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spk11: Good morning, everyone, and welcome to the Mohawk Industries second quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touchtone telephones. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to James Brunk. Please go ahead.
spk04: Thank you, Jamie. Good morning, everyone. Welcome to Mohawk Industries' quarterly investor call. Joining me on today's call are Jeff Lohrbaum, Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's second quarter performance and provide guidance for the third quarter of 2024. 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. With that, I'll turn the call over to Jeff. Thanks, Jim.
spk02: Our second quarter performance reflected our focus on the controllable factors of our business, including sales initiatives, cost containment, and restructuring actions. Our net sales for the quarter were $2.8 billion, down 5.1% compared to last year. our adjusted earnings per share were $3, up 9% year over year, as a result of productivity initiatives and restructuring, as well as lower energy and material costs, partially offset by market pressures on pricing and mix and foreign exchange headwinds. We generated free cash flow of approximately $142 million during the quarter, for a total of $239 million year to date. In a quarter, we purchased 755,000 shares, or 1.2% of our stock, for approximately $90 million. We remain optimistic about the future of our business and confident that in time our worldwide markets will recover. Our second quarter results exceeded our expectations despite soft market conditions around the globe. The commercial channel continues to outperform residential, although some softness in the category is occurring. While the long-term demand for our products is strong, residential purchases across our geographies remains weak. During the quarter, the actions we've taken to improve volumes in many product categories helped us, though the gains were offset by consumers trading down in competitive pricing. Residential remodeling is under the greatest pressure as consumers defer large discretionary purchases due to inflation and uncertainties about the future. In addition, flooring remodeling is significantly influenced by housing turnover rates, which remain suppressed due to elevated mortgage rates, high home prices, and the locked-in effect on homeowners. To reduce costs and align our business with current conditions, we're initiating additional restructuring actions across all our segments that will generate annualized savings of approximately $100 million, of which $20 to $25 million will be recognized this year. The cash cost of these actions is about $40 million, with a total cost of approximately $130 million. The execution timelines will vary by project, with some extending throughout 2025 and into 26. In our global ceramic segment, we will optimize manufacturing by idling some less productive operations and aligning production to increase efficiency. We'll consolidate regional warehouses, further reduce product complexity and leverage technology to lower administrative costs. We'll rationalize some of our Flooring North America manufacturing to enhance plant utilization, retire less efficient equipment, and simplify our offering. And Flooring the rest of the world will lower our administrative and operating costs, streamline our product portfolio and distribution, and decommission inefficient assets. These actions will complement our previous restructuring initiatives that will reduce costs by approximately $60 million in 2024. Along with these, our teams are implementing many measures to manage current conditions, including enhancing sales opportunities, increasing productivity, and managing our overhead and working capital. Economists had anticipated that the Federal Reserve would lower rates this year to stimulate the U.S. housing sector. While central banks and some of our markets have already begun to reduce rates, the Fed has indicated it intends to wait until inflation and economic activity sufficiently slow before taking actions. After the U.S. Consumer Price Index dropped in June, many are predicting a September rate cut. If the Fed begins to lower rates at that time, we anticipate our industry should benefit next year as pent-up consumer demand increases flooring purchases. In April, US Today once again named Mohawk one of America's climate leaders, given our reduction in greenhouse gas emissions over the past four years. On July 16th, we published our 15th annual sustainability report, which can be found online at mohawksustainability.com. Now, Jim will review our financial performance for the second quarter.
spk04: Thank you, Jeff. Sales for the quarter were just over $2.8 billion. That's a 5.1% decline as reported, or 4.5% on an adjusted basis, with global ceramic having the strongest quarter versus the prior year. All segments continue to see price and mix pressures with residential remodeling trailing the new construction and commercial channels in the quarter. Gross margin for the quarter was 25.8% as reported and 27.1% on adjusted basis versus 25.9% in the prior year, with lower input costs and increased productivity offsetting the weakness in price and mix. SG&A expense was 18.2% as reported and 17.9% on an adjusted basis. This is in line with the prior year. Operating income as reported was $214 million or 7.6%. Non-recurring charges for the quarter were $43 million, primarily due to restructuring expenses in the period. That gives us an operating income on an adjusted basis of $257 million or 9.2%. That's a 90 basis points improvement versus the prior year as our lower input costs of $83 million and productivity gains of $49 million offset the unfavorable price mix of $111 million and FX of $11 million. Interest expense for the quarter was $13 million. That's down $10 million from the prior year due to strong overall cash flow and the payoff of term loans earlier in the year. Our non-GAAP tax rate was 20.9%. versus 19.6% in the prior year. We expect Q3's rate to be between 19 and 20%, and the full year rate to be between 20 and 21%. That gives us an earnings per share on a reported basis of $2.46, or on an adjusted basis of $3. That's an increase of approximately 9% versus the prior year. Turning to the segments, Global Ceramic had sales of just over $1.1 billion. That's a 3.4% decrease as reported and 2.9% on adjusted basis. Our industry volume remains constrained and pricing aggressive while we are investing in new products to try to improve our mix. Across our various geographies, residential new construction is outperforming remodeling and commercial, though slowing, is stronger than residential. Operating income on an adjusted basis was $95 million, or 8.5%, which was in line with the prior year, as lower input costs of $17.5 million and increase in productivity of $14 million offset the unfavorable price and mix of $25 million, FX of $10 million, and the lower overall volumes. In flooring North America, sales were 959 million or a 4.3% decrease as reported, even though our laminate product continues to take share as a waterproof wood alternative and with our LVT product is expanding in the retail and builder channels. In commercial, the hospitality, government, and education channels are driving the outperformance versus the residential sector. Operating income on adjusted basis was $82 million, or 8.6%. That's an increase of 260 basis points versus the prior year, as lower input costs of $36 million and the strength of our productivity of $19 million offset the weakness in price and mix of $36 million. And in flooring the rest of the world, net sales were $727 million. That is an 8.3% decrease as reported and 7% decrease on adjusted basis as market conditions remain slow with weak consumer discretionary spending on larger ticket home projects. Pricing mixes also continue under pressure. Those sales actions taken by our team through the introduction of new products and expansion of our customer base did lead to an increase in unit volume in laminate, LVT, and panels. Operating income on adjusted basis was $91 million. That's a 12.6% operating margin. That's 40 basis points increase versus prior year, led by a reduction in input costs of $30 million, positive impact of increased productivity of $15 million, offset by unfavorable price and mix of $50 million. Corporate end eliminations were $12 million during the quarter, in line with the prior year. with 2024 expected to be approximately $45 million. Now turning to the balance sheet, cash and cash equivalents were just shy of $500 million, with free cash flow during the period of $142 million, bringing our year-to-date total of almost $240 million. Inventories were just shy of $2.6 billion, That's a year-over-year decrease of approximately $40 million due to reductions in cost and impact of FX as volume slightly increased. Inventory days increased to 128 versus 120 in the prior year. The current plan, though, is to keep inventory relatively flat versus the prior year by year end. Property plant equipment stands at just under $4.8 billion, with capex of $91 million in the quarter compared to DNA of $172 million. The company plans to invest approximately $480 million in the year with DNA at approximately $630 million. And the balance sheet overall and cash flow remain very strong with net debt of $1.9 billion, leverage at 1.3 times, and liquidity at approximately $1.3 billion. with the company purchasing approximately 90 million of shares in the quarter. With that, I will turn it over to Chris to review our Q2 operational performance.
spk17: Thank you, Jim. In global ceramic, our markets remain highly competitive as reduced industry utilization continues to impact pricing and margins. Our mix is weaker given soft residential remodeling activity and consumers trading down to lower price points. In the quarter, the impact of labor and freight inflation was offset by decreases in material and energy costs. In addition to our restructuring initiatives, we are implementing numerous cost reduction projects across the segment, including product reengineering, process improvements, and streamlining administrative functions. To improve our mix, we are investing in product differentiation with leading-edge printing, polishing, and rectifying technologies. These assets allow us to create floor and wall tile collections with superior visuals and higher value sizes, styles, and formats. On May 10th, the U.S. Department of Commerce announced the commencement of anti-dumping and countervailing duty investigations of ceramic tile imported from India. The U.S. Tile Trade Organization believes this could lead to tariffs between 400 and 800%. Given India's widespread dumping, Mexico has increased import duties and other markets are currently investigating similar options. In the U.S., our high-end design capabilities, domestic manufacturing, and extensive distribution infrastructure are enhancing our participation in the builder and commercial sectors. In Europe, our unit sales exceeded last year as we leveraged our manufacturing and styling advantages to create higher-value products. Our porcelain slab expansion has enhanced our offering as demand continues to increase across the flooring, furniture, and countertop markets. European energy prices declined from last year, which should help increase consumer discretionary spending. Markets in Latin America remain difficult despite central banks initiating interest rate cuts. In Mexico, we have announced price increases to offset inflationary pressures and import duties. In Mexico and Brazil, we are initiating additional sales and operational improvements to maximize the performance of our acquisitions. In both countries, we have restructured the organizations and implemented new product and distribution strategies. In our flooring rest of world segment, market conditions remain slow with constrained consumer discretionary spending. Declining inflation led the European Central Bank to lower key rates on June 6th, and additional cuts may follow. In this challenging environment, we focused on actions to drive sales, such as enhancing our product offering, executing promotions, and implementing strategic marketing campaigns. As a result of these sales initiatives, our volumes in laminate, LVT, and panels improved from prior year low levels. Pricing and mix remained under pressure, partially offset by lower input costs. In addition to our restructuring actions, we are launching many projects to improve productivity, enhance yields, and lower labor costs. We are consolidating regional flooring distribution centers and reducing logistics costs to align with present conditions. We are completing the conversion of our residential LVT program from flexible to rigid products, and we are improving our mix in our sheet vinyl category. Our laminate volumes grew as we expanded our customer base and enhanced sales with existing customers. The margins of our insulation and panels businesses have declined as fewer projects are being initiated and industry competition escalates. In Australia and New Zealand, our results were stronger given our actions to improve price and mix through new products and retail promotions. Increased manufacturing volume and associated productivity gains contributed to margin improvement in our business. In flooring North America segment, despite challenging market conditions, volumes improved year over year in some markets and channels, though partially offset by price and mixed dynamics. Our margins benefited from productivity gains driven by operational improvements, lower input costs, logistics efficiencies, and restructuring. This year, we have expanded our relationships with larger U.S. home builders who are increasing their share of the market. Residential remains weak, with home sales turnover at the lowest level since 2008 and consumers continuing to delay remodeling projects. Both of our luxury carpet collections and our value-oriented polyester products are accelerating. Sales of our LVT and laminate collections were stronger in the retailer and builder channels. Our recent laminate expansion is ramping up to satisfy higher demand for our waterproof flooring. The commercial sector continues to outperform residential with hospitality, government, and education channels leading, though fewer projects are being initiated. Jeff, I'll return the call to you for closing remarks.
spk02: Thank you. We anticipate present conditions continuing in the third quarter with elevated interest rates, inflation, and weak housing sales impacting our markets. In the current environment, we're executing plans to optimize our revenues and costs. We're managing the controllable aspects of our business, including innovative product introductions, reducing overhead, and rationalizing less efficient assets. We're streamlining operations by reducing complexity in our processes and product portfolios. Our restructuring initiatives will deliver significant savings and enhance our performance when our markets recover. We continue to benefit from lower energy and raw material costs, partially offset by labor and freight inflation. In the third quarter, we anticipate pricing pressures will continue given low industry volumes, constrained consumer spending on large purchases, and consumers trading down. As usual, European summer holidays will seasonally impact our sales and performance. Given these factors, we anticipate our third quarter adjusted EPS to be between $2.80 and $2.90, excluding restructuring or other one-time charges. While we manage the short-term environment, we're preparing to capitalize on the demand that occurs when the industry rebounds. Residential remodeling is our industry's largest category and should lead to recovery as interest rates decline and consumer confidence improves. Across our regions, new home construction is needed to satisfy demand, and aging homes will require remodeling to meet homeowners' needs. In addition, new commercial projects will be initiated as the economy strengthens and our product investments will enhance our participation. As the world's largest flooring manufacturer, we have the products, capabilities, and financial strength to optimize our results as the market recovers. We'll now be glad to take your questions.
spk11: Ladies and gentlemen, at this time, we'll begin that question and answer session. To ask a question, you may press star and then one using a touch and telephone. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. In the interest of time, we do ask that you please limit yourselves to one question and a single follow-up. At this time, we'll pause momentarily to assemble the roster. And our first question today comes from Eric Bossart from Cleveland Research. Please go ahead with your question.
spk09: Good morning. Thanks. The restructuring or cost-out program, whichever you call it, I'm just curious, you've gone through a couple of these the last few years. The projects that you've identified here, why were they not included in the last one or asked a different way, like why take cost and capacity out now?
spk02: Well, when we're looking at the market to where it is now, we think there'll still be some time before we see a significant recovery into next year. And so we're trying to work through how we're going to optimize the profits, both in the short term and the long term. And we believe that taking more costs out will position us better in the second half, and it will also increase our profitability as the market recovers.
spk09: Within this, I guess the second component of this is you think about solving for the growth scenarios in 2025. How much capacity do you have to support growth next year or embedded in that, what is the growth assumption you're considering as you rate size capacity or optimize capacity?
spk02: As we think about next year, we think that we're going to start seeing the cycle move from what the low point is at. Demand for housing today remains strong and we think there's pent up demand in the remodeling markets. but we can't predict the timing of it. The decline of inflation, the change in interest rates will positively impact consumer confidence, housing sales, home remodeling, commercial activity, which all should have a significant impact on our category. As it improves, we think we'll get the leverage in these cost structures and our product mix. On an individual business, we put investments in in the areas where we thought we would have the most growth rate in the pieces, and the businesses that we're putting new stuff in is the laminate business, the countertop business with quartz, the slab business in Europe, and the insulation businesses. We believe those have the most opportunities for higher growth, and we have invested in those, so we're ready to take advantage of the next few years as they improve.
spk15: Thank you.
spk11: Our next question comes from David McGregor from Longbow Research. Please go ahead with your question.
spk18: Yes, good morning. Thanks for taking the questions. I guess just thinking while we're on the topic of restructuring and the cost reductions, can you just talk about how the anticipated savings, which I think you shared some aggregate numbers on that, how that would fall across the three reporting segments?
spk04: As you look at the restructuring savings, first of all, the initial reactions that we took last year, we've realized of the $150 million that we announced, about $110 million through the second quarter, and should see approximately about $130 million by year end. That program was fairly evenly spread across all three of the segments, maybe with Florida and North America a little bit more. With the announcement today of the additional $100 million, as we said, 20 to 25 would be recognized this year, a much larger piece into the following year. And then all businesses are continuing to look at reductions in SG&A operations and logistics. And as you look at that, Flooring North America will have more benefits than the other segments in the recently announced actions. Okay.
spk18: Thank you for that, Culler. And just as a follow-up, I wanted to get you to talk a little more about the commercial business where you're seeing a little more strength than you are in residential. You noted some softness, though, is now starting to creep into this business through, you know, fewer projects being initiated. Just talk about what you're seeing there and, you know, is there a difference between the Main Street commercial versus the institutional business and And what level of growth should we anticipate through the second half from commercial?
spk02: You're correct. Commercial is holding up better than residential. We are seeing some slowing in new projects and postponement of it. If you look by channels, the ones that are outperforming for us are hospitality, retail, government, and education. We're also taking actions to increase our penetration with large strategic accounts. and we're increasing our participation with them. The good news is that in these categories, pricing is more resilient and give them more differentiation in the marketplace. And then just keep in mind as we come out of this thing, commercial improvement takes longer because even though the macro things change, the planning and construction times take longer to do so that there's a lag between them. Great.
spk18: And can you talk about what the growth is for the second half, what you think you might see there?
spk02: We're projecting it's going to be down somewhat. It's different by market, by channel, all over the place. But, I mean, it is slowing somewhat.
spk11: Okay. Thanks, Jeff. Our next question comes from Susan McClary from Goldman Sachs. Please go ahead with your question.
spk13: Thank you. Good morning, everyone. Good morning.
spk11: Good morning.
spk13: Jeff, my first question is a bit about how you're driving the business through the products. One of the things that you've mentioned is the product differentiation that you're focused on, as well as the cost side of things. Can you talk a bit about what some of those benefits or those features are that you're stressing in those products? And as those gain traction over the coming quarters, how should we think about what they can contribute in either the back half of this year or even into next year in terms of perhaps mix shift and what that could mean for the business on a top line as well as a profitability perspective?
spk02: Sure. In the new products, one is we've continued to invest in putting them out in the marketplace and bringing new products. And every category is participating. In ceramic, we put in new assets that can make tiles with different color intensity, textures, three-dimensional surfaces, different shapes and sizes. In LVT, we've taken actions that we can actually enhance the coloration and textures, and we've also introduced a different core we call a renewable polymer core as another category. In laminate, we've introduced features that will impact both the durability and the sound acoustics with it as we go through. and even in the different countertop businesses, in our quartz countertop, we're introducing higher value veining technologies in the mid-price points, and every product category has features like this that we're doing as we come out. What's happened is the biggest part of the market that's been affected, the bottom end's doing better, and the high end, the middle part, which goes through retail, is the most affected, and these features and benefits are will have a lot of positive impact when the retail business picks up as consumers come back in the marketplace and get more confident.
spk13: Okay, that's helpful. And then it was encouraging to see that you did $90 million of share buybacks in the quarter. Can you talk a bit about what drove your decision to do that? And should we take it as a sign, perhaps, of you having some greater confidence in the visibility and the forward trajectory of the business? Is it a sign that maybe we've turned the corner and you're feeling better about things from here?
spk02: I think you probably answered my question for me. We're more confident that we are reaching the end of the cycle. We have taken additional actions to manage the short-term pressures by taking additional costs out. We're confident that the markets are going to recover. We can't predict the moment, but we know they're going to recover. So it's a good time to buy shares.
spk13: And does that mean maybe that you'll do more of them in the future?
spk02: Well, our balance sheet, as you know, is strong. In past cycles, we've had multiple opportunities coming out of these things as the industry recovers with acquisitions. And we'll continue to evaluate share repurchases as a part of our capital allocation strategy.
spk13: Okay, thank you. Good luck with everything.
spk11: Thank you. Our next question comes from Mike Call from RBC Capital Markets. Please go ahead with your question.
spk08: All right, thanks for taking my questions. Just I think the prior question around second half growth, it sounded like that was specific to commercial. Maybe could we zoom out and just, you know, you've been organically down and mid single digits from top line standpoint in the first half. Can you talk about what's embedded from a top line standpoint for 3Q and how you're thinking about that into 4Q as well?
spk02: Sure. At this point, we don't anticipate anything changing the present conditions in the third quarter. And we've built in just a continuation of weak demand and pressure on pricing and continued low industry utilization. We don't see the mix changing with a consumer in the period much from where it is. And so we see the trading down continuing. We see new construction maybe softening a little bit, but not a lot. And then we still have remodeling that's compressed. And just to remind everybody, the remodeling business is our highest margin business because they tend to buy better quality products. than the other residential channels. In addition, to remind everybody, the third quarter is always seasonally slower, and don't forget European holidays. They take off and it pulls down our third quarter, and then in general, we're anticipating compared to last year, we're going to see some improvements from all the different actions we've been taking. If you go into the fourth quarter, we think that central banks will probably start reducing rates, but we expect that the impact on us, we probably won't feel until we go into the next year. And then, again, the seasonality of it declines with the holidays where people spend on other things than home and commercial projects. And then with this, given where we are, built into ours is continued low volume of our industry, which means we're going to have shutdowns and unabsorbed overheads as we maintain the discipline in our inventory levels as we go through. Other than that, I guess, as we get out in that area, there and further out, we could start seeing cost increases in different pieces, and as those things happen, we'll have to consider Do we need to make any changes and raise prices in the future as the markets change? What else is there? In the fourth quarter, one other comment. We actually have two additional days in the period due to just the way the calendar falls.
spk08: Got it. Okay, that's really comprehensive. Thank you for that. As a follow-up question, You know, so top line and then your term sounds like status quo. I guess your guide then implies that I think the operating margin sequentially is still kind of flattish, which to your point, you have some normal seasonality, but there's obviously puts and takes around that seasonality, but then some of the actions that you're taking. So can you speak to, I guess, the... the ability to continue to improve margins from here in the back half of the year despite these top line pressures?
spk02: We gave you the expectations for the third quarter. Most of the improvements coming from the internal actions we're taking rather than the marketplace. However, we are seeing some improvements in volume as we said in I don't know, it could be almost maybe half the product categories or different places. But at the same time, there's still huge pressure on pricing and mix. So anything that we're picking up in the volume piece is being offset by the pricing and mix in the marketplace in the second half.
spk15: Got it. Okay. Thanks, Jeff.
spk11: Our next question comes from Keith Hughes from Truist. Please go ahead with your question.
spk14: Thank you. In the release in Flooring North America and in the prepared comments, you called out LVT and laminate. I guess the question, were those businesses up year over year?
spk02: LVT and laminate, the volumes have improved. We've improved some of the margins in those businesses we go through. You have to remember, last year there was all kinds of also negative pressures in the comparisons. Laminate is gaining share and we're doing our self-help actions in LVT is helping those.
spk04: Those were two of the categories, Keith, that Jeff was mentioning that from a unit volume was up.
spk14: Units were up in both. Okay, great. And your earlier comment to the last question, I think you said half your product categories are up in volume. That's a remarkable statement if I heard it correctly. That feels like share gain. I don't think your markets are that strong. Is that fair to say?
spk02: Well, remember, I'm talking about a worldwide market with a lot of different parts. Yeah, right, I get it. With different comparisons. In Europe, I mean, the market's really depressed. So, and in Europe, a year ago, we were struggling with some cost structures with high gas prices and pieces. It was more difficult to compete against the imports. I mean, we've taken actions in different marketplaces to help us. I think that we're increasing our distribution in some, and... I mean, it's a tough market, but I think we're executing well.
spk14: Okay, great. Thank you.
spk11: Our next question comes from Michael Rahut from J.P. Morgan. Please go ahead with your question.
spk12: All right, thanks. Good morning, everyone. Question, I'd love to try and get a sense from your perspective of what drove the upside to the second quarter if there were specific areas within perhaps, for example, North America that maybe came in a little better than expected either, and just more broadly on either the sales or the margin side. And if you see any of these trends perhaps continuing into the third quarter, that might cause a similar result if those trends kind of remain in place, that that might ostensibly also drive some upside to the 3Q guide.
spk02: The 3Q guide has, as I just said, it's got the assumption that the present conditions in the second quarter continue into the third quarter. Don't forget Europe. I mean, you have to know that when they go on vacation, people quit spending money, and whatever's happening, it takes a huge dip, and the holidays are different in every country, so it pulls down our period. The pressures on pricing and mix, I can't I can't emphasize enough. I mean, the markets, when you have industries with huge capital investments running at low throughputs, everybody's trying to optimize the marketplaces, and our aggressiveness in trying to bring new markets, satisfy people different, expand our distribution are helping us, but it's difficult.
spk04: Dan, on your question, Mike, specifically like Flooring North America, generally across all three segments, Jeff's prepared remarks talking about managing the controllable costs and the business is really benefiting from those cost reduction and restructuring activities while we're still investing in new products which should improve our mix and profitability as some of this pent-up demand gets released later end the recovery.
spk12: Okay. No, I appreciate that. Secondly, just wanted to get your sense in terms of how to think about the top line in the back half of the year. You know, currently we're looking for a slight decline on a consolidated sales basis for both 3Q and 4Q. I was wondering if that is similar to how you're thinking about the business, particularly in the fourth quarter where there is an easier comp. And then just technically, if I could just throw in an additional technical question, the share count really didn't move that much. The average share count didn't really move that much in 2Q. You had the share buyback, though. Should we expect to see that fully reflected in the share count in 3Q, or is there any offset there? you know, share issuance that might still keep the share count around 64 million.
spk04: Well, the last question, it is a weighted average, and so it depends on when, obviously, each of the shares was purchased. So you'll start to see more of the impact as you go into Q3 and then for the full year. So there will be some change as you go out of the balance of the year. In terms of the top line, you know, for the back half, As we said, we are seeing some unit expansion in some of our product categories. But remember, as Jeff just emphasized, you also have price and mix. So even if you're up a little bit on units, it's being basically either offset or partially offset at the very least by price and mix.
spk16: Okay. Thank you.
spk11: Our next question comes from Phil Nye from Jefferies. Please go ahead with your question.
spk06: Hey, guys. Congrats on a really strong quarter in a tough environment. So, Jeff, if I heard you correctly, you were kind of hinting at maybe you're seeing higher costs. You could consider raising prices, certainly ocean freight, shipping containers. Depending where it's coming from, I think like Asia might be up like 3 to 4x, at least that's what we're hearing. So it's putting a lot of pressure for some of your competitors that import products into the U.S., like LVT and Lamin of that sort. At least we're hearing maybe there's rumblings of price increases in the back end. I'm curious what you're hearing on that front, and what does that mean for Mohawk? Is that a cost headwind? Does that provide a pricing umbrella? And how does that potentially impact your portfolio?
spk17: Well, I'll just comment that the increased ocean freight and potential tariffs should improve our, or should benefit our manufacturing, domestic manufacturing.
spk02: And then the other side, the imported products where we'd have them, we'll have to pass through the ocean freight changes as everyone else will as it changes. I guess the, I think you had another, on the material side of it, we think that the prices have bottomed and we are seeing some increases now. In this marketplace, it's really hard to determine where they're going to be six months from now. So given the low demand, we see it coming. We'll just have to find out if it's going to happen sooner or later. Usually when you have low demand like we have, there's not much pricing upward movement materials, but we'll have to react to whatever happens and manage through it as we go through.
spk06: Jeff, you're not hearing any rumblings importers are looking to raise prices at this point?
spk02: I don't hear anything, but they're going to have to. It's not if. I mean, these freight rates are up significantly.
spk06: And then maybe this is a tough question to ask because you mentioned a few times that it's hard to predict timing. But let's say if we do get rate cuts this fall, whether it's the U.S. and Europe, how does that kind of ripple through? Could you see the uplift as soon as spring next year, I want to get a sense of what the lag works and how different parts of your end markets should kind of shake out. Do we need to actually see existing home sales turn or rate cuts coming down provides that confidence and maybe unlocks HELOC? Just kind of help us unpack what it means from a rate cut standpoint and how the lag and how it impacts different parts of your portfolio.
spk02: If it works the same as historical, which it may or may not, When rates start coming down, the people's confidence goes up. And what happens is you have this multiple years of pushed-out remodeling that happens. So usually the consumer that's sitting there, when they start feeling better about the economy and different pieces, the remodeling industry picks up, and there's very limited lag times when it starts. That's typically followed by the new housing market, and existing houses, people start moving more and more confidence in doing it. And then you typically have anywhere from a 9- to 12-month lag from that point before the commercial sector, which takes longer to plan, get budgets approved, before you start seeing those type of things. Help tends to be the typical recovery. And when you start with the timing of it, I mean, your guess is as good as mine. Sooner is better for me. Okay.
spk06: But you would expect your R&R side to come back first. Is that fair, in particular North America? It always does it.
spk02: Okay.
spk06: All right. That's helpful. Really appreciate it.
spk11: Our next question comes from Matthew Bully from Barclays. Please go ahead with your question.
spk03: Hey, good morning, everyone. Thanks for taking the questions. Back on the new restructuring issue, I'm curious if it was more kind of a change to your near or medium-term outlook for that recovery, or, you know, was part of this something more structural around kind of the longer-term need for capacity in certain product categories? I think you mentioned it might be a little more weighted to the floor in North America. So, yeah, any color on that kind of decision process. Thank you.
spk02: We have to manage the circumstances we're in. We know that market's going to turn in the future. We don't know the timing it's going to turn. We know that our view was that the second half of the year will continue to be difficult. So we encouraged all of our businesses to find ways to improve their margins to get through the near term without hurting our long-term potential in the future. All of them put together projects to improve their productivity, to utilize the assets. In some cases, we've idled some assets that we can start back up, and in other cases, we've shut down some higher cost ones. We've taken costs out with people. We are managing the product portfolios aggressively to have them in the best shape we can have in. And we think we're doing all the right things to take advantage of when this thing turns. And don't forget, when it turns, it's going to take several years. Typically, the industry runs it slightly over GDP. And when this thing turns, you typically have multiple years of above-industry growth to get us back to the trend lines.
spk04: But given the restructuring you take, it's important to reiterate that we feel good about the capacity of that we still have installed to react to, as Jeff said, that recovery period.
spk03: Got it. Okay, that's helpful. And then secondly, kind of zooming into the near term, I think the difference between price and cost got a little wider in Q2 than in Q1. I think as we look forward, clearly the year-over-year comparisons are very different on price and cost as we get into Q3. I mean, is the expectation that you would still stay a little bit negative on price-cost or any additional color on how that would play out over these next few months? Thank you.
spk04: You are correct that in the quarter, if you just look at material and energy, That's about $90 million of benefit from a year-over-year perspective compared to the weaker price mix of $111. That's just material and energy. And then the productivity, which was close to $50 million, was really there to offset the increases in wages and benefits. Now, as you fast-forward to the second half of the year, we would expect each of the segments to see that continued price and mix pressure. But from a year-over-year benefit, also there would be less benefit from input costs as you lap over the lower costs from last year. Now, that is one reason, you know, also, as Jeff pointed out, we're implementing additional cost reductions and restructuring actions to manage the situation.
spk03: All right. Thanks, Jim. Thanks, everyone. Good luck.
spk11: Our next question comes from Adam Baumgarten from Zellman and Associates. Please go ahead with your question.
spk05: Hey, guys. You talked about the price or the cost piece on a year-over-year basis maybe being less of a tail end in the back half. Are you actually seeing sequential input cost inflation as we've gone through the year so far?
spk02: Prices have been fairly stable. I mean, we buy a lot of pieces, so there are some that are going up. We'll have to see how they evolve and where they're going to go. Again, as you come out of these cycles, they're all going to go up. We have to manage our way out of it when it occurs.
spk04: The key point, Adam, was that we've been very consistent. You see the lower costs flowing through compared to last year. The high point was going to be in the first quarter. We saw a little bit less in the second quarter. I would expect that to continue as you go into the third and fourth quarter as well.
spk05: Okay, got it. And then maybe switching gears to laminate, that's been a good part of the story. I guess, where are you seeing from an in-market perspective the most adoption there or sort of penetration? Is it in single-family new construction or home improvement or both, I guess? Just some more color there would be helpful.
spk02: It's really broad-based. What's happened is that laminate's becoming accepted as an alternative to wood floors and or LVP in all the markets. Builders are using it more than they have. In retail, the retailers are also picking it up and utilizing it. And then, what am I missing? The commercial business doesn't use it at all. They're very limited. is that our laminate, we have unique technologies that makes our laminate look better and different visuals than other people can make. And so in the world markets, as well as the U.S., we have a huge share of the mid to upper end part of the laminate business, and we have none of the commodity at the bottom. Our equipment's different, our products look different, and the value propositions are different.
spk05: Okay, got it. Thank you. Best of luck.
spk11: Our next question comes from Catherine Thompson from Thompson Research Group. Please go ahead with your question.
spk01: Hi. Thank you for taking my questions today. Based on some of our work and talking to the channel and feedback from the field, it indicates that you've gained some market share this year. In order to see if you could clarify what gains you're seeing either by channel or by product categories, and how sustainable you think these gains may be. Thank you.
spk02: We've been aggressive in the marketplace, like everybody else is being in the market. We have good relationships with people. We are bringing products and value propositions that are different. We've been investing through the downturn in our sales and marketing activities. We continue to provide merchandising and promotions to help them maximize their business, and I think we're being rewarded in some places for that and increasing our distribution. We have things like with the freight and all the parts, our ceramic business, we have been able to satisfy the high-end market of ceramic, for instance, in the commercial channels where there's been disruptions in timing. We've improved our styling and offerings, so we've become alternatives for higher-end Italian tile, for instance. So we're taking the right actions in each product category while at the same time we're managing our costs and cutting our costs, and the management's really doing an excellent job.
spk04: Another good example, Catherine, is in Europe in ceramic. With energy costs coming down, we are able to – level playing field and be more competitive in that marketplace. And we saw that in the quarter where we approved over Q1 and from a unit perspective and a cost perspective.
spk02: Just some more on Europe. In Europe, when gas prices were 300, the material prices were high. I mean, our ability to compete was really hurt. We We didn't hedge any of our gas prices, so we were paying premium prices for everything. So, I mean, there's a huge change in our capacity to compete in the marketplace today in Europe, for instance, than there was a year ago.
spk01: Okay, great. I have just a clarification from your press release yesterday afternoon, and one of the items you said in terms of the cost-cutting measures was leveraging technology to lower administrative costs. How much of this, could you clarify more? Is this a euphemism for AI and incorporating that? Just help us understand a little bit more about that phrase. Thanks so much.
spk02: In AI, we're all looking at trying to find ways to use it. We're in initial stages of understanding it. We're going through training programs with different parts of our organization to try to utilize it. We think it's going to help do much more in-depth analysis and see trends that we haven't seen before. So we're investing in it, but we're really at the front end and the opportunities are significant. The general businesses, we continue to improve our internal information systems and we keep using them to reduce our administrative structures and respond rapidly.
spk01: So you're not, just to clarify, You're not to the point of having AI be part of cost improvement plans quite yet. Is that a fair statement?
spk02: There's ideas, but I can't say that they have made a major change in the cost structures up to this point.
spk01: Okay, great. Thank you.
spk11: Our next question comes from Ray Jadarosich from Bank of America. Please go ahead with your question.
spk07: Good morning. Thanks for taking my questions. I just wanted to follow up on some of the productivity gains that you've spoken about and how that carries into the remainder of this year and into next year. If we see volume continue to decline, and let's say it's flattish next year, do you think your productivity gains are still enough to drive margin expansion? And then within that, can you just talk about how, versus that $50 million you talked about in the second quarter, how do we think about the gains in 3Q into 2024?
spk02: Just from a general point of view, then I'll let Jim try to give you some more view. When the volume's going down, you have to make all these cost changes to try to keep the cut. You don't get any benefits. In upticks, what you're having to do is trying to cut the costs out to manage the lower throughputs and pull them down to keep them in line. Now, as we come out of it, what will happen is as the volume goes up, we're going to try to limit the expansion of these costs and leverage the margins and get them back to double digits and higher from where we are today.
spk04: Certainly, volume is the story, Rafe. As you As you look for volume to pick up, you also are able to run the facilities at a more steady state. Therefore, you have less interruption and less shutdown costs, which certainly helps from an unabsorbed overhead perspective. From a productivity view, going through this year into next, we would expect All the businesses are continuing to bring ideas forward on cost reductions. As I talked about CapEx, for example, about 45% of the capital spending is around cost reductions and product innovation. So those will continue to evolve as we go into next year. And as I pointed out, on the restructuring savings, Of the 100 million we just announced, only 20 to 25 will be really recognized this year, and we'll still have a little bit of a carryover from the 150 million that we originally announced last year.
spk07: Okay, that's helpful. And then just on the pricing side, as you look across each of the three segments, I know on a year-over-year basis it's down. But sequentially, are you seeing any type of stabilization? And then just to clarify on an earlier question, you have not seen any impact yet from the higher shipping costs in terms of competitors reacting to price?
spk04: Not yet on the competitors, no. On your sequential question, so the biggest move was from Q4 to Q1. Q1 to Q2, though, there are some declines, mostly in the price area, but it's certainly moderating as you go sequentially through the year, but you're still seeing some declines.
spk07: So from 2Q into 3Q, you'd expect sequentially down, just still down, but less than it was down 1Q into 2Q? Yes. Thank you.
spk11: Our next question comes from Laura Champine from Loop Capital. Please go ahead with your question.
spk00: Thanks for taking my question. It's just a follow-on to the last one, which in NICS, is NICS getting, and I know it's negative year on year, but sequentially, is it getting worse or better in your three major segments?
spk04: Mix is a tough one because you have not only product mix, but you also have channel mix. So as we've said, as commercial slows, that will have a negative impact on mix, as Jeff talked about the commercial market earlier in the call. But on the flip side, on the products, because of our investments that we have made, we are really trying to leverage that to see stronger mix. So you have the combination of the two. So as we look forward, price and mix, it's more on the pricing side.
spk02: As we said, we think we're going to see the conditions. We don't see a significant change as we go from second quarter into third quarter and even into fourth quarter this year.
spk11: And ladies and gentlemen, with that, we'll conclude our question and answer session. I'd like to turn the conference call back over to Jeff Lauerbaum for any closing comments.
spk02: We're confident in the long-term fundamentals of our industry. We are well positioned to take advantage of the recovery of the housing markets, and we expect there to be some different timing of how they come out, but they're all going to come out and go back to more normal things in the next few years. Thank you for taking your time and spending it with us.
spk11: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
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