Mohawk Industries, Inc.

Q4 2022 Earnings Conference Call

2/10/2023

spk25: Good day, and welcome to the Mohawk Industries Incorporated fourth quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to James Brunk. Please go ahead.
spk21: Thank you, Jason. Good morning, everyone, and welcome to Mohawk Industries quarterly investor call. Joining me on today's call are Jeff Lowerbaum, Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's fourth quarter and full-year performance and provide guidance for the first quarter of 2023. 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 reconciliation of any non-GAAP to GAAP amounts, please refer to our form 8K in press release in the investor section of our website. I'll now turn over the call to Jeff for his opening remarks. Jeff?
spk18: Thank you, Jim. For the full year of 22, Mohawk's net sales were $11.7 billion, up approximately 4.8% as reported, or 8.8% on a constant basis. And our adjusted EPS for the year was $12.85. The flooring industry entered 22 with momentum from strong housing markets supported by record home sales, low interest rates, and rising household formations. High home equity levels Shifts to larger homes and the desire to customize living spaces during the pandemic were driving remodeling investments. As the year progressed, the U.S. housing market declined under pressure from rising interest rates and inflation. In Europe, energy and overall inflation escalated, and consumers reduced discretionary spending to pay for essentials. In the first half of the year, the company implemented pricing actions and production strategies that offset the inflation we incurred. With reduced home sales and remodeling in the second half of the year, our flooring volumes decreased. Our pricing did not cover material and energy inflation. Throughout the year, commercial and new construction and remodeling activity outperformed residential. Even with the housing industry slowing during the second half of the year, we concluded 22 with a strong balance sheet low net debt leverage of 1.3 times EBITDA, and available liquidity of approximately $1.8 billion to manage the current environment and optimize our long-term results. We acquired five bolt-on businesses during the year that extend the scope of our product offering and our distribution. These include sheet vinyl, mezzanine flooring, and wood veneer plants in Europe, a nonwoven flooring manufacturer, and a flooring accessories company in the U.S., When we complete the integration of these acquisitions, we will expand their sales opportunities, enhance their operations, and improve their efficiencies. We've just acquired Elizabeth in Brazil and are awaiting regulatory approval to close Vitramex in Mexico, both of which will almost double our local market positions in ceramics, expand our customer base and product offering, and improve our manufacturing capabilities. The teams are preparing to integrate the businesses, which will create significant sales and operational synergy. Turning to the fourth quarter results, Mohawk net sales were $2.7 billion, down 4% as reported, or approximately 1.3% on a constant basis, and our adjusted EPS was $1.32. Our revenues were driven by price increases and strengthened commercial channels. Our sales across all our businesses were slower than we expected in the quarter as residential sales contracted with rising interest rates, declining home sales, and lower consumer confidence. As a consequence, our customers lowered their inventory levels and consumers reduced their spending for renovation. Unlike other products, flooring does not require immediate replacement, so purchases can be deferred more than other durable goods. Commercial sales continued stronger than residential in the quarter, benefiting from ongoing remodeling and new construction projects. In the quarter, our global ceramic segment outperformed the others due to a higher level of commercial and new construction sales. Our flooring rest of the world segment softened as higher inflation and energy costs reduced demand in Europe. Our flooring North America segment sales declined with lower residential activity and a reduction in customer inventory levels. The combination of weakening sales, plant shutdowns, and the consumption of higher-cost inventory decreased the segment's performance for the quarter. In response, we reduced production rates and lowered our inventory, which increased unabsorbed overhead expenses. We curtailed spending across the enterprise, though inflation offset many of our initiatives. In both Florida and North America, as well as flooring the rest of the world, we're taking restructuring actions in specific areas to align our operations with the present market conditions. During the quarter, energy and material costs around the world began to decline, which would positively affect our future results. While we're managing the present economic cycle, we're operating with a long-term perspective and expanding capacities in areas where we have the greatest growth potential when markets rebound. These include LVT, laminate, quartz countertops, porcelain slabs, and insulation. We have reduced our planned capital spending until we see greater certainty in our markets around the world. We recently announced an agreement to resolve the securities class action lawsuit filed in January 2020. Though we believe the case is without merit, further litigation would be burdensome and expensive. We reached a settlement of $60 million, a significant portion of which will be covered by insurance and is subject to court approval. We also settled the dispute with the Belgian tax authority regarding royalty income. Though we believe our position is correct, we settled the $187 million assessment for 3 million euros. I'll turn the call over to Jim for a review of our fourth quarter financial performance.
spk21: Thank you, Jeff. Sales for the quarter were just under $2.7 billion. That's a 4% decrease as reported, or 1.3% on a constant basis. Favorable price mix in the quarter was offset by reduced volume and unfavorable FX. The decrease was primarily driven by weakness in the U.S. as residential markets slowed more than expected in the quarter. Gross margin, as reported, was 20.9% and excluding one-time items was 22.4% versus 26.8% in the prior year. The year-over-year decrease was primarily driven by higher inflation of $263 million offset by stronger price mix of $269 million and productivity of $16 million. The fourth quarter margin was further negatively impacted by weaker volume of $95 million temporary plant shutdowns of $69 million, and FX headwinds of $12 million. SG&A is reported with 18.6% of sales, and excluding one-time items with 17.9% in line with the prior year. On dollar basis, the favorable impact of FX of $12 million and volume of $3 million was partially offset by price mix of $6 million and inflation of $3 million. Operating margin, as reported, was 2.3% for the quarter. Restructuring and one-time charges, $58 million, including initiatives in Flooring North America and Flooring rest of the world and our disclosed litigation settlements. The restructuring charges combined the initiatives announced in Q2 and a new project in Flooring rest of the world to better align our LVT assets with market conditions. Operating margin Excluding charges was 4.5%, and the year-over-year decline in operating income was primarily driven by higher inflation of $266 million, offset by price mix of $263 million, productivity of 15, lower startup and other items of $8 million, although these were not enough to counter the weaker volume of $92 million and increasing temporary plant shutdowns of $69 million. Interest expense for the quarter was $15 million. Another income other expense was a $10 million expense due to unfavorable impact of transactional effects. In the fourth quarter, our non-GAAP tax rate was 12.6% versus 18.9% in the prior year. We are forecasting the full year 2023 tax rate to be between 21% and 22% with some quarterly variations. Earnings per share, as reported, was $0.52, and excluding charges was $1.32. Turning to the segments, global ceramic had sales of $988 million. That's a 4% increase, as reported, and 5% on a constant basis. Actions to drive favorable price and mix across the segment and improved year-over-year volume in the U.S. offset weakening unit volumes and other geographies. Operating income excluding charges was $70 million, which is a 16.7% increase versus prior year. An operating margin at 7.1% improved 70 basis points due to improved price mix of $111 million, productivity gains of $17 million, and favorable FX and other items of $8 million, offsetting the increase in inflation of $85 million, lower volume of $28 million, and related increased temporary plant shutdowns of $14 million. Flora North America had sales of $946 million. That's a 6.8% decrease versus prior year, as weaker volumes was only partially offset by favorable price and mix. The volume decrease was primarily resolved at declines in residential channels and customers lowering inventory levels with consumers deferring discretionary spending. On an adjusted basis, Florida North America's operating margin was approximately break-even. The year-over-year decline in profitability was driven by weakening volume of $32 million, temporary plant shutdowns of $33 million, and the impact of a higher cost inventory and other inflation flowing through the P&L of $109 million, only being partially offset by price mix of $71 million and productivity of $8 million. We expect many of these issues to carry over to Q1. Then in Q2, with seasonally stronger sales, lower costs, and increased production levels, we should see a solid improvement in profitability. And finally, flooring the rest of the world has sales of $717 million. That's a 9.9% decrease as reported and 2% on a constant basis. Installation products continued with strong growth in the quarter, but it was not enough to compensate for the decline seen in the flooring categories, primarily laminate and LVP, as inflation resulted in consumers reducing discretionary spending and in turn customers lowering inventory levels. Operating margin excluding charges was 7.7% for the quarter. Operating income declined versus prior year, It was the result of the decrease in volumes of 32 million, temporary plant shutdowns of 22 million, which contributed to lower productivity of 10 million, and increases in inflation of $79 million, only partially offset by price and mix actions of 81 million for the quarter. With the business concentrated in residential channels, we expect a number of these issues to impact Q1, which results in proving, as we move through the year, as lower energy and material costs should drive higher consumer spending. Corporate eliminations were $6 million in Q4 and $37 million for the full year. Moving to the balance sheet, the company generated free cash flow of $91 million in the fourth quarter and over $165 million in the second half of 2022. Receivables for the quarter ended at $1.9 billion, with the DSO at 60 days versus 56 days in the prior year, due in part to customer and channel mix. Inventories ended at just under $2.8 billion, or a 17% increase versus prior year, but declined 4% versus the third quarter. The year-over-year growth in inventory was primarily due to a spike in inflation, and sequentially, the decrease is primarily due to lowering of production levels to better align with demand. Inventory days ended at 138 days for the current year versus 131 in the third quarter. Property, plant, and equipment ended at just shy of $4.7 billion, and capital for the quarter was $151 million versus DNA of $159 million. For the full year, CapEx ended at $581 million and DNA of $595 million. Our current view for 2023 is a forecast of $560 million for CapEx and DNA of $592 million, but we will adjust with the changing environment. And finally, if the company maintains a strong overall balance sheet with gross debt of $2.8 billion and leverage at 1.3 times adjusted EBITDA, this strength gives us the flexibility to manage through the challenging environment. With that, I'll turn it over to Chris.
spk13: Thank you, Jim. The global ceramic segment increased sales and earnings with a higher mix of new residential construction and commercial sales than our overall business. Residential ceramic sales in all geographies are slowing, and operating margins are contracting due to lower volumes and manufacturing shutdowns. The cost of energy and transportation are declining, which will benefit our margins as these costs flow through our inventories. In the U.S., ceramic sales and volume both increased as we benefited from our premium product offering, price increases, and growing countertop business. Our collections with larger sizes and unique finishes combined with specialized structures and shapes are enhancing our sales and mix. We are increasing our sales efforts in growing categories, including healthcare, hospitality, and fitness, as well as multifamily and bill-for-rent homes. Cost inflation increased as higher energy and transportation expenses from prior periods were incurred. We are optimizing material supply chains and reengineering formulations to improve our costs. We reduced our inventories during the quarter by lowering production and enhancing our import strategies. We are reducing discretionary spending and limiting capital investments. To support additional growth in our quartz countertop sales, we are adding manufacturing capacity by the end of this year. Our countertop mix continues to improve as we expand our premium collections featuring our advanced veining technology. Our ceramic business in Europe remains under pressure with slowing demand, customer inventory reductions, and inflation. Our cost in the quarter were impacted by peak energy prices in the third quarter and reductions in plant volumes from temporary shutdowns. We are receiving energy subsidies in Italy but we remain disadvantaged to some competitors who have long-term energy contracts. Natural gas prices have declined substantially, though disruptions could impact future costs. As ceramic sales slow, the market is becoming more competitive. We are introducing new technologies to enhance surface textures, expand design capabilities, and improve our costs. We are completing the expansion of our large porcelain slabs to support continued growth and enhance our stylings. We have successfully reformulated our body composition to use alternative materials. Sales in both Mexico and Brazil decelerated in the quarter as inflation and increasing interest rates reduced residential demand. We anticipate continued near-term weakness and have reduced production levels in both countries. To cover inflation, we are managing mix in pricing. Natural gas prices in the regions are declining in line with the worldwide market and will lower cost as it flows through inventory. We have completed the acquisition of Elizabeth in Brazil and are awaiting regulatory approval to close Vitramex in Mexico. These acquisitions will position us as top producer in two of the world's largest ceramic markets. We anticipate significant synergies in all aspects of the businesses, which will enhance our sales and margins. We should be well positioned to leverage our combined strengths when the markets emerge from this downturn. During the fourth quarter, our flooring rest of world segment was impacted by high inflation and energy prices, and consumers reduced investments in home improvement. This caused a decline in residential sales, which comprised a majority of the segment's business. As consumer spending slowed, our customers further reduced their inventory levels, which lowered market demand even more. In response, we implemented temporary plant shutdowns and reduced our inventory levels, compressing our margins. Natural gas prices in Europe peaked at an unprecedented level in the third quarter, raising our material and production costs. Our pricing and mix did not fully cover inflation, which remains a headwind. We remain focused on optimizing volume with selective promotions, as well as controlling costs until the business improves. To enhance our competitive position, we are increasing our supply chain from outside the European Union. We have initiated additional restructuring actions to align with current conditions. Since the beginning of 2023, gas prices have declined substantially and material costs should follow. Assuming this trend holds, Europe should see lower overall inflation with higher wages, consumer spending should increase. During the quarter, all of our European flooring categories experienced significant volume declines, with many residential remodeling projects being postponed as inflation eroded consumer discretionary spending. Our product mix was impacted as homeowners purchased lower-priced flooring to maintain their budgets. We are launching new product collections and expanding promotional activities to improve our sales. Higher-cost inventory will compress our margins until it flows through our costs. Our sheet vinyl sales outperformed our other flooring categories as consumers chose lower-priced alternatives. We are improving the small Polish sheet vinyl plant we acquired in the third quarter by increasing its output reducing its cost, and expanding its distribution. We are expanding our rigid LVT offering as it takes share from flexible. We are increasing our existing operations and improving our formulation to lower our cost. We're adding new rigid production that makes smaller runs with additional patented features. We will phase out of the residential flexible LVT products and will close the supporting production. The cost of this new restructuring initiative is approximately $45 million, with a cash cost of approximately $7.5 million, resulting in annualized cost savings of $15 million and significantly increased sales. Our insulation business is growing as conserving energy has become a higher priority and building requirements have increased. We selectively increased pricing to cover higher material costs, and we lowered production in the fourth quarter to reduce inventory levels. We are growing our sales and distribution in the U.K. as we start up our new insulation plant. Our panels business has faced the same pressures as our other categories with softening demand and rising material prices. During the quarter, our customers continued to reduce their inventory levels, further impacting our sales. Anticipating higher winter wood and energy costs, we maintained our inventory levels going into the first quarter. Our investments in green energy have benefited our performance by reducing our reliance on higher cost gas and electricity. The integration of our recent mezzanine acquisition in Germany is progressing as planned. We are defining best practices and utilizing our own manufacturing to replace source boards. Our business in Australia and New Zealand are slowing with the local economies as inflation and mortgage rates are impacting foreign sales. We are taking actions to align our cost and inventory levels with the expected volume declines. We have announced additional price increases and are initiating selective promotions to maximize our sales. We are updating our product offering and enhancing our merchandising to capture greater market share. As in other categories, commercial sales are stronger than residential, and we are increasing our participation in specified projects. For the quarter, Flory North America's sales decreased faster than anticipated, primarily due to declines in residential channels, rug, and customer inventory reductions. With inflation and interest rates at high levels, many consumers defer discretionary spending or traded down to lower-cost products. Earnings in the segment were compressed due to lower sales, consumption of higher-cost materials, reduced inventory levels, and temporary plant shutdowns. Our hard-surface products outperformed soft, and the commercial sector remained stronger than residential, with hospitality showing the most growth. In response to slower market conditions, we are completely completing our restructuring actions, deferring capital projects, and reducing discretionary spending. During 2022, we reduced our costs through process enhancements and rationalization of less efficient facilities while absorbing historically high inflation. We continue to adjust our strategies to manage the near-term market conditions. Reductions in energy and materials should become a tailwind in the second quarter. Our commercial business remains solid as remodeling and new construction projects continue. We maintain strong margins in the quarter with pricing and mixed offsetting inflation. Our flexible LVT products are a preferred alternative that provides versatile styling with easy installation. The combination of our carpet tile and LVT collections enables the customization of commercial spaces with unique designs. Our integration of a small flooring accessories acquisition is proceeding well. The company produces rubber baseboards and stair treads used in commercial installations and broadens our current flooring accessory business. In the fourth quarter, sales of residential soft surfaces declined more than other categories. Sales weakened as retailers reduced inventory with declining consumer sentiment and home sales. The multifamily channel was the strongest performer, and we are realigning resources focused more on this sector. As demand dropped in the quarter, we increased temporary shutdowns, which resulted in higher unabsorbed costs. We have significantly lowered inventories in the fourth quarter and are reducing costs by eliminating less efficient manufacturing, enhancing productivity, and adjusting production to demand. Participation in our recent flooring roadshows was at record levels, with leading retailers expressing optimism about the year ahead. Our rug sales were lower as national retailers continued to adjust inventories with reduced consumer spending. We are restructuring our rug operations to lower cost and align production with demand. The integration of our non-woven rug and carpet acquisition is progressing well and provides new opportunities with our existing customers. Our resilient sales grew in the quarter as we leveraged our wet protect and antimicrobial technologies to differentiate our collections. We offset inflation through pricing and mix, though increased plant shutdowns resulted in higher unabsorbed costs and lower margins. We are introducing new collections to expand our offering while eliminating less productive SKUs. Our sheet vinyl sales were higher as consumers pursued budget-friendly flooring options and the multifamily channel strengthened. The first phase of our new West Coast LVT plant is operating at expected levels. We are preparing new technologies that will improve our cost and add differentiated features. We will install additional production lines and train personnel throughout this year. Our premium laminate sales were impacted by slowing retail traffic and customer inventory adjustments. Our laminate is gaining acceptance as an alternative waterproof product in all channels. During the quarter, we offset inflation through pricing and mix, though our margins were impacted by lower absorption from temporary shutdowns has reduced our inventory. We are beginning to see reductions in material inflation, which should help us recover our costs. Our new manufacturing line, which began last year, is operating at planned levels and will deliver our next generation of laminate features. With its industry-leading design and performance, our laminate business is in an excellent position to capitalize on the growing waterproof flooring category. Now I'll return the call to Jeff for his closing remarks.
spk18: Thank you, Chris. The flooring industry is slowing due to higher interest rates, sustained inflation, and low consumer confidence. The visibility of the depth and duration of this cycle is limited, and conditions differ across the world. Mohawk has a strong record of managing these downturns by proactively executing the necessary actions. We're adjusting our business for the current conditions by reducing production levels, inventory, cost structures, and capital expenditures. We're implementing restructuring actions in both Flooring North America and Flooring the rest of the world to streamline operations, reduce SG&A, and rationalize higher-cost assets. In the first quarter, we anticipate more pressure on pricing and mix due to the low industry volumes. Our inventory costs remain elevated in most products due to the higher material and energy that we incurred in earlier periods. Additionally, we will not raise production as normal in the first quarter to prepare for future demand, increasing our unabsorbed costs. Our costs of energy have fallen and should benefit our global margins as our inventory turns. Our second quarter results should have sequentially stronger improvement with seasonally higher sales, increased production, and lower material costs. Significantly lower costs of energy in Europe should enhance consumer spending discretionary purchases, and flooring demand. We're refocusing our sales teams on the channels that are performing the best in the current environment. We're introducing new innovative collections and merchandising, as well as targeted promotions to improve sales. Given these factors, we anticipate our first quarter EPS to be between $1.24 and $1.34, excluding restructuring and other charges. Around the world, the long-term demand for housing will require significant investments in new construction and remodeling. Mohawk is uniquely positioned with a comprehensive array of innovative products, industry-leading distribution, and strength in all sales channels. We're implementing structural changes to navigate the industry's challenges while optimizing our future results. We anticipate coming out of this downturn in a stronger position as we benefit from our bolt-on acquisitions enhanced market positions in Brazil and Mexico, and strategic expansion of our high-growth product categories. Our balance sheet is well-positioned to manage the current cycle and to drive future growth and profitability. We'll now be glad to take your questions.
spk25: We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Phil Ng from Jefferies. Please go ahead.
spk11: Hey, Jeff. Quick question. In terms of your price-cost, despite demand actually weaker last year, you managed price-cost actually really well, but you did highlight you're seeing a little more competition on pricing, but RAS are falling as well and kind of flow through a little more in 2Qs. So how should we think about that price-cost equation looking in the current backdrop in 2023 and how that progresses through the year? Any pockets we're seeing a little more pricing competition in particular you want to flag?
spk18: So the energy and material costs are moving. The low amount of volume we're seeing across the world, we're seeing additional promotions and pieces so far It's been controlled pieces across most of the marketplaces, and so we think that's going to continue. In our first quarter, we said we expect more pressure on pricing and mix at the lowest part of the year, and then we think that we're going to see some balancing of the costs and pricing better in the second quarter as the costs flow through inventory. We'll have to see how the rest of the year goes. We're going to have to continue to manage it and change as required.
spk21: And Phil, from a year-over-year perspective, we would expect that you still have the higher cost inventory layers that are going to come off in the first quarter. And with that renewed pressure on price and mix, I would expect the gap between price mix and inflation to be greater in the first quarter than the fourth quarter. And that was included in our guidance.
spk11: Got you. So it feels like your margins are going to bottom out in one queue and get progressively better throughout the year. That's a really good color. And then help us think through productivity. You talked about you're rolling out some restructuring efforts in North America and the rest world, but demand's a little weaker and you're seeing more startup costs with new capacity coming on. So it gives a little color how to think about productivity for this year. And then how is the acceptance of some of these newer capacity that's coming on? I think you're bringing on laminate. You've got some LVT coming on as well. How is the product acceptance so far?
spk18: The productivity piece is driven by multiple pieces. As we slow down, some of the costs we isolate into temporary shutdowns, but we don't catch them all. So the productivity ends up a catch-all for all of those things that change as they go through. We think due to the volume differences between last year and this year, the productivity is going to be less in almost all the businesses. If you remember last year, we were coming out of COVID in the first half. We were building inventories and running most of the businesses at very high levels. This year, we're going to be running at much lower levels, and that's what's going to show up in the productivity decrease as we go through. I think your other question was around the new investments. The new investments are all in areas that are growing and that we've had capacity limitations, and we think they're preparing us for a growth cycle as we come out of this cycle at the other end. We're putting in The pieces are, so we're adding laminate, which has been a growing category in the pieces as we go through. And it's expanding because it's becoming more accepted as a waterproof option, which is a technology we've brought in as an alternative to LVT. And it's actually more resistant to scratches and more durable. We're increasing our quartz countertop business, which our line's been running full. We've been supplementing with imported products to support greater sales, and that should be starting up the end of this year. The investments in LVT in the western part of the country should support a broader local-based production of it and should give us advantages by having both East Coast and West Coast production. Then we can supplement or not source products we're doing with the same equipment. We are out of production in our ceramic slab businesses, which is based in Europe. It's a growing category that's taking the high-end marketplace as another alternative. We're increasing it. Finally, we've just started up a new insulation plant in Europe. In the UK, it puts us in a new region that we haven't been in. It's starting up now and expanding its production. We've chosen the parts of the business that have the largest growth potential. We think as we go into 2024, it's going to pay us a lot of benefits.
spk11: Just a point of clarification on that productivity comment, Jeff. You said it's a catch-all, less productivity versus last year, but on a year-over-year basis, is that still a good guy, or should we expect to be a negative headwind on a year-over-year basis?
spk21: On a year-over-year basis, when we get outside the first quarter, it should become more of a positive. Again, what you have is when you're running the facilities, even if it's not a complete shutdown, if you're running slower, you do have inefficiencies both in labor and material that are going to come through the productivity line.
spk25: Okay, super. Thanks a lot for the call. Our next question comes from Susan McLary from Goldman Sachs. Please go ahead.
spk05: Thank you. Good morning.
spk08: Good morning, Susan. My first question is, can you help us think about that sequential lift that you expect for the second quarter of relative to what we normally see in sort of historical years? Should it be bigger than what we've otherwise seen, given some of the factors that you outlined? And then how do we think about the cadence through the year? Is it reasonable to think that first quarter should be the low point?
spk18: So going into the first quarter, residential sales are slowing, and customers are minimizing the inventory, so we're expecting them to keep their inventories low at this point. We are using high-cost inventory levels in the first quarter. Production volumes are lower than last year when the business benefited from the rebound we just talked about. There's more pressure on pricing and mix due to the industry volume and competition trying to utilize facilities as we are. We see inflation impacting our labor costs around the world as we start raising the labor rates. And we're actually putting some more investment in new products to reposition some of the pieces to optimize our volume this year. With this, we're anticipating improving conditions as we go into the second quarter with lower costs. To remind you, normally margins expand as we go into the second quarter. We think they'll expand a little more this year because of seasonally stronger volume and mix. in both our flooring, rest of world, and North American segments. We're expecting the margins to improve as the costs and pricing better align from this inventory flow through. We believe that European demand will also improve. In Europe, their wages are increasing at a higher rate than they are in the United States. And then over the winter, their energy costs were so high that it really impacted their discretionary spending. We see that changing as the new gas prices flow through the economy. With all that, we see the input being a tailwind. Production levels should increase from where they are in the first quarter to the second quarter. We see restructuring should start benefiting us more as we go through. I guess last is we go through, when we go into the fall of the year, the fall comparison should be weaker, and we think that the category could improve with inflation declining, wages being higher, and potentially housing starts improving from the bottom.
spk07: Okay, that's very helpful color, Jeff.
spk08: And then my second question is, How do you think about the longer-term trajectory for your Flooring North America margins? You obviously made up a lot of ground in the last couple of years relative to where we were before the pandemic. How much of that do you think you can hold on to as things normalize, and how should we be thinking about what that new rate of profitability could look like?
spk18: First, where we are today... you have those peak costs that we weren't able to cover. So the cost peaked in the third quarter. It's still flowing through our inventory. The pricing never got aligned with it as the inventories were falling off, so that impacted the margins. As we go through, the costs and prices should more align, helping the margins, and then over time we expect them to continue increasing, but in this environment there's pressure on everything. So we'll have to get through this year, and I should improve significantly if we go into next year.
spk21: Just a reminder, this cycle is a little bit different. It's not kind of typical of other cycles. The employment remains strong with wages increasing. Housing remains in short supply, and low mortgages will kind of limit people moving as much. Aging homes, higher home values should support future remodeling. and strengthen the rebound or the pent-up demand. Commercial projects continue to be initiated. That's holding at this point. And inflation is slowing, and interest rates may actually be near a peak.
spk08: Okay. So is it reasonable to assume then that you can sustainably operate at a higher level than you were at, say, in 2019 or so, but maybe still holding a bit below the peaks that we'd seen before? in the earlier years?
spk18: I don't have the numbers in my head to compare them like you're asking. I think that in this year, what you have is all the lack of visibility, and we don't exactly know what the volumes are going to be and the competition is going to be, so we'll have to adjust as we go forward.
spk04: Okay. All right. Thank you, Jeff. Good luck.
spk25: Our next question comes from Eric Bouchard from Cleveland Research Company. Please go ahead.
spk27: Thank you. A couple things. First of all, you talked about the pressure on price mix, which still looked to be, I think, ahead of cost for RAS here in 4Q. But I'm curious, Jeff, in prior cycles, is it, you know, this changes for, it sounds like there's some pressure for a quarter or two and then it improves. How should we think about how price mix behaves through sort of this phase of the cycle, you know, not just one Q, but throughout kind of 23?
spk18: Price mix, first of all, you have a channel change as you go through. As you go through the cycles, the highest margin businesses we have are the retail replacement business, remodeling businesses, and those slow down first, so Those margins slow down and that impacts the mixes we go through. That's having one part of it. The margins are then affected by these lower throughputs through the plants as our costs increase. Then we have to make conscious decisions over what we do with the infrastructure and how far you cut it back in order to make sure that you're able to operate as the business improves on the other side in the pieces. So we're managing those and keep changing the strategy based on what the volume levels do. The other thing I guess going on this year is you have recently all the channel inventories were taken down. We think they should be bottomed out about now. We think the energy and inflation in Europe is going to be a big change in it. it flows through the economy over there we see residential remodeling and home sales improving as we go through the year and with that we expect the mix to improve as the other categories improve okay so that the favorable price mix which was 270 million or thereabouts in the quarter that number
spk27: from what you're saying, that doesn't have to necessarily step down meaningfully in 23. That number can still, I guess, the question is, is there trade down? Is there this change? Does that number deflate or contract meaningfully from the level that it's at now, or is that not how it works?
spk21: You are going to, Eric, and we're seeing it right now, you're going to see some trade down. Again, it depends if you're looking you know, sequentially versus year-over-year, but in the first quarter year-over-year, you do have some still favorable price mix from all the pricing that was initiated in Q2, Q3, and Q4 of last year, and then you are going to get to a point where you start overlapping the initiatives from 2022. The point is, and especially in the first quarter with the lower volumes to fill that gap, starts to pick up, you're going to continue to see pricing pressure, um, in the marketplace.
spk27: Okay. And then the second question just relates to, uh, the competitive environment. I think you talked about some restriction of your Europe LVT business is transport costs. And specifically I'm thinking ocean costs of bringing containers of LVT to the U S has changed, uh, I'm curious how you're seeing the U.S. competitive dynamic supply situation, I guess narrowly in LVT, different now or ask differently how the global supply of LVT is influencing the market and your expectations for 23.
spk13: Yeah, I'll comment on that. So specifically related to imports, the import prices have been declining, but also our production cost in the U.S. has been declining. As you look at the competitive situation, we have a broad offering for both residential and commercial. We participate in all price points of rigid and flexible LBT. Imports are declining, and U.S. material and energy costs are also falling. Our local costs are higher than imports, but we get a premium for better service versus supply chains that can be three months or longer. We're improving our production and adding features like wet protect, that protects subfloors and anti-bicrobial to differentiate. Lastly, our West Coast plant cost will continue to fall as that plant comes up.
spk25: That's helpful. Thank you. Our next question comes from Truman Patterson from Wolf Research. Please go ahead.
spk15: Hey, good morning, guys. I'll just ask a multi-part question and keep mine to one. Following up on some of the prior questions, you know, clearly NatGas was a large headwind for ceramics throughout 2022. It's clearly nosedived here recently, both in the U.S. and Europe. I know you all have, you know, that high cost inventory you need to work through. You all were hedged partially in Europe in the fourth quarter, but Any chance, you know, nat gas, ceramics, any chance you can help us think through some of the potential cost tailwinds as we move through the year and we get through some of these items? And do you primarily, you know, give these cost tailwinds back through pricing, trying to stimulate demand? or are there any offsets that you all think you might be able to maintain pricing and kind of recapture that price cost?
spk13: Well, let's talk about the cost first. So as we get in the back half of the year, our costs should be more in line with our competitors. We should be pretty much equal.
spk17: That's a European comment.
spk13: Yes, European. And then there will be – we do think there's going to be volumes pressure in the market. But as those energy costs continue to come down and wages go up, we think demand could be higher in Europe going forward. So it just depends on how that works out.
spk18: And then around the world, the energy prices continue to come down everywhere and it will impact the cost. We're going to have to see what happens with a competitive environment given the slowing conditions around the world.
spk15: Okay. Should I extrapolate that for North America, U.S. as well? Correct. All right. Thank you all. Thank you.
spk25: Our next question comes from Mike Dole from RBC Capital Markets. Please go ahead.
spk26: Morning. Thanks for taking my questions. Sorry to beat the dead horse here on the price-cost stuff, but I'll ask one more. On the pricing side, correct me if I'm wrong, but some of the Some of the pricing last year, we were under the assumption it was almost kind of like surcharge pricing that layered in pretty quickly in relation to some of the energy cost increases on both product and maybe on some of the logistics also. So I guess the question is, you know, to what extent is it more kind of quantitative or mathematic in terms of how much pricing comes off as some of those costs come down and maybe those surcharges roll off.
spk18: You're correct that we did in different markets on different products have some of it as temporary surcharges. It was both on product and on freight and most of those surcharges have now gone away and they don't exist anymore at this point. The majority of the increases, though, were put through by price increases in the marketplace, and we'll just have to manage those relative to the competition to stay competitive as the world changes.
spk26: Okay, that's helpful. Thanks, Jeff. And my second question is just in relation to the channel inventories and then your own production. Where is your sense of where channel inventories are? Obviously, it does cover a broad range of products and geographies, but so either kind of high level or by region, you know, do you think you, are you back at normal levels? Are you below normal levels? It's trying to gauge the risk of further destock here in part.
spk18: As a general statement, we think there was a significant amount taken out in the fourth quarter and the third quarter, and We believe in most markets that they should be close to the bottom. There's some where the costs and prices and supply was a little tighter and longer, so there may be some in a few regional markets. But for the most case, we are assuming they're close to the bottom at this point, but we'll know after this quarter.
spk25: Got it. Thanks. Our next question comes from Stephen Kim from Evercore ISI. Please go ahead.
spk39: Yeah, thanks very much for all the info. I'm going to sort of follow up on that last question there regarding inventory. With respect to the plant shutdowns and your planned inventory reduction, I understand that market forces are driving some of this. But it also seems like there's a bit of an opportunistic aspect, perhaps, where you're shifting the timing of your annual production into periods, you know, with lower commodity costs. So, in other words, what I'm curious about is if commodity costs were not declining as they are, would you still take the same amount of shutdowns or are you planning to take a little bit more than you would otherwise do because of the trajectory of commodity costs? And then finally, can we get some guidance about where your inventories and dollars could go over the next couple of quarters?
spk18: So in the fourth quarter, we made conscious decisions to decrease the inventories in some of the businesses given our forward view of the commodity prices. And so we took them down even knowing that our customers were also taking them down, which also you know, hurt our margins in the quarter. And some of the businesses in Europe, we made a choice not to take them down. At the time, we were looking at it and we didn't know whether there was going to be a spike in the energy costs and we actually left some of the inventories higher in anticipation of higher costs in the first quarter, which we are going to reverse out in the first quarter now that they didn't It didn't happen like we thought. So we actually, if we knew what would have happened, we probably would have taken those down sooner, is it? So we are making those decisions on a constant basis based on our future view of the dynamic for the business. I forgot the other part of your question.
spk21: So the other part, Stephen, in terms of our view of kind of our inventory plan for 2023, you know, presently we would expect the year to be kind of at year end to be slightly below where we ended in 2022. Obviously, it really depends upon the demand conditions as we go through the second quarter and the second half of the year and the pace of inflation.
spk39: Okay, so that's a year-end comment. In terms of the trajectory here over the next couple of quarters, though, can you give us an idea of what we might expect, Jim?
spk21: The goal is to try to keep the inventory levels and production very close to demand, so the That was one of the principles behind not building the inventory as we normally do in Q1.
spk39: Second question relates to mix, not price per se, but mix. You've mentioned that you've seen trade down across your categories, reflecting pressure that the average consumer is feeling with their rising household expenses. And so basically the consumer's P&L, if you will, is driving negative mix. But on the other hand, certainly in the U.S., but in many other markets, I think you've seen homeowners' balance sheets strengthen dramatically due to much higher home equity levels. And so my question is, do you expect this to show up eventually in favorable mix? as folks tap into that home equity? And are you positioning your product assortments in any way to be able to capitalize on an eventual move to higher-end products or a richer mix, which is different from what you're seeing right now?
spk18: Yes to your question. It's really a question of timing. At this point, we see we're towards the front end of it. I mean, it started with the housing slowing down in the third quarter. So we're seeing at the front end. So we would be doing all that later in the year.
spk13: We're also, Stephen, I know in LVT and ceramic, like in ceramic, we've got new collections with larger sizes and specialized shapes, all that are helping to mix. And we're also doing some of that in LVT as well. So we are doing things to take advantage of a higher mix.
spk39: Perfect. Thanks very much, guys.
spk25: The next question comes from Keith Hughes from Truist Security. Please go ahead.
spk28: Thank you. You talked about this a little bit earlier, but just some more clarification. This sequential rise into the second quarter, is that going to be felt in all three segments, and which one would you say would feel it the most?
spk14: The two firsts.
spk18: The two ones that will feel it the most, as we said before, will be Flooring North America and Flooring the rest of the world as their costs better align with the pieces as you go through. And then the ceramic business has held up better because of the different mix it has, so it won't have the same change in the other as the other two. So we think those two will be much more than the other one for those reasons.
spk28: And one other question just within that, will it be returning to normal production that's the biggest lift, or what would be the biggest one-two factors that would cause a sequential lift?
spk21: Well, I'd say it's a combination, really. So you have seasonally higher demand, so that's going to help me on the volume. My production increases, so then my plants, just by the nature of it, are going to run better, so I don't have that unabsorbed. expenses shutdowns. And then the last one would be the cost, you know, kind of a line. So inflation is not as impactful is the hope as you go through Q2. Okay.
spk25: Thank you. The next question comes from Michael Rehout from JP Morgan. Please go ahead.
spk22: Hi, guys. This is Andrew. I'm from Mike. I guess I just wanted to head on in terms of a multi-year acquisition strategy. Where are you seeing any opportunity in terms of product or geographies?
spk18: Let's see. We're in the midst of concluding two ceramic acquisitions, which we talked about in Brazil and Mexico. We think those are really good ones for us because We have positions in both marketplaces. And it will put us in either the first or second position in each marketplace. They are huge ceramic markets. And the combination of the two businesses will enable us to have a complete offering from top to bottom in both marketplaces. And the companies tend to be in different, focus on different areas of the business. In both markets, we tend to be a little higher in the product offerings, and so they fill in the lower parts of the market for us to help us get the biggest opportunities out of them. So we see both of them really helping us once we get the two businesses put together. Other than that, usually in this environment, you don't do a lot of acquisitions. When people's margins are low, Unless they're in real trouble, they tend not to want to sell, given both their margins and the market multiple. So I wouldn't assume that we're going to do much until you get to the other side where you're coming out and the multiples go up and the margins start expanding.
spk24: Okay, thank you for that.
spk25: The next question comes from John Livalo from UBS. Please go ahead. Hey, guys.
spk09: Thank you for putting me in here. The first question is on cash flow conversion this year. Given similar CapEx levels and entering the year at sort of higher work capital levels, how are you guys thinking about free cash flow conversion?
spk21: A couple things to note there. In the second half of the year, we generated a little over $165 million. Coming into 2022, obviously, we were behind $25 on inventory, so we had to kind of build up inventory. So for 23, you know, even though our visibility is limited, we do expect cash flow to improve, you know, but it's worth a note that we're investing in, you know, growth categories and acquisitions to try to improve the long-term results.
spk09: Gotcha. Okay, and then the second question is, it sounds like the commercial business has held up really well. Are you seeing any signs of slowing in that business?
spk18: You start with the ABI index, which I'm sure we're all watching. It's been under 50 for several months. So it looks like there's less projects going to be. Most of those projects tend to have at least a time before we get to them, a minimum of a year and some up to three years. So it takes a while for the projects to come through to know what's going on. Some categories in commercial are performing better than others, like hotels didn't invest during the whole time. There's still investments in hotels going on to update them and keep them, and it's performing the best. And it all depends on the economy. But, again, it's got a long tail to it.
spk25: Got it. Thank you, guys. The next question comes from Rafi Jadrosic from Bank of America. Please go ahead.
spk30: Rafi Jadrosic Hi. Thanks for taking my question. I just wanted to follow up on a comment you made earlier in terms of the Europe natural gas input. I think you said that you thought costs would be more in line with competitors by year end. I thought while raw material costs were going up, your competitors were hedged, so they had lower input costs. I would have thought as the gas prices come down and they're hedged, you would actually have sort of a benefit there, lower gas prices. Is there a window where your input costs will be lower because they're hedged and they don't get the benefit from the falling raw material costs?
spk18: First is that the comment was around our European ceramic business, not all our businesses. And so in European ceramic, the cost of gas prior to this was about 15% of the manufacturing cost. It peaked somewhere over 40%. And what we said was going into this thing that we have not hedged gas prices historically. It has given us an advantage by not doing it. But as you went through these things, as gas prices went up by... eight to ten times over there, we're competing against people that had hedged it at much lower prices. The comments were around this year as the gas prices have dropped substantially that we believe by the fall, blowing through inventory, we should be on a competitive level with those companies that had hedged before this whole thing started.
spk30: Scott, because they're still hedged, will they have higher gas prices at the end of the year?
spk13: I think where they are hedged will be more like what the market will be, is the way to look at that.
spk18: We think their average hedging price will be similar because we're assuming that they hedged more. If you have a hedging policy, we're assuming that their average hedge price is will be similar to where our purchase prices will be.
spk30: Okay, that's really helpful. And then just in terms of the planned CapEx, can you just break out how much of it is maintenance versus growth? And then within that growth component, like how much is flooring categories versus some of the other growing lines like countertops? Thank you.
spk21: Well, the growth investments, I would say, are between $200,000 and $250,000. depending on timing. Most of that would be really in the flooring area. Maintenance, capex, approximately $250 million. And then the balance is on cost reductions, product innovation, and acquisitions.
spk29: Thank you. Very helpful.
spk25: Our next question comes from Adam Baumgarten from Zellman. Please go ahead.
spk19: Hey, everybody. Just a question on first quarter EPS. Given that it's roughly in line, expected to be in line with 4Q, should we expect, from a segment level, the performance to be similar as well?
spk21: Similar. Explain your question a little bit more, please.
spk19: Your EPS guidance is probably the same, 1Q versus what you put up in 4Q. So, just from a segment, you know, fundamentals and performance, should that look similar as well?
spk21: So, I would say, you know, in Florida and North America, you know, given the market conditions and such, you know, remain slow. And they, you know, we do anticipate more pressure on pricing and mix with the higher cost inventory still being used. Production levels will still be low and labor inflation will increase. But given this, I'd still expect margins in Q1 should be slightly better and then strengthening Q2 when the costs align and volume seasonally increases.
spk19: Okay. Got it. Thanks. And then just on the LVT piece, you know, shutting down or exiting the business out of Europe, do you foresee a similar move in North America at some point? And also just on that European exit inflexible, are you able to repurpose that capacity for the rigid manufacturing?
spk13: Yeah, let's just isolate that one question. So in Europe, we're replacing our residential flexible with rigid. We'll continue to produce flexible for the commercial market. And then in the U.S., you won't have that because we have a much larger commercial presence where we use our flexible LVT.
spk35: Okay, got it. That's helpful. Thanks.
spk25: Our next question comes from Laura Champagne from Loop Capital. Please go ahead.
spk37: Good morning. Thanks for taking my question. In flooring North America, are you holding share versus your competition?
spk18: We think that the carpet industry, we are in line with the industry.
spk37: Got it. And is the issue there more that carpet is losing share versus other flooring categories? And do you think that, if so, is that just a function of the mixed shift towards commercial, or are there other factors still at play there?
spk18: I think it's a few different pieces. One is you're comparing to the fourth quarter, the prior year, where we had really significant pent-up demand that the inventories were low, all the plants were running as much as we could get labor and materials to run. You're comparing that now to an environment in our customers' inventories were low, and they were actually trying to build their inventories, which continued into the first half of the year. You're comparing that to an environment where the opposite is occurring. Our customers are lowering inventories. The environment's slower, and so that's exacerbating the decrease, but it is still losing share to hard surface as it has been. Understood. Thank you.
spk25: Our next question comes from Catherine Thompson from Thompson Research Group. Please go ahead.
spk38: Hey, good afternoon. This is actually Brian Byrus on for Catherine. Thank you for taking my questions. It seems like after Q1, maybe starting in Q2 or even mid-year, things are expected to ramp up from the current low levels going on now. What indicators do you guys look at to understand when and how much to ramp up production? There's obviously just seasonality lift, but beyond that, is it strictly just orders coming in, or are there other metrics you look at to kind of get a sense of how do we get ahead of this retail customer or the new resi activity that picks up to be ready for the ramp up and not just reacting to it?
spk18: We act differently based on the capacity utilizations. So in a slow marketplace, you have excess capacity and you can react to it so you don't have to anticipate it more. Earlier in the call, we talked about in some period, we usually build inventory in the first quarter to cover the peaks in the rest of the year which would be a typical year. So this year, we're not acting the same way because of the capacity availability that we have.
spk38: Okay, thank you. That's helpful. And second question, I guess, is given the restructuring plans you guys have, you know, adjustments of products, operating lines, plans, is there a way to think about kind of the new Mohawk capacity going forward here? You know, a lot of moving pieces, especially since you're also adding some products as well. But is there just a way to understand what the company is able to serve going forward now versus what it was previously? Maybe it's something like we took out 5% of capacity or across our footprint, just any color on that kind of dynamic would be helpful.
spk18: I think that on the capacity side, what we've done is we've reduced some of the carpet, less efficient plants. We're aligning the rug business with lower volumes in it. And we said we... We're taking out some capacity and flexible in Europe. So those are the decreases in the business. The increases are in the main growth categories, which we've been telling you about. And I can repeat them again, or I think you have them already. Yeah, we got it. Thank you.
spk38: Okay, so that's helpful. Thank you.
spk25: Our next question comes from Matthew Boley from Barclays. Please go ahead.
spk03: Good afternoon, everyone. Thanks for taking the questions. Another one on the Q1 earnings guide, just to make sure we got all this right. It sounds like you're speaking to some additional kind of headwinds that might be worse sequentially. Price-cost, I heard you mentioned. Obviously, reducing production and all that. You're guiding to earnings flat sequentially, roughly, and historically Q1 is below that of Q4. So I'm just curious what else we're missing there, what might be a little bit better than you typically see seasonally. Thank you.
spk18: I don't think that we're anticipating Q1 being significantly better. We are... trying to tighter manage our inventories given that our future view is weaker and that we don't want to build inventory. We think that the commodity prices and energy prices will stay low, so we're not trying to build the inventories in the first quarter.
spk21: Matt, sequentially, when you think about it, to the two The two benefits that you have sequentially is the lower cost, Q4 to Q1, and then less shutdowns, Q4 to Q1. And so those are being offset partially with, as we talked about, the price mix, which is kind of all leading you back to a relatively flat quarter-to-quarter performance.
spk03: Okay, that makes a lot of sense. That's very helpful there. And secondly, back on the pricing environment in European ceramic, just any thoughts kind of, you know, if you're going to educate us historically, how does the market kind of typically react there to reductions in input costs? And, you know, you mentioned the competitive environment, you know, just I know it's prognostication, but any thoughts from you guys on how you think the competitive environment will evolve given the reduction in costs there? Thank you.
spk13: I'll give you sort of an overview. Our business is under pressure there with slow demand, customer inventory reductions, and inflation. Our results in the quarter were impacted by energy prices from the third quarter and temporary shutdowns. The market is still being supported with energy subsidies. And we still are, at least in the first part of the year, disadvantaged because of the hedging. I think as that As you go through the year, what we would hope to happen is that energy costs come down, that the consumer will be able to have a better situation with wages going up and energy costs going down. But I still think it will be a competitive situation in Italy for the short term.
spk18: Just as a comment, where some of you don't keep up with Europe, there were people that their energy costs were more than their mortgages. I mean, it's a huge drag on the economy.
spk25: Yep, got it.
spk03: All right, thanks, everyone.
spk25: Our next question comes from David McGregor from Longbow Research. Please go ahead.
spk16: Yes, good morning, everyone. Jeff, just a question on the commercial business here. How are you thinking about your competitive position in North American commercial flooring? Do you see sustainably better flooring fundamentals in this category, and therefore you invest more aggressively to gain share? Where do you attribute the relative strength you're seeing in commercial to just timing and the typical lag that the category has historically shown behind changes in residential, and therefore you kind of go forward with what you have? Just curious how you're thinking longer term about capital allocation in commercial form.
spk18: We've been supporting the commercial business with both products and capacity to satisfy the demand that we think we have, and we haven't been restricting it. Typically in these cycles, though, as we talked about, commercial is the last thing to fall off. This is really an unusual cycle because typically all categories are in lower shape. In this thing, you have hospitality that's doing really well at the moment where other categories are doing really poorly. The airline business is doing really well. We provide airline carpets. This is a really unusual environment that we haven't seen in prior cycles. We'll have to see how the whole thing works out, but we continue to invest in the commercial business. We have strong relationships. We have a broad product offering, and we'll continue to do so.
spk16: Okay, thanks for that. If I could just ask a follow-up. I'm really just trying to calibrate here. Within your first quarter guidance, What do you assume for U.S. residential core industry unit growth?
spk21: It depends if you're looking year over year or sequentially. Sequentially, we would expect the volume to improve generically across the business. That's from a sales volume perspective. But certainly, year over year, it's going to be under pressure. It'll be significantly below last year. Yes. Year over year, for sure, it'll be significantly below. Because remember, this time last year, we were still in a very hot market.
spk16: Right, right. Yeah, I think you discussed that previously on the call. I'm just trying to get some sense of what maybe quantitatively you're looking for so we can calibrate against the guidance.
spk21: I don't really have a good number to give you just on specific residential units.
spk16: Okay. Thanks very much, gentlemen. Good luck.
spk25: This concludes our question and answer session. I would like to turn the conference back over to Jeff Lorberbaum for any closing remarks.
spk18: Thank you very much for joining us. We are in a strong position to manage through this period. It's going to be slower for the near term. and we'll continue to invest to optimize the long-term results, and we think we're in a very good position to improve our business as we come out. Thank you very much.
spk25: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you. Hello. Thank you. music music
spk33: Thank you.
spk25: Good day, and welcome to the Mohawk Industries Incorporated fourth quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to James Brunk. Please go ahead.
spk21: Thank you, Jason. Good morning, everyone, and welcome to Mohawk Industries quarterly investor call. Joining me on today's call are Jeff Lowerbaum, Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's fourth quarter and full-year performance and provide guidance for the first quarter of 2023. 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 reconciliation of any non-GAAP to GAAP amounts, please refer to our form 8K in press release in the investor section of our website. I'll now turn over the call to Jeff for his opening remarks. Jeff?
spk18: Thank you, Jim. For the full year of 22, Mohawk's net sales were $11.7 billion, up approximately 4.8% as reported, or 8.8% on a constant basis. And our adjusted EPS for the year was $12.85. The flooring industry entered 22 with momentum from strong housing markets supported by record home sales, low interest rates, and rising household formations. High home equity levels Shifts to larger homes and the desire to customize living spaces during the pandemic were driving remodeling investments. As the year progressed, the US housing market declined under pressure from rising interest rates and inflation. In Europe, energy and overall inflation escalated and consumers reduced discretionary spending to pay for essentials. In the first half of the year, the company implemented pricing actions and production that offset the inflation we incurred. With reduced home sales and remodeling in the second half of the year, our flooring volumes decreased. Our pricing did not cover material and energy inflation. Throughout the year, commercial and new construction and remodeling activity outperformed residential. Even with the housing industry slowing during the second half of the year, we concluded 22 with a strong balance sheet low net debt leverage of 1.3 times EBITDA, and available liquidity of approximately $1.8 billion to manage the current environment and optimize our long-term results. We acquired five bolt-on businesses during the year that extend the scope of our product offering and our distribution. These include sheet vinyl, mezzanine flooring, and wood veneer plants in Europe, a nonwoven flooring manufacturer, and a flooring accessories company in the U.S. When we complete the integration of these acquisitions, we will expand their sales opportunities, enhance their operations, and improve their efficiencies. We've just acquired Elizabeth in Brazil and are awaiting regulatory approval to close Vitramex in Mexico, both of which will almost double our local market positions in ceramics, expand our customer base and product offering, and improve our manufacturing capabilities. The teams are preparing to integrate the businesses, which will create significant sales and operational synergy. Turning to the fourth quarter results, Mohawk net sales were $2.7 billion, down 4% as reported, or approximately 1.3% on a constant basis, and our adjusted EPS was $1.32. Our revenues were driven by price increases and strengthened commercial channels. Our sales across all our businesses were slower than we expected in the quarter as residential sales contracted with rising interest rates, declining home sales, and lower consumer confidence. As a consequence, our customers lowered their inventory levels and consumers reduced their spending for renovation. Unlike other products, flooring does not require immediate replacement, so purchases can be deferred more than other durable goods. Commercial sales continued stronger than residential in the quarter, benefiting from ongoing remodeling and new construction projects. In the quarter, our global ceramic segment outperformed the others due to a higher level of commercial and new construction sales. Our Flooring Rest of the World segment softened as higher inflation and energy costs reduced demand in Europe. Our Flooring North America segment sales declined with lower residential activity and a reduction in customer inventory levels. The combination of weakening sales, plant shutdowns, and the consumption of higher-cost inventory decreased the segment's performance for the quarter. In response, we reduced production rates and lowered our inventory, which increased unabsorbed overhead expenses. We curtailed spending across the enterprise, though inflation offset many of our initiatives. In both Florida and North America, as well as flooring the rest of the world, we're taking restructuring actions in specific areas to align our operations with the present market conditions. During the quarter, energy and material costs around the world began to decline, which would positively affect our future results. While we're managing the present economic cycle, we're operating with a long-term perspective and expanding capacities in areas where we have the greatest growth potential when markets rebound. These include LVT, laminate, quartz countertops, porcelain slabs, and insulation. We have reduced our planned capital spending until we see greater certainty in our markets around the world. We recently announced an agreement to resolve the securities class action lawsuit filed in January 2020. Though we believe the case is without merit, further litigation would be burdensome and expensive. We reached a settlement of $60 million, a significant portion of which will be covered by insurance and is subject to court approval. We also settled the dispute with the Belgian tax authority regarding royalty income. Though we believe our position is correct, we settled the $187 million assessment for 3 million euros. I'll turn the call over to Jim for a review of our fourth quarter financial performance.
spk21: Thank you, Jeff. Sales for the quarter were just under $2.7 billion. That's a 4% decrease as reported, or 1.3% on a constant basis. Favorable price mix in the quarter was offset by reduced volume and unfavorable FX. The decrease was primarily driven by weakness in the U.S. as residential markets slowed more than expected in the quarter. Gross margin, as reported, was 20.9% and excluding one-time items was 22.4% versus 26.8% in the prior year. The year-over-year decrease was primarily driven by higher inflation of $263 million offset by stronger price mix of $269 million and productivity of $16 million. The fourth quarter margin was further negatively impacted by weaker volume of $95 million temporary plant shutdowns of $69 million, and FX headwinds of $12 million. SG&A is reported with 18.6% of sales and excluding one-time items with 17.9% in line with the prior year. On dollar basis, the favorable impact of FX of $12 million and volume of $3 million was partially offset by price mix of $6 million and inflation of $3 million. Operating margin, as reported, was 2.3 percent for the quarter. Restructuring and one-time charges, $58 million, including initiatives in Flooring North America and Flooring rest of the world and our disclosed litigation settlements. The restructuring charges combined the initiatives announced in Q2 and a new project in Flooring rest of the world to better align our LVT assets with market conditions. Operating margin, Excluding charges was 4.5%, and the year-over-year decline in operating income was primarily driven by higher inflation of $266 million, offset by price mix of $263 million, productivity of 15, lower startup and other items of $8 million, although these were not enough to counter the weaker volume of $92 million and increasing temporary plant shutdowns of $69 million. Interest expense for the quarter was $15 million. Another income other expense was a $10 million expense due to unfavorable impact of transactional effects. In the fourth quarter, our non-GAAP tax rate was 12.6% versus 18.9% in the prior year. We are forecasting the full year 2023 tax rate to be between 21% and 22% with some quarterly variations. Earnings per share, as reported, was $0.52, and excluding charges was $1.32. Turning to the segments, global ceramic had sales of $988 million. That's a 4% increase, as reported, and 5% on a constant basis. Actions to drive favorable price and mix across the segment and improved year-over-year volume in the U.S. offset weakening unit volumes and other geographies. Operating income excluding charges was $70 million, which is a 16.7 percent increase versus prior year. An operating margin at 7.1 percent improved 70 basis points due to improved price mix of $111 million, productivity gains of $17 million, and favorable FX and other items of $8 million, offsetting the increase in inflation of $85 million, lower volume of $28 million, and related increase temporary plant shutdowns of $14 million. Glory North America had sales of $946 million. That's a 6.8% decrease versus prior year, as weaker volumes was only partially offset by favorable price and mix. The volume decrease was primarily a result of declines in residential channels and customers lowering inventory levels with consumers deferring discretionary spending. On an adjusted basis, Florida North America's operating margin was approximately break-even. The year-over-year decline in profitability was driven by weakening volume of $32 million, temporary plant shutdowns of $33 million, and the impact of a higher cost inventory and other inflation flowing through the P&L of $109 million, only being partially offset by price mix of $71 million and productivity of $8 million. We expect many of these issues to carry over to Q1. Then in Q2, with seasonally stronger sales, lower costs, and increased production levels, we should see a solid improvement in profitability. And finally, flooring the rest of the world has sales of $717 million. That's a 9.9% decrease as reported and 2% on a constant basis. Installation products continued with strong growth in the quarter, but it was not enough to compensate for declines seen in the flooring categories, primarily laminate and LVP, as inflation resulted in consumers reducing discretionary spending and, in turn, customers lowering inventory levels. Operating margin excluding charges was 7.7% for the quarter. Operating income declined versus prior year, It was the result of the decrease in volumes of 32 million, temporary plant shutdowns of 22 million, which contributed to lower productivity of 10 million, and increases in inflation of $79 million, only partially offset by price and mix actions of 81 million for the quarter. With the business concentrated in residential channels, we expect a number of these issues to impact Q1, which results in proving, as we move through the year, as lower energy and material costs should drive higher consumer spending. Corporate eliminations was $6 million in Q4 and $37 million for the full year. Moving to the balance sheet, the company generated free cash flow of $91 million in the fourth quarter and over $165 million in the second half of 2022. Receivables for the quarter ended at $1.9 billion. with the DSO at 60 days versus 56 days in the prior year, due in part to customer and channel mix. Inventories ended at just under $2.8 billion, or a 17% increase versus prior year, but declined 4% versus the third quarter. The year-over-year growth in inventory was primarily due to a spike in inflation, and sequentially, the decrease is primarily due to lowering of production levels to better align with demand. Inventory days ended at 138 days for the current year versus 131 in the third quarter. Property, plant, and equipment ended at just shy of $4.7 billion, and capital for the quarter was $151 million versus DNA of $159 million. For the full year, CapEx ended at $581 million and DNA of $595 million. Our current view for 2023 is a forecast of $560 million for CapEx and DNA of $592 million, but we will adjust with the changing environment. And finally, the company maintains a strong overall balance sheet with gross debt of $2.8 billion and leverage at 1.3 times adjusted EBITDA. This strength gives us the flexibility to manage through the challenging environment. With that, I'll turn it over to Chris.
spk13: Thank you, Jim. The global ceramic segment increased sales and earnings with a higher mix of new residential construction and commercial sales than our overall business. Residential ceramic sales in all geographies are slowing, and operating margins are contracting due to lower volumes and manufacturing shutdowns. The cost of energy and transportation are declining, which will benefit our margins as these costs flow through our inventories. In the U.S., ceramic sales and volume both increased as we benefited from our premium product offering, price increases, and growing countertop business. Our collections with larger sizes and unique finishes combined with specialized structures and shapes are enhancing our sales and mix. We are increasing our sales efforts in growing categories, including healthcare, hospitality, and fitness, as well as multifamily and bill-for-rent homes. Cost inflation increased as higher energy and transportation expenses from prior periods were incurred. We are optimizing material supply chains and reengineering formulations to improve our costs. We reduced our inventories during the quarter by lowering production and enhancing our import strategies. We are reducing discretionary spending and limiting capital investments. To support additional growth in our quartz countertop sales, we are adding manufacturing capacity by the end of this year. Our countertop mix continues to improve as we expand our premium collections featuring our advanced veining technology. Our ceramic business in Europe remains under pressure with slowing demand, customer inventory reductions, and inflation. Our cost in the quarter were impacted by peak energy prices in the third quarter and reductions in plant volumes from temporary shutdowns. We are receiving energy subsidies in Italy but we remain disadvantaged to some competitors who have long-term energy contracts. Natural gas prices have declined substantially, though disruptions could impact future costs. As ceramic sales slow, the market is becoming more competitive. We are introducing new technologies to enhance surface textures, expand design capabilities, and improve our costs. We are completing the expansion of our large porcelain slabs to support continued growth and enhance our stylings. We have successfully reformulated our body composition to use alternative materials. Sales in both Mexico and Brazil decelerated in the quarter as inflation and increasing interest rates reduced residential demand. We anticipate continued near-term weakness and have reduced production levels in both countries. To cover inflation, we are managing mix in pricing. Natural gas prices in the regions are declining in line with the worldwide market and will lower cost as it flows through inventory. We have completed the acquisition of Elizabeth in Brazil and are awaiting regulatory approval to close Vitramex in Mexico. These acquisitions will position us as top producer in two of the world's largest ceramic markets. We anticipate significant synergies in all aspects of the businesses, which will enhance our sales and margins. We should be well positioned to leverage our combined strengths when the markets emerge from this downturn. During the fourth quarter, our flooring rest of world segment was impacted by high inflation and energy prices, and consumers reduced investments in home improvement. This caused a decline in residential sales, which comprised a majority of the segment's business. As consumer spending slowed, our customers further reduced their inventory levels, which lowered market demand even more. In response, we implemented temporary plant shutdowns and reduced our inventory levels, compressing our margins. Natural gas prices in Europe peaked at an unprecedented level in the third quarter, raising our material and production costs. Our pricing and mix did not fully cover inflation, which remains a headwind. We remain focused on optimizing volume with selective promotions, as well as controlling costs until the business improves. To enhance our competitive position, we are increasing our supply chain from outside the European Union. We have initiated additional restructuring actions to align with current conditions. Since the beginning of 2023, gas prices have declined substantially and material costs should follow. Assuming this trend holds, Europe should see lower overall inflation with higher wages, consumer spending should increase. During the quarter, all of our European flooring categories experienced significant volume declines, with many residential remodeling projects being postponed as inflation eroded consumer discretionary spending. Our product mix was impacted as homeowners purchased lower priced flooring to maintain their budgets. We are launching new product collections and expanding promotional activities to improve our sales. Higher cost inventory will compress our margins until it flows through our costs. Our sheet vinyl sales outperformed our other flooring categories as consumers chose lower priced alternatives. We are improving the small Polish sheet vinyl plant we acquired in the third quarter by increasing its output, reducing its cost, and expanding its distribution. We are expanding our rigid LVT offering as it takes share from flexible. We are increasing our existing operations and improving our formulation to lower our cost. We're adding new rigid production that makes smaller runs with additional patented features. We will phase out of the residential flexible LVT products and will close the supporting production. The cost of this new restructuring initiative is approximately $45 million, with a cash cost of approximately $7.5 million, resulting in annualized cost savings of $15 million and significantly increased sales. Our insulation business is growing as conserving energy has become a higher priority and building requirements have increased. We selectively increased pricing to cover higher material costs, and we lowered production in the fourth quarter to reduce inventory levels. We are growing our sales and distribution in the UK as we start up our new insulation plan. Our panels business has faced the same pressures as our other categories with softening demand and rising material prices. During the quarter, our customers continued to reduce their inventory levels, further impacting our sales. Anticipating higher winter wood and energy costs, we maintained our inventory levels going into the first quarter. Our investments in green energy have benefited our performance by reducing our reliance on higher cost gas and electricity. The integration of our recent mezzanine acquisition in Germany is progressing as planned. We are defining best practices and utilizing our own manufacturing to replace source boards. Our business in Australia and New Zealand are slowing with the local economies as inflation and mortgage rates are impacting foreign sales. We are taking actions to align our cost and inventory levels with the expected volume declines. We have announced additional price increases and are initiating selective promotions to maximize our sales. We are updating our product offering and enhancing our merchandising to capture greater market share. As in other categories, commercial sales are stronger than residential, and we are increasing our participation in specified projects. For the quarter, Flooring North America's sales decreased faster than anticipated, primarily due to declines in residential channels, RUG, and customer inventory reductions. With inflation and interest rates at high levels, many consumers defer discretionary spending or traded down to lower-cost products. Earnings in the segment were compressed due to lower sales, consumption of higher-cost materials, reduced inventory levels, and temporary plant shutdowns. Our hard-surface products outperformed soft, and the commercial sector remained stronger than residential, with hospitality showing the most growth. In response to slower market conditions, we are completely completing our restructuring actions, deferring capital projects, and reducing discretionary spending. During 2022, we reduced our costs through process enhancements and rationalization of less efficient facilities while absorbing historically high inflation. We continue to adjust our strategies to manage the near-term market conditions. Reductions in energy and materials should become a tailwind in the second quarter. Our commercial business remains solid as remodeling and new construction projects continue. We maintain strong margins in the quarter with pricing and mixed offsetting inflation. Our flexible LVT products are a preferred alternative that provides versatile styling with easy installation. The combination of our carpet tile and LVT collections enables the customization of commercial spaces with unique design. Our integration of a small flooring accessories acquisition is proceeding well. The company produces rubber baseboards and stair treads used in commercial installations and broadens our current flooring accessory business. In the fourth quarter, sales of residential soft services declined more than other categories. Sales weakened as retailers reduced inventory with declining consumer sentiment and home sales. The multifamily channel was the strongest performer. and we are realigning resources focused more on this sector. As demand dropped in the quarter, we increased temporary shutdowns, which resulted in higher unabsorbed costs. We have significantly lowered inventories in the fourth quarter and are reducing costs by eliminating less efficient manufacturing, enhancing productivity, and adjusting production to demand. Participation in our recent flooring roadshows was at record levels, with leading retailers expressing optimism about the year ahead. Our rug sales were lower as national retailers continued to adjust inventories with reduced consumer spending. We are restructuring our rug operations to lower cost and align production with demand. The integration of our non-woven rug and carpet acquisition is progressing well and provides new opportunities with our existing customers. Our resilient sales grew in the quarter as we leveraged our wet protect and antimicrobial technologies to differentiate our collections. We offset inflation through pricing and mix, though increased plant shutdowns resulted in higher unabsorbed costs and lower margins. We are introducing new collections to expand our offering while eliminating less productive SKUs. Our sheet vinyl sales were higher as consumers pursued budget-friendly flooring options and the multifamily channel strengthened. The first phase of our new West Coast LVT plant is operating at expected levels. We are preparing new technologies that will improve our cost and add differentiated features. We will install additional production lines and train personnel throughout this year. Our premium laminate sales were impacted by slowing retail traffic and customer inventory adjustments. Our laminate is gaining acceptance as an alternative waterproof product in all channels. During the quarter, we offset inflation through pricing and mix, though our margins were impacted by lower absorption from temporary shutdowns has reduced our inventory. We are beginning to see reductions in material inflation, which should help us recover our costs. Our new manufacturing line, which began last year, is operating at planned levels and will deliver our next generation of laminate features. With its industry-leading design and performance, our laminate business is in an excellent position to capitalize on the growing waterproof flooring category. Now I'll return the call to Jeff for his closing remarks.
spk18: Thank you, Chris. The flooring industry is slowing due to higher interest rates, sustained inflation, and low consumer confidence. The visibility of the depth and duration of this cycle is limited, and conditions differ across the world. Mohawk has a strong record of managing these downturns by proactively executing the necessary actions. We're adjusting our business for the current conditions by reducing production levels, inventory, cost structures, and capital expenditures. We're implementing restructuring actions in both flooring North America and flooring the rest of the world to streamline operations, reduce SG&A, and rationalize higher-cost assets. In the first quarter, we anticipate more pressure on pricing and mix due to the low industry volumes. Our inventory costs remain elevated in most products due to the higher material and energy that we incurred in earlier periods. Additionally, we will not raise production as normal in the first quarter to prepare for future demand, increasing our unabsorbed costs. Our costs of energy have fallen and should benefit our global margins as our inventory turns. Our second quarter results should have sequentially stronger improvement with seasonally higher sales, increased production, and lower material costs. Significantly lower costs of energy in Europe should enhance consumer spending discretionary purchases, and flooring demand. We're refocusing our sales teams on the channels that are performing the best in the current environment. We're introducing new innovative collections and merchandising, as well as targeted promotions to improve sales. Given these factors, we anticipate our first quarter EPS to be between $1.24 and $1.34, excluding restructuring and other charges. Around the world, the long-term demand for housing will require significant investments in new construction and remodeling. Mohawk is uniquely positioned with a comprehensive array of innovative products, industry-leading distribution, and strength in all sales channels. We're implementing structural changes to navigate the industry's challenges while optimizing our future results. We anticipate coming out of this downturn in a stronger position as we benefit from our bolt-on acquisitions enhanced market positions in Brazil and Mexico, and strategic expansion of our high-growth product categories. Our balance sheet is well-positioned to manage the current cycle and to drive future growth and profitability. We'll now be glad to take your questions.
spk25: We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Phil Ng from Jefferies. Please go ahead.
spk11: Hey, Jeff. Quick question. In terms of your price-cost, despite demand actually weaker last year, you managed price-cost actually really well, but you did highlight you're seeing a little more competition on pricing, but RAS are falling as well and trying to flow through a little more in 2Qs. So how should we think about that price-cost equation looking in the current backdrop in 2023 and how that progresses through the year? Any pockets we're seeing a little more pricing competition in particular you want to flag?
spk18: So the energy and material costs are moving. The low amount of volume we're seeing across the world, we're seeing additional promotions and pieces so far It's been controlled pieces across most of the marketplaces, and so we think that's going to continue. In our first quarter, we said we expect more pressure on pricing and mix at the lowest part of the year, and then we think that we're going to see some balancing of the costs and pricing better in the second quarter as the costs flow through inventory. We'll have to see how the rest of the year goes. We're going to have to continue to manage it and change as required.
spk21: And Phil, from a year-over-year perspective, we would expect that you still have the higher cost inventory layers that are going to come off in the first quarter. And with that renewed pressure on price and mix, I would expect the gap between price mix and inflation to be greater in the first quarter than the fourth quarter. And that was included in our guidance.
spk11: Got you. So it feels like your margins are going to bottom out in one queue and get progressively better throughout the year. That's a really good color. And then help us think through productivity. You talked about you're rolling out some restructuring efforts in North America and the rest world, but demand's a little weaker and you're seeing more startup costs with new capacity coming on. So it gives a little color how to think about productivity for this year. And then how is the acceptance of some of these newer capacity that's coming on? I think you're bringing on laminate. You've got some LVT coming on as well. How's the product acceptance so far?
spk18: The productivity piece is driven by multiple pieces. As we slow down, some of the costs we isolate into temporary shutdowns, but we don't catch them all. So the productivity ends up a catch-all for all of those things that change as they go through. We think due to the volume differences between last year and this year, the productivity is going to be less in almost all the businesses. If you remember last year, we were coming out of COVID in the first half. We were building inventories and running most of the businesses at very high levels. This year, we're going to be running at much lower levels, and that's what's going to show up in the productivity decrease as we go through. I think your other question was around the new investments. The new investments are all in areas that are growing and that we've had capacity limitations, and we think they're preparing us for a growth cycle as we come out of this cycle at the other end. We're putting in The pieces are, so we're adding laminate, which has been a growing category in the pieces as we go through. And it's expanding because it's becoming more accepted as a waterproof option, which is a technology we've brought in as an alternative to LVT. And it's actually more resistant to scratches and more durable. We're increasing our quartz countertop business, which our line's been running full. We've been supplementing with imported products to support greater sales, and that should be starting up the end of this year. The investments in LVT in the western part of the country should support a broader local-based production of it and should give us advantages by having both East Coast and West Coast production. Then we can supplement or not source products we're doing with the same equipment. We are out of production in our ceramic slab businesses, which is based in Europe. It's a growing category that's taking the high-end marketplace as another alternative. We're increasing it. Finally, we've just started up a new insulation plant in Europe. In the UK, it puts us in a new region that we haven't been in. It's starting up now and expanding its production. We've chosen the parts of the business that have the largest growth potential. We think as we go into 2024, it's going to pay us a lot of benefit.
spk11: Just a point of clarification on that productivity comment, Jeff. You said it's a catch-all, less productivity versus last year, but on a year-over-year basis, is that still a good guy, or should we expect to be a negative headwind on a year-over-year basis?
spk21: On a year-over-year basis, when we get outside the first quarter, it should become more of a positive. Again, what you have is when you're running the facilities, even if it's not a complete shutdown, if you're running slower, you do have inefficiencies, you know, both in labor and material that are going to come through the productivity line.
spk25: Okay, super. Thanks a lot for the call. Our next question comes from Susan McLaurie from Goldman Sachs. Please go ahead.
spk05: Thank you. Good morning.
spk08: Morning, Susan. My first question is, can you help us think about that sequential lift that you expect for the second quarter of relative to what we normally see in sort of historical years? Should it be bigger than what we've otherwise seen, given some of the factors that you outlined? And then how do we think about the cadence through the year? Is it reasonable to think that first quarter should be the low point?
spk18: So going into the first quarter, residential sales are slowing, and customers are minimizing the inventory, so we're expecting them to keep their inventories low at this point. We are using high-cost inventory levels in the first quarter. Production volumes are lower than last year when the business benefited from the rebound we just talked about. There's more pressure on pricing and mix due to the industry volume and competition trying to utilize facilities as we are. We see inflation impacting our labor costs around the world as we start raising the labor rates. and we're actually putting some more investment in new products to reposition some of the pieces to optimize our volume this year. With this, we're anticipating improving conditions as we go into the second quarter with lower costs. To remind you, you know, normally margins expand as we go into the second quarter. We think they'll expand, you know, a little more this year because of seasonally stronger volume and mix. in both our flooring, rest of world, and North American segments. We're expecting the margins to improve as the costs and pricing better align from this inventory flow through. We believe that European demand will also improve. In Europe, their wages are increasing at a higher rate than they are in the United States. And then over the winter, their energy costs were so high that it really impacted their discretionary spending. We see that changing as the new gas prices flow through the economy. With all that, we see the input being a tailwind. Production levels should increase from where they are in the first quarter to the second quarter. We see restructuring should start benefiting us more as we go through. I guess last, as we go through, when we go into the fall of the year, the fall comparison should be weaker, and we think that the category could improve with inflation declining, wages being higher, and potentially housing starts improving from the bottom.
spk07: Okay, that's very helpful color, Jeff.
spk08: And then my second question is, How do you think about the longer-term trajectory for your Flooring North America margins? You obviously made up a lot of ground in the last couple of years relative to where we were before the pandemic. How much of that do you think you can hold on to as things normalize, and how should we be thinking about what that new rate of profitability could look like?
spk18: First, where we are today... you have those peak costs that we weren't able to cover. So the cost peaked in the third quarter. It's still flowing through our inventory. The pricing never got aligned with it as the inventories were falling off, so that impacted the margins. As we go through, the costs and prices should more align, helping the margins, and then over time we expect them to continue increasing, but in this environment there's pressure on everything. So we'll have to get through this year, and I should improve significantly as we go into next year.
spk21: Just a reminder, this cycle is a little bit different. It's not kind of typical of other cycles. The employment remains strong with wages increasing. Housing remains in short supply, and low mortgages will kind of limit people moving as much. Aging homes, higher home values should support future remodeling. and strengthen the rebound or the pent-up demand. Commercial projects continue to be initiated. That's holding at this point. And inflation is slowing, and interest rates may actually be near a peak.
spk08: Okay. So is it reasonable to assume then that you can sustainably operate at a higher level than you were at, say, in 2019 or so, but maybe still holding a bit below the peaks that we'd seen before? in the earlier years?
spk18: I don't have the numbers in my head to compare them like you're asking. I think that in this year, what you have is all the lack of visibility, and we don't exactly know what the volumes are going to be and the competition is going to be, so we'll have to adjust as we go forward.
spk04: Okay. All right. Thank you, Jeff. Good luck.
spk25: Our next question comes from Eric Bouchard from Cleveland Research Company. Please go ahead.
spk27: Thank you. A couple things. First of all, you talked about the pressure on price mix, which still looked to be, I think, ahead of cost for RAS here in 4Q. But I'm curious, Jeff, in prior cycles, is it, you know, this changes for, it sounds like there's some pressure for a quarter or two and then it improves. How should we think about how price mix behaves through sort of this phase of the cycle, you know, not just one Q, but throughout kind of 23?
spk18: Price mix, first of all, you have a channel change as you go through. As you go through the cycles, the highest margin businesses we have are the retail replacement business, remodeling businesses, and those slow down first, so Those margins slow down and that impacts the mixes we go through. That's having one part of it. The margins are then affected by these lower throughputs through the plants as our costs increase. Then we have to make conscious decisions over what we do with the infrastructure and how far you cut it back in order to make sure that you're able to operate as the business improves on the other side in the pieces. So we're managing those and keep changing the strategy based on what the volume levels do. The other thing I guess going on this year is you have recently all the channel inventories were taken down. We think they should be bottomed out about now. We think the energy and inflation in Europe is going to be a big change in it. it flows through the economy over there we see residential remodeling and home sales improving as we go through the year and with that we expect the mix to improve as the other categories improve okay so that the favorable price mix which was 270 million or thereabouts in the quarter that number
spk27: From what you're saying, that doesn't have to necessarily step down meaningfully in 23. That number can still, I guess the question is, is there trade down? Is there this change? Does that number deflate or contract meaningfully from the level that it's at now, or is that not how it works?
spk21: You are going to, Eric, and we're seeing it right now, you're going to see some trade down. Again, it depends if you're looking you know, sequentially versus year-over-year, but in the first quarter year-over-year, you do have some still favorable price mix from all the pricing that was initiated in Q2, Q3, and Q4 of last year, and then you are going to get to a point where you start overlapping the initiatives from 2022. The point is, and especially in the first quarter with the lower volumes, and Phil, that's starts to pick up, you're going to continue to see pricing pressure, um, in the marketplace.
spk27: Okay. And then the second question just relates to, uh, the competitive environment. I think he talked about some restriction of your Europe LVT business is transport costs. And specifically I'm thinking ocean costs of bringing containers of LVT to the U S has changed, uh, I'm curious how you're seeing the U.S. competitive dynamic supply situation, I guess narrowly in LVT, different now or ask differently how the global supply of LVT is influencing the market and your expectations for 23.
spk13: Yeah, I'll comment on that. So specifically related to imports, the import prices have been declining, but also our production cost in the U.S. has been declining. As you look at the competitive situation, we have a broad offering for both residential and commercial. We participate in all price points of rigid and flexible LVT. Imports are declining, and U.S. material and energy costs are also falling. Our local costs are higher than imports, but we get a premium for better service versus supply chains that can be three months or longer. We're improving our production and adding features like wet protect, that protects subfloors and anti-bicrobial to differentiate. Lastly, our West Coast plant cost will continue to fall as that plant comes up.
spk25: That's helpful. Thank you. Our next question comes from Truman Patterson from Wolf Research. Please go ahead.
spk15: Hey, good morning, guys. I'll just ask a multi-part question and keep mine to one. Following up on some of the prior questions, you know, clearly NatGas was a large headwind for ceramics throughout 2022. It's clearly nosedived here recently, both in the U.S. and Europe. I know you all have, you know, that high-cost inventory you need to work through. You all were hedged partially in Europe in the fourth quarter, but Any chance, you know, NatGas, ceramics, any chance you can help us think through some of the potential cost tailwinds as we move through the year and we get through some of these items? And do you primarily, you know, give these cost tailwinds back through pricing, trying to stimulate demand? or are there any offsets that you all think you might be able to maintain pricing and kind of recapture that price cost?
spk13: Well, let's talk about the cost first. So as we get in the back half of the year, our cost should be more in line with our competitors. We should be pretty much equal.
spk17: That's a European comment.
spk13: Yes, European. And then there will be – we do think there's going to be volumes pressure in the market. But as those energy costs continue to come down and wages go up, we think demand could be higher in Europe going forward. So it just depends on how that works out.
spk18: And then around the world, the energy prices continue to come down everywhere and it will impact the cost. We're going to have to see what happens with a competitive environment given the slowing conditions around the world.
spk15: Okay. Should I extrapolate that for North America, U.S. as well? Correct. All right. Thank you all. Thank you.
spk25: Our next question comes from Mike Dole from RBC Capital Markets. Please go ahead.
spk26: Morning. Thanks for taking my questions. Sorry to beat the dead horse here on the price-cost stuff, but I'll ask one more. On the pricing side, correct me if I'm wrong, but some of the Some of the pricing last year, we were under the assumption it was almost kind of like surcharge pricing that layered in pretty quickly in relation to some of the energy cost increases on both product and maybe on some of the logistics also. So I guess the question is, you know, to what extent is it more kind of quantitative or mathematic in terms of how much pricing is comes off as some of those costs come down and maybe those surcharges roll off.
spk18: You're correct that we did in different markets on different products have some of it as temporary surcharges. It was both on product and on freight and most of those surcharges have now gone away and they don't exist anymore at this point. The majority of the increases, though, were put through by price increases in the marketplace, and we'll just have to manage those relative to the competition to stay competitive as the world changes.
spk26: Okay. That's helpful. Thanks, Jeff. My second question is just in relation to the channel inventories and then your own production. Where is your sense of where channel inventories are? Obviously, it does cover a broad range of products and geographies, but so either kind of high level or by region, you know, do you think you, are you back at normal levels? Are you below normal levels? It's trying to gauge the risk of further destock here in part.
spk18: As a general statement, we think there was a significant amount taken out in the fourth quarter and the third quarter, and We believe in most markets that they should be close to the bottom. There's some where the costs and prices and supply was a little tighter and longer, so there may be some in a few regional markets. But for the most case, we are assuming they're close to the bottom at this point, but we'll know after this quarter.
spk25: Got it. Thanks. Our next question comes from Stephen Kim from Evercore ISI. Please go ahead.
spk39: Yeah, thanks very much for all the info. I'm going to sort of follow up on that last question there regarding inventory. With respect to the plant shutdowns and your planned inventory reduction, I understand that market forces are driving some of this, but it also seems like there's a bit of an opportunistic aspect perhaps where you're shifting the timing of your annual production into periods, you know, with lower commodity costs. So, in other words, what I'm curious about is if commodity costs were not declining as they are, would you still take the same amount of shutdowns or are you planning to take a little bit more than you would otherwise do because of the trajectory of commodity costs? And then finally, can we get some guidance about where your inventories and dollars could go over the next couple of quarters?
spk18: So in the fourth quarter, we made conscious decisions to decrease the inventories in some of the businesses, given our forward view of the commodity prices. And so we took them down, even knowing that our customers were also taking them down, which also hurt our margins in the quarter. Some of the businesses in Europe, we made a choice not to take them down. At the time, we were looking at it, and we didn't know whether there was going to be a spike in the energy costs. We actually left some of the inventories higher in anticipation of higher costs in the first quarter, which we are going to reverse out in the first quarter now that they didn't It didn't happen like we thought. So we actually, if we knew what would have happened, we probably would have taken those down sooner, is it? So we are making those decisions on a constant basis based on our future view of the dynamic for the business. I forgot the other part of your question.
spk21: So the other part, Stephen, in terms of our view of kind of our inventory plan for 2023, you know, presently we would expect the year to be kind of at year end to be slightly below where we ended in 2022. Obviously, it really depends upon the demand conditions as we go through the second quarter and the second half of the year and the pace of inflation.
spk39: Okay, so that's a year-end comment. In terms of the trajectory here over the next couple of quarters, though, can you give us an idea of what we might expect, Jim?
spk21: The goal is to try to keep the inventory levels and production very close to demand, so the That was one of the principles behind not building the inventory as we normally do in Q1.
spk39: Second question relates to mix, not price per se, but mix. You've mentioned that you've seen trade down across your categories, reflecting pressure that the average consumer is feeling with their rising household expenses. And so basically the consumer's P&L, if you will, is driving negative mix. But on the other hand, certainly in the U.S., but in many other markets, I think you've seen homeowners' balance sheets strengthen dramatically due to much higher home equity levels. And so my question is, do you expect this to show up eventually in favorable mix? as folks tap into that home equity? And are you positioning your product assortments in any way to be able to capitalize on an eventual move to higher-end products or a richer mix, which is different from what you're seeing right now?
spk18: Yes to your question. It's really a question of timing. At this point, we see we're towards the front end of it. I mean, it started with the housing slowing down in the third quarter. So we're seeing at the front end. So we would be doing all that later in the year.
spk13: We're also, Stephen, I know in LVT and ceramic, like in ceramic, we've got new collections with larger sizes and specialized shapes, all that are helping to mix. And we're also doing some of that in LVT as well. So we are doing things to take advantage of a higher mix.
spk39: Perfect. Thanks very much, guys.
spk25: The next question comes from Keith Hughes from Truist Security. Please go ahead.
spk28: Thank you. You talked about this a little bit earlier, but just some more clarification. This sequential rise into the second quarter, is that going to be felt in all three segments, and which one would you say would feel it the most?
spk14: The two firsts.
spk18: The two ones that will feel it the most, as we said before, will be Flooring North America and Flooring the rest of the world as their costs better align with the pieces as you go through. And then the ceramic business has held up better because of the different mix it has, so it won't have the same change in the other as the other two. So we think those two will be much more than the other one for those reasons.
spk28: And one other question just within that, will it be returning to normal production that's the biggest lift, or what would be the biggest one-two factors that would cause a sequential lift?
spk21: Well, I'd say it's a combination, really. So you have seasonally higher demand, so that's going to help me on the volume. My production increases, so then my plants, just by the nature of it, are going to run better, so I don't have that unabsorbed. expenses shutdowns and then the last one would be the cost you know kind of a line so inflation is not as impactful is the hope as you go through q2 okay thank you the next question comes from michael rehout from jp morgan please go ahead
spk22: Hi, guys. This is Andrew. I'm from Mike. I guess I just wanted to head on in terms of a multi-year acquisition strategy. Where are you seeing any opportunity in terms of product or geographies?
spk18: Let's see. We're in the midst of concluding two ceramic acquisitions, which we talked about in Brazil and Mexico. We think those are really good ones for us because We have positions in both marketplaces, and it will put us in either the first or second position in each marketplace. They are huge ceramic markets, and the combination of the two businesses will enable us to have a complete offering from top to bottom in both marketplaces, and the companies tend to be in different, focus on different areas of the business. In both markets, we tend to be a little higher in the product offerings, and so they fill in the lower parts of the market for us to help us get the biggest opportunities out of them. So we see both of them really helping us once we get the two businesses put together. Other than that, usually in this environment, you don't do a lot of acquisitions. When people's margins are low, Unless they're in real trouble, they tend not to want to sell, given both their margins and the market multiple. So I wouldn't assume that we're going to do much until you get to the other side where you're coming out and the multiples go up and the margins start expanding.
spk24: Okay, thank you for that.
spk25: The next question comes from John Livalo from UBS. Please go ahead.
spk09: Hey, guys. Thank you for putting me in here. The first question is on cash flow conversion this year. Given similar CapEx levels and, you know, entering the year at sort of higher work capital levels, how are you guys thinking about free cash flow conversion?
spk21: So a couple things to note there. You know, in the second half of the year, we generated a little over $165 million. You know, coming into 22, obviously, we were behind. on inventory, so we had to kind of build up inventory. So for 23, you know, even though our visibility is limited, we do expect cash flow to improve, you know, but it's worth a note that we're investing in, you know, growth categories and acquisitions to try to improve the long-term results.
spk09: Gotcha. Okay, and then the second question is, it sounds like the commercial business has held up really well. Are you seeing any signs of slowing in that business?
spk18: You start with the ABI index, which I'm sure we're all watching. It's been under 50 for several months, so it looks like there's less projects going to be. Most of those projects tend to have at least a time before we get to them, a minimum of a year and some up to three years. So it takes a while for the projects to come through to know what's going on. Some categories in commercial are performing better than others, like hotels didn't invest during the whole time. There's still investments in hotels going on to update them and keep them, and it's performing the best. And it all depends on the economy. But, again, it's got a long tail to it.
spk25: Got it. Thank you, guys. The next question comes from Rafi Jadrosic from Bank of America. Please go ahead.
spk30: Rafi Jadrosic Hi. Thanks for taking my question. I just wanted to follow up on a comment you made earlier in terms of the Europe natural gas input. I think you said that you thought costs would be more in line with competitors by year end. I thought while raw material costs were going up, your competitors were hedged, so they had lower input costs. I would have thought as the gas prices come down and they're hedged, you would actually have sort of a benefit there, lower gas prices. Is there a window where your input costs will be lower because they're hedged and they don't get the benefit from the falling raw material costs?
spk18: First is that the comment was around our European ceramic business, not all our businesses. And so in European ceramic, the cost of gas prior to this was about 15% of the manufacturing cost. It peaked somewhere over 40%. And what we said was going into this thing that we have not hedged gas prices historically. It has given us an advantage by not doing it. But as you went through these things, as gas prices went up by... Eight to ten times over there, we're competing against people that had hedged it at much lower prices. The comments were around this year as the gas prices have dropped substantially that we believe by the fall, blowing through inventory, we should be on a competitive level with those companies that had hedged before this whole thing started.
spk30: Scott, because they're still hedged, will they have higher gas prices at the end of the year?
spk13: I think where they are hedged will be more like what the market will be, is the way to look at that.
spk18: We think their average hedging price will be similar because we're assuming that they hedged more. If you have a hedging policy, we're assuming that their average hedge price is will be similar to where our purchase prices will be.
spk30: Okay, that's really helpful. And then just in terms of the planned CapEx, can you just break out how much of it is maintenance versus growth? And then within that growth component, like how much is flooring categories versus some of the other growing lines like countertops? Thank you.
spk21: Well, the growth investments, I would say, are between $200,000 and $250,000. depending on timing. Most of that would be in the flooring area. Maintenance, capex, approximately $250 million. And then the balance is on cost reductions, product innovation, and acquisitions.
spk29: Thank you. Very helpful.
spk25: Our next question comes from Adam Baumgarten from Zellman. Please go ahead.
spk19: Hey, everybody. Just a question on first quarter EPS. Given that it's roughly in line, expected to be in line with 4Q, should we expect from a segment level the performance to be similar as well?
spk21: Similar? Explain your question a little bit more, please.
spk19: Your EPS guidance is roughly the same, 1Q versus what you put up in 4Q. So, just from a segment, you know, fundamentals and performance, should that look similar as well?
spk21: So, I would say, you know, flooring North America, you know, given the market conditions and such, you know, remains slow. And they, you know, we do anticipate more pressure on pricing and mix with the higher cost inventory still being used. Production levels will still be low and labor inflation will increase. But given this, I'd still expect margins in Q1 to be slightly better and then strengthening Q2 when the costs align and volume seasonally increases.
spk19: Okay, got it. Thanks. And then just on the LVT piece, you know, shutting down or exiting the business out of Europe, do you foresee a similar move in North America at some point And also just on that European exit inflexible, are you able to repurpose that capacity for the rigid manufacturing?
spk13: Yeah, let's just isolate that one question. So in Europe, we're replacing our residential flexible with rigid. We'll continue to produce flexible for the commercial market. And then in the U.S., you won't have that because we have a much larger commercial presence where we use our flexible LDT. Okay.
spk35: Okay, got it. That's helpful. Thanks.
spk25: Our next question comes from Laura Champagne from Loop Capital. Please go ahead.
spk37: Good morning. Thanks for taking my question. In flooring North America, are you holding share versus your competition?
spk18: We think that the carpet industry, we are in line with the industry.
spk37: Got it. And is the issue there more that carpet is losing share versus other flooring categories? And do you think that, if so, is that just a function of the mixed shift towards commercial, or are there other factors still at play there?
spk18: I think it's a few different pieces. One is you're comparing to the fourth quarter, the prior year, where we had really significant pent-up demand that the inventories were low, all the plants were running as much as we could get labor and material to run. You're comparing that now to an environment in our customers' inventories were low, and they were actually trying to build their inventories, which continued into the first half of the year. You're comparing that to an environment where the opposite is occurring. Our customers are lowering inventories. The environment's slower, and so that's exacerbating the decrease, but it is still losing share to hard surface as it has been. Understood. Thank you.
spk25: Our next question comes from Catherine Thompson from Thompson Research Group. Please go ahead.
spk38: Hey, good afternoon. This is actually Brian Byros on for Catherine. Thank you for taking my questions. It seems like after Q1, maybe starting in Q2 or even mid-year, things are expected to ramp up from the current low levels going on now. What indicators do you guys look at to understand when and how much to ramp up production? There's obviously just seasonality lift, but beyond that, is it strictly just orders coming in, or are there other metrics you look at to kind of get a sense of how do we get ahead of this retail customer or the new resi activity that picks up to be ready for the ramp up and not just reacting to it?
spk18: We act differently based on the capacity utilizations. So in a slow marketplace, you have excess capacity and you can react to it so you don't have to anticipate it more. Earlier in the call, we talked about in some period, we usually build inventory in the first quarter to cover the peaks in the rest of the year which would be a typical year. So this year we're not acting the same way because of the capacity availability that we have.
spk38: Okay, thank you. That's helpful. And second question, I guess, is given the restructuring plans you guys have, you know, adjustments of products, operating lines, plans, is there a way to think about kind of the new Mohawk capacity going forward here? You know, a lot of moving pieces, especially since you're also adding some products as well. But is there just a way to understand what the company is able to serve going forward now versus what it was previously? Maybe it's something like we took out 5% of capacity or across our footprint, just any color on that kind of dynamic would be helpful.
spk18: I think that on the capacity side, what we've done is we've reduced some of the carpet, less efficient plants. We're aligning the rug business with lower volumes in it. And we said we... We're taking out some capacity and flexible in Europe. So those are the decreases in the business. The increases are in the main growth categories, which we've been telling you about. And I can repeat them again, or I think you have them already. Yeah, we got it. Thank you.
spk38: Okay, so that's helpful. Thank you.
spk25: Our next question comes from Matthew Boley from Barclays. Please go ahead.
spk03: Good afternoon, everyone. Thanks for taking the questions. Another one on the Q1 earnings guide, just to make sure we got all this right. It sounds like you're speaking to some additional kind of headwinds that might be worse sequentially. Price-cost, I heard you mentioned. Obviously, reducing production and all that. you're guiding to earnings flat sequentially, roughly, and historically Q1 is below that of Q4. So I'm just curious what else we're missing there, what might be a little bit better than you typically see seasonally. Thank you.
spk18: I don't think that we're anticipating Q1 being significantly better. We are trying to tighter manage our inventories given that our future view is weaker and that we don't want to build inventory. We think that the commodity prices and energy prices will stay low, so we're not trying to build the inventories in the first quarter.
spk21: Matt, sequentially, when you think about it, to the two The two benefits that you have sequentially is the lower cost, Q4 to Q1, and then less shutdowns, Q4 to Q1. Those are being offset partially with, as we talked about, the price mix, which is all leading you back to a relatively flat quarter-to-quarter performance.
spk03: Okay, that makes a lot of sense. That's very helpful there. And secondly, back on the pricing environment in European ceramic, just any thoughts kind of, you know, if you're going to educate us historically, how does the market kind of typically react there to reductions in input costs? And, you know, you mentioned the competitive environment, you know, just I know it's prognostication, but any thoughts from you guys on how you think the competitive environment will evolve given the reduction in costs there?
spk13: Thank you. I'll give you sort of an overview. Our business is under pressure there with slow demand, customer inventory reductions, and inflation. Our results in the quarter were impacted by energy prices from the third quarter and temporary shutdowns. The market is still being supported with energy subsidies, and we still are, at least in the first part of the year, disadvantaged because of the hedging. I think as that As you go through the year, what we would hope to happen is that energy costs come down, that the consumer will be able to have a better situation with wages going up and energy costs going down. But I still think it will be a competitive situation in Italy for the short term.
spk18: Just as a comment, some of you don't keep up with Europe. There were people that their energy costs were more than their mortgages. I mean, it's a huge drag on the economy.
spk25: Yep, got it.
spk03: All right, thanks, everyone.
spk25: Our next question comes from David McGregor from Longbow Research. Please go ahead.
spk16: Yes, good morning, everyone. Jeff, just a question on the commercial business here. How are you thinking about your competitive position in North American commercial flooring? Do you see sustainably better flooring fundamentals in this category, and therefore you invest more aggressively to gain share? Where do you attribute the relative strength you're seeing in commercial to just timing and the typical lag that the categories historically shown behind changes in residential, and therefore you kind of go forward with what you have? Just curious how you're thinking longer term about capital allocation in commercial form.
spk18: We've been supporting the commercial business with both products and capacity to satisfy the demand that we think we have, and we haven't been restricting it. Typically in these cycles, though, as we talked about, commercial is the last thing to fall off. This is really an unusual cycle because typically all categories are in lower shape. In this thing, you have hospitality that's doing really well at the moment where other categories are doing really poorly. The airline business is doing really well. We provide airline carpets. This is a really unusual environment that we haven't seen in prior cycles. We'll have to see how the whole thing works out, but we continue to invest in the commercial business. We have strong relationships. We have a broad product offering, and we'll continue to do so.
spk16: Okay, thanks for that. If I could just ask a follow-up. I'm really just trying to calibrate here. Within your first quarter guidance, What do you assume for U.S. residential core industry unit growth?
spk21: It depends if you're looking year over year or sequentially. Sequentially, we would expect the volume to improve generically across the business. That's from a sales volume perspective. But certainly, year over year, it's going to be under pressure. It'll be significantly below last year. Yes. Year over year, for sure, it'll be significantly below. Because remember, this time last year, we were still in a very hot market.
spk16: Right, right. Yeah, I think you discussed that previously on the call. I'm just trying to get some sense of what maybe quantitatively you're looking for so we can calibrate against the guidance.
spk21: I don't really have a good number to give you just on specific residential units.
spk16: Okay. Thanks very much, gentlemen. Good luck.
spk25: This concludes our question and answer session. I would like to turn the conference back over to Jeff Lorberbaum for any closing remarks.
spk18: Thank you very much for joining us. We are in a strong position to manage through this period. It's going to be slower for the near term. and we'll continue to invest to optimize the long-term results, and we think we're in a very good position to improve our business as we come out. Thank you very much.
spk25: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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