Good day, and welcome to the Mohawk Industries Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Please note, today's event is being recorded. I would now like to turn the conference over to James Brunk. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone, and welcome to Mohawk Industries quarterly investor call. Joining me on the call are Jeff Lorberbaum, Chairman and Chief Executive Officer, and Chris Wellborn, President and Chief Operating Officer. Today, we will update you on the Company's fourth quarter and full year performance and provide guidance for the first quarter of 2024. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined 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 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. I'll now turn over the call to Jeff for his opening remarks. Jeff?

Thanks, Jim. Our fourth quarter results were ahead of our expectations, with net sales for the quarter of approximately $2.6 billion, down 1.4% as reported or 4.1% on a constant and legacy basis. Lower demand in residential remodeling and new construction continued to impact our results. Our adjusted EPS for the quarter was $1.96, with benefits from cost containment, productivity and lower input costs. Pricing and product mix declined offset by lower raw material and energy costs during the quarter. Foreign exchange had an impact of approximately $22 million on operating income, or $0.27 on EPS. Turning to our full year results. Mohawk's net sales were approximately $11.1 billion, down approximately 5% as reported or 7.7% on a constant basis with adjusted EPS of $9.19. Last year, interest rates increased creating challenges for our industry, which is highly sensitive to rate fluctuation. Even though we have a diversified geographic footprint, all of our markets were impacted by similar conditions. During '23, existing home sales declined substantially, remodeling projects were postponed and consumers traded down. New home construction was also constrained as rising interest rates and a weak housing market reduced home starts. Throughout the year, the commercial sector remained stronger than residential though investments began to slow as interest rates increased in lending types. These factors reduced industry demand across our business, creating unabsorbed overhead and shutdown costs. As a result, our industry reduced selling prices and we pass through declining cost in energy and materials. Under these conditions, we focused on optimizing our revenues and lowering our costs through restructuring actions and manufacturing enhancement. We aggressively managed inventory levels, which reduced our working capital by over $300 million, excluding acquisitions. We also invested in sales resources, merchandising in new products with innovative features to inspire consumers to purchase flooring. As we integrate our recent acquisitions around the world, we are investing to improve their operations and product offering. In 2023, we completed two acquisitions in Latin America that extended our position as the world's largest ceramic tile producer and solidified our leadership in the region. In the year, we focused our capital expenditures on product innovation and cost reduction, as well as product categories that should have the highest growth as the economy improves. In Europe, our porcelain slab and installation expansions are now fully operational, while in North America our premium laminate LVT projects are progressing. During the second half of this year, we anticipate completing expansion of laminate in Europe and quartz countertops in the United States. We closed the year with debt leverage of 1.5 times, free cash flow of $716 million, and available liquidity of $1.9 billion. We are retiring a term loan of approximately $900 million in quarter one, which has a higher interest rate. We are well-positioned to manage current conditions and emerge stronger from this economic cycle when the rebound occurs. Finally, in January, Newsweek recognized Mohawk as one of America's greatest workplaces for diversity. Our talented people are our most valuable asset and we are proud that our teams mirror the communities in which we operate. And now, Jim will provide an overview of our fourth quarter financials.

Thank you, Jeff. Sales for the quarter were just over $2.6 billion. That's a 1.4% decrease as reported and 4.1% on a constant basis as price and mix pressures and unfavorable FX offset limited year-over-year volume improvement. Gross margin on an adjusted basis was 24.7% versus 22.4% in the prior year. The improvement is due to lower inflation, offsetting unfavorable price and mix along with increased productivity, partially offset by the impact of FX. SG&A expense as a percentage of sales was 18% on an adjusted basis, which was in line with the prior year. That gives us an operating income as reported of 6.4%. On an adjusted basis, 6.7% versus 4.5% in the prior year as lower inflation of $156 million offset unfavorable price and mix of $127 million as well as productivity gains of $57 million only were partially offset by unfavorable FX of $22 million. Interest expense for the quarter was $17 million. Our non-GAAP tax rate was 21.3% in the current year. We expect Q1 2024's tax rate to be approximately 21% to 22%, and the full year 2024 to be between 18.5% and 20.5%. That gives us an earnings per share on an adjusted basis for the quarter of $1.96. Turning to the segments. Global Ceramic had sales of just under $1 billion. That's a 0.6% increase as reported, or 4.7% decrease on a constant legacy basis, with all geographies seeing increased pressure in price and mix, driven by lower demand and decreases in energy costs. Operating margin on adjusted basis was 4.8% versus 7% in the prior year, due to unfavorable price/mix of $41 million, only partially offset by lower energy and material costs of $29 million. Unfavorable FX of $13 million and a reduced sales volume of $10 million accounted for the balance of the decrease in the year-over-year margins and were only partially offset by productivity gains of $17 million. Flooring North America had sales of just over $900 million. That's a 3.6% decrease as reported, as demand levels and tight budgets continue to pressure pricing and mix. Our commercial category outperformed residential led by the hospitality channel. In this environment, we are focused on new innovative products which are being well received and position us to take advantage of the pent-up demand. Operating margin on adjusted basis was 6.9% and significantly ahead of the breakeven margin in the prior year, due to lower inflation of $73 million, especially in material costs, offsetting the weakness in price and mix of $37 million. Also benefiting our results were gains in productivity of $29 million. In Flooring Rest of the World, sales were just over $700 million for the quarter. That's a 1.5% decrease as reported and 4% on a legacy constant basis. Stronger volume in insulation, resilient and laminate were offset by continued price and mix pressures in all product categories. Consumer sentiment in Europe continues to be impacted by geopolitical events combined with higher interest rates, which is limiting remodeling activity and increasing the competitive environment. Operating margins on adjusted basis were 10.6% versus 7.7% in the prior year due to lower inflation of $59 million, offsetting unfavorable price/mix of $49 million. Productivity gains of $12 million and higher sales volume of $10 million also contributed to the year-over-year improvement in operating performance, only partially offset by unfavorable FX of $9 million. Corporate eliminations for the quarter were $11 million. And in 2024, we expect them to be approximately $43 million to $48 million. Finally, turning to the balance sheet. Cash and cash equivalents were $643 million for the quarter with free cash flow of $56 million in Q4 and $716 million for the full year. Inventories were just shy of $2.6 billion, with total inventory reduction of approximately $300 million, excluding acquisitions with a reduction of eight days versus the prior year to 130 days. Property, plant and equipment were just shy of $5 billion with Q4 CapEx of $240 million and the full year at $613 million and D&A of $630 million. The company plans to reduce CapEx by approximately 20% to $480 million in 2024 with D&A of approximately $610 million. The balance sheet and cash flow of Mohawk remained very strong with gross debt of $2.7 billion and leverage of 1.5 times, positioning the company well for the market rebound. Now, Chris will review our Q4 operational performance.

Thank you, Jim. In our Global Ceramic segment, industry volume remains low, which is compressing prices and margins. All of our geographies are experiencing similar competitive conditions and the industry passed through declining energy costs. We're managing our production to align with demand and have significantly reduced inventory throughout the year. To enhance our mix, we are introducing stylized products in large and small sizes, tailored to each market. To contain costs, we have increased productivity, reduced overhead and implemented alternative formulation. In the US, we are expanding our distribution through our local service centers and offering new collections with premium Italian styling to improve our product mix. We're expanding our quartz countertop business with innovative new introductions and increasing our participation in the retail kitchen, bath and DIY channel. We've integrated Vitromex in Mexico and Elizabeth in Brazil and are enhancing our sales, marketing and operational strategy. In both countries, demand significantly declined last year due to rising interest rates and slowing economic conditions which reduced our results. Combined with our legacy businesses, these acquisitions give us leading positions in Brazil and Mexico. In Europe, gas prices have continued to decline and are improving our competitive position. We are optimizing our recent expansion of premium porcelain slabs in Italy to meet growing demand in both the residential and commercial channels. In our Flooring Rest of the World business, our improved results in the quarter were driven by lower input cost and productivity gains, offsetting pricing pressure and foreign exchange. The European building product category remains under stress, with consumers remaining cautious and retailers reducing their inventory levels. We are investing in new products for 2024, while implementing tight cost control. We are reenergizing our flagship Quick-Step brand with interactive displays. We are completing the transition to rigid LVT and we have decommissioned our residential flexible line. As material and energy costs decline, we've reduced prices across our product categories in response to the competitive market. In insulation, we have recently experienced material increases and are raising our prices accordingly. Our wood panels performance has declined during the year from typically high pricing to a more competitive environment with excess capacity. We continue to implement restructuring actions and enhance our smaller bolt-on acquisitions in insulation, MDF boards, sheet vinyl, and mezzanine flooring. In Flooring North America, fourth quarter profitability improved significantly over last year with benefits from decreased input costs, restructuring, and productivity gain. Reduced market volumes led to low industry utilization rate and aggressive competition in the marketplace. We are continuing to invest in sales and marketing initiatives to expand our distribution and improve our long-term growth. To enhance our business, we are making capital investments to increase our differentiated features and lower our manufacturing costs. In each product category, we are introducing innovative new collections, which are being well-accepted. We have already begun installing our new displays with retailers around the country to accelerate the sales of these product launches. We have created the next generation of LVT with our SolidTech premier collection featuring new technology that enhances visuals with higher definition color and texture. We've also introduced a new flooring category called PureTech which is PVC-free. It is an alternative to LVT made from renewable polymer core that is waterproof and made with 70% recycled content. The commercial channel outperformed our expectation led by the hospitality sector. We are leveraging our customer relationships to expand our needle punch flooring and trim acquisitions. With that, I'll return the call to Jeff for his closing remarks.

Thank you, Chris. As we enter 2024, the industry is at a cyclical low and we expect quarter one seasonality to be more aligned with long-term historical levels. Our businesses are minimizing their expenses, reducing the overhead and restructuring to adapt to the present conditions. We are continuing to invest in innovative products to increase our sales and mix. We are reacting to competitive pressures to optimize our volumes as we pass through the declines in our input costs. We continue to manage our inventory and anticipate temporary shutdowns to align with demand. Our businesses are implementing initiatives to enhance our processes to reduce the impact of inflation. Given these factors, we anticipate our first quarter EPS to be between $1.60 and $1.70, excluding any restructuring charges. Over the past 18 months, we've initiated many actions across the company to improve our cost structure, manage our lower volumes, and integrate our recent acquisitions. We've closed four manufacturing facilities and a number of higher-cost production lines, consolidated administrative functions and reduced overall headcount. When complete, these actions will collectively decrease our operating costs by approximately $150 million with about half of this already realized. Combined with our actions, improving industry conditions as we emerge from the bottom of the cycle should improve our results in the second half of the year. We anticipate central banks will lower interest rates, expanding home sales, residential remodeling, and commercial projects. The pace of improvement of the flooring category will be dependent on inflation rates, consumer confidence and the strength of home sales. We believe the U.S. and Latin American markets should improve sooner than Europe given the current geopolitical pressures. Historically, remodeling activity has led the flooring industry out of downturns, followed by new home construction with commercial projects taking longer, given the time to plan and complete. After past housing recessions, our industry has expanded with increased sales and margins for multiple years. Housing remains in short supply across all our geographies and increased remodeling investments will be required to update that aging housing stock. Our restructuring actions, investments in new technology, targeted expansions and recent acquisitions will enable us to further expand our business. As the world's largest flooring company, we believe we are uniquely positioned to improve our results as the market recovers. We'll now be glad to take your questions.

Thank you. We will now begin the question-and-answer session. And today's first question comes from Susan Maklari with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone, and thanks for taking the questions.

Good morning.

Jeff, maybe we could start out with how you think about the cadence and the sequential lift for the business as we move into 2024? How should we think about coming into this year at this cyclical low that you talked about? And where we can go to over the next several quarters? Do you still think that there's the potential for that second half lift that you talked about on the last quarter call?

Let's start with last year. The interest rates increased throughout the year and our business declined with lower investments in housing and commercial projects. This year, we anticipate the reverse to occur. We are starting with the industry starting out slower and improving with consumer confidence and interest rates throughout the year. The U.S. mortgage rates have declined from their peak and Brazil has already started to lower their rates. We anticipate Europe to lag given geopolitical risks, energy prices, and slower economies in the rest of our markets. We believe the business will strengthen in the second half from these improved results from last year. We should also see an improvement in product mix as remodeling grows. We expect an extended period of higher demand as the economy recovers, and our investments in new products, cost reductions, and expansion projects should benefit our future results.

Okay. That's very helpful. And then maybe digging into that a little bit more. When you think about the different economies globally and what's going on there relative to the segments of Mohawk segment, how do you think about what that could imply for, say, Flooring North America versus Global Ceramics or Rest of World? Anything that you can give us just in terms of the different segments and how you're thinking about the opportunities there?

Sure. We anticipate more improvement in Flooring North America and the Ceramic businesses, with remodeling leading the way in each category. We believe that Europe will take longer to recover, facing ongoing pricing pressures, particularly in the flooring and panels sectors along with other categories.

And we've kind of seen in Europe, consumers have traded down given tighter lower budgets and the geopolitical crisis is further stressing consumer confidence. But as the region recovers, we know we'll see improvement across our business.

Just to remind everybody in Europe, they still have the higher energy costs, and the regulations make it a less dynamic marketplace. They are going to get through, and at the same time, their wages have increased more than the rest of the world impacting inflation.

Okay, that's great color. Thank you both, and good luck.

Thank you.

And our next question today comes from Phil Ng with Jefferies. Please go ahead.

Hey guys. Certainly, your business has been hard hit with rates being elevated on the R&R side. When it comes down, is the bigger driver we should be looking at tied to housing turnover or rates coming down just kind of improving consumer confidence that is going to drive demand? So just trying to gauge what are the things that we should look at? And when we do see, and how quickly that could kind of unleash that pent-up demand?

In past cycles, it all starts with consumer sentiment. As it starts improving, they start spending money on discretionary spending. And that then impacts the remodeling business, which the consumer, as soon as they feel more comfortable about it, can walk in the stores and start immediately. So that always starts it. The Central Banks lowering interest rates then starts increasing the home resales, which is also a large part of that shows up in the remodeling business, but it happens concurrently as you start. Then what happens is, with the lower rates, you have the builders start building more new homes and they start increasing. But just to remind you, they take longer because our products are put in almost right before they sell the home at the end. And then finally the piece that works is you start planning commercial projects, but they take a longer time to complete, and it works through one after the other.

And so Phil, you also have two key points. One is that in most of our geographies, new homes are really underbuilt so the inventory is low. And then, it's also an aging inventory so it's kind of in prime position as we start to come out for remodeling to increase which puts us in a very strong position.

Okay. And then, a follow-up, Jim. You have clearly made significant progress on reducing costs and transitioning the portfolio with some new products. As we look towards recovery in the latter half of 2025, how can we best understand the operating leverage of that business, whether through volume or overall revenue growth from a downward perspective?

Well, a couple of things are important there. So, you're right that utilization rates, which right now are anywhere between 70% and 80%, differing, of course, based on geography and business, is driving some shutdowns, which certainly impacted us in 2023. As we look at 2024, lower inventory reductions and improving volumes through the year should reduce that impact. And as you look further in terms of demand increasing, incremental margins could be anywhere from 25% to 35% depending on segment and the product category, and also whether you're in the premium or more in the commodity product line.

Okay. I appreciate the color, guys.

Our next question today comes from Eric Bouchard with Cleveland Research. Please go ahead.

Thanks. Two things, if I could. First of all, on the commercial side, Jeff, you outlined a path to improvement in the back half of the year. I assume that's more residential focused, especially because commercial has been better. What is the path you're expecting or we should expect for commercial to travel from here? And is there an incremental pressure that that applies to the business in 2024, perhaps into 2025 relative to 2023?

Yeah. As we went through 2023 and the rates started going up, the commercial business slowed down. We expect it to continue to be slower. We think there is going to be a lag time between projects getting started, giving how tight the markets are for borrowing money, and the costs of borrowing money. And then what I described earlier was when the interest rates start falling, the projects will come in, but then the time it takes to start them before we actually feel it could be a year to a year and a half or more.

Okay. And so, within this, the path for revenue growth for Mohawk, if 25% of the business is Europe and 25% of the business is commercial, I'm just trying to get a sense of the improvement in rates in U.S. residential, at the same time, those are lags or incremental lags. Can the revenues of the business grow in that type of an environment, or do you need to wait for the commercial to recover before the total company can generate revenue growth?

We're expecting the growth in the residential business to offset the decline in commercial, and so to have a growth in it even though the commercial is weaker.

And then the second question, the CapEx change in ‘24 versus ‘23. Can you just dig into that a little bit? What are you doing less of in ‘24? What did you do more of in ‘23? Just give us a little bit of perspective on that decision?

Sure. As I noted in prepared remarks, our forecast for 2024 is about $480 million. About 50% of that is going to be focused on cost reductions and product innovation. 20% will be to complete the growth initiatives that we've identified around laminate, quartz countertops, LVT, porcelain slabs, and insulation. And then about 30% is for maintenance and other items in the year.

Okay. Thank you.

Thank you. And our next question comes from Stephen Kim with Evercore. Please go ahead.

Thank you very much. My first question is about the pricing dynamic. Could you explain how it varies across different products or markets? I've noticed that in the U.S., particularly in ceramics, there's some pressure from imports. Could you provide some context on the overall pricing dynamic within your portfolio?

So, what we believe is that pricing is generally at the bottom, more near the bottom, and so you should continue to see that trend through the year. From a comparable standpoint from year-over-year, you certainly still see the pressure. We anticipate, though, that lower material and energy basically to align with price and mix, and then other inflation items such as wages and benefits and insurances and those types of items to be more covered by productivity and restructuring actions. In the EU, Europe remains still weak with pricing pressures and lower production rates. But as Jeff pointed out, as we go through the second half of the year and that improvement should drive improved year-over-year results.

Okay. Helpful.

Our next question comes from Timothy Wojs with Baird. Please go ahead.

Hi, guys. Good morning. Just really had two questions. So the first one, maybe just a longer term or bigger picture question around M&A. Historically, Jeff, kind of coming out of cycles, there's been a little bit more kind of M&A activity in the flooring industry over the last couple of decades. I guess, how would you kind of characterize the opportunity around M&A as maybe we come out of the bottoming of this cycle? I mean, would that same kind of M&A opportunity be there today like it was over the last several cycles?

So, I don't know how to predict the future, but in the past, what's happened is that when you get with low margins in the businesses, that the expectations of the sellers are high and the expectations of the buyers are low and you can't get together. So, as you start coming out and the margins start going back up, it's easier to align with valuations. So, anybody who has wanted to sell or wants to get out, it typically comes as you're in the first couple of innings of the coming out of it, and I would expect the same thing is going to happen this time.

Okay. Okay, good. And then just second question on the new kind of LVT formulations and lines. Is there any way just to give us an update on kind of what you're seeing with that and maybe any sort of kind of preliminary feedback or expectations for maybe what sales might look like there over the next several quarters?

I can comment that we are increasing our production on the West Coast and implementing our new extrusion process in Georgia. We also have unique technologies that enhance visuals and surfaces. Additionally, we are introducing a new renewable polymer core as an alternative.

Once the equipment is operational, we still need to align sales with it, which takes time since we can't sell until everything is running smoothly. Sales are increasing now as the equipment becomes operational, and we anticipate filling our capacity as we progress through the year.

Okay. Any feedback preliminarily from the channel or is it just kind of too early?

It's too early to tell exactly. We are gaining commitments to fill it up, and we believe we will complete the process as we move through the middle of the year.

Okay. Very good. Thanks, everybody.

Thank you.

And our next question today comes from Keith Hughes at Truist. Please go ahead.

Thank you. Just a question more on the pace of business in North America. It's a weak volume in the quarter. Is the remodel market here to be bottoming out right now? Is there a way you can tell where the pace of business is going here in the short term?

All we can do is get feedback. One is, we know our own volumes. We get feedback from our customers of how they see it. They're all pretty optimistic at this point about next year getting better, but there's no way to actually measure where the piece is and what's going to change it other than the things that impacted our consumer sentiment seem to have bottomed. So that helps as people get the higher prices on homes and things. There are people who have been postponing it. So it really comes down to gaining confidence in the pieces and it's not that much different than the other regions, if you want to know the truth. They're all in similar places.

Okay. And then raw material is obviously a part of this quarter. Jim, if input costs remain stable, will those numbers continue to benefit you? And approximately how many quarters until they start to decline?

You're right. They are starting to fade away, I anticipate that. Those continue to see lower energy and materials flow-through from a comparison standpoint, and at least through the first half of the year on a year-over-year basis in terms of raw material and energy, which kind of aligns with where price and mix are in that same time period.

So at a diminishing rate in the first and second quarter, is that a way to think about it?

Yes, because there is that much less to kind of flow out of the inventory through the P&L.

Okay. Thank you.

And our next question today comes from Michael Rehaut with JPMorgan. Please go ahead.

Hi, guys. This is Andrew Azzi on for Mike. I appreciate you taking my question. Just one for me. As you think further out and all the initiatives you've been taking with cost actions and mix initiatives, all the things have been going on there, where do you think the margin perhaps in Flooring North America can get to maybe on a longer-term basis? And how does that compare to what we are seeing recently in the segment?

The margins in this segment are still low. As the plant utilization goes up, the stoppages of the plant, you're going to get decreased costs, you're going to get leverage on the SG&A, as it goes up as we are going to try to hold the SG&A barely flat and the volume goes up. So we will get leverage there and those things will expand the margins. And we think you'll see continued margin growth as it occurs over the next few years.

Thank you. And then maybe also actually, in these investments in sales resources and merchandising, is there any way to like quantify the magnitude of those initiatives? Or is that more of a longer-term horizon?

Part of the magnitude is evident in the SG&A costs, which, compared to historical highs, reflect our deliberate decision to maintain our sales teams and keep investing in products and merchandising to support our long-term strategy. This is why we see a higher level of SG&A as a percentage of sales, which will decrease as sales volume increases.

As you can observe the increase in the placement of samples and new materials in the marketplace, we have also strengthened in the second half as consumer sentiment improves. This will position us well as we approach the end of the year and move into next year.

Thanks a lot, guys. Good luck on the next quarter.

And our next question today comes from Joe Ahlersmeyer with Deutsche Bank. Please go ahead.

Yeah. Thanks very much, guys. Good morning. Jim, you are talking here about the price mix, sort of offsetting the deflation benefits that you're seeing. And then on the other side of it, the productivity sort of offsetting the other bad guys here. I mean, it sounds like you are to the place where you've been trying to get to, which is that improvement in EBITDA is just going to be a function of volume. And if we are talking about a back half improvement, it seems like maybe what you're suggesting is that we could see flattish EBIT in the front half, which you're already kind of guiding to on the first quarter and then EBIT up in the second half to potentially EBIT up for the year. Are you willing to kind of let us say that?

Yeah, I think that's pretty much in line, Joe, with what Jeff indicated. As the business strengthens, if in fact we're correct through the second half of the year then it will be a volume-led story to improve the results from a year-over-year perspective, and then from a full year perspective.

This is a comment that if the business picks up as it has in the past with remodeling, the mix also improves because they sell better products to homeowners.

You also benefit from more steady production, resulting in fewer shutdowns, which helps reduce unabsorbed overhead. This will also be relevant in the second half of the year if volumes start to improve.

Right. This was actually my second question on the shutdowns because it feels like you've had if we are just looking at the back half, that the most recent two back half they are sort of negative on negative. The way I've always understood this is there are positives once you lap them. So if you're getting volume growth and you're lapping these that would kind of be a double positive. But just wondering kind of the timing around decision to improve production. Do you have to do that in anticipation of the improvement in demand in the back half, or is it more flexible for you?

Given the capacities we have, we assume we are going to flex it up as it occurs. So you won't build the inventories in anticipation of it. If we were running at very high levels, you'd have to build some of it beforehand, but we are not intending to.

All right. Understood. Thanks. Good luck, guys.

Thank you, Joe.

And our next question today comes from John Lovallo with UBS. Please go ahead.

Good morning, guys. Thanks for taking my questions. The first one is just around the comments on returning to normal seasonality in the first quarter. So if I look at 2017 to 2019 for instance, is it fair to assume that kind of low to mid-single-digit sequential improvement maybe in both Global Ceramic and Flooring Rest of World revenue and may be flat to slightly down revenue in North America? I mean is that the right way to think about it? And along those same lines, how do you think about sort of normal seasonality in segment margins from the fourth quarter to the first quarter?

So if you look from a segment perspective in the first quarter, we believe Flooring North America margins should improve from last year with increased productivity and lower costs, some of which coming from the restructuring actions. Ceramic and Flooring Rest of World are more impacted by a lower mix or a weaker mix and lower volumes with Flooring Rest of World being impacted more given so much of its market right now is in Europe and lower prices and wood panels and the laminate categories compressing margins.

Got it. Is that cadence that I mentioned in terms of revenue though consistent with how you guys are thinking about it, low to mid-single-digit sequential improvement in both Global Ceramic and Flooring Rest of World? And maybe flat-to-down in North America?

Are you speaking of just in the first quarter versus the prior year?

Sorry. Sequentially, fourth quarter to first quarter.

Follow-up on that one.

Sure, yeah, no problem. Second question is just on capital allocation. I know you guys mentioned paying down the $900 million term loan. Any thoughts on when you might get back into the market in terms of repurchases?

We haven't made a decision yet. We can adapt as needed in the short-term, but we still face uncertainties due to challenging financing conditions. We chose to pay off $900 million of debt in the first quarter. Therefore, we haven't decided to buy back stock at this time.

Okay. Thank you, guys.

Thank you. And our next question comes from Laura Champine with Loop Capital. Please go ahead.

Thanks for taking my question. On the Flooring North America, we were struck with the 700 basis point year-over-year profit improvement. Given that sales were down 4%, I'm wondering if that is most fleet cost recapture or if there's something else really driving that? And then on the segment profitability for ceramic, I'm wondering how much of a hit that segment is taking from the acquisitions in Brazil and Mexico?

So, in the Flooring North America, the earnings did improve from lower costs, offsetting pricing, restructuring as well as productivity gains in the period. Then we continue to invest in all these different marketing activities and new product collections to drive business. We think it's going to carry over into the first quarter and continue on with the margins.

And, Laura, on the South America, both in Mexico and Brazil had dramatic increases in interest rates, which impacted the acquisitions and our base business. In that environment, we've done a lot to reduce the cost. We've got the businesses more or less fully integrated and the interest rates are starting to come down, which should improve those businesses a lot in the future.

Got it. But any more granularity you can give me on how much the negative impact was on the acquired revenues to the margins in Q4?

Well, the businesses are fully integrated. I expect that they are somewhat dilutive as the markets have slowed down and were underutilized.

Got it. Thank you.

And our next question today comes from Matthew Bouley with Barclays. Please go ahead.

Hi. Good morning. Thank you for taking the questions. Just zooming into Global Ceramic, obviously, price cost was positive for the entire enterprise, but it was still negative in ceramic. Any color on how you're expecting price versus cost to play out sequentially into Q1 in ceramic? Thank you.

Yeah. I'll comment on ceramic. So Q4 was in line with what we expected. Year-over-year, margins were impacted by lower demand, price/mix and FX. And then we also took extra production downtime around the holidays to manage our inventories. In that environment, we still were able to enhance our mix with new products. We reduced our cost and we've increased our productivity, and we also got those acquisitions integrated. You are seeing some decline in price/mix as the energy prices are coming down, and most of those have been passed along to the consumers.

I would say that sequentially, from Q4 to Q1, you've seen a lot of that bottoming out, and it should actually show a slight improvement again sequentially.

Got it. Okay. Perfect. Thank you. And then second one, obviously, you've gotten or you've announced a few cost reduction programs over the past year. Can you just sort of remind us of the magnitude of these cost reduction programs together? And are you kind of at run rate today in terms of those savings flowing through, or there's additional benefit to kind of accrue as we move through 2024? Thank you.

So, we focused in the restructuring actions late over the last 18 months of trying to take out high-cost assets, aligning our capacity, and implementing other lower-cost processes really across all three of the segments. Collectively, there are about $150 million of cost reductions that we should garner from these actions. Almost half of that has been realized in 2023. So, you get the remaining portion to flow through 2024. Of course, you're seeing some of that in 2023 being offset by other factors. We'll continue to evaluate the current situation and take actions as necessary to continue trying to drive improved results.

All right. Thanks, guys. Good luck.

And our next question comes from Kathryn Thompson with Thompson Research Group. Please go ahead.

Hi. Thank you for taking my questions. Following up on the previous question, you are primarily responsible for most of the cost-cutting measures. However, you earlier mentioned that you cannot predict M&A activities. That said, there are numerous public and private companies that can provide insights into their growth strategies, especially regarding their focus on organic growth and their M&A pipelines. Could you share your thoughts on future growth, particularly regarding the areas where you are emphasizing products and geographies, and also discuss the current state of your M&A pipeline? Thank you.

We are currently not fully utilizing the capacities across our businesses, so our objective is to enhance the utilization of existing product categories and operations as the business improves. We are also investing in areas that were previously more constrained before the slowdown. This includes the LVT category, for which we are in the process of updating the plants, and we expect to see them operating at full capacity throughout this year. We are introducing a new LVT renewable polymer core structure that has been well received in the market. In laminate, we are implementing new technologies to enhance acoustics and durability, improving the effectiveness of those assets. In the ceramic segment, we have launched products with unique color intensity, textures, and three-dimensional surfaces. Our main goal is to maximize the use of our existing assets. Regarding acquisitions, there are currently no pending deals ready to close, but we are always seeking opportunities. However, there is a significant gap between buyers and sellers right now, as we have previously noted, so there is nothing immediate to finalize at this time.

Is there a further clarification or confirmation regarding our geographic and/or product focus from an M&A standpoint?

We recently completed two acquisitions in Latin America, and they are fully integrated, so there’s nothing additional we need to do with them. The management teams are handling those. We are finishing up and improving several bolt-on acquisitions, although we have not yet realized all the benefits globally that we discussed earlier. We don’t have a specific area that requires immediate focus, but if I had to highlight one, it would be our insulation business, which is experiencing growth. I believe investing in additional assets for that business will happen sooner than in other areas to expand capacities. On the acquisition front, we are primarily looking for the right fit that aligns with our business. While we prefer bolt-on acquisitions due to the benefits of integration, we would consider entering new geographies if the right product and management are available.

Great. Thank you very much.

Thank you.

And our next question comes from Adam Baumgarten with Zelman. Please go ahead.

Hey, good morning. Just, Jeff, to confirm, do you expect residential markets to outperform commercial in 2024? And if that is the case, would that have a negative impact on mix and maybe margins?

Built in our plans are a decrease in the commercial businesses, because what happens is you have the projects that were started a year to two years ago completing. As they complete, there's less being started. So, there's going to be a gap for a period of time. And then the mix. You're correct. The mix in commercial is higher. But we think it's going to be offset by gains in the residential business. And the mix in the consumer purchases in retail, which they buy higher quality products.

You have to remember, Adam, that residential is somewhat divided between new construction and remodeling. As consumer sentiment improves, this leads to more remodeling and higher-ticket items, which creates a favorable mix for our business, providing additional support.

Okay, got it. And then just thinking about Flooring North America. Maybe just some color across the various product categories and where you're seeing the most pricing pressure? I know, I think, it's pressure across the board, but maybe the degree across the various different products you're selling in that business?

The entire category is experiencing pressure due to declining volumes. As expected, the more commoditized products face greater pressure compared to the differentiated ones. Carpets are struggling with both pricing and product mix. LVT prices have fallen as import prices have decreased, and there is also less volume being sold in these categories. Therefore, the situation for LVT might be more challenging than for other products.

Got it, thanks. Appreciate it.

Thank you.

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

Hi, good morning. It's Rafe. Thanks for taking my question. I wanted to ask if container rates have moved up recently? I'm wondering is that helping your business or reducing competition either in Europe or the U.S.? And if container rates were to continue to rise could that lead to less pricing competition on the LVT or ceramic side?

Let's first start with imported products; there's a long supply chain. When things move, it takes some time before they reach the marketplaces, and this needs to be sustained over time. Therefore, it's too early to determine the situation. If freight rates increase and remain elevated, it would eventually impact the market after the current inventories are used up, which would lead to higher prices. At this point, it's still too early to conclude whether there will be any sustained impact.

If container rates stay where they are today for the next quarter or two quarters, do you think that would start to have an impact on pricing and you'd see some price either stabilization or actual improvement?

What happened is, as you would suspect, it would have to flow into the cost of the product that would raise the prices, and the prices in the marketplace will go up, and it would help our local manufacturing.

Great. And then where do you compete most against imported product? Is that in the U.S., or is that in Europe and the context is, obviously, with some of the disruptions in the Red Sea? Does that, like could your European business start to benefit from fewer imports from Asia?

Yeah. So from Asia, you have the imports in Europe would be, mostly LVT. Then you have the ceramic is moving where the most aggressive players are in India, is that, so those two would be the most on the other side, we do ship product around the world. We ship high-end ceramic all over the place. We ship vinyl to the Middle East and other marketplaces. So it impacts those limited ways.

Thank you. Very helpful.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back to our Jeffery Lorberbaum for any closing remarks.

Thank you very much. We appreciate your interest in Mohawk. We believe we are well-positioned for the recovery that's going to come in the United States. Thank you for joining the call. Have a good day.

Thank you. The conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.