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spk01: good day and welcome to the mohawk industries inc first quarter 2023 earnings conference 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 to ask a question you may press star then one on a touch tone phone to withdraw your question please press star then two Please note this event is being recorded. I would now like to turn the conference over to James Brunk. Please go ahead.
spk02: Thank you, Dave. Good morning, everyone. Welcome to Mohawk Industries' quarterly investor call. Joining me on today's call are Jeff Lohrbaum, Chairman and Chief Executive Officer, and Chris Walborn, President and Chief Operating Officer. Today, we'll update you on the company's first quarter performance and provide guidance for the second 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 the discussion of non-GAAP numbers for reconciliation of any non-GAAP-to-GAAP amounts please refer to our form 8K and press release in the investor section of our website. I'll now turn the call over to Jeff for opening comments.
spk03: Thanks, Jim. For the first quarter of 2023, Mohawk's net sales were $2.8 billion, down approximately 6.9% as reported, or 5.9% on a constant basis, and our adjusted EPS for the quarter was $1.75. All of our businesses are adapting our strategies to a more challenging environment. We're managing our costs while investing for both short and long-term growth. We exceeded our earnings expectations with the businesses maintaining higher pricing and mix and flooring rest of the world outperforming the other segments. The commercial channel continues to be stronger than residential with home remodeling projects being postponed and new housing construction being impacted by higher mortgage rates. Our balance sheet remained strong, and we generated over $125 million of free cash flow. We strategically invested in new product innovation, enhanced merchandising, and customer trade shows to improve sales. We are continuing to reduce costs across the enterprise by enhancing productivity, streamlining processes, and controlling administrative expenses. Our customers remain conservative in their inventory commitments, and all of our operations are running at lower utilization levels, creating higher costs from unabsorbed overhead. We see increased competition as industry capacity utilization and input costs decline. In Europe, natural gas prices have dropped dramatically, though they remain at almost double the historical levels. We expect consumer spending to improve as wages rise, inflation slows, and energy costs fall. Our new product introductions provide more value options for budget-conscious consumers. In the US, limited supply, high interest rates, and persistent inflation have suppressed the housing market. Lower home sales and changing consumer spending habits are impacting the remodeling category. We are maximizing our commercial business with new introductions, marketing initiatives, and targeted promotions. In our other geographies, demand is similarly slowing with residential more affected than commercial. Though the Mexican economy faces challenges, our business there is holding up better, while Brazil slowed more with higher interest rates and reductions in consumer inventories. Our restructuring actions are on track in the flooring North America and flooring rest of world segments and should improve the results of our business. We are limiting our other capital investments to those providing significant sales, margins, and process improvements. We're expanding our constrained categories that have the greatest growth potential when the economy recovers. These include LVT, premium laminate, quartz countertops, porcelain slabs, and insulation products. We completed two acquisitions in ceramic in Brazil and Mexico that had combined sales of approximately $425 million, almost doubling our existing market share in those geographies. We are developing strategies to increase our sales by providing broader product offering and using combined brands to satisfy all price points. In each country, we're beginning to consolidate the businesses to reduce costs, improve efficiencies, and optimize production. We also continue to improve the small bolt-on acquisitions in Europe and U.S. that we completed last year. Despite falling energy prices, natural gas and electricity inflation remained a headwind in the first quarter, though our future results will benefit as lower costs flow through the P&L. Our sustainable strategy includes investments in both production of green energy from biomass, wind, and solar, which reduces both our expenses and our carbon footprint. Our two biomass energy plants lowered our costs and improved our results in the quarter. We also purchased some of our European energy at various times to reduce future cost volatility. Italian energy subsidies have been extended at reduced levels through the second quarter. I'll turn the call over to Jim for his review of our financial performance.
spk02: Thank you, Jeff. Sales for the quarter were just over $2.8 billion. That's a decrease of 6.9% as reported, or 5.9% on a constant basis, driven by a reduction in volume and unfavorable FX. As compared to Q1 2022, which was still benefiting from the COVID pandemic rebound in residential remodeling activity, the decrease was partially offset by favorable price mix and acquisitions. Global ceramic, with a larger percentage of commercial and new construction, had the strongest quarter. Gross profit as a percentage of sales was 22.9% as reported, and excluding one-time items was 24.1% versus 26.6% in the prior year. The year-over-year decline was due to the impact of inflation, lower volume, the related temporary plant shutdowns, and unfavorable FX, partially offset by stronger price mix and productivity gains. The actual detailed amounts of these items will be included in the MD&A of our 10-Q, which will be filed after the call. SG&A as a percentage of sales was 18.4% as reported. The year-over-year dollar increase in SG&A was driven by inflation, primarily in employee expenses, increased costs in product development and marketing to drive future sales, volume and unfavorable price mix, partially offset by favorable FX and productivity initiatives. Operating margin as reported was 4.5%. Restructuring, acquisitions, and other charges were $36 million in the quarter, of which $6 million was cash. These charges are primarily related to the previously announced initiatives, mainly in flooring North America and flooring the rest of the world. Operating margin excluding charges was 5.8%, and similar to gross margin, the year-over-year decline is driven by higher inflation, lower volumes, and related temporary plant shutdowns. and costs associated with investments in new product development and marketing, partially offset by favorable price mix and productivity gains. Interest expense for the quarter was $17 million, increasing year over year, primarily due to the higher interest rates. Our non-GAAP tax rate for the quarter was 22.6% versus 22.3% in the prior year. We expect Q2's tax rate to be approximately 19% to 20%, and the full year rate to be between 21% and 22% with quarterly variations. That leads us to an earnings per share as reported of $1.26 and excluding charges of $1.75. Turning to the segments, in global ceramics, sales were just shy of $1.1 billion. That's a 0.5% decrease as reported and 1.2% decrease on a constant basis. Volume declines across all regions were only partially offset by favorable price mix, FX gains, and acquisitions. Overall, the U.S. business had the strongest year-over-year performance as commercial and new home construction outperformed residential remodeling. Operating margin excluding charges was 6.3%, declining year-over-year due to the slowing economies and higher interest rates impacting all geographies. resulting in lower volumes and short-term plant shutdowns, partially offset by favorable price mix and productivity gains. We are focusing on expanding markets, integration of our acquisitions in Mexico and Brazil, differentiated products, and growth capex to drive future results. In Florida, North America, sales are 953 million. That's an 11.1% decrease as reported and on a constant basis. we saw weakness across all product categories compared to a very robust Q1 of 2022, led by residential soft-surface products, as our commercial and laminate businesses, while still down versus prior year, had the strongest year-over-year volumes in the segment. Operating margin excluding charges was 0.5%. The decline in operating margin was due to the weakening in the housing market, with consumers deferring home improvement projects and trading down to meet constrained budgets, leading to lower volumes and temporary plant shutdowns. In addition, the segment's margins were compressed as it absorbed peak material costs from prior periods. In the quarter, we also invested in new product development and marketing initiatives to expand future sales. These headwinds were partially offset by favorable price mix and productivity gains. And finally, for the rest of the world, with sales of $793 million, That's a 9.7% decline, as reported, including unfavorable FX, and 6% on a constant basis, as housing-related purchases significantly declined, negatively impacting our flooring products, as compared to our insulation business, which maintained a positive year-over-year growth, driven by the push to further conserve energy. Operating margin excluding charges was 12.6%, declining versus prior year, due to the higher inflation, lower volumes, and temporary plant shutdowns, partially offset by favorable price mix and benefit from our green energy production. We are implementing selective promotion, executing our restructuring actions, and increasing supply chains outside of Europe to drive sales and margin growth. Corporate expense and eliminations were $10 million in line with the prior year. and I would expect full year corporate expenses should be approximately $45 million. Turning to the balance sheet, free cash flow for the period was $129 million versus a $75 million use of cash in the prior year. Receivables were just shy of $2.1 billion with DSO at 56 days versus 54 in the prior year, but improving from 60 days as of the end of the year of 2022. Inventories were just over $2.7 billion. Now, excluding the impact of acquisitions, inventories decreased $114 million versus Q4 of 2022. Inventory days stand at 128 days versus 111 in the prior year, but improving from 138 days at the end of 2022. Property plant equipment was just over $4.9 billion. And Q1 CapEx was $128 million with DNA at $170 million. Full year, our 23 forecasts includes CapEx of $570 million and DNA of approximately $600 million. And finally, gross debt of $3.3 billion and leverage at 1.7 times adjusted EBITDA gives us the strength and flexibility to manage through this uncertain market. Now I will turn the call over to Chris to review our Q1 operational performance.
spk04: Thank you, Jim. The global ceramic segment spans many countries with each having their own unique economic conditions. All of our regions are being impacted by slowing economies and higher interest rates. The commercial channel is strongest and new home construction held up better than residential remodeling as consumers reduce discretionary purchases. In this softening environment, our customers are lowering their inventory levels with significant differences in each region. As industry volumes decline, we are facing additional competitive pressures in our markets. Our pricing has lagged our cost changes, though we are seeing decreases in energy and material expenses, which should benefit our future results. The U.S. is performing better than our other ceramic markets due to our greater sales in the commercial sectors. Our domestic production is more reliable than imported alternatives, which is benefiting our sales, particularly in our premium collections, which compare favorably to European alternatives. We are shifting our sales force focus to target opportunities in the multifamily and exterior channels and are expanding our commercial and builder distribution with curated collections for immediate delivery. To increase our countertop volume, we are expanding our business with national accounts, contractors, and kitchen and bath retailers. We are re-engineering our entry-level quartz countertop to lower our cost and enhance the value. To manage through the slowing environment, we continue to reduce our costs across the business, including overhead and discretionary spending. Our ceramic business in Europe remains under pressure as demand has declined due to ongoing inflation and higher interest rates. We maintained higher average selling prices than we anticipated, partially due to our new introductions.
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