Mohawk Industries, Inc.

Good morning. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries first quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press the pound key. Should anyone need assistance at any time during this conference, please press star, then zero, and an operator will assist you. As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, April 26, 2019. Thank you. I would now like to introduce Mr. Frank Boykin. Mr. Boykin, you may begin your conference.

Thank you, Simon. Good morning, everyone, and welcome to Mohawk Industries' quarterly investor conference call. Today, we'll update you on the company's results for the first quarter of 2019 and provide guidance for the second quarter. 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 Security and Exchange Commission. This call may include discussion of non-GAAP numbers. You can refer to our Form 8K and press release in the Investor Information section of our website for a reconciliation of any non-GAAP to GAAP amounts. Before proceeding with the call, we want to express our sympathy to the family of John Swift, Mohawk's CFO from 1984 through 2004, who recently passed away. John was a leader in the transition of Mohawk from a $300 million division of Mohasko through a leveraged buyout, followed by an initial public offering. He helped grow Mohawk into a $5 billion flooring company prior to his retirement in 2004. Moving back to the earnings call, joining us today are Jeff Loeberbaum, Chairman and Chief Executive Officer, Chris Wellborn, President and Chief Operating Officer, and Glenn Landau, who joined Mohawk this month as Executive Vice President and Chief Financial Officer. With that, I'll turn the call over to Jeff for his opening remarks. Jeff?

Thank you, Frank. In the first quarter, our results came in line with the high end of our expectations. We delivered sales of $2.4 billion, up 1% as reported, and up 6% on a constant exchange in days basis. Our adjusted operating income for the period was $207 million, or 8.5% of sales, in a difficult environment which we anticipate improving. The U.S. dollar strengthened significantly versus the prior year, reducing our translated results for the period. During the period, the economies were softer in most of our regions. Housing markets were weaker, and material and energy costs escalated around the world. Uneven demand impacted volume, increasing pressure on pricing and mix as competition increased. To align our inventories with demand, we reduced production rates to manage working capital. In the U.S., flooring retailers reported that after disappointing results in January and February, activity was improving by the end of the quarter. During the first quarter, we raised prices in many of our markets to cover inflation, and each of our businesses are taking specific actions to adapt to the present environment. We're introducing new products to differentiate our offerings and enhance our margins. We've replaced higher cost assets, consolidated operations, enhanced manufacturing processes, and reduced overhead expenses. We will take further actions across the enterprise as we move through the year to grow our sales and improve our margins. While we are managing through the current conditions, we're continuing to strengthen the long-term value of the business. The integration of our 2018 acquisitions in Australia, New Zealand, and Brazil remains on track, and we are further investing to enhance their performance. Our products and geographic expansions continue to ramp up as we increase sales. We will realize the potential of these projects through 2020 and beyond. For more detail on the performance of our segments, I'll turn the call over to Chris.

Thank you, Jeff. For the quarter, our global ceramic segment sales increased about 2.5% as reported and were up about 7% on a constant days in exchange rate. Our operating income was about $90 million, or 10% of sales, including the acquisition of Illiani and headwinds from slower markets, pricing pressures, and inflation. In the U.S., the ceramic industry faced continued pressures from LVT as well as imports from a stronger dollar. A group of ceramic tile has recently filed dumping claims against China, the largest ceramic exporter to the U.S. If confirmed, tariffs could significantly increase the deliberate cost of Chinese imports and change competitive pressures. Due to earlier interest rate increases, U.S. home sales and construction slowed, although both have recently improved as mortgage rates declined. To enhance our position, we have begun many initiatives across the business. To cover inflation in transportation, we implemented price increases across many categories. To compete with imports, we've begun offering private label programs and are shipping direct truckloads to reduce the delivered cost. We have improved service to our customers with new mobile systems to make ordering and picking up faster and easier. We are enhancing our value proposition with unique features such as slip resistance, greater durability, and bacteria resistant technologies. We've added high-end decorative tile collections and thick porcelain outdoor tiles as an alternative to stone. We are testing a fast installation technology, and we are pioneering a porcelain roofing system that offers the beauty of traditional slate with greater value. The start of our new quartz countertop plant is on schedule and will complement our source stone and quartz program. The plant produces slabs that are about 30% larger than the industry, which reduces both installation seams and waste. We are also expanding sales of our porcelain slabs made in Italy that are used on floors, walls, and countertops. To reduce operational expenses, we have enhanced body formulations and improved manufacturing efficiencies maintenance costs, and freight strategies. We have also reduced both our administrative and selling costs with system enhancements. In Mexico, we are outperforming the market by broadening our customer base, expanding our polished and technical porcelain offering, and supporting stores that exclusively sell our brand. We continue to grow our exports to Central and South America with our leading design. In the period, we implemented price increases to recover higher natural gas, electricity, and transportation costs. We anticipate our Mexican business improving from these actions. As the new Brazilian government implements policy changes, the country's economy is in transition. We have recently implemented price increases to offset the dramatically higher cost of natural gas, which is regulated by the government. We are upgrading our mix with high-end porcelain and large sizes and have begun producing wall tile for the U.S. market, which replaces other source products. To support higher sales, we have restarted an existing production line that was idle. New investments in Brazil will expand our porcelain production by the first part of 2020. We have reviewed best practices between Ileani and our other ceramic businesses, and we are implementing improvements across all groups. The European ceramic industry has weakened with the regional economies. Competition in the market has increased and is pressuring industry pricing. We believe we have grown our market share in this environment. Our sales were driven by commercial, outdoor, and porcelain slab products, as well as higher-style, mid-price offerings. During the period, we temporarily lowered our production rates to reduce our inventory. We are realigning the production in our European plants and reducing staffing to improve our costs, distribution, and service. We have consolidated management to increase our productivity, re-engineered our formulations, and refined our maintenance processes. To reduce transportation expenses and enhance service, we have reorganized our Eastern European logistics system with new warehouses and technology. We are investing in energy-saving initiatives and adding cogeneration to improve costs this year. Our Russian ceramic business is gaining momentum with sales improving significantly driven by our premium national distribution network and 365 owned and franchised stores. The strength of our brand and breadth of our offering has made us the market leader. For new residential and commercial projects, we have expanded our specification organization, which is the strongest in the industry. Our product mix continues to improve, and we are increasing prices to recover inflation. During the period, we completed our porcelain floor and wall expansion to support further growth this year, and we have begun construction for additional slab production and the manufacturing of premium sanitary ware to expand our offering. For the quarter, our Florida North America segment sales were down 3 percent as reported and 1.4 percent when adjusted for one less day in the period, reflecting the 2018 mortgage increases and more severe weather conditions. The business improved as we moved into the second quarter, supported by higher retail activity and an improving housing environment. As expected, operating income for the segment declined due to lower volume, inventory reductions, higher material costs, and LBT manufacturing variances. Across the segment, we are taking many actions to improve our sales, costs, and margins. To address changing consumer preferences, our new residential carpet introductions included more blended, multicolor collections and sophisticated patterns. Our new ColorMax technology, which blends earth tones, was voted the best carpet innovation at the national show. As polyester products gain share, we have differentiated our continuum collections with enhanced color visuals. The carpet price increases we have implemented are being partially offset by declining product makes. To ensure that each of our products in the market is priced properly, we have instituted better practices and controls. We have replaced high-cost assets and are consolidating four inefficient operations, which will reduce our overhead and cost structures. We are enhancing planning strategies, increasing production outputs, and reducing process variations to facilitate this realignment. These actions are being completed with additional improvements are being reviewed. Our commercial business improved during the quarter due to new soft and hard product launches and channel segmentation. We are increasing our product benefits with new soft service collections featuring advanced soil and stain protection, unsurpassed durability, and a proprietary moisture-resistant backing. Our hard surface sales increased dramatically with new product introductions with unique features for different commercial channels. We are adding sales reps to expand our specialization to increase our soft and hard surface penetration in the education, healthcare, and hospitality channels. We have improved the performance of our soft surface commercial facilities with investments in new technology and process enhancements. We are the North American leader in laminate flooring, and our recent investments in advanced technology are expanding our market and upgrading our mix. Our unique waterproof technology has revitalized the laminate market and extended the use of our products in the home. We have improved the production of our premium products, including those with deeply embossed surfaces. To improve our efficiencies, cost, and service, we have consolidated operations and warehouses. Our sheet vinyl margins have improved due to better mix and manufacturing performance, even as we discontinued the sale of non-MOHA branded products. We're expanding our sheet vinyl distribution and introducing new products to expand the market. Our LVT continues to grow substantially, and we have a complete offering under our key brands at all price points. Our Mohawk Smart Select and Solid Tech collections provide unique features with different value propositions. We have introduced a premium rigid LVT collection called Pergo Extreme, which is being well accepted due to its leading style, performance, and brand recognition. We will extend our high-end LBT collections as the year progresses. Engineering modifications to our LBT manufacturing are being implemented and will substantially improve our output and cost throughout the year. Most of these changes have already been proven in our European operations, and we are confident in our long-term positions. For the quarter, our flooring rest of world segment sales were up 6%, as reported, and up 16% on a constant days and currency basis. Our adjusted operating income for this segment was about $95 million, or 15.3% of sales, up 11% on a local basis, including our acquisitions. The economies in Europe and Australia and New Zealand have been slowing, putting pressure on our revenues and margins. In this climate, we outperformed in most of our businesses. We have been increasing prices on selected products to offset inflation and currency changes. We are expanding both our residential and commercial sales organizations to enhance the distribution of our products. The segment was impacted by startup costs and underabsorption of our new LBT sheet vinyl, laminate, and carpet tile operations. Our strategic acquisitions of the flooring leader in Australia and New Zealand a mezzanine flooring business in Europe, and regional hard surface distributors enhanced our market position and our first quarter results. In laminate, we outperformed the European market with our unique technologies that make our products the preferred alternative to wood. Our new introductions are elevating the design and features of our brands at all price points. The acquisitions of our regional distributors are enhancing our market position and customer base. We have specialized our European laminate plants so they produce either luxury or volume products to improve our efficiencies and cost. In Russia, we are also introducing similar premium alternatives on our new state-of-the-art equipment. During the period, our LVT manufacturing substantially improved reliability and production. We're introducing more rigid LVT collections across our brands. We're making additional equipment modifications to relieve process restrictions as throughput has increased. We will continue to drive enhancements in our processes, formulations, and features throughout the year. To increase our sheet vinyl sales in Europe, we are introducing innovative products with unique features and expanding our commercial offering and sales organization. The new Russian sheet plan has opened up capacity in Europe, and we are pursuing new customers and channels. In Russia, the new plan is operating ahead of our initial plan in both volume and yields. We're expanding our customer base, and over time we will increase market share to optimize our results. Our insulation results improved as last year's material shortages have been resolved and cost declined. The product category is growing significantly since our cost and selling prices have normalized. Our volume has exceeded prior peaks, and we are taking share from other insulation alternatives. To extend the use of our products, we have introduced a new insulation product used under floors that complements our ceiling and wall products. Our board businesses are operating well as a result of our prior investments. The slowing European economies are impacting the industry and pressuring our volumes and pricing. We continue to enhance our processes, reduce our costs, and increase the use of recycled materials. In Belgium, with government assistance, we are constructing another power plant that will convert waste wood to energy and improve our competitive position. Our new carpet tile plant in Belgium is operating well as we continue to build our specified and transactional sales. Our business continues to grow as we expand our customers, product offering, and our sales organization. The Australia-New Zealand market is under pressure as the economy and housing slow. We are raising prices to offset increased costs primarily from a weaker local currency. We are introducing new products with enhanced styling and performance to extend our leadership in the market. We are closing high-cost extrusion assets and supplying yarn from our U.S. operations and other sources around the world. We are broadening our hard surface collections to expand our share of the flooring market. Leveraging our U.S. capabilities, we are constructing a new carpet tile line to grow our position in the commercial channel. I'll now turn the call over to Glenn, who will review our first quarter financial performance.

Thank you, Chris, and thank you, Frank, as well, for the introduction and support over these past weeks. I am pleased and excited to be a part of the Mohawk team and look very much forward to engaging with you, our current and prospective shareholders in the broader investment community, to build on an already strong relationship. Now to the financial performance and the year-over-year bridges. First quarter net sales were $2.4 billion, up 1.3% as reported compared to prior year, or up 6% adjusted for days on a constant FX basis. Organic growth in legacy businesses measured in net sales per day on a constant FX basis was positive despite slowing markets and weather in North America, up nearly 1% versus prior year. One point of clarification for those of you who may not have picked this up already, in our last earnings call, it was stated that there would be one more day in the first quarter this year versus last year, while in actuality, there was one less day. Correspondingly, there will be one more day in the fourth quarter this year. I hope that clears up any questions. Back to the financials. At the segment level, Legacy flooring rest of the world showed the strongest growth, largely offsetting continued weakness in flooring North America. Gross margin adjusted for special items came in at 27.1% in the first quarter, a decrease of 280 basis points versus prior year. The decrease was driven primarily due to inflation and inputs of $45 million, weaker price mix of $12 million, and market-related downtime of $7 million. partially offset by higher volume including acquisitions of $21 million and lower startup costs of $9 million. FX impact on gross margin dollars was $22 million unfavorable. In terms of overhead, SG&A per net sales was 18.7%, excluding unusual items, up 90 basis points due to investment in samples, displays, and marketing to drive sales. Special items in total were $41 million for the quarter, of which $15 million was cash. Of the total, $6 million was acquisition-related, and the remaining $35 million was restructuring, made up of charges for replacing high-cost assets and consolidating manufacturing and warehousing facilities in Florida and North America, as well as workforce reductions in global ceramic. Adjusted operating margin was 8.5%, down from 12.1% last year. as inflation and input costs headwinds of $51 million, weaker price mix of $12 million, and lower productivity of $4 million hit the bottom line. Increased market-related downtime and softer volumes of $9 million were offset by reduced startup costs. Additionally, FX translation of $11 million further reduced income and more than offset the transactional FX positive $4 million below the line in other income expense. Adjusted EBITDA was $348 million, or 14.3%, before interest expense of $10 million, up $8 million from last year, the $2 million increase due to additional debt from acquisitions and share buybacks. The effective tax rate for the quarter was 23%, and is expected to move into the range of 20% to 22% in the second quarter, while still maintaining guidance of 22% to 23% for the full year. Finally, adjusted net earnings per share was $2.13 in the quarter, down from $3.00 or 29% versus last year. Now let me turn to the segments. Global Ceramic had a solid quarter, with sales of $898 million, an increase of 2.5% as reported versus last year, with legacy sales per day holding at 1% on a constant FX basis. Adjusted operating income was $90 million, or 10% of net sales, down from 13.3% margin last year. Inflation and input cost headwinds were $21 million. Softer volume and market-related downtime amounted to $7 million, and additional costs for product development, sales personnel, and marketing were $5 million. Improving productivity of $8 million and lower startup costs of $2 million were partial offsets. and FX translation was unfavorable by $3 million in the global ceramic segment. In the flooring North America segment, sales of $922 million decreased year-over-year by 3% on an as-reported basis, or 1.4% on a daily rate. Adjusted operating income dropped to $31 million, or 3.4% of net sales in the quarter, as input costs of $35 million and other inflation of $4 million, combined with weaker volume of $15 million and lower productivity of $13 million, were only modestly offset by $3 million in price mix. With that said, raw material costs peaked in the quarter, with improvement expected in the second quarter as lower cost inventory works its way through the process, and we also expect seasonally stronger sales. Now moving to flooring rest of the world, the segment performed very well as sales improved year over year by 6% as reported with legacy sales per day up 4% on a constant FX basis. Acquisitions added 12% to the top line or 69 million. Adjusted operating income came in at 95 million or 15.3% of sales, up 11% including acquisitions and on a constant FX basis. as relief on overall inflation of $10 million driven by lower input costs and improved volume totaling $14 million driven by acquisitions and strong performance in LVT, laminate, and insulation in Europe were only partially offset by lower price mix of $16 million. FX translation was unfavorable by $8 million. Corporate expenses and eliminations drove an operating loss of $10 million with a full-year estimate in the range of $35 to $40 million. Speaking now to the balance sheet, receivables ended the quarter at $1.7 billion, with day sales outstanding, improving versus the fourth quarter to 56 days, roughly in line with last year. Inventories ended the quarter at $2.3 billion, or 126 days, slightly better than prior quarter, and higher year-over-year by $293 million due to the ramp-up of new plants, acquisitions, and higher raw material costs. As shared in the segment detail, inventories were adjusted in the first quarter with plant downtime. Going forward, we will match our production with demand while continuing to try to optimize the supply chain. Fixed assets for the quarter held at $4.7 billion compared to the prior quarter on capital expenditures of $137 million in the period for 100% of depreciation in line with plan. Guidance for the full year continues to be CapEx spending within a range of $550 to $580 million, again, roughly in line with depreciation of around $570 million. So, wrapping up, total debt was $3.3 billion at the end of the quarter, with leverage at 1.9 times debt to EBITDA. The balance sheet is strong. and free cash flow of $33 million in the quarter improved materially over the same period last year by $100 million, underlining expectations of a very solid year in terms of cash generation. With that, Jeff, I'll turn it back over to you.

Thank you, Glenn. All of our businesses are taking actions to enhance our results with our major focus on LVT manufacturing, U.S. carpet performance, managing ceramic headwinds, and increasing the utilization of new investments. In the U.S., flooring sales started out weaker and have recently begun to improve. Outside the U.S., most markets have softened, and we are adjusting as required. Across the business, we are enhancing our offerings, reducing our costs, and ramping up new plants to expand our portfolio. We continue to realize increases to offset inflation and restore our margins. Our LVT sales are expanding significantly and we are making equipment modifications to increase our volume and productivity this year. We are restructuring our U.S. carpet and laminate assets and realigning our European ceramic operations to improve our costs and results. Our recent acquisitions are positively impacting our results as we integrate them into our business. Taking all this into account, our EPS guidance for the second quarter of 2019 is 281 to 291, excluding any one-time charges. We're investing in new products and geographies to drive growth and strengthen our organization to improve our execution. We're taking the necessary steps to adapt to the present conditions and deliver greater profitability for the long term. We'll now be glad to take your questions.

Simon, operator?

Operator?

Ladies and gentlemen, at this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Management requests that you limit your questions to one primary and one follow-up. If you have additional questions, you may re-enter the queue by, again, pressing star 1 on your telephone keypad. Your first question comes from the line of Stephen East with Wells Fargo. Go ahead. Your line is open.

Thank you, and good morning, guys. Jeff, as you look at the demand both in Europe and the U.S., U.S. is rising, Europe is starting to slow down. Could you talk some about the magnitude of each? Is the U.S. acceleration offsetting Europe or not? And do you think Europe, the way you all are forecasting now, do you expect Europe's sales to remain positive for the year?

In the U.S., The industry we're anticipating with housing and what's going on in the market to be slower this year than last year, but we really don't have good visuals into how that's going to evolve depending on the different estimates. Some people have it picking up dramatically as we go through the year and others have it still hesitating. Our estimates aren't any better. In Europe, the economies are all slowing across Europe and The competition is increasing as that occurs, and in that environment, we outperformed it in the first quarter, and we think we can continue to outperform it for the rest of the year.

Gotcha. Okay. And then as you look at Flooring North America, you know, the big issue was obviously, you know, on the margin side versus the revenues, but margin down about two-thirds versus last year, and it actually – You know, your op income sequentially declined more than your revenues declined. So I guess if you all could rank order the causes of the drop in, you know, your op income and any color on how you expect those to continue through the year.

The industry sales were weaker. The production was lower in order to reduce the inventories. We had high material costs flowing through from prior, which impacted the margins. The price increases we put in are helping to offset, except the mix is going the other direction. We see lower material costs and higher prices improving margins going into the second quarter. To prove the cost, we talked about replacing high-cost assets, closing inefficient operations. We're consolidating multiple warehouses, and we're reducing headcounts and overhead. to improve the results.

All right. Thank you. I appreciate it.

Your next question comes from the line of Tim Woys with Baird. Your line is open.

Yeah. Hey, good morning, everybody. I guess just maybe my first question on LVT. Is there any way to provide any sort of kind of numerical update, you know, maybe on just how the LVT performance is in North America, maybe relative to last quarter or six months ago, and how does that compare if you look at Europe maybe as a proxy since that capacity has been up a little longer than North America?

What we've said is that the global capacity when it's operating where we expect will be over a billion dollars when the plants are optimized as we go through In Europe, the LVT line is ahead of the U.S. line and the process has stabilized. The productivity and waste are continuing to get better. We have identified equipment modifications which are being executed as the volume is going up to eliminate bottlenecks which are holding it up. We are introducing products across our brands and rigid products to use the capacity and we're expanding our customer base in Europe. In the US, we are making engineering modifications similar to ones that have already been put in Europe. The US is making progress in it. We are shipping rigid products in the marketplace as we go through. And I don't have any specific numbers to give you, but we're confident that the LVT will provide us advantages and through the year will continue increasing. As we increase the volume, the overhead absorptions and the returns will get better.

Okay. Is there, of that billion dollars of capacity, I mean, is there any way to think about what the utilization is today on a run rate basis?

I don't have it to give you.

Okay. And then I guess on the production side of things, How are you kind of thinking about production as you kind of move into Q2? And I guess if you look at the market for 2019, what market growth level are you assuming in your production expectations? Is it flat? Is it up slightly? I'm just trying to think about, you know, how you guys are thinking about, you know, top-line growth in 2019 organically.

It's really different by market by market than you have the acquisitions and going through, you know, Maybe just the U.S.?

Maybe just the U.S.?

In the U.S., the numbers aren't out for last year yet, but we're estimating that the industry grew 3% to 3.5%, and our assumptions are that with what's going on, it'll be slower than that, it'll be less than that, even with the price inflation that's occurred overall is how we're sort of thinking about it. The carpet industry sales in the first quarter were down, and so were ours with LVT impacting them, as we go through, and it's also being impacted by mixed decline as we go through. So I don't know if that would help you a little.

Okay. No, no, that's helpful. So maybe kind of, you know, on a volume basis, you know, flattish sales growth to the market isn't a bad assumption.

Okay.

Your next question comes from the line of Susan McClally with Credit Suisse. Your line is open.

Thank you. Good morning, everybody. My first question is just, you know, how should we think about productivity in the U.S., and especially given the initiative that you have within CARPET, you know, consolidating some of those assets, LVT obviously coming online, Laminate, all these different kind of, you know, projects that are coming through. How should we think about those coming together and perhaps improving the productivity over time?

So productivity across the business was impacted by lower manufacturing levels, higher costs with employees, and the ramping up of these new projects all end up in productivity. To improve the cost, we talked about replacing assets and restructuring different parts and operations, and we reduced both direct labor and overheads. We think the productivity will continue to lag in the near term due to the inefficiencies and higher costs, But we expect to see improvements continuing throughout the year.

Okay. And then as we do think about the inventories and going into maybe a seasonally stronger period, do you think that you've fully right-sized the business? How are you thinking about your level of utilization going into the second and the third quarters?

Okay. The inventory levels were up in the period, but almost all the inventory increase was up due to new plants that require inventories to support them. The acquisitions that we did last year, the inventory flowing in, and then with the tariffs that were expected, the products that were imported from China, we dramatically increased the inventories in the period. For the most part, most of our... Inventories in the ongoing businesses were kept under control with lower production rates, and we're going to match the production with the demand for the most part going forward.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Stephen Kim with Evercore ISI. Your line is open.

Yeah, thanks very much, guys. I appreciate the time. My first question relates to the role that mix played in the quarter and what we could expect heading into 2Q and the rest of the year. In particular, we noticed that the price mix number was pretty big negative in flooring rest of world. And I know you also include mix by product type in your volume numbers. And so I wanted to, and I noticed that in Flooring North America, that volume number impact was a little higher than we expected. So I guess my question is essentially, can you help us understand what the mix dynamics, product mix and channel mix, were the main drivers in Flooring North America and Flooring rest of world? And should we expect those trends to be longer lasting throughout the rest of this year?

The mix in flowing North America, Steve, is the same thing that's been going on for some time. First, let me just say what we disclose and talk about is a combination of price mix. We have a difficult time pulling them apart and separating them. The mix in North America has been negative as we have seen a couple things. One, product changes, where we've seen product changing from higher price point nylon to lower price point polyester. And then as we started putting in price increases, that also drove some negative mix as well. And then I think you're referring to the, on the Flooring Rest of the World, the number you're speaking to is price mix combined, right? Not mix itself, correct? Correct. Yeah. So I think what's happening in Flooring Rest of the World is in some of the categories over there, product categories, we're seeing raw materials go down, and that's impacting pricing. Jeff, I don't know if you want to add anything to that or not.

Last year in the insulation business, there was a shortage of raw materials, and the prices spiked about 30 percent or more. And the prices have, in a recent time, come back down So a major part of that is those prices coming down. But at the same time, it drove our selling prices up, impacted the volume of the industry and us. And with the price, the price, the cost coming down, we're lowering the selling prices along with the decreases. But the volume of the product category is going up and it's doing reasonably well right now.

Got it. OK, that's helpful. My second question relates to some of the management changes that we've seen recently. Obviously, Glenn, it's nice to have you aboard, and, Frank, we're going to be sorry when you're not as present on the calls. But we've also had some other questions regarding sort of deeper within the organization. And so my question relates to, number one, what is your plan in the global ceramic business, and particularly Daltile, in terms of running that business, or are you going to have any differences in how you manage that business? And then secondly, in Florian North America, I wasn't sure if you had yet a head of the resilient business within Florian North America. I know you broke that into five categories, or Paul did, and so I just wanted to get a sense for how we're doing in terms of staffing on that.

Okay. We have a really strong organization in the North American ceramic business. It's operating well and continues to operate well. At the moment, we've chosen for Chris to operate as the interim president, and we haven't selected another person at this point. There's no rush. Chris, if you remember, operated the business for many years, and the organization is continuing to go forward. We have selected someone else to run the other business, and everything's like we would like it.

Stephen, I would just comment that the Throughout the ceramic segment now, the organization is extremely strong. Europe, Russia, Brazil, North America. And, of course, JT and I have sat beside each other for 20 years. I put him in that job. And I just want some time to get in the business again, and it's working really well.

I just wanted Chris to work another day a week.

Excellent. Okay, thanks, guys.

Your next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open.

Good morning. Thanks for taking my questions. My first question, a lot of companies across building products have called out a number of headwinds in the quarter, but one in particular has been destocking at large retail. Could you comment about kind of what the inventory levels is are in your sense of where the inventory levels are from your larger customers, and have you seen any changes in order patterns as part of that comment you made about improvement?

Well, I can just comment on the, in some cases, in the ceramics side with large customers, we have a lot of new products coming in, and they are at the same time taking all the old products out. So that's of causing some of the destocking that you were talking about, where it's just product changes.

And some of the other ones, there was some pushing out of it as it went through also.

Got it. Okay. My second question, Jeff, it's a bit bigger picture. If I step back and think about the moving pieces and what you're talking about in some of your global operations, clearly a big focus for you and the company has been expanding. internationally over the past decade and increasingly the growth has come in countries that are emerging in nature and it seems like you're adding volatility to the portfolio alongside this global push and I wanted to just ask you how you're thinking about your global strategy at this point based on kind of how the past 12 months or so have informed your results.

I don't think it's changed anything. Nothing's come as a surprise. You have periods of time where the U.S. dollar strengthens and then the translated results are impacted as part of it. The European businesses we're investing in, we're trying to grow into other product categories as we've talked about to expand our footprint in Europe. We have a strong organization that we think is outperforming the market. In Russia, we expanded our presence We have the leading ceramic business in Russia. We expanded the laminate business into Russia's doing well. We put in new equipment to expand it. And we're putting more investments in as we grow our market share in Russia. We've entered the Brazilian market with the new acquisition we made last fall. We bought one of the best businesses and got the talented management alongside it to operate it. There will be more volatility in that marketplace, but I think we're well positioned to do well within it. And so as a general rule, I would throw in Australia, too. Australia, we knew that the marketplace was due for a slowdown when we bought it. That was based on what we paid for it. We think we paid the right amount for it, given that we knew we were headed into it. And no surprise that housing was overbuilt and softening right now. The results are still good and they're changing the strategy as we go forward. I think we're doing the right things for the long term of the business.

Mike, I would just add one more thing just to make a point. Russia, we've been in since 2013 with the ceramic acquisition. We've got a really good, strong management team there. They have done a phenomenal job managing through the ups and downs and staying out ahead of the market through both increasing and declining environments. So overall, I think we've done a pretty good job of managing the complexity of the footprint around the globe.

But there is more volatility. I mean, the one you just talked about, the translated results from Russia went in half with the ruble. It collapsed, but our business is still strong there and still growing.

And I would just add one more thing. Even when we go into a market like Brazil, we've known Ileani for 20 years. We know the management team very well, the president very well, and so we've done a lot of work before we make an acquisition like that.

Okay. I appreciate the thoughts. Thank you.

Your next question comes from the line of Keith Hughes with SunTrust. Your line is open.

Thank you. There was a comment earlier in the call about reducing capacity, I think specifically in Flooring North America. Can you talk about what specifically you're doing and what's the timeline to get that completed?

First thing is we installed some new low-cost extrusion capacity, which then is leading to closing two old extrusion operations. We're also closing a yarn plant and a small tufting plant. In laminate, we built a new warehouse to take up, and we're closing two other warehouses and consolidating another plant with that move. All of the things have good paybacks based on reducing the cost.

So, Jeff, are you lowering your overall extrusion capacity by these moves, or are you just supplanting? I know carpet volumes are just exceptionally weak the last six months.

We took out some high-cost extrusion, and it'll be slightly less, but it won't keep it from meeting the ongoing demand.

Are you running extrusion below where you need to run it to make good profits?

We're running it below. Well, we consolidate these together. So the new assets we have, half of it in and running now. and the other half's going in in the next month, I think, and we get through, the cost of our extrusion cost will come down. That's the question.

Okay. Thank you.

Your next question comes from the line of Justine Spear with Zellman Associates. Your line is open.

Thank you, guys. This first question, Frank or Glenn, can you walk through or give us your free cash flow expectations for the year? And within that, your expectations for working capital drag as you map towards a full year number?

Sure. This is Glenn speaking. Like I said earlier, free cash flow was strong in the quarter at $33 million. It's $100 million better year over year. And our outlook is very good, and that's based on the fact that – Capital spending, as we spoke to in our outlook, will be down materially year over year, and that is all upside versus last year. So, again, we're quite confident in a very strong cash performance and cash generation, and ultimately we believe we can whittle down that working capital during the year on efficiencies.

I think the number was like $600 or $700 million that you relayed last year. quarter is that is that still intact i think i think it's north of that and in terms of that working capital just looking at that you know the the working capital is a percentage of sales is quite elevated 25 percent it's i think the highest we've seen in quite a while how and you mentioned a few of the puts and takes there most of the takes but how how should we think about that as the year progresses and is there any risk of obsolescence within that number

One of the big driver on that is inventories. Justin and we've been working, as Jeff mentioned, to get our inventories down for some time. I think we've made good progress with that. The inventories are up, if you look at it, from the end of last quarter to the end of this quarter, by $50 million. However, the day's actually improved. about one and a half days. If you compare inventories to a year ago, they're up just a little bit over $290 million, and most of that's related to the new plants, all the investments we're doing that we're putting up. Got to get the inventories up ahead of the sales, the acquisitions that we've done, and then the higher Chinese inventories that we came in to get ahead of the tariffs. I think we're managing our inventories well, we're making progress, and we'll be in line with where we need to be by the end of the year.

Thank you. The next question is just the implied guidance and the sequencing of guidance. I know it's an improvement in terms of year-over-year degradation, but the second quarter guidance is below what most were expecting, particularly given the lower inputs that we saw with oil collapsing into January. I know it's since re-accelerated, but oil input's down quite a bit. Pricing's still good. Why isn't the margin profile better next quarter? And when should we see the year-over-year become more neutralized in your mind as we start thinking about potentially a better back half in terms of underlying demand?

As you said, the results for the first quarter were at the high end of our expectations. We expect the second quarter results to improve with higher pricing and volume and lower raw material costs. At the same time, as we look out, we see the economy slowing and we see housing growth under pressure. We also are having difficulty anticipating what the inflation is going to be for the rest of the year. What we continue to say is that the year-over-year decline in margins will improve throughout the year and keep getting better. future periods will have higher production rates, will have increased pricing, there'll be less startup costs in them, and we'll start getting some of the benefits from the restructurings that we've been talking about.

And can you quantify any of the restructuring benefit this year that falls into this year that you've just announced in the press release?

You know, we'll get some. The activities will be ongoing through this year, and then we'll see a much better benefit, larger benefit, full-year benefit as we move into next year.

Thank you. Appreciate it.

Your next question comes from the line of John Boff with Stiefel. Your line is open.

Thank you for taking my questions, and my condolences on John's first pathway. Sad news. My question is two different ones. One, did you have a material increase in the amount of imported LVT to sell either year over year or sequentially? And then is there any update on the accretion from the acquisitions you've done? Any update with macro slowing, particularly in Australia, to that guidance? Thank you.

The imported LVT sales are going up significantly. We also brought in more inventory based on thinking there could be a 25% tariff increase ahead of it. Also, the sales of our own manufactured products are also going up as we go through. Do you have the guidance we've given you?

Well, the accretion guidance hasn't really changed, John. I think we said for Ileani, the Brazilian acquisition, we expected annual EPS accretion in the first year of about 15 cents. And then on Godfrey Hearst, I think we had said accretion of 15 cents in the second half of last year, so about 30 cents for a full year. So those numbers haven't changed. Okay.

Thank you. Good luck.

Your next caller or your next question comes from the line of Phil Eng with Jefferies. Your line is open.

Hey, guys. I think part of the path towards earnings improvement going forward, at some point, productivity would flip positive. You start lapping some of these price-cost headwinds, and you're done drawing down and in towards. Just curious, it'd be helpful for you to kind of give us a sense if any of these pieces you're expecting to flip positively in the next few quarters, or just any color on some of the timeframe would be really helpful.

I think that we do expect those. At the same time, we're having difficulty estimating the economies and the housing pieces we go through as well as the inflation right now. And the only guidance we've given is what we keep saying, that the year-over decline in margins will improve and get better as we go through the year.

Okay. And just on the product, just in terms of production and inventory, it sounds like it's a work in progress. Should we expect that to be – a big headwind going forward just because it's been a drawdown dynamic throughout the last few quarters. Do you have any better lineups out on that front?

Most of it's behind us, but there's still some of it left because the first quarter wasn't quite as strong as we thought. But for the most part, as we said, we'll be manufacturing most of the businesses similar to the demand.

Got it. And then from a capacity standpoint, just curious if you could give a little color in terms of where your capacity is shaking out with some of the initiatives you've done in North America going forward, whether it's carpet. Is there an opportunity for you to kind of repurpose maybe some of your vinyl capacity into LVD? Thank you.

The different assets manufacture different products. and so you can't easily switch them between one product category and another.

Next question, operator.

Your next question comes from the line of Michael Wood with Nomura InstantNet. Your line is open.

Hi. Thanks for taking my question. I just wanted to ask the margin question another way. I understand the pressure is to 2Q year over year since you're still destocking, and there's a lot of price mix pressures. But in third quarter, you begin to lap some pretty major headwinds that were supposed to be temporary. I'm curious, by third quarter, what are the major pressure points to margins? Is there going to be lower productivity or higher you know, mix, negative mix or cost pressures?

The problem we're having is you're asking for specific ongoing guidance, which we continue to say we're giving the general piece of where it is. We think that we have a lot of actions in place to improve our position in the business. There's some questions about what will happen in the different environments, such as, you know, it depends on who you listen to. The dollar strength could go up significantly depending on somebody or it could go the other way dramatically depending on who you listen to. The oil price hit recent highs lately. It could be at $55 or it could be at $80 then, which impacts the prices. There's a lot of variables which we don't know how to put into the specifics. and we don't want to lead you astray.

Understood. Okay. And you talked about price being implemented across some product categories. Do you know yet whether or not they've been successful, taken by the market, and any quantification in terms of what that incremental benefit could be?

There are price increases. In most products and most geographies that have been implemented, the prices are flowing into the business, which is helping the second quarter. Also, there's increases in various places. We mentioned Brazil. The gas prices have gone up astronomically. We have the same thing in Mexico as well. In some cases, it's covering the changing pieces. In other cases, it should help the margins, which is why the second quarter is going to be better.

Okay, thank you.

The final question is from the line of Matthew Boulay with Barclays.

Your line is open. Hi, thanks for taking my question. On the inflation side, Jeff, understanding it's not your business to predict commodities, but how does that oil price rebound impact your thoughts around price increases, specifically in carpet? Do you think that further price increases would be necessary, just looking at where commodities are at this point? Thank you.

It's too early to tell. The price is highly volatile. It could drop significantly or stay the same or go up. In general, it takes anywhere from two to three, four months to pass through to what our purchase is. And that also changes depending on supply and demand dynamics of the various steps in between. So we're watching it and we'll have to see. The move has been recent and we have no idea whether it's going to going to be maintained or if it's going to go up or down from here quickly. Our guesses are no better than anybody else in the oil business and the chemical businesses as you go through. With that, I'd like to make sure everybody understands that we're taking the actions to improve our results. We're confident that our new investments will give us the returns we want in time as we ramp them up. We're taking actions to improve the existing businesses, and we appreciate you joining us for the call. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.