Mohawk Industries, Inc. (NYSE:MHK) Q1 2024 Earnings Call Transcript

Mohawk Industries, Inc. (NYSE:MHK) Q1 2024 Earnings Call Transcript April 26, 2024

Mohawk Industries, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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.

James Brunk: Thank you, Jamie. Good morning, everyone. Welcome to Mohawk Industries’ quarterly investor conference call. Joining me on today’s call are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Chris Wellborn, President and Chief Operating Officer. Today, we will update you on the company’s first quarter performance and provide guidance for the second quarter of 2024. I’d like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission.

This call may include discussion of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8-K and press release in the Investors section of our website. I’ll now turn the call over to Jeff.

Jeff Lorberbaum: Thanks, Jim. Good morning, everyone. Though economic headwinds are impacting our industry, our results reflect positive effects of the actions we are taking to enhance our performance. Our net sales for the first quarter were $2.7 billion, down 4.5% compared to last year. Adjusted earnings per share were $1.86, up 6% versus 2023 as a result of restructuring, productivity initiatives and benefits from lower cost of materials and energy, partially offset by weaker pricing and mix. Currency exchange rates continue to affect our operating income, with a negative impact in the quarter of approximately $12 million or $0.15 on EPS. Across our regions, market conditions remained similar to the prior quarter with significant pricing and mix pressure through the industry competition for volume.

Though slowing the commercial channel continues to outperform residential. Residential remodeling remained soft due to low housing sales and the impact of inflation on discretionary spending. Retailers have reported that consumers are reluctant to initiate higher ticket projects with flooring facing greater pressure since most replacements can be readily deferred. Our teams remain focused on managing through the near-term environment, realizing sales opportunities, reducing controllable costs and completing restructuring initiatives. We continue to manage our production levels to align inventories with market demand. To stimulate sales, we are investing in new product introductions with enhanced features that convey the value of our collections.

Given inflationary pressures and labor benefits and other items, we continue to take additional actions to reduce our cost structure and improve productivity. Globally, there is optimism about consumer confidence, improving interest rates declining, and a rebound in the housing market. The timing of this inflection in each market depends on inflation levels and actions by their central banks. Latin America aggressively raised interest rates to combat inflation and now the region is among the first to implement rate reductions. Brazil Central Bank initiated several rate cuts and Mexico recently lowered rates for the first time since 2021. In the U.S. and Europe, central banks are maintaining interest rates as they focus on achieving their targeted inflation levels.

The present forecast for U.S. new home starts and existing home sales is for a slight increase in 2024 with greater improvement in the second half of the year. In some countries, governments are subsidizing housing investments by reducing mortgage rates. In the U.S., builders are stimulating purchases of their properties by buying down interest rates for consumers. The U.S. Realtors Association recently noted that life events eventually require buyers and sellers to make moves regardless of interest rates. The desire for homeownership remains strong and people will find a way to realize that goal. Since our last call, Newsweek named Mohawk, one of America’s Greatest Workplaces for Women and Green Builder selected our PureTech PVC-free resilient flooring as one of their top products of the year.

We are pleased to be recognized for both our commitment to our people and our product innovation. Jim will provide a review of our financial performance for the quarter.

James Brunk: Thank you, Jeff. Again, sales were just under $2.7 billion, that’s a 4.5% decrease as reported and 5.5% on a constant basis due to year-over-year price and mix pressures continuing due to a combination of tight demand, the pass-through of lower input costs and the consumer trading down. Our Flooring Rest of the World segment was impacted the most by the price and mix issue in the quarter. Gross margin was 24.2% as reported or 24.4% on an adjusted basis versus 24.1% in the prior year, primarily due to lower cost, material and energy of $147 million substantially offsetting the negative impact of price and mix of $152 million, in addition to the benefit of our productivity and restructuring actions of $35 million.

SG&A expense was 18.8% as reported an 18.4% on an adjusted basis, basically in line with the prior year. That gave us an operating margin of 5.5% as reported. Non-recurring charges were $17 million in the quarter, giving us an adjusted operating margin of 6.1%. That’s a slight improvement over prior year, driven by the lower input cost of approximately $136 million and increased productivity of $47 million, offsetting the negative impact of weaker price and mix of $153 million, and the unfavorable impact of foreign currency of $12 million and temporary manufacturing shutdowns of $10 million. Interest expense for the quarter was $15 million at slightly favorable versus prior year. Our non-GAAP tax rate is 21.8% versus 22.6% in the prior year.

We expect Q2’s tax rate to be between 20% and 21% and the full year rate to be between 19% and 21%. That gave us earnings per share as reported of $1.64 and on an adjusted basis of $1.86 an increase of 6% versus the prior year. Turning to the segments. Global Ceramic had sales of just over $1 billion, that’s a 1.4% decrease as reported and 5% on a legacy and constant basis due to the unfavorable impact of price and product mix and lower volume as the industry demand remains compressed. Operating margin on an adjusted basis was 5%. That’s a decrease of approximately 130 basis points due to the unfavorable impact of price and product mix of approximately $40 million reflecting the continued difficult market conditions. And the unfavorable impact of foreign currency of approximately $11 million, partially offset by lower input costs of $32 million and productivity gains of $14 million.

In Flooring North America, we had sales of $900 million, that’s a 5.6% decrease as reported due to lower remodeling activity impacting volume as well as pressuring price and mix across our product lines. The business improved through the quarter and we are introducing new residential collections with unique features to enhance our carpet, laminate and resilient sales. Operating margin on an adjusted basis was 5.3%. That’s a significant improvement versus prior year with favorable impact of lower input costs of $57 million and productivity gains of $23 million as we benefit from our cost optimization and restructuring initiatives. This was partially offset by unfavorable impact of price and product mix of $20 million. And finally, Flooring Rest of the World had sales of just over $730 million.

That’s a 7.4% decrease as reported or 5.9% on a constant basis due to the unfavorable impact of price and product mix partially offset by an increase in our unit volume even in a generally weak environment across Europe. Operating margin on an adjusted basis was 10.1%. That’s a decrease of 250 basis points driven by the unfavorable impact of price and product mix of approximately $92 million primarily in our panels business, which has declined substantially compared to the high prior year comps when the industry was running near capacity. These were partially offset by lower input costs of $48 million, stronger unit volume of $11 million and productivity gains of $10 million. Corporate and eliminations was $11 million for the quarter, in line with prior year and our full year forecast is for $45 million.

Looking at the balance sheet. Cash and cash equivalents were just over $650 million with free cash flow in the quarter of $97 million. Inventories were just over $2.5 billion, with the year-over-year inventory decrease of about $200 million, primarily due to a reduction in costs. Our inventory days were reduced to 125 days versus the year-end level of 130 Property, plant and equipment were just shy of $4.9 billion. Our CapEx for the quarter was $87 million, with depreciation and amortization of $154 million. The company plans to invest approximately $480 million to $500 million in 2024 with D&A for the full year forecasted to be approximately $600 million. Overall, the balance sheet and cash flow remained very strong with gross debt of just over $2.6 billion and leverage at 1.4x.

At this point, I will turn it over to Chris to review our Q1 operational performance.

Chris Wellborn: Thanks, Jim. During the quarter, sales in our Global Ceramic segment remains soft across our regions. The industry is operating below historical levels and market competition to capture volume is affecting both our pricing and margins. Product mix is also declining as higher-value residential remodeling channel is softest and those customers undertaking new projects are selecting lower-cost options. Reduced energy prices are enhancing our results, though wages, benefits and other costs have increased. We continue to execute cost reduction initiatives, including utilization of lower-cost materials, product reformulations and reductions in SG&A spending. We’re driving productivity through increased efficiencies higher yields and consolidating our distribution network.

Our investments in new printing, polishing and rectifying technologies are delivering higher value sales and formats to improve our mix. We are introducing decorative innovations with new glazes, 3-dimensional surfaces and updated artisanal mosaics. We are launching larger formats in floor and wall tile and porcelain slabs along with smaller offerings that replicate handcrafted visuals. Our broad product offering, quality and service advantages are helping us expand business with both new and existing customers. In the U.S., cold weather caused the suspension of operations at a number of our manufacturing facilities and service centers in January impacting our cost and revenue. Our Tennessee quartz countertop expansion should be completed later this year, and we’re developing new products and enhanced marketing tools to support our additional capacity.

The U.S. ceramic tile industry has filed a petition against India in response to widespread dumping of ceramic tile in the U.S. market and expects tariffs between 400% and 800% plus additional duties for subsidies. Other countries where we operate are considering similar actions. In Europe, we’re seeing robust growth in porcelain panel sales after our recent expansion and sales have also benefited from our new smaller and larger sized premium products. European energy prices have moved to lower levels than forecasted, which should benefit consumers. In Mexico and Brazil, we’re optimizing our sales and improving our operations. We’re implementing new distribution and product strategies in each country, so our brands complement each other in the marketplace.

In our Flooring Rest of World segment, markets remained soft despite declining inflation. In the quarter, our volumes increased from the prior year’s low levels, which may be an indication of improving trends in our categories. So our results were impacted by pricing pressures as we pass through lower input costs in highly competitive markets. Our Quick-Step brand sales improved during the quarter as we realign price points, reflecting lower cost and increased marketing efforts to stimulate demand. We’ve completed the restructuring of our residential LVT program and are beginning to see the savings we anticipated. The change is delivering substantial growth in our residential rigid LVT, which is replacing our discontinued flexible products.

In Insulation, we’ve recently experienced material increases and are raising our prices accordingly. In our panels business, margins have declined from our cyclical high comparisons due to the underutilization of industry capacity partially offset by mix improvement in our decorative collections. We’ve announced selective price increases and panels to reflect rising material cost. We continue to implement productivity initiatives and cost containment projects across the business, including labor efficiencies, higher yields and alternative materials. We’re enhancing our bolt-on acquisition in MDF Boards, sheet vinyl and mezzanine flooring and will complete our premium laminate expansion this year. In Australia, New Zealand reduced input costs and increased productivity offset lower pricing and volumes in a slow environment.

In our Flooring North America segment, our results versus the prior year benefited from declining raw material and energy costs, partially offset by lower price and mix. While residential remodeling was generally weaker overall, market conditions vary depending on channel and product category. Sales improved through the quarter, though many retailers in some of our facilities were temporarily closed in January due to weather. Lower market demand and consumers trading down are creating a competitive marketplace, pressuring average selling prices and product mix. Based on builder optimism, new single-family home sales should improve through the year, positively impacting our flooring business. Commercial sales continue to outperform residential led by the specified hospitality, retail and government channels.

Retailers are embracing our new residential product launches, including PetPremier carpet and PureTech resilient planks. We’re optimizing sales of our coordinated accessories and growing our recently acquired rubber trim business. We’re increasing the sales of our non-woven acquisition with new customers and product expansions. Our West Coast LVT facility is increasing production, and our Georgia restructuring initiatives are being implemented. During the quarter, we delivered productivity gains across the segment with operational improvements, better yields and enhanced logistics. I’ll return the call to Jeff for closing remarks.

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. This year, we’re completing our LVT quartz countertop and premium laminate expansion projects to support our products with the greatest growth potential when the market recovers. Our other capital investments are focused on reducing costs, delivering product innovation or maintaining the business.

Due to European vacation schedules, our second quarter sales are seasonally higher than the third quarter. Given these factors, we anticipate our second quarter adjusted EPS to be between $2.68 and $2.78, excluding any restructuring or onetime charges. Residential flooring sales should lead to recovery as consumer confidence improves, the housing market strengthens and postponed remodeling projects are initiated. Existing home sales will normalize and our meaningful catalyst for flooring since homeowners replace it more often before listing a property or soon after completing a purchase. Across our geographies, housing has not kept pace with household formations and substantial home construction will be required for many years to satisfy those needs.

Additionally, as homes age, increased remodeling investments are required to maintain property values. As the world’s largest flooring manufacturer, we expect to significantly benefit from our brand leadership, investments in new capabilities and recent acquisitions as the flooring market recovers. We have the products to inspire consumers the infrastructure to deliver superior service and the balance sheet to invest in opportunities for the business. We’ll now be glad to take your questions.

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Q&A Session

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

Matthew Bouley: Hi, good morning, everyone. Thank you for taking the question. So obviously, the trajectory of interest rates is a little different than what the market thought earlier this year. I guess two parts. Are you have any different thoughts around how you’re thinking about earnings growth for Mohawk? I think previously, you had expected in the second half of the year that you could see growth year-over-year. Clearly, it was positive year-over-year in the first quarter. But any kind of thoughts around the cadence of the business into the second half? And then just are you managing the business any differently assuming this different rate environment, capital allocation managing capacity, any restructuring actions being considered. Any thoughts around how that has evolved here? Thank you.

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.

Matthew Bouley: Got it. Perfectly. And then I guess maybe sticking with the capital allocation side. You’re completing some of your capacity investments this year. What does that mean for capital expenditures beyond 2024? And just kind of any additional thoughts around the share repurchase within that capital allocation set of priorities. Thank you.

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, the focus will be on cost reductions, product innovation and the maintenance of the business, unless of course, we come up with new ideas from a capacity standpoint. In terms of other cash priorities, again, we’ll focus on broadening our product offering and innovations around products identifying acquisitions, whether they be bolt-on or acquisitions that would help us get into new markets. And then share buybacks are still being considered as part of that allocation.

Matthew Bouley: Thanks, James. Good luck, everyone.

Operator: Our next question comes from Tim Wojs from Baird. Please go ahead with your question.

Tim Wojs: Hey, guys. Good morning. Maybe just to start, just in the first quarter, I mean, price mix, I think kind of more than offset some of the raw material improvement or raw material cost improvement that you kind of saw on a year-over-year basis. So as you kind of think about the next few quarters, how should we kind of model or kind of think about that price mix cadence and maybe just price cost in general as we kind of go through 2024.

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.

Tim Wojs: Okay. Okay. That’s really helpful. And then just, I guess, on the panel kind of price mix kind of commentary, when do the comps there just get easier?

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

Jeff Lorberbaum: Less – will get easier in the second half.

Tim Wojs: Okay. Okay, great. Thanks, Jeff.

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

Susan Maklari: Thank you. Good morning, everyone.

Jeff Lorberbaum: Good morning.

Susan Maklari: Jeff, it seems like you are starting to realize more of the benefits of the productivity and the restructuring efforts even with the business continuing to be under pressure. Can you talk a bit about how that can contribute to the margin profile over time? And maybe where do you think that this can go even if the macro remains less supportive?

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. So that comes back – we expect, as you said, the mix and average selling prices as the market improves, it actually changes because there’s more higher-value retail replacement business, and it helps the margins. We’ll benefit from all the different activities on a continuous basis that the cost reduction, the product investments, the growth initiatives, the different acquisitions that we’ve made over the past 1.5 years, we expect them to benefit our results significantly as the thing improves.

This will increase the margins with higher volumes, and we’ll get leverage in the SG&A and the other overhead costs as well as the increased productivity. So coming out of the cycle, we’re at a low level, which happened in the last big downturn. The first expectation is that we get back to 10% operating income and then continue to expand it further.

Susan Maklari: Okay. That’s helpful color. And then I guess, you mentioned that you still expect to expand in the second half of this year. Just any thoughts on more specifics around how that may come together? What some of the key factors could be, especially as you think about the Flooring North America segment?

Jeff Lorberbaum: Why don’t 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. What else is different. Again, we’re just assuming that the replacement business, which has been really low, at some point, they have to start if they’re going to stay in their houses, they’re going to have to start improving them. And then some of the people are going to have to move just because of their lifestyles so it can’t stay at the bottom forever.

So we’re assuming that even if interest rates don’t change a lot, that we’ll start seeing some of this improvement there. And as you look in the other countries around the world, they look like they’re going to start lowering interest rates sooner and faster. And the same thing should occur in those countries with consumer confidence and moving forward and doing more remodeling, which is the first thing that pickup.

Susan Maklari: Okay. Thank you for that color. And good luck with everything.

Jeff Lorberbaum: Thank you, Susan.

Operator: Our next question comes from John Lovallo from UBS. Please go ahead with your question.

John Lovallo: Good morning, guys. Thank you for taking my question. 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: Well, first of all, in the first quarter, as I said, if I just look at materials and energy, it’s about $147 million favorable in terms of lower cost compared to the 153 unfavorable price and mix. The most pressure was seen, as we said, in the Flooring Rest of the World category and that is – that is the one place where materials and Energy did not offset the negative price mix. I would think in the second quarter, I would anticipate that trend continuing where the pressure is the highest in Flooring Rest of the world.

John Lovallo: Okay. Okay. Got it. And then just trying to wrap my head around the second half of the year. I mean, should we expect a negative impact from pricing to sort of lap to maybe less of a price mix headwind year-over-year, but also probably less favorable impact from lower input costs. And then sort of from there, you need volume to drive productivity to offset any additional inflation. Is that the right way to think about it?

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 at 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.

John Lovallo: Great. Thank you.

Operator: Our next question comes from Phil Ng from Jefferies. Please go ahead with your question.

Collin Verron: Hi, good morning. 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 floor in 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?

Jeff Lorberbaum: What we said was that the commercial business is holding up better than we had anticipated. We thought that it would fall off faster than it has, and it is we’re performing better than we thought. We still think it’s going to continue slowing through the year as new projects haven’t been initiated in the last year. So we’re still anticipating it slowing. Commercially, you also have pricings more resilient since the products are more unique, so you don’t have as much price pressure. And presently, the hospitality retail government channels are outperforming. And just as a comment on the back side, when we start getting better, it’s going to take longer for the commercial to improve because it takes a longer time to get the planning approvals and construction to begin on the business. Anything else you want to give?

James Brunk: And overall, the commercial makes up roughly about 20%, 25% of the overall Mohawk business with it being the highest in the ceramic segment.

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?

Chris Wellborn: Well, the prices of imports have been declining with excess capacity, energy and freight costs. And of course, India has been growing. The Tile Council of North America expects those tariffs to be between 400% and 800%. And that should help our volume and increase market pricing since it’s been pushed down so low.

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

Collin Verron: Great. Thank you, and good luck.

Jeff Lorberbaum: Thank you.

Operator: Our next question comes from Keith Hughes from Truist. Please go ahead with your question.

Keith Hughes: Thank you. 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?

James Brunk: At this point, no, in the first quarter, volumes were still lower in both the Florida North America and Global Ceramic segments, we did see, as we noted, some volume improvement in the rest of the world segment.

Keith Hughes: Okay. So no sequential movement in those to what you’re saying.

Jeff Lorberbaum: Remember, the first quarter is always lower than the fourth quarter.

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

Keith Hughes: Okay. Second question in ceramic. I guess if you could talk about the end-user markets in North America, I know commercial has been strong. What areas of commercial have been moving the numbers up?

Chris 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.

Jeff Lorberbaum: I think the comment was the – our business is about flat. I don’t think the market is.

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

Jeff Lorberbaum: That would be the same one we talked about before.

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

James Brunk: And I would add to that government as well.

Keith Hughes: Okay, thank you.

Operator: Our next question comes from Michael Rehaut from JPMorgan. Please go ahead with your question.

Michael Rehaut: Hi – excuse me. Good morning. Thanks for taking my question. First, I would love to get your thoughts around price mix trends for Flooring North America and Global Ceramic. And as we look into the second quarter and even the second half of the year, given the current demand backdrop, would you expect pricing and mix to remain negative as we get into the back half? And what kind of trends would be driving that or would be driving any type of change into the positive?

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.

Chris Wellborn: I mean one thing that should help us in the future as remodeling comes back, the margins in that, at least on ceramic, tend to be higher.

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?

James Brunk: That is the right way to think about it that’s more specified in nature and tends to be a richer blend of product and margin.

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?

James Brunk: Let me frame a little bit better for you, Mike, in terms of the restructuring actions. We continue to execute the actions that we have previously identified we’ve realized about $90 million of the savings of about $150 million goal through the first quarter. So that’s last year through the first quarter of this year. So we have another $60 million of benefit that is going to flow through the P&L. Most of the – much of the restructuring has been executed, including the closure of high-cost assets restructuring of LVT operations, discontinuing low-margin products and reducing administrative structure. And all the businesses are continuing cost reductions and SG&A operations and logistics. In the first quarter, that certainly was a part of the benefit of the $47 million that I noted in our productivity and that will help as we go through the balance of the year.

Michael Rehaut: Great. Thanks so much.

Operator: Our next question comes from Mike Dahl from RBC. Please go ahead with your question.

Mike Dahl: Hi. Thanks for taking my questions. First one is, obviously, on a year-on-year basis, there is a lot of noise looking at kind of the price mix comparisons. On a sequential basis and maybe specifically for North America and Global Ceramic, can you talk to kind of the sequential trends that you have seen year-to-date or versus 4Q and price mix? What’s embedded in the 2Q guide? And then the flip side, obviously, on cost, you addressed some of the year-on-year dynamics we have seen, obviously, a pickup in oil. So, can you also speak to whether or not in Flooring North America, in particular, you are starting to see some upward pressure sequentially on your cost basket?

James Brunk: So, from – let me start with your comment on the sequential on price/mix. From Flooring North America and Global Ceramic, from Q4 to Q1, it was relatively flat. But from Q1 to Q2, I would anticipate that you will see more pressure in Flooring North America. Again, that’s sequentially Q1 to Q2. Some of that is around seasonality. Some of that is in the price/mix pressures in that segment. But from an overall company standpoint, I still would say that for rest of the world remains under probably the most pressure because of what we have talked about in the panels area.

Jeff Lorberbaum: There is still going to be additional productivity and cost reductions to help offset that. And as you look forward with it, we think we are coming the raw materials and input costs coming into the year were the low. We have seen some movements in the first quarter, and we expect limited increases given the present environment that we are in. We think that as business improves in the future, at some point, we would expect the suppliers to raise prices and we will have to follow with increases to pass them through. And then it’s also possible, given all the economic events and/or regional conflicts that they could change our view on it overnight.

Mike Dahl: Right. Yes. Okay. Fair enough. Thanks. And then second question. Specifically with respect to the second half and 3Q, you did make a comment highlighting European seasonality, 2Q versus 3Q. I feel like normally, that might be a comment that we see more next quarter. As a reminder, the people as you are thinking about your 3Q guide. Can you just talk to the intent behind that?

Jeff Lorberbaum: We were just trying to – 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 are putting through the models, we just wanted to remind you.

Mike Dahl: So, in the context of the year-on-year improvement is the idea that sequentially, 3Q earnings could be down sequentially?

James Brunk: So, if you are 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.

Mike Dahl: Got it. Okay. Thank you.

Operator: Our next question comes from Kathryn Thompson from Thompson Research Group. Please go ahead with your question.

Kathryn Thompson: Hi. Thanks for taking my questions today. So, you talked about the move for tariffs on surfaces in the U.S. But we do acknowledge that, and we have 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? Thank you.

Chris Wellborn: Well, you asked about LVT in general. So, LVT sales have slowed as in other foreign categories. Pricing has declined with lower raw materials, import cost and transportation. In the U.S., our West Coast facility is increasing our production and our Georgia restructuring is being completed. And in Europe, we completed the restructuring of our LVT operations. We have implemented the change in our residential LVT to rigid and where our sales are expanding, and we are improving our product mix and reducing cost to increase our profitability as we go through the year. That’s specific to LVT.

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

Kathryn Thompson: Are you seeing competitive pressures just from lower-priced LVT hitting the market in Europe, like additional?

Chris 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.

Kathryn Thompson: Okay. That’s helpful. And then I know that not to beat the commercial end market worse I guess. But maybe pull the string a little bit more and with the preponderance of mega projects. One of the things the market focused on a lackluster ABI number that came out this week. But on the other hand, our industry contacts that we talked to point out that often large kind of mega projects aren’t necessarily captured in that ABI number. So, channel checks are showing a better commercial end market versus what the ABI would suggest. Against the backdrop of these larger-scale projects, what does Mohawk do to get in early in the conversation, I know it’s always a process, you have always said that done in the past, but this is truly a different period of time. How do you position yourself with these larger type projects? And how do you – kind of how do you win in this environment?

Chris Wellborn: Well, I can just answer one thing on that, that in our carpet commercial and our ceramic commercial, we have got a lot of people that are calling on these commercial projects together and are sharing resources, and it works out really well and gives us an advantage.

Jeff Lorberbaum: We are 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 have 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 are being aggressive in our calling on and offerings to the marketplace.

Kathryn Thompson: Okay. Great. Thank you.

Jeff Lorberbaum: Thank you.

Operator: Our next question comes from Laura Champine from Loop Capital. Please go ahead with your question.

Laura Champine: Hi. My question is on excess capacity. I think that you have 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?

Jeff Lorberbaum: The restructuring initiatives we have done, we are still in a 75%, 80% range. It should – it also depends which period and quarter you are in. So, as you go through the year, though, I think it’s going to – it should move up. And the question really is, when does the market get back and really change the dynamics. We tend to try to flatten our production out over the year to even it out to level it out as best we can. We haven’t done anything that’s going to dramatically change it the capacity utilization without the marketplace improvement.

James Brunk: And 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.

Laura Champine: I know that it flexes back and forth, but do you find yourself becoming more or less vertically integrated, meaning are you extruding your own yarn? Are you doing less so with this cost inflation that you are seeing?

Chris Wellborn: It hasn’t changed.

Laura Champine: Okay. Thank you.

Chris Wellborn: Thank you.

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

Stephen Kim: Yes. Thanks very much guys. Earlier in the call, I think you talked about the fact that you are 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? Is it – we are talking about getting like maybe 10% kind of volume growth from here, or just to kind of get some order of magnitude in your estimation?

Jeff Lorberbaum: I am 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 have 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 are going to see some of it this fall, and we should see significantly more next year as we come out of this.

Chris Wellborn: And Stephen, given how underutilized we are, as that volume moves up, we get a substantial benefit as it moves.

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 are 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 are looking for something fairly material. I mean it’s not like I mean I threw a 10% type growth number out there that I didn’t think that, that was unreasonable. Is that kind of in the ballpark of the kind of expansion off the bottom that you would see at a minimum?

James Brunk: Yes. Stephen, the numbers that you are 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 pop 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.

Stephen Kim: Yes, exactly. Okay. Well, that will be fun to watch. Second question relates to Flooring Rest of World. Specifically, I am looking at the margins there. And in each of the past 3 years, your margins have declined from the first quarter, which was the highest actually to the second quarter to the third quarter to the fourth quarter, it was actually kind of a steady decline. And then going even further back, typically, the margins are stronger in the – certainly in the front half than they are in the back half. Just wondering, are there any structural factors that you can call out maybe the vacations as part of that. And is there any reason to think that 2024 would track differently from that recent trend where we have seen just sequential declines in margins?

Jeff Lorberbaum: Listen, in Europe, you are correct. When you come out of the – you tend to ship a little more going into the third quarter because of the vacations, both us and our customers, the vacations last two weeks, three weeks, which in many cases, we shutdown the entire factories then you hit the fourth quarter, which you have the Christmas vacations in addition to which, so both of those things caused the second quarter to be a peak.

Stephen Kim: Got it. Alright. Thanks very much guys. Appreciate it.

Operator: Our next question comes from Sam Reid from Wells Fargo. Please go ahead with your question.

Sam Reid: Awesome. Thanks so much, guys. I wanted to dig a bit deeper on pricing, particularly in the U.S., but perhaps ask it from a slightly different vantage point. So, can you walk through some of the differences that you might be seeing by channel. So, for instance, are there any deviations in price dynamics that you have been seeing more recently, say, between the independent retailers versus the home centers?

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 have been impacted more than the other channel at this point.

Chris Wellborn: And I would say, overall, like particularly in ceramic, the one that’s been off the most has been the remodeling, which not only affects the home centers like Jeff said, but it’s also one of our higher margin businesses that’s been under pressure.

Sam Reid: No, that makes sense. And then maybe switching gears, just quickly talking tile here, your delta business had a pretty impressive display at the kitchen and bath show this year, I was impressed by it and that was in Vegas, obviously. I wanted to see though, any wins that you have gotten from that event or kind of any feedback? Just sort of curious kind of what the outcome was there. Thanks.

Chris Wellborn: I think we had a really good show. And if you just talk about U.S. ceramic, the new construction and commercial improved as we expanded our distribution. Our price and mix have been negatively impacted, but we have done a lot on new innovative and higher margin products that are gaining traction and partially offsetting these price declines. So, there has been a lot of work in our ceramic business in the U.S., particularly to improve our product mix, and I think it’s paid off. And we have taken some market share from the high-end Europeans with a cost higher and we have also been able to expand in some of the builder channels as our service levels were better than the imported products coming in.

Sam Reid: Absolutely guys, helpful and thanks so much.

Operator: Our next question comes from Eric Bosshard from Cleveland Research. Please go ahead with your question.

Eric Bosshard: Yes. Two 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?

Jeff Lorberbaum: So, the first quarter results were better because we had greater benefits from restructuring and productivity. We had declines in input costs that you went through a minute ago, offset the lower pricing and mix. The weaker sales did result in more unabsorbed overhead, which we had expected. Floor North America improved the most, but it had the most easier comps from the group. And then the rest of the world piece we keep reviewing that the panel business really did the margin step change from last year and it has the industry volume declined. And anything else you want to add, Jim?

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 threw out.

Eric Bosshard: Okay. And then secondly, the optimism going into the second half, what are you seeing in the business now? You talked about North America price mix, I guess eroding a bit incrementally into 2Q. What are you seeing within your business now, the results March or even April that is improving and kind of informs that second half optimism?

Jeff Lorberbaum: And we are seeing the normal seasonality improvements through the first quarter and going into the second quarter that we would expect. And we don’t have any definitive information that you don’t have.

James Brunk: Yes. And we will continue to watch certain signs. We look at indicators like consumer confidence. Obviously, we have talked about interest rates, but also discretionary spending and continued monitoring the housing starts as well as new build has been stronger through this cycle along with commercial. Most people are anticipating the remodeling business coming off the bottom. It’s been so low with people postponing it, and we are assuming we are going to see some benefits from that also. So, we anticipate volumes really across the business to start to pick up at least in the low-single digit area.

Jeff Lorberbaum: One other thing, last year, we reduced inventory substantially. We don’t have to do that again.

Eric Bosshard: Thank you.

Operator: And ladies and gentlemen, with that, we will be concluding today’s question-and-answer session. I would like to turn the floor back over to Jeff Lorberbaum for any closing remarks.

Jeff Lorberbaum: Long-term, the category will rebound from the downturn as it always has. We are well positioned on our products and markets to enhance our results. We appreciate you for taking the time and joining us. Have a good day. Thank you.

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.