Good day, and welcome to the Mohawk Industries Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to hand the call to James Brunk. Please go ahead.

Thank you, Andrea. Good morning. 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 third-quarter performance and provide guidance for the fourth 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. Good morning, everyone. We delivered a solid third-quarter performance in soft market conditions with earnings per share of $2.90, an increase of approximately 7%, which reflects the positive impact of our sales initiatives, productivity and restructuring actions, and lower input costs, partially offset by pricing and mix pressure. Our net sales for the quarter were $2.7 billion, down approximately 2% compared to last year. Due to our increased earnings and management of working capital, we generated free cash flow of approximately $204 million in the quarter for a total of approximately $443 million year-to-date. This year, we're investing approximately $450 million in capital projects that are focused on growth, reducing cost, and asset maintenance. In all of our regions, market conditions were slower than anticipated given high interest rates, lingering inflation, and lower consumer confidence. Pricing remained under pressure as industry demand in the third quarter continued to decline due to slowing in both residential and commercial activity. Our sales initiatives delivered volume gains in many product categories, offset by pricing pressures and negative mix. Though the commercial channel has lost some momentum as the year progressed, it continues to outperform residential. In our markets, central banks are shifting from a restrictive policy to a more balanced approach to stimulate their economy, which should benefit our industry as consumer and business spending expands. We expect the recent interest rate cuts in the U.S., Europe, and Latin America will strengthen housing markets and increase flooring sales as we progress through next year. In the U.S., the Fed decreased rates by 0.5% in September and appears committed to further rate cuts to reduce restrictions on the economy. In all our markets, residential construction has failed to keep pace with household formations and immigration, and additional units must be built to satisfy growing needs. In the U.S., higher home values have significantly increased equity in homes, which should support increased remodeling projects that were postponed over the past few years. In Europe, some governments have introduced programs to provide financial support for home remodeling to enhance the aging housing stock. All of this will support improvement next year in existing home sales, remodeling, and new construction. We remain focused on managing controllable aspects of our business to enhance our results. With gross margins under pressure from weaker industry demand, all of our businesses are implementing strategies to maximize volume and plant utilization. To increase sales, we're implementing new product launches, marketing initiatives, and promotional activities. We are enhancing productivity and exercising disciplined cost management in all aspects of the business. Our teams are executing the $100 million of restructuring initiatives that we announced last quarter, including idling capacity, rationalizing assets, streamlining distribution, and reducing administrative costs. Our businesses are making additional cost reductions in SG&A, operations, and logistics. These actions will continue throughout next year to achieve our planned savings. Now Jim will review our third-quarter results.

Thank you, Jeff. Sales for the quarter were just over $2.7 billion, a 1.7% decrease as reported and 2.1% on an adjusted basis as continued unfavorable pricing and mix offset the volume growth in a number of our product categories across the company, especially seen in our Flooring North American segment. Gross margin for the quarter was 25.5% as reported or 26.2% on an adjusted basis versus 26.6% in the prior year, as the impact of the unfavorable pricing and mix, pressured by the underutilization of assets in our industry, offset the accretion of our productivity actions and lower input costs. SG&A as a percentage of sales was 17.7% as reported or 17.3% on an adjusted basis, versus 18% in the prior year, with benefits from our year-over-year restructuring and cost containment actions. That gives us an operating income as reported of $212 million or 7.8%. Non-recurring charges for the quarter were $28 million, primarily due to our previously disclosed restructuring actions, which on a cumulative basis should generate cost reductions of over $250 million when completed. That gives us an operating income on an adjusted basis of $240 million or 8.8%, which is a 40 basis point improvement versus the 8.4% in the prior year. The benefit of our productivity initiatives of $44 million, lower input costs of $15 million, and the combined benefit of increased unit volume and lower shutdown costs of approximately $18 million offset the continued weakness in pricing and mix, which was $70 million in the quarter. Interest expense for the quarter was $11 million, a decrease over last year due in part to the strong cash flow and resulting lower debt level. Our non-GAAP tax rate was 19.8% versus 20.7% in the prior year. We expect the Q4 rate to be between 17% and 18%, giving us a full year rate of approximately 20%. This resulted in an earnings per share as reported of $2.55 or an adjusted basis of $2.90, an increase of approximately 7%. Turning to the segments, Global Ceramic had sales of just under $1.1 billion, a 3.1% decrease as reported and 2.2% on an adjusted basis. Market conditions in our industry remain difficult with consumer confidence under pressure and the deferral of larger remodeling projects. To strengthen our sales, we are leveraging our industry-leading design and finishing technology to create differentiated collections. Operating income on an adjusted basis was $91 million or 8.6%, a 60 basis point increase versus last year as our productivity actions of $22 million offset the unfavorable price/mix of $15 million and lower year-over-year net sales volume. In addition, our total year-over-year input costs were basically flat, with increases in wages and benefits offsetting the deflation in material and energy. In Flooring North America, we had sales of just over $970 million, a 1.2% increase as reported. Due to a combination of our product innovation and sales initiatives, we saw growth in both our residential and commercial soft surface and hard surface collections, led by our resilient and laminate product offerings. We are seeing strength in both our premium and value-oriented products, even though repair and remodeling continues to lag new construction and commercial activity. Our operating income on an adjusted basis was $89 million or 9.1%, which is a 100 basis point improvement versus the prior year. The margin expansion was due to productivity gains of $14 million, deflation of $12 million, and increased sales volume of $11 million, offsetting the unfavorable price/mix of $28 million as pressure in our product category continues. Finally, Flooring Rest of the World had sales of just over $680 million, a 3.5% decrease as reported and 6.3% on an adjusted basis. With weak consumer sentiment and remodeling projects trailing prior year, we did not experience a normal bounce post the summer holiday period in Europe. We continue to execute promotional activities and advertising actions to boost traffic in the retail channel. But year-over-year, we did see weakening volume in our flooring and insulation product categories in the period. Operating income on an adjusted basis in Flooring Rest of the World was $72 million or 10.5%, a 40 basis point decrease versus the prior year as the resulting pricing and mix weakening of approximately $28 million offset the combined gains we experienced in increased productivity, lower shutdown, and net input cost deflation of approximately $19 million. Corporate and eliminations was $11 million in the quarter, in line with the prior year, and the full year 2024 is expected to be approximately $48 million. Turning to the balance sheet, cash and cash equivalents were just over $420 million with free cash flow for the quarter over $200 million, bringing us to a year-to-date of $440 million. Inventory was just over $2.6 billion, with inventory days at 131. On a year-over-year basis, inventory increased approximately $90 million due to a combination of higher production volume and impact of FX, partially offset by net lower input costs. Property, plant, and equipment was just over $4.7 billion, with CapEx at $115 million and D&A at $156 million. The company plans to invest approximately $450 million in 2024, with D&A for the full year of just over $600 million. Given the current conditions, we have again tightened our annual CapEx for the balance of the year, limiting our spending to higher return projects along with required maintenance. Overall, the balance sheet again remains in a strong position with net debt of $1.8 billion and leverage at 1.2 times. And with that, I will turn it over to Chris to review our Q3 operational performance.

Thank you, Jim. In Global Ceramic, competition in our markets remains intense as decreased industry utilization continues to impact pricing. During the quarter, the segment's margins expanded due to increased productivity and lower material and energy costs offset labor and freight inflation. In addition to our restructuring projects, we are executing many cost containment initiatives across the segment, including product reformulations, process enhancements, and improved administrative efficiencies. To grow sales and enhance our mix, we are leveraging industry-leading printing, polishing, and rectifying technology to deliver floor and wall tile collections with differentiated visuals. The U.S. Department of Commerce expects the preliminary antidumping decision relative to ceramic tile from India to be rendered in November '24, with tariffs potentially retroactive to August '24. Other ceramic markets are at various stages of pursuing similar antidumping actions against Indian manufacturers. In the U.S., we increased our partnership with builders by providing a complete product offering with superior service. As the commercial sector has begun to slow, we are focusing on the education, healthcare, and hospitality channels, which are expected to be more active in 2025. Our domestically produced quartz countertops are outperforming other work surfaces, and we will start up our new production line next year as the market strengthens. In Europe, our volumes exceeded the prior year even as market demand remains soft. Pricing pressures remained a headwind, partially offset by product mix from Advanced Technologies and expanded participation in the commercial channel. In Latin America, the Mexican Central Bank lowered rates in September and is expected to make further cuts this year. In Brazil, the Central Bank has cut rates multiple times and is monitoring inflation to determine its next steps. We have announced targeted price increases in Mexico and volume in Brazil has begun to strengthen. In both markets, we are implementing sales and operational improvements, introducing updated collections, and expanding our distribution to improve our results. This year, our Flooring Rest of World segment did not see its usual sales improvement in Europe after the summer holidays due to continued weakness in the economy. After six quarters of declines, European building permits have recently increased, and the job market remained strong with record employment levels. Last month, the European Central Bank reduced its key interest rate by an additional 25 basis points to 3.25% as inflation further slowed. In response to current conditions, we are reducing operational and administrative costs, simplifying SKU complexity, and enhancing logistics operations. To optimize volumes, we executed promotional activities, which pressured both our pricing and mix, partially offset by lower input costs. We are increasing consumer advertising for our premium laminate products to boost traffic for our retail customers. In slowing markets, our insulation and panels business faced increased competition as new industry capacity came online, impacting pricing. In Australia and New Zealand, we improved pricing and mix in our carpet collections, though volumes remain under pressure. Our operations delivered productivity gains with improved efficiencies across the business. The New Zealand Central Bank recently cut rates by 50 basis points to stimulate their economy. In our Flooring North America segment, we believe we're outperforming the overall market in a difficult environment with sales and margins improving over the prior year and increased volume partially offset by lower pricing and mix. Our margins benefited from lower raw material costs, restructuring projects, and productivity gains in our manufacturing, administrative, and sales operations. With existing home sales at multi-decade lows, residential remodeling remains under significant pressure. We are retiring high-cost equipment and exiting underperforming product categories while investing in capital projects that have short paybacks. We continue to improve our participation in the homebuilder channel with our comprehensive product offering. We are supporting our residential product launches with marketing initiatives to connect consumers with our retail partners. While overall U.S. home sales are down, higher-income consumers are purchasing our premium products. Sales of our value-oriented carpet collections are also improving, building on the success of our leading polyester offering. Our LVT and laminate collections delivered sales growth as consumers embraced our new introductions with enhanced performance features. We continue to deliver product innovation with a new resilient plank flooring technology that is environmentally friendly and provides greater stability and performance. Our commercial sales were led by our carpet tile collections that offer industry-leading sustainability and award-winning designs inspired by nature. Our results also benefited from increased sales of flooring accessories that coordinate with our hard surface products. We continue to pursue additional opportunities in the hospitality channel, which has shown more resilience in the current environment. Now I'll return the call to Jeff for closing remarks.

Global conflicts, political uncertainty, and inflation are weighing on consumer confidence and discretionary spending around the world. Short-term macroeconomic conditions remain unpredictable, and we don't anticipate an industry improvement this year. The demand trends remain weak in each of our product categories and markets face unique economic situations. Our mix is impacted by consumers trading down and by new construction outpacing the higher-value remodeling channels. We are responding with sales and restructuring actions, operational improvements, and cost containment initiatives to strengthen our results. We continue to pursue volume through innovative introductions, marketing programs, and promotional activity to leverage our fixed cost structure. In some products, we're seeing inflation on materials that will increase our costs in the period. As we end the year, we expect to reduce our manufacturing levels to manage our inventory, increasing our unabsorbed overhead. In the period, we anticipate the recent U.S. hurricanes will negatively impact our sales by $25 million to $40 million, with an offsetting benefit from rebuilding next year. Given these factors and the effect of seasonality, we anticipate our fourth quarter adjusted EPS to be between $1.77 and $1.87, excluding any restructuring or one-time charges. We remain confident in the fundamentals of our business and our strategy to improve our results. In 2025, we anticipate demand in all our markets improving as interest rates decline and consumer spending in the category accelerates across the world. Elevated home equity values will provide property owners the resources to renovate their residences. All of our regions require significant new home construction, and we have grown our participation in the channel. Commercial construction and remodeling should also expand as financing becomes more affordable and investment returns increase. As our markets recover, we will leverage the extensive improvements that we've implemented to maximize our sales and margins. We'll now be glad to take your questions.

We will now begin the question-and-answer session. Our first question will come from Tim Wojs of Baird. Please go ahead.

Hey, everybody. Good morning. Maybe just first question, Jeff. I mean, I know the dynamics kind of going into the fourth quarter with shutdowns and things are still broadly weak. But you have kind of talked about 2025 recovering. And I guess just as you think about next year, do you need lower rates and kind of a normalization in housing turnover to see that recovery? Or do you think there's enough just pent-up demand and kind of home value equity that can kind of get us back to a growth situation?

I think it's going to take a combination of both. We think the interest rates across the world are going to decline, and they should improve demand in our markets. The consumers need to be more positive about the future. And if they are, they can start doing remodeling immediately. So the interest rates are really more to change the confidence level of both businesses and individuals to make it. On the other hand, we expect lower interest rates to come and make housing more affordable in all our markets across the world, and we're anticipating to see that as we start through next year sometime.

Okay. And I guess if that doesn't happen, do you feel like you just keep slugging it out as things kind of bottom? Is that kind of the other side?

I really can't see a scenario where we stay where we are. I mean, the interest rates everywhere are coming down. All the banks are continuing to the central banks say they're going to continue lowering them. They're still in restrictive territory based on historical levels that you think about. So we'll have to see how it goes.

Okay. And then just my second question. Do you have any figures or numbers just around how much LVT capacity is based in North America, both your own and just the overall industry?

I don't have it now.

Basically, Tim, what the latest data showed is that LVT as a market is over 30% of the U.S. market. But there is still limited manufacturing capacity in the U.S. Most of it is still an import story.

Okay. Sounds good. Thank you, guys. Good luck on rest of the year.

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

Good morning, guys. Thanks for taking my questions, as well. Jim, I think the prior expectation from a revenue standpoint in the fourth quarter was for global ceramic and Flooring Rest of World to be up sort of low single digits year-over-year. And I think flooring North America to be sort of flattish. Curious if those have changed. It seems like there might be a little bit of downside to that. So any thoughts on that would be helpful.

Yeah. Certainly, as you know, John, we gave guidance from an EPS perspective. So obviously, that was an assumption people were making. As you look at Q4, as Jeff talked about, we anticipate limited industry improvement, and the demand does remain weak. The events, the terrible events that occurred with the back-to-back hurricanes certainly have impacted the Southeast and hurt the U.S. ceramic business and our Flooring North America business. So that weighs into our outlook for the fourth quarter. Seasonally, of course, the volume declined in Q4, and we do have significant shutdowns as well. So at this point, those factors weigh into the sales and our guidance for the fourth quarter.

Understood. And then maybe taking it one step further to the margins. I mean, it appears that the lapping of the lower material and energy costs are going to turn price/mix, productivity negative here. I mean, how should we sort of think about the cadence of margins by segment as we move into the fourth quarter?

Well, what I would say is first on the inflation, deflation story of this year, unlike the first three quarters where we did enjoy through the P&L the benefits of lower material and energy costs, which offset the increased wages and benefits. We now have lapped that period of time. So in the fourth quarter, we do have inflation, which basically is driven by wages and benefits. And price/mix, although it has stepped down from Q2’s level to Q3, it still remains as a headwind with the underutilization in the industry. Certainly, the positive news is the strength of the productivity that we’ve had. As I just reported, it was over $44 million in the quarter, and I would expect to see a similar, if not greater productivity in the fourth quarter. So all the businesses are taking the necessary actions in the quarter.

Okay. Thank you, guys.

The next question comes from Susan Maklari of Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Susan.

My first question is talking a little bit more about those company-specific efforts that you did see come through in the third quarter. You mentioned productivity and the cost savings. Can you talk a bit more about how those did come together and help to offset some of the broader demand weakness? And how do you build upon those as you look to 2025 and maybe even further out from there?

Well, in the third quarter, we benefited from all our initiatives in sales, productivity, cost containment as well as the restructuring actions we took. Demand in the third quarter started out stronger. And as we went through the period, it slowed in most channels and geographies. We still had commercial outperforming residential. Pricing continued to remain under pressure given the slow markets and low utilization that we saw through. As we look towards '25, we think, as we discussed a minute ago, that interest rates around the world will continue to decline. We believe that demand in all our markets will increase. It's impossible to predict the exact inflection point given all the variables that make up in the different markets that we're in. We think the changes in interest rates will have a positive impact on the confidence of both consumers and businesses, and that will increase our volume and help our mix, which will end up improving our sales and margins. Next year, we also believe we'll have an improved mix, both the channel mix as well as product mix. We see volume increasing at some point, and we see the asset utilization increasing. At the same time, we're anticipating limited inflation given the environment we're in. All the activities that we've been talking about will benefit from our restructuring, we'll have lower costs, and we expect to have higher productivity. And then we continue to introduce new innovative products, which we think will help us pull through. And just to remind everybody, historically, as we exit a downturn, given the compression that the industry goes through, you have several years of above-industry average growth as these postponed projects are initiated, and they all leverage all our fixed costs. And with that, we anticipate our results improving as we go through '25.

Okay. That's very helpful color. And then maybe digging in a little bit more to that product mix. It sounds like you are getting some momentum as you're building into some of these faster-growing categories, exiting some of the underperforming areas and gaining share in there. Can you talk about how that is coming through and the progress and how you're thinking about that over the next several years?

We are continuing to invest in areas where we believe there will be significant sales growth. We have put resources into our ceramic business, particularly in the ceramic slabs category, which is expanding. Additionally, we are increasing our investments in countertop products and tackling other areas where we face limitations. As we move forward, we anticipate changes in pricing and product mix, as retail consumers tend to choose the best products they can afford. Given the decline in existing home sales worldwide, consumers are not spending as they used to, largely due to inflation-related postponements. However, we believe there will naturally be an increase in our margins and product mix as time progresses. What else would you like to know?

I don’t know. That was good color, Jeff. Thank you. That’s helpful. Good luck with everything.

Thank you.

The next question comes from Matthew Bouley of Barclays. Please go ahead.

Good morning, everyone. Thanks for taking the questions. I just wanted to ask on the hurricane impact, the $25 million to $40 million. Historically or typically, what do you usually see with that kind of rebuild in the year after? Kind of can you recoup all of it? And typically, what would be the kind of timing of recouping some of that? Thank you.

Thank you, Matt. In terms of the impacted areas, certainly, it's going to take a while for our customers and the locations that were closed after the storms to reopen and for consumers to initiate new projects or ramp up from this current situation. The damaged properties obviously have to be repaired. And remember, flooring is the last product to really be installed. So the timing of really the rebuild from our perspective would be pushed through 2025. It really depends on the pace of the recovery.

Okay. Thank you for that, Jim. And then secondly, the plant shutdown that you're guiding to in Q4. Is this kind of just a Q4 thing given the sort of state of demand here and maybe channel inventories, or is the expectation from what you could tell today that you may still be looking to reduce inventories in early 2025 as well? Thank you.

Well, as we said in my prepared remarks, inventory was slightly up in the quarter. We do expect to decrease the inventory with shutdowns in Q4. Our goal right now is that total inventory should end the year relatively from a dollar basis, relatively flat from previous year-end. Now, if you look at that, the industry certainly is slower than expected. We've talked about the seasonality of Q4 as well. The impact of the hurricanes only reduces that further in terms of demand in the quarter. So reducing the inventory is a prudent thing to do at this point, and it's best for the business to do it during that holiday shutdown time.

All right. Thanks, Jim. Thanks, everyone. Good luck.

Thank you.

The next question will come from Phil Ng of Jefferies. Please go ahead.

Hey, guys. Ocean freight prices have started to move higher. You called out inflation. That said, price mix is obviously still a challenging weighing on your margins in the fourth quarter. Are you seeing any ability to kind of raise prices as we look out to 2025? And have you seen price increases from some of your competitors that import goods? Separately, I think one of your larger competitors in carpet announced some capacity closure on the feedstock side, and I think another player announced some today on nylon polymer. So kind of help us think through, is this a needle mover in terms of capacity tightening up in North America? And then your ability broadly to get price to offset a more inflationary environment?

There has been some capacity taken out of the industry. The industry is still at a huge deficit to where we were running before. So we still have excess capacity. The ocean freight is increasing the cost of landing imported products and those imported products will have to go up to pay for the increased ocean freight at some point. Our ability to raise prices is limited given everybody is trying to keep their assets running. On the other hand, if you have significant inflation, everyone has to push it through.

Okay. And then Jeff, you expressed confidence that demand will be up across the board in all your segments. Timing this is not easy. But I guess my question is, how do you kind of expect the year to shape up first half, back half? And then some of the fourth-quarter headwinds, whether it's curtailment, the hurricane, hopefully, that gets fleshed out. Do you have enough levers to kind of grow EBITDA and EPS? Because you were growing EBITDA and EPS in the first three quarters of this year. So I just want to get a level set of the shape of the year for 2025 and then your ability to drive earnings EBITDA higher next year.

The drivers that we have are to reduce our cost structure, which we announced the other restructuring not long ago, it will take us through most of next year to get it. Jim, I believe earlier gave the dollar amount he expected to flow through in the period. The predicting of the inflection point, given all the moving parts in any single economy and around the world is impossible to anticipate. All the different markets are projected to have significant growth in housing and remodeling across the world in all the different markets as the capacity gets utilized, we get leverage from the fixed costs that come up, we get leverage out of the mix change as higher-quality products work, and we expect to have higher margins with that now. The moment in time it occurs is anybody’s guess.

Okay. Appreciate the color. Thank you.

The next question comes from Laura Shaman of Loop Capital. Please go ahead.

Hi, everyone. It's Laura Champine. I have a follow-up question regarding the hurricane. I appreciate the estimation of the disruption at around $25 million to $40 million. When considering your capacity to help with repairs, should we anticipate a benefit next year that is several times that amount? Could you give us some context based on previous storms of similar magnitude about the potential revenue increase for next year?

We don't have a good way of estimating it. What happens first is it depends on the damage to the house. So as you know the building, typically, it takes a significant amount of time just to get the insurance companies to agree on what to do. Then what happens is where you have limited damage of a few broken windows in the water, you can replace it as you go through. And then if you have major damage, you have to rebuild the house, dry out everything, and it could take nine to 12 months or more. And then if it's depending upon how much there is in the geography, there’s not enough labor to do it. So it could drag out over a couple of years depending upon how much there is and how broad it is. The impact in hours, it's just going to get distributed over the quarters, and it's going to be hard to see in any given moment.

Got it. On the European business, which seems to be kind of taking another leg down in terms of demand. Should we expect that to recover on a lagging basis relative to your other geographies? Or would that be reading too much into this Q4 softness?

Well, you really started with just kind of looking at conditions outside the U.S. When you look at higher interest rates that have really similarly impacted our category. We expect differences in the recovery, the pace of the recovery and the timing, but it's hard to predict with any precision at this point. In addition, you have the political uncertainties in Europe that may impact the timing of the recovery. Now the good news is that the central banks in Europe at least are on their third interest rate cut, and lowering those rates is an effort to hopefully stimulate more activity, which would benefit our category as well.

Got it. Thank you.

The next question comes from Keith Hughes of Truist. Please go ahead.

Thank you. And the way you talk about the $100 million cost reduction plan has been around a while. It looks like you might be talking a little bit more than that. So I guess my question is, what kind of magnitude are we looking at? And how much have you already realized through the third quarter?

So in the plan that we announced in the second quarter, we originally announced it was about $100 million savings. As each of the segments have firmed up those plans, we should get a little bit more than that. Again, we'll see about $20 million to $25 million this year with the majority, probably two-thirds of it in $25 million, with a little bit on the longer projects will carry over into '26. But so far, the projects are being initiated by each of the segments, and we're on schedule.

Okay. That’s helpful. Thank you.

The next question comes from Michael Rehaut of JPMorgan. Please go ahead.

Hi, everyone. This is Andrew Azzi on for Mike. Thanks for taking my question. I just wanted to ask maybe in Flooring Rest of World given some of those reduction of cost and simplifying SKU, how large of a net impact are you expecting there or is it relatively small?

Well, in Flooring Rest of World, our sales volumes didn't pick up as we expected after the holidays. The market conditions remain challenging, and we executed additional promotional activities. Pricing and mix headwinds continue, given the weak demand, but declining inflation led to the ECB to lower interest rates with additional cuts expected.

Got it. Thanks. And maybe in LVT and laminate it seems things are going well. If I want to see if you could expand on kind of the growth you expect to see next year and how that is going to play out going forward? Thanks.

Well, I can address LVT. Our sales are under pressure, and pricing has declined, but we believe we outperformed the market. Our margins have benefited from productivity and lower material costs. We're launching a new wood plank with recycled content and better performance. Our West Coast operation is increasing production, and our Georgia restructuring is being executed to further improve results. And in Europe, we've changed our residential LVT from flexible to rigid. We're expanding our volumes, which will leverage our fixed cost, and we're executing productivity and restructuring initiatives to improve the results.

On the laminate side in the U.S., our volume increased over last year. It's been more accepted by the different channels, including the new construction home business, which didn't use it in the past. We're taking share as the waterproof alternative with superior performance to LVT. In the period, we had some cost benefit that were offset by price and mix, and we continue to start up new production to satisfy increasing demand.

Got it. Appreciate that color. Thank you, gentlemen. Good luck.

Thanks.

The next question comes from Adam Baumgarten of Zelman. Please go ahead.

Hey, good morning, guys. Just curious if you saw any benefit to shipments in September for maybe some customer inventory stocking ahead of the port strike, which obviously in hindsight was resolved. But in September, did you see any bump in shipments?

It's hard to measure what's going where. We believe that customers took in some more in anticipation of potential problems at the strike, but it's hard to quantify anything.

Okay. Got it. And then just on commercial, you talked about demand slowing. Any specific verticals you'd call out as being weaker than they had been maybe earlier in the year?

Well, from a channel perspective, as we said on the flip side, hospitality, government, and education are actually the ones outperforming, and it's where we're really focusing our attention on. The good news on commercial as well is that its pricing is more resilient given the more differentiation, which helps from a margin perspective. But commercial does take longer to respond to economic changes. So it has a longer tail as you go down. And then the flip side, as you recover, it normally takes longer to start back up.

Okay. Thanks. Best of luck.

The next question comes from Eric Bosshard of Cleveland Research. Please go ahead.

Thanks. A follow-up and then a question, if I could. On the commercial conversation, Jim, your comment that I think it's still growing, but entering a period where it's probably going to contract. Is this a pressure point for mix for the business, and in '25? I know there's some optimism about better price mix. Is slowing commercial an offset to that and to what magnitude? How should we think about that?

Commercial products generally have higher margins than residential ones. We anticipate a slowdown in this area. The architectural index has been negative for an extended period, raising concerns about whether it will rebound in the future and avoid a significant decline in the commercial segment. However, our projections indicate that we expect it to slow down.

And the good news, Eric, is taking that into account is that commercial across our whole business is roughly 25%. Obviously, the majority and the key spot is the remodeling. That's almost probably half of our business. So as Jeff said earlier, when you get that inflection on remodeling, you get an uptick in mix and volume. So we get the benefit from the contribution of volume, the contribution on higher mix, and also the more steady production levels and asset utilization. So as you look at '25, that is really what we're focused on. And normally in these cycles, the first thing that comes back out is the remodeling as consumer confidence is really heightened.

There should be significant pent-up demand. I mean, we're at the cyclical bottom. Existing home sales are at the lowest point since 1995 to remind everybody; flooring tends to have a higher correlation to home sales because people tend to remodel more either right before they sell it or right after they move into it as they go through. So we think there's a huge recovery coming; the question is when.

I wanted to clarify your earlier comment, Jeff, about expecting demand to improve in 2025. Many companies, including Mohawk, anticipated an increase in demand during the second half of 2024, which hasn't happened. So, when you say demand will improve in 2025, is there something specific in the business that gives you confidence in that, or is it more of a general expectation that demand will eventually rise? I’d like to better understand your perspective.

Listen, I've been through a lot of these cycles in my career. And I haven't seen one when interest rates fell dramatically that the housing industry didn't pick up from the pent-up demand that would test people could afford to buy them. And I would be surprised if it didn't occur this time as well.

Okay. Thank you.

The next question comes from Stephen Kim of Evercore ISI. Please go ahead.

Thanks very much, everyone. I wanted to start with a couple of housekeeping items. First, did you repurchase any shares in the quarter? And Jim, could you tell us what the impact of volume was on sales in the third quarter by segment?

No, we did not repurchase shares in the quarter. We will continue to be opportunistic regarding the buyback of stock. On a positive note, we continue to have strong free cash flow and liquidity, which provides us with options, including internal investments, acquisitions, and stock repurchase. What was your second question, Steve?

The benefit of volume to sales across the segments?

In terms of volume, really across segments on sales, you had anywhere between $15 million to $20 million in ceramic and Flooring Rest of the world and probably double that in Flooring North America, if you're speaking of volume.

Yes, that’s helpful. I wanted to discuss the increase in volume in Flooring North America further, as it seems to be a key area of interest for investors. Although the European market presents challenges, it appears that Flooring North America is nearing a bottom. You mentioned that you believe you are gaining market share in LVT and laminate, which has been boosted by innovation. LVT seems to be starting from a lower base as well. Can you elaborate on your confidence in gaining share in Flooring North America? Is this growth limited to those two categories, or are you noticing broader trends within the region compared to the industry? Additionally, is there anything noteworthy about your distribution or merchandising strategies that have changed in the past year or two?

We're seeing improvement in most of the different product categories, not just in those two. It's come from a more aggressive approach to try to pick up volume to keep the plants running. On the other side, we're giving up some price and margin to do it. So they're offsetting each other a little bit, but we think we're gaining share in the market.

Really, when you look at it, we're very proud of the product features that we continue to bring to the market with LVT, for example, introducing a recycled polymer core, which is PVC-free, laminate, next-generation aesthetics in those products. And along with that, in ceramic, looking at increasing textures, using 3D surfaces, the enhanced printing technologies are amazing. When you look at the new projects that are coming out, both in ceramic and on the countertop side as well. And in carpet, looking at a more super premium collection in terms of same resistant softness and the ability to really help the consumer.

Jim, you just mentioned there something that caught my ear, which was you said in ceramic, you talked about the visualization technology, which you feel is a competitive advantage. I recall that this was definitely something that more than several years back was a real moat around your ceramic business, your visualization technology. It feels like we went through a period where that became a little bit more commoditized. Is what you're describing here with the 3D visualization technology something like the advantage that you had back then?

Absolutely. I think the technology that we’re using across the ceramic business, led by our business in Italy is making really great strides and that’s also being helpful out the porcelain slabs business, the innovation that’s going into that porcelain slabs is industry-leading. So I feel pretty good about it. And also the ability to take that technology and push it through all of our divisions across the globe is an advantage for us.

Thank you. Thanks very much, guys.

The next question comes from Trevor Allinson of Wolf Research. Please go ahead.

Hi. Good morning. Thank you for taking my question. First, the presidential election is less than two weeks away, and clearly, elevated tariff rates have been a big topic depending on the outcome of that election. Should we see significantly higher rates on imported LVT, do you have a sense for how large of a tailwind that could be for you, not only from your domestic LVT production but also your premium laminate? And then you guys have also brought on some laminate capacity recently. Can you remind us the size of that capacity add and what the current utilization of it is?

Higher tariffs would increase the prices of all. If it’s broad-based, it would increase the price of imported products. The amount of it would have a dramatic impact depending on if it's large or small to change the different marketplaces; we'll have to see what happens in the future. We have changed the technology inside of our plant in Georgia, and we are most of the way through starting up the plant in Mexico next to the California border, and both are running, and we're continuing to improve the productivity and production in both.

Can you discuss the current M&A environment and process considering the lower utilization rates? Are there chances to acquire weaker competitors and consolidate the market? Additionally, how do these opportunities differ between the U.S. and other regions?

When the industry is at a low point, earnings are low, people typically don't want to sell their businesses and want to wait until the business turns around. So at the moment, there are limited transactions given that. We expect over the next 12 to 18 months to see a significant change as the industry improves.

That makes sense. Thanks a lot. Good luck moving forward.

Thank you.

The next question comes from Sam Reid of Wells Fargo. Please go ahead.

Thanks so much. I wanted to circle back on the hurricane impact. It's kind of a two-part question. So first, could you just walk us through the math you used to get to the $25 million to $40 million estimate? It's very precise, so I just want to understand that. And then looking back in time, I don't think you've called out hurricane impacts in past quarters, even after some of the activity we might have seen in 2022, which was arguably more damaging. So I just want to understand what's different about this hurricane cycle versus prior cycles.

First of all, the number is anything but precise. We took the regions that were impacted. We've been following the sales since they occurred. And as you would suspect, when it first occurred, everything went to zero. Then we've been tracking how they've been coming back. Based on that, we made an estimate; they could come back faster or slower than the estimate as we go through. So what was the other part of the question?

Comparing to the other hurricanes, I mean, the devastation, and you really need to step back and ensure we recognize and share our sympathies with the families and the businesses that have been impacted this. It's unprecedented to have back-to-back hurricanes in the span of three weeks. Plus it's a little bit unprecedented for it to go the direction it went, where it really went into not only Georgia and South Carolina but into North Carolina. So I think the difference, Florida, obviously, was hit twice as well. So that whole Southeast region was more impacted, certainly this time around, than in past cycles, and it represents a meaningful piece of both our Flooring North America and our U.S. ceramic business.

No, that's really helpful. Thanks. Thanks, folks. And then I wanted to follow up on M&A question. I don't want to read too much into you not repurchasing shares in the third quarter. But would one interpretation of that be that you're potentially saving up firepower for M&A as the category potentially recovers? Just thinking about the M&A from that angle.

I can just answer the question that we talked about M&A before; there are limited options at this point. We assume that there’s going to be more coming, but you can’t make bets on things that aren’t here.

This concludes our question-and-answer session. I'd like to turn the call back over to Jeff Lorberbaum for any closing remarks.

We appreciate you taking time and joining us. We're well positioned for the recovery that we believe is going to start soon, and the industry should see the impact of it next year. We appreciate you taking the time with us and have a nice weekend.

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