Mohawk Industries Q2 2024 Earnings Results & Report

Mohawk Industries EPS Results

• Actual EPS: $3.00
• Consensus EPS: $2.75
• Beat/Miss: Beat by +$0.25
• One Year Ago EPS: $2.76
• EPS Beat Rate: 7 of last 8 quarters

Mohawk Industries Revenue Results

• Actual Revenue: $2.80 billion
• Expected Revenue: $2.84 billion
• Beat/Miss: Missed by -$34.01 million
• YoY Revenue Growth: -5.10%

Mohawk Industries (NYSE:MHK) is a global manufacturer and distributor of flooring products. The company serves residential and commercial customers through products sold to retailers, distributors, builders, contractors and other industry professionals.

Its product portfolio includes carpet, rugs, ceramic and porcelain tile, hardwood flooring, laminate, luxury vinyl tile and other resilient flooring products. Mohawk markets products under a range of well-known brands, including Mohawk, Karastan, Pergo, Quick-Step, Marazzi, Daltile, American Olean and Durkan.

The company traces its origins to a carpet mill established in 1878 and is headquartered in Calhoun, Georgia. Mohawk has expanded through organic growth and acquisitions and operates manufacturing and distribution facilities serving customers in North America, Europe and other international markets.

Mohawk Industries Q2 2024 Earnings Call Transcript

Key Takeaways

• Mohawk reported Q2 net sales of $2.8 billion (down 5.1%) and an adjusted EPS of $3.00 (up 9%), driven by lower input costs and productivity gains despite pricing/mix and FX headwinds.
• The company generated free cash flow of $142 million in the quarter (YTD $239 million) and repurchased 755,000 shares (1.2%) for $90 million.
• Management announced additional restructuring actions to achieve $100 million of annualized savings (recognizing $20–25 million this year) at a total cost of ~$130 million, focusing on manufacturing optimization and administrative efficiency.
• Market conditions remain challenging: residential remodeling is under the greatest pressure from elevated mortgage rates and consumer trading-down, while commercial channels continue to outperform.
• For Q3, Mohawk expects adjusted EPS of $2.80–2.90 and remains optimistic about a housing-led recovery once central banks begin cutting rates.

Presentation

[Operator]

Good morning, everyone, and welcome to the Mohawk Industries second quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touch-tone telephones. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to James Brunk. Please go ahead.

[James Brunk, CFO at Mohawk Industries]

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 reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8-K and press release in the investor section of our website.

[James Brunk, CFO at Mohawk Industries]

With that, I'll turn the call over to Jeff.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

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.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

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 remain 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 will generate annualized savings of approximately $100 million, of which $20 million-$25 million will be recognized this year.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

The cash cost of these actions is about $40 million, with a total cost of approximately $130 million. The execution timelines will vary by project, with some extending throughout 2025 and into 2026. In our Global Ceramic 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. In Flooring Rest of the World, we'll 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.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

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 U.S. housing sector. While central banks and 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 U.S. 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, USA TODAY once again named Mohawk one of America's climate leaders, given our reduction in greenhouse gas emissions over the past four years.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

On July 16th, we published our 15th annual sustainability report, which can be found online at mohawksustainability.com. Now, Jim will review our financial performance for the second quarter.

[James Brunk, CFO at Mohawk Industries]

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.

[James Brunk, CFO at Mohawk Industries]

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 costs of $83 million and productivity gains of $49 million offset the unfavorable price mix of $111 million and FX 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 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.

[James Brunk, CFO at Mohawk Industries]

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 increase in productivity of $14 million offset the unfavorable price and mix of $25 million, FX of $10 million, and the lower overall volume.

[James Brunk, CFO at Mohawk Industries]

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 is 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. In Flooring Rest of the World, net sales were $727 million. That is an 8.3% decrease as reported and 7% decrease on an adjusted basis, as market conditions remain slow with weak consumer discretionary spending on larger ticket home projects.

[James Brunk, CFO at Mohawk Industries]

Pricing and mix is also continuing under pressure, though those 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. That's a 12.6% operating margin. That's 40 basis points increase versus 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 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.

[James Brunk, CFO at Mohawk Industries]

Inventories were just shy of $2.6 billion. That's a year-over-year decrease of approximately $40 million due to reductions in cost and impact of FX as volume slightly increased. 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 equipment stands at just under $4.8 billion, with CapEx of $91 million in the quarter compared to D&A of $172 million. The company plans to invest approximately $480 million in the year, with D&A at approximately $630 million. In the balance sheet overall, net 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.

[Christopher Wellborn, President and COO at Mohawk Industries]

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 10th, the U.S. Department of Commerce announced the commencement of anti-dumping and countervailing duty investigations of ceramic tile imported from India. The U.S.

[Christopher Wellborn, President and COO at Mohawk Industries]

Trade organization believes this could lead to tariffs between 400%-800%. Given India's widespread dumping, Mexico has increased import duties, and other markets are currently investigating similar options. In the U.S., 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.

[Christopher Wellborn, President and COO at Mohawk Industries]

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 organizations and implemented new product and distribution strategies. In our Flooring Rest of the World segment, market conditions remain slow with constrained consumer discretionary spending. Declining inflation led the European Central Bank to lower key rates on June 6th, and additional cuts may follow. In this challenging environment, we focused on actions to drive sales, such as enhancing our product offering, 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.

[Christopher Wellborn, President and COO at Mohawk Industries]

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 are 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.

[Christopher Wellborn, President and COO at Mohawk Industries]

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 U.S. home builders who are increasing their 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.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

Thank you. 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.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

Given these factors, we anticipate our third quarter adjusted EPS to be between $2.80-$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.

[Operator]

Ladies and gentlemen, at this time, we'll begin that question-and-answer session. To ask a question, you may press star and then one using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. In the interest of time, we do ask that you please limit yourselves to one question and a single follow-up. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Eric Bosshard from Cleveland Research. Please go ahead with your question.

[Keith Hughes, Managing Director at Truist]

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 the last two years. The projects that you've identified here, why were they not included in the last one or asked a different way? Why take cost and capacity out now?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

Well, when we're looking at the market to where it is now, we think there'll still be some time before we see a significant recovery in the next year. And 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.

[Keith Hughes, Managing Director at Truist]

Within this, I guess the second component of this is you think about solving for the growth scenarios in 2025. 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?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

Well, as we think about next year, we think that we're going to start seeing the cycle move from what the low point it's at. Demand for housing today remains strong, and we think there's pent-up demand in the remodeling markets. But we can't predict the timing of it. The decline of inflation, the change in interest rates will positively impact consumer confidence, housing sales, home remodeling, commercial activity, which all should have a significant impact on our category. As it improves, we think we'll get the leverage in these cost structures in our product mix. On an individual business, we have. We put investments in the areas where we thought we would have the most growth rate in the pieces. And the businesses that we're putting new stuff in are the laminate business, the countertop business with quartz, the slab business in Europe, and the insulation businesses.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

We believe those have the most opportunities for higher growth, and we have invested in those, so we're ready to take advantage of the next few years as they improve.

[Keith Hughes, Managing Director at Truist]

Thank you.

[Operator]

Our next question comes from David MacGregor from Longbow Research. Please go ahead with your question.

[David MacGregor, President at Longbow Research]

Yes. Good morning. Thanks for taking the questions. 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?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

As you look at the restructuring savings, first of all, the initial reactions that we took last year, we've realized about of the $150 million that we announced, about $110 million through the second quarter, and should see approximately about $130 million by year-end. That program was fairly evenly spread across all three of the segments, maybe with Flooring North America a little bit more. With the announcement today of the additional $100 million, as we said, $20 million-$25 million would be recognized this year, a much larger piece into the following year. And then all businesses are continuing to look at reductions in SG&A operations and logistics. And as you look at that, Flooring North America will have more benefit than the other segments in the recently announced actions.

[David MacGregor, President at Longbow Research]

Okay. 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 the institutional business? And what level of growth should we anticipate through the second half from commercial?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

You're correct. Commercial is holding up better than residential. We are seeing some slowing and 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.

[David MacGregor, President at Longbow Research]

Great. Can you talk about what the growth is for the second half? What you think you might see there?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

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

[David MacGregor, President at Longbow Research]

Okay. Thanks, Jeff.

[Operator]

Our next question comes from Susan Maklari from Goldman Sachs. Please go ahead with your question.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Thank you. Good morning, everyone.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

Good morning.

[Christopher Wellborn, President and COO at Mohawk Industries]

Good morning.

[Susan Maklari, Senior Equity Research Analyst at 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 a top line as well as a profitability perspective?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

Sure. In the new products, one is, we've continued to invest in putting them out in the marketplace and bringing new products. Every category is participating. In Ceramic, we put in new assets that can make tiles with different color intensity, textures, three-dimensional surfaces, different shapes and sizes. In LVT, we've taken actions that we can actually enhance the coloration and textures. We've also introduced a different core we call a renewable polymer core as another category. In laminate, we've introduced features that will impact both the durability and the sound acoustics with it as we go through. Even in the different countertop businesses, in our quartz countertop, we're introducing higher-value veining technologies in the mid-price points. Every product category has features like this that we're doing as we come out.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

What's happened is the biggest part of the market that's been affected, the bottom end's doing better, and the high end, the middle part, which goes through retail, is the most affected. These features and benefits will have a lot of positive impact when the retail business picks up as consumers come back in the marketplace and get more confident.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Okay. That's helpful. 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? Should we take it as a sign perhaps of you having some greater confidence in the 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?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

I think you 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.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

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

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

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. We'll continue to evaluate share repurchases as a part of our capital allocation strategy.

[Susan Maklari, Senior Equity Research Analyst at Goldman Sachs]

Okay. Thank you. Good luck with everything.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

Thank you.

[Operator]

Our next question comes from Mike Dahl from RBC Capital Markets. Please go ahead with your question.

[Mike Dahl, Managing Director of Equity Research at RBC Capital Markets]

All right. Thanks for taking my questions. I think the prior question around the second half growth, it sounded like that was specific to commercial. Maybe could we zoom out and just you've been organically down in mid-single digits from a top line standpoint in the first half. Can you talk about what's embedded from a top line standpoint for 3Q and how you're thinking about that into 4Q as well?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

Sure. At this point, we don't anticipate anything changing the present conditions in the third quarter. We've built in just a continuation of weak demand and pressure on pricing and continued low industry utilization. We don't see the mix changing with a consumer in the period much from where it is. So we see the trading down continuing. We see new construction maybe softening a little bit, but not a lot. Then we still have remodeling that's compressed. Just to remind everybody, the remodeling business is our highest margin business because they tend to buy better quality products than the other residential channels. In addition, to remind everybody, the third quarter is always seasonally slower. Don't forget European holidays. They take off, and it pulls down our third quarter.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

In general, we're anticipating compared to last year, we're going to see some improvements from all the different actions we've been taking. If you go into the fourth quarter, we think that central banks will probably start reducing rates, but we expect that the impact on us, we probably won't feel until we go into the next year. Again, the seasonality of it declines with the holidays where people spend on other things than home and commercial projects. With this, given where we are, built into ours is continued low volume of our industry, which means we're going to have shutdowns and unabsorbed overheads as we maintain the discipline in our inventory levels as we go through. Other than that, I guess as we get out in that area further out, we could start seeing cost increases in different pieces.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

As those things happen, we'll have to consider, do we need to make any changes and raise prices in the future as the markets change? What else is there? In the fourth quarter, one other comment, we actually have two additional days in the period due to just the way the calendar falls.

[Mike Dahl, Managing Director of Equity Research at RBC Capital Markets]

Got it. Okay. That's really comprehensive. Thank you for that. As a follow-up question, so top line in the near term sounds like status quo. I guess your guide then implies that I think the operating margin sequentially is still kind of flattish, which to your point, you have some normal seasonality, but there's obviously puts and takes around seasonality, but then some of the actions that you're taking. So can you speak to, I guess, the ability to continue to improve margins from here in the back half of the year despite these top line pressures?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

Well, I mean, we gave you the expectations for the third quarter, is that most of the improvements coming from the internal actions we're taking rather than the marketplace. However, we are seeing some improvements in volume, as we said, and I don't know, it could be almost maybe half the product categories are different places. But at the same time, there's still huge pressure on pricing and mix. So anything that we're picking up in the volume piece is being offset by the pricing and mix in the marketplace in the second half.

[Mike Dahl, Managing Director of Equity Research at RBC Capital Markets]

Got it. Okay. Thanks, Jeff.

[Operator]

Our next question comes from Keith Hughes from Truist. Please go ahead with your question.

[Keith Hughes, Managing Director at Truist]

Thank you. In the release in Flooring North America and in the prepared comments, you called out LVT and Laminate. Here's the question. Were those businesses up year over year?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

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

[Christopher Wellborn, President and COO at Mohawk Industries]

Yeah, those were two of the categories, Keith, that Jeff was mentioning that from a unit volume was up.

[Keith Hughes, Managing Director at Truist]

Units were up in both. Okay. Great. And your earlier comment to the last question, I think you said half your product categories are up in volume. It's a remarkable statement if I heard it correctly. That feels like share gain. I don't think your markets are that strong. Is that fair to say?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

Well, remember, I'm talking about a worldwide market with a lot of different parts in it.

[Keith Hughes, Managing Director at Truist]

Yeah. Right. I get it.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

With different comparisons. In Europe, I mean, the market's 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 import. So 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.

[Keith Hughes, Managing Director at Truist]

Okay. Great. Thank you.

[Operator]

Our next question comes from Michael Rehaut from J.P. Morgan. Please go ahead with your question.

[Michael Rehaut, Senior Equity Research Analyst at J.P. Morgan]

All right. Thanks. Good morning, everyone. Question. I'd love to kind of get a sense from your perspective of what drove the upside to the second quarter, if there were specific areas within perhaps, for example, North America that maybe came in a little better than expected, and just more broadly on either the sales or the margin side. And if you see any of these trends perhaps continuing into the third quarter, that might cause a similar result. If those trends kind of remain in place, that might ostensibly also drive some upside to the 3Q guide.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

The 3Q guide has, as I just said, it's got the assumption that the present conditions in the second quarter continue into the third quarter. Don't forget Europe. I mean, you have to know that when they go on vacation, people quit spending money. And whatever's happening, it takes a huge dip, and the holidays are different in every country. So it pulls down our period. The pressures on pricing and mix, I can't emphasize enough. I mean, the markets, when you have industries with huge capital investments running at low throughputs, everybody's trying to optimize the marketplaces. And our aggressiveness in trying to bring new markets, satisfy people different, expand our distribution are helping us, but it's difficult.

[Christopher Wellborn, President and COO at Mohawk Industries]

Yeah. Then on your question, Mike, on specifically Flooring North America, I mean, generally across all three segments, 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.

[Michael Rehaut, Senior Equity Research Analyst at J.P. Morgan]

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?

[Christopher Wellborn, President and COO at Mohawk Industries]

Well, 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 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.

[Michael Rehaut, Senior Equity Research Analyst at J.P. Morgan]

Okay. Thank you.

[Operator]

Our next question comes from Philip Ng from Jefferies. Please go ahead with your question.

[Philip Ng, Managing Director at Jefferies]

Hey, guys. Congrats on a really strong quarter and in a tough environment. So Jeff, if I heard you correctly, you were kind of hinting at maybe you're seeing higher costs. You could consider raising prices. Certainly, ocean freight, shipping containers, depending where it's coming from, I think like Asia might be up like 3-4x, at least that's what we're hearing. So it's putting a lot of pressure for some of your competitors that import products into the U.S. like LVT and laminate of that sort. At least we're hearing maybe there's rumblings of price increases in the back half. I'm curious what you're hearing on that front. And what does that mean for Mohawk? Is that a cost headwind? Does that provide a pricing umbrella? And how does that potentially impact your portfolio?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

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

[Christopher Wellborn, President and COO at Mohawk Industries]

And then 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 I think you had another on the material side of it. We think that the prices have bottomed, and we are seeing some increases now. And this marketplace is 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 materials, but we'll have to react to whatever happens and manage through it as we go through.

[Philip Ng, Managing Director at Jefferies]

Would you have heard any rumblings? Importers are looking to raise prices at this point?

[Christopher Wellborn, President and COO at Mohawk Industries]

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

[Philip Ng, Managing Director at Jefferies]

Okay. 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 U.S. and Europe, how does that kind of ripple through? Could you see the uplift as soon as spring next year? I want to get a sense of what the lag works and how different parts of your end markets kind of shake out. Do we need to actually see existing home sales turn, or rate cuts coming down provide that confidence and maybe unlock, see lock? Just kind of help us unpack what it means from a rate cut standpoint and how that the lag and how it impacts different parts of your portfolio.

[Christopher Wellborn, President and COO at Mohawk Industries]

If it works the same as historical, which it may or may not, when rates start coming down, the market, the people's confidence goes up. And what happens is you have this multiple years of pushed-out remodeling that happens. So usually, the consumer that's sitting there when they start feeling better about the economy and different pieces, the remodeling industry picks up, and there's very limited lag times when it starts. That's typically followed by the new housing and existing houses. People start moving more and more confidence in doing it. And then you typically have anywhere from a 9-12-month lag from that point before the commercial sector, which takes longer to plan, get budgets approved before you start seeing those type of things help tends to be the typical recovery.

[Christopher Wellborn, President and COO at Mohawk Industries]

When you start with the timing of it, I mean, your guess is as good as mine. Sooner is better for me.

[Philip Ng, Managing Director at Jefferies]

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

[Christopher Wellborn, President and COO at Mohawk Industries]

It always does it.

[Philip Ng, Managing Director at Jefferies]

Okay. All right. That's helpful. Really appreciate it.

[Operator]

Our next question comes from Matthew Bouley from Barclays. Please go ahead with your question.

[Matthew Bouley, Managing Director at Barclays]

Hey, good morning, everyone. Thanks for taking the questions. 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 kind of the longer-term need for capacity in certain product categories? I think you mentioned it might be a little more weighted to Flooring North America. So yeah, any color on that kind of decision process? Thank you.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

We have to manage the circumstances we're in. We know the market's going to turn in the future. We don't know the timing it's going to turn. We know that our view was that the second half of the year will continue to be difficult. So we encouraged all of our businesses to find ways to improve their margins to get through the near term without hurting our long-term potential in the future. And all of them put together projects to improve their productivity, to utilize the assets. In some cases, we've idled some assets that we can start back up. And in other cases, we've shut down some higher-cost ones. We've taken costs out with people. We are managing the product portfolios aggressively to have them in the best shape we can have in.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

We think we're doing all the right things to take advantage of when this thing turns. Don't forget, when it turns, it's going to take several years. Typically, the industry runs at slightly over GDP. When this thing turns, you typically have multiple years of above-industry growth to get us back to the trend lines.

[Christopher Wellborn, President and COO at Mohawk Industries]

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.

[Matthew Bouley, Managing Director at Barclays]

Got it. Okay. That's helpful. And then secondly, kind of zooming into the near term, I think the difference between price and cost got a little wider in Q2 than in Q1. 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.

[James Brunk, CFO at Mohawk Industries]

You are correct. In the quarter, if you just look at material and energy, that's about $90 million of benefit from a year-over-year perspective compared to the weaker price mix of $111 million. That's just material and 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 would 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 and restructuring actions to manage the situation.

[Keith Hughes, Managing Director at Truist]

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

[Operator]

Our next question comes from Adam Baumgarten from Zelman & Associates. Please go ahead with your question.

[Adam Baumgarten, Managing Director at Zelman & Associates]

Hey, guys. You talked about the price or the cost piece on a year-over-year basis maybe being less of a tailwind in the back half. Are you actually seeing sequential input cost inflation as we've gone through the year so far?

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

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.

[James Brunk, CFO at Mohawk Industries]

Yeah. The key point, Adam, was that we've been very consistent. As you see the lower costs flowing through compared to last year, the high point was going to be in the first quarter. We 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.

[Adam Baumgarten, Managing Director at Zelman & Associates]

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

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

It's really broad-based. What's happened is that laminate's becoming accepted as an alternative to wood floors and/or LVT in all the markets. Builders are using it more than they have. In retail, the retailers are also picking it up and utilizing it. And then what am I missing? The commercial business doesn't use it at all. Is it very limited? Is it? Our laminate, we have unique technologies that make our laminate look better and different visuals than other people can make. And so in the world markets, as well as the U.S., we have a huge share of the mid to upper-end part of the laminate business, and we have none of the commodity at the bottom. Is it our equipment's different? Our products look different, and the value propositions are different.

[Adam Baumgarten, Managing Director at Zelman & Associates]

Okay. Got it. Thank you. Best of luck.

[Operator]

Our next question comes from Kathryn Thompson from Thompson Research Group. Please go ahead with your question.

[Kathryn Thompson, CEO at 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, it indicates 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.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

We've been aggressive in the marketplace like everybody else is being in the market. We have good relationships with people. We are bringing products and value propositions that are different. We've been investing through the downturn in our sales and marketing activities. We continue to provide merchandising and promotions to help them maximize their business. And I think we're being rewarded in some places for that and increasing our distribution. We have things like with the freight and all the parts, our ceramic business, we have been able to satisfy the high-end market of ceramic, for instance, in the commercial channels. Whether it's been disruptions in timing, we've improved our styling and offering, so we've become alternatives for higher-end Italian tile, for instance. So we're taking the right actions in each product category. Well, at the same time, we're managing our costs and cutting our costs.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

The management's really doing an excellent job.

[James Brunk, CFO at Mohawk Industries]

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

[Christopher Wellborn, President and COO at Mohawk Industries]

Just some more on Europe. In Europe, when gas prices were 300, 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.

[Kathryn Thompson, CEO at Thompson Research Group]

Okay. Great. Just a clarification from your press release yesterday afternoon. One of the items you said in terms of the cost-cutting measures was leveraging technology to lower administrative cost. How much of this could you clarify more? Is this a euphemism for AI? Incorporating that, just help us understand a little bit more about that phrase. Thanks so much.

[Christopher Wellborn, President and COO at Mohawk Industries]

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 do 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 businesses, we continue to improve our internal information systems, and we keep using them to reduce our administrative structures and respond rapidly.

[Kathryn Thompson, CEO at Thompson Research Group]

Just to clarify, you're not necessarily to the point of having AI be part of cost improvement plans quite yet. Is that a fair statement?

[Christopher Wellborn, President and COO at Mohawk Industries]

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

[Kathryn Thompson, CEO at Thompson Research Group]

Okay. Great. Thank you.

[Operator]

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

[Rafe Jadrosich, Managing Director at Bank of America]

Hey, good morning. Thanks for taking my questions. I just wanted to follow up on some of the productivity gains that you've spoken about and 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 how versus that $50 million you talked about in the second quarter, how do we think about the gains in 3Q and into 2024?

[Christopher Wellborn, President and COO at Mohawk Industries]

Just from a general point of view, then I'll let Jim try to give you some more view. When the volume's going down, you have to make all these cost changes to try to keep the you don't get any benefits in upticks. What you're having to do is trying to cut the costs out to manage the lower throughputs and pull them down to keep them in line. Now, as we come out of it, what will happen is as the volume goes up, we're going to try to limit the expansion of these costs and leverage the margins and get them back to double digits and higher from where we are today.

[James Brunk, CFO at Mohawk Industries]

Yeah. 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 are continuing 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-$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.

[Rafe Jadrosich, Managing Director at Bank of America]

Okay. That's helpful. And then just on the pricing side, as you look across each of the three segments, I know on a year-over-year basis, it's down. But sequentially, are you seeing any type of stabilization? And then just to clarify on an earlier question, you have not seen any impact yet from the higher shipping costs in terms of competitors reacting to price?

[James Brunk, CFO at Mohawk Industries]

Not yet. On the competitors, no. On your sequential question, so the biggest move was from Q4 to Q1. Q1 to Q2, though, there are some declines, mostly in the price area, but it's certainly moderating as you go sequentially through the year, but you're still seeing some declines.

[Rafe Jadrosich, Managing Director at Bank of America]

All right. So from 2Q into 3Q, you'd expect sequentially down, just still down, but less than it was down 1Q into 2Q?

[James Brunk, CFO at Mohawk Industries]

Yes.

[Rafe Jadrosich, Managing Director at Bank of America]

Okay. Thank you.

[Operator]

Our next question comes from Laura Champine from Loop Capital. Please go ahead with your question.

[Laura Champine, Head of Research at Loop Capital]

Thanks for taking my question. It's just a follow-on to the last one, which, in mix, is mix getting, and I know it's negative year-over-year, but sequentially, is it getting worse or better in your three major segments?

[James Brunk, CFO at Mohawk Industries]

Mix is a tough one because you have not only product mix, but you also have channel mix. So as we've said, as commercial slows, that will have a negative impact on mix. As Jeff talked about the commercial market earlier in the call. But on the flip side, on the products, because of our investments that we have made, we are really trying to leverage that to see stronger mix. So you have the combination of the two. So as we look forward, price and mix, it's more on the pricing side.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

As we said, we think we're going to see the conditions. We don't see a significant change as we go from second quarter into third quarter and even into fourth quarter this year.

[Operator]

Ladies and gentlemen, with that, 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.

[Jeffrey Lorberbaum, Chairman and CEO at Mohawk Industries]

We're confident in the long-term fundamentals of our industry. We are well-positioned to take advantage of the recovery of the housing markets. 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.

[James Brunk, CFO at Mohawk Industries]

Wow.

[Operator]

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.

Participants

Executives

• Christopher Wellborn, President and COO
• James Brunk, CFO
• Jeffrey Lorberbaum, Chairman and CEO

Analysts

• Adam Baumgarten, Managing Director at Zelman & Associates
• David MacGregor, President at Longbow Research
• Kathryn Thompson, CEO at Thompson Research Group
• Keith Hughes, Managing Director at Truist
• Laura Champine, Head of Research at Loop Capital
• Matthew Bouley, Managing Director at Barclays
• Michael Rehaut, Senior Equity Research Analyst at J.P. Morgan
• Mike Dahl, Managing Director of Equity Research at RBC Capital Markets
• Philip Ng, Managing Director at Jefferies
• Rafe Jadrosich, Managing Director at Bank of America
• Susan Maklari, Senior Equity Research Analyst at Goldman Sachs