Good morning. My name is Erica, and I will be your conference operator today. I would like to welcome everyone to the Mohawk Industries Second Quarter 2020 Earnings Conference Call. All lines have been muted to minimize background noise. After the speakers' remarks, there will be a question-and-answer session. This conference is being recorded on Friday, August 7, 2020. Thank you. I would now like to introduce Mr. Frank Boykin. Mr. Boykin, you may begin your conference.

Thank you, Erica. Good morning, everyone, and welcome to Mohawk Industries quarterly investor conference call. Today, we'll update you on the company's second quarter results. 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 a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8-K and press release in the Investors section of our website. With regards to our recent litigation and related investigations, our audit committee with assistance from outside legal counsel and forensic accountants has substantially completed its internal investigation. The company has appropriately filed its Form 10-Q for the second quarter. The company continues to cooperate fully with the government inquiries. Beyond that, we refer you to the disclosure in the 10-Q and remind you we cannot comment further. I will now turn the call over to Jeff for his opening remarks. Jeff?

Thank you, Frank. For the second quarter, at the height of the COVID disruption, our sales were down 21% as reported or 19% on a constant currency basis. Adjusted operating income for the period was $36 million or 2% of sales, and our adjusted EPS was $0.37. During the period, our cost production initiatives, working capital reductions, and lower capital spending generated free cash flow of almost $500 million. Those sales trends have improved significantly since government restrictions were lifted. The current environment is the most unpredictable in the history of our business as the pandemic has affected our markets and operations around the world. During the quarter, all of our businesses were dramatically impacted with most of our customers and facilities operating either in a limited capacity or completely shut down for some time. Residential remodeling was impacted by retail shops closing and consumers staying at home. Commercial has declined as businesses have postponed their projects due to economic uncertainty. U.S. housing starts and home builder confidence improved sharply in June as the market rebounded. In the period, our operations were curtailed or stopped by government mandates, employee concerns, and lack of demand. We responded to these challenges by keeping our workforce safe, cutting expenses in investments, and furloughing employees. In the U.S., government programs provided tax credits to our business. Federal unemployment supplements have made attracting workers more difficult. Outside the U.S., many government subsidized businesses to keep workers employed and others required companies to continue paying employees that were not working in full. After the company sales bottomed in April, our May and June results appreciably improved across the segments as stay-at-home restrictions were gradually lifted, consumers initiated remodeling projects, stores reopened, and construction increased. Through the period, our markets improved more than we expected and our shipments exceeded our production rates, reducing our inventory. Our manufacturing levels were impacted by government restrictions, COVID disruptions, and employee absenteeism across the enterprise. At this time, our visibility to the future continues to be uncertain due to persistent COVID spread, the unknown strength, and the economic recovery. Some near-term factors represent a potential upside, including historically low interest rates, rising remodeling activity, consumer discretionary funds being shifted to home improvements, and increasing home purchases. Alternately, potential changes in government policies, consumer and business spending, and higher COVID infection rates could reduce demand around the world, particularly due to increased restrictions. Given these factors, our business plans must remain flexible to quickly adjust our production levels. We are restructuring the business to enhance our results and future performance. We're reducing SG&A, our headcount, and lower performing products and SKUs. We’re closing less efficient operations and investing in more productive equipment. The largest of these changes are in the United States, where LVT sales growth and a strong dollar have impacted many of our businesses. We anticipate these actions will deliver annual savings of approximately $110 million to $120 million with an estimated cost of $170 million, of which $44 million will be in cash. Many of these actions are currently being executed, with those affecting our manufacturing costs happening to flow through our inventory. It will take much of next year to complete these initiatives and capture the full benefit. Our business is well positioned with a strong balance sheet and deep liquidity. We've recently issued over $1 billion of new bonds to enhance our ability to strategically invest and better position Mohawk for the long-term. We're taking the right steps to manage through the pandemic and we remain focused on delivering innovative products, exceptional value, and superior service. Our talented people are devoted to making Mohawk the best supplier to our customers, improving our business in all areas, and maximizing our results. With that, I'll turn the call over to Frank for our second quarter results.

Thank you, Jeff. Sales for the quarter were $2.50 billion, down 21% as reported, but decreased 19% on a constant basis as the pandemic and related recession significantly impacted our business. Our gross margin was 18% as reported or 21.4% excluding charges compared to 28.8% last year. The year-over-year decrease was driven primarily by lower volume, shutdown costs, negative price mix, and unfavorable productivity, offset by deflation. The actual amounts of all of these items are included in the 10-Q that was filed yesterday. SG&A as reported was $431 million or 21% of sales, and 19.7% compared to 18.1%, both of which exclude charges. It was down $63 million or 13% excluding charges, primarily from savings due to furloughs, layoffs, and government support. Other unusual charges were $97 million, of which $29 million was cash, primarily related to the $170 million cost reduction initiative that Jeff just mentioned. We are adjusting our capacity by closing inefficient operations, as well as consolidating some others, reducing the workforce, and streamlining our SKUs. We estimate annual savings of approximately $110 million to $120 million when complete. Our operating margin excluding charges was 1.7% compared to 10.7% last year. The decline was driven by weaker volume, shutdown costs, and unfavorable price mix, partially offset by productivity and deflation. Our detrimental margin was 45% for the quarter and resulted from sales dropping faster than costs. Our third quarter operating margin is expected to improve sequentially from the second quarter, but will be lower than last year with pressure on pricing and product mix, along with higher manufacturing costs. Looking at income taxes, on a non-GAAP basis, we had no tax expense in the second quarter. Going forward, the rate could vary significantly in the next two quarters between 16% and 22% due to changes in profit before tax and/or geographic dispersion of income. Our earnings per share, excluding charges, came in at $0.37 compared to $2.89 last year. Turning to the segments. In the Ceramic segment, we had sales of $753 million, down 21% as reported, with the business down 19% on a constant basis. The Russian business performed best with new construction and owned retail shops driving performance. Our operating margin, excluding charges, was 0.5% compared to 12.3% last year. The decline was driven by higher shutdown costs and unfavorable volume and price mix, offset by increased productivity. In Ceramic, we expect the cost of our restructuring initiative to be $80 million. In the Flooring North America segment, sales were $800 million, down 19% as reported. Laminate performed best with its waterproof features and DIY installation, appealing to consumers. Our operating loss margin, excluding charges, was a negative 2.2% compared to 6.7% last year. The decrease in earnings was driven by lower volume and productivity, as well as shutdown costs, offset partially by deflation. We're estimating restructuring costs of $54 million in this segment, as we consolidate production and distribution assets, close high-cost plants, and reduce our workforce. In the Rest of the World segment, sales were $496 million, down 23% as reported and decreased by 20% on a constant basis. Sales in this segment declined more rapidly in April, but improved more quickly later in the quarter. Our operating margin, excluding charges, was 11.9% compared to 16.4% last year. The main drivers were lower volume and shutdown costs, partially offset by productivity and deflation. As we streamline our product offering and reduce staffing levels over the next few quarters, we will incur costs of $36 million in this segment. Our corporate and elimination segment had an operating loss of $10 million, and we are expecting a total loss for the year of $39 million. Jumping to the balance sheet. Cash for the quarter was $738 million and includes the remaining proceeds from the two bond offerings earlier this year, after paying down outstanding commercial paper. Receivables were $1.586 billion with days’ sales outstanding at 64 days compared to 59 last year. Inventories were $1.922 billion and dropped almost $450 million or 19% from last year as all businesses made significant cuts to their inventory. Inventory days were flat with last year at 126 days. Our fixed assets were $4.435 billion and included in the quarter, capital expenditures of $81 million, and depreciation and amortization of $154 million. In the second quarter, we cut our estimated annual capital expenditures by $150 million to $400 million. We're in the process of evaluating the amount going forward based on changing economic conditions. Our depreciation and amortization is estimated for the full year at $585 million. Going to long-term debt. The balance sheet and cash flow both remained strong with total debt at $2.7 billion and leverage at 1.6 times net debt-to-adjusted EBITDA. Our ratings all remain unchanged at BBB+ or Baa1. I will now turn the call over to Chris to go through the segment results in more detail. Chris?

Thank you, Frank. In the Global Ceramic Segment, all of our businesses around the world were impacted by government reactions to the pandemic. Within the segment, Southern Europe and Mexico implemented the most dramatic regulations, suspending commerce and our operations for extended periods of time. To improve our performance, we're reducing our cost and complexity and aligning production with demand while all of our businesses have improved; future demand is uncertain and we will respond as conditions change. In the U.S. Ceramic market, many of our retail customers were closed for some time, while construction continued in most markets. The Northeast and Midwest regions were most impacted during the period due to greater state restrictions. For example, our ceramic manufacturing in Pennsylvania was closed for an extended time along with most of our customers in that region. To manage the situation, we reduced costs across the business, including furloughs to decrease our overhead, cutting marketing activities, deferring product introductions, and controlling manufacturing and distribution costs. Demand increased faster than we anticipated and our inventories declined as we ramped up production. Presently, all of our U.S. plants are operating and our service level is improving. Our new click ceramic tile is being delivered to our customers and sales should increase throughout the year. Our new countertop facility in Tennessee has become profitable and will improve with higher volume and mix. We have begun producing higher value products with more stylized colors and veining. Our new B2B systems are making product selection, ordering, and picking up faster and safer for our customers and employees. We have implemented measures that exceed CDC guidelines to keep our workforce safe. Given pressures on the U.S. ceramic industry, we are consolidating manufacturing into our most advanced facilities and closing our least efficient assets. We are combining some of our sales service centers, where they overlap in local markets. With lower commercial activity, we are refocusing our sales efforts to broaden our position in new home construction. We are taking out lower volume SKUs to reduce complexity and improve our costs. We have made permanent staffing reductions to reduce our fixed costs and align with current demand. The Mexican economy has declined significantly impacting employment, retail, and construction. Our manufacturing operations in Mexico are currently running, but were limited during the second quarter under government orders. During this time, we were required to pay our workforce without any government assistance. All of those plants are currently running and most of our customers are open for business. To reduce our costs, we are rationalizing our current product offering and aligning our production and workforce with demand. As the peso has weakened, we're increasing our position in the premium market to replace imported ceramic and introducing promotional products to increase our sales. The Brazilian economy is contracting as the COVID pandemic reduces business activity. Interest rates are at historically low levels and government programs to stimulate housing sales are being introduced. Our sales are improving as retail stores reopened in Brazil's major cities. Our exports have expanded as the local currency has weakened. With inventories low, we're increasing our production to support local sales and improve our service. Our Southern European ceramic business was impacted during the period by severe lockdowns, especially within Italy, which was the epicenter of the COVID crisis. Both our customers and our plants were completely shut down for extended periods. Presently, we have limited cases of the virus due to safety measures in the local communities and our facilities. As the country has opened up, our sales dramatically improved. Our Eastern European operations were less affected and demand has improved significantly. Our European exports to other continents are down substantially as major projects have been postponed around the world. All of our plants in Europe are ramping up to satisfy demand and service levels should soon approach our target. Continued government subsidies are being used to manage our ongoing costs. We're introducing fewer SKUs this year and are paring down less productive ones. As with the last downturn, we anticipate higher rates of business failures in some of our markets due to their weak economies. In Russia, our ceramic business declined significantly when the country locked down. Our strong position in new construction and our owned and franchised retail stores provided us with better market access and benefited our business. Sales improved through the quarter and our plants are now operating at similar rates to last year. We are placing a greater emphasis on the new construction channel, which the government is supporting to stimulate the economy. Our Flooring North America segment sales declined substantially in April and then improved throughout the quarter as government restrictions were lifted and consumers started shopping and remodeling their homes. With most home centers remaining open, products such as our premium laminate outperformed as homeowners undertook new DIY projects. Our inventories declined as sales improved faster than our manufacturing ramped up. Many of our operations are facing challenges in increasing production due to local health concerns in our communities. To enhance the segment's performance, we're reducing our overhead costs and lowering our SG&A. We are taking out higher cost manufacturing assets and consolidating distribution points. We are streamlining our product offering and investing in more efficient assets to reduce costs. Our LVT sales improved as government restrictions were gradually lifted across the country. A significant part of our LVT distribution is through specialty stores, many of which were closed for periods of time. As our LVT sales improved in the quarter, we are increasing our production, though the spread of COVID is creating challenges. We have improved our manufacturing speeds and processes; however, our progress was slowed because European technicians were unable to travel to the U.S. We are upgrading our manufactured and sourced LVT offerings to provide enhanced visuals and features while reducing the complexity of our collections. In residential carpet, the new home construction channel performed best, with housing improving through the period. The remodeling category slowed as retail and installation activities were suspended in some regions. Our mix and pricing declined as the higher value remodeling channel was more impacted, and lower price polyester performed better. We are increasing our production to meet greater demand and improve our service levels. The commercial sector continues to be challenged as many businesses are postponing new investments. The education and government sectors were impacted less and the hospitality channel contracted the most. We're providing both virtual and local outdoor events to support architects and designers working remotely. We believe commercial projects will continue to be delayed and the sector will take longer to recover. Our rug business was severely impacted during April as many of our retail customers were completely shut down, and their inventories were not replenished. As the period progressed, home centers and mass merchants rebounded first as consumers used our rugs as an easy way to enhance their homes. E-commerce continues to grow and is important as a sales channel for our rug collections. We are increasing our production to improve our service and meet our customers' needs. Our laminate business outperformed our other categories as consumers increased DIY projects while at home. We're operating all of our laminate capacity to satisfy this increased demand. Our unique technology provides waterproof solutions and superior visuals as alternatives to other hard surfaces. We are expanding our laminate manufacturing to support our growing market and introduce the next generation of technology, which we are presently selling in Europe. Flooring Rest of the World results continue to outperform our other segments. We were able to take advantage of more flexible government support as well as cut our expenses across the business. Our laminate and LVT categories performed the best in the period. As LVT production in China has recovered, our patent licensing business has fallen. As we went through the period, we saw strong improvement in sales as stores reopened and replaced their inventories. In the segment, we have a much greater presence in residential remodeling, which is performing better than the commercial category. Our Australian and Russian businesses held up better than Europe due to different government approaches to the pandemic. Across the segment, we have reduced our overhead costs and are consolidating lower volume SKUs. We are now increasing production to meet emerging demand while protecting our employees’ health. Our laminate business outperformed our other products as our waterproof collections and new introductions are increasing consumer preference for our products. Through our internet presence, we're supporting our retailers by expanding their online sales. In Russia, our laminate sales declined less and we're increasing the plant’s production to satisfy demand in other regions. Our flexible and rigid LVT sales improved as we progressed through the period, as retailers reopened in our key markets. Our manufacturing plants were also impacted and are increasing production to satisfy growing sales. Our residential sales have recovered more than commercial sales, as businesses have deferred projects. In Europe, we manufacture almost all of our LVT, which is positively contributing to our results. We are continuing to modify our processes to expand our capacity, reduce our costs, and introduce new features into the market. In Europe, our sheet vinyl is sold primarily through retailers, and sales were significantly reduced by store closures, especially in France and the UK. As in other categories, our business has recovered, and we are expanding our production to satisfy our customers. In Russia, our new sheet vinyl plant contributed positively to our results, and we have broadened our product offering to increase our market share. Our insulation business was primarily impacted by COVID, with our markets in Ireland and the UK affected the most. When restrictions were lifted, the category rebounded in June as contractors completed projects already underway. We are expanding our customer base and the geographic reach of our products. Our wood boards faced similar plant disruptions, which impacted both our sales and margins. We introduced a new virtual showroom and developed specialty products to improve our mix. The start of our new waste-to-energy plant was delayed due to the pandemic and is in now full operation. The COVID crisis was handled differently in Australia and had a less detrimental impact on our performance. The Australian market has largely recovered and we are seeing improved residential carpet sales. Our European LVT collections were introduced during the period and are expanding our hard surface sales in the region. This month, we implemented pricing increases in Australia to offset cost increases. New Zealand's government enforced one of the most comprehensive lockdowns in response to the pandemic, resulting in significant sales declines during the quarter. New Zealand's economy is now open and the virus is currently contained and our sales are improving. Now I'll return the call back to Jeff.

Thanks, Chris. Since April, we've seen substantial improvement in all of our segments and markets. The residential remodeling and new construction channels have recovered more than commercial, where businesses are maintaining a cautious approach to investment. Some areas, particularly in the U.S., Brazil, and Russia are experiencing an increasing level of COVID cases, which are impacting our operational costs and production levels. Across the business, we’re decreasing costs by rationalizing assets, minimizing SG&A, reducing our workforce, and managing our product offering and working capital. Much uncertainty remains around all of our markets regarding government policies, business confidence, and consumer spending. Our sales in July were approximately flat compared to the prior year, but we cannot predict how sales will evolve going forward. Given this, we are unable to provide guidance for the third quarter, though we anticipate a significant improvement in our results from the second quarter. We managed through the challenging second quarter while generating significant cash flow, strengthening our balance sheet, and issuing over $1 billion in bonds. We're taking substantial actions to navigate the changing environment and position Mohawk for the future. We’ll now be glad to take your questions.

Your first question comes from Keith Hughes with Truist Securities. Mr. Hughes, your line is open.

Yes. Thank you. In the second quarter, the reduced capacity was a big hit, obviously, in the number, second largest. What do capacities look like for the third given what you've seen in July? You can do that in dollar to year-over-year, whatever the best way to describe it.

Sorry. The question was what's the capacity?

Yes. I mean, what kind of capacity rate, I mean, are you running at? You cut a lot in the second quarter to get inventory down. What's it going to look like in the third compared to second?

In the third quarter, we're running the business at a much higher rate than we were. We're actually trying to increase the inventories because they decreased too much, but we're having difficulties getting them up given the labor issues, vacations in Europe, and other things. So they're going to run at much higher rates.

Will you equal the rates in the third quarter of last year?

It depends on business sector pieces. They're all over the place.

One of the end markets, Keith, is not performing as well as you know was commercial. So to the extent, we've got commercial capacities to be running at lower rates than the others.

And I guess final question, can you talk on the intro about margins being up in the third from the second, but down year-over-year? Is capacity curtailment the major driver or why it's going to be down year-over-year, or is it something else?

We've got several things that we think are going to be impacting us. We'll have pressure on pricing and we're going to have pressure on product mix. Volumes are also going to be an issue for us. And I think like Jeff mentioned, even as we're trying to get our inventories up now, we are going to have higher manufacturing costs due to COVID labor issues and shorter product runs as we try to rebalance our inventories.

Your next question is from Justin Speer with Zelman Associates.

Thanks, guys. Just one quick question on the trends. You mentioned flattish trends in July. Are there any major distinctions by the segments? Or are they all kind of trending similarly into July?

Yes. We said July was basically flat compared to last year and improved more than we had anticipated. Overall, Rest of the World did better than the other two categories – other two segments.

And then the other thing, just in terms of the phasing of the benefits to profits from the restructuring efforts that you've already taken, how should we think about that phasing in the back half? And then as we think about, I know that you mentioned annualizing it in 2021, but in the back half that should be an offset, I would assume to some of the other headwinds that you're seeing, but you're saying that the other headwinds will be more than that?

Sorry, your question is on the savings, how are they going to phase in? Was that your question?

Right. And so – I’m just kind of following on Keith's question about the year-over-year change in margins. They may be pressured from some of the actions, labor issues, shorter productivity runs. I guess those will not – those will more than offset any kind of benefit from the phasing to restructuring. I was just curious if you could quantify some of the tailwinds from just the restructuring efforts that you announced and took – the $100 million charge that you took in the second quarter.

Yes. What happened? We started out with basically on our experience from 2008 and 2009, we decided that if the business was going to slow down, we're going to take more aggressive actions earlier to improve our position. With that, we’re cutting SG&A, reducing the workforce, we’re streamlining our product offering, we’re closing less efficient plants, and investing more in efficient assets, which we got to the $110 million to $120 million of savings. It will take through next year to complete those and capture the full benefit. The manufacturing savings, don't forget, will have to flow through inventory, which will be three to five months later depending upon what it is and where it is. We estimate just at a really high level that the savings will range from about $15 million to $25 million per quarter until we achieve the results that we expect. And then just as a comment, remember that the margins for everything are really dependent on the future sales, and in the short-term COVID affecting it, and we're really not sure where they're going to be.

Well, that makes sense. And if I could sneak one more in on this subject, just thinking about the broader trends, thinking about the actions that you're taking in terms of capacity rationalization, I guess how much of your non-LVT businesses are going to be rationalized from these efforts? And are these adjustments just reconciling for the relative share loss to LVT that's already taking place? Or are these accommodating for maybe potential further erosion to LVT in the future?

We are setting the business up at a level we think that it will be – needed to be at for the future. We've made the adjustments in the ceramic capacities. We’ve consolidated some of the higher cost assets in the Flooring Rest of the World, I mean, in the Flooring North America. And then we've taken costs down in every part of the business in every segment, anticipating that it's not going to be a V straight up and stay there.

Hey, thanks for taking my questions. A question – the first question is really around from a channel standpoint in the U.S. Can you remind us how much of your business goes into specialty and – both in Flooring North America and Global Ceramic? And then given the relative restrictions on specialty versus home centers in the quarter, how do you think about the share shift dynamic and whether or not that's just kind of accelerated share shift towards home centers over the medium-term, or whether your specialty channel can kind of play catch up to that?

You asked a lot of different questions. The specialty channel, the home center channel in most of the markets stayed open through this piece. So what happened is as the specialty stores were shut down and the only place for customers to buy our products were in the home centers in many markets. Over the period, that changed. So that's a temporary change in the business. In total over the past 15, 20 years, the home centers have continued to expand their participation in the market and take share, and it's different by product categories. The larger the category is and do it yourself and/or some other different contracting businesses depends on where it ends up and which channel it’s in. So I don't see this being a significant change in the short term, but just a same continuation they had been on.

Okay. Got it. Thanks, Jeff. And second question, just back on the restructuring. I understand there's been spare capacity and then probably some underperforming SKUs in terms of things that are getting either consolidated or rationalized. Is there any sales impact we should be thinking about though, when you take out this much capacity and you take out some of the SKUs? Do you think there is a corresponding sales impact? Or is this really – you're going to be able to replace any lost sales with other kind of productivity measures?

We're being more aggressive in getting rid of low-volume SKUs. We have alternatives to the products to offer the customers, but there's always risks of trying to transition one to the other. The goal is to end up with more businesses with a more consolidated offering.

Two questions. First of all, throughout the segment you talked about price and mix pressure. Curious if you could just expand on that a little bit, where you're seeing that and what is driving that, and then also the kind of ongoing outlook for price and mix?

It's occurring in all of the different categories. First is that commercial businesses tend to be higher margin than the residential businesses. The commercial businesses have taken a bigger hit and are coming back slower, and we're not sure how they're going to evolve over time. Within the other pieces in the more promotional products tend to sell more than the other during downturns because the higher-end shops and stores that sell them, the people that had it pulled back in the market more. We're going to have to see how that evolves going forward. It's a little early to tell what the – if it's going to be a permanent change or not, we're just assuming that the market's going to be more difficult and we're going to have to respond to competitive positions all around the world.

And then going forward, I mean, as we've said numerous times, we have a really hard time looking out beyond just a few weeks in this environment, but we would anticipate that we will continue to see price mix pressure going forward through the rest of this year.

And then a follow-up on restructuring. It sounds like you've outlined a good program. I'm just curious when considering what's taken place in the industry, especially in the U.S., for the last number of years and the contraction and operating profit of the company in total, if you had considered a larger program aimed at generating more cost out, more cost savings? Or is that just unreasonable with how the business is set up or how you view the market? Just curious if there was a program that could have netted $200 million or $300 million of savings, or if that's just not reasonable?

It all starts with how you perceive the market's going to be in the future and what you need to satisfy it. At the moment, we believe that the changes we made are set up for how we believe the best guess that the business is going to be for the next few years, but we'll have to see what happens.

Hey, thanks for taking the question. There’s a lot of discussion around the costs that are being cut, but I think, Jeff, you mentioned in the opening remarks that $1 billion in bonds that there were some intention around strategic investments there. I guess just if you could outline some of the areas that are sort of top of mind for investment?

We're always looking at acquisitions to go through. At this point, it's a little hard to aggressively do acquisitions given that you don't know the environment in cases, but we're always talking to different people on acquisitions. On the business, we're trying to minimize the capital investments for the moment, but we believe there will be greater visibility in the not distant future, and we'll start changing it. If you go back a month and a half ago, the directive was stop everything that you could stop. And we really haven't moved from that at this moment, but we're trying to decide what it should be. And every week we get a better view of the market and what we should do.

Well, what we're seeing in the U.S. Ceramic, just like the others: commercial is slowing. They are finishing existing projects, but we anticipate that slowing. But we also think there's a significant opportunity in remodeling and new construction. So we're taking advantage and moving our sales and assets in that direction.

All right. Thanks. Good morning, and it's Mike Rehaut. Thanks for taking my questions. So I just wanted to circle back for a moment to the cost savings. And I believe, Jeff, you had said or Frank that you were kind of looking at a $15 million to $25 million a quarter. I wasn't sure if that was something that you would expect would kick in in the third quarter. Obviously, you talked about there being a lag in terms of the manufacturing benefit that we might not see that impact until, let's say, the first quarter of 2021. I was just really hoping to get a sense of, of the $110 million or $120 million of overall annualized savings, how much is expected to be realized in 2020 and specifically 3Q and 4Q? Thanks.

We're expecting, like Jeff said, to average between $15 million and $25 million of savings a quarter. We're expecting to start realizing savings in the third quarter. But we're also saying that, as we go forward, we expect that margins are going to be impacted by volumes still. And that's a big question mark, right, in terms of how the volume returns or not, as well as short-term labor impact from the COVID virus, how that might impact the workforce and productivity as we continue to rebuild our inventory and get it back to where it needs to be.

Your next question is from Stephen Kim with Evercore ISI.

Thanks very much, guys. Just wanted to ask a question longer-term about Flooring North America, I guess that's a start. I was a little surprised that you mentioned that the improvement you did generally better than you expected, mostly it sounded like in Flooring Rest of the World not Flooring North America. So I just wanted to clarify, did the USA operations in general exceed your expectations as well? But a more longer-term question about margins in Flooring North America, one thing that investors are concerned about is the idea that FNA margins are maybe artificially high a few years ago as inventories were rising. And maybe there's a fear that some of these lower margins that we're dealing with more recently are more reflective of the margins going forward, but obviously, there's a lot of near-term things that are weighing down the market. And so I'm wondering what you think the longer-term margin structure in Flooring North America looks like? Is it reasonable to think we can get back to where we were a few years ago, mid-to-high teens or once these discreet challenges are behind you? Or do you think that the longer-term margin structure is maybe a little lower than it was at that time?

Well, let's start with the first question, which was what's different in our projection. Everything, I mean, we were projecting the market to be much more difficult and not to rebound as much as it has to. On our pieces, we were preparing for a much longer slower recovery than we've seen at this point. Now, how it's going to go on from here is anybody's guess, isn't it? So that's the first one. The Flooring North America, we changed management a little over a year ago, we're continuing to put different processes in place to improve our operations and run them better, improve our margins and profitability in the business. And we have a huge amount of activities going on to do that, we expect the margins to improve. We'll see how far we can get them.

Good morning, Jeff. Good morning, Frank. How are you?

Good morning.

Good.

Two questions. I'd hope they're quick. So I'll be allowed to ask them. In light of your being under inventoried at the end of the second quarter, I'm guessing that included stock-outs. So your July sales results being flat, I'm wondering how much of a benefit July saw from shipping unfilled orders from Q2 and how much of it really is truly current demand. I'm trying to get a sense of the sustainability of that July trend?

The order backlogs are still simply – we haven't been able to push the backlog down because the sales have been going up. So we still need to get the inventories up and we haven't gotten them up high enough to achieve the service levels we want on one side, but going back to the prior comments we're not sure how much of this is a bubble from before and how much is inventory in the channels. So to answer your question, we need both of those and we don't have it.

And my last one would be, given FIFO should we expect input cost benefits to accelerate going forward in the P&L?

I'm not sure they're going to accelerate. We're going to continue – when you say input cost, you mean depletion materials?

Yes. The benefits from input costs, yes.

Yes. I think we will continue to see benefits going forward, but I wouldn't say they're going to move – benefits are going to increase sequentially. And some of the businesses in different businesses the price mix is offsetting the decrease in raw materials in many cases.

Hey, good afternoon, everyone. I'm just curious where are you if your journey optimizing your LVT facilities in North America, in terms of breaking even? It looks like the exemptions on imports are at least going away for now. Do you have that ability to kind of meet that demand as your capacity ramps up this back half, is that a nice windfall for you guys?

Let's start. What he's talking about is there were duties on click LVT that were withdrawn a year ago for a year. I think it was yesterday, the government has reinstated the duties on those products. With that, what we think is going to happen is the reverse of what happened last year is that the industry will have to increase prices to cover the tariffs, which would increase the value of our manufacturing as we go through. With the businesses, the European operations are ahead of our U.S. operations in their improvements. The European operation is profitable today and it's going to continue to improve as we continue to enhance the operations and tech costs out. The U.S. improvements are following, but again, I think we said it before, we expect to have multiple engineers over here all through the second quarter helping the group do the same thing we've already done. I don't know if you know that you can't travel between the two, so all of that's been postponed, but we are with or without increasing the production speeds and processes and all of them, and at the same time, we're introducing new products and styling to help the businesses we go through. So I think it should help us. I think we're getting better at it and we're turning the corner.

Hey guys. Good morning. I just had one question on ceramic. Is there a way just with the restructuring that you could frame for us in maybe percentage terms, the structural capacity that you’re reducing within the ceramic business?

Yes. We're only reducing capacity in the U.S. We're taking out our least efficient assets which is about 10% to 15% of the total and that'll improve our costs, but yet support our future needs.

Thanks for taking my question. It's about a disclosure in your 10-Q, that says that earlier this week your audit committee completed an investigation of certain allegations. Is it fair to say that if material restatements were deemed necessary, those would have been taken in this quarter or is that the wrong read?

You know, like we've said earlier in my intro, we outlined basically what we could say and talk about with regards to that. You're asking if the financial statements are correct. Yes, the financial statements are correct. But beyond that, with regards to the investigation like I said, we really can't comment.

Understood. Then if I can get a quick follow-on onto a previous question, have you disclosed the utilization rate in your LVT plants in the U.S. right now, just give us a sense of how much volume you can serve as hopefully demand picks up there?

We haven't, but what's happening is the capacity is increasing as the productivity and efficiencies are going up. So we can service business significantly greater than we have.

Thank you. Good morning. My question is around the mix shift. You commented that you're seeing that as an ongoing pressure in the business. But in the U.S., as we have seen that consumers are perhaps shifting some of their spend more to home improvement. How are you seeing that? That's driving any benefit in terms of the mix? And then I guess when you kind of think about the mix shift that you are seeing there, how does that compare to past recessions? And how much of that is due to maybe underlying shifts in the industry as we've gotten this growth in LVT and some of these newer product categories that have come through?

Each different product category is different from each other. And carpet is an ongoing trend of polyester selling more. You also have a mix in channels, so the home builder channel, the new home construction channel is a lower mix than our retail channel. So as retail didn't do as well as the new home construction that also impacted that you go through. So there's channel mix as well as customer mix going on. In the different businesses – they're all different, in my ceramic business and my laminate business, we basically participate in the mid-to-high end of the business, and it's growing in its use as alternatives to other hard surfaces, it's being used in both the retail and the new construction business much more so and our products are outperforming in those creases. The ceramic business, the mix has decreased somewhat because some of the product categories are impacted by LVT using some of the higher-end stuff. And then you have the commercial mix, which is much higher than all the businesses in it. So there's product changes, consumer changes, and channel changes all at the same time.

Hi, thank you for taking my questions today. Just on revisiting the news from yesterday on the tariffs. If you could give a little bit more clarity in terms of, are there any timeframes? So in other words there's certain tariffs that have a certain end date to them, is this – as we know indefinites and then what does this mean more specifically for your operations, not just in the U.S. but also in terms of global sourcing? Thank you.

The tariff that – there were tariffs put on originally 25% on all products. A year ago, they took the tariffs off clip LVT only and they did it for a one year period and it came back for renewal. The renewal was turned down, so the 25% starts, I don't have the date in front of me, I don't know if it's today, yesterday, it may start today. I'm not sure and so we all have to start paying it and then we're going to have to get the prices up in order to cover it. I'm not sure I've got the whole question.

It really is a stair stepping in terms of you answered one part, but then the second is, what's the real impact? And you have some good precedents from previous tariffs in terms of your expectations and how it will impact that particular product category and profitability.

Well, when the tariffs went down, the industry dropped prices somewhere in the 15% to 20% range. So I'm assuming that the prices are going to go up in the 15% to 20% range. And anytime, anything that we're manufacturing outside of China will be better off than it was before.

Hi, good morning guys. Thanks for taking my question. So your CapEx you guided toward $400 million which you said you're evaluating, I think a portion of this, you have capacity projects that are probably partially unfinished in your pipeline. Just how much additional capacity you think you're going to bring online in the back half of the year and into 2021? And can you just remind us what products those are in possibly geographies?

We stopped all increases in capacity when this thing started. So whatever was already started, we continue. The biggest one that I remember off the top of my head is we are expanding our laminate production in the United States with a new production line, with new capabilities that will be in next year. We're running all of the capacity that we have now and we're looking at importing some from our overseas businesses to support the business in the short-term. As we had some capacity increase this year in the Russian business and I think there was a Russian ceramic business, and I think there was some in the Eastern European ceramic business, both of which are running at fairly high rates and we expect to use them all in limited ways. The bigger pieces were new businesses, so we said that the sheet vinyl business would put a new line in Russia, it turned profitable. And the LVT lines in Europe have turned profitable. The carpet tile lines in Europe, we are investing all the cash we have and we're investing back and expanding our sales force to expand the distribution of it as we speak. And then going forward, we're going through a strategic planning process now to determine what the right level is and where to invest in. I'm assuming most of its going to be in enhancing the product mix and enhancing the product offerings with new features and benefits versus large capacity expansions at this point.

Thank you for your questions. I'll now turn the call back over to Mr. Lorberbaum for closing comments.

The business in the environment has gotten much better than we expected. We're taking the actions to manage through the changing environment. We're continuing to manage our cost structures and we'll continue adjusting as needed. Thank you for your time and joining us today.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.