Good morning, everyone, and welcome to the Mohawk Industries First Quarter 2024 Earnings Conference Call. Please note this event is being recorded. At this time, I'd like to turn the floor over to James Brunk. Please go ahead.

Thank you, Jamie. Good morning, everyone. Welcome to Mohawk Industries' quarterly investor conference call. Joining me on today's call are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's first quarter performance and provide guidance for the second quarter of 2024. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. For 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 the call over to Jeff.

Thanks, Jim. Good morning, everyone. Though economic headwinds are impacting our industry, our results reflect positive effects of the actions we're taking to enhance our performance. Our net sales for the first quarter were $2.7 billion, down 4.5% compared to last year. Adjusted earnings per share were $1.86, up 6% versus 2023 as a result of restructuring productivity initiatives and benefits from lower costs of materials and energy, partially offset by weaker pricing and mix. Currency exchange rates continue to affect our operating income with a negative impact in the quarter of approximately $12 million or $0.15 on EPS. Across our regions, market conditions remained similar to the prior quarter with significant pricing and mix pressure through industry competition for volume. Though slowing, the commercial channel continues to outperform residential. Residential remodeling remained soft due to low housing sales and the impact of inflation on discretionary spending. Retailers have reported that consumers are reluctant to initiate higher ticket projects, with flooring facing greater pressure since most replacements can be readily deferred. Our teams remain focused on managing through the near-term environment, realizing sales opportunities, reducing controllable costs, and completing restructuring initiatives. We continue to manage our production levels to align inventories with market demand. To stimulate sales, we're investing in new product introductions with enhanced features that convey the value of our collections. Given inflationary pressures and labor benefits and other items, we continue to take additional actions to reduce our cost structure and improve productivity. Globally, there is optimism about consumer confidence, improving interest rates, declining, and a rebound in the housing market. The timing of this inflection in each market depends on inflation levels and actions by their central banks. Latin America aggressively raised interest rates to combat inflation, and now the region is among the first to implement rate reductions. The Brazil Central Bank initiated several rate cuts and Mexico recently lowered rates for the first time since 2021. In the U.S. and Europe, Central banks are maintaining interest rates as they focus on achieving their targeted inflation levels. The present forecast for U.S. new home starts and existing home sales is for a slight increase in 2024, with greater improvement in the second half of the year. In some countries, governments are subsidizing housing investments by reducing mortgage rates. In the U.S., builders are stimulating purchases of their properties by buying down interest rates for consumers. The U.S. Realtors Association recently noted that life events eventually require buyers and sellers to make moves regardless of interest rates. The desire for homeownership remains strong, and people will find a way to realize that goal. Since our last call, Newsweek named Mohawk one of America's greatest workplaces for women, and Green Builder selected our PureTech PVC-free resilient flooring as one of their top products of the year. We're pleased to be recognized for both our commitment to our people and our product innovation. Now, Jim will provide a review of our financial performance for the quarter.

Thank you, Jeff. Again, sales were just under $2.7 billion. That's a 4.5% decrease as reported and 5.5% on a constant basis due to year-over-year price and mix pressures continuing due to a combination of tight demand, the pass-through of lower input costs, and consumer trading down. Our Flooring Rest of the World segment was impacted the most by the price and mix issue in the quarter. Gross margin was 24.2% as reported or 24.4% on an adjusted basis versus 24.1% in the prior year, primarily due to lower costs of material and energy of $147 million substantially offsetting the negative impact of price and mix of $152 million, in addition to the benefit of our productivity and restructuring actions of $35 million. SG&A expense was 18.8% as reported and 18.4% on an adjusted basis, basically in line with the prior year. That gave us an operating margin of 5.5% as reported. Nonrecurring charges were $17 million in the quarter, giving us an adjusted operating margin of 6.1%. That's a slight improvement over prior year, driven by the lower input cost of approximately $136 million and increased productivity of $47 million, offsetting the negative impact of weaker price and mix of $153 million and the unfavorable impact of foreign currency of $12 million and temporary manufacturing shutdowns of $10 million. Interest expense for the quarter was $15 million, slightly favorable versus prior year. Our non-GAAP tax rate is 21.8% versus 22.6% in the prior year. We expect Q2's tax rate to be between 20% and 21%, and the full-year rate to be between 19% and 21%. That gave us an earnings per share as reported of $1.64 and, on an adjusted basis, $1.86, an increase of 6% versus the prior year. Turning to the segments, Global Ceramic had sales of just over $1 billion. That's a 1.4% decrease as reported and 5% on a legacy and constant basis due to the unfavorable impact of price and product mix and lower volume as the industry demand remains compressed. Operating margin on an adjusted basis was 5%. That's a decrease of approximately 130 basis points due to the unfavorable impact of price and product mix of approximately $40 million reflecting the continued difficult market conditions and the unfavorable impact of foreign currency of approximately $11 million, partially offset by lower input costs of $32 million and productivity gains of $14 million. In Flooring North America, we had sales of $900 million. That's a 5.6% decrease as reported due to lower remodeling activity impacting volume as well as pressuring price and mix across our product lines. The business improved through the quarter, and we are introducing new residential collections with unique features to enhance our carpet, laminate, and resilient sales. Operating margin on an adjusted basis was 5.3%. That's a significant improvement versus prior year with favorable impacts from lower input costs of $57 million and productivity gains of $23 million, as we benefit from our cost optimization and restructuring initiatives. This was partially offset by the unfavorable impact of price and product mix of $20 million. Lastly, Flooring Rest of the World had sales of just over $730 million. That's a 7.4% decrease as reported or 5.9% on a constant basis due to the unfavorable impact of price and product mix, partially offset by an increase in our unit volume, even in a generally weak environment across Europe. Operating margin on an adjusted basis was 10.1%. That's a decrease of 250 basis points driven by the unfavorable impact of price and product mix of approximately $92 million, primarily in our panels business, which has declined substantially compared to the high prior year comps when the industry was running near capacity. These were partially offset by lower input costs of $48 million, stronger unit volume of $11 million, and productivity gains of $10 million. Corporate and eliminations was $11 million for the quarter, in line with prior year, and our full-year forecast is for $45 million. Looking at the balance sheet, cash and cash equivalents were just over $650 million with free cash flow in the quarter of $97 million. Inventories were just over $2.5 billion, with a year-over-year inventory decrease of about $200 million, primarily due to a reduction in costs. Our inventory days were reduced to 125 days versus the year-end level of 130. Property, plant, and equipment were just shy of $4.9 billion. Our CapEx for the quarter was $87 million, with depreciation and amortization of $154 million. The company plans to invest approximately $480 million to $500 million in 2024, with D&A for the full year forecasted to be approximately $600 million. Overall, the balance sheet and cash flow remain very strong with gross debt of just over $2.6 billion and leverage at 1.4x. At this point, I will turn it over to Chris to review our Q1 operational performance.

Thanks, Jim. During the quarter, sales in our Global Ceramic segment remained soft across our regions. The industry is operating below historical levels and market competition to capture volume is affecting both our pricing and margins. Product mix is also declining as higher-value residential remodeling channel is softest, and those customers undertaking new projects are selecting lower-cost options. Reduced energy prices are enhancing our results, though wages, benefits, and other costs have increased. We continue to execute cost reduction initiatives, including utilization of lower-cost materials, product reformulations, and reductions in SG&A spending. We're driving productivity through increased efficiencies, higher yields, and consolidating our distribution network. Our investments in new printing, polishing, and rectifying technologies are delivering higher value sales and formats to improve our mix. We are introducing decorative innovations with new glazes, 3-dimensional surfaces, and updated artisanal mosaics. We are launching larger formats in floor and wall tile and porcelain slabs, along with smaller offerings that replicate handcrafted visuals. Our broad product offering, quality, and service advantages are helping us expand business with both new and existing customers. In the U.S., cold weather caused the suspension of operations at a number of our manufacturing facilities and service centers in January, impacting our cost and revenue. Our Tennessee quartz countertop expansion should be completed later this year, and we're developing new products and enhanced marketing tools to support our additional capacity. The U.S. ceramic tile industry has filed a petition against India in response to widespread dumping of ceramic tile in the U.S. market and expects tariffs between 400% and 800%, plus additional duties for subsidies. Other countries where we operate are considering similar actions. In Europe, we're seeing robust growth in porcelain panel sales after our recent expansion, and sales have also benefited from our new smaller and larger sized premium products. European energy prices have moved to lower levels than forecasted, which should benefit consumers. In Mexico and Brazil, we're optimizing our sales and improving our operations. We're implementing new distribution and product strategies in each country, so our brands complement each other in the marketplace. In our Flooring Rest of World segment, markets remained soft despite declining inflation. In the quarter, our volumes increased from the prior year's low levels, which may be an indication of improving trends in our categories. So our results were impacted by pricing pressures as we pass through lower input costs in highly competitive markets. Our Quick-Step brand sales improved during the quarter as we realign price points, reflecting lower costs and increased marketing efforts to stimulate demand. We've completed the restructuring of our residential LVT program and are beginning to see the savings we anticipated. The change is delivering substantial growth in our residential rigid LVT, which is replacing our discontinued flexible products. In Insulation, we've recently experienced material increases and are raising our prices accordingly. In our panels business, margins have declined from our cyclical high comparisons due to the underutilization of industry capacity, partially offset by mix improvement in our decorative collections. We've announced selective price increases and panels to reflect rising material costs. We continue to implement productivity initiatives and containment and cost containment projects across the business, including labor efficiencies, higher yields, and alternative materials. We're enhancing our bolt-on acquisition in MDF Boards, sheet vinyl, and mezzanine flooring and will complete our premium laminate expansion this year. In Australia and New Zealand, reduced input costs and increased productivity offset lower pricing and volumes in a slow environment. In our Flooring North America segment, our results versus the prior year benefited from declining raw material and energy costs, partially offset by lower price and mix. While residential remodeling was generally weaker overall, market conditions vary depending on channel and product category. Sales improved through the quarter, though many retailers in some of our facilities were temporarily closed in January due to weather. Lower market demand and consumers trading down are creating a competitive marketplace, pressuring average selling prices and product mix. Based on builder optimism, new single-family home sales should improve through the year, positively impacting our Flooring business. Commercial sales continue to outperform residential, led by the specified hospitality, retail, and government channels. Retailers are embracing our new residential product launches, including PETPremier carpet and PureTech resilient planks. We're optimizing sales of our consolidated coordinated accessories and growing our recently acquired rubber trim business. We're increasing the sales of our nonwoven acquisition with new customers and product expansions. Our West Coast LVT facility is increasing production, and our Georgia restructuring initiatives are being implemented. During the quarter, we delivered productivity gains across the segment with operational improvements, better yields, and enhanced logistics. I'll return the call to Jeff for closing remarks.

Thank you, Chris. The Flooring industry appears to be at the bottom of this cycle, and we are managing controllable aspects of our business to improve our results. We continue to reduce our fixed and variable costs through ongoing restructuring and additional productivity initiatives. We're aligning production with market demand to control working capital, which increases our unabsorbed overhead to enhance sales and margins. We're upgrading our product offering with unique features and investing in new merchandising. This year, we're completing our LVT, quartz countertop, and premium laminate expansion projects to support our products with the greatest growth potential when the market recovers. Our other capital investments are focused on reducing costs, delivering product innovation, or maintaining the business. Due to European vacation schedules, our second quarter sales are seasonally higher than the third quarter. Given these factors, we anticipate our second quarter adjusted EPS to be between $2.68 and $2.78, excluding any restructuring or one-time charges. Residential flooring sales should lead to recovery as consumer confidence improves, the housing market strengthens, and postponed remodeling projects are initiated. Existing home sales will normalize and serve as another meaningful catalyst for flooring since homeowners tend to replace flooring more often before listing a property or soon after completing a purchase. Across our geographies, housing has not kept pace with household formations, and substantial home construction will be required for many years to satisfy those needs. Additionally, as homes age, increased remodeling investments are required to maintain property values. As the world's largest flooring manufacturer, we expect to significantly benefit from our brand leadership, investments in new capabilities, and recent acquisitions as the flooring market recovers. We have the products to inspire consumers, the infrastructure to deliver superior service, and the balance sheet to invest in opportunities for the business. We'll now be glad to take your questions.

Our first question today comes from Matthew Bouley from Barclays.

So obviously, the trajectory of interest rates is a little different than what the market thought earlier this year. I guess two parts. Do you have any different thoughts around how you're thinking about earnings growth for Mohawk? I think previously, you had expected in the second half of the year that you could see growth year-over-year. Clearly, it was positive year-over-year in the first quarter. But any kind of thoughts around the cadence of the business into the second half? And then just are you managing the business any differently, assuming this different rate environment, capital allocation, managing capacity, any restructuring actions being considered? Any thoughts around how that has evolved here?

The recent comments by the Fed that interest rates will stay higher could somewhat impact housing sales and the flooring industry improvement as we go through the year. The industry has been running at extremely low levels, and eventually buyers and sellers have to conduct transactions. People who are not moving should increase remodeling over time, and housing sales are expected to increase from their very low levels. At the same time, we anticipated commercial would slow significantly. It’s possible it could be better than we expected given the stronger economies at this time. We still anticipate improvement in the second half and expect to exceed results this year.

Got it. Perfectly. And then I guess maybe sticking with the capital allocation side. You're completing some of your capacity investments this year. What does that mean for capital expenditures beyond 2024? And just kind of any additional thoughts around the share repurchase within that capital allocation set of priorities?

Well, first of all, just to remind you, our forecast this year is somewhere between $480 million and $500 million. That's below D&A of about $600 million. About 45% of that is really focused on cost reductions and product innovation. 15% is relatively to complete those growth investments that you just mentioned. And the remaining 40% or so is on the maintenance of the business. Going forward into next year, given the completion of the capacity projects, the focus will be on cost reductions, product innovation, and the maintenance of the business, unless, of course, we come up with new ideas from a capacity standpoint. In terms of other cash priorities, again, we'll focus on broadening our product offering and innovations around products and identifying acquisitions, whether they be bolt-on or acquisitions that would help us get into new markets. And then share buybacks are still being considered as part of that allocation.

Our next question comes from Tim Wojs from Baird.

Maybe just to start, just in the first quarter. I mean, price mix, I think, kind of more than offset some of the raw material improvement or raw material cost improvement that you kind of saw on a year-over-year basis. So as you kind of think about the next few quarters, how should we kind of model or think about that price mix cadence and maybe just price cost in general as we kind of go through 2024?

Let me start with some of the assumptions around Q2 that give us a baseline. As we enter Q2, we are seeing some signs of increasing volume but are seeing continued price and mix pressure. We expect seasonality to be more aligned with historical levels. We continue to invest in innovative products, process improvements, and cost reductions to try to control our costs. Still anticipate that FX will continue to be a headwind as well. In terms of material costs in Q2, we would anticipate the benefits from lower costs from a year-over-year perspective to be offset by that price and mix pressure, with the Flooring Rest of the World continuing to be under the most pressure.

Okay. Okay. That's really helpful. And then just, I guess, on the panel kind of price mix commentary, when do the comps there just get easier?

I think the panels business is going to be under pressure all during this year.

But the cost will become easier in the second half.

Our next question comes from Susan Maklari from Goldman Sachs.

Jeff, it seems like you are starting to realize more of the benefits of the productivity and the restructuring efforts even with the business continuing to be under pressure. Can you talk a bit about how that can contribute to the margin profile over time? And maybe where do you think that this can go even if the macro remains less supportive?

Let's start out with the general view by different channels. In the residential flooring sector, sales always rebound from the low level that they're at. Consumer confidence improves, housing improves; you have to postpone remodeling that hasn't been done in the last couple of years due to inflation. So that comes back; we expect, as you said, the mix and average selling prices as the market improves. It actually changes because there's more higher-value retail replacement business, and it helps the margins. We'll benefit from all the different activities on a continuous basis, the cost reduction, the product investments, the growth initiatives, the different acquisitions that we've made over the past 1.5 years. We expect them to benefit our results significantly as conditions improve. This will increase the margins with higher volumes, and we'll get leverage in the SG&A and the other overhead costs, as well as the increased productivity. So, coming out of the cycle, we're at a low level, which happened in the last big downturn. The first expectation is that we get back to a 10% operating income and then continue to expand it further.

Okay. That's helpful color. And then I guess you mentioned that you still expect to expand in the second half of this year. Just any thoughts on more specifics around how that may come together? What some of the key factors could be, especially as you think about the Flooring North America segment?

When we start, we expect to see the usual seasonal patterns, which typically show that in the U.S., the peak occurs at the end of the second quarter and into the third quarter, and we anticipate it will return to normal. Currently, as we've mentioned, demand remains weak with ongoing pricing pressure. Until volume increases, we believe that pressure will continue, along with the product mix. Additionally, we're assuming that the replacement business, which has been quite low, will eventually pick up as homeowners start to improve their properties if they plan to stay. Furthermore, some individuals will need to move due to lifestyle changes, which means this low point cannot persist indefinitely. We expect that even if interest rates do not fluctuate significantly, we will begin to see some improvement. In other countries, it appears they may start to lower interest rates more quickly, which should lead to increased consumer confidence and a rise in remodeling activities, as that is typically the first area to see growth.

Our next question comes from John Lovallo from UBS.

The first one, maybe just focusing on the second quarter. It seemed, I think, that previously, you had expected sort of on a year-over-year basis, energy cost reductions this offset negative price mix and that productivity would offset wage and benefit inflation. I guess the question is, is that the expectation still for the second quarter? And did that happen in the first quarter only in North America?

Well, first of all, in the first quarter, as I said, if I just look at materials and energy, it's about $147 million favorable in terms of lower cost compared to the $153 million unfavorable price and mix. The most pressure was seen, as we said, in the Flooring Rest of the World category, and that is the one place where materials and energy did not offset the negative price mix. I would think in the second quarter, I would anticipate that trend continuing where the pressure is the highest in Flooring Rest of the world.

Okay. Okay. Got it. And then just trying to wrap my head around the second half of the year. I mean, should we expect a negative impact from pricing to sort of lap to maybe less of a price mix headwind year-over-year, but also probably less favorable impact from lower input costs? And then sort of from there, you need volume to drive productivity to offset any additional inflation. Is that the right way to think about it?

Yes, John, it is the right way to think about it. What I would anticipate, as you start to lap the prior year, price/mix will become less of a headwind. Again, we're speaking about year-over-year. But you're also right; I'm going to start to also lap the lower cost. And so that will become less impactful as well. Really what it's going to turn into is, as we anticipate volume getting a little bit stronger, you'll get a pickup in volume, but you'll also get a benefit and less shutdown costs as well. And so that will be the focus as we go into the second half of the year.

Our next question comes from Phil Ng from Jefferies.

This is actually Collin on for Phil. I just wanted to start on the commercial piece. You know that the commercial continued to outpace residential that's slowing. Are volumes higher year-over-year in that commercial business? And then how are you thinking about your commercial flooring volumes as we move through the end of 2024? And then maybe just remind everyone of the size of that commercial business for each of your segments?

What we said was that the commercial business is holding up better than we had anticipated. We thought that it would fall off faster than it has, and it’s performing better than we thought. We still think it's going to continue slowing through the year as new projects haven't been initiated in the last year. So we're still anticipating it slowing. Commercially, you also have pricing that is more resilient since the products are more unique, so you don't have as much price pressure. Presently, the hospitality, retail, and government channels are outperforming. Just a comment on the backside: when we start getting better, it's going to take longer for commercial to improve because it takes a longer time to get the planning approvals and construction to begin in the business. Anything else you want to add?

And overall, the commercial makes up roughly about 20% to 25% of the overall Mohawk business, with it being the highest in the ceramic segment.

Okay. That's helpful color. And then I guess I just wanted to touch on the India ceramic tile tariffs. Can you just talk about the price point of those Indian imports, how you're positioned versus that price point? And what percentage of your portfolio would really benefit from the tariff on the Indian tile?

Well, the prices of imports have been declining with excess capacity, energy, and freight costs. And of course, India has been growing. The Tile Council of North America expects those tariffs to be between 400% and 800%. That should help our volume and increase market pricing since it's been pushed down so low. They tend to be more focused in the low to mid-end of the marketplace to answer that part of the question.

Our next question comes from Keith Hughes from Truist.

Your comments around business improving earlier in the call, I know that was highlighted in the release. Have you also seen some volume improvements in Flooring North America?

At this point, no, in the first quarter, volumes were still lower in both the Flooring North America and Global Ceramic segments. We did see, as we noted, some volume improvement in the rest of the world segment.

Okay. So no sequential movement in those two is what you're saying.

Remember, the first quarter is always lower than the fourth quarter.

I was speaking from a year-over-year perspective as well.

Okay. Second question in ceramic. I guess if you could talk about the end-user markets in North America. I know commercial has been strong. What areas of commercial have been moving the numbers up?

Well, generally, the commercial business in ceramic, I would say, has been flat. It hasn't decreased as much as we thought it would. But as Jeff said, we expect that to soften as we go through the year.

I think the comment was that our business is about flat; I don't think the market is.

And within commercial, I assume office is weaker, but what areas are offsetting? Is that right?

That would be the same one we talked about before.

Yes, like hospitality, the medical schools, those things have still been strong.

And I would add to that government as well.

Our next question comes from Michael Rehaut from JPMorgan.

First, I would love to get your thoughts around price mix trends for Flooring North America and Global Ceramic. And as we look into the second quarter and even the second half of the year, given the current demand backdrop, would you expect pricing and mix to remain negative as we get into the back half? And what kind of trends would be driving that or would be driving any type of change into the positive?

Given right now, the low housing sales and industry volumes are still down significantly. We think price/mix remains under pressure, especially given the high fixed cost of operations. The industry will start to rebound as you start to see consumer confidence and housing activity certainly increase. But we do believe we should start to get towards the bottom of the cycle, but I would anticipate price/mix being that headwind for the balance of the year.

I mean, one thing that should help us in the future as remodeling comes back, the margins in that, at least on ceramic, tend to be higher.

Right. Okay. I guess the margins on commercial, though, are also a little bit higher. So that would be depending on how much commercial slows, a little bit of an offset as well? Or is that the right way to think about that?

That is the right way to think about it. It's more specified in nature and tends to be a richer blend of product and margin.

Right. Second question, would love to get your thoughts. You do a continuous amount of productivity, restructuring adjustments to your footprint. I know there are a lot of moving pieces there, but I would love to try and get a sense for what benefits of cost-saving benefits your restructuring actions contributed to the second quarter in aggregate. And if that type of contribution or benefit that you're seeing right now on a quarterly pace would increase into the back half of the year or just kind of stay consistent with what you're seeing this past quarter?

Let me frame it a little bit better for you, Mike, in terms of the restructuring actions. We continue to execute the actions that we have previously identified. We've realized about $90 million of the savings of about a $150 million goal through the first quarter. That's last year through the first quarter of this year. So we have another $60 million of benefit that is going to flow through the P&L. Much of the restructuring has been executed, including the closure of high-cost assets, the restructuring of LVT operations, discontinuing low-margin products, and reducing administrative structure. All the businesses are continuing cost reductions and SG&A operations and logistics. In the first quarter, that certainly was a part of the benefit of the $47 million that I noted in our productivity, and that will help as we go through the balance of the year.

Our next question comes from Mike Dahl from RBC.

First one is, obviously, on a year-on-year basis, there's a lot of noise looking at kind of the price mix comparisons. On a sequential basis, and maybe specifically for North America and Global Ceramic, can you talk to kind of the sequential trends that you've seen year-to-date or versus 4Q and price mix? What's embedded in the 2Q guide? And then the flip side, obviously, on cost. You addressed some of the year-on-year dynamics we've seen; obviously, a pickup in oil. So can you also speak to whether or not in Flooring North America in particular, you're starting to see some upward pressure sequentially on your cost basket?

Let me start by addressing your comment on the sequential trends in price and mix for Flooring North America and Global Ceramic. From the fourth quarter to the first quarter, the changes were relatively flat. However, I expect more pressure in Flooring North America as we move from the first quarter to the second quarter. This is partly due to seasonality and some pricing pressures in that segment. Overall, I would say that Flooring Rest of the World is facing the most significant pressure, particularly related to the issues we've discussed in the panels area.

There will still be additional productivity and cost reductions to help offset that. Looking ahead, we believe that the raw materials and input costs at the beginning of the year were low. We have observed some changes in the first quarter, and we anticipate limited increases given the current environment. As business improves in the future, we expect suppliers to raise prices, and we will need to implement increases to pass those costs through. Additionally, various economic events or regional conflicts could alter our perspective on this situation suddenly.

Right. Yes. Okay. Fair enough. And then second question. Specifically with respect to the second half in 3Q, you did make a comment highlighting European seasonality, 2Q versus 3Q. I feel like normally that might be a comment that we see more next quarter. As a reminder, the people, as you're thinking about your 3Q guide. Can you just talk to the intent behind that?

We wanted to highlight that the European business operates on a different cycle, and some of our South American businesses are currently experiencing winter. It's important to remember that non-U.S. businesses are not always taken into account. We just wanted to point this out as you review the models.

So in the context of the year-on-year improvement, is the idea that sequentially, 3Q earnings could be down sequentially?

It’s a bit early to determine since it depends on the rebound. If we start to see an increase in volume, as mentioned earlier, the key point is that Europe typically peaks in the second quarter historically.

Our next question comes from Kathryn Thompson from Thompson Research Group.

So you talked about the move for tariffs on services in the U.S. But we do acknowledge that, and we've gotten some feedback about the Chinese tariffs have rolled off last year and are hearing just more dumping activities, particularly for LVT since the end of last year. What are your thoughts or updates on potential reinstatement of tariffs or better yet, what are you seeing in terms of trends in Europe for your products?

Well, you asked about LVT in general. So LVT sales have slowed as in other foreign categories. Pricing has declined with lower raw materials, import costs, and transportation in the U.S. Our West Coast facility is increasing our production, and our Georgia restructuring is being completed. In Europe, we completed the restructuring of our LVT operations. We've implemented the change in our residential LVT to rigid and where sales are expanding, and we're improving our product mix and reducing costs to increase our profitability as we go through the year. That's specific to LVT.

There haven't been any announced actions against dumping on LVT at this point. That's the answer to the other question.

Are you seeing competitive pressures just from lower-priced LVT hitting the market in Europe? Like additional?

I mean it's a very competitive environment, but the products that we are putting in the market tend to be at the higher end and are actually doing pretty well.

Okay. That's helpful. I understand that we shouldn't overly scrutinize the commercial end market, but I'd like to explore it a bit further, especially given the rise of mega projects. The market is currently focused on a disappointing ABI number released this week. However, our industry contacts have noted that major mega projects often aren’t reflected in that ABI number. Our inquiries indicate a stronger commercial end market than the ABI suggests, particularly in light of these larger-scale projects. What strategies does Mohawk employ to engage early in discussions surrounding these projects? I know it's always a process that you've described in the past, but this time period is quite different. How does Mohawk position itself for these larger projects, and what tactics do you use to succeed in this environment?

Well, I can just answer one thing on that: in our carpet commercial and our ceramic commercial, we've got a lot of people that are calling on these commercial projects together and are sharing resources, and it works out really well and gives us an advantage.

We're calling on the designers, the architects, the building owners, and the contractors all at the same time. We are participating in the planning of the different projects, and we've been able to position ourselves well in the marketplace. Our comment, I guess, are agreeing with you that it's holding up a little stronger than we anticipated, but we still think it's going to continue to slow, and we're being aggressive in our calling on and offerings to the marketplace.

Our next question comes from Laura Champine from Loop Capital.

My question is on excess capacity. I think that you've quantified sort of ballpark running at 75% utilization in the not too recent past. Where is that now? And how high would you like to get it with your current restructuring initiatives, assuming volumes stay where they are today?

The restructuring initiatives we've implemented are still showing a utilization range of 75% to 80%. This varies depending on the specific period and quarter. As the year progresses, I believe it will continue to improve. The key question is when the market will recover and alter the dynamics. We aim to stabilize our production throughout the year as much as possible. However, we haven't made any changes that would significantly increase capacity utilization unless there is improvement in the marketplace.

As we said on CapEx, really, our focus is more on the cost reduction and product innovation as we just complete the growth investments that we had talked about before.

I know that flexes back and forth, but do you find yourself becoming more or less vertically integrated, meaning are you extruding your own yarn? Are you doing less so with this cost inflation that you're seeing?

It hasn't changed.

Our next question comes from Stephen Kim from Evercore.

Earlier in the call, you mentioned your goal of achieving a 10% operating margin and possibly going beyond that. I wanted to delve deeper into that 10% figure. What level of volume growth do you believe is necessary to hit that target on an annual basis, particularly in relation to our current situation? Are we looking at needing around 10% volume growth from this point to get a clearer understanding of your estimate?

I'm not sure I have the number to give you. We have our models out for the next 3 years and we see ourselves reaching that with the different models we've done, and I don't recall the volume changes that are built into it. The timing, like you know, it's impossible to define the moment in time it changes. We think we're going to see some of it this fall, and we should see significantly more next year as we come out of this.

And Stephen, given how underutilized we are, as that volume moves up, we get a substantial benefit as it moves.

Yes, that's clearly something beyond your control. It seems you're doing everything possible regarding costs and product development. Ultimately, the market will decide that aspect for you. However, it looks like you're anticipating something quite significant. I mentioned a growth rate of about 10%, which I believe is reasonable. Would that be in line with the minimum expansion you expect from the current low point?

Yes, Stephen, the numbers that you're talking about are not unusual as you come out of a downturn, even if you go back to the last one. That first year, you get in kind of accelerated top-line sales as remodeling starts to come back; new home construction is stronger. So it's not unusual to get a multiyear benefit from the rebound before you get more back into a normal growth, which in flooring could be GDP plus type numbers.

Yes, exactly. Okay. Well, that will be fun to watch. Second question relates to Flooring Rest of World specifically. I'm looking at the margins there. And in each of the past 3 years, your margins have declined from the first quarter, which was the highest actually to the second to the third to the fourth. It was actually kind of a steady decline. And then even further back, typically, the margins are stronger and certainly in the front half than they are in the back half. Just wondering, are there any structural factors that you can call out? Maybe the vacations are part of that. And is there any reason to think that 2024 would track differently from that recent trend where we've seen just sequential declines in margins?

In Europe, you're right. After the second quarter, we tend to increase shipments going into the third quarter due to vacations for both us and our customers. These vacations last 2 to 3 weeks, during which we often shut down entire factories. Then, as we enter the fourth quarter, we encounter Christmas vacations as well. Both of these factors contribute to the second quarter being a peak.

Our next question comes from Sam Reid from Wells Fargo.

I wanted to dig a bit deeper on pricing, particularly in the U.S., but perhaps ask it from a slightly different vantage point. So can you walk through some of the differences that you might be seeing by channel? So for instance, are there any deviations in price dynamics that you've been seeing more recently, say, between the independent retailers versus the home centers?

In general, the retail business is under a lot of pressure. You have the home centers that, in general, have a lower income level buying on average from our specialty retailers. So they've been impacted more than the other channel at this point.

And I would say, overall, like particularly in ceramic, the one that's been off the most has been the remodeling, which not only affects the home centers, like Jeff said, but it's also one of our higher-margin businesses that's been under pressure.

No, that makes sense. And then maybe switching gears, just quickly talking tile here. Your Tile Delta business had a pretty impressive display at the Kitchen and Bath show this year, at least I was impressed by it. I wanted to see, though, any wins that you've gotten from that event or kind of any feedback? Just sort of curious kind of what the outcome was there.

I think we had a really good show. And if you just talk about U.S. ceramic, the new construction and commercial improved as we expanded our distribution. Our price and mix have been negatively impacted, but we've done a lot on new innovative and higher-margin products that are gaining traction and partially offsetting these price declines. So there's been a lot of work in our ceramic business in the U.S., particularly, to improve our product mix, and I think it's paid off. And we've taken some market share from the high-end European, with a cost higher, and we've also been able to expand in some of the builder channels as our service levels were better than the imported products coming in.

Our next question comes from Eric Bosshard from Cleveland Research.

Yes, two things, if I could. First of all, what was better than expected in the quarter? I think the earnings were a little bit better and even the 2Q guide is a little bit better than consensus. I know that's not your number. But what's better than expected?

So the first quarter results were better because we had greater benefits from restructuring and productivity. We had declines in input costs that he went through a minute ago offset the lower pricing and mix. The weaker sales did result in more unabsorbed overhead, which we had expected. Flooring North America improved the most, but it had the most easier comps from the group. Then the rest of the world piece we keep reviewing that the panel business really did the margin step change from last year as the industry volume declined. And anything else you want to add, Jim?

No. The commercial channel, again, keeps outperforming residential at this point. But as Jeff said, probably the biggest gains for the quarter were around the productivity that the segments through us.

And then secondly, the optimism going into the second half, what are you seeing in the business now? You talked about North America price mix, I guess, eroding a bit incrementally into 2Q. What are you seeing within your business now, the results from March or even April that is improving and kind of informs that second half optimism?

And we're seeing the normal seasonal improvements through the first quarter and going into the second, that we would expect. And we don't have any definitive information that you don't have.

Yes, and we'll continue to watch certain signs. We look at indicators like consumer confidence. Obviously, we've talked about interest rates, but also discretionary spending and continued monitoring the housing starts, as well as new builds that have been stronger through this cycle along with commercial. Most people are anticipating the remodeling business coming off the bottom. It's been so low with people postponing it, and we're assuming we're going to see some benefits from that also. So we anticipate volumes really across the business to start to pick up at least in the low single-digit area.

One other thing. Last year we reduced inventory substantially. We don't have to do that again.

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

Long term, the category will rebound from the downturn as it always has. We're well positioned on our products and markets to enhance our results. We appreciate you for taking the time and joining us. Have a good day. Thank you.

And ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.