projects. We are experiencing some mix pressure in commercial, as customers seek to maintain budgets. The Hospitality and Main Street channels performed best in the quarter and we are expecting our participation in the Healthcare channels. Our unique products which are certified carbon neutral are growing as they deliver superior performance with a negative carbon footprint. Our commercial accessories acquisition is performing well as we leverage our relationships to enhance its product sales. Mohawk is the leading producer of premium laminate due to our more realistic visuals and waterproof performance. We continue to see a broader adoption of our RevWood products in both retail and builder channels. We have increased the offering of our revolutionary Signature Technology, which enhances the richness of our Pergo and Karastan collections. We are aligning production with current conditions, implementing cost reductions and managing pricing and mix to optimize our results. In residential carpet, we've seen a sequential improvement in sales and production along with the decline in input costs which improved our margins from the first quarter. We have enhanced our luxury Karastan and Godfrey Hirst collections and are providing retailer incentives to grow volumes. Our expanded solution-dyed polyester carpet portfolio is increasing our position with multifamily developers and single home builders, negatively impacting our product mix. We have integrated our recent non-woven acquisition and are improving its sales and operations. With the decline in ocean freight costs, market pressures for LVT are increasing and the U.S. Forced Labor Protection Act is impacting some shipments. Higher cost inventory reduced our margins as we adapted to the changing market. Our new rigid LVT introductions with updated visuals, WetProtect and antimicrobial technologies differentiated us in the market, and our sheet vinyl sales rose as consumers selected more affordable options. Our West Coast LVT plant will continue to ramp up throughout the rest of the year. With that, I'll return the call to, Jeff.

Operator:

[Operator Instructions]. Your first question comes from Philip Ng of Jefferies. Go ahead.

Jeffrey S. Lorberbaum:

I guess as you look at the cycles, what happens is, as we go through these downturns, all the activity is postponed. Our product category of flooring nothing has to be replaced as it -- from either breaking or anything else. So, when people get uncomfortable, it gets postponed. This cycle though, is not really typical of the other ones, as you go through. What we believe is that, when central banks change to a more balanced approach, you'll see all the pent-up demand from these postponed purchase is coming through, and that will expand the volume. At the same time, the mix improves. As retail increases, the retail channel tends to have higher margins because customers pick higher value products and it's most affected now. So as that terms you get an increase in it, And then the use of the asset goes up and reduces the cost per unit and the margins expand at the same time. This time, we think also that our new investments and expansion will allow us to increase the categories of the business that are growing the most. And we should see, acquisitions help us position us, as we come out of this because we should have them integrated about the time the thing starts coming together. So, we're optimistic about the long-term.

Jeffrey S. Lorberbaum:

We're hoping it's at a bottom, is that consumers when they have inflation and they start to manage their budgets, again, our category is more postponed-able the most. So, we're hoping it's going to get better, but I can't say that we've seen it yet.

James F. Brunk:

Yes. If you look at also the sales inventories in the channel, across our region, customers did reduce inventory, and did become more conservative. We believe most channels have largely aligned with the current conditions.

James F. Brunk:

So, from a year-over-year perspective, you heard that certainly inventory is down for the quarter. What is key to us is sequentially from Q1 to Q2, the inventory decreased about $110 million, about 60% of that was volume and 40% was the lower cost. We do anticipate further inventory decreases this year, certainly depending on demand and inflation, but what we're doing is we're keeping the inventory low you get better churn and the plant operations, which helps with that unabsorbed overhead.

James F. Brunk:

Yes, if you look at, you’ve to consider the seasonality as well. So, you have certain shutdowns in the third quarter mostly associated with Europe and the shutdowns. And then obviously in the fourth quarter, you will also have a shutdown associated with holidays. Now, in the fourth quarter though, we would expect that the shutdowns would be less than in the prior year.

Operator:

Our next question comes from Keith Hughes of Truist. Go ahead.

Jeffrey S. Lorberbaum:

We had expected when we came out of the first quarter that the decline in energy prices which was a huge burden on the consumer that we had expected it to come down and that consumer would be positively impacted. At this point, we haven't seen the demand in flooring reflect that. Like here, there are more vacations being taken and other things experiences they're doing. But in our category, we haven't seen an improvement yet.

James F. Brunk:

So Keith, if you kind of step back sequentially, if you look Q1 to Q2 inflation or deflation, was about $55 million from Q1 to Q2, which offset the reductions in price and mix of about $36 million, which helped us expand the margins as the cost declined. Now I would expect to see as we go through the second quarter to third quarter also that same phenomena of lower input costs, lower inflation helping offset the price mix again from a sequential standpoint.

Operator:

Our next question comes from Eric Bosshard of Cleveland Research. Go ahead.

James F. Brunk:

Yes. Sequentially is what I was focused on is from Q1 to Q2, you saw that from Q2 to Q3, we expect the same to occur. Again, that sequentially, it's very -- yes, it's an interesting year where you looking at sequential changes are actually more important. You can see the flow through quicker at the lower cost material and energy offsetting the pressure on price mix.

Jeffrey S. Lorberbaum:

I mean, it's being caused by the low utilization rates, in a different depending on geography and product category. To remind you, the industry, all the different pieces are tend to be highly capital intense with high fixed cost. So, the participants tend to try to maximize volume to cover the overhead. With the energy and material arc declining, and we're tending to pass through the majority of that to the customers. At the same time, you have a mix change that's going on. As we've said before the retail, has higher margins and as the retails declining more, it's impacting the margins and average prices as well.

Jeffrey S. Lorberbaum:

I guess, to begin with, we're hoping that the demand is maybe at a bottom for the cycle. But as you said, the cycle is not exactly typical of prior ones. Unusual to have the employment remaining strong and our category be so pressured which it is this time. The whole housing market is totally different than prior ones. And so you see right now, the housing is starting to -- the new starts are going up. It's going to take four to nine months for us to see that depending upon which house and how long it flows through before we see that. On the longer term side, when people's confidence, historically the consumer confidence is also a good indicator of when they start spending more money, because as that goes up, they'll start taking these postponed projects that they have and doing them. So far, the commercial is still holding up. We're assuming it's going to weaken as we go through the fall, but we'll have to see how it goes. So, far the index of the billing index for architects doesn't show it declining yet, but we're anticipating it's going to get weaker.

Operator:

Our next question comes from Susan Maklari from Goldman Sachs. Go ahead.

Jeffrey S. Lorberbaum:

Good morning, Susan.

Jeffrey S. Lorberbaum:

Yes, I think Jim and I think both of us do that one for you. In the third quarter, everybody didn't look like they built in the European decline that we always have and given the vacations they take, our volumes over there drop and our margins drop as well. We expect lower industry volumes will continue pressuring pricing and mix across the whole industry. And at this time, we're not building in any catalyst for remodeling to improve. At some point, it will, but we don't have it in any of our expectations at this point. The period will continue to benefit from lower material and energy costs as well as our restructuring actions. We're going to keep controlling the inventory relative to the demand. We've talked a few times about the retail margins impacting our mix. And then we also think that the currency change have been going on. It could have an impact of another $5 million to $15 million just in the currency changes. Jim, you want to sort of give her between the different segments?

Susan Maklari :

Okay. That's very helpful color. And then perhaps as we think about 2024, as that approaches understanding that it's hard to understand where the global macros will go and some of these demand factors. But when you think about all the cost actions that you have taken across the business in the last call it three or four years, you think about some of the capacity changes that you've made in there as well. Any thoughts, Jeff, on how the business can perform across the different end markets and segments that you have at some sort of level?

Susan Maklari :

Okay. Thank you for the color, Jeff, and good luck with everything.

Operator:

Our next question comes from Laura Champine from Loop Capital. Go ahead.

James F. Brunk:

No. Energy has started to come down. So, what you're seeing in the third quarter is the flow through of the higher cost inventory that we had.

James F. Brunk:

I think most of it will be finished through this, after the third quarter.

James F. Brunk:

Well, we're very focused on investing to optimize the future of the business. The growth investments that we talked about, they make up about, almost about $250 million of the 2023 budget depending on timing. Maintenance CapEx for the business is roughly $200 million to $250 million as well. Now we're also focused, the balance really is on the quick kind of return projects on cost reductions, our focus on product innovation, and then also some projects on acquisitions. What we were speaking about is now looking forward into next year about being very, I guess, diligent looking at the CapEx budget for next year.

James F. Brunk:

Yes, it's a little bit early, but we're working with all the teams as we speak.

Operator:

Our next question comes from Truman Patterson with Wolfe Research. Go ahead.

Jeffrey S. Lorberbaum:

Sure. So in the U.S., you have which -- the declining import prices, which affect both LVT and ceramic. So, those are moving down and we're adjusting as we have to do those. Some of that is impacting our margins as we have higher cost inventory. In our European business, our ceramic businesses had been at very low levels to the marketplace, is getting very aggressive trying to run the assets that are there. So, the market pricing there is under pressure. And, our flooring business in Europe, it's more of a mix problem than a pricing problem. On the other hand, you have growth in the lower cost product categories. So, we're putting people down rather than lowering prices. And then our panels and installation businesses tend to go up and down with the material and energy prices and those are being passed through as they occur.

James F. Brunk:

Well, in Flooring North America, similar to the other segments, from Q1 to Q2, you're absolutely right. We started to see sequentially the benefit of the lower costs coming through not only raw materials, but in energy as well. In our view of Q2 to Q3, we still see some of that maybe a slower pace sequentially, but you still get a benefit we’re lower cost and raw material, energy and also freight, as you look in the U.S. as well. So, those are the assumptions around Flooring North America.

Operator:

The next question comes from John Lovallo of UBS. Please go ahead.

James F. Brunk:

Yes. So, John, you kind of asked two different time periods there. So, let me tackle sequentially first. So again, sequentially, from Q1 to Q2, we benefited where you had lower cost versus the impact of lowering price and mix. I would expect a similar occurrence albeit, maybe a less impact, but similar occurrence in Q2 to Q3 and also in Q3 to Q4. Again, that's sequentially. Now year-over-year, you're absolutely right. What we've said is that, we have a tailwind in the back half of the year, again, year-over-year from lower materials and lower energy. But price mix and the pressure on both will continue in the third and fourth quarter. A gap from a year-over-year perspective will close by the end of the year, but it will still exist, premise from a little bit.

James F. Brunk:

Now, these actions are really focused around headcount reductions, as you said, in both administrative and manufacturing functions along with some consolidation of distribution points. So, most of that cash is, will occur in the third, fourth quarter of this year.

Operator:

Our next question comes from Michael Rehaut of JPMorgan. Go ahead.

James F. Brunk:

If you're speaking about it from a year-over-year perspective, that is a correct statement. The benefit and the lower cost compared to the pressure on price and mix that differential will lessen. We anticipate as we move through the balance of the year. That's why Mike, I think, sequentially is so important to look at because you see more in real time the benefit of the lower cost offsetting the impact of price mix.

James F. Brunk:

Well, Mike, it really, first of all, it depends on that demand cycle, what we talked about from a fourth quarter perspective, yes, you'll have seasonally lower production with Christmas vacations. The industry volume though maybe at a bottom, though pricing pressure could continue. Higher cost inventory by then should relatively be consumed as, Chris, indicated earlier. We do have a bump as you well heard and seen on new home construction, which could help us increased flooring sales. We have the restructuring that's going to benefit our cost structures. And last year, as I noted earlier, we included much more shutdowns than normal. So, that should help us in the fourth quarter as well.

Michael Rehaut :

Right. Maybe just one last quick one. The Italian subsidies, does that end right on June at the end of 2Q? And if you could just quantify what that meant on a quarterly basis?

Jeffrey S. Lorberbaum:

But the energy prices have continued to drop without those. So, they were making up for high energy costs, so the energy costs have dropped substantially. So, the difference will not be dramatic.

Michael Rehaut :

Okay, great. Appreciate it. Thank you.

Michael Dahl:

Hi, thanks for taking my questions. Hard to beat the horse a little bit on the pricing comments. It seems like the sequential versus year-on-year is obviously that we are just given the magnitude of all the changes. But it would seem like on a year-on-year basis, your cost tailwind should step up significantly in 4Q versus 3Q, again, on a year-on-year basis. I just want to make sure I heard correctly that even in 4Q, you're still assuming that the price cost is slightly negative. And then, I guess, how do we think about that -- and kind of an exit rate, do you think you'll get back to the neutral by year-end as you think about kind ‘24 planning or because it seems to imply still some sequential price decline through the year? For accelerating the clients through the year, I should say.

Michael Dahl:

Got it. Okay. And then my second question just related to kind of the LVT import dynamics, and some of the puts and takes around the Forced Labor Act. Can you just -- you mentioned it in the opening comments, but just elaborate a little bit more on, kind of, how you've seen that evolve, and whether the supply chains have shifted enough and you've gotten product on port or competition has gotten product into ports. Just what's the update on that?

Jeffrey S. Lorberbaum:

It is stopping product from coming in they seem to be doing it on an individual business supplier base, they keep adding to it over time. It has stopped shipments from coming in. We in particular stop hours. It's impacted our service level on existing sales and it's also impacted our new product introductions, which got stopped. It is difficult to tell how it's going to evolve.

Stephen Kim :

Yes. Thanks a lot guys. Appreciate the color. My line cut out a couple of times. So apologies if this asked. I don't think it was. But I wanted to ask you about the impact or the benefit we can anticipate when volume ultimately returns. I know you're not giving a specific time frame for when that will be, but when it does occur inevitably, I'm curious about what we might see from productivity, attempt shutdowns in particular. Regarding productivity, we've usually seen a positive boost to your EBIT from productivity when volumes rising, but, recently, you've actually generated positive productivity when volume was going down. And so I'm curious, when volume ultimately inflect up, is it reasonable to think that we could still get positive productivity year-on-year? And then similarly with them shutdowns, you mentioned I think that in 4Q shutdowns, you will have shutdowns, but will be less than the prior year. What I'm interpreting that, is that you're going to get an EBIT benefit year-on-year from the reduced shutdown. So when you move forward and volume picked up, I assume you won't have any shutdowns. And so that should also be a benefit on top of whatever volume benefit you would get. I just want to make sure that both of those are true?

Stephen Kim :

Yes. Great. That's yeah. We look forward to that day. Alright. So second question for me is in ceramic, we've seen over the years or so we've seen a pretty big rise in ceramic imports from India. You all have obviously moved stepped into LatAm pretty significantly, Brazil, Mexico, etcetera. I'm curious if you could help us understand, are there any salient differences either in product quality or other cost of doing business that favor Latin America for as a place to import for you or ship product to the U.S. from versus other parts of Asia?

Christopher Wellborn:

The other thing I would say, Stephen, is that the from India right now that freight rates are really low, which we don't think are sustainable. But in the U.S, we've done a lot of work on our mid and premium product to reduce the impact of the changes in that imported product.

Stephen Kim :

Got you. Okay, great. Thanks so much guys.

Matthew Bouley:

Go ahead. Good afternoon. Thank you for taking the questions. I think you mentioned a few times that commercial has been outperforming, but that you expected commercial to weaken later this year. I guess, how is that dynamic evolving for you specifically? Are actually starting to see signs of, I don't know, weakening orders in the commercial end market and just how might you expect that to play out from a volume and price perspective?

Matthew Bouley:

Got it. Okay. That's helpful. And then secondly, on the $35 million of savings actions, I think you said half would be realized this year. I mean, should we assume that you're kind of reaching the run rate really in Q4 or are you already starting to realize a lot of that in Q3? How does that kind of phase between the next two quarters? Thank you.

Matthew Bouley:

All right. Thanks guys. Good luck.

Adam Baumgarten :

Hey. Good afternoon, everyone. Just curious if you could walk through where you're seeing the biggest negative mix impacts across the various products and geographies?

Adam Baumgarten :

Okay. Got it. And then just as we think about the restructuring actions, maybe how to think about that across the various segments as you spread it across the different businesses?

Adam Baumgarten :

Okay, great. Thanks. Best of luck.

Rafe Jadrosich:

Hi, good afternoon. Thanks for taking my question. When you look at the dealers that you sell through in the U.S, sort of the smaller independent ones. Just can you talk about the health of that sort of network. Obviously, like the industry sales have been under pressure and I'm sure they're sitting on some -- where they were sitting on some high cost inventory and prices have come down. How is like the health of that retail channel for you? And are you seeing any consolidation there?

Rafe Jadrosich:

Okay. That's good to hear. And then the second question was just on as pricing comes down with the lower input costs like you're talking about in the second half here. What have you historically seen in terms of volumes with lower pricing like what is the demand elasticity to price? Do you ever get an uptick in volumes because the pricing is lower?

Rafe Jadrosich:

Is this price competitive environment different than other doubts like is it kind of a similar level that you would have anticipated like more competitive, less competitive than what you've seen historically?

Rafe Jadrosich:

That makes sense. It's very helpful. Thank you.

Jeffrey S. Lorberbaum:

We'd like to thank everyone for joining us. We are focused on managing the short-term and we think we're well positioning the business to maximize the long-term growth and earnings. Thank you again.

Operator:

Good day, and welcome to the Mohawk Industries, Inc. First Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to James Brunk. Please go ahead.

Jeffrey Lorberbaum:

Thanks, Jim. For the first quarter of 2023, Mohawk's net sales were $2.8 billion, down approximately 6.9% as reported or 5.9% on a constant basis, and our adjusted EPS for the quarter was $1.75. All of our businesses are adapting our strategies to a more challenging environment. We're managing our costs while investing for both short- and long-term growth. We exceeded our earnings expectations with the businesses maintaining higher pricing and mix and Flooring Rest of World outperforming the other segments. The commercial channel continues to be stronger than residential with home remodeling projects being postponed and new housing construction being impacted by higher mortgage rates. Our balance sheet remains strong, and we generated over $125 million of free cash flow. We strategically invested in new product innovation, enhanced merchandising in customer trade shows to improve sales. We are continuing to reduce costs across the enterprise by enhancing productivity, streamlining processes and controlling administrative expenses. Our customers remain conservative in their inventory commitments and all of our operations are running at lower utilization levels, creating higher costs from unabsorbed overhead. We see increased competition as industry capacity utilization and input costs decline. In Europe, natural gas prices have dropped dramatically, though they remain at almost double the historical levels. We expect consumer spending to improve as wages rise, inflation slows and energy costs fall. Our new product introductions provide more value options for budget conscious consumers. In the U.S. limited supply, high interest rates and persistent inflation have suppressed the housing market. Lower home sales and changing consumer spending habits are impacting their modeling category. We are maximizing our commercial business with new introductions, marketing initiatives and targeted promotions. And our other geographies, demand is similarly slowing with residential more affected than commercial. Though the Mexican economy faces challenges, our business there is holding up better, while Brazil slowed more with higher interest rates and reductions in consumer inventories. Our restructuring actions are on track in the Flooring North America and Flooring Rest of World segments and should improve the results of our business. We are limiting our other capital investments to those providing significant sales, margins and process improvements. We're expanding our constrained category that have the greatest growth potential when the economy recovers. These include LVT, premium laminate, quartz countertops, porcelain slabs and insulation products. We completed 2 acquisitions in ceramic in Brazil and Mexico that had combined sales of approximately $425 million, almost doubling our existing market share in those geographies. We are developing strategies to increase our sales by providing broader product offering and using combined brands to satisfy all price points. In each country, we're beginning to consolidate the businesses to reduce costs, improve efficiencies and optimize production. We also continue to improve the small bolt-on acquisitions in Europe and U.S. that we completed last year. Despite falling energy prices, natural gas and electricity inflation remained a headwind in the first quarter, though our future results will benefit as lower costs flow through the P&L. Our sustainable strategy includes investments in both production of green energy from biomass, wind and solar, which reduces both our carbon -- our expenses in our carbon footprint. Our 2 biomass energy plants lowered our cost and improved our results in the quarter. We also purchased some of our European energy at various times to reduce future cost volatility. Italian energy subsidies have been extended at reduced levels through the second quarter. I'll turn the call over to Jim for his review of our financial performance.

Chris Wellborn:

Thank you, Jim. The Global Ceramic segment spans many countries with each having their own unique economic conditions. All of our regions are being impacted by slowing economies and higher interest rates. The commercial channel is strongest and new home construction held up better than residential remodeling as consumers reduce discretionary purchases. In this softening environment, our customers are lowering their inventory levels with significant differences in each region. As industry volumes decline, we are facing additional competitive pressures in our markets. Our pricing has lagged our cost changes, though we are seeing decreases in energy and material expenses, which should benefit our future results. The U.S. is performing better than our other ceramic markets due to our greater sales in the commercial sector. Our domestic production is more reliable than imported alternatives, which is benefiting our sales, particularly in our premium collections, which compare favorably to European alternatives. We are shifting our sales force focus to target opportunities in the multifamily and exterior channels and are expanding our commercial and builder distribution with curated collections for immediate delivery. To increase our countertop volume, we are expanding our business with national accounts, contractors and kitchen and bath retailers. We are reengineering our entry-level quartz to countertop to lower our cost and enhance the value. To manage through the slowing environment, we continue to reduce our costs across the business, including overhead and discretionary spending. Our ceramic business in Europe remains under pressure as demand has declined due to ongoing inflation and higher interest rates. We maintained higher average selling prices than we anticipated, partially due to our new introductions. Our overall [Technical Difficulty].

Jeffrey Lorberbaum:

David, have you reconnected him?

Chris Wellborn:

Pressure as demand has declined due to ongoing inflation and higher interest rates. We maintained higher average selling prices than we anticipated, partially due to our new introductions. Our overall volumes were down in the quarter with all markets impacted by slowing residential remodeling. As the market slows, competition is becoming more aggressive in all channels. We are increasing porcelain slab production to support continued sales growth through enhanced visuals and specialized textures. A drop in fourth quarter energy prices benefited our cost in this quarter and subsidies from the Italian government helped to offset the impact of energy inflation. We continue to focus on cost containment, including productivity projects and R&D initiatives. Our other ceramic markets are slowing, and we are reducing our production to align with demand. Sales trends improved as we progress through the quarter, and we expect these markets will continue to improve. Our 2023 product launches with new sizes, unique visuals and polished finishes are being well accepted in the market. The integration of our acquisitions is progressing and we are implementing specific sales, marketing and operational plans to improve the businesses. This year, we will convert the acquisitions to our information systems to enable operating as a single business and enhance efficiencies. In our Flooring Rest of World segment, our European business have been compressed as high energy prices and inflation impacted consumer budgets. In the first quarter, higher volumes reduced shutdowns, lower energy costs and production of green energy improved our business from the fourth quarter. The contraction in the housing market has reduced volume levels in our industry as consumers change spending priorities and customers' adjusted inventory levels. We are increasing promotions to attract additional volume and expanding product options for more constrained consumer budgets. We have increased controls to manage our cost and reduce our inventories. We are reengineering our formulations and expanding our supply base to improve our competitive position. We are executing our restructuring actions to adapt to the current environment. As input costs decline, we anticipate greater competitive pressures in the market. As consumers have deferred residential remodeling projects, our flooring category was most impacted during the quarter. Both laminate and LVT volumes were lower in the quarter, and we are controlling our cost and production levels in response. We have begun the conversion of our residential LVT from flexible to rigid and are preparing to restructure the operations. Our sheet vinyl increased in volume as consumers sought options to lower remodeling costs. We are improving the product offering at our new Eastern European sheet vinyl acquisition with updated styling as we enhance the facility's production efficiencies. Our panels business has slowed with market and inventory reductions in the channel. Our margins are higher than anticipated due to stronger pricing, lower input costs and benefits from our biomass energy plans. We are making progress on achieving our planned synergies of our French panels plant and our recent mezzanine flooring acquisition. Our insulation category performed the best in this segment as energy efficiency has become a greater priority. Government regulations around energy conservation continue to increase, and our polyurethane products provide the greatest heat-resistant properties. We have integrated our insulation acquisition in Ireland and the U.K., and our new facility is ramping up ahead of schedule. In Australia and New Zealand, the economies are slowing and inflation and higher interest rates have affected the housing market. In the quarter, our results were impacted by lower volumes in both residential soft and hard surfaces. We're implementing additional price increases to offset inflation and selectively introducing promotions to drive sales. The commercial sector is outperforming residential and we are expanding our emphasis in specified projects. We are controlling costs and adjusting inventory levels to market demand. Our Flooring North America segment has been challenged by significant inflation, higher interest rates and more restrictive lending, which have weakened the housing market and our industry. Many consumers are deferring home improvement investments or trading down due to budget constraints. As a result, our customers are more tightly managing their inventory levels. The segment's earnings for the quarter were compressed due to lower volumes and absorption of peak material costs, which our pricing did not cover. We significantly reduced inventory as we align production with demand and benefited from lower energy and material costs. Our restructuring actions are on track and will lower our cost in our residential and commercial soft service categories. As the market conditions evolve, we are adjusting our manufacturing and sales strategies and reducing inventory with market demand. To control cost, we are postponing capital projects and reducing discretionary spending. Our second quarter margin should expand as our input cost improved and plant utilization increases. Our first quarter commercial sales remained solid with new construction and remodeling projects continuing in most channels. The Architectural Billing Index indicates limited softening in the planning of new commercial projects this year. We are providing exciting flooring options that are carbon neutral with superior features to deliver greater value for the desiring green alternatives. Developed in partnership with disabled and disadvantaged artists, our new art lifting collections, fashionable designs are quickly gaining traction in the market. The commercial flooring accessories acquisition we completed last year has complemented our product offering and benefited our business. Sales of residential soft surfaces declined more than other categories as retailers reduced inventory due to weaker consumer discretionary spending in the slowing housing market. The multifamily business remains the strongest category in residential, and we are expanding our participation in this channel. Retailers have responded positively to our new product launches, including Everstrand Polyester collections at accessible price points and our proprietary SmartStrand Silk collections that provide superior softness in design. The new merchandising systems for our new carpet collections are being well accepted by our customers. In the quarter, we enhanced our LVT collections with higher value introductions, featuring our Web Protect and antimicrobial technologies. We're seeing a more competitive market as the industry slows and ocean freight costs decline. Imports from Asia are being interrupted as the U.S. requires proof of compliance with the Force Labor Protection Act. It is still too early to determine the disruption this legislation will create. Sheet vinyl sales are outperforming as consumers seek more budget-oriented options. Our West Coast LVT plant is continuing to ramp-up and our production will expand as we move through the year. During the quarter, our laminate sales in retail expanded with its increased acceptance as a waterproof alternative. Volumes in other channels are declining as consumers deferred remodeling projects and our customers reduced their inventory levels. We expect our Redwood collections to continue taking share due to their realistic visual, superior scratch resistance and waterproof properties. Our signature technology advances the design and texture of our Redwood products so that they are indistinguishable from premium wood flooring, by offering greater value and durability. Our input costs are declining, which will help us recover the inflation that impacted our margins. Now I'll return the call to Jeff for his closing remarks.

Operator:

[Operator Instructions]. The first question comes from Joe Ahlersmeyer with Deutsche Bank.

Jeffrey Lorberbaum:

When you go through a cycle, our industry always goes through a similar direction. So going into the cycle, the first thing that slows down is the residential remodeling because the consumers can immediately postpone it and it's followed by the new housing construction and then by the commercial businesses that take longer to execute. When you come out of the cycle, it comes out in the same order for the same reason. So to their remodeling piece should pick up first and do better. This cycle is not typical of the other cycles. Historically, by this point, employment would be down significantly, and it still remains strong. You have wages are still increasing. We have housing is in short supply and mortgage rates are limiting people to move. These things, combined with aging homes and higher home values, should support more remodeling and commercial projects continue to be initiated. So when you take all this together, we're expecting the rebound on the other side to be stronger and faster than it has in past cycles because we're not under the same compression that we've been in these areas we just discussed.

James Brunk:

I think, Joe, you would start with looking at the relationship between materials, energy, and pricing, as you kind of alluded to. If you think about it, the cost really started to gradually fall for us late in 2022. And it takes anywhere from 3 to 6 months for it to flow through the P&L. What we would expect in 2023 is that inflation to become a more kind of declining headwind and become a benefit in the second half with price and mix weakening with more competition from lower industry volumes. Volume itself -- it was interesting in the first quarter, it was lower against some very, very strong comps in the prior year with pricing lighting inflation. Another point is, as we had indicated, we did not build inventory as normal. And so some of the shutdowns compressed our margins, though it improved sequentially. In the second quarter, we would anticipate higher production and fewer shutdowns. And as I said before, kind of all the details of this certainly will be in our 10-Q in terms of the bridge items. But also one other point would be around the growth investments. Our current expansion projects, we are focused on future sales opportunities and capacity constraints, very focused on laminate, LVT, quartz, countertops, ceramic slabs and their installation businesses. They are postponing other investments until visibility improves, but these investments should really set us up along with their acquisitions to help our business in '24 and beyond.

Timothy Wojs:

Maybe just the first question I had, as you kind of think about energy prices, how would you expect that to kind of mechanically kind of work through the P&L? I would imagine maybe you get some benefit early and then pricing kind of starts to react to that. But how quickly do you think pricing reacts to energy prices? I mean is it pretty immediate? Or do you think it's more like what you would see with like oil-based inputs in like Flooring North America, for example?

Timothy Wojs:

Okay. So is it fair to say it would kind of be like normal input costs? We just haven't seen this type of energy inflation before. So that's what I'm trying to ask.

Timothy Wojs:

Okay. Okay. Good. And then on price/mix, just kind of holding up better than you thought in the quarter? I mean, is that -- do you think that's due to the overall consumer not trading down as much as maybe you thought? Or is it something that Mohawk's kind of done internally around product mix or channel mix that has kind of held that up a little bit better?

James Brunk:

Don't forget also, you were seeing falling ocean freights, which is reducing the cost of imports to the U.S. So the weaker dollar certainly will partially offset.

Susan Maklari:

My first question is, appreciating that you've got limited visibility to the second half. But can you talk contextually about how you're thinking about the operating environment as it relates to housing activity, R&R, commercial and then even maybe the U.S. versus Europe? And are you still expecting that we will see more normal seasonality as we move through the balance of this year?

Susan Maklari:

Okay. That's helpful. And then focusing in on the Flooring North America segment. Obviously, that's been under pressure recently, just given the reduced production there. But as you think further out and the strategic initiatives you've been taking the cost actions, all the various things that have been going on there. Where do you think that margin can get to? And any thoughts on how that might compare to what we've seen more recently from that segment?

Operator:

The next question comes from John Lovallo with UBS.

Jeffrey Lorberbaum:

First, you have to remember on the comparisons, we came out of '21, the inventories were low. We were having trouble getting materials. We were hitting limitations with employees. So we went into the first quarter of last year with low inventories, and our customers also had low inventories. So we didn't put out as many new products. We didn't spend as much in marketing and merchandising. And so this year, we're going back to a more normal level. It's always heavier in the first quarter, and then we expect it to come down as we go through the year. We're putting investments in new merchandising and product categories across the businesses, trying to upgrade the product and mix and maximize the opportunities that are here in the environment that we're in.

John Lovallo:

Makes sense. Okay. And then just on the commercial channel remaining pretty resilient here in the first quarter. There's obviously some growing concern of slowing activity in U.S. commercial. And Jeff, I think you talked to your expectation that, that could slow a bit. Are you seeing any signs right now that things are moderating on the commercial side in Mohawk's business?

Operator:

Our next question comes from Stephen Kim with Evercore ISI.

Jeffrey Lorberbaum:

Usually, you go into cycles, the multifamily will slow down as well and then people start having to move around as jobs get harder. We haven't seen that here. So what you have is the multifamily. The vacancy rates are still reasonably low. You still have more completions coming in and we're trying to maximize our share in what we think is going to be one of the stronger parts of the business this year.

Jeffrey Lorberbaum:

In the multifamily side, they tend to have lower value products because they're trying to control the cost of the rentals. So we have a broad selection in carpet LVT and laminate that are all going into the category and -- as well as sheet vinyl. And I'm not -- we're not doing much different with the products because we've always had a broad offering to satisfy it. We're just being more aggressive in our selling.

James Brunk:

So in the first quarter, you're right, we closed on Vitromex and Elizabeth purchase price is just over $500 million combined. If you step back, we did about 5 bolt-on acquisitions last year in 2022, plus 2 ceramic acquisitions that we just completed. And to frame it from a sales perspective, it should be in the $600 million range on an annual basis given normal conditions. Obviously, the markets are a little bit tighter in Brazil and Mexico, like they are in other geographies. So what we gave you was their sales from the prior year.

James Brunk:

Yes. All in, it's about a little over $600 million.

Operator:

Our next question comes from Keith Hughes with Truist.

Jeffrey Lorberbaum:

Combination of everything. First is that we did take some inventories down. The second is we expected -- we expect an improvement from seasonal improvements from one or the other, so where there are less shutdowns across the business all over.

James Brunk:

I was speaking about the question, Keith, was on energy. That was the comment on energy.