Good morning, everyone, and welcome to the Mohawk Industries Second Quarter 2024 Earnings Conference Call. 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 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 second-quarter performance and provide guidance for the third 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. With that, I'll turn the call over to Jeff.

Thanks, Jim. Our second-quarter performance reflected our focus on the controllable factors of our business, including sales initiatives, cost containment, and restructuring actions. Our net sales for the quarter were $2.8 billion, down 5.1% compared to last year. Our adjusted earnings per share were $3, up 9% year over year as a result of productivity initiatives and restructuring, as well as lower energy and material costs, partially offset by market pressures on pricing and mix and foreign exchange headwinds. We generated free cash flow of approximately $142 million during the quarter for a total of $239 million year to date. In the quarter, we purchased 755,000 shares or 1.2% of our stock for approximately $90 million. We remain optimistic about the future of our business and confident that in time, our worldwide markets will recover. Our second-quarter results exceeded our expectations despite soft market conditions around the globe. The commercial channel continues to outperform residential, although some softness in the category is occurring. While the long-term demand for our products is strong, residential purchases across our geographies remained weak. During the quarter, the actions we've taken to improve volumes in many product categories helped us; though the gains were offset by consumers trading down and competitive pricing. Residential remodeling is under the greatest pressure as consumers defer large discretionary purchases due to inflation and uncertainties about the future. In addition, flooring remodeling is significantly influenced by housing turnover rates, which remain suppressed due to elevated mortgage rates, high home prices, and the locked-in effect on homeowners. To reduce costs and align our business with current conditions, we're initiating additional restructuring actions across all our segments that would generate annualized savings of approximately $100 million, of which $20 million to $25 million will be recognized this year. The cash cost of these actions is about $40 million, with a total cost of approximately $130 million. The execution timeline will vary by project, with some extending throughout 2025 and into '26. In our global ceramics segment, we will optimize manufacturing by idling some less productive operations and aligning production to increase efficiency. We'll consolidate regional warehouses, further reduce product complexity, and leverage technology to lower administrative costs. We'll rationalize some of our Flooring North America manufacturing to enhance plant utilization, retire less efficient equipment, and simplify our offering. And Flooring Rest of World will lower our administrative and operating costs, streamline our product portfolio and distribution, and decommission inefficient assets. These actions will complement our previous restructuring initiatives that will reduce costs by approximately $60 million in 2024. Along with these, our teams are implementing many measures to manage current conditions, including enhancing sales opportunities, increasing productivity, and managing our overhead and working capital. Economists had anticipated that the Federal Reserve would lower rates this year to stimulate the US housing sector. While central banks in some of our markets have already begun to reduce rates, the Fed has indicated it intends to wait until inflation and economic activity sufficiently slow before taking actions. After the US Consumer Price Index dropped in June, many are predicting a September rate cut. If the Fed begins to lower rates at that time, we anticipate our industry should benefit next year as pent-up consumer demand increases flooring purchases. In April, US Today once again named Mohawk one of America's climate leaders, given our reduction in greenhouse gas emissions over the past four years. On July 16, we pushed our 15th annual sustainability report, which can be found online at mohawksustainability.com. Now, Jim will review our financial performance for the second quarter.

Thank you, Jeff. Sales for the quarter were just over $2.8 billion. That's a 5.1% decline as reported or 4.5% on an adjusted basis, with global ceramic having the strongest quarter versus the prior year. All segments continue to see price and mix pressures, with residential remodeling trailing the new construction and commercial channels in the quarter. Gross margin for the quarter was 25.8% as reported and 27.1% on an adjusted basis versus 25.9% in the prior year, with lower input costs and increased productivity offsetting the weakness in price and mix. SG&A expense was 18.2% as reported and 17.9% on an adjusted basis. This is in line with the prior year. Operating income as reported was $214 million or 7.6%. Non-recurring charges for the quarter were $43 million, primarily due to restructuring expenses in the period. That gives us an operating income on an adjusted basis of $257 million or 9.2%. That's a 90 basis points improvement versus the prior year as our lower input cost of $83 million and productivity gains of $49 million offset the unfavorable price mix of $111 million and foreign exchange of $11 million. Interest expense for the quarter was $13 million. That's down $10 million from the prior year due to strong overall cash flow and the payoff of the term loans earlier in the year. Our non-GAAP tax rate was 20.9% versus 19.6% in the prior year. We expect Q3's rate to be between 19% and 20% and the full-year rate to be between 20% and 21%. That gives us an earnings per share on a reported basis of $2.46 or on an adjusted basis of $3. That's an increase of approximately 9% versus the prior year. Turning to the segments. Global ceramic had sales of just over $1.1 billion. That's a 3.4% decrease as reported and 2.9% on an adjusted basis. Our industry volume remains constrained and pricing aggressive, while we are investing in new products to try to improve our mix. Across our various geographies, residential new construction is outperforming remodeling; and commercial, though slowing, is stronger than residential. Operating income on an adjusted basis was $95 million or 8.5%, which was in line with the prior year as lower input costs of $17.5 million and an increase in productivity of $14 million offset the unfavorable pricing mix of $25 million, foreign exchange of $10 million, and the lower overall volume. In Flooring North America, sales were $959 million or a 4.3% decrease as reported, even though our laminate product continues to take share as a waterproof wood alternative and with our LVT product expanding in the retail and builder channels. In commercial, the hospitality, government, and education channels are driving the outperformance versus the residential sector. Operating income on an adjusted basis was $82 million or 8.6%. That's an increase of 260 basis points versus the prior year as lower input costs of $36 million and the strength of our productivity of $19 million offset the weakness in price and mix of $36 million. And in Flooring Rest of the World, net sales were $727 million. That is an 8.3% decrease as reported and a 7% decrease on an adjusted basis as market conditions remained slow with weak consumer discretionary spending on larger ticket home projects. Pricing mix has also continued under pressure, though sales actions taken by our team through the introduction of new products and expansion of our customer base did lead to an increase in unit volume in laminate, LVT, and panels. Operating income on an adjusted basis was $91 million, which is a 12.6% operating margin. That's a 40 basis points increase versus the prior year led by a reduction in input costs of $30 million, positive impact of increased productivity of $15 million, offset by unfavorable price and mix of $50 million. Corporate and eliminations were $12 million during the quarter, in line with the prior year, with 2024 expected to be approximately $45 million. Now turning to the balance sheet. Cash and cash equivalents were just shy of $500 million with free cash flow during the period of $142 million, bringing our year-to-date total of almost $240 million. Inventories were just shy of $2.6 billion. That's a year-over-year decrease of approximately $40 million due to reductions in costs and the impact of foreign exchange as volumes slightly increase. Inventory days increased to 128 versus 120 in the prior year. The current plan, though, is to keep inventory relatively flat versus the prior year by year-end. Property, plant, and equipment stands at just under $4.8 billion, with CapEx of $91 million in the quarter, compared to depreciation and amortization of $172 million. The company plans to invest approximately $480 million in the year with depreciation and amortization at approximately $630 million. And the balance sheet overall and cash flow remained very strong with net debt of $1.9 billion, leverage at 1.3 times, and liquidity at approximately $1.3 billion, with the company purchasing approximately $90 million of shares in the quarter. With that, I will turn it over to Chris to review our Q2 operational performance.

Thank you, Jim. In global ceramic, our markets remain highly competitive as reduced industry utilization continues to impact pricing and margins. Our mix is weaker given soft residential remodeling activity and consumers trading down to lower price points. In the quarter, the impact of labor and freight inflation was offset by decreases in material and energy costs. In addition to our restructuring initiatives, we are implementing numerous cost reduction projects across the segment, including product reengineering, process improvements, and streamlining administrative functions. To improve our mix, we are investing in product differentiation with leading-edge printing, polishing, and rectifying technologies. These assets allow us to create floor and wall tile collections with superior visuals and higher-value sizes, styles, and formats. On May 10, the US Department of Commerce announced the commencement of anti-dumping and countervailing duty investigations of ceramic tile imported from India. The US tile trade organization believes this could lead to tariffs between 400% and 800%. Given India's widespread dumping, Mexico has increased import duties, and other markets are currently investigating similar options. In the US, our high-end design capabilities, domestic manufacturing, and extensive distribution infrastructure are enhancing our participation in the builder and commercial sectors. In Europe, our unit sales exceeded last year as we leveraged our manufacturing and styling advantages to create higher value products. Our porcelain slab expansion has enhanced our offering as demand continues to increase across the flooring, furniture, and countertop markets. European energy prices declined from last year, which should help increase consumer discretionary spending. Markets in Latin America remain difficult despite central banks initiating interest rate cuts. In Mexico, we have announced price increases to offset inflationary pressures and import duties. In Mexico and Brazil, we are initiating additional sales and operational improvements to maximize the performance of our acquisitions. In both countries, we have restructured the organization and implemented new product and distribution strategies. In our Flooring Rest of World segment, market conditions remained slow with constrained consumer discretionary spending. Declining inflation led the European Central Bank to lower key rates on June 6, and additional cuts may follow. In this challenging environment, we focused on actions to drive sales, such as enhancing our product offerings, executing promotions, and implementing strategic marketing campaigns. As a result of these sales initiatives, our volumes in laminate, LVT, and panels improved from prior year low levels. Pricing and mix remained under pressure, partially offset by lower input costs. In addition to our restructuring actions, we are launching many projects to improve productivity, enhance yields, and lower labor costs. We are consolidating regional flooring distribution centers and reducing logistics costs to align with present conditions. We are completing the conversion of our residential LVT program from flexible to rigid products, and we're improving our mix in our sheet vinyl category. Our laminate volumes grew as we expanded our customer base and enhanced sales with existing customers. The margins of our insulation and panels businesses have declined as fewer projects are being initiated and industry competition escalates. In Australia and New Zealand, our results were stronger given our actions to improve price and mix through new products and retail promotions. Increased manufacturing volume and associated productivity gains contributed to margin improvement in our business. In Flooring North America segment, despite challenging market conditions, volumes improved year over year in some markets and channels, though partially offset by price and mix dynamics. Our margins benefited from productivity gains driven by operational improvements, lower input costs, logistics efficiencies, and restructuring. This year, we have expanded our relationships with larger US homebuilders who are increasing the share of the market. Residential remains weak with home sales turnover at the lowest level since 2008, and consumers continuing to delay remodeling projects. Both of our luxury carpet collections and our value-oriented polyester products are accelerating. Sales of our LVT and laminate collections were stronger in the retailer and builder channels. Our recent laminate expansion is ramping up to satisfy higher demand for our waterproof flooring. The commercial sector continues to outperform residential, with hospitality, government, and education channels leading, though fewer projects are being initiated. Jeff, I'll return the call to you for closing remarks.

We anticipate present conditions continuing in the third quarter with elevated interest rates, inflation, and weak housing sales impacting our markets. In the current environment, we're executing plans to optimize our revenues and costs. We're managing the controllable aspects of our business, including innovative product introductions, reducing overhead, and rationalizing less efficient assets. We're streamlining operations by reducing complexity in our processes and product portfolios. Our restructuring initiatives will deliver significant savings and enhance our performance when our markets recover. We continue to benefit from lower energy and raw material costs, partially offset by labor and freight inflation. In the third quarter, we anticipate pricing pressures will continue given low industry volumes, constrained consumer spending on large purchases, and consumers trading down. As usual, European summer holidays will seasonally impact our sales and performance. Given these factors, we anticipate our third-quarter adjusted EPS to be between $2.80 and $2.90, excluding restructuring or other one-time charges. While we manage the short-term environment, we're preparing to capitalize on the demand that occurs when the industry rebounds. Residential remodeling is our industry's largest category and should lead the recovery as interest rates decline and consumer confidence improves. Across our regions, new home construction is needed to satisfy demand, and aging homes will require remodeling to meet homeowners' needs. In addition, new commercial projects will be initiated as the economy strengthens, and our product investments will enhance our participation. As the world's largest flooring manufacturer, we have the products, capabilities, and financial strength to optimize our results as the market recovers. We'll now be glad to take your questions.

Our first question today comes from Eric Bosshard from Cleveland Research.

Good morning. Thanks. The restructuring or cost-out program, whichever you call it, I'm just curious. You've gone through a couple of these in the last few years. The projects that you've identified here, why were they not included in the last one? Or asked a different way, like why take cost and capacity out now?

Well, when we're looking at the market where it is now, we think there'll still be some time before we see a significant recovery next year. So we're trying to work through how we're going to optimize the profits both in the short term and the long term. And we believe that taking more costs out will position us better in the second half, and it will also increase our profitability as the market recovers.

Within this, I guess, the second component of this, as you think about solving for the growth scenarios in '25, how much capacity do you have to support growth next year? Or embedded in that, what is the growth assumption you're considering as you right size capacity or optimize capacity?

As we look ahead to next year, we expect to see the cycle shift from its current low point. Demand for housing remains robust, and we believe there is significant pent-up demand in the remodeling sector. While we cannot forecast the exact timing, we anticipate that decreasing inflation and changes in interest rates will boost consumer confidence, housing sales, home remodeling, and commercial activity, all of which will greatly influence our category. As conditions improve, we expect to gain leverage with our cost structures and product mix. In terms of individual business investments, we have focused on areas that we believe will experience the highest growth rates. These include the laminate business, the quartz countertop business, the slab business in Europe, and the insulation businesses. We see substantial opportunities for growth in these areas and have made investments accordingly. We are prepared to capitalize on the favorable developments in the coming years.

Our next question today comes from David MacGregor from Longbow Research.

Yes, good morning. Thanks for taking my question. I guess just thinking while we're on the topic of restructuring and the cost reductions, can you just talk about how the anticipated savings, which I think you shared some aggregate numbers on that, how that would fall across the three reporting segments?

As you evaluate the restructuring savings, the initial actions we took last year have resulted in approximately $110 million of the $150 million we announced, through the second quarter. By year-end, you should see around $130 million. This program has been fairly evenly distributed across all three segments, with Flooring North America receiving a slightly larger share. With today's announcement of an additional $100 million, we expect to recognize $20 million to $25 million this year, with a significantly larger portion in the following year. All businesses continue to explore reductions in SG&A, operations, and logistics. In this context, Flooring North America will benefit more from the recently announced actions compared to the other segments.

Thank you for that color. And just as a follow-up, I wanted to get you to talk a little more about the commercial business where you're seeing a little more strength than you are in residential. And you noted some softness, though, is now starting to creep into this business through fewer projects being initiated. Just talk about what you're seeing there? And is there a difference between the Main Street commercial versus institutional business? And what level of growth should we anticipate through the second half of the commercial?

You're correct. Commercial is holding up better than residential. We are seeing some slowing in new projects and postponement of it. If you look by channels, the ones that are outperforming for us are hospitality, retail, government, and education. We're also taking actions to increase our penetration with large strategic accounts, and we're increasing our participation with them. The good news is that in these categories, pricing is more resilient, given more differentiation in the marketplace. And then just keep in mind, as we come out of this thing, commercial improvement takes longer because even though the macro things change, the planning and construction times take longer to do so that there's a lag between them.

And can you talk about what the growth is for the second half, what you think you might see there?

We're projecting it's going to be down somewhat. And it's different by market, by channel, all over the place. But I mean, it is slowing somewhat.

Our next question today comes from Susan Maklari from Goldman Sachs.

Jeff, my first question is a bit about how you're driving the business through the products. One of the things that you've mentioned is the product differentiation that you're focused on as well as the cost side of things. Can you talk a bit about what some of those benefits or those features are that you're stressing in those products? And as those gain traction over the coming quarters, how should we think about what they can contribute in either the back half of this year or even into next year in terms of perhaps mix shift and what that could mean for the business on top line as well as a profitability perspective?

Certainly. We have been focusing on introducing new products to the market across all categories. In ceramics, we’ve added new capabilities to produce tiles with varied colors, textures, three-dimensional designs, and different shapes and sizes. In the LVT segment, we’ve implemented enhancements for coloration and textures, along with a new renewable polymer core. For laminate, we’ve introduced features to improve durability and sound quality. Additionally, in our quartz countertop range, we’re implementing advanced veining technologies at mid-price points. Each product category is seeing similar enhancements. Overall, the lower end of the market is performing better, while the middle segment, which relies heavily on retail, is facing the most challenges. These new features and advantages are expected to positively influence our business when retail activity increases and consumer confidence returns.

Okay, that's helpful. And then it was encouraging to see that you did $90 million of share buybacks in the quarter. Can you talk a bit about what drove your decision to do that? And should we take it as a sign perhaps of you having some greater confidence in visibility and the forward trajectory of the business? Is it a sign that maybe we've turned the corner and you're feeling better about things from here?

I think you've probably answered my question for me. We're more confident that we are reaching the end of the cycle. We have taken additional actions to manage the short-term pressures by taking additional costs out. We're confident that the markets are going to recover. We can't predict the moment, but we know they're going to recover. So it's a good time to buy shares.

And does that mean maybe that you'll do more of them in the future?

Well, our balance sheet, as you know, is strong. In past cycles, we've had multiple opportunities coming out of these things as the industry recovers with acquisitions, and we'll continue to evaluate share repurchases as part of our capital allocation strategy.

Our next question today comes from Mike Dahl from RBC Capital Markets.

Hi. Thank you for taking my questions. The previous question about growth in the second half seemed to focus on the commercial sector. Could we take a broader look? You've experienced a mid-single digit decline in organic top-line performance during the first half. Could you discuss what you anticipate for the top line in the third quarter and your outlook for the fourth quarter?

At this point, we don’t expect any changes in the current conditions for the third quarter. We anticipate a continuation of weak demand, pricing pressure, and low industry utilization. We don’t foresee significant changes in consumer behavior during this period. We expect the trend of trading down to persist. New construction may soften somewhat, but not drastically. Remodeling remains constrained, and it’s important to note that this segment is our highest margin area because customers typically purchase better quality products compared to other residential channels. Additionally, the third quarter is usually slower due to seasonality, and we have to consider the impact of European holidays, which contribute to a decline in our third quarter performance. Overall, compared to last year, we anticipate some improvements thanks to various actions we are implementing. Looking ahead to the fourth quarter, we believe central banks will likely start lowering rates, though we won’t feel the effects of this until next year. Furthermore, seasonality will affect spending, diverting it from home and commercial projects during the holidays. Given the current situation, we are anticipating continued low industry volume, which will require shutdowns and careful management of our overhead and inventory levels. Looking further out, we may start to see cost increases in various areas, and we’ll need to evaluate whether price adjustments are necessary as market conditions evolve. Lastly, it’s worth mentioning that we will benefit from two extra days in the fourth quarter due to the calendar.

Thank you for the comprehensive information. As a follow-up, it seems that the top line will remain stable in the near term. Your guidance suggests that the operating margin will likely remain flat sequentially, which seems to align with the normal seasonality you mentioned. However, there are various factors affecting seasonality and other actions you're taking. Can you discuss the prospects for improving margins in the latter half of the year despite these pressures on the top line?

We provided our expectations for the third quarter, indicating that most of the improvement will stem from our internal actions rather than external market conditions. That said, we are noticing some increases in volume across maybe half of our product categories. However, there continues to be significant pressure on pricing and mix. Therefore, any gains we achieve in volume are being counterbalanced by the challenges posed by pricing and mix in the latter half of the year.

Our next question today comes from Keith Hughes from Truist.

Thank you. In the release, in Flooring North America, and in the prepared comments, you called out LVT and laminate. I guess the question, were those businesses up year over year?

LVT and laminate, the volumes have improved. We've improved some of the margins in those businesses as we go through. You have to remember, last year, there were all kinds of negative pressures in the comparisons. So laminate is gaining share, and we're doing our self-help actions. And LVT is helping those.

Yeah. Those were two of the categories, Keith, that, from a unit volume, were up.

Units were up in both categories, which is great. Regarding your earlier comment, I believe you mentioned that half of your product categories have increased in volume. If I'm correct, that's an impressive statement. It seems like you're gaining market share, as the overall market conditions don't appear to be that robust. Would you agree with that assessment?

Remember, I'm talking about a worldwide market with a lot of different parts of that with different comparisons in Europe. I mean the market is really depressed. And in Europe, a year ago, we were struggling with some cost structures with high gas prices and pieces. It was more difficult to compete against the imports. I mean, we've taken actions in different marketplaces to help us. I think that we're increasing our distribution in some. And I mean, it's a tough market, but I think we're executing well.

Our next question today comes from Michael Rehaut from JPMorgan.

Thank you. Good morning, everyone. I would like to understand what factors contributed to the positive results in the second quarter. Were there specific regions, like North America, that performed better than expected, particularly regarding sales or margins? Additionally, do you anticipate any of these trends continuing into the third quarter that could lead to similar outcomes if they persist, potentially resulting in an improved guidance for Q3?

The guidance for the third quarter is based on the assumption that the current conditions from the second quarter will persist. We must consider Europe in this context, as spending typically declines when people go on vacation. Additionally, holiday seasons vary by country, impacting our results. The pressures on pricing and product mix are significant. In markets where industries have large capital investments but are operating at low capacity, there is a push to optimize these markets. Our efforts to enter new markets, cater to customer needs differently, and broaden our distribution are beneficial, but it remains challenging.

Then on your question, Mike, on specifically like Flooring North America. I mean, generally, across all three segments, in Jeff's prepared remarks, talking about managing the controllable costs. And the business is really benefiting from those cost reduction and restructuring activities while we're still investing in new products which should improve our mix and profitability as some of this pent-up demand gets released later in the recovery.

Okay. No, I appreciate that. Secondly, just wanted to get your sense in terms of how to think about the top line in the back half of the year. Currently, we're looking for a slight decline on a consolidated sales basis for both 3Q and 4Q. I was wondering if that is similar to how you're thinking about the business, particularly in the fourth quarter, where there is an easier comp? And then just technically, if I could just throw in an additional technical question. The share count really didn't move that much. The average share count didn't really move that much in 2Q. You had the share buyback though. Should we expect to see that fully reflected in the share count in 3Q or is there any offset share issuance that might still keep the share count around $64 million?

For the last question, it is a weighted average. And so it depends on when, obviously, each of the shares was purchased. So you'll start to see more of the impact as you go into Q3 and then for the full year. So there will be some change as you go out the balance of the year. In terms of the top line for the back half, as we've said, we are seeing some unit expansion in some of our product categories. But remember, as Jeff just emphasized, you also have price and mix. So even if you're up a little bit on units, it's being basically either offset or partially offset at the very least by price and mix.

Our next question today comes from Phil Ng from Jefferies.

Hey, everyone. Congratulations on a fantastic quarter despite challenging conditions. Jeff, if I understood you correctly, you mentioned that you might be observing higher costs and are considering raising prices. It seems that ocean freight and shipping container costs, especially from Asia, could be increasing significantly; we’ve heard it may be three to four times higher. This is creating a lot of pressure for some of your competitors who import products into the US like LVT and laminate. We’ve also heard that there might be discussions about price increases later in the year. I’m interested in what insights you have regarding this situation and its implications for Mohawk. Is this a cost challenge for you? Does it give you room to adjust prices? And how might it affect your overall portfolio?

Well, I'll just comment that the increased ocean freight and potential tariffs should improve or should benefit our manufacturing, domestic manufacturing.

And on the other side, the imported products, where we'd have them, will have to pass through the ocean freight changes, as everyone else will as it changes. I guess on the material side of it, we think that the prices have bottomed, and we are seeing some increases now. In this marketplace, it's really hard to determine where they're going to be six months from now. So given the low demand, we see it coming. We'll just have to find out if it's going to happen sooner or later. Usually, when you have low demand like we have, there's not much pricing, upward movement in materials, but we'll have to react to whatever happens and manage through it as we go through.

But Jeff, are you not hearing any rumblings? Importers are looking to raise prices at this point.

I don't hear anything, but they're going to have to. It's not if. I mean, these freight rates are up significantly.

And then maybe this is a tough question to ask because you mentioned a few times that it's hard to predict timing. But let's say, if we do get rate cuts this fall, whether it's the US, in Europe, how does that ripple through? Could you see the uplift as soon as spring next year? Like, I want to get a sense of what the lag works and how different parts of your end markets just kind of shake out. Do we need to actually see existing home sales turn or does rate cuts coming down provide that confidence and maybe it unlocks you up? Just kind of help us unpack what it means from a rate cut standpoint and how the lag and how it impacts different parts of the group portfolio.

If the situation unfolds similarly to previous patterns, when interest rates begin to decrease, consumer confidence typically rises. This leads to an increase in remodeling activities that have been postponed over the years. Generally, when consumers start feeling more optimistic about the economy, the remodeling sector experiences a quick uptick, followed closely by activity in both new and existing housing as people become more willing to make moves. Typically, there's a lag of about nine to twelve months before the commercial sector sees a similar response, as it requires more time for planning and budget approvals. As for timing, it's uncertain; I think sooner would be preferable.

But you would expect your R&R side to come back first. Is that fair, particularly in North America?

It always does.

Our next question today comes from Matthew Bouley from Barclays.

Hey. Good morning, everyone. Thanks for taking the question. Back on the new restructuring. I'm curious if it was more kind of a change to your near or medium-term outlook for that recovery? Or was part of this something more structural around the longer-term need for capacity in certain product categories? I think you mentioned it might be a little more weighted to the Flooring North America. So yeah, any color on that kind of decision process. Thank you.

We need to navigate our current situation. We anticipate that the market will eventually recover, although we cannot predict when that will happen. Our belief is that the second half of the year will remain challenging, so we have urged all our divisions to seek ways to enhance their margins to manage through this period without compromising our long-term growth potential. They have collectively developed plans to boost productivity and optimize asset usage. In some instances, we have temporarily halted certain operations, while in others, we have closed down higher-cost operations. We have also reduced workforce costs. We are actively managing our product portfolios to ensure they are as robust as possible. We believe we are taking the appropriate steps to position ourselves for when the market rebounds. It's important to remember that when the recovery occurs, it typically takes several years, as the industry generally grows at a rate slightly above GDP. After the recovery starts, we can expect several years of growth that exceeds industry averages to help us return to our expected growth trajectory.

But given the restructuring we take, it's important to reiterate that we feel good about the capacity that we still have installed to react to, as Jeff said, that recovery period.

Got it, okay. That's helpful. And then secondly, zooming into the near term. I think the difference between price and cost got a little wider in Q2 than in Q1. And I think as we look forward, clearly, the year-over-year comparisons are very different on price and cost as we get into Q3. I mean, is the expectation that you would still stay a little bit negative on price cost? Or any additional color on how that would play out over these next few months? Thank you.

You are correct that in the quarter, if you just look at material and energy, it's about $90 million of benefit from a year-over-year perspective compared to the weaker price mix of material on energy. And then the productivity, which was close to $50 million was really there to offset the increases in wages and benefits. Now as you fast forward to the second half of the year, we would expect each of the segments to see that continued price and mix pressure. But from a year-over-year benefit also, there will be less benefit from input costs as you lap over the lower costs from last year. Now that is one reason also, as Jeff pointed out, we're implementing additional cost reductions or restructuring actions to manage the situation.

Our next question today comes from Adam Baumgarten from Zelman & Associates.

Hey, guys. You mentioned that the price or cost aspect on a year-over-year basis may become less favorable in the second half. Are you actually experiencing input cost inflation as we progress through the year?

Prices have been fairly stable. I mean, we buy a lot of pieces. So there are some that are going up. We'll have to see how they evolve and where they're going to go. But again, as you come out of these cycles, they're all going to go up. And so we have to manage our way out of it when it occurs.

The key point, Adam, was that we've been very consistent as you see the lower cost flowing through compared to last year. The high point was going to be in the first quarter, saw a little bit less in the second quarter. I would expect that to continue as you go into the third and fourth quarter as well.

Okay, got it. And then maybe switching gears to laminate that's been a good part of the story. I guess, what are you seeing from an end market perspective, the most adoption there or penetration? Is it in single-family new construction or home improvement or both, I guess? Just some more color there would be helpful.

It's really widespread. Laminate is increasingly being accepted as a substitute for wood floors and LDP. Builders across all markets are using it more than they have in the past. Retailers are also adopting and utilizing it. The commercial sector, however, does not use it at all, which is quite limited. Our laminate features unique technologies that enhance its appearance and offer different visuals compared to competitors. In both global and US markets, we hold a significant share of the mid- to upper-end segment of the laminate market, lacking presence in the commodity segment at the bottom. Our equipment and products are distinct, and our value propositions are different.

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

Hi. Thank you for taking my questions today. Based on some of our work and talking to the channel and feedback from the field, in the case that you've gained some market share this year. I wanted to see if you could clarify what gains you're seeing either by channel or by product categories and how sustainable you think these gains may be. Thank you.

We have been proactive in the marketplace, similar to what others are doing. We maintain strong relationships and are introducing unique products and value propositions. Despite a decline in sales, we have continued to invest in our marketing efforts. We are also providing merchandising and promotions to help our partners maximize their business, and we are seeing positive results in some areas, leading to increased distribution. In our ceramic business, we have managed to meet high-end market demands, especially in commercial channels that have faced disruptions. We have enhanced our styling and offerings, positioning ourselves as an alternative to high-end Italian tile. We are taking the appropriate actions across all product categories while simultaneously managing and reducing costs. The management team is performing exceptionally well.

Another good example, Kathryn, is in Europe. In ceramic, with energy costs coming down, we are able to level the playing field to be more competitive in that marketplace. And we saw that in the quarter where we proved over Q1 and from a unit perspective and a cost perspective.

Just some more in Europe. In Europe, when gas prices were high, the material prices were high. I mean, our ability to compete was really hurt. We didn't hedge any of our gas prices, so we were paying premium prices for everything. So, I mean, there's a huge change in our capacity to compete in the marketplace today in Europe, for instance, than there was a year ago.

I have a clarification regarding your press release from yesterday afternoon. You mentioned that one of the cost-cutting measures involves leveraging technology to reduce administrative costs. Can you provide more details on this? Are you referring to AI and its implementation? I’d appreciate any further explanation on this phrase. Thank you.

AI, we're all looking at trying to find ways to use it. We're in initial stages of understanding it. We're going through training programs with different parts of our organization to try to utilize it. We think it's going to help to much more in-depth analysis and see trends that we haven't seen before. So we're investing in it, but we're really at the front end, and the opportunities are significant. The general business is we continue to improve our internal information systems. And we keep using them to reduce our administrative structures and respond rapidly.

So to clarify, you are not at the stage of incorporating AI into cost improvement plans yet. Is that correct?

There's ideas, but I can't say that they have made a major change in the cost structures up to this point.

Our next question today comes from Rafe Jadrosich from Bank of America.

Hi. Good morning. Thanks for taking my questions. I just wanted to follow up on some of the productivity gains that you've spoken about, how that carries into the remainder of this year and into next year. If we see volume continue to decline and let's say it's flattish next year, do you think your productivity gains are still enough to drive margin expansion? And then within that, can you just talk about versus that $50 million you talked about in the second quarter, how do we think about the gains in 3Q and into 2024?

From a general perspective, I'll let Jim provide further insight. When volumes decline, we need to implement cost adjustments to maintain stability, but we don’t see any benefits or increases. Instead, we focus on reducing costs to manage lower throughput and align our expenses accordingly. As we recover and volumes rise, our goal will be to limit the growth of these costs while maximizing our margins, aiming to return them to double digits and beyond from our current position.

Certainly, volume is a story, Rafe. As you look for volume to pick up, you also are able to run the facilities at a more steady state. Therefore, you have less interruption and less shutdown costs, which certainly helps from an unabsorbed overhead perspective. From a productivity view, going through this year into next, we expect all the businesses to continue to bring ideas forward on cost reductions. As I talked about CapEx, for example, about 45% of the capital spending is around cost reductions and product innovation. So those will continue to evolve as we go into next year. And as I pointed out, on the restructuring savings, of the $100 million we just announced, only $20 million to $25 million will be really recognized this year. And we'll still have a little bit of a carryover from the $150 million that we originally announced last year.

Okay, that's helpful. On the pricing side, as you examine each of the three segments, I understand it is down year-over-year. But are you noticing any signs of stabilization on a sequential basis? Also, just to clarify an earlier question, you have not experienced any effects so far from the increased shipping costs regarding competitors' price reactions.

I would say not yet. The competitors are aware of your sequential question. The most significant change was from Q4 to Q1. However, between Q1 and Q2, there are some declines, primarily in pricing. It is certainly stabilizing as we progress through the year, but declines are still present.

So from the second quarter into the third quarter, you would expect a decrease, just still decreasing, but less than it was from the first quarter into the second quarter?

Yes.

Our next question today comes from Laura Champine from Loop Capital.

Thank you for my question. I'm following up on the previous one regarding the mix. I understand that it's showing a negative year-over-year trend. However, can you clarify whether it is getting better or worse sequentially in your three main segments?

Mix is challenging because it involves both product and channel. As we mentioned, a slowdown in the commercial sector will negatively affect the mix, as Jeff discussed earlier in the call. However, due to our investments, we are actively working to enhance our product mix. So, we have these two factors to consider. Looking ahead, the focus will be on pricing as it relates to the mix.

Just as we mentioned, we think we're going to see that the condition is we don't see a significant change as we progress from the second quarter into the third quarter and even in the fourth quarter this year.

And ladies and gentlemen, we'll conclude our question-and-answer session. I'd like to turn the conference call back over to Jeff Lorberbaum for any closing comments.

We're confident in the long-term fundamentals of our industry. We are well positioned to take advantage of the recovery of the housing market. And we expect there to be some different timing of how they come out, but they're all going to come out and go back to more normal things in the next few years. Thank you for taking your time and spending it with us.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.