Mohawk Industries, Inc. (NYSE:MHK) Q2 2024 Earnings Call Transcript

Mohawk Industries, Inc. (NYSE:MHK) Q2 2024 Earnings Call Transcript July 26, 2024

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.

James Brunk: Thank you, Jamie. Good morning, everyone. Welcome to Mohawk Industries’ quarterly investor 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’ll update you on the company’s second-quarter performance and provide guidance for the third 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. With that, I’ll turn the call over to Jeff.

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.

James Brunk: Thank you, Jeff. Sales for the quarter were just over $2.8 billion. That’s a 5.1% decline as reported or 4.5% on an adjusted basis, with global ceramic having the strongest quarter versus the prior year. All segments continue to see price and mix pressures, with residential remodeling trailing the new construction and commercial channels in the quarter. Gross margin for the quarter was 25.8% as reported and 27.1% on an adjusted basis versus 25.9% in the prior year, with lower input costs and increased productivity offsetting the weakness in price and mix. SG&A expense was 18.2% as reported and 17.9% on an adjusted basis. This is in line with the prior year. Operating income as reported was $214 million or 7.6%. Non-recurring charges for the quarter were $43 million, primarily due to restructuring expenses in the period.

That gives us an operating income on an adjusted basis of $257 million or 9.2%. That’s a 90 basis points improvement versus the prior year as our lower input cost of $83 million and productivity gains of $49 million offset the unfavorable price mix of $111 million and FX of $11 million. Interest expense for the quarter was $13 million. That’s down $10 million from the prior year due to strong overall cash flow and the payoff of the term loans earlier in the year. Our non-GAAP tax rate was 20.9% versus 19.6% in the prior year. We expect Q3’s rate to be between 19% and 20% and the full year rate to be between 20% and 21%. That gives us an earnings per share on a reported basis of $2.46 or on an adjusted basis of $3. That’s an increase of approximately 9% versus the prior year.

Turning to the segments. Global ceramic had sales of just over $1.1 billion. That’s a 3.4% decrease as reported and 2.9% on an adjusted basis. Our industry volume remains constrained and pricing aggressive, while we are investing in new products to try to improve our mix. Across our various geographies, residential new construction is outperforming remodeling; and commercial, though slowing, is stronger than residential. Operating income on an adjusted basis was $95 million or 8.5%, which was in line with the prior year as lower input costs of $17.5 million, an increase in productivity of $14 million, offset the unfavorable pricing mix of $25 million, FX of $10 million, and the lower overall volume. In Flooring North America, sales were $959 million or a 4.3% decrease as reported, even though our laminate product continues to take share as a waterproof wood alternative and with our LVT product is expanding in the retail and builder channels.

In commercial, the hospitality, government, and education channels are driving the outperformance versus the residential sector. Operating income on an adjusted basis was $82 million or 8.6%. That’s an increase of 260 basis points versus the prior year as lower input costs of $36 million and the strength of our productivity of $19 million offset the weakness in price and mix of $36 million. And in Flooring Rest of the World, net sales were $727 million. That is an 8.3% decrease as reported and 7% decrease on an adjusted basis as markets conditions remained slow with weak consumer discretionary spending on larger ticket home projects. Pricing mix has also continued under pressure, though sales actions taken by our team through the introduction of new products and expansion of our customer base did lead to an increase in unit volume in laminate, LVT, and panels.

Operating income on an adjusted basis was $91 million. That’s a 12.6% operating margin. That’s 40 basis points increase versus prior year led by a reduction in input costs of $30 million, positive impact of increased productivity of $15 million, offset by unfavorable price and mix of $50 million. Corporate and eliminations were $12 million during the quarter, in line with the prior year, with 2024 expected to be approximately $45 million. Now turning to the balance sheet. Cash and cash equivalents were just shy of $500 million with free cash flow during the period of $142 million, bringing our year-to-date total of almost $240 million. Inventories were just shy of $2.6 billion. That’s a year-over-year decrease of approximately $40 million due to reductions in costs and impact of FX as volumes slightly increase.

Inventory days increased to 128 versus 120 in the prior year. The current plan, though, is to keep inventory relatively flat versus the prior year by year-end. Property, plant, and equipment stands at just under $4.8 billion, with CapEx of $91 million in the quarter, compared to D&A of $172 million. The company plans to invest approximately $480 million in the year with D&A at approximately $630 million. And the balance sheet overall and cash flow remained very strong with net debt of $1.9 billion, leverage at 1.3 times, and liquidity at approximately $1.3 billion, with the company purchasing approximately $90 million of shares in the quarter. With that, I will turn it over to Chris to review our Q2 operational performance.

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.

Jeffrey Lorberbaum: We anticipate present conditions continuing in the third quarter with elevated interest rates, inflation, and weak housing sales impacting our markets. In the current environment, we’re executing plans to optimize our revenues and costs. We’re managing the controllable aspects of our business, including innovative product introductions, reducing overhead, and rationalizing less efficient assets. We’re streamlining operations by reducing complexity in our processes and product portfolios. Our restructuring initiatives will deliver significant savings and enhance our performance when our markets recover. We continue to benefit from lower energy and raw material costs, partially offset by labor and freight inflation.

In the third quarter, we anticipate pricing pressures will continue given low industry volumes, constrained consumer spending on large purchases, and consumers trading down. As usual, European summer holidays will seasonally impact our sales and performance. Given these factors, we anticipate our third-quarter adjusted EPS to be between $2.80 and $2.90, excluding restructuring or other one-time charges. While we manage the short-term environment, we’re preparing to capitalize on the demand that occurs when the industry rebounds. Residential remodeling is our industry’s largest category and should lead the recovery as interest rates decline and consumer confidence improves. Across our regions, new home construction is needed to satisfy demand; and aging homes will require remodeling to meet homeowners’ needs.

In addition, new commercial projects will be initiated as the economy strengthens, and our product investments will enhance our participation. As the world’s largest flooring manufacturer with the products, capabilities and financial strength to optimize our results as the market recovers. We’ll now be glad to take your questions.

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

Q&A Session

Eric Bosshard: Good morning. Thanks The restructuring or cost-out program, whichever you call it, I’m just curious. You’ve gone through a couple of these in the last few years. The projects that you’ve identified here, why were they not included in the last one? Or asked a different way, like why take cost and capacity out now?

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.

Eric Bosshard: Within this, I guess, the second component of this, as you think about solving for the growth scenarios in ’25, how much capacity do you have to support growth next year? Or embedded in that, what is the growth assumption you’re considering as you rightsize capacity or optimize capacity?

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.

Operator: Our next question today comes from David MacGregor from Longbow Research.

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?

James Brunk: As you look at the restructuring savings, first of all, the initial actions that we took last year, we’ve realized about — of the $150 million that we announced, about $110 million through the second quarter, you should see approximately about $130 million by year end. That program was fairly evenly spread across all three of the segments, maybe with Flooring North America a little bit more. With the announcement today of the additional $100 million, as we said, $20 million to $25 million would be recognized this year, a much larger piece into the following year. And then all businesses are continuing to look at reductions in SG&A, operations, and logistics. And as you look at that, Flooring North America will have more benefits than the other segments in the recently announced actions.

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?

Jeffrey Lorberbaum: You’re correct. Commercial is holding up better than residential. We are seeing some slowing in new projects and postponement of it. If you look by channels, the ones that are outperforming for us are hospitality, retail, government, and education. We’re also taking actions to increase our penetration with large strategic accounts, and we’re increasing our participation with them. The good news is that in these categories, pricing is more resilient, given more differentiation in the marketplace. And then just keep in mind, as we come out of this thing, commercial improvement takes longer because even though the macro things change, the planning and construction times take longer to do so that there’s a lag between them.

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

Jeffrey Lorberbaum: We’re projecting it’s going to be down somewhat. And it’s different by market, by channel, all over the place. But I mean it is slowing somewhat.

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

Susan Maklari: Jeff, my first question is a bit about how you’re driving the business through the products. One of the things that you’ve mentioned is the product differentiation that you’re focused on as well as the cost side of things. Can you talk a bit about what some of those benefits or those features are that you’re stressing in those products? And as those gain traction over the coming quarters, how should we think about what they can contribute in either the back half of this year or even into next year in terms of perhaps mix shift and what that could mean for the business on top line as well as a profitability perspective?

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.

Susan Maklari: Okay, that’s helpful. And then it was encouraging to see that you did $90 million of share buybacks in the quarter. Can you talk a bit about what drove your decision to do that? And should we take it as a sign perhaps of you having some greater confidence in visibility and the forward trajectory of the business. Is it a sign that maybe we’ve turned the corner and you’re feeling better about things from here?

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.

Susan Maklari: And does that mean maybe that you’ll do more of them in the future?

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.

Operator: Our next question today comes from Mike Dahl from RBC Capital Markets.

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?

Jeffrey Lorberbaum: Sure. At this point, we don’t anticipate anything changing the present conditions in the third quarter. And we’ve built in just a continuation of weak demand and pressure on pricing and all — and continued low industry utilization. We don’t see the mix changing with the consumer in the period much from where it is. And so we see the trading down continuing. We see new construction may be softening a little bit, but not a lot. And then we still have remodeling that’s compressed and — just to remind everybody, the remodeling business is our highest margin business because they tend to buy better quality products than the other residential channels. In addition, to remind everybody, the third quarter is always seasonally slower.

And don’t forget European holidays. They take off and it pulls down our third quarter. And then in general, we’re anticipating, compared to last year, we’re going to see some improvements from all the different actions we’ve been taking. If you go into the fourth quarter, we think that the central banks will probably start reducing rates. But we expect that the impact on us, we probably won’t feel until we go into next year. And then again, the seasonality of it declines with the holidays where people spend on other things than home and commercial projects. And with this, given where we are, built into hours is continued low volume of our industry, which means we’re going to have shutdowns and overheads as we maintain the discipline in our inventory levels as we go through.

Other than that, I guess, as we get out in that area — for there and further out, we could start seeing cost increases in different pieces. And as those things happen, we’ll have to consider, do we need to make any changes and raise prices in the future as the markets change? What else is there? In the fourth quarter, one other comment. We actually have two additional days in the period due to just the way the calendar falls.

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?

Jeffrey Lorberbaum: I mean, we gave you the expectations for the third quarter is that most of the improvement is coming from the internal actions we’re taking rather than the marketplace However, we are seeing some improvements in volume, as we said, and — I don’t know, it couldn’t be as — almost maybe half the product categories or different places. But at the same time, there’s still huge pressure on pricing and mix. So anything that we’re picking up in the volume piece is being offset by the pricing and mix in the marketplace in the second half.

Operator: Our next question today comes from Keith Hughes from Truist.

Keith Hughes: Thank you. In the release, in Flooring North America, and in the prepared comments, you called out LVT and laminate. I guess the question, were those businesses up year over year?

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.

James Brunk: Yeah. Those were two of the categories, Keith, that Jeff was mentioning that, from a unit volume, was up.

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?

Jeffrey Lorberbaum: Remember, I’m talking about a worldwide market with a lot of different parts of that with different comparisons in Europe. I mean the market is really depressed. And in Europe, a year ago, we were struggling with some cost structures with high gas prices and pieces. It was more difficult to compete against the imports. I mean, we’ve taken actions in different marketplaces to help us. I think that we’re increasing our distribution in some. And I mean, it’s a tough market, but I think we’re executing well.

Operator: Our next question today comes from Michael Rehaut from JPMorgan.

Michael Rehaut: Thanks. Good morning, everyone. Question. I’d love to try and get a sense from your perspective of what drove the upside to the second quarter, if there were specific areas within perhaps, for example, North America that maybe came in a little better than expected, either — and just more broadly on either the sales or the margin side. And if you see any of these trends perhaps continuing into the third quarter that might cause a similar result if those trends remain in place, that that might ostensibly also drive some upside to the 3Q guide?

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.

James Brunk: Then on your question, Mike, on specifically like Flooring North America. I mean, generally, across all three segments, in Jeff’s prepared remarks, talking about managing the controllable costs. And the business is really benefiting from those cost reduction and restructuring activities while we’re still investing in new products which should improve our mix and profitability as some of this pent-up demand gets released later in the recovery.

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?

James Brunk: For the last question, it is a weighted average. And so it depends on when, obviously, each of the shares was purchased. So you’ll start to see more of the impact as you go into Q3 and then for the full year. So there will be some change as you go out the balance of the year. In terms of the top line for the back half, as we’ve said, we are seeing some unit expansion in some of our product categories. But remember, as Jeff just emphasized, you also have price and mix. So even if you’re up a little bit on units, it’s being basically either offset or partially offset at the very least by price and mix.

Operator: Our next question today comes from Phil Ng from Jefferies.

Phil Ng: Hey, guys. Congrats on a really strong quarter in a tough environment. So Jeff, if I heard you correctly, you were hinting at maybe you’re seeing higher costs. You could consider raising prices. Certainly, ocean freight, shipping containers, depending where it’s coming from — I think, like Asia might be up like 3x to 4x, at least that’s what we’re hearing. So it’s putting a lot of pressure for some of your competitors that import products in the US like LVT, lam, and all of that sort. At least we’re hearing maybe there’s rumblings of price increases in the back half. I’m curious what you’re hearing on that front? And what does that mean for Mohawk? Is that a cost headwind? Does that provide a pricing umbrella? And how does that potentially impact your portfolio?

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

Jeffrey Lorberbaum: And on the other side, the imported products, where we’d have them, will have to pass through the ocean freight changes, as everyone else will as it changes. I guess on the material side of it, we think that the prices have bottomed, and we are seeing some increases now. In this marketplace, it’s really hard to determine where they’re going to be six months from now. So given the low demand, we see it coming. We’ll just have to find out if it’s going to happen sooner or later. Usually, when you have low demand like we have, there’s not much pricing, upward movement materials, but we’ll have to react to whatever happened and manage through it as we go through.

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

Jeffrey Lorberbaum: I don’t hear anything, but they’re going to have to. It’s not if. I mean, these freight rates are up significantly.

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.

Jeffrey Lorberbaum: If it works the same as historical, which it may or may not, when rates start coming down, the market — the people’s confidence goes up. And what happens is is you have this multiple years of pushed out remodeling that happened. So usually, the consumer that’s sitting there, when they start feeling better about the economy and different pieces, the remodeling industry picks up and there’s very limited lag times when it starts. That’s typically followed by the new housing and existing houses. People start moving more and more confidence in doing it. And then you typically have anywhere from a 9- to 12-month lag from that point before the commercial sector, which takes longer to plan, get budgets approved, before you start seeing those type of things help tends to be the typical recovery. And when you start with the timing of it, I mean, your guess is as good as mine. Sooner is better for me.

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

Jeffrey Lorberbaum: It always does it.

Operator: Our next question today comes from Matthew Bouley from Barclays.

Matthew Bouley: Hey. Good morning, everyone. Thanks for taking the question. Back on the new restructuring. I’m curious if it was more kind of a change to your near or medium-term outlook for that recovery? Or was part of this something more structural around the longer-term need for capacity in certain product categories? I think you mentioned it might be a little more weighted to the Flooring North America. So yeah, any color on that kind of decision process. Thank you.

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.

James Brunk: But given the restructuring we take, it’s important to reiterate that we feel good about the capacity that we still have installed to react to, as Jeff said, that recovery period.

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.

James Brunk: You are correct that in the quarter, if you just look at material and energy, it’s about $90 million of benefit from a year-over-year perspective compared to the weaker price mix of . That’s just material on energy. And then the productivity, which was close to $50 million was really there to offset the increases in wages and benefits. Now as you fast forward to the second half of the year, we would expect each of the segments to see that continued price and mix pressure. But from a year-over-year benefit also, there will be less benefit from input costs as you lap over the lower cost from last year. Now that is one reason also, as Jeff pointed out, we’re implementing additional cost reductions or restructuring actions to manage the situation.

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

Adam Baumgarten: Hey, guys. You talked about the price or the cost piece on a year-over-year basis maybe being less of a tailwind in the back half. Are you actually seeing input — sequential input cost inflation as we’ve gone through the year so far?

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.

James Brunk: The key point, Adam, was that we’ve been very consistent as you see the lower cost flowing through compared to last year. The high point was going to be in the first quarter saw a little bit less in the second quarter. I would expect that to continue as you go into the third and fourth quarter as well.

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.

Jeffrey Lorberbaum: It’s really broad-based. What’s happened is that laminate is becoming accepted as an alternative to wood floors and/or LDP. In all the markets, builders are using it more than they have. In retail, the retailers are also picking it up and utilizing it. And then — what am I missing? The commercial business doesn’t use it at all. It is a very limited? Is it — our laminate, we have unique technologies that makes our laminate look better and in different visuals than other people can make. And so if — in the world markets as well as the US, we have a huge share of the mid- to upper-end part of the laminate business, and we have none of the commodity at the bottom. Our equipment is different, our products look different, and the value propositions are different.

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

Kathryn Thompson: Hi. Thank you for taking my questions today. Based on some of our work and talking to the channel and feedback from the field, in the case that you’ve gained some market share this year. I wanted to see if you could clarify what gains you’re seeing either by channel or by product categories and how sustainable you think these gains may be? Thank you.

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.

James Brunk: Another good example, Kathryn is in Europe. In ceramic, with energy costs coming down, we are able to level the playing field to being more competitive in that marketplace. And we saw that in the quarter where we proved over Q1 and from a unit perspective and a cost perspective.

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.

Kathryn Thompson: Okay, great. I have just a clarification from your press release yesterday afternoon. And one of the items you said in terms of the cost-cutting measures was leveraging technology to lower administrative costs. How much of this — could you clarify more? Is this a euphemism for AI and incorporating that? Just help us understand a little bit more about that phrase. Thanks so much.

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.

Kathryn Thompson: So you’re not — just to clarify, you’re not necessarily — you’re not to the point of having AI be part of cost improvement plans quite yet. Is that a fair statement?

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.

Operator: Our next question today comes from Rafe Jadrosich from Bank of America.

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?

Jeffrey Lorberbaum: Just from a general point of view, then I’ll let Jim try to give you some more view. When the volume is going down, you have to make all these cost changes to try to keep the — you don’t get any benefits and upticks. What you’re happening to do is trying to cut the cost out to manage the lower throughput and pull them down to keep them in line. Now as we come out of it, what will happen is as the volume goes up, we’re going to try to limit the expansion of these costs and leverage the margins and get them back to double digits and higher from where we are today.

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.

Rafe Jadrosich: Okay, that’s helpful. And then just on the pricing side, as you look across each of the three segments — I know on a year over year basis, it’s down. But sequentially, are you seeing any type of stabilization? And then just to clarify on an earlier question, you not have not seen any impact yet from the higher shipping costs in terms of competitors reacting to price.

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.

Rafe Jadrosich: So from 2Q into 3Q, you would expect sequentially down — just still down, but less than it was down 1Q into 2Q?

James Brunk: Yes.

Operator: Our next question today comes from Laura Champine from Loop Capital.

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?

James Brunk: Mix is a tough one because you have not only product mix, but you also have channel mix. So as we’ve said, as commercial slows, that will have a negative impact on mix, as Jeff talked about, the commercial market earlier in the call. But on the flip side, on the products, we — because of our investments that we have made, we are really trying to leverage that to see stronger mix. So you have the combination of the two. So as we look forward, price and mix, it’s more on the pricing side.

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.

Operator: And ladies and gentlemen we’ll conclude our question-and-answer session. I’d like to turn the conference call back over to Jeff Lorberbaum for any closing comments.

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: Ladies and gentlemen, with that, we’ll conclude today’s conference call and presentation. We do thank you for joining. You may now disconnect your lines.