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spk46: Good morning, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to Mohawk Industries' third quarter 2023 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 and the number one on your telephone keypads. To withdraw your questions, you may press star and two. Should anyone need assistance during the conference, you can signal an operator by pressing star and zero. As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, October 27th, 2023. Thank you. I would now like to introduce Mr. James Brunk. Mr. Brunk, you may begin your conference.
spk20: Thank you, Jamie. Good morning, everyone. Welcome to Mohawk Industries Quarterly Investor Conference Call. Joining me on today's call are Jeff Lohrbaum, Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's third quarter performance and provide guidance for the fourth 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 and press release in the Investor section of our website. I'll now turn the call over to Jeff for his opening remarks.
spk15: Thanks, Jim. In the third quarter, our net sales were $2.8 billion, down approximately 5.2% as reported, or 8.1% on a constant and legacy basis, in line with our expectations as our industry faced continued pressures across all regions, primarily due to constrained residential investments and tightening of consumer discretionary spending. Our adjusted EPS for the quarter was $2.72, with our margins across the business benefiting from cost reductions productivity initiatives, and lower input costs. Our third quarter performance was seasonally impacted by vacations in Europe, which reduced our sales and earnings versus the prior quarter. Our lower material and energy costs offset the decline in both price and mix. We also faced FX headwinds of approximately $20 million on operating income, or 25 cents on EPS. We are managing our working capital and generated strong free cash flow of $385 million in the quarter and $660 million on the year-to-date basis. During the quarter, central banks around the world continue to raise interest rates to slow down their economies and reduce inflation. Their actions are affecting new construction and remodeling in both residential and commercial channels, postponing spending on new projects. In the U.S., Mortgage rates have climbed to the highest level in more than two decades, which has suppressed the housing market and limited home renovation activity. In Europe, consumers are deferring large purchases such as flooring as a result of higher energy costs, inflation, and uncertainty due to the war in Ukraine. Our industry faces a greater impact from these pressures than other sectors, given that most flooring purchases are deferrable. With the high fixed costs required to produce flooring, competition increases as the industry slows, and participants attempt to increase their sales to maximize absorption. As a result, our average selling prices and mix have declined, with the impact partially offset by lower material and energy costs, restructuring benefits, and process improvements. The expected housing sector recovery continues to be postponed, and we are managing the business to optimize our results and cash flow until it occurs. We're taking actions to increase our volumes while managing margins and operating expenses. We've launched differentiated collections, selectively introduced promotions, and expanded our participation in the new construction channel. To further enhance our competitive position, we will shut down older ceramic production in Italy, and we are converting U.S. rigid LVT production to a direct extrusion process. These restructuring initiatives will result in a non-recurring charge of approximately $55 million, of which $50 million is non-cash. When completed, these initiatives should improve our profitability by $30 million annually by enhancing our productivity, lowering our manufacturing costs, and optimizing our production flexibility. Our European expansions in insulation and porcelain slabs are currently in operation. Our U.S. premium laminate and LVT projects are continuing to start up. Expanded production in European laminate and U.S. quartz countertops should begin in the second half of 24. As the integration of our acquisitions in Mexico and Brazil proceeds, we have consolidated the general management, sales, and administrative functions while enhancing the company's product offering, operational efficiencies, and customer base. While the Mexican and Brazilian markets are experiencing reduced demand and margins, we anticipate gaining additional benefits from our acquisitions as these markets recover. In September, we released our 14th annual sustainability report, and for the first time, we provided scope three emissions. Institutional Shareholder Services has ranked Mohawk as one of the top companies for environmental quality in the durable goods and apparel category. We have significantly exceeded our 25 goals related to decarbonization, waste reduction, and water conservation. We're lowering our carbon footprint by using more recycled content, increasing our green energy production, and expanding our product circularity. We recently received the Susan G. Komen Promise Award for our two decades of partnership in the fight against breast cancer. We've also formalized a board of directors selection policy as part of our ongoing commitment to diversity. To learn more, you can read the report online at mohawksustainability.com. I'll turn the call over to Jim for a view of our third quarter financial performance.
spk20: Thank you, Jeff. Sales for the quarter were just under $2.8 billion. It's a 5.2% decrease as reported, 8.1% on a constant legacy basis. Higher interest rates and continued inflation has weakened new housing and remodeling activity, negatively impacting our global business with lower volume and price and mix pressures. Gross margin for the quarter was 25%, as reported, and excluding one-time items was 26.6%. That's up 100 basis points versus the prior year, with lower input and energy costs exceeding unfavorable price and mix in the quarter, along with stronger productivity, only partially offset by lower volume and unfavorable FX. The actual detailed amounts of these items will be included in the MD&A of our 10-Q, which we will file after the call. SG&A as a percentage of sales was 19.9% as reported. Excluding one-time items was 18.1%. The dollar increase was primarily attributable to the impact of acquired businesses, investments in new products and marketing to drive increased future sales, unfavorable FX, and higher inflation. The operating margin as reported was a negative 26.5% and excluding charges was 8.4%. As the company's current market capitalization along with challenging economic conditions and higher discount rates resulted in a non-cash goodwill and trade name impairment charge of $876 million in the quarter. Total non-recurring charges was $967 million, primarily related to the impairment of the Goodwill and Trade names. But in addition, to further enhance our competitive position, we will shut down older ceramic production in Italy and converting our U.S. rigid LVT production to a direct extrusion process. These actions should improve our profitability by approximately $30 million annually. Adjusted operating income was 8.4%, as I noted. The year-over-year decline was primarily driven by lower sales volume and unfavorable FX, partially offset by the reduction in input and energy costs exceeding the impact of negative price and mix, and increased productivity gains, which were under pressure due to lower plant utilization. Interest expense for the quarter was $20 million. The year-over-year increase is due to significant rise in global interest. Other income, other expense was income of $8 million. Non-GAAP tax rate was 20.8% in the current year versus 17.9% in the prior year. We expect Q4 2023's tax rate to be approximately 17.5% to 18.5%. That gives us an earnings per share on an adjusted basis of $2.72. Turning to the segments, in global ceramics, sales were just under $1.1 billion. That's a 0.5% decrease as reported and 6% on a legacy and constant basis. The U.S. businesses volume outperformed, benefiting from our expanded position in new construction and commercial channel in the quarter. Adjusted operating income was $88 million, or 8% of sales, a decline versus prior year as the global slowdown in demand and pressure on price mix led to further temporary shutdowns, lower sales volume, in addition to the impact of unfavorable effects, partially offset by improving productivity gains and restructuring actions. In Florida and North America, our sales were just over $960 million. That's a decrease of 11.7% as reported and 12.2% on a constant basis, as higher interest rates and inflation continue to pressure discretionary spending across all product channels. Adjusted operating income was $78 million, or 8.1%. The operating margin was in line with prior year, as lower input and energy costs offset negative price mix, partially offset by weaker volume and lower productivity due to underutilization of our plant assets in the current demand environment. Infloring the rest of the world, with sales of just over $710 million, That's a 2.6% decrease as reported and 5% on a constant basis, as our business has been impacted by low consumer confidence, higher interest rates, inflation, and geopolitical events. The business in Australia and New Zealand and our resilient and insulation products held up best in this environment. Adjusted operating income was $77 million, or 10.9%. Our adjusted operating income margin expanded versus prior year as lower input and energy costs offset the weakening price mix similar to flooring North America, in addition to the benefits of green energy and fewer temporary plant shutdowns than the prior year, all partially offset by unfavorable FX. Corporate eliminations were $10 million for the quarter in line with the prior year. Turning to the balance sheet, cash and cash equivalents were $518 million for the quarter. Driven by strong management of working capital, our free cash flow grew to $385 million in the third quarter and are standing at $660 million on a year-to-date basis. Receivables were just over $1.9 billion, with a DSO of 59 days, which was in line with the prior year. Inventories were just over $2.5 billion. The year-over-year inventory decreased $380 million, and excluding the impact of acquisitions, the decrease was $438 million, primarily due to a focus reduction in units supported by lower year-over-year costs. Inventory days also decreased to 125 days from 131 in the prior year. Property, plant, and equipment was just shy of $4.8 billion, with Q3 CapEx standing at $127 million, with DNA of $150 million. Full-year 2023 forecast includes a CapEx of just over $620 million at this point. And finally, gross debt was $2.6 billion, with leverage at 1.5 times adjusted EBITDA. This positions the business to take full advantage of the rebound that historically follows a downturn like we are experiencing today. Now, with that, I'll turn it over to Chris to review our Q3 operational performance.
spk11: Thanks, Jim. In global ceramic, our business outperformed due to our innovative product introductions and higher service levels. With this, we expanded our positions in the new home construction and commercial channels. Residential remodeling was slower due to lower home sales and postponed projects. Our investments in new decorating technology, polishing, and mosaics are providing domestic alternatives to premium imported ceramics. We are expanding our sales to regional builders as well as kitchen and bath retailers with our coordinated tile and countertop collections. To further expand our quartz countertop sales, we are introducing more stylized collections utilizing new technologies that provide greater value. We have lowered our distribution costs by shipping more product directly from our plants and bypassing our regional warehouses. In our European ceramic business, retail traffic and new construction are being affected by economic uncertainty. In Southern Europe, where our business is concentrated, the economies are under greater pressure. Across all channels, low industry volume is creating more intense competition and we are responding with specific price promotions by geography and channel to gain additional sales. Natural gas prices have declined by 80% from their peak, and we have reset our pricing to align with energy costs. While volumes have declined across most product types, sales of our premium porcelain slabs continue to grow, and we are optimizing our recent capacity expansion. We continue to adjust inventory and production to align with changing market conditions. To contain cost, we have increased productivity, reduced overhead, and implemented alternative formulations. In Latin America, we have reduced our cost structures to adapt to slower, more competitive markets, with Mexico being less affected. Our margins are being impacted by lower industry pricing, partially offset by declining energy costs. Inflation in both Mexico and Brazil is receding, and central banks are beginning to lower interest rates in response with further reductions expected this year. We are integrating our acquisitions in both countries and making significant progress in executing our sales, product, and manufacturing synergies. To increase our distribution, we are gaining customer commitments to expand sales across all channels and price points using the combined product portfolio. In each country, we are utilizing the assets of our legacy business and acquisitions to broaden our product offerings. We have completed the information systems conversion in Mexico, and the system consolidation in Brazil will be completed by the end of the year, enabling further operational improvements. In flooring rest of world, our margins benefited from declines in energy and raw material costs, partially offset by lower price and mix. Sheet vinyl continues to outperform other categories as it provides a lower cost alternative, and we have increased production to meet higher demand. With operational improvements underway, our Eastern European sheet vinyl acquisition is delivering higher-style products and increased sales. Our laminate and LVT sales are under pressure in the software market, and we are introducing new products, merchandising, and select promotions to optimize volumes. We have executed the restructuring to support the conversion of our residential LVT offering from flexible to rigid cores, which is positively impacting our results. We are pursuing additional flooring sales, reducing costs, and aligning production with demand to manage the current conditions. Our panels business has slowed due to a decline in remodeling activity, construction projects, and industrial demand. Lower industry sales are affecting both our selling prices and volumes. Our material costs are declining, and we're also benefiting from improved productivity and green energy production. Sales of our higher-margin HPL collections are growing as our customer base expands. Our sales and operational synergies are progressing in both our board and mezzanine acquisitions. Our insulation business is positioned for longer-term growth as governments require greater energy conservation for new construction and remodeling. Insulation is less impacted than our other product categories as consumers and businesses invest to minimize their energy costs. Industry pricing has declined along with input costs with regional variation caused by new plants coming online. In the third quarter, our volume improved and our margins were in line with the prior year. In Australia and New Zealand, the industry slowed during the quarter and our sales in both countries were down slightly. Our results were impacted by mixed pressure in the residential channels as consumers sought lower cost flooring options to maintain their project budgets. To increase sales and protect our margins, we are introducing enhanced collections across fiber categories, elevating the market of our high-end products, and implementing targeted promotions to meet evolving demand. Commercial sales in New Zealand remain strong, and our broad product offering is helping us secure larger specified projects. In our Flooring North America segment, pricing and mix were under additional pressure as competition increased across all product categories. The impact on our results was partially offset by lower input costs, restructuring, and productivity initiatives. To expand our retail presence in all foreign categories, we continue to invest in both products and merchandising systems. We are increasing our participation in the new home construction channel with regional and national builders. Across the segment, we are implementing many projects to reduce costs, improve efficiencies, and maximize material utilizations. we are reengineering products with alternative materials and increasing recycled content. We have completed many of our restructuring initiatives to lower our costs and better align with current conditions. In residential carpet, to improve our mix, we are expanding our premium collections, which provide superior styling and features for the more discerning consumer. For the value-conscious homeowners, we are increasing our environmentally friendly recycled polyester offer. We have completed the integration of our non-woven flooring acquisition and are expanding their customer relationships. In Resilient, our sheet vinyl collections continue to perform well as a preferred choice for budget-oriented consumers. As an alternative to PVC-based products, we introduced a new Resilient polymer core that is more environmentally friendly and scratch-resistant. In the third quarter, our imported LVT sales were disrupted by U.S. customs actions and to satisfy customer orders, we substituted higher cost alternatives. We anticipate an increase in LVT inventories in the fourth quarter to improve service. We are continuing to ramp up our West Coast LVT production and the new extrusion process in Georgia. We anticipate both projects will be substantially operational in the first quarter. In addition, the proprietary technology we are implementing in these plants will enable us to introduce unique styling and features to the markets. We are expanding our distribution of laminate in the retail and builder channels. Our redwood collections are being more widely accepted as waterproof flooring alternatives with superior visuals. Our new laminate product launches have been well received as consumers seek premium visuals at accessible price points. We are offering selective promotions to improve volumes in a soft market. Our trim and stair accessories business is growing as we broaden the range of our patented products across all channels. Though U.S. commercial activity slowed in the quarter as financing became more difficult, our commercial performance is holding up better than residential, led by the hospitality sector. Our carbon-neutral product collections with industry-leading recycled content provide superior performance and design options to architects and designers. Our EcoFlex One carpet tile technology is gaining rapid adoption in the specifier community due to its acoustics, comfort, and ease of installation. We are expanding the sales and distribution of our recent flooring and accessories acquisition through our existing commercial partners. Our business development group has leveraged our product and service advantages to cultivate new relationships with major retail, healthcare, senior living, and real estate development customers. I'll return the call to Jeff for his closing remarks.
spk15: Thanks, Chris. In the present industry downturn, we're managing the controllable aspects of our business while adjusting to regional market conditions. In all of our geographies, elevated interest rates and persistent inflation are restricting consumer discretionary spending, resulting in postponed remodeling projects and new home purchases. Similar pressures are beginning to reduce commercial investments as business sentiment declines. Competition for sales to utilize plant capacity is increasing in all of our markets, and lower input costs should offset the impact. With enhanced products and merchandising, selective promotions, and expanded participation in the best-performing sales channels, we're maximizing our volumes while managing our margins and operating expenses. Across the enterprise, we are implementing productivity cost reductions and restructuring initiatives to lower our expenses and improve our results. We continue to manage our working capital management to optimize our cash flow. We expect foreign exchange rates to continue to be an earnings headwind. Given these factors, we anticipate our fourth quarter adjusted EPS to be between 180 and 190, excluding any non-recurring charges. With this, our full year 2023 adjusted EPS should exceed $9. Historically, the flooring industry undergoes greater cyclical peaks and troughs than other building products due to its postponable nature. Our business fundamentals remain strong and will benefit from significant pent-up demand when the industry rebounds. Given the aging U.S. housing stock, more than 80% of homeowners who responded to recent J.P. Morgan surveys indicated they are planning renovation projects in the near term. In addition, after years of construction trailing demand, substantial new home building will be required for many years to come. Commercial activity will expand as the economic outlook improves. As the world's largest flooring provider, Mohawk is well positioned to capitalize on these opportunities. We'll now be glad to answer your questions.
spk46: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then number one using your telephone keypads. Management requests that you please limit yourselves to one primary and one follow-up. Once again, that is star and then one to join the question queue. Our first question today comes from Matthew Bully from Barclays. Please go ahead with your question.
spk22: Hey, good morning, everyone. Thanks for taking the question. Did I hear you correctly that the reduction in input costs actually exceeded the decline in price mix during the quarter? I guess correct me if I misheard that, but how do you anticipate price mix versus cost to play out into 4Q and perhaps any early thoughts on 24 there? Thank you.
spk20: Thank you, Matt. Yes, let me frame that. So the cost started gradually falling in late 2022, and it takes usually three to six months the flow through our P&L. In Q3, and I'll provide some numbers here that will also be in our 10Q, lower costs led by material and energy totaled $112 million, offsetting the weaker price mix of $106 million. Now, sequentially, costs declined $65 million, exceeding the lower price mix of $29 million. In the fourth quarter, we would anticipate lower costs should continue to flow through the P&L.
spk22: Got it. Okay, super helpful. Thank you for that, Jim. Then, secondly, you mentioned maybe zooming into Europe and natural gas and ceramic there specifically. I know you mentioned certainly the costs have come down quite a bit from the extreme levels last year, but now European natural gas seems like it's creeping higher again. clearly in a market that seems like it's a little more competitive. So, you know, how do you anticipate specifically cost and price playing out in that market, European ceramic? Thank you.
spk11: Well, you're correct that the cost for gas has come down a lot, but in Europe the business continues to face pressure with declining retail traffic and new construction. We're responding to conditions with promotions and And we also have premium slabs continue to grow, and we're optimizing our new slab line. We're also initiating restructuring actions to eliminate older assets and improve our cost and utilization. And then we'll just have to see, you know, how the gas levels out. It's definitely a lot lower than last year.
spk42: All right. Thanks, guys. Good luck.
spk46: Thank you. Our next question comes from John Lovallo from UBS. Please go ahead with your question.
spk28: Good morning, guys. Thank you for taking my questions. Maybe just following up on Matt there. Did the lower material and input costs offset the declines in price mix across segments in the quarter? You know, I'm more curious, I guess, about global ceramic there specifically. And then as we move into the fourth quarter, how should we think about margins by segment? Is there anything outside of normal seasonality that we should consider there?
spk20: Well, in the quarter, the lower material energy offset price mix and flooring North America and flooring the rest of the world as global ceramic still has some higher cost material that is flowing through. It should kind of complete hitting the P&L in the third quarter.
spk28: Got it. And then any factors we should consider on margin in the fourth quarter outside of sort of normal seasonality?
spk20: No. If you look at the fourth quarter, we still have elevated interest rates and inflation. We anticipate constrained discretionary spending with postponed remodeling and home purchases. Remember, obviously, it seasonally slows due to the holidays. Margins are expected to be higher than last year with greater pricing pressure and increased shutdowns. We do anticipate lower input costs, as I noted, and we should be continuing to implement productivity and cost reductions. And don't forget, foreign exchange we anticipate will continue to be a headwind in the quarter.
spk15: The higher volumes in the quarter will leverage the margins as we pick up later.
spk13: Sorry, that's not this quarter. In the quarter, he got it right. I'm sorry.
spk28: Okay, thank you. And then as a follow-up, the $620 million in full-year capex implies a pretty good step up to, I think, around $250 million in the fourth quarter. Is that just timing, or is there anything going on there in particular that we should consider?
spk20: No, it's really timing as you end the quarter in terms of 2023, between 2023 and 2024. You know, our focus continues to be investing in optimizing the future of the business with the growth investments that we've talked about, really making up $200 million to $250 million of that. Maintenance CapEx would be another $250 million, and then the balance of that budget for the year on cost reductions, product innovation, and acquisitions.
spk44: Okay. Thank you, guys.
spk46: Our next question comes from Joe Allersmeyer from Deutsche Bank. Please go ahead with your question.
spk05: Hey, good morning, everybody. Thanks for taking the questions.
spk09: Good morning.
spk05: A couple peers of yours have offered some early assumptions on residential USN markets into next year. You might call it a flattish outlook on balance. And for simplicity, let's just maybe take the international markets aside for a second and the commercial as well and just talk about North America residential markets. across your segments. Question is, I guess, do you agree with that assessment that the market could be relatively flat next year within that and what the sources of upside and downside to that might be?
spk15: We look forward at it. The flooring industry has actually been in a downturn since mid-22. We believe that we're going to see an improvement in the middle of the year as inflation moderates and financing improves. When these occur, we think consumer confidence will improve and the industry will start to get better. So we see the first half basically as a continuation of where we are with improvement as we go through the year. And then depending upon how strong and when it occurs, we'll determine what the volume is versus this year.
spk05: That's very helpful, Jeff. Appreciate that. So maybe seemingly a follow-up here. late 20 to early 22, you bought back, you know, $1.4 billion of your stock, around $170 a share. There's even a stretch in there where you're buying it at 200 bucks. You stopped buying it back last March. And I know there was, you know, cashflow softened, you were investing in CapEx and you had some maturities in there, but you know, on several calls now, and especially on this one, you're talking about the health of the category, your competitive position, not having changed much. So How might an investor who is the incremental buyer of your stock today reconcile that sentiment with seemingly the hesitancy around buying back their stock right now?
spk15: Well, at the moment, there's still a lot of economic uncertainty in the world. The financing conditions are still difficult. There's regional conflicts that can affect everything. So we believe that at the moment, having excess capacity is preferred, but we're continuing to review it and but consider buying stock as our visibility approach from where it is today.
spk37: All right. Thank you, Jeff.
spk46: Our next question comes from Susan McClary from Goldman Sachs. Please go ahead with your question.
spk43: Thank you. Good morning, everyone. Good morning. Good morning. Jeff, maybe just building off of Joe's question, as you think about 24, you're going to go into the year with some excess capacity. I know you mentioned that you think the market can improve in the middle of the year, but how do you think about the company-specific efforts that you detailed in your remarks around cost-cutting and new products and how those will be layered in over the course of 24 and what they could mean for Mohawk?
spk15: As we look through it, higher volumes as we go and the business improves will leverage the SG&A and get overhead and the productivity will all improve. We expect improvements in the average selling prices as margins expand. Customers start trading up and buying better products. We'll also see benefits from the restructuring and takeouts that will come through with all that occurs. We have multiple acquisitions we've done recently. Those have also been compressed. Those will also, the volume will come up, and we expect them to significantly help our performance. And finally, the investments in the growth areas will add to our sales ability as we come out of this. So as we think through the whole thing, we see the margins expanding significantly as the business improves.
spk43: Okay, that's helpful, Collar. And then as part of that, you've mentioned that the macro in some of these markets, especially some of your newer markets, is hopefully maybe taking a bit of a turn for the better next year. As you think about the opportunities in some of those areas and those categories, anything that is interesting to you or that we should be thinking about over the next year and a half or so?
spk17: If you look at Latin America in this cycle,
spk15: They actually raised rates more aggressively than the rest of the world and further. So we're actually starting to see them starting to lower rates and we think there could be significant rate decreases in Mexico and Brazil even this year. So those things, they may come out of this earlier than others. The business in Australia has held up better for us. There's a less competitive environment in the marketplace and we've been able to hold on to margins a little better. Europe is really difficult to know what's going to happen. The consumer confidence remains low, and it's going to take something to help it move. And different than the United States and Europe, the average worker got much higher increases, so they covered more of inflation than we do. So it's really a confidence issue in Europe.
spk43: Okay. Thank you for the color and good luck with everything.
spk23: Thank you, Susan.
spk46: Our next question comes from Stephen Kim from Evercore. Please go ahead with your question.
spk24: Yeah, thanks very much, guys. Appreciate all the color you've given so far. Jeff, you've laid out pretty clearly in both your press release and what you've said today the factors that drive your business to be rather cyclical. You know, right now you've got a lot of challenges that are coming from all quarters, you know, as competitors try to leverage their fixed costs in a tough market and drive pricing and all that. And then also on the way, you know, on the way up, everything gets better. I think you just were talking about with Susan. More broadly, my question is, how important is it to you to drive changes in your business that may deliberately reduce this embedded cyclicality in your business over the longer haul?
spk15: Well, the cyclicality is based on really two things. One is how sensitive we are to interest rates. And then the other part is these high capital fixed costs that the industry, including our company, our competitors, and we tend to move up and down trying to minimize these things. I think if you're going to stay in the industry, it's part of it. Now, we're getting into other things like the insulation business. that we're in in Europe, it doesn't have as much, the fixed costs are much less, for instance, and the margins hold up better in it. So we're in different businesses and different categories that react differently today.
spk20: And remember, these are not purchases that are canceled. These are deferred. So you see a pent-up demand, and with the aging stock of housing, And as Jeff said in prepared remarks, the building just being behind the need for housing, we feel like we're in a great position over that mid to longer term.
spk15: For the first two or three years after this thing is over, the pent-up demand for houses, for housing, for improvements and remodeling that hasn't been done, we don't lose it. It just comes back later.
spk24: Yep. Yeah, I certainly agree that there's a somewhat longer-term rebound on the way. And so getting to that, I think Joe was asking you about the timing of a rebound, or maybe it was somebody else. But you talked about it with the U.S. I think you said you're bracing for a tough one, first half next year. You think by mid-year, it's going to materialize. Let's say you're right. and it does actually start to materialize by mid-year. I'm curious how you are planning to carry your inventory levels. I think of relatively higher levels of inventory as being something that leads to strong service levels as soon as demand rebounds, and I'm curious as to whether you're planning around inventory in the U.S. particularly is going to be such that you sort of, you know, allow yourself to build inventories or carry higher inventories than maybe normal, you know, in anticipation of wanting to try to provide strong service levels, maybe at the beginning of 3Q. And then also, could you just broaden your view beyond the U.S. to, let's say, Europe and LATAM? You know, do you similarly think, you know, mid-year next year is where we may see a turn?
spk09: Let's start with the first part.
spk15: The inventory levels are based on two things. One is what the market is and the other is in our ability to respond. Given the low volume rates we're at presently, we have a significant upside in capacity to react to it and so we probably won't build much inventory until we see it coming and then we think we have the ability to utilize the capacity that we already have to solve it, to satisfy it as it goes up. On the other side, the different regions, I think that this possible Latin America will come out of this first, and then Europe is a little hard to know. I would guess Europe may trail the U.S. If I had to pick, Latin America may come out of it earlier, U.S. in the middle, and maybe Europe a little later would be my present guess, but we'll have to see how it evolves.
spk20: And, Stephen, one thing on your original question as well, the restructuring actions that we're taking, part of that is to lower and permanently lower our cost structure, which then does help us in good times and bad.
spk24: Okay. Yeah, makes sense. Thanks very much, guys.
spk46: Our next question comes from Keith Hughes from Truist. Please go ahead with your question.
spk27: Thank you. A question on the – change your LBT production, your rigid, to direct expansion, to direct extrusion. Can you talk a little bit more about that, what kind of cost savings and that, how long it's going to take to do the conversion?
spk11: Yeah, Keith, our Georgia rigid production is presently being converted to direct extrusion to lower our costs. We're also installing new technology in both plants that will provide unique styling and features. These changes will give us more flexibility to ship the products from both the east and west plants, and we will have savings of more than $20 million annually when it's executed.
spk27: Will this change all of your rigid LVT production to this method, or is this a partial conversion?
spk06: No, it'll all be changed to this.
spk27: Does this drive more efficient machine time, or how do you get the savings from it?
spk11: Well, we're changing from a heated press technology to an extrusion process, and this allows for a lower-cost formulation, and it's just currently in the startup phase. We should be substantially operational in Q1.
spk26: Q1. Okay. All right. Thank you very much.
spk46: And our next question comes from Phil Eng from Jefferies. Please go ahead with your question.
spk19: Hey, guys. Energy prices have kind of bounced off the bottom. Are you starting to see any upwards pressure on your input costs more broadly? I know it's somewhat tied to oil, preaching there's a lag. And have you started seeing your price mix in your different respective business stabilize here, or there's still some pressure as we kind of look forward?
spk15: Let's see if we can answer a few different ways. One is we think that the material costs have probably bottomed at this point. as well as there's a good chance maybe the pricing is also maybe bottom, but we'll have to see. As the oil and energy prices go up, there's the basic cost of it, but also supply and demand. So I'm not sure how it's going to actually flow through given the low demand of the industry and categories using the different chemicals. It may take a little longer for it to flow through this time than normal. Usually as we come out of the recession, what happens is the demand goes up and then the chemicals have to recover their margins as it goes through. And when that occurs, we have to pass through the increase in cost as it happens.
spk19: Okay. That's helpful. And then a few more questions on LVT. With the investment you're making on the extruding side and with Mexicali coming online early next year, How does your product stack up from a cost and quality standpoint versus imports coming out of Asia? And does your LVT manufacturing business now at this point, early next year, stack up from a margin standpoint versus North American flooring? Is it accretive, neutral, still a headwind? How should we think about all those things?
spk10: Let me see.
spk11: First of all, we think the new products that we're coming out with in the LVT, especially at the high end, we're going to be definitely competitive with imports.
spk15: The pricing has declined substantially from the import prices with both lower freight as well as lower material costs. Our U.S. manufacturer costs are also coming down with it. We still have other things going on, like service disruptions from China, given the U.S. impeding the different pieces. And so next year, our margins should expand, and we expect the profitability of the business to improve.
spk11: And we also introduced a new resilient polymer core that's environmentally friendly with superior scratch resistance that's doing really well.
spk19: Okay. And some of the friction you mentioned in terms of imports coming in from Asia, how does that position Mohawk, especially as you ramp up some of this domestic capacity? Is it a good guy or just probably your cost goes up because at the end of the day you're still importing from Asia, maybe not directly from China?
spk15: The combination of both, as you would suspect. The lower cost for getting through with the imports that we do, We're also getting lower costs here as the material costs fall and energy prices here fall also. On the other hand, competition's increased with the lower volumes and the pricing's come down at the same time.
spk18: Okay. Appreciate all the great color. Thank you.
spk46: Our next question comes from Michael Rehart from J.P. Morgan. Please go ahead with your question.
spk29: Hi, guys. This is Andrew Ozzie on for Mike. Thanks for taking my question. I appreciate you guys shouting this out in your press release. I just wanted to ask maybe from a pricing standpoint, any markets in particular that you have concerns for that prices will fall more significantly or maybe even vice versa?
spk15: Most of the markets, as a matter of fact, all the markets we're in, the pricing has declined significantly. You have a combination of the cost of the materials coming down, the energy prices coming down, and the unabsorbed overhead that we've talked about the industry. So the pricing's come down. The question is, is it at the bottom today, or will it go down or not? We think it may be at the bottom as we speak. And as the things improve going forward, we think that there'll be pressure once the... industry improves to increase the material prices from our supply base and we'll react to that when it occurs, but that's usually after the industry does. At the same time, you have the world events with oil and gas and how that affects everything.
spk16: That one's anybody's guess and we'll just have to react to it.
spk30: Thanks, Jeff. I guess in terms of
spk29: Lower input costs and energy costs. Are you seeing any further sequential declines into next quarter and maybe any thoughts on next year and how quickly pricing has been aligning to energy prices?
spk20: Well, again, from a total material and energy cost in the fourth quarter versus the prior year, we should continue to see the positive impact of the flow through to the P&L offsetting the lower That's from a year-over-year perspective.
spk30: Thanks. I appreciate that.
spk46: Our next question comes from Adam Baumgarten from Zellman. Please go ahead with your question.
spk31: Hey, guys. Just one for me. Good morning. Just wondering if the recent carpet payment terms and the removal of some of the discounts you guys historically had as an industry, will have a positive impact on the pouring North America segment going forward?
spk15: The industry has changed some of the terms within it. Depending upon where you are, it has helped the margins a little bit. We are staying aligned with our customers in many cases, and we didn't try to push through an increase like some of the other guys did. So we're trying to use it to improve our position within the customers.
spk32: Okay, got it. Thank you.
spk46: Our next question comes from Catherine Thompson from Thompson Research Group. Please go ahead with your question.
spk40: Hi, thank you for answering my question today. Just focusing on the commercial and market, you look at some resi-focused stocks, stocks traded better on less bad news this year, early this year, and then you fast forward to this week, you had a more commercial-focused ceiling manufacturer also trade up on less bad news in the commercial space or relatively less bad news. What are you seeing in terms of your pipeline of your business in North America with commercial and market And what have you done to shift your business and focus towards certain end markets that are performing relatively better than the traditional office and retail? Thank you.
spk15: Commercial business is holding up better than the residential business. We are seeing softening in the marketplace in different categories. The ABI index, which predicts the new parts coming online, is showing declines. So as in other recessions, typically a year to year and a half later, the commercial starts softening as the commercial projects finish up. So we're starting to see that. On the other hand, in commercial, you have a much more differentiated product offering. So the pricing is more resilient than it is in the residential business. In the different categories, government, senior care, hospitality, restaurants are all doing better and we're emphasizing our participation in those.
spk40: Okay, yeah, I have a full understanding of the timing difference between residential and non-res. It was really, and it was helpful to some extent, but just getting a better understanding of that mix shift for you. And now, importantly, what does it look like going forward? Because, for instance, we're having industry contacts who are saying, we're starting to see projects being not just postponed but canceled, but we're able to shift mix to adjust. One other follow-up question. As you have obviously made a lot of efforts over the past trailing 12 months to right-size operations and to make various restructuring charges, but Stepping back and looking at the bigger picture, from a long-term standpoint, what is the industrial logic for having the global footprint as you manage your business going forward? What's the argument for keeping the global footprint as it is currently? Thanks very much.
spk15: The global footprint allows us to participate in the same categories across the world. It allows us to leverage the knowledge of what we can do with product innovation, styling design, distribution concepts, in order to optimize the businesses. And the businesses that we have, such as ceramic, we used the technology. We have different businesses that are in high, medium, and low. The high ones lead it, and then it flows down through to the other ones to help us increase our mix and distribution in the business. In different businesses we get into, we can help. If they're strong and residential, we can help them show how to maximize their commercial business. We have other categories that we get involved. benefits out of just the processes, running warehouses and distribution, information systems. So there's a lot of synergies that you can do to help the acquired businesses.
spk41: Okay, great. Thank you.
spk46: Our next question comes from Truman Patterson from Wolf Research. Please go ahead with your question.
spk21: Hey, good morning, everyone, and thanks for taking my questions. First, whenever I'm looking at the fourth quarter EPS guidance sequentially versus 3Q, it implies, you know, a bit worse than normal seasonal decline. I'm just hoping you could help us discuss from a high level the buckets that got worse throughout the quarter that really led to that guide. And then also, I believe you mentioned Brazil, Australia. But are there any areas, product categories, you know, pricing, et cetera, where you're perhaps seeing some stability, if you will?
spk14: You covered a lot of ground. Let's see if I can get most of it.
spk15: Starting out with the elevated interest rates and inflation are constraining the spending, and it's postponing the remodeling and home purchases. Our assumptions are that it's more difficult in the period. You're also in the time where the seasonality, so there's more holidays. Given the control of the inventories and lack of need for manufacturing ahead, there's more shutdowns being planned in the period. We are assuming increasing pressure in commercial in the fourth quarter versus the third quarter. The margins on a year-over-year are higher than they were. We think there's still going to be this greater pressure and less covering the absorbed overhead as we control the inventories and working capital. We're implementing productivity and cost reductions, and then we expect the foreign exchange, our present assumptions are that it's a similar headwind with what was happening in the third quarter.
spk20: Yeah, so sequentially, you know, that gap that you're talking about, you know, if you look back over time, you know, You've got mid-20% difference from Q3 to Q4. It's a little bit more this year in our guidance. I'd say the additional shutdowns and the foreign exchange certainly are two headwinds that may be a little bit unusual than prior years.
spk15: Another also difference is in normal years, we would normally pull the inventories down in the end of the third quarter, the start of the fourth quarter, and then be building back as we come out of that quarter. So we're not doing, that didn't happen this year.
spk21: Okay. Uh, thanks for that. And then just wanted to follow up on kind of a prior question. Uh, you all been generating a lot of cash flow this year. 2.6 billion in debt, it seems pretty manageable. And Jeff, I think you mentioned earlier that perhaps you might not step into share repurchase today. I'm just hoping you could discuss potential for M&A, any geographies or product categories of focus. as well as how you might balance that with your own current valuation of your share price, balance M&A in lieu of share repurchases.
spk15: First, before we get into the new M&A, we have the two recent acquisitions we've done in Brazil and Mexico, which we are integrating and taking costs out. We have three or four bolt-on acquisitions that are also being put together with a business. All of those should give a significant upside as we come up and the volumes go up in the businesses. As we come out of this in the future, you're correct that the value of the business today allows to purchase the stock and give significant opportunity which we consider as soon as we make sure there's not another worldwide problem that's about to occur with all the events going on as we go through. And then we'll have to see what that looks like versus other alternatives that arise.
spk21: Asked another way, any M&A deals flowing across your desk, are those valuations more attractive than your current valuation for Mohawk?
spk15: The only businesses that tend to sell in this environment are ones that are seriously distressed and don't have any options. At these valuations, most companies don't try to sell their businesses.
spk36: Okay, perfect. Thank you.
spk46: Our next question comes from Laura Champagne from Loop Capital. Please go ahead with your question.
spk38: Thanks for taking my question. You called out in your press release the negative impact on Europe from the conflict in Ukraine. Can you give us more information on the Russian business? What are your plans for that? And is that business a material hit to earnings this year?
spk11: Well, the answer is no to that. But in Russia, we're following all the sanctions. We're adjusting our strategies to be to adjust to these more difficult market conditions. We're also leveraging our leading styling and distribution to maximize our sales in the market.
spk20: Remember, Russia is less than all the Russian businesses together, less than 5% of our business.
spk39: Understood. Thank you.
spk45: Our next question comes from Eric Bouchard from Cleveland Research.
spk46: Please go ahead with your question.
spk25: Thank you. Two things. First of all, Jeff, you've talked about this being the bottom of price and then a potential improvement in the middle of 24. I'm just curious what you're seeing in the business now that supports both of those thoughts.
spk15: First is the pricing decreases are following the material cost, and the material costs, we believe, are at a bottom. So we believe that will change the pricing from falling significantly more going forward. And then what was the other part of the question?
spk25: The second part was the comment about the first half being similar to today and then the path for improvement in the back half of 24. What you're seeing in the business today that informs that?
spk15: I guess that we don't have a crystal ball any more than you do. We're making the assumption that the present circumstances continue, we believe we have line of sight into the first quarter. After that, given the dynamics that's going on in the world, anything could happen.
spk20: That's it. What we're kind of quoting there is there's numerous people that have come out and said that you'll see some strengthening in the back half of the year, but again, you can get an argument going the other way as well. So it's really one scenario, Eric.
spk25: Okay. And then secondly, the goodwill write-off, is a component of that, or I'm just curious, the catalyst for this, is there some component of this that relates to a reduced future earnings of the business, or are there other dynamics that explain a write-off of this magnitude?
spk20: Eric, it really starts with the volatility on the macro side. The higher interest rates, inflation, deterioration, and the market conditions negatively impacted our business which reduced our market capitalization. Then you go through an internal review of the stock price compared to that, and it triggered the goodwill impairment that was required. Remember, that's a non-cash charge in the quarter, and it's across all the segments. There will be more detail for you to see in the 10-Q that's filed after the call.
spk23: Okay. Thank you.
spk46: Our next question comes from Raf Jadrasek from Bank of America. Please go ahead with your question.
spk03: Hi. Thanks for taking my questions, Rafe. So the first thing I wanted to ask is just what are you seeing in terms of industry capacity, particularly in the U.S.? Are you seeing other competitors start to pull back in any of the segments, or are you seeing any – foreign competition continuing to add capacity?
spk15: Across all the different categories, there have been capacity taken out of some pieces of the industry in different places. In LVT over the past year, there have been some increases in capacity in the U.S. marketplace.
spk16: What else was the rest of the question?
spk03: Are you seeing any of the foreign competitors open capacity in the U.S.? Is there any incremental capacity investments there? And then are any of the domestic manufacturers reducing capacity on categories like carpet or hardwood?
spk11: Well, just to comment on ceramic, there have been a couple that have added new plants, but And generally, the capacity that's in the United States is slightly underutilized, I would say, in ceramic.
spk15: And the ceramic one, probably about 50, in excess of 50% is imported. So there's some of the foreign companies are opening some capacity here, which he's talking about. LVT would be similar to the same situation. whether some of the foreign ones have opened up capacity here, trying to find ways to optimize their service levels from where they are. And in some of the other product categories, there have been some capacities taken out of the industry.
spk03: Okay, got it. That's helpful. And then just on the new construction outlook, Can you just remind us your exposure to multifamily versus single family and then what you're seeing between those two segments?
spk15: I'm not sure I have those numbers in front of me. The new construction home building I think is around 20%, 25% of our business. I don't have the number in front of me of the multifamily piece.
spk20: We don't have that. We don't usually break that out. We kind of include it in the new construction number that Jeff quoted.
spk15: It's either in the new construction number or it's in the remodeling number as it gets replaced as we go forward.
spk03: It seems like, based on what home builders are saying now, that we'll still see single-family construction probably rise next year. but it looks like the multifamily outlook is pretty soft and we could see some pretty significant declines. Do you have the meaningful exposure on the multifamily side? Is there any margin difference between single-family and multifamily? Or is it relatively small compared to single-family?
spk15: Multifamily typically is lower. They typically use lower quality products than the single-family home construction market. On the other hand, the multifamily gets replaced much more frequently. Typically after they change over tenants in it, depends on where they are and what it could be replaced every few years where the home new building could be a seven to 10 year cycle. So there's a big difference in replacement cycles as well as the quality of products going into each.
spk20: As we've said earlier, we see expanding presence in U.S. ceramic and new construction and the commercial channels and also in flooring North America as well. Our relationship with the builders is stronger.
spk15: The other thing you mentioned, the multifamily, the new starts are coming, but the typical multifamily takes a minimum of a year and a half and could be two and a half years to finish. There is a huge number of projects that are coming through that haven't been finished yet. And our product category is the last one to go in.
spk20: So similar to commercial, it has a long tail to be completed.
spk03: Got it. So there's still a backlog there. It's very helpful. Thank you.
spk20: Correct. Thank you.
spk46: And ladies and gentlemen, at this time, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Mr. Lorberbaum for closing remarks.
spk15: We're managing the controllable costs that we've been discussing. We continue to react to changing market conditions, which are volatile. We see significant upside when the market returns, and we think we're well positioning ourselves for that to occur. We appreciate you joining us. Have a great day.
spk46: And ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending today's presentation.
spk45: You may now disconnect your lines. you Thank you. Thank you. Thank you.
spk46: Good morning, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to Mohawk Industries' third quarter 2023 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 and the number one on your telephone keypads. To withdraw your questions, you may press star and two. Should anyone need assistance during the conference, you can signal an operator by pressing star and zero. As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, October 27th, 2023. Thank you. I would now like to introduce Mr. James Brunk. Mr. Brunk, you may begin your conference.
spk20: Thank you, Jamie. Good morning, everyone. Welcome to Mohawk Industries' quarterly investor conference call. Joining me on today's call are Jeff Lohrbaum, Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's third quarter performance and provide guidance for the fourth 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 and press release in the Investor section of our website. I'll now turn the call over to Jeff for his opening remarks.
spk15: Thanks, Jim. In the third quarter, our net sales were $2.8 billion, down approximately 5.2% as reported, or 8.1% on a constant and legacy basis, in line with our expectations as our industry faced continued pressures across all regions, primarily due to constrained residential investments and tightening of consumer discretionary spending. Our adjusted EPS for the quarter was $2.72, with our margins across the business benefiting from cost reductions productivity initiatives, and lower input costs. Our third quarter performance was seasonally impacted by vacations in Europe, which reduced our sales and earnings versus the prior quarter. Our lower material and energy costs offset the decline in both price and mix. We also faced FX headwinds of approximately $20 million on operating income, or 25 cents on EPS. We are managing our working capital and generated strong free cash flow of $385 million in the quarter and $660 million on the year-to-date basis. During the quarter, central banks around the world continue to raise interest rates to slow down their economies and reduce inflation. Their actions are affecting new construction and remodeling in both residential and commercial channels, postponing spending on new projects. In the U.S., Mortgage rates have climbed to their highest level in more than two decades, which has suppressed the housing market and limited home renovation activity. In Europe, consumers are deferring large purchases such as flooring as a result of higher energy costs, inflation, and uncertainty due to the war in Ukraine. Our industry faces a greater impact from these pressures than other sectors, given that most flooring purchases are deferrable. With the high fixed costs required to produce flooring, competition increases as the industry slows, and participants attempt to increase their sales to maximize absorption. As a result, our average selling prices and mix have declined, with the impact partially offset by lower material and energy costs, restructuring benefits, and process improvements. The expected housing sector recovery continues to be postponed, and we are managing the business to optimize our results and cash flow until it occurs. We're taking actions to increase our volumes while managing margins and operating expenses. We've launched differentiated collections, selectively introduced promotions, and expanded our participation in the new construction channel. To further enhance our competitive position, we will shut down older ceramic production in Italy, and we are converting US rigid LVT production to a direct extrusion process. These restructuring initiatives will result in a non-recurring charge of approximately $55 million, of which $50 million is non-cash. When completed, these initiatives should improve our profitability by $30 million annually by enhancing our productivity, lowering our manufacturing costs, and optimizing our production flexibility. Our European expansions in insulation and porcelain slabs are currently in operation. Our U.S. premium laminate and LVT projects are continuing to start up. Expanded production in European laminate and U.S. quartz countertops should begin in the second half of 24. As the integration of our acquisitions in Mexico and Brazil proceeds, we have consolidated the general management, sales, and administrative functions on enhancing the company's product offering, operational efficiencies, and customer base. While the Mexican and Brazilian markets are experiencing reduced demand and margins, we anticipate gaining additional benefits from our acquisitions as these markets recover. In September, we released our 14th Annual Sustainability Report, and for the first time, we provided Scope 3 emissions. Institutional Shareholder Services has ranked Mohawk as one of the top companies for environmental quality in the durable goods and apparel category. We have significantly exceeded our 25 goals related to decarbonization, waste reduction, and water conservation. We're lowering our carbon footprint by using more recycled content, increasing our green energy production, and expanding our product circularity. We recently received the Susan G. Komen Promise Award for our two decades of partnership in the fight against breast cancer. We've also formalized a board of directors selection policy as part of our ongoing commitment to diversity. To learn more, you can read the report online at mohawksustainability.com. I'll turn the call over to Jim for a view of our third quarter financial performance.
spk20: Thank you, Jeff. Sales for the quarter were just under $2.8 billion. That's a 5.2% decrease as reported, 8.1% on a constant legacy basis. Higher interest rates and continued inflation has weakened new housing and remodeling activity, negatively impacting our global business with lower volume and price and mix pressures. Gross margin for the quarter was 25%, as reported, and excluding one-time items was 26.6%. That's up 100 basis points versus the prior year, with lower input and energy costs exceeding unfavorable price and mix in the quarter, along with stronger productivity, only partially offset by lower volume and unfavorable FX. The actual detailed amounts of these items will be included in the MD&A of our 10Q and which we will file after the call. SG&A as a percentage sales was 19.9% as reported. Excluding one-time items was 18.1%. The dollar increase was primarily attributable to the impact of acquired businesses, investments in new products and marketing to drive increased future sales, unfavorable FX, and higher inflation. The operating margin, as reported, was a negative 26.5%, and excluding charges was 8.4%. As the company's current market capitalization, along with challenging economic conditions and higher discount rates, resulted in a non-cash goodwill and trade name impairment charge of $876 million in the quarter. Total non-recurring charges was $967 million, primarily related to the impairment of the Goodwill and Trade names. But in addition, to further enhance our competitive position, we will shut down older ceramic production in Italy and converting our U.S. rigid LVT production to a direct extrusion process. These actions should improve our profitability by approximately $30 million annually. Adjusted operating income was 8.4%, as I noted. The year-over-year decline was primarily driven by lower sales volume an unfavorable FX, partially offset by the reduction in input and energy costs, exceeding the impact of negative price and mix, and increased productivity gains, which were under pressure due to lower plant utilization. Interest expense for the quarter was $20 million. The year-over-year increase is due to significant rise in global interest. Other income, other expense was income of $8 million. Non-GAAP tax rate was 20.8% in the current year versus 17.9% in the prior year. We expect Q4 2023's tax rate to be approximately 17.5% to 18.5%. That gives us an earnings per share on an adjusted basis of $2.72. Turning to the segments, in global ceramics, sales were just under $1.1 billion. That's a 0.5% decrease as reported. and 6% on a legacy and constant basis. The U.S. businesses volume outperformed, benefiting from our expanded position in new construction and commercial channel in the quarter. Adjusted operating income was $88 million, or 8% of sales, a decline versus prior year as the global slowdown in demand and pressure on price mix led to further temporary shutdowns, lower sales volume, in addition to the impact of unfavorable effects, partially offset by improving productivity gains and restructuring actions. In Florida and North America, our sales were just over $960 million. That's a decrease of 11.7% as reported and 12.2% on a constant basis, as higher interest rates and inflation continue to pressure discretionary spending across all product channels. Adjusted operating income was $78 million, or 8.1%. The operating margin was in line with prior year, as lower input and energy costs offset negative price mix, partially offset by weaker volume and lower productivity due to underutilization of our plant assets in the current demand environment. Infloring the rest of the world, with sales of just over $710 million, That's a 2.6% decrease as reported and 5% on a constant basis, as our business has been impacted by low consumer confidence, higher interest rates, inflation, and geopolitical events. The business in Australia and New Zealand and our resilient and insulation products held up best in this environment. Adjusted operating income was $77 million, or 10.9%. Our adjusted operating income margin expanded versus prior year as lower input and energy costs offset the weakening price mix similar to Flooring North America, in addition to the benefits of green energy and fewer temporary plant shutdowns than the prior year, all partially offset by unfavorable FX. Corporate eliminations were $10 million for the quarter in line with the prior year. Turning to the balance sheet, cash and cash equivalents were $518 million for the quarter. Driven by strong management of working capital, our free cash flow grew to $385 million in the third quarter and our standing at $660 million on a year-to-date basis. Receivables were just over $1.9 billion with a DSO of 59 days, which was in line with the prior year. Inventories were just over $2.5 billion. The year-over-year inventory decreased $380 million, and excluding the impact of acquisitions, the decrease was $438 million, primarily due to a focus reduction in units supported by lower year-over-year costs. Inventory days also decreased to 125 days from 131 in the prior year. Property, plant, and equipment was just shy of $4.8 billion, with Q3 CapEx standing at $127 million, with DNA of $150 million. Full-year 2023 forecast includes a CapEx of just over $620 million at this point. And finally, gross debt was $2.6 billion, with leverage at 1.5 times adjusted EBITDA. This positions the business to take full advantage of the rebound that historically follows a downturn like we are experiencing today. Now, with that, I'll turn it over to Chris to review our Q3 operational performance.
spk11: Thanks, Jim. In global ceramic, our business outperformed due to our innovative product introductions and higher service levels. With this, we expanded our positions in the new home construction and commercial channels. Residential remodeling was slower due to lower home sales and postponed projects. Our investments in new decorating technology, polishing, and mosaics are providing domestic alternatives to premium imported ceramics. We are expanding our sales to regional builders as well as kitchen and bath retailers with our coordinated tile and countertop collections. To further expand our quartz countertop sales, we are introducing more stylized collections utilizing new technologies that provide greater value. We have lowered our distribution costs by shipping more product directly from our plants and bypassing our regional warehouses. In our European ceramic business, retail traffic and new construction are being affected by economic uncertainty. In Southern Europe, where our business is concentrated, the economies are under greater pressure. Across all channels, low industry volume is creating more intense competition and we are responding with specific price promotions by geography and channel to gain additional sales. Natural gas prices have declined by 80% from their peak, and we have reset our pricing to align with energy costs. While volumes have declined across most product types, sales of our premium porcelain slabs continue to grow, and we are optimizing our recent capacity expansion. We continue to adjust inventory and production to align with changing market conditions. To contain cost, we have increased productivity, reduced overhead, and implemented alternative formulations. In Latin America, we have reduced our cost structures to adapt to slower, more competitive markets, with Mexico being less affected. Our margins are being impacted by lower industry pricing, partially offset by declining energy costs. Inflation in both Mexico and Brazil is receding, and central banks are beginning to lower interest rates in response with further reductions expected this year. We are integrating our acquisitions in both countries and making significant progress in executing our sales, product, and manufacturing synergies. To increase our distribution, we are gaining customer commitments to expand sales across all channels and price points using the combined product portfolio. In each country, we are utilizing the assets of our legacy business and acquisitions to broaden our product offerings. We have completed the information systems conversion in Mexico, and the system consolidation in Brazil will be completed by the end of the year, enabling further operational improvements. In flooring rest of world, our margins benefited from declines in energy and raw material costs, partially offset by lower price in mix. Sheet vinyl continues to outperform other categories as it provides a lower cost alternative, and we have increased production to meet higher demand. With operational improvements underway, our Eastern European sheet vinyl acquisition is delivering higher-style products and increased sales. Our laminate and LVT sales are under pressure in the software market, and we are introducing new products, merchandising, and select promotions to optimize volumes. We have executed the restructuring to support the conversion of our residential LVT offering from flexible to rigid cores, which is positively impacting our results. We are pursuing additional flooring sales, reducing costs, and aligning production with demand to manage the current conditions. Our panels business has slowed due to a decline in remodeling activity, construction projects, and industrial demand. Lower industry sales are affecting both our selling prices and volumes. Our material costs are declining, and we're also benefiting from improved productivity and green energy production. Sales of our higher-margin HPL collections are growing as our customer base expands. Our sales and operational synergies are progressing in both our board and mezzanine acquisitions. Our insulation business is positioned for longer-term growth as governments require greater energy conservation for new construction and remodeling. Insulation is less impacted than our other product categories as consumers and businesses invest to minimize their energy costs. Industry pricing has declined along with input costs with regional variation caused by new plants coming online. In the third quarter, our volume improved and our margins were in line with the prior year. In Australia and New Zealand, the industry slowed during the quarter and our sales in both countries were down slightly. Our results were impacted by mixed pressure in the residential channels as consumers sought lower cost flooring options to maintain their project budgets. To increase sales and protect our margins, we are introducing enhanced collections across fiber categories, elevating the market of our high-end products, and implementing targeted promotions to meet evolving demand. Commercial sales in New Zealand remain strong, and our broad product offering is helping us secure larger specified projects. In our Flooring North America segment, pricing and mix were under additional pressure as competition increased across all product categories. The impact on our results was partially offset by lower input costs, restructuring, and productivity initiatives. To expand our retail presence in all foreign categories, we continue to invest in both products and merchandising systems. We are increasing our participation in the new home construction channel with regional and national builders. Across the segment, we are implementing many projects to reduce costs, improve efficiencies, and maximize material utilizations. we are reengineering products with alternative materials and increasing recycled content. We have completed many of our restructuring initiatives to lower our costs and better align with current conditions. In residential carpet, to improve our mix, we are expanding our premium collections, which provide superior styling and features for the more discerning consumer. For the value-conscious homeowners, we are increasing our environmentally friendly recycled polyester offer. We have completed the integration of our non-woven flooring acquisition and are expanding their customer relationships. In resilient, our sheet vinyl collections continue to perform well as a preferred choice for budget-oriented consumers. As an alternative to PVC-based products, we introduced a new resilient polymer core that is more environmentally friendly and scratch-resistant. In the third quarter, our imported LVT sales were disrupted by U.S. customs actions and to satisfy customer orders, we substituted higher cost alternatives. We anticipate an increase in LVT inventories in the fourth quarter to improve service. We are continuing to ramp up our West Coast LVT production and the new extrusion process in Georgia. We anticipate both projects will be substantially operational in the first quarter. In addition, the proprietary technology we are implementing in these plants will enable us to introduce unique styling and features to the markets. We are expanding our distribution of laminate in the retail and builder channels. Our redwood collections are being more widely accepted as waterproof flooring alternatives with superior visuals. Our new laminate product launches have been well received as consumers seek premium visuals at accessible price points. We are offering selective promotions to improve volumes in a soft market. Our trim and stair accessories business is growing as we broaden the range of our patented products across all channels. Though U.S. commercial activity slowed in the quarter as financing became more difficult, our commercial performance is holding up better than residential, led by the hospitality sector. Our carbon-neutral product collections with industry-leading recycled content provide superior performance and design options to architects and designers. Our EcoFlex One carpet tile technology is gaining rapid adoption in the specifier community due to its acoustics, comfort, and ease of installation. We are expanding the sales and distribution of our recent flooring and accessories acquisition through our existing commercial partners. Our business development group has leveraged our product and service advantages to cultivate new relationships with major retail, healthcare, senior living, and real estate development customers. I'll return the call to Jeff for his closing remarks.
spk15: Thanks, Chris. In the present industry downturn, we're managing the controllable aspects of our business while adjusting to regional market conditions. In all of our geographies, elevated interest rates and persistent inflation are restricting consumer discretionary spending, resulting in postponed remodeling projects and new home purchases. Similar pressures are beginning to reduce commercial investments as business sentiment declines. Competition for sales to utilize plant capacity is increasing in all of our markets, and lower input costs should offset the impact. With enhanced products and merchandising, selective promotions, and expanded participation in the best-performing sales channels, we are maximizing our volumes while managing our margins and operating expenses. Across the enterprise, we are implementing productivity cost reductions and restructuring initiatives to lower our expenses and improve our results. We continue to manage our working capital management to optimize our cash flow. We expect foreign exchange rates to continue to be an earnings headwind. Given these factors, we anticipate our fourth quarter adjusted EPS to be between 180 and 190, excluding any non-recurring charges. With this, our full year 2023 adjusted EPS should exceed $9. Historically, the flooring industry undergoes greater cyclical peaks and troughs than other building products due to its postponable nature. Our business fundamentals remain strong and will benefit from significant pent-up demand when the industry rebounds. Given the aging U.S. housing stock, more than 80% of homeowners who responded to recent J.P. Morgan surveys indicated they are planning renovation projects in the near term. In addition, after years of construction trailing demand, substantial new home building will be required for many years to come. Commercial activity will expand as the economic outlook improves. As the world's largest flooring provider, Mohawk is well positioned to capitalize on these opportunities. We'll now be glad to answer your questions.
spk46: Ladies and gentlemen, at this time we'll begin the question and answer session. To ask a question, you may press star and then number one using your telephone keypads. Management requests that you please limit yourselves to one primary and one follow-up. Once again, that is star and then one to join the question queue. Our first question today comes from Matthew Bully from Barclays. Please go ahead with your question.
spk22: Hey, good morning, everyone. Thanks for taking the question. Did I hear you correctly that the reduction in input costs actually exceeded the decline in price mix during the quarter? I guess correct me if I misheard that, but how do you anticipate price mix versus cost to play out into 4Q and perhaps any early thoughts on 24 there? Thank you.
spk20: Thank you, Matt. Yes, let me frame that. So the cost started gradually falling in late 2022, and it takes usually three to six months the flow-through, or P&L. In Q3, and I'll provide some numbers here that will also be in our 10Q, lower costs led by material and energy totaled $112 million, offsetting the weaker price mix of $106 million. Now, sequentially, costs declined $65 million, exceeding the lower price mix of $29 million. In the fourth quarter, we would anticipate lower costs should continue to flow through the P&L.
spk22: Got it. Okay, super helpful. Thank you for that, Jim. Then secondly, you mentioned maybe zooming into Europe and natural gas and ceramic there specifically. I know you mentioned certainly the costs have come down quite a bit from the extreme levels last year, but now European natural gas seems like it's creeping higher again. clearly in a market that seems like it's a little more competitive. So, you know, how do you anticipate specifically cost and price playing out in that market, European ceramic? Thank you.
spk11: Well, you're correct that the cost for gas has come down a lot, but in Europe the business continues to face pressure with declining retail traffic and new construction. We're responding to conditions with promotions and And we also have premium slabs continue to grow, and we're optimizing our new slab line. We're also initiating restructuring actions to eliminate older assets and improve our cost and utilization. And then we'll just have to see, you know, how the gas levels out. It's definitely a lot lower than last year.
spk42: All right. Thanks, guys. Good luck.
spk46: Thank you. Our next question comes from John Lobalo from UBS. Please go ahead with your question.
spk28: Good morning, guys. Thank you for taking my questions. Maybe just following up on Matt there. Did the lower material and input costs offset the declines in price mix across segments in the quarter? You know, I'm more curious, I guess, about global ceramic there specifically. And then as we move into the fourth quarter, how should we think about margins by segment? Is there anything outside of normal seasonality that we should consider there?
spk20: Well, in the quarter, the lower material energy offset price mix and flooring North America and flooring the rest of the world, as global ceramic still has some higher cost material that is flowing through, it should kind of complete hitting the P&L in the third quarter.
spk28: Got it. And then any factors we should consider on margin in the fourth quarter outside of sort of normal seasonality?
spk20: No. If you look at the fourth quarter, we still have elevated interest rates and inflation. We anticipate constrained discretionary spending with postponed remodeling and home purchases. Remember, obviously, it seasonally slows due to the holidays. Margins are expected to be higher than last year with greater pricing pressure and increased shutdowns. We do anticipate lower input costs, as I noted, and we should be continuing to implement productivity and cost reductions. And don't forget, foreign exchange we anticipate will continue to be a headwind in the quarter.
spk15: The higher volumes in the quarter will leverage the margins as we pick up later.
spk13: Sorry, that's not this quarter. In the quarter, he got it right. I'm sorry.
spk28: Okay, thank you. And then as a follow-up, the $620 million in full-year CapEx implies a pretty good step up to, I think, around $250 million in the fourth quarter. Is that just timing, or is there anything going on there in particular that we should consider?
spk20: No, it's really timing as you end the quarter in terms of 2023, between 2023 and 2024. You know, our focus continues to be investing in optimizing the future of the business with the growth investments that we've talked about, really making up $200 to $250 million of that. Maintenance CapEx would be another $250 million, and then the balance of that budget for the year on cost reductions, product innovation, and acquisitions.
spk44: Okay. Thank you, Gus.
spk46: Our next question comes from Joe Allersmeyer from Deutsche Bank. Please go ahead with your question.
spk05: Hey, good morning, everybody. Thanks for taking the questions.
spk09: Good morning.
spk05: A couple peers of yours have offered some early assumptions on residential USN markets into next year. You might call it a flattish outlook on balance. And for simplicity, let's just maybe take the international markets aside for a second and the commercial as well and just talk about North America residential markets. across your segments. Question is, I guess, do you agree with that assessment that the market could be relatively flat next year within that and what the sources of upside and downside to that might be?
spk15: We look forward at it. The flooring industry has actually been in a downturn since mid-22. We believe that we're going to see an improvement in the middle of the year as inflation moderates and financing improves. When these occur, we think consumer confidence will improve and the industry will start to get better. So we see the first half basically as a continuation of where we are with improvement as we go through the year. And then depending upon how strong and when it occurs, we'll determine what the volume is versus this year.
spk05: That's very helpful, Jeff. Appreciate that. So maybe seemingly a follow-up here. Late 20 to early 22, you bought back $1.4 billion of your stock, around $170 a share. There's even a stretch in there where you're buying it at $200. You stopped buying it back last March. And I know there was cash flow softened. You were investing in CapEx and had some maturities in there. But on several calls now, and especially on this one, you're talking about the health of the category, your competitive position not having changed much so quickly. How might an investor who is the incremental buyer of your stock today reconcile that sentiment with seemingly the hesitancy around buying back their stock right now?
spk15: Well, at the moment, there's still a lot of economic uncertainty in the world. The financing conditions are still difficult. There's regional conflicts that can affect everything. So we believe that at the moment, having excess capacity is preferred, but we're continuing to review it and but consider buying stock as our visibility approach from where it is today.
spk37: All right. Thank you, Jeff.
spk46: Our next question comes from Susan McClary from Goldman Sachs. Please go ahead with your question.
spk43: Thank you. Good morning, everyone. Good morning. Good morning. Jeff, maybe just building off of Joe's question, as you think about 24, you're going to go into the year with some excess capacity. I know you mentioned that you think the market can improve in the middle of the year, but how do you think about the company-specific efforts that you detailed in your remarks around cost-cutting and new products and how those will be layered in over the course of 24 and what they could mean for Mohawk?
spk15: As we look through it, higher volumes as we go and the business improves will leverage the SG&A and get overhead and the productivity will all improve. We expect improvements in the average selling prices as margins expand. Customers start trading up and buying better products. We'll also see benefits from the restructuring and takeouts that will come through with all that occurs. We have multiple acquisitions we've done recently. Those have also been compressed. Those will also, the volume will come up, and we expect them to significantly help our performance. And finally, the investments in the growth areas will add to our sales ability as we come out of this. So as we think through the whole thing, we see the margins expanding significantly as the business improves.
spk43: Okay, that's helpful, Collar. And then as part of that, you've mentioned that the macro in some of these markets, especially some of your newer markets, is hopefully maybe taking a bit of a turn for the better next year. As you think about the opportunities in some of those areas and those categories, anything that is interesting to you or that we should be thinking about over the next year and a half or so?
spk17: If you look at Latin America in this cycle,
spk15: They actually raised rates more aggressively than the rest of the world and further. So we're actually starting to see them starting to lower rates and we think there could be significant rate decreases in Mexico and Brazil even this year. So those things, they may come out of this earlier than others. The business in Australia has held up better for us. There's a less competitive environment in the marketplace and we've been able to hold on to Margin's a little better. Europe is really difficult to know what's going to happen. The consumer confidence remains low, and it's going to take something to help it move. And different than the United States and Europe, the average worker got much higher increases, so they covered more of inflation than we do. So it's really a confidence issue in Europe.
spk43: Okay. Thank you for the color and good luck with everything.
spk23: Thank you, Susan.
spk46: Our next question comes from Stephen Kim from Evercore. Please go ahead with your question.
spk24: Yeah, thanks very much, guys. Appreciate all the color you've given so far. Jeff, you've laid out pretty clearly in both your press release and what you've said today the factors that drive your business to be rather cyclical. You know, right now you've got a lot of challenges that are coming from all quarters, you know, as competitors try to leverage their fixed costs in a tough market and drive pricing and all that. And then also on the way, you know, on the way up, everything gets better. I think you just were talking about with Susan. More broadly, my question is, how important is it to you to drive changes in your business that may deliberately reduce this embedded cyclicality in your business over the longer haul?
spk15: Well, the cyclicality is based on really two things. One is how sensitive we are to interest rates. And then the other part is these high capital fixed costs that the industry, including our company, our competitors, and we tend to move up and down trying to minimize these things. I think if you're going to stay in the industry, it's part of it. Now, we're getting into other things like the insulation business. that we're in in Europe, it doesn't have as much, the fixed costs are much less, for instance, and the margins hold up better in it. So we're in different businesses and different categories that react differently today.
spk20: And remember, these are not purchases that are canceled. These are deferred. So you see a pent-up demand, and with the aging stock of housing, And as Jeff said in prepared remarks, the building just being behind the need for housing, we feel like we're in a great position over that mid to longer term.
spk15: For the first two or three years after this thing is over, the pent-up demand for houses, for housing, for improvements and remodeling that hasn't been done, we don't lose it. It just comes back later.
spk24: Yep. Yeah, I certainly agree that there's a somewhat longer-term rebound on the way. And so getting to that, I think Joe was asking you about the timing of a rebound, or maybe it was somebody else. But you talked about it with the U.S. I think you said you're bracing for a tough one, first half next year. You think by mid-year, it's going to materialize. Let's say you're right. and it does actually start to materialize by mid-year. I'm curious how you are planning to carry your inventory levels. I think of relatively higher levels of inventory as being something that leads to strong service levels as soon as demand rebounds, and I'm curious as to whether you're planning around inventory in the U.S. particularly is going to be such that you sort of, you know, allow yourself to build inventories or carry higher inventories than maybe normal, you know, in anticipation of wanting to try to provide strong service levels, maybe at the beginning of 3Q. And then also, could you just broaden your view beyond the U.S. to, let's say, Europe and LATAM? You know, do you similarly think, you know, mid-year next year is where we may see a turn?
spk09: Let's start with the first part.
spk15: The inventory levels are based on two things. One is what the market is, and the other is in our ability to respond. Given the low volume rates we're at presently, we have a significant upside in capacity to react to it, and so we probably won't build much inventory until we see it coming, and then we think we have the ability to utilize the capacity that we already have to solve it, to satisfy it as it goes up. On the other side, the different regions, I think that this possible Latin America will come out of this first, and then Europe is a little hard to know. I would guess Europe may trail the U.S. If I had to pick, Latin America may come out of it earlier, U.S. in the middle, and maybe Europe a little later would be my present guess, but we'll have to see how it evolves.
spk20: And, Stephen, one thing on your original question as well, the restructuring actions that we're taking, part of that is to lower and permanently lower our cost structure, which then does help us in good times and bad.
spk24: Okay. Yeah, makes sense. Thanks very much, guys.
spk46: Our next question comes from Keith Hughes from Truist. Please go ahead with your question.
spk27: Thank you. A question on the – change your LVT production, your rigid, to direct expansion, to direct extrusion. Can you talk a little bit more about that, what kind of cost savings and that, how long it's going to take to do the conversion?
spk11: Yeah, Keith, our Georgia rigid production is presently being converted to direct extrusion to lower our cost. We're also installing new technology in both plants that will provide unique styling and features. And these changes will give us more flexibility to ship the products from both the east and west plants, and we will have savings of more than $20 million annually when it's executed.
spk27: And will this change all of your rigid LVT production to this method, or is this a partial conversion?
spk06: No, it'll all be changed to this.
spk27: Okay. And does this drive just more efficient machine time, or how do you get the savings from it?
spk11: Well, we're changing from a heated press technology to an extrusion process, and this allows for a lower-cost formulation, and it's just currently in the startup phase. We should be substantially operational in Q1.
spk26: Q1.
spk11: Okay.
spk26: All right. Thank you very much.
spk46: And our next question comes from Phil Eng from Jefferies. Please go ahead with your question.
spk19: Hey, guys. Energy prices have kind of bounced off the bottom. Are you starting to see any upwards pressure on your input costs more broadly? I know it's somewhat tied to oil, preaching there's a lag. And have you started seeing your price mix in your different respective business stabilize here, or there's still some pressure as we kind of look forward?
spk15: Let's see if we can answer a few different ways. One is we think that the material costs have probably bottomed at this point. as well as there's a good chance maybe the pricing is also maybe bottom, but we'll have to see. As the oil and energy prices go up, there's the basic cost of it, but also supply and demand. So I'm not sure how it's going to actually flow through given the low demand of the industry and categories using the different chemicals. It may take a little longer for it to flow through this time than normal. Usually as we come out of the recession, what happens is the demand goes up and then the chemicals have to recover their margins as it goes through. And when that occurs, we have to pass through the increase in costs as it happens.
spk19: Okay, that's helpful. And then a few more questions on LVT. With the investment you're making on the extruding side and with Mexicali coming online early next year, How does your product stack up from a cost and quality standpoint versus imports coming out of Asia? And does your LVT manufacturing business now at this point, early next year, stack up from a margin standpoint versus North American flooring? Is it accretive, neutral, still a headwind? How should we think about all those things?
spk10: Let me see.
spk11: First of all, we think the new products that we're coming out with in the LVT, especially at the high end, we're going to be definitely competitive with imports.
spk15: The pricing has declined substantially from the import prices with both lower freight as well as lower material costs. Our U.S. manufactured costs are also coming down with it. We still have other things going on, like service disruptions from China, given the U.S. impeding the different pieces. And so next year, our margins should expand, and we expect the profitability of the business to improve.
spk11: And we also introduced a new resilient polymer core that's environmentally friendly with superior scratch resistance that's doing really well.
spk19: Okay. In some of the friction you mentioned in terms of imports coming in from Asia, how does that position Mohawk, especially as you ramp up some of this domestic capacity? Is it a good guy or just probably your cost goes up because at the end of the day you're still importing from Asia, maybe not directly from China?
spk15: The combination of both, as you would suspect. The lower cost for getting through with the imports that we do, We're also getting lower costs here as the material costs fall and energy prices here fall also. On the other hand, competition's increased with the lower volumes, and the pricing's come down at this time.
spk18: Okay. Appreciate all the great color. Thank you.
spk46: Our next question comes from Michael Rehart from J.P. Morgan. Please go ahead with your question.
spk29: Hi, guys. This is Andrew Auzion from Mike. Thanks for taking my question. I appreciate you guys shouting us out in your press release. I just wanted to ask, maybe from a pricing standpoint, any markets in particular that you have concerns for that prices will fall more significantly or maybe even vice versa?
spk15: Most of the markets, as a matter of fact, all the markets we're in, the pricing has declined significantly. You have a combination of the cost of the materials coming down, the energy prices coming down, and there's unabsorbed overhead that we've talked about the industry. So the pricing's come down. The question is, is it at the bottom today, or will it go down or not? We think it may be at the bottom as we speak. And as things improve going forward, we think that there'll be pressure once the – industry improves to increase the material prices from our supply base and we'll react to that when it occurs, but that's usually after the industry does. At the same time, you have the world events with oil and gas and how that affects everything.
spk16: That one's anybody's guess and we'll just have to react to it.
spk30: Thanks, Jeff. I guess in terms of
spk29: Lower input costs and energy costs. Are you seeing any further sequential declines into next quarter and maybe any thoughts on next year and how quickly pricing has been aligning to energy prices?
spk20: Well, again, from a total material and energy cost in the fourth quarter versus the prior year, we should continue to see the positive impact of the flow through to the P&L offsetting the lower That's from a year-over-year perspective.
spk30: Thanks. I appreciate that.
spk46: Our next question comes from Adam Baumgarten from Zellman. Please go ahead with your question.
spk31: Hey, guys. Just one for me. Good morning. Just wondering if the recent decision, carpet payment terms and the removal of some of the discounts you guys historically had as an industry, will have a positive impact on the pouring North America segment going forward?
spk15: The industry has changed some of the terms within it, depending upon where you are. It has helped the margins a little bit. We are staying aligned with our customers in many cases, and we didn't try to push through an increase like some of the other guys did. So we're trying to use it to improve our position within the customers.
spk32: Okay, got it. Thank you.
spk46: Our next question comes from Catherine Thompson from Thompson Research Group. Please go ahead with your question.
spk40: Hi, thank you for closing my question today. Just focusing on the commercial and market, you look at some resi-focused stocks, stocks traded better on less bad news this year, early this year, and then you fast forward to this week, you had a more commercial-focused ceiling manufacturer also trade up on less bad news in the commercial space or relatively less bad news. What are you seeing in terms of your pipeline of your business in North America with commercial and market And what have you done to shift your business and focus towards certain end markets that are performing relatively better than the traditional office and retail? Thank you.
spk15: Commercial business is holding up better than the residential business. We are seeing softening in the marketplace in different categories. The ABI index, which predicts the new parts coming online, is showing declines. So as in other recessions, typically a year to year and a half later, the commercial starts softening as the commercial projects finish up. So we're starting to see that. On the other hand, in commercial, you have a much more differentiated product offering, so the pricing is more resilient than it is in the residential business. In the different categories, government, senior care, hospitality, restaurants are all doing better and we're emphasizing our participation in those.
spk40: Okay, yeah, I have a full understanding of the timing difference between residential and non-res. It was really, and it was helpful to some extent, but just getting a better understanding of that mix shift for you. And now, importantly, what does it look like going forward? Because, for instance, we're having industry contacts who are saying, Listen, we're starting to see projects being not just postponed but canceled, but we're able to shift mix to adjust. One other follow-up question. As you have obviously made a lot of efforts over the past trailing 12 months to right-size operations and to make various restructuring charges, but Stepping back and looking at the bigger picture, from a long-term standpoint, what is the industrial logic for having the global footprint as you manage your business going forward? What's the argument for keeping the global footprint as it is currently? Thanks very much.
spk15: The global footprint allows us to participate in the same categories across the world. It allows us to leverage the knowledge of what we can do with product innovation, styling, design, distribution concepts, in order to optimize the businesses. And the businesses that we have, such as ceramic, we used the technology. We have different businesses that are in high, medium, and low. The high ones lead it, and then it flows down through to the other ones to help us increase our mix and distribution in the business. In different businesses we get into, we can help. If they're strong and residential, we can help them show how to maximize their commercial business. We have other categories that we get into. benefits out of just the processes, running warehouses and distribution information systems. So there's a lot of synergies that you can do to help the acquired businesses.
spk41: Okay, great. Thank you.
spk46: Our next question comes from Truman Patterson from Wolf Research. Please go ahead with your question.
spk21: Hey, good morning, everyone, and thanks for taking my questions. First, whenever I'm looking at the fourth quarter EPS guidance sequentially versus 3Q, it implies a bit worse than normal seasonal decline. I'm just hoping you could help us discuss from a high level the buckets that got worse throughout the quarter that really led to that guide. And then also, I believe you mentioned Brazil, Australia. But are there any areas, product categories, you know, pricing, et cetera, where you're perhaps seeing some stability, if you will?
spk14: You covered a lot of ground. Let's see if I can get most of it.
spk15: Starting out with the elevated interest rates and inflation are constraining the spending, and it's postponing the remodeling and home purchases. Our assumptions are that it's more difficult in the period. You're also in the time where the seasonality, so there's more holidays. Given the control of the inventories and lack of need for manufacturing ahead, there's more shutdowns being planned in the period. We are assuming increasing pressure in commercial in the fourth quarter versus the third quarter. The margins on a year-over-year are higher than they were. We think there's still going to be this greater pressure and less covering the absorbed overheads as we control the inventories and working capital. We're implementing productivity and cost reductions. And then we expect the foreign exchange, our present assumptions are that it's a similar headwind with what was happening in the third quarter.
spk20: Yeah, so sequentially, you know, that gap that you're talking about, you know, if you look back over time, you know, You've got mid-20% difference from Q3 to Q4. It's a little bit more this year in our guidance. I'd say the additional shutdowns and the foreign exchange certainly are two headwinds that may be a little bit unusual than prior years.
spk15: Another also difference is in normal years, we would normally pull the inventories down in the end of the third quarter, the start of the fourth quarter, and then be building back as we come out of that quarter. So we're not doing, that didn't happen this year.
spk21: Okay. Uh, thanks for that. And then just wanted to follow up on kind of a prior question. Uh, you all been generating a lot of cash flow this year. you know, 2.6 billion in debt, it seems pretty manageable. And Jeff, I think you mentioned earlier that, you know, perhaps you might not step into share repurchase today. You know, I'm just hoping you could discuss potential for M&A, any geographies or product categories of focus. as well as how you might balance that with your own current valuation of your share price, balance M&A in lieu of share repurchases.
spk15: First, before we get into the new M&A, we have the two recent acquisitions we've done in Brazil and Mexico, which we are integrating and taking costs out. We have three or four bolt-on acquisitions that are also being put together with the business. All of those should give us significant upside as we come up and the volumes go up in the businesses. As we come out of this in the future, you're correct that the value of the business today allows to purchase the stock and give significant opportunity which we consider as soon as we make sure there's not another worldwide problem that's about to occur with all the events going on as we go through. And then we'll have to see what that looks like versus other alternatives that arise.
spk21: Asked another way, any M&A deals flowing across your desk, are those valuations more attractive than your current valuation for Mohawk?
spk15: The only businesses that tend to sell in this environment are ones that are seriously distressed and don't have any options. At these valuations, most companies don't try to sell their businesses.
spk36: Okay, perfect. Thank you.
spk46: Our next question comes from Laura Champagne from Loop Capital. Please go ahead with your question.
spk38: Thanks for taking my question. You called out in your press release the negative impact on Europe from the conflict in Ukraine. Can you give us more information on the Russian business? What are your plans for that? And is that business a material hit to earnings this year?
spk11: Well, the answer is no to that. But in Russia, we're following all the sanctions. We're adjusting our strategies to adjust to these more difficult market conditions. We're also leveraging our leading styling and distribution to maximize our sales in the market.
spk20: Remember, Russia is less than all the Russian businesses together, less than 5% of our business.
spk39: Understood. Thank you.
spk45: Our next question comes from Eric Bouchard from Cleveland Research.
spk46: Please go ahead with your question.
spk25: Thank you. Two things. First of all, Jeff, you've talked about this being the bottom of price and then a potential improvement in the middle of 24. I'm just curious what you're seeing in the business now that supports both of those thoughts.
spk15: First is the The pricing decreases are following the material cost, and the material costs, we believe, are at a bottom. So we believe that will change the pricing from falling significantly more going forward. And then what was the other part of the question?
spk25: The second part was the comment about the first half being similar to today and then the path for improvement in the back half of 24, what you're seeing in the business today that informs that?
spk15: I guess that we don't have a crystal ball any more than you do. We're making the assumption that the present circumstances continue. We believe we have line of sight into the first quarter. After that, given the dynamics that's going on in the world, anything could happen.
spk20: That's it. What we're quoting there is there's Numerous people have come out and said that you'll see some strengthening in the back half of the year, but again, you can get an argument going the other way as well. So it's really one scenario here.
spk25: And then secondly, the goodwill write-off, is a component of that, or I'm just curious, the catalyst for this, is there some component of this that relates to a reduced future earnings of the business, or are there other dynamics that explain right off the bat?
spk20: Eric, it really starts with the volatility on the macro side. The higher interest rates, inflation, deterioration, and the market condition negatively impacted our business, which reduced our market capitalization. Then you go through an internal review of of the stock price compared to that, and it triggered the goodwill impairment that was required. Remember, that's a non-cash charge in the quarter, and it's across all the segments. There'll be more detail for you to see in the 10-Q that's filed after the call.
spk23: Okay. Thank you.
spk46: Our next question comes from Raf Jadrasek from Bank of America. Please go ahead with your question.
spk03: Hi, thanks for taking my questions. The first thing I wanted to ask is just what are you seeing in terms of industry capacity, particularly in the U.S.? Are you seeing other competitors start to pull back in any of the segments, or are you seeing any foreign competition continuing to add capacity?
spk15: Across all the different categories, there have been capacity taken out of some pieces of the industry in different places. In LVT over the past year, there have been some increases in capacity in the U.S. marketplace.
spk16: What else was the rest of the question?
spk03: Are you seeing any of the foreign competitors open capacity in the U.S.? Is there any incremental capacity investments there? And then are any of the domestic manufacturers reducing capacity on categories like carpet or hardwood?
spk11: Well, I can just comment. In ceramic, there have been a couple that have added new plants, but in generally, the capacity that's in the United States is slightly underutilized, I would say, in ceramic.
spk15: And the ceramic one, probably about 50, in excess of 50% is imported. So there's some of the foreign companies are opening some capacity here, which he's talking about. LVT would be similar to the same situation, where there's some of the foreign ones have opened up capacity here, trying to find ways to optimize their service levels from where they are. And in some of the other product categories, there have been some capacities taken out of the industry.
spk03: Okay, got it. That's helpful. And then just on the new construction outlook, can you just remind us your exposure to multifamily versus single family? and then what you're seeing between those two segments.
spk15: I'm not sure I have those numbers in front of me. The new construction home building, I think, is around 20%, 25% of our business. I don't have the number in front of me of the multifamily piece.
spk20: We don't have that. We don't usually break that out. We kind of include it in the new construction number that Jeff quoted.
spk15: It's either in the new construction number or it's in the remodeling number as it gets replaced as we go forward.
spk03: It seems like, based on what kind of home builders are saying now, that we'll still see single-family construction probably rise next year. But it looks like the multifamily outlook is pretty soft and we could see some pretty significant declines. do you have the meaningful exposure on the multifamily side? Is there any margin difference between single-family and multifamily? Or is it relatively small compared to single-family?
spk15: Multifamily typically is lower. They typically use lower quality products than the single-family home construction. On the other hand, the multifamily gets replaced much more frequently. Typically, after They change over tenants in it. It depends on where they are and what it is. It could be replaced every few years where the home and new building could be a seven to ten year cycle. So there's a big difference in the replacement cycles as well as the quality of products going into each.
spk20: As we've said earlier, we see an expanding presence in U.S. ceramic and new construction and the commercial channels. And also in flooring North America as well, our relationship with the builders is stronger.
spk15: The other thing you mentioned, the multifamily, the new starts are coming, but the typical multifamily takes a minimum of a year and a half and could be two and a half years to finish. There is a huge number of projects that are coming through that haven't been finished yet, and our product category is the last one to go in them.
spk20: Yeah, so similar to commercial, it has a long tail to be completed.
spk03: Got it. So there's still a backlog there. It's very helpful. Thank you.
spk20: Yes, correct. Thank you.
spk46: And, ladies and gentlemen, at this time, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Mr. Lorberbaum for closing remarks.
spk15: We're managing the controllable costs that we've been discussing. We continue to react to changing market conditions, which are volatile. We see significant upside when the market returns, and we think we're well positioning ourselves for that to occur. We appreciate you joining us. Have a great day.
spk46: Thank you. And, ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.
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