Good morning, my name is Alan and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries’ Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. As a reminder, ladies and gentlemen, this conference is being recorded, today Friday, 28 July, 2023. I would like now to introduce Mr. James Brunk. Mr. Brunk, you may begin your conference.

Thank you, Alan. Good morning, everyone. Welcome to Mohawk Industries' quarterly investor conference call. Joining me on today's call are Jeffrey Lorberbaum, Chairman and Chief Executive Officer; and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's second quarter performance and provide guidance for the third quarter of 2023. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include a 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 that, I'll turn over the call to Jeff, for his opening remarks.

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

Thank you, Jeff. Sales exceeded $2.9 billion for the quarter, a 6.4% decrease as reported and 9.6% on a legacy and constant basis, as global inflation and higher interest rates significantly impacted the flooring industry volumes, especially in the residential remodeling channel. Our Global Ceramic business has the strongest year-over-year sales performance in part due to a greater exposure to commercial and new home construction which outperformed residential remodeling. Gross margin for the quarter was 24.8% as reported and excluding one-time items was 25.9% versus 27.7% in the prior year. The year-over-year decline is due to softening volume, temporary plant shutdowns, unfavorable price mix, higher inflation, and the net impact of FX, partially offset by productivity gains. The actual detailed amounts of these items will be included in the MD&A of our 10-Q, which will be filed after this call. SG&A expense as a percentage of sales was 19.6% as reported, and excluding one-time items was 17.6% versus 16% in the prior year. The increase in SG&A expense was primarily attributable to higher inflation than the net impact of acquisitions, partially offset by productivity gains. Operating income as reported was 5.2%. Restructuring, integration and other items were $91 million for the quarter, comprised of legal settlements and reserves as disclosed in our quarterly filing, costs associated with restructuring actions announced in 2022, and acquisition and integration costs, primarily for our ceramic acquisitions in Mexico and Brazil. Also in the quarter, we have taken additional actions across the enterprise to lower our costs and strengthen our results. The total cost of these actions is $17 million for an annual savings of approximately $35 million once completed. Operating margin excluding charges was 8.3% for the quarter. The decline year-over-year was primarily driven by the lower sales volume and higher inflation, along with temporary plant shutdowns, negative price, mix and the unfavorable net impact of FX, partially offset by productivity gains. Sequentially though, we saw significant margin expansion, as seasonal volume helped strengthen our quarterly sales and reduce our manufacturing shutdowns. And lower costs, especially in raw material and energy, combined with increased productivity, offset weakening price and mix. Interest expense for the quarter was $23 million increasing from the prior year, mainly due to the higher interest rates. Non-GAAP tax rate was 19.5% versus 22% in the prior year. Our forecast in Q3 tax rate is between 18% and 19%, and the full year rate is forecasted to be 19% to 20%. Earnings per share as reported were $1.58 and excluding charges were $2.76. Turning to the segments. Global Ceramics segment had sales just shy of $1.2 billion, that was basically flat as reported, and a decrease of 6.7% on a legacy and constant basis. Weaker volume and unfavorable FX were only partially offset by positive price and mix. Compared to the prior year, our business in the U.S. held up the strongest in the quarter led by its performance in commercial and new construction. Operating margin excluding charges was 8.6%, as higher interest rates and inflation are impacting the flooring industry across our regions to varying degrees, leading to lower volumes and increased plant shutdowns, partially offset by productivity gains, positive price mix and the favorable impact of FX. Turning to Flooring North America, sales just exceeded $1 billion that was an 8.9% decrease as reported and 12% on a legacy basis, especially in the residential remodeling channel, and negative impact of price mix along with the lower volume. In the quarter, the year-over-year weakening conditions were felt the most in our residential soft surface businesses. Operating margin excluding charges was 6%. As current economic conditions, with reduced inventory volumes and increased competition is driving negative price mix, lowering sales volume and creating more temporary plant shutdowns, partially offset by decreasing input costs. It should be noted that sequentially, we saw strong margin expansion in both Global Ceramic and the Flooring North American segments. Lastly, Flooring Rest of the World, sales is just over $790 million, that's an 11.4% decrease as reported and 10.2% on a legacy and constant basis. The decrease was primarily attributable to lower volume, negative price mix and unfavorable FX. The weakness in residential remodeling was felt the most in our laminate and wood businesses. In addition, our insulation and panels business was negatively impacted by the deferral of new projects. Operating margin excluding charges was 12.1%, as consumer spending in our category has not improved at this point and market competition increases, we are negatively impacted by the lower volume, temporary plant shutdowns and unfavorable net impact of FX, partially offset by productivity gains. Corporate and eliminations was $12 million for the quarter, and on a full year basis, corporate expenses should be approximately $45 million. Turning to the balance sheet, cash and cash equivalents were $571 million for the quarter with free cash flow of a $147 million in Q2 versus a use in the prior year. Free cash flow year-to-date is over $275 million. Receivables were just shy of $2.1 billion, with a DSO of 58 days versus 56 in the prior year and prior quarter. Inventories for the quarter finished at just over $2.6 billion and excluding the impact of acquisitions, inventories decreased $277 million versus Q2 of 2022. Inventory days are at 120 days versus 116 in the prior year, but have decreased from the 128 days in the prior quarter. Property and plant and equipment is just shy of $5 billion. Q2 CapEx was $117 million, with D&A of $157 million. For the full year, our forecast includes CapEx of approximately $600 million with D&A of $595 million. Finally, gross debt finished just shy of $3.1 billion with leverage at 1.8x adjusted EBITDA. This provides us the flexibility and strength as we look forward to the rebound in our industry. Now, Chris will review our Q2 operational performance.

Thank you, Jim. Our Global Ceramic segments result improved from the first quarter with increased sales, higher production and lower energy costs. Around the globe, high interest rates and inflation are reducing housing sales and remodeling investments to varying degrees based on local conditions. We believe that most of our customers have now aligned their inventory levels with market conditions. Our asset utilization remained low with compressed demand and we further reduced our inventory and working capital. Our P&L benefited from lower materials and energy flowing through the inventory. This reduction was partially offset by greater market competition and lower mix which impacted our selling prices. While energy costs around the world have substantially decreased, they continue to be highly volatile. In our acquisitions in Brazil and Mexico, we are realigning the organizations, defining new sales and product strategies and executing cost reductions. Our U.S. Ceramic business benefited from greater participation in the commercial and new construction channels, enhanced styling, and more consistent service. As energy and freight cost decline and industry volumes weaken, the market is becoming more competitive. We are introducing higher style products to improve our mix, and are focusing on stronger sales channels. We've expanded our customer base, which is helping to offset the weakness in residential remodeling. In the quarter, we further reduced our inventory while maintaining high service levels. The decline in energy prices will improve our cost as it flows through our inventory. We have taken cost reduction actions in response to increased competition and other inflation. As we prepare for the start of the additional countertop capacity, we are enhancing our product portfolio, and expanding our kitchen and bath channel with complementary tile and countertop selections. Our ceramic business in Europe remains under pressure as residential remodeling remains slow. Our volumes in the quarter improved sequentially, and our results benefited from sales of premium residential collections, commercial products and exports. Competition is becoming more intense in all channels due to low industry volume and declining energy prices. We are adjusting to the changing environment and using promotional activities to deliver additional volume. To utilize our new porcelain slab capacity, we are broadening our portfolio with innovative visuals and will manufacture products we have been outsourcing. We continue to focus on cost containment, including overhead reductions, productivity projects and alternative formulations. As with our other regions, our Latin American Ceramic businesses are also being pressured by higher interest rates, which have compressed residential remodeling. We are making progress integrating our existing businesses and new acquisitions, and we have begun to leverage sales of our total product portfolio to expand our distribution. The combined synergies we are realizing are partially offsetting the weakening market conditions. By the end of the year, we should complete the migration of our acquisitions onto our existing information systems, which will facilitate further sales and cost opportunities. Of the two regions, Mexico is performing better due to the economy and lower interest rates, while the Brazilian Ceramic Industry is now being more impacted by economic conditions after holding up longer. We are taking additional sales and operational actions to manage the softening environment. The Brazilian government has recently announced that it will subsidize low-interest rate mortgages to support new home construction and help the economy. Our Flooring Rest of World segment continues to successfully manage a difficult environment. Consumer spending has not improved as we expected, confidence remaining low given inflation, higher interest rates and the war in Ukraine. Sequentially, our sales volume and production rates improved from the first period. With low manufacturing utilization and declining input costs, industry pricing and mix continues under pressure. During the quarter, energy and raw material costs declined, partially offsetting weakening conditions. To manage lower volumes, we're pursuing additional sales, reducing costs and aligning production with demand. The segment's third quarter is seasonally impacted by extended vacations which will reduce our sales and earnings in the period. Our flooring sales are under pressure our sheet vinyl collections are outperforming as consumers trade down to lower price alternatives to minimize project costs. To meet rising demand across our regions, we are increasing our sheet vinyl production. The integration of our Eastern European sheet vinyl acquisition has significantly progressed. We have enhanced its offering with higher performance products, sped up its operations and added another manufacturing shift to support growing volume. We are managing the production of laminate and LVT to align with present demand and are introducing new products, merchandising and specific promotions to expand sales volumes. We have begun to transition our residential LVT offering from flexible to rigid cores and are executing the previously announced restructuring to support this conversion. In our panels business, fewer projects are being initiated and industrial use has decreased due to slower market conditions. We are increasing sales of our higher-margin decorative HPL products as we expand our customer base. Our plant utilization remains low and our selling prices are declining, partially offset by lower material costs, improved productivity and our green energy production. We have made considerable progress integrating our small board and mezzanine acquisitions including enhancing their operations, aligning sales strategies and combining administrative functions. Long-term prospects for our insulation business remain strong, supported by increasing energy conservation and government regulations. Presently, demand is declining as residential and commercial investments are being deferred and new industry capacity is increasing competition in some of our markets. Industry pricing is declining as input costs fall and we are reducing expenses to adjust market conditions. Similar to our other regions, the Australia and New Zealand housing markets have softened due to inflation and higher interest rates. Our results for the quarter were impacted by lower volumes and mix in our residential channels, and we are introducing new products and selective promotions to increase sales volume. Our commercial sales in New Zealand were stronger and we are leveraging our innovative collections to capture larger projects. Our Flooring North America segment has faced the same challenging conditions, as inflation, high interest rates and more conservative lending practices have impacted the U.S. housing market and our industry. As we anticipated, the segment's margins sequentially expanded in the quarter due to seasonality and lower costs flowing through the inventory. To control costs, we have enhanced productivity, streamlined administrative functions and initiated restructuring actions. With weak residential remodeling and softer mix, retailers continued to tightly manage their inventory levels, further impacting demand in the quarter. With energy and raw material costs declining, market competition is increasing. New single-family home starts have begun to increase with some builders subsidizing interest rates to attract buyers. In retail, we are providing new product options to trade up consumers and value alternatives for those with budget constraints. To increase sales, we're initiating selective promotional activity, enhancing our product offering and introducing more consumer-friendly displays. The U.S. commercial sector has proven more resilient as businesses continue to invest in new construction and remodeling projects. The July Architectural Billing Index reflected a stable environment for new projects. We are experiencing some mix pressure in commercial, as customers seek to maintain budgets. The Hospitality and Main Street channels performed best in the quarter and we expect our participation in the Healthcare channels. Our unique products which are certified carbon neutral are growing as they deliver superior performance with a negative carbon footprint. Our commercial accessories acquisition is performing well as we leverage our relationships to enhance its product sales. Mohawk is the leading producer of premium laminate due to our more realistic visuals and waterproof performance. We continue to see a broader adoption of our RevWood products in both retail and builder channels. We have increased the offering of our revolutionary Signature Technology, which enhances the richness of our Pergo and Karastan collections. We are aligning production with current conditions, implementing cost reductions and managing pricing and mix to optimize our results. In residential carpet, we've seen a sequential improvement in sales and production along with the decline in input costs which improved our margins from the first quarter. We have enhanced our luxury Karastan and Godfrey Hirst collections and are providing retailer incentives to grow volumes. Our expanded solution-dyed polyester carpet portfolio is increasing our position with multifamily developers and single-home builders, negatively impacting our product mix. We have integrated our recent non-woven acquisition and are improving its sales and operations. With the decline in ocean freight costs, market pressures for LVT are increasing and the U.S. Forced Labor Protection Act is impacting some shipments. Higher-cost inventory reduced our margins as we adapted to the changing market. Our new rigid LVT introductions with updated visuals, WetProtect and antimicrobial technologies differentiated us in the market, and our sheet vinyl sales rose as consumers selected more affordable options. Our West Coast LVT plant will continue to ramp up throughout the rest of the year. With that, I'll return the call to Jeff.

Thanks, Chris. Our second quarter performance reflected the positive impact of the many initiatives we're executing across our business. We're managing the current market conditions while preparing for the rebound in demand that follows cyclical downturns. Central banks have raised interest rates to reduce inflation and are signaling additional rate hikes are possible. In the U.S., we have seen a rise in builder confidence and housing starts which will increase our residential new construction business. We expect the commercial sector to outperform the residential category through this year, even with continued weakness in the office category. Though employment remains strong, remodeling and existing home sales are being delayed due to limited housing availability, higher interest rates, and inflation. Historically, when the economy recovers, these postponed remodeling projects fuel greater industry growth. Our new restructuring initiatives could save $35 million per year, and our recent acquisitions will add greater benefit to our results as we optimize their performance. In this competitive market, we expect continued pressure on pricing and mix, partially offset by the flow through of lower material and energy costs. Our third quarter seasonally weakens due to summer holidays, lower consumer spending and lower production in Europe. Given these factors, we anticipate our third quarter adjusted EPS to be between $2.62 and $2.72, excluding any restructuring, acquisition and other charges. At Mohawk, we are taking the necessary steps to manage today's challenges while preparing for tomorrow's opportunities. When central banks shift their focus to a more balanced approach, our business will accelerate as the industry recovers. In all our regions, housing is in short supply, aging homes are in need of remodeling, and businesses will invest to grow in more favorable conditions. These factors will create higher growth for flooring, and our investments in capacity expansions and our recent acquisitions will further enhance our results. We'll now be glad to take your questions.

Your first question comes from Philip Ng of Jefferies. Go ahead.

Hey, guys. Jeff, you've been in the business for some time now. You've talked about potentially on the R&R cycle turning. Any color on the bidding activity you've seen through the last few months? And then when you looked at past cycles, what are some of the things that you're looking to kind of inform your view that it's inflecting? Is that existing homes turning, rates coming down? Any color on that front, would be really helpful.

As we navigate through these downturns, all activities tend to be delayed. Our flooring products don't require replacement due to wear or damage, so when consumers feel uncertain, they postpone their purchases. However, this cycle isn't like the previous ones. We believe that when central banks adopt a more balanced approach, there will be an influx of pent-up demand from these delayed purchases, leading to increased sales volume. Concurrently, the product mix improves as retail sales rise, resulting in higher margins since customers tend to choose more valuable products. This improvement will further enhance as asset utilization increases, lowering the cost per unit while expanding margins simultaneously. We are also confident that our new investments and expansions will enable us to grow our most promising business categories. Additionally, we expect that our upcoming acquisitions will help us better position ourselves as we emerge from this phase, with integration likely occurring around the time things begin to stabilize. Therefore, we remain optimistic about the long-term outlook.

Got you. Have you seen the order activity for the R&R side of things at least flattened out here or it's still TBD?

We're hoping it's at a bottom, is that consumers when they have inflation and they start to manage their budgets again, our category is more postponable the most. So, we're hoping it's going to get better, but I can't say that we've seen it yet.

Yes. If you look at also the sales inventories in the channel, across our region, customers did reduce inventory and did become more conservative. We believe most channels have largely aligned with the current conditions.

Okay. That's perfect. I would jump to my next question. It sounds like inventory is flushed out with the channel. What about your inventory? Is your inventory at a good spot? The reason why I asked is because you started curtailing production pretty heavily last year and you're starting to lap that. It was a pretty negative headwind. So, does that flip positive? Are you at a pretty good spot? Any color there would be really helpful.

So, from a year-over-year perspective, you heard that certainly inventory is down for the quarter. What is key to us is sequentially from Q1 to Q2, the inventory decreased about $110 million, about 60% of that was volume and 40% was the lower cost. We do anticipate further inventory decreases this year, certainly depending on demand and inflation, but what we're doing is we're keeping the inventory low you get better churn and the plant operations, which helps with that unabsorbed overhead.

Okay. But you're still curtailing production in the back half. Is that what you're saying, Jim, on a year-over-year basis?

Yes, if you look at, you’ve to consider the seasonality as well. So, you have certain shutdowns in the third quarter mostly associated with Europe and the shutdowns. And then obviously in the fourth quarter, you will also have a shutdown associated with holidays. Now, in the fourth quarter though, we would expect that the shutdowns would be less than in the prior year.

Okay. Thank you. I appreciate the color guys.

Our next question comes from Keith Hughes of Truist. Go ahead.

Thank you. You've made some comments on Europe on pacing in demand, I might be confusing the geographies. If you could just go back over where you think particularly European consumer demand is trending during the quarter and then here in July?

We had expected when we came out of the first quarter that the decline in energy prices which was a huge burden on the consumer that we had expected it to come down and that consumer would be positively impacted. At this point, we haven't seen the demand in flooring reflect that. Like here, there are more vacations being taken and other things experiences they're doing. But in our category, we haven't seen an improvement yet.

Okay. And you've talked about lower input costs, lower energy costs. Are you seeing any more sequential declines as we head into the second half of the year on those costs?

So Keith, if you kind of step back sequentially, if you look Q1 to Q2 inflation or deflation, was about $55 million from Q1 to Q2, which offset the reductions in price and mix of about $36 million, which helped us expand the margins as the cost declined. Now I would expect to see as we go through the second quarter to third quarter also that same phenomena of lower input costs, lower inflation helping offset the price mix again from a sequential standpoint.

Okay. Thank you.

Our next question comes from Eric Bosshard of Cleveland Research. Go ahead.

Thank you. First of all, if we could just circle back on that comment, the path forward on cost getting better and price getting worse is, did I interpret what you just said to say that the savings in inputs more than paid for the impact or pressure from price mix, am I saying that right?

Yes. I was focused on the sequential changes from Q1 to Q2, and we expect the same to occur from Q2 to Q3. This year is interesting because sequential changes are actually more significant. You can observe that the quicker flow through is due to lower cost materials and energy offsetting the pressure on price mix.

Okay. And then secondly, I guess related to that and somewhat answered within that statement. Jeff, you talked a good bit kind of globally about price mix pressure either related to demand or influenced by what's going on with inputs? In terms of what you're seeing from consumers or your customers, is that path a steady one per the comment that was just made? Is it increasing? Is it stabilizing? Just trying to figure out what the slope of that curve looks like.

I mean, it's being caused by the low utilization rates, in a different depending on geography and product category. To remind you, the industry, all the different pieces are tend to be highly capital intensive with high fixed cost. So, the participants tend to try to maximize volume to cover the overhead. With the energy and material arc declining, and we're tending to pass through the majority of that to the customers. At the same time, you have a mix change that's going on. As we've said before the retail has higher margins and as the retail's declining more, it's impacting the margins and average prices as well.

Okay. And then last, Jeff, you spoke to it today and was in the release about signs of a bottom and hoping for a bottom as well. I guess I look at the channel, the retailers taking inventory out would suggest they're positioned more conservatively. In normal cycles, would I guess historically we would look to see that inventories would increase and mix would get better and that would be a sign of a more bullish consumer. What should we be watching for, if it's not inventories and price mix to suggest more bullishness from either your customers or the end consumers about better demand?

To start, we hope that demand may have reached a low point in this cycle. However, as you mentioned, this cycle is not typical compared to previous ones. It's unusual for employment to remain strong while our category is under so much pressure. The housing market is completely different now. Currently, new housing starts are increasing. It will take four to nine months for us to see the impact, depending on the type of house and how long the process takes. In the long term, consumer confidence is a reliable indicator of increased spending, as people will begin to undertake postponed projects when confidence rises. So far, the commercial sector remains stable, but we expect it to weaken as we move into the fall. We will have to wait and see how that unfolds. Currently, the architect billing index does not indicate a decline, but we anticipate it will weaken.

Thank you.

Our next question comes from Susan Maklari from Goldman Sachs. Go ahead.

Thank you. Good morning, everyone.

Good morning, Susan.

Can you help us walk through each of the segments in your third quarter guidance and discuss the expected sequential changes from a seasonal perspective regarding the top lines and margins?

Yes, I think Jim and I think both of us do that one for you. In the third quarter, everybody didn't look like they built in the European decline that we always have and given the vacations they take, our volumes over there drop and our margins drop as well. We expect lower industry volumes will continue pressuring pricing and mix across the whole industry. And at this time, we're not building in any catalyst for remodeling to improve. At some point, it will, but we don't have it in any of our expectations at this point. The period will continue to benefit from lower material and energy costs as well as our restructuring actions. We're going to keep controlling the inventory relative to the demand. We've talked a few times about the retail margins impacting our mix. And then we also think that the currency change have been going on. It could have an impact of another $5 million to $15 million just in the currency changes. Jim, you want to sort of give her between the different segments?

So, Flooring Rest of the World obviously is most exposed to the European holidays. So, from again sequentially from Q2 to Q3, you would expect to see a margin decline in their business. Global Ceramic has some exposure to Europe, but the largest component and piece of that segment is the U.S. So, margins from Q2 to Q3 could be flat to slightly down. And then in Flooring North America usually Q3 is one of their strongest quarters, so we expect to see margin expansion from Q2 to Q3.

Okay. That's very helpful color. And then perhaps as we think about 2024, as that approaches understanding that it's hard to understand where the global macros will go and some of these demand factors. But when you think about all the cost actions that you have taken across the business in the last call it three or four years, you think about some of the capacity changes that you've made in there as well. Any thoughts, Jeff, on how the business can perform across the different end markets and segments that you have at some sort of level?

First, I don't think I'm capable of calling the term. I don't know when it’s going to happen. It will happen. It usually follows the interest rates peaking and I'm starting to fall. And I don't know if that's going to happen at the end of this year or sometime in the next year, anywhere in between. With that, the next year, all of the things you mentioned is right. We should have, as we talked about before, the volume should jump significantly. Usually, you have a significant increase in the industry volume making up for the decreases that we've had as you come out. We think the margins will expand in all the businesses. Typically, the sales also go up further because our suppliers start raising our costs and we pass those through. So, those help the top line further. And you have an expansion of the volume and expansion of selling prices and then you have the margins expanding as the leverage in the businesses go. This time, we also have more capacity in what we think are going to be the high growth areas for our business. And then again, we should have there going to be very limited accretion in the acquisitions until the business turns, but when it turns, we should have the costs taken out, we should have restructured the product portfolios and those should be ready to expand. So, we're expecting a significant improvement as we come out of this.

Okay. Thank you for the color, Jeff, and good luck with everything.

Thank you, Susan.

Our next question comes from Laura Champine from Loop Capital. Go ahead.

Thanks for taking my question. First on the ceramic business, your press release calls out inflation. I'm assuming that's year-on-year. Is that just flowing through the higher cost inventories? Are you still seeing product cost inflation for that segment?

No. Energy has started to come down. So, what you're seeing in the third quarter is the flow through of the higher cost inventory that we had.

And is this the last quarter to where you would expect to see that impact?

I think most of it will be finished through this, after the third quarter.

After the third quarter. Got it. And then on CapEx, there's language in the press release about sort of being careful on projects and needing series return. However, the budget doesn't seem to have shifted. So maybe what did change if anything this quarter versus last on your CapEx plans?

Well, we're very focused on investing to optimize the future of the business. The growth investments that we talked about, they make up about, almost about $250 million of the 2023 budget depending on timing. Maintenance CapEx for the business is roughly $200 million to $250 million as well. Now we're also focused, the balance really is on the quick kind of return projects on cost reductions, our focus on product innovation, and then also some projects on acquisitions. What we were speaking about is now looking forward into next year about being very, I guess, diligent looking at the CapEx budget for next year.

Got it. And is it too early to give us kind of a first look on the direction there?

Yes, it's a little bit early, but we're working with all the teams as we speak.

Understood. Thank you.

Our next question comes from Truman Patterson with Wolfe Research. Go ahead.

Hi, good morning, everyone. Thanks for taking my questions. Clearly, you all have been pretty open about increased pricing competition globally. Do you think you could discuss just some of the big buckets, where you're seeing this occur, either product category or region? As well as perhaps how this has evolved versus your expectations through the year?

In the U.S., declining import prices are affecting both LVT and ceramic, leading us to make adjustments. This situation is impacting our margins due to holding higher-cost inventory. In Europe, our ceramic business has been operating at very low levels in the marketplace and is aggressively managing the available assets, but market pricing is under pressure. The flooring sector in Europe is facing more of a mix issue rather than a pricing problem, while we are seeing growth in lower-cost product categories, prompting us to reduce personnel instead of cutting prices. Additionally, our panels and installation businesses fluctuate with material and energy prices, which we pass through as they arise.

Okay, perfectly. And then in North America with oil coming down quite a bit, understood if I look at your margins kind of sequentially, it seems like that raw material deflation versus pricing benefit probably occurred in North America a little bit more than some of the other regions. But could you help us think through what's built into your third quarter guide regarding raws in the North American segment specifically?

Well, in Flooring North America, similar to the other segments, from Q1 to Q2, you're absolutely right. We started to see sequentially the benefit of the lower costs coming through not only raw materials, but in energy as well. In our view of Q2 to Q3, we still see some of that maybe a slower pace sequentially, but you still get a benefit we’re lower cost and raw material, energy and also freight, as you look in the U.S. as well. So, those are the assumptions around Flooring North America.

Alright. Thanks for taking my questions.

The next question comes from John Lovallo of UBS. Please go ahead.

Hi, guys. Thank you for taking my questions. Just want to make sure I have the cadence right here on the input cost inflation and price mix. So, in terms of the input cost inflation, it looks like sequentially, we'll see improvement in the third quarter. Should we expect sort of a leveling-off as we move into the fourth quarter and should the third quarter and fourth quarter on a year-over-year basis be improved? And, then in terms of price mix, are we still expecting sequential deterioration as we move through the third quarter and the fourth quarter?

Yes. So, John, you kind of asked two different time periods there. So, let me tackle sequentially first. So again, sequentially, from Q1 to Q2, we benefited where you had lower costs versus the impact of lowering price and mix. I would expect a similar occurrence albeit, maybe a less impact, but similar occurrence in Q2 to Q3 and also in Q3 to Q4. Again, that's sequentially. Now year-over-year, you're absolutely right. What we've said is that we have a tailwind in the back half of the year, again, year-over-year from lower materials and lower energy. But price mix and the pressure on both will continue in the third and fourth quarter. A gap from a year-over-year perspective will close by the end of the year, but it will still exist, premise from a little bit.

Okay. That's helpful. Regarding the $17 million in restructuring charges that will lead to $35 million in annual savings, are these charges related to headcount? I'm curious about how quickly these savings will be realized. If that is indeed the case, are you at all worried that this might hinder your ability to respond if activity picks up more quickly than expected?

Now, these actions are really focused around headcount reductions, as you said, in both administrative and manufacturing functions along with some consolidation of distribution points. So, most of that cash is, will occur in the third, fourth quarter of this year.

Got you. Thank you.

Our next question comes from Michael Rehaut of JPMorgan. Go ahead.

Great. Thanks very much. So, just wanted to make sure I understood right in terms of your prior comments, if you kind of think about price mix versus cost. I just want to make sure I'm understanding that it sounds like you're saying it will be negative in the next two quarters, but perhaps that negative gap moderating or lessening as you get to the fourth quarter versus third, is that the right way to think about it?

If you're speaking about it from a year-over-year perspective, that is a correct statement. The benefit and the lower cost compared to the pressure on price and mix that differential will lessen. We anticipate as we move through the balance of the year. That's why Mike, I think, sequentially is so important to look at because you see more in real time the benefit of the lower cost offsetting the impact of price mix.

And then but at the same time, it sounds like at least for the third quarter, you've pointed to that historical seasonality kicking in where on a broad basis inclusive of even price cost, but on a broad basis, you're looking for margins to decline on a consolidated basis in 3Q versus 2Q. And it would sound that even if the price cost gap is narrowing in 4Q on a year-over-year, I would assume you're still expecting again consistent with the typical seasonality you're expecting in the 3Q, further sequential margin contraction in 4Q. Is that fair to say?

Well, Mike, it really first of all, it depends on that demand cycle, what we talked about from a fourth quarter perspective, yes, you'll have seasonally lower production with Christmas vacations. The industry volume though maybe at a bottom, though pricing pressure could continue. Higher cost inventory by then should relatively be consumed as, Chris, indicated earlier. We do have a bump as you well heard and seen on new home construction, which could help us increased flooring sales. We have the restructuring that's going to benefit our cost structures. And last year, as I noted earlier, we included much more shutdowns than normal. So, that should help us in the fourth quarter as well.

We're also, as we've said before, anticipating commercial that weakens somewhat as we go through the year. That we'll have to see, hopefully, we're wrong.

Right. Maybe just one last quick one. The Italian subsidies, does that end right on June at the end of 2Q? And if you could just quantify what that meant on a quarterly basis?

Yes. So, as we said before, it's about $15 million to $20 million per quarter. The government did stop it at the end of the second quarter, but it will flow through my inventory into my P&L. So, I'll get some benefit at a lower level in Q3 and then by Q4, it's basically gone.

But the energy prices have continued to drop without those. So, they were making up for high energy costs, so the energy costs have dropped substantially. So, the difference will not be dramatic.

Yes. So, with that lower cost, we are expecting to be aligned with the competition as well.

Okay, great. Appreciate it. Thank you.

Our next question comes from Michael Dahl of The Royal Bank of Canada. Go ahead.

Hi, thank you for taking my questions. It's difficult to fully address the pricing comments. Clearly, the current changes are significant when comparing sequential and year-on-year data. However, it appears that your cost benefits should increase notably in the fourth quarter compared to the third quarter on a year-on-year basis. I want to confirm that even in the fourth quarter, you expect the price-cost dynamic to be slightly negative. Additionally, regarding the exit rate, do you anticipate returning to neutral by the end of the year as you plan for 2024, or does this indicate ongoing sequential price decreases throughout the year, especially with client acceleration?

So let me kick that off. Mike, so you're absolutely right. The benefit from a year-over-year perspective should peak in terms of this year, should peak in the fourth quarter. That's why I said the gap will close significantly between the inflation and price mix. It's very difficult at this point to say it’s going to be flat, slightly negative, but we'll have to see as the pricing evolves and the mix over the balance of the year. But certainly, the inflation gets or the lower costs flowing through the P&L gets much more substantial in the fourth quarter. So let me just add one more comment, Mike, to your prior statements. So, the point we talked about sequentially when you look back at macro and what you see the economies doing. As you’ve indicated a little earlier, it is more about what will happen on macroeconomic based on rates and inflation as we go through the year. That's going to have that kind of impact.

Got it. Okay. My second question is related to the LVT import dynamics and the implications of the Forced Labor Act. Could you elaborate on how this has evolved? Have the supply chains changed enough for you to receive product at the port, or have competitors successfully brought in product? What’s the current situation?

Yes, we're seeing market pressures increasing with lower volumes and declining freight. Higher cost inventories reducing our margin as it flows through. We also have our West Coast operations will be in start-up phase at the end of the year, but that Forced Labor Act is still impacting some of the sales and timing of our new introductions.

It is stopping product from coming in they seem to be doing it on an individual business supplier base, they keep adding to it over time. It has stopped shipments from coming in. We in particular stop ours. It's impacted our service level on existing sales and it's also impacted our new product introductions, which got stopped. It is difficult to tell how it's going to evolve.

Got it. Okay, thanks, sir. Our next question comes from Stephen Kim of Evercore. Please go ahead.

Yes. Thanks a lot guys. Appreciate the color. My line cut out a couple of times. So apologies if this asked. I don't think it was. But I wanted to ask you about the impact or the benefit we can anticipate when volume ultimately returns. I know you're not giving a specific time frame for when that will be, but when it does occur inevitably, I'm curious about what we might see from productivity, attempt shutdowns in particular. Regarding productivity, we've usually seen a positive boost to your EBIT from productivity when volumes rising, but, recently, you've actually generated positive productivity when volume was going down. And so I'm curious, when volume ultimately inflects up, is it reasonable to think that we could still get positive productivity year-on-year? And then similarly with the shutdowns, you mentioned I think that in 4Q shutdowns, you will have shutdowns, but will be less than the prior year. What I'm interpreting that is that you're going to get an EBIT benefit year-on-year from the reduced shutdown. So when you move forward and volume picked up, I assume you won't have any shutdowns. And so that should also be a benefit on top of whatever volume benefit you would get. I just want to make sure that both of those are true?

Yes, they are all true as the utilization of the factories goes up, that will reduce the fixed overhead costs. Usually, the productivity of the plants also increases as well. We usually get leverage in the sales cost as well as it all turns. And then somewhere along the line as it goes in, we'll start raising prices as our suppliers start trying to expand their margins as we go forward. So all those things occur.

Yes. Great. That's yeah. We look forward to that day. Alright. So second question for me is in ceramic, we've seen over the years or so we've seen a pretty big rise in ceramic imports from India. You all have obviously moved stepped into LatAm pretty significantly, Brazil, Mexico, etcetera. I'm curious if you could help us understand, are there any salient differences either in product quality or other cost of doing business that favor Latin America for as a place to import for you or ship product to the U.S. from versus other parts of Asia?

Just as a comment before he answers that one. Our investments in Latin America are primarily for the Latin American markets. We do ship some into the United States, but the majority of it is for the local markets. Chris, you want to answer the rest?

The other thing I would say, Stephen, is that the from India right now that freight rates are really low, which we don't think are sustainable. But in the U.S., we've done a lot of work on our mid and premium product to reduce the impact of the changes in that imported product.

Right now, India does have an advantage for freight.

Our next question comes from Matthew Bouley of Barclays.

Go ahead. Good afternoon. Thank you for taking the questions. I think you mentioned a few times that commercial has been outperforming, but that you expected commercial to weaken later this year. I guess, how is that dynamic evolving for you specifically? Are actually starting to see signs of, I don't know, weakening orders in the commercial end market and just how might you expect that to play out from a volume and price perspective?

I first have to go back to other cycles. I've never seen a cycle where the commercial business didn't fall off and it usually falls off about a year after the other one. So it's possible you get through this without it, but hard to believe. So there are some indications of some weakening new projects being started in it and new orders. So we're going to have to see how it evolves. There's a chance to keep going through it. But at least in our expectations, we're assuming there's going to be some weakening show up.

Got it. Okay. That's helpful. And then secondly, on the $35 million of savings actions, I think you said half would be realized this year. I mean, should we assume that you're kind of reaching the run rate really in Q4 or are you already starting to realize a lot of that in Q3? How does that kind of phase between the next two quarters? Thank you.

It's fairly split between Q3 and Q4. I would say by the run rate, you're correct, you will see it as we get through Q4.

Our next question comes from Adam Baumgarten from Zelman. Go ahead.

Hey. Good afternoon, everyone. Just curious if you could walk through where you're seeing the biggest negative mix impacts across the various products and geographies?

Right now in the second quarter, the price mix was unfavorable from a year-over-year perspective and the largest part in the second quarter was in Flooring North America and LVT with the pricing declines driven by imports.

Okay. Got it. And then just as we think about the restructuring actions, maybe how to think about that across the various segments as you spread it across the different businesses?

Well, if you back up a little bit, so we announced in 2022 and Q2 and Q4 restructuring actions that should say as we go through this year into next about $60 million that was mainly split between Flooring North America and Flooring Rest of the World as they took out higher cost assets around reducing work production, phasing out the residential flexible LVT in Europe as well as some other initiatives. And then this current action that we just announced is fairly spread between Flooring North America and Global Ceramic.

The next question comes from Rafe Jadrosich with Bank of America. Please go ahead.

Hi, good afternoon. Thank you for taking my question. Regarding the smaller independent dealers in the U.S. that you sell through, can you discuss the condition of that network? It's clear that industry sales have faced challenges, and I'm sure some of these dealers are managing high-cost inventory as prices have dropped. What is the current state of that retail channel for you, and are you observing any consolidation in that area?

Most of the retailers have been able to go through the last year, they were able to pass through the costs, they were able to pass through the higher labor installation rates. And in some cases, many of them their margins expanded. So for the most part, most of them are in fairly good shape at this point.

Okay. That's good to hear. And then the second question was just on as pricing comes down with the lower input costs like you're talking about in the second half here. What have you historically seen in terms of volumes with lower pricing like what is the demand elasticity to price? Do you ever get an uptick in volumes because the pricing is lower?

In these situations, we typically lower prices in response to market conditions, leading some to attempt to capture isolated segments and increase their market share. As expected, other competitors work to maintain their share as well. Therefore, when prices decrease, we usually pass a significant portion of the reduced costs on to our customers while managing our assets.

Is this price competitive environment different than other doubts like is it kind of a similar level that you would have anticipated like more competitive, less competitive than what you've seen historically?

I think it's probably typical. The difference will be in Europe. You have a much lower environment. And so I think in Europe, it might be more aggressive than historical. But also the costs were up higher, much higher in Europe too, see in both dynamics.

That makes sense. It's very helpful. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over Mr. Jeff Lorberbaum for any closing remarks.

We'd like to thank everyone for joining us. We are focused on managing the short-term and we think we're well positioning the business to maximize the long-term growth and earnings. Thank you again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.