Mohawk Industries, Inc.

Good morning. My name is Alan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries second quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star, then the number two. Should anyone need assistance at any time during this conference, please press star then zero and an operator will assist you. As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, the 28th of July, 2023. I would like now to introduce Mr. James Brunk. Mr. Brunk, you may begin your conference.

Thank you, Alan. Good morning, everyone. Welcome to Mohawk Industries Quarterly Investor Conference Call. Joining me on today's call are Jeff Lauerbaum, Chairman and Chief Executive Officer of and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's second quarter performance and provide guidance for third 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 by the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth and 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 and press release in the Investors section of our website. With that, I'll turn over the call to Jeff for his opening remarks.

Thanks, Jim. Mohawk's second quarter net sales were $2.95 billion. down approximately 6.4% as reported, or 9.6% on a constant and legacy basis, primarily due to continued pressure and residential remodeling across all of our regions. Our adjusted EPS was $2.76, as our margins across the enterprise expanded sequentially due to seasonal improvement, increased production, productivity initiatives, and lower input costs. We generated over 145 million of free cash flow during the quarter, further strengthening our financial position. Typical of housing recessions, higher interest rates and inflation are significantly impacting flooring sales around the world. To manage, we are selectively investing to increase sales and reducing expenses by enhancing productivity, consolidating distribution points, and improving administrative efficiencies. We initiated restructuring and integration actions that will save $35 million annually at a cost of approximately $17 million. We anticipate approximately half of the estimated savings should be realized in the current year, partially offsetting the weak residential remodeling activity. In addition, we're limiting future capital investments to those delivering significant sales, margin, and operational improvements. In all of our regions, We're taking actions to increase sales, including promotions, retailer incentives, and selective product launches. The integration of our recent acquisition is progressing as we combine strategies and enhance their manufacturing and product offering. While managing lower market demand, we're preparing for the rebound that historically follows cyclical declines in our industry. Our LVT, premium laminate, quartz countertop, porcelain slab, and insulation Manufacturing expansion should deliver the greatest growth as the market recovers. Across our regions, we continue to see stronger results in the commercial sector than in residential. Residential remodeling remains the industry's greatest headwind due to lower home sales and deferred improvement projects. We believe channel inventories have declined and could be at a bottom. Price competition is increasing with declining industry volume mix, and input costs. In the US, the housing markets remain under pressure due to limited supply, high interest rates, and continued inflation. Existing homeowners are not moving at historical levels to maintain their low mortgage rates. In Q2, new home starts increased to 1.45 million, showing the first quarterly increase since the beginning of last year. We believe the trend in housing starts will continue and will positively impact flooring shipments in the future. In our regions, home sales and remodeling are also declining due to inflation and interest rates. In Europe, energy prices have continued to decline, though persistent inflation in other categories is limiting consumer remodeling. In the quarter, we benefited from lower energy prices that flowed through our P&L. Our investments in biomass solar and wind energy production reduce our operational expenses and carbon footprint positively impacting our performance. During the second quarter, the Italian government provided energy subsidies at a reduced level, and the program will not be continued. In May, USA Today ranked Mohawk as one of America's businesses that made the greatest reductions in their global emissions over the past three years. Mohawk was the only flooring company recognized, reinforcing our position as a global leader in sustainability. Earlier this month, we announced that Bernard Tiers will be stepping down as president of Flooring Rest of World next year and will continue with the company in a senior advisory role to support a smooth transition. Bernard has made many important contributions to the success of the business since we acquired Uniland in 2005. He has led the Flooring Rest of World segment for the past 14 years and delivered profitable growth by expanding our product offerings entering new geographies and bringing new product innovation to the market. I'm proud of the exceptional team that Bernard has assembled across this segment. Wim Messiaen will be joining Mohawk in October after he completes his contractual notice period. He'll become president of Flooring Rest of World on February 1st. Wim has more than 30 years of leadership experience with multinational packaging, building products, and flooring manufacturers in Europe, Asia, and Australia. He has considerable experience driving both growth organically and through acquisitions. Wim will complement our strong leadership team with a passion for innovation, strong customer focus, and a commitment to sustainability. Jim will now cover our financial performance for the second quarter.