Mohawk Industries, Inc.

Good morning everyone and welcome to the Mohawk Industries First Quarter 2025 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 phones. Please note this event is being recorded. At this time, I'd like to turn the conference call over to Mr. James Brunk, Chief Financial Officer. Sir, please go ahead.

Thanks, Jamie. Good morning everyone and welcome to Mohawk Industries quarterly investor conference call. Joining me on the call are Jeff Lorbom, Chairman and Chief Executive Officer, and Paul DeCock, President and Chief Operating Officer. Today we'll update you on the company's first quarter performance and provide guidance for the second quarter of 2025. 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 and Legislation 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 periodic filings with the Securities and Change Commission. This call may include the discussion of non-GAAP numbers. For a 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 over the call to Jeff for his opening remarks. Thank you, Jim.

In the first quarter, our reported sales were $2.5 billion, a decrease of .7% as reported, or about flat on a constant basis, absorbing too few shipping days and -over-year foreign exchange headwinds. Even with soft market conditions, our premium collections and differentiated products will be launched in 2024, generated above market results. We recorded earnings per share of $1.52, with our performance primarily benefiting from productivity gains, restructuring actions, and a lower tax rate, which offset pricing pressure and higher input costs. The impact of missed sales and extraordinary costs from our new flooring North America order system was within the expected range, and service has returned to historical rates. We are enhancing the system to improve our efficiencies and provide greater functionality and capabilities. During the quarter, we purchased 225,000 shares of our stock for approximately $26 million. Last month, global tariffs were announced, which elevated uncertainty for businesses and consumers. In response to the retaliatory tariffs, the U.S. also implemented tariffs of 145% on China, which supplies a significant part of LVT sold in the U.S. MOAC is a substantial domestic operation to produce ceramic tiles, carpet, laminate, sheet vinyl, LVT, and quartz countertops, which is more advantageous as tariffs increase. To offer our customers a wider variety of options, we supplement our ceramic tile and some of the LVT manufactured in the U.S. with imported products. Most of the ceramic tile and some of the LVT we import is produced in our own facilities in Mexico and is not subject to tariffs under the USMCA agreement. We increased our inventory levels in preparation of tariffs being implemented. At the current 10% rate, we expect estimate MOAC will incur annualized costs of approximately $50 million, which is we expect to address through price increases and supply chain adjustments as needed. In addition to the direct impact, the tariffs are likely to influence consumer and new construction and business spending in both the U.S. and abroad, though the extent is unpredictable at this time. Another impact of the tariffs is a weakening of the U.S. dollar, which could benefit our and translated results this year. Across our markets, conditions in the first quarter weakened sequentially, with residential remodeling remaining the lowest sector. Even before the tariff announcements, consumer confidence had been falling as individuals have grown increasingly anxious about their future prospects. In the U.S., concerns over inflation have prevented the Fed from reducing rates, though predicting the Fed will make multiple rate cuts during 2025. So far this year, more U.S. homes are being offered for sale as available housing inventory continues to rise. After multiple years of deferring purchases, some consumers are re-entering the real estate market to meet their current family needs. Others are staying in their homes longer than planned and will initiate remodeling projects to maintain their properties and accommodate family changes. As the spring selling season begins, the outlook for U.S. homebuilders remains cautious, with March results showing significant variation by region. Due to economic uncertainty and the war in Ukraine, consumer confidence in Europe has also declined, leading to postponed home sales and remodeling activities. As inflation nears their target, the European Central Bank cut central rates to 2.25 percent in April to stimulate the economy as well as the housing market. As defense and infrastructure spending increases, European economies, particularly Germany, could see improvement. Now, Jim will review our financial details for the quarter.

Thank you, Jeff. Sales for a quarter were just over $2.5 billion. That's 5.7 percent decrease as reported, or 0.7 percent on a constant basis, including absorbing two less shipping days, unfavorable -over-year foreign exchange, and the previously disclosed impact of the Florida North America system conversion. These headwinds were partially offset by favorable price mix in the quarter, primarily in our global ceramic and Florida North America segments. Gross margin for the quarter was 23.1 percent as reported, and excluding charges was 24.1 percent in line with the prior year. As J&A expense as a percentage of sales was 19.2 percent on a adjusted basis, again, relatively in line with the prior year. Operating income as reported was $96 million, or 3.8 percent. During the quarter, we had charges of $26 million, primarily related to our previously announced restructuring actions across the enterprise, which will generate approximately $100 million of savings this year. It gave us an operating margin from an adjusted basis of 4.8 percent, 130 basis point decrease versus the prior year due to higher input costs of $41 million, the impact of the Florida North America order management system conversion of approximately $30 million, which was in line with our expectations, volume of $11 million, partially offset by improvement in productivity of $51 million. Interest expense for the quarter was $6 million, a decrease versus the prior year due to lower overall debt and the benefit of interest income, reflecting the strength of our balance sheet. Based on our current outlook, we anticipate our interest expense to be in the range of $25 to $30 million for the full year. Our non-GAAP tax rate was approximately 18 percent versus 21.8 percent in the prior year. We're forecasting a Q2 tax rate of approximately 21 percent, and for the full year to be approximately 20 percent. It gave us an earnings per share for the quarter on a reported basis of $1.15 and adjusted earnings per share of $1.52. Turning to the segments, global ceramic had sales of just over $990 million. That's a 4.9 percent decrease as reported and an increase of 1.2 percent on a constant basis, driven by an improvement in our product and channel mix across the segment, partially offset by lower sales volume. Our operating income on an adjusted basis was $48 million, or 4.8 percent. That's only 20 basis points below the prior year, as higher input costs of $18 million, lower sales volume of $10 million, offset gains in productivity versus the prior year of $21 million, driven by an improvement in our -over-year results in the U.S., Brazil, and Europe. In Florida and North America, our sales were $862 million. That is a decrease of 4.2 percent as reported, or 1.1 percent on a constant basis, as the segment had improvement in price and mix, especially in the resilient, laminate, and commercial soft business units, offset by the negative impact of the order management system conversion, which was approximately $50 million, most of that being on volume. That gave us an operating income on an adjusted basis of $26 million, or 3 percent, excluding charges, a decline of 230 basis points versus the prior year, as the -over-year improvement in productivity of $27 million was offset by higher input costs of $19 million, and the impact of the system conversion of approximately $30 million. In Florida and the rest of the world, we had sales of $670 million. That's an 8.8 percent decrease as reported, and 2.9 percent on an adjusted basis, driven by a lower sales volume and unfavorable price mix, primarily in our laminate, insulation, and sheet vinyl business units. Operating income on an adjusted basis was 9.1 percent. That's a decline of 100 basis points versus the prior year, due to unfavorable price mix of approximately $8 million and lower sales volume, only partially offset by stronger productivity, as the improvement in our LVT business was offset by the weakness in insulation and laminate. Corporate eliminations for the quarter were $12 million, in line with the prior year, and we anticipate the full year expenses to be approximately $50 million. Turning to the balance sheet, cash and cash equivalents were just over $700 million. In Q1, our free cash flow was a use of approximately $85 million, primarily due to timing with the delayed invoicing in Florida and North America, and an increase in imported goods ahead of U.S. tariff rollout. We still forecast a strong overall year in free cash flow. Inventories were just over $2.6 billion. Our inventory grew by approximately $80 million versus the prior year, primarily due to the increase of imported goods, again, ahead of the recently announced U.S. tariffs. Property plant equipment was just over $4.6 billion. Our Q1 capex was $89 million, with DNA at approximately $150 million. The company plans to invest approximately $530 million in 2025, with DNA at approximately $600 million. Focusing on cost reduction and product innovation projects. And lastly, overall, the balance sheet and cash flow outlook remain very strong, with current net debt of $1.7 billion and a leverage of $1.2 billion. And with that, I will turn it over to Paul to review our Q1 operational performance.

Thank you, Jim. In our global ceramic segment, our strategy is to grow our market share in a difficult environment. We believe we outperform the markets in most of our regions while optimizing our mix and reducing costs. With low demand, we are leveraging our extensive offering, superior service, and reliability to improve our position with existing customers while pursuing new opportunities. Pricing pressure remains a challenge due to low capacity utilization across the industry in all of our geographies, and we are taking selective pricing actions where feasible. Our restructuring projects are on schedule, and we are evaluating additional initiatives to lower our costs. In the U.S., we delivered solid results in both residential and commercial, as we focused on ceramic tile contractors, kitchen and bar dealers, and commercial projects. Given rising input costs, we implemented targeted pricing increases on our higher value products. Most of our U.S. floor and wall tile portfolio is manufactured in the U.S. and Mexico, which should advantage our business given tariffs on imported products. Our domestically produced quartz countertops should also benefit since more than half of that market is using imported alternatives. In Europe, our results benefited from our premium collections, innovative product introductions, and growing participation in the commercial channel which is outperforming residential. Tales of our porcelain slabs are growing significantly due to our advanced visuals, capacity expansion, and improved costs. Natural gas prices in Europe have recently declined and will help offset other inflation. In Brazil, our results benefited from strengthened exports throughout South America, pricing actions, and enhanced mix. The Mexican market remains challenging, and we are expanding our porcelain offering to grow our distribution and improve our mix. Our restructuring projects in Mexico are on track and will lower our costs and increase our competitive position. In our flooring rest of the world segment, we are responding to challenging market conditions through strategies to expand sales in parts of Europe with stronger economies, introducing new products to satisfy regional preferences, and focusing on greater export opportunities around the world. To offset higher input costs, we are taking selective pricing actions where possible while also pursuing productivity gains and cost reductions. We are controlling inventory and managing operations to align with lower demand in the region. In our flooring business, our transition from flexible to rigid LVT has helped increase volumes and we have improved our manufacturing performance. In Europe, we are experiencing increased pricing and mixed pressures in our flooring categories as retailers shift their product assortment to lower price points to align with consumers trading down. To increase sales of our quick-step premium flooring, we are expanding distribution in Southern and Eastern Europe. In the quarter, we started a new laminate press that can deliver the next generation of product features and is more efficient than the line we retired. Our panels mix benefited from the growth of our premium collections and higher value decorative panels despite ongoing pressure on our commodity panels business. Our insulation performance improved in the UK and sales of flat roof products for commercial projects increased. We are expanding insulation sales into Eastern Europe to support a new facility in Poland that will be operational in 2027 when we expect more favorable market conditions. In both the panels and insulation business, we have announced selective pricing increases given inflation. Our flooring North America segment performed in line with expectations as our shipments recovered from the disruption caused by the order system conversion. Residential remodeling remains under pressure due to low housing turnover, elevated interest rates and weakening consumer confidence. In 2025, we launched many new products to better position us for a recovery of the category. At the end of the quarter, our new black label luxury carpet collection was chosen by dealers as the best product for style and design. During the quarter, we also benefited from strong sales performance in LVT as we have expanded our portfolio across all price points. Our East and West Coast LVT production strategy is improving our service and optimizing our logistics costs. The acceptance of our premium waterproof laminate as an alternative to LVT is progressing in both residential remodeling and new construction. It provides superior aesthetics and scratch resistant and the more dependable supply. We are further increasing our domestic laminate capacity to support the increasing demand. We have expanded our relationships with homebuilders across the country in both carpet and hard surfaces which are yielding higher sales. In commercial, order activity is good in all categories as we benefited from accelerated launches. Our restructuring actions in the segment are on track and delivering the expected savings. We are working to offset higher input costs through additional process improvements and cost reduction actions. I will now return the call to Jeff for his closing remarks.

Thank you, Paul. With the implementation of the tariffs last month, there is more uncertainty with the global economic outlook and softer conditions are anticipated given higher inflation, lower consumer confidence and reduced business investments. At this point, the tariff amount and the effect on consumer spending and housing are still evolving. We will take the appropriate actions to manage the impact of tariffs as needed. We are focusing on optimizing our sales and further lowering our operational costs with our restructuring initiatives this year which would result in a benefit of approximately $100 million. Our flooring North American segment service has returned to historical levels while we continue to enhance the functionality and efficiency of the system's new order system. We expect increased costs from inflation will be partially mitigated through productivity gains, cost containment and strategic pricing actions. We anticipate pricing pressure will continue in all regions given low demand and competitive markets. Global ceramics and flooring North America are improving their mix with increased participation in the commercial channel, sales of premium collections and performance of recent product introductions. In the rest of the world segment, European consumer demand for large discretionary purchases such as flooring is at a low level with product remixing though declining interest rates could stimulate demand. Given these factors, we expect our second quarter adjusted EPS will be between $2.52 and $2.62 excluding any restructuring or other one-time charges. We remain optimistic about the long-term prospects of the flooring category given where we are in the housing cycle. To improve our results, we continue to reduce our cost structures, simplify our operations and product complexity and invest in new product features. When the Great Recession bottomed out, our industry rebounded dramatically growing more than 10% in subsequent years. Though we cannot predict the inflection point, we expect our results to significantly improve when the industry volumes return to historical levels. As with past economic cycles, we will emerge from this period operationally stronger and ready to provide our customers with superior products and service. We'll now be glad to take your questions.

Ladies and gentlemen, at this time we'll begin that question and answer session. To ask a question, you may press star and then 1 on your touchtone phones. If you are using a speaker phone, we do ask that you please pick up your handset before pressing the keys. To withdraw your question, you may press star and 2. We do ask that you please limit yourselves to one question and a single follow-up in the interest of time. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from John LaValle from UBS. Please go ahead with your question. Good

morning, guys. Thank you for taking my questions. Maybe starting with the tariffs, you guys talked about an annualized cost impact of $50 million. How should we think about the timing of that coming through in 2025? Is there anything embedded in 2Q or just more kind of a second half? You mentioned your intentions to offset the impact with pricing actions and supply chain adjustments. Any additional color there between the split of those buckets, particularly considering that the pricing environment right now is currently challenging?

Let me start, John, on your first question on timing. Obviously, as you know, we're on a FIFO accounting system, which means that as we start to purchase material that has tariff on it, it will take somewhere between four and five months to kind of turn through the inventory. This would be certainly more of a late third quarter, fourth quarter impact, giving us sufficient time to get pricing and other actions aligned.

We've started announcing increases. We're going to continue assessing the timing of when we're going to announce the rest of them. We think that we've stopped importing product from China at this point already, and we're continuing product between different suppliers and regions as we think is appropriate for what's going on. We'll continue adjusting as we need to.

Understood. Then the second question would be, if I remember correctly, about 40 percent of LVT came in from China last year. To the extent that the tariffs actually raised some of those import prices, how do you guys think about using your domestic capacity to either take some share or raise prices along with the rest of the industry? How do you sort of think about the balance there?

Well, our East and West Coast production capacity is obviously improving our service and logistics cost and position in the US market. We have a very good manufacturing footprint, which should advantage us with the increase in tariffs. Going forward, we'll use a balance of source and manufactured goods to optimize our results, and we'll continue on focusing on filling our existing capacity.

Okay. Thank you,

guys. Thank you.

Thank you,

John. Our next question comes from Matthew Bully from Barclays Investment Bank. Please go ahead with your question.

Hey. Morning, everyone. Thanks for taking the questions. I guess sticking on that same topic of pricing power. I just wanted to press a little bit on balancing the environment, that promotional, when you have slower demand in the industry. You mentioned at the top potential for more pricing pressure across geographies, and then at the same time, you're announcing price increases going forward. How do you think about that balance there? Is there a mix impact that can happen in that scenario? Or maybe are there different categories that may see better pricing power relative to others? Just any more color on that. Thank you.

We think that the market's going to pass through the tariffs in our category with pricing actions. It's just starting to happen, and it's still evolving as we're going through at this point. We have announced price increases, and we are assessing the timing of the rest of them to pass it through. We think that the tariffs will increase our competitive position, given all the local products that we make. There could be some movements between product categories within it, as LVT in general goes up more than the other product categories, and it could benefit alternatives like laminate, which is an easy alternative for it. Ceramic, as well as carpet may benefit as the costs go up and people try to manage it.

Got it. Thank you for that, Jeff. Secondly, back on the $50 million of higher cost, I just wanted to get a little more detail. I guess that implies maybe you import $500 million from other countries besides China. Just any color on what specifically you do import, which countries that may be, because obviously we just want to understand what can happen, given what may change with each individual country's tariffs. Thank you.

You're correct. The $500 million is obviously a whole different scala of different products, majoritarily LVT, but we import many other products. Then we are optimizing our supply chain continuously to minimize the duties and maximize our buying power across the world, across the $500 million.

Okay. Thanks, Paul. Good luck,

guys. Yeah.

Thank you.

Our next question comes from Rafe Jucic from Bank of America. Please go ahead with your question.

Hey, good morning. Thanks for taking my question. I think last quarter, you guys spoke about hoping to be able to grow EPS year over year, obviously excluding the impact of the ERP issue in the first quarter. With the $50 million tariff hit, how do you think about that playing out? And then what are the puts and takes there?

As you know, it's going to be dependent on market conditions, which are really unpredictable at this point. We think that the tariffs will be covered by price increases, as we've said, and we think we'll get enough to cover the present tariffs. We'll have to see what happens after that. We're taking actions that we've gone through to mitigate the inflation by cutting our costs and restructuring, taking other costs out. Our flooring results this year will really depend on the activity level of the global economies, the interest rates, consumer spending, and housing around the world.

And Rafe, it's key, as Jeff said, is that our plan is to offset that $50 million through pricing and other supply chain initiatives. And if you exclude the system conversion, given the current conditions, if the economy does stabilize, tariffs remain at the present level, and you should get some, you know, maybe potential interest rate falls, we could still exceed last year's results. Obviously, the alternative is the economies weaken and investments in housing discretionary spending fall. Our results would then certainly be under pressure.

That's helpful. And then just on the price cost outlook from here, I think it was a $40 million headwind in the first quarter. You've spoken about some price increases here, and it is increasing more recently. Just how do we think about the price costs as we go through the year?

Well, you know, material and energy costs increased towards the end of last year. And as I said about on the tariffs, that will begin to flow through really our results a little bit this quarter, but into Q2 and Q3. We also have to absorb the increased cost of labor and benefits across the business. Now, the cost of natural gas, you're correct, in the U.S. and Europe recently has decreased, and that should benefit us as it flows through the inventory, but it will be later in the year. We are increasing prices selectively and taking actions to really further reduce our costs. And we'll adjust as required, though competitive markets are making it more difficult and more challenging for increases.

Thanks. Appreciate it.

Our next question comes from Susan McClary from Goldman Sachs. Please go ahead with your question.

Thank you. Good morning, everyone.

Good

morning.

My question is, maybe just building on the outlook for 2025, can you talk a bit more on how you're thinking of the sequential lift from first quarter to the second quarter for both the top line and the margins? And then as we do think to the back half of the year, any thoughts on the margin expectations there, especially as you think about flooring North America and some of the various factors around some of the new products gaining momentum, the productivity initiatives relative to some of those headwinds that you've spoken about?

As you look for the rest of the year, the government policies are slowing the economy and reducing consumer confidence, which is lowering the housing and remodeling activity. As we said, we've begun price increases and expect to compensate for the present tariff levels, and we'll have to adjust if they change. We'll benefit from the restructuring savings of more than 70 million left for the balance of the year. We are driving additional productivity to reduce our cost structure to help offset it. We anticipate some tailwinds in the fourth quarter from lower energy. Our interest costs this year will also be lower, given that we've reduced our debt and the interest income is higher. And then we still see a potential that central banks are reducing rates and could stimulate growth, which could help our category in Europe. The rates should be getting low enough to help if the consumer confidence will help it a little bit. And we continue to be flexible and we'll continue to adjust to the changing environment.

That's helpful, Jeff. And then it was good to hear and see that you bought back some stock again this quarter. Can you talk a bit to your thoughts on capital allocation in this environment? And maybe with that too, Mohawk's ability to continue to generate really strong free cash flows, even in a tougher macro?

Yes, Susan. We still forecast, even with the use of cash in the first quarter, strong free cash flow for the total year. I mentioned that CAFEX forecast is about $530 million, but we may reduce that depending on as conditions materialize for the balance of the year. We did buy back about $26 million and we'll continue to use that as part of our overall capital allocation strategy.

Okay, thank you. Good luck with everything.

Thank you.

Our next question comes from Colin Braun from Deutsche Bank. Please go ahead with your question.

Good morning. Thank you for taking my question. For North America sales, they were down modestly in the quarter, but when you start to parse out sort of the system conversion impact, it looked like sales could have been up below single digits. First, is that the right way to think about it? And if it is, can you just talk about what's driving an improvement either by end markets or product categories? And do you think you saw any pull forward just as customers got ahead of some terrorists here?

Yes, so in the flooring North America, our performance was in line with expectations as our shipments recovered well from the disruption that was caused by the order system conversion. Although residential remodeling is at low levels because of low housing turnover, elevated interest rates, and weakening consumer confidence, we performed well in the market. We are capturing volume share with differentiated products and promotions. And also, our commercial business performed quite well. In North America, in the flooring North America segment and in the Dow tile business, we have a larger exposure to commercial than in our other businesses. And so commercial is holding up well and pricing is more resilient and we are increasing investments in that segment.

Great, that's helpful color. And I guess just following up on that, how sustainable are those trends in commercial, just given sort of the uncertain backdrop? Have you seen any changes sort of in customer behavior as you look out into sort of projects that might hit in the back half of the year or is it still pretty strong relative to the other end markets? Thank you.

Yes, you're correct that we are of course still benefiting from projects that were started last year. But at this time, we don't see the incoming orders on commercial projects tapering down. And so we are hopeful for the remainder of the year that this continues.

Thank you for all the color.

Thank you very much. Our next question comes from Keith Hughes from Truist. Please go ahead with your question.

Thank you. I think in the prepared statement, she said that price mix was up in both ceramic and flooring North America. This first time in a couple years that we've seen that. Can you talk about what's going on in those sectors driving that up?

Well, in flooring North America and in global ceramic, you are seeing the premium, first of all, you're seeing the premium product do well, both on the higher end, for instance, carpet, laminate, porcelain slab in Europe. And then also you have that mix of channel that Paul just described where commercial, which is a larger piece of flooring North America and global ceramic compared to flooring rest of the world has done well so far this year, which is also helping their mix. So Keith, it's really a combination of a little bit of product mix and a little bit of channel mix.

Second question. As you look in North America, specifically on LDT, the vast majority is imported. The United States somewhat asked earlier, when do you think the price result of everything that's going on, how long is that going to take to hit the industry?

Well, we and market participants have already increased prices to compensate for these tariffs. And as the tariffs change, the industry will highly likely push those through with more price increase.

The announcements are just going out on a pricing with different pieces and the implementation will go through. We think you're going to see it as we go through the second quarter. We're going to see more and more of it getting into the marketplace.

Is there enough inventory out there to carry through the second quarter before the impact or before then?

It depends on each. In us, he said it was probably going to be somewhere in the third quarter before we flow through the inventory.

Okay. All right. Thank you.

Our next question comes from Tim Woos from Baird. Please go ahead with your question.

Hey, everybody. Good morning.

Maybe

just to kind of pop on to Keith's question, just, is there a way that you could kind of give us some color on just what those competitive price increases are in terms of percentages or dollars? And kind of what you're thinking various, you know, kind of import competitors are going to have to raise prices? I mean, is there a way that you can just kind of frame how much imports might have to go up in terms of price relative to domestically manufactured product?

It's really too early to tell. They're just getting out there. The announced increases of some of them are somewhere around 8% at the moment, but that's only for a portion of it. We'll have to see how they average out and what they're going to end up with at the end. It's just the first announcements are just rough directions of where it's going. Then they get to the individual product prices don't come out until later.

Okay. And would you raise price by less and focus on volume? I mean, is there, would there be a real opportunity for you to pick up placements and pick up share, especially retail?

We're really going to have to see how the announcements come out, when they are, what the amounts are. And again, we also have to make sure that whatever is going to happen with inflation in the US also. So we're going to take all those to account and it'll solidify probably over the next 30,

45 days. Tim, the good news is, you know, we really focus back on the fact of our domestic capacity, as Jeff had previously said. And if you think about, you know, our capacity in the US on, you know, from ceramic tile, carpet, laminate, sheet vinyl, LVT and quartz countertop, it really puts us in an advantage situation as these tariffs increase.

Okay. Okay. And then just thinking about productivity, I mean, it seems like just given the general pressure on price kind of ex tariffs that if you continue to see sluggish demand, I mean, we're going to get to a point where pricing keeps going down maybe, and you have to kind of do bigger chunkier productivity, you know, kind of improvements again. I mean, is there something, you know, three to six months from now where, you know, the volume environment still isn't improved and there's another kind of reassessment of, you know, the footprint? Or have you taken as many actions as you can in this environment and everything else is going to be kind of smaller?

Listen, to start out with, I'm not sure, you know, this, our category of flooring, when the interest rates started falling in 22, the industry has been going down since then. I'm not so sure how much there is left to go down as you go through. Is it on the side with our own stuff? We're continuing to take costs out. We have the balance of the 100 million, 70 million. We're looking at additional productivity actions we can take. And if we can find more, we're going to take them.

Yeah, and that 70 million is just on the restructuring savings. So we still have ongoing initiatives, just kind of a day to day looking at each of the facilities.

Okay. Okay. Appreciate the color, guys. Thank you.

Our next question comes from Adam Bojarten from Zellman. Please go ahead with your question.

Hey, good morning, guys. Just on the positive price mix in flooring North America and global ceramics, sounds like it was mix driven. Can you give us some color on how pricing behaves? Was it down or maybe closer to flattish?

No, we did take some selective price increases in some of our more premium ceramic products. We also took price increases in our laminate flooring business because of higher input costs. And so we're continuing to look very strategically where we can take price to compensate some of the inflation that is in the market right now. So we're continuously working on it on all categories.

Okay, got it. Thanks. And then just on the cost side, just with oil prices down, I think that's historically the benefit cost perspective in areas like flooring North America. Do you expect that to flow through at some point later in the year as well? I know you mentioned that gas costs and 4Q being a positive, but maybe as it relates to oil and the timing there.

Well, as we said, we have seen natural gas prices come down, which we believe we should get some benefit later in the year from our energy costs. In terms of a whole lot at this point, but you're right if any petrochemicals stay down longer, that would help us. But again, it would have to flow through inventory. So it would be more of a second half later in the year benefit.

Great. Thanks.

Our next question comes from Brian from Thompson Research Group. Please go ahead with your question.

Hey, good morning. Thank you for taking my questions. Can you expand on the earlier question about balancing your market share versus price and margin? And I guess between the two options, are you more inclined to take share or protect margins and keep your current market share?

Look, we're always trying to take market share in the market. We never lead with price to take market share, but we focus on our vast portfolio of differentiated products and phenomenal innovations that we have. So we focus on that and we focus on our service capabilities. We focus on our quality capabilities in the market and we never really use price to drive market share and we will continue to do that.

Also, given where the markets are, the prices are pretty compressed everywhere in almost all the markets because everybody has excess capacity. The costs are the same whether you run it or you don't in many cases. So one of the reasons our margins are as low as they are is we're three years into this downturn in volume. At some point it's got to turn up and when it does, it's going to go back to the historical trends and we're going to have multiple years of historically high growth rate feature. Got it.

Secondly, can you talk about your inventory levels and I guess really the levels in the channel? Is there any work down that needs to be done there? You kind of talked about some advanced imports on your part. We'd heard there was some maybe pre-buy activity in the retail channel in advance of the price increases as well. So just wondering kind of how that all this now with the weaker market to sell into and how that might flow back through the supply chain. Thank you.

Well, I'll start with our inventory and it had increased to about 80 million dollars and as I previously said, it's primarily due to the increase in imported goods ahead of the new terrace and given the possibility of the terrace increasing further, we'll expect to kind of hold that at this level for really for the time being. We haven't

seen a significant change we can identify with the customers given that we haven't announced price increases. We haven't seen a large increase in the downstream volumes from us.

Our next question comes from Michael Rayhut from JP

Morgan. Please go ahead with your question.

Hi, thanks. Good morning. Thanks for taking my questions. First, I just wanted to get a little more granularity on you know, in flowing North America where you've you know, put across some incremental pricing. What type of impact you know, from a you know, percent revenue basis should we be thinking about for 2Q and 3Q as it currently stands with with what you've announced so far?

You know Michael, at this point as Paul said, it's really been more on a selective basis to offset some increases, short-term increases in raw material. I would expect as we go through the year, as Jeff indicated, with the demand being constrained that you'll continue to see pressure on pricing which is why it's so good to see that we're getting benefit from NYX both on our premium products and with the strength of the commercial channel.

Okay. I guess just secondly on the roughly 500 million of imports that you expect the 50 million tariffs to hit. Just circling back to that, if you can break down, it would be appreciated, you know, which countries those come from, you know, either order of magnitude or a rough breakdown of you know, the top two, three, four countries you know, that you're getting that 500 million from that would be very helpful. Thanks.

Yes, so the 500 million or the tariff imports of course. As Jeff said, we have barely any exposure to China which is obviously a good thing. And then besides that, a big component of that 500 million is LVT and a large component of that comes out of Vietnam. And then we have also other countries we source from like India. We have countries we source from like Korea. That would be the main ones. And then I can also remind you that Mexico or the products that we make in Mexico are non-tariff at this moment. And so these are not part of this 500 million.

But we have tariffs all over the place from countertops coming in from different countries and other product categories as well. Ceramic we're buying from different ones to supplement our

total portfolio. Our next question comes from Stephen Kim from Evercore.

Please go ahead with your question.

Yeah, thanks very much guys. Kind of two issues kind of working in opposite directions. You know, one on the one hand, you know, you obviously have less tariff exposure than probably a lot of your competitors. And on the other side, you also have been leaning into the premium kind of product selection, particularly in North America. But I believe most of those products are imported. And so maybe a little more exposed to the tariff. So let me start with that part first. So on the higher end products in Florida, North America and ceramic, how much is it is imported? Would you say the majority of it is imported? And is it your view that the tariffs and the necessary pricing to cover the tariffs would crimp demand there? Or is it your view that that customer is pretty immune? And so you're just going to continue to target the higher end consumer there. You continue to lead into it and just figure lean into it and just figure you'll just drive pricing to cover that. And that really will not suffer from a demand perspective due to price.

There's two parts to the question. One part is that over the last few years, we have increased the capabilities of our US manufacturing and we have continued to push up the value proposition of the US manufacturer. On the other hand, the super high premium all comes out of Italy and we're buying it from our own facilities and it's going to keep coming over. And there is no alternatives for it. So either the consumer is going to pay more for it or they'll move to some lower value options.

My understanding though, I think you showed us the Karastan Black and I think there was also the Karastan LVT, if I'm not mistaken, the WC product. Are those imported products?

Some are, some aren't. Some of the high end wool products we import from our own facilities in Australia. Other cases we import some from India and in other cases part of the collection we manufacture here. So all of the above. So you

can't really say that all the premium is imported and the bid is made in America. I mean we are very focused on getting the right products with the right price from the right plant within Mohawk or from the right supplier and so we're optimizing the full product line.

Okay, yeah that makes sense. Okay then second question relates to sort of the opportunistic pricing opportunity I guess that maybe some others have touched on. So you talked about the fact that you have FIFO accounting and that therefore it's going to take a certain amount of time. I think you said late 3Q before the impacts flow through from any potential Taracan. Yet your competitors are not all on FIFO obviously and so they're putting through pricing it seems like probably a little bit earlier than you might need. Is it reasonable to think therefore that you might actually see price cost be a near term positive perhaps you know in late 2Q, 3Q into 3Q and then you know you would have the offset to that you know on the back end maybe sometime in the future when pricing decelerates but in the near term you would actually potentially see a price cost benefit. Is that a reasonable possibility?

Anything's possible. What happens is there's not enough information in the marketplace where the prices are going to go, how they're going to get implemented and the structures of them and we're waiting to adjust to the market circumstances.

The price increases that have been announced are very very specific at this point so we'll have to see how it evolves but as I said earlier you we still have the higher cost material and energy that you know is purchased at the end of the year that will flow through so that has nothing to do with with the tariffs and the general demand outside of tariffs is still very very competitive.

Yeah okay well we can hope though anyway I guess. All right thanks a lot guys.

Our next question comes from Trevor Allenson from Wolf Research. Please go ahead with your question.

Hi good morning thank you for taking my questions. First of all I just want to follow up on some of the energy commentary with NAT gas prices coming down here. Can you quantify what you expect the energy cost headwinds to be that's assumed in your QQ guide and then you're talking about some benefits of lower NAT gas by the fourth quarter. Are you talking about just less inflation from NAT gas in the fourth quarter? Are you actually expecting NAT gas to turn into a tailwind on the fourth quarter?

Well when I look at you know the input cost in total in the first quarter was just over 40 million dollars as I previously noted. I would expect that to be slightly higher in the second quarter and again that's driven by all three you know main categories of raw materials wages and benefits and energy so all three of those. So I would expect the impact and inflation from a -over-year perspective that was considered in our guidance to be higher in Q2 versus Q1. And then the second part of your question again it really depends on you know the stability of that natural gas prices you know it could just be you know sequentially it could be better as we get into the fourth quarter but from a -over-year standpoint it really depends on where that price lands over the next really the next quarter.

Okay gotcha makes sense. And a question on Europe and

perhaps maybe the knock-on effects of US tariffs on China. If US competitors who are currently importing LVT from China specifically if they begin sourcing from other countries do you see a risk of Chinese LVT finding its way into the European market and perhaps weighing on on pricing in Europe?

Thanks. Europe is already importing vast amounts of China-produced LVT at this moment and so the market is saturated with the product and the demand of the market is satisfied so we don't really expect any additional cost or price pressure in the European markets given all the all the changes and we do expect the China supply chain to move to other countries for the US of course.

Okay thanks for that Paul and thanks for all the color good luck moving forward. Thank you.

Our next question comes from Phil from Jeffreys please go ahead with your question.

Hey guys curious to get your thoughts on interquarter trends in 1Q and how April's kind of progressed by geography certainly North America is particularly hard hit with consumer confidence coming down with tariffs and whatnot but curious to get your thoughts on just broadly broadly worldwide how you're seeing trends kind of progress interquarter and into April.

Listen we're anticipating continuous slow conditions we it doesn't matter what country you're in we're seeing lower consumer confidence and business investments being pushed out. Again home sales and remodeling have been on a downturn across the entire world and that what we don't know is the outside the US we've seen interest rates start falling mainly in Europe and that could help demand but up to this moment we haven't seen it yet. The tariff impact is still evolving around the world and with the country that we're in that are shipping products here it's too early to tell how it's going to impact those economies as we go through. We do expect inflation to keep being a problem and we're thinking it's going to be mitigated through our strategic pricing productivity cost containment and product mix as we go into the second quarter.

Jeff I'm trying to gauge just like April I mean it's certainly March in fact February softened but did April get worse or is kind of stabilized I'm just trying to get a gauge from that standpoint.

I think it followed the same trends that we've been at so far.

Okay so some some level of stability and then for Jim a lot of moving pieces the FIFO piece gives you some line of sight on raws but based on what you know today would you expect raws to kind of in terms of -over-year inflation peaking in 2Q or that could actually get materially worse in the back-end and certainly from a price cost standpoint you know a lot of moving pieces on pricing how do you see that equation kind of evolving from a price cost standpoint as well is 2Q kind of your biggest pinch point quarter or or actually get worse in the back-end.

First you have we have to see if the lower oil prices follows through with changing the commodity prices that are related to it to remind you we have outside of the plastic pieces we have large businesses in ceramic that have limited use of it wood products that aren't impacted by it so at this point there's a possibility to come down or there's a possibility that the supply chain given the low margins that are at we're not sure what's going to happen.

Okay all right thank you.

Our next question comes from Laura Champagne from Loop Capital please go ahead with your question.

Thanks for taking my question I'm wondering if there's a material amount of product that you're going to resource into your US facilities and if so what the short-term costs might be of moving that production and what the longer terms or capacity utilization benefits might be.

I'm assuming you asked that question on LVT.

Yes.

Yes so we have ceramic

I guess it's a good question for ceramic too because I know you make some in Mexico that you import here I'm not sure what the plan is there.

The Mexican stuff doesn't have any tariffs because of the USMCA so there's changes in it.

So given the impact of the tariffs we're obviously going to balance our internal resources with our external supply not all products can be made in our factories not all products can be sourced so we have some limitations there but as we move forward we're going to continue to maximize the capacity utilization of our internal factories and we have a little bit of capacity at this moment across the two categories we just discussed and we will also continue to import from the appropriate locations minimizing our costs and minimizing our import duties.

Got it and then a quick follow-up on on the your comments on Chinese production impacting the European business. I'm aware that they're already there but couldn't an influx impact your pricing there and and are you already accounting for that in your plans for this year?

We don't know exactly what's going to happen with the Chinese producers we know the prices are already low in the European market and I'm not sure there's a lot lower to get is it so we'll have to see.

Thank you.

And our next question comes from Mike Dahl from RBC Capital Markets please go ahead with your question.

Thanks for taking my questions. I want to circle back on channel inventories. I know you mentioned Jeff you hadn't necessarily seen a meaningful difference in customer activity but one of the large foreign retailers last night seemed to suggest that they had done a material amount of pre-buy specifically with some Chinese product and our sense has been home centers have done some so do you just not have the level of intelligence in the market to at a market level to get granular into your customers and see those inventory positions or are you just seeing something something different there?

I thought I answered a different question the question was have they increased the inventories of my products in their stores? I assume everybody in the industry is doing what we're doing and on imported products expecting high tariffs that everybody raised the inventory.

Okay got it thanks that may be misinterpreted your your answer then. Appreciate the clarification second second comment or question and then Jim in response to Ray's question about earnings you suggested so the potential for earnings to be up year on year you know here's what I'm wondering seasonally speaking your three Qs usually flat to down versus two Q and four Qs is almost always down a decent amount seasonally and so you know with demand weak and you know the the incremental pressures that could come in the second half it would take an atypically seasonally strong second half to get anywhere close to flat to up for the full year even X ERP so you know I'm just trying to understand that bridge it seems like the base case should be that there's going to be some continued year on year pressure.

Well first of all everything is excluding the impact of what has happened in Florida North America with the system conversion so you set that you know 30 million dollar impact aside you know as we go through you know the balance of the year one you know one difference is the of the restructuring savings that we have you know flowing through still in Q3 Q4 as that Jeff said we have about 70 million dollars that we should see for the balance of the year we have additional productivity initiatives as well that will help in Q3 and Q4 and then if we get some of that tailwind on energy that would also help that situation as well. The other point and that's why I gave the range in my prepared remarks you know interest costs with the strength of the balance sheet is certainly a help this year you know it's down year over year just in the quarter it was it was down nicely for the period almost nine million dollars so that's going to help us as we go through the balance of the year and then the last point is the on the FX side we are obviously exposed to the euro it's our largest currency outside of the US and with the weakening dollar you've seen the euro certainly increase and from a translation standpoint that also helps so you know a combination of productivity the strengthening mix that we've talked about and then if we see some of those tailwinds on raw materials or energy as we get the back half of the year it is it is still possible now obviously we do need assistance from as I said some stabilization from the macro economy to make really that happen.

Okay got it yeah thanks for those pieces appreciate it.

Thank you.

And ladies and gentlemen with that we'll be concluding today's question and answer session. I'd now like to turn the floor back over to Jeff Loverbaum for any closing remarks.

Our local manufacturing should be a greater competitive advantage we're going to continue to flexibly manage the environment as it changes the postponed housing remodeling that's been pushed out over the last few years will return to historical levels and we'll see a rebound from it when it occurs we appreciate your interest in mohawk. Thank you.

Ladies and gentlemen that does conclude today's conference call a presentation we do thank you for joining you may now disconnect your lines.