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Operator: Good morning, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to Mohawk Industries Third Quarter 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, October 27, 2023. Thank you. I would now like to introduce Mr. James Brunk. Mr. Brunk, you may begin your conference.

James Brunk: Thank you, Jamie. Good morning, everyone. Welcome to Mohawk Industries quarterly investor conference call. Joining me on today’s call are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Chris Wellborn, President and Chief Operating Officer. Today, we will update you on the company’s third quarter performance and provide guidance for the fourth quarter of 2023. 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.

An overhead view of a website displaying the multiple options of flooring products available for purchase.

This call may include discussion of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8-K and press release in the Investors section of our website. I will now turn the call over to Jeff for his opening remarks.

Jeff Lorberbaum: Thank you, Jim. In the third quarter, our net sales were $2.8 billion, down approximately 5.2% as reported or 8.1% on a constant and legacy basis, in line with our expectations as our industry faced continued pressures across all regions primarily due to constrained residential investments and tightening of consumer discretionary spending. Our adjusted EPS for the quarter was $2.72 with our margins across the business benefiting from cost reductions, productivity initiatives and lower input costs. Our third quarter performance was seasonally impacted by vacations in Europe, which reduced our sales and earnings versus the prior quarter. Our lower material and energy costs offsets the decline in both price and mix.

We also faced FX headwinds of approximately $20 million on operating income or $0.25 on EPS. We are managing our working capital and generated strong free cash flow of $385 million in the quarter and $660 million on a year-to-date basis. During the quarter, central banks around the world continued to raise interest rates to slow down their economies and reduce inflation. Their actions are affecting new construction and remodeling in both residential and commercial channels, postponing spending on new projects. In the U.S., mortgage rates have climbed to their highest level in more than two decades, which has suppressed the housing market and limited home renovation activity. In Europe, consumers are deferring large purchases such as flooring as a result of higher energy costs, inflation and uncertainty due to the war in Ukraine.

Our industry faces a greater impact from these pressures than other sectors, given that most flooring purchases are deferrable. With the high fixed costs required to produce flooring, competition increases as the industry slows and participants attempt to increase their sales to maximize absorption. As a result, our average selling prices and mix have declined, with the impact partially offset by lower material and energy costs, restructuring benefits and process improvements. Expected housing sector recovery continues to be postponed and we are managing the business to optimize our results and cash flow until it occurs. We are taking actions to increase our volumes, while managing margins and operating expenses. We have launched differentiated collections, selectively introduced promotions and expanded our participation in the new construction channel.

To further enhance our competitive position, we will shut down older ceramic production in Italy and we are converting U.S. rigid LVT production to a direct extrusion process. These restructuring initiatives will result in a non-recurring charge of approximately $55 million of which $50 million is non-cash. When completed, these initiatives should improve our profitability by $30 million annually by enhancing our productivity, lowering our manufacturing costs and optimizing our production flexibility. Our European expansions in insulation and porcelain slabs are currently in operation. Our U.S. premium laminate and LVT projects are continuing to start up. Expanded production in European laminate and U.S. quartz countertops should begin in the second half of 2024.

As the integration of our acquisitions in Mexico and Brazil proceeds, we have consolidated the general management, sales and administrative functions while enhancing the company’s product offering, operational efficiencies and customer base. While the Mexican and Brazilian markets are experiencing reduced demand and margins, we anticipate gaining additional benefits from our acquisitions as these markets recover. In September, we released our 14th Annual Sustainability Report and for the first time we provided Scope 3 emissions. Institutional Shareholder Services is right Mohawk is one of the top companies for environmental quality in the durable goods and apparels category. We have significantly exceeded our 25 goals related to decarbonization, waste reduction and water conservation.

We are lowering our carbon footprint by using more recycled content, increasing our green energy production and expanding our product circularity. We recently received the Susan G. Komen Promise Award for our two decades of partnership in the fight against breast cancer. We have also formalized a Board of Directors selection policy as part of our ongoing commitment to diversity. To learn more, you can read the report online at mohawksustainability.com. I will turn the call over to Jim for a review of our third quarter financial performance.

James Brunk: Thank you, Jeff. Sales for the quarter were just under $2.8 billion. That’s a 5.2% decrease as reported, 8.1% on a constant legacy basis. Higher interest rates and continued inflation has weakened new housing and remodeling activity, negatively impacting our global business with lower volume and price and mix pressures. Gross margin for the quarter was 25% as reported and excluding one-time items, was 26.6%, that’s up 100 basis points versus the prior year, with lower input and energy costs exceeding unfavorable price and mix in the quarter, along with stronger productivity, only partially offset by lower volume and unfavorable FX. The actual detailed amounts of these items will be included in the MD&A of our 10-Q, which we will file after the call.

SG&A as a percentage of sales was 19.9% as reported. Excluding one-time items, it was 18.1%. The dollar increase was primarily attributable to the impact of acquired businesses, investments in new products and marketing to drive increased future sales, unfavorable FX and higher inflation. The operating margin as reported was negative 26.5% and excluding charges was 8.4%, as the company’s current market capitalization, along with challenging economic conditions and higher discount rates resulted in a non-cash goodwill and trade name impairment charge of $876 million in the quarter. Total non-recurring charges was $967 million, primarily related to the impairment of the goodwill and trade names, but in addition to further enhance our competitive position we will shut down older ceramic production in Italy and converting our U.S. rigid LVT production to a direct extrusion process.

These actions should improve our profitability by approximately $30 million annually. Adjusted operating income was 8.4% as I noted. The year-over-year decline was primarily driven by lower sales volume and unfavorable FX, partially offset by the reduction in input and energy costs exceeding the impact of negative price and mix and increased productivity gains which were under pressure due to lower plant utilization. Interest expense for the quarter was $20 million. The year-over-year increase is due to significant rise in global interest rates. Other income, other expense was income of $8 million. Non-GAAP tax rate was 20.8% in the current year versus 17.9% in the prior year. We expect Q4 2023 tax rate to be approximately 17.5% to 18.5%. That gives us an earnings per share on an adjusted basis of $2.72.

Turning to the segments, in Global Ceramic, sales were just under $1.1 billion. That’s a 0.5% decrease as reported and 6% on a legacy and constant basis. The U.S. business volume outperformed benefiting from our expanded positions in new construction and commercial channel in the quarter. Adjusted operating income was $88 million or 8% of sales, a decline versus prior year as the global slowdown in demand and pressure on price mix led to further temporary shutdowns, lower sales volume in addition to the impact of unfavorable FX, partially offset by improving productivity gains and restructuring actions. In Flooring North America, our sales were just over $960 million. That’s a decrease of 11.7% as reported and 12.2% on a constant basis, as higher interest rates and inflation continued to pressure discretionary spending across all print — product channels.

Adjusted operating income was $78 million or 8.1%. The operating margin was in line with prior year as lower input and energy costs offset negative price mix, partially offset by weaker volume and lower productivity due to underutilization of our plant assets in the current demand environment. In Flooring Rest of the World, the sales were just over $710 million. That’s a 2.6% decrease as reported and 5% on a constant basis, as the business has been impacted by low consumer confidence, higher interest rates, inflation and geopolitical events. The business in Australia and New Zealand and our resilient and insulation products held up the best in this environment. Adjusted operating income was $77 million or 10.9%. Our adjusted operating income margin expanded versus prior year as lower input and energy costs offset the weakening price mix, similar to Flooring North America, in addition to the benefits of green energy and fewer temporary plant shutdowns than the prior year, all partially offset by unfavorable FX.

Corporate and eliminations were $10 million for the quarter in line with the prior year. Turning to the balance sheet, cash and cash equivalents were $518 million for the quarter, driven by strong management of working capital, our free cash flow grew to $385 million in the third quarter and they are standing at $660 million on a year-to-date basis. Receivables were just over $1.9 billion with a DSO of 59 days, which was in line with the prior year. Inventories were just over $2.5 billion. The year-over-year Inventory decreased $380 million, and excluding the impact of acquisitions, the decrease was $438 million, primarily due to a focused reduction in units, supported by lower year-over-year costs. Inventory days also decreased to 125 days from 131 days in the prior year.

Property, plant and equipment was just shy of $4.8 billion with Q3 CapEx standing at $127 million with D&A of $150 million. Full year 2023 forecast includes the CapEx of just over $620 million at this point. And finally, gross debt was $2.6 billion, with leverage at 1.5 times adjusted EBITDA. This positions the business to take full advantage of the rebound that historically follows a downturn like we are experiencing today. Now, with that, I will turn it over to Chris to review our Q3 operational performance.

Chris Wellborn: Thanks, Jim. In Global Ceramic, our business outperformed due to our innovative product introductions and higher service levels. With this, we expanded our positions in the new home construction and commercial channels. Residential remodeling was slower due to lower home sales and postponed projects. Our investments in new decorating technology, polishing and mosaics are providing domestic alternatives to premium imported ceramic. We are expanding our sales to regional builders, as well as kitchen and bath retailers with our coordinated tile and countertop collections. To further expand our quartz countertop sales, we are introducing more stylized collections, utilizing tech — new technologies that provide greater value.

We have lowered our distribution cost by shipping more product directly from our plants and bypassing our regional warehouses. In our European Ceramic business, retail traffic and new construction are being affected by economic uncertainty. In Southern Europe where our business is concentrated, the economies are under greater pressure. Across all channels, low industry volume is creating more intense competition and we are responding with specific price promotions by geography and channel to gain additional sales. Natural gas prices have declined by 80% from their peak and we have reset our pricing to align with energy costs. While volumes have declined across most product types, sales of our premium porcelain slabs continue to grow and we are optimizing our recent capacity expansion.

We continue to adjust inventory and production to align with changing market conditions. To contain cost, we have increased productivity, reduced overhead and implemented alternative formulations. In Latin America, we have reduced our cost structures to adapt to slower more competitive markets with Mexico being less affected. Our margins are being impacted by lower industry pricing, partially offset by declining energy costs. Inflation in both Mexico and Brazil is receding and central banks are beginning to lower interest rates in response with further reductions expected this year. We are integrating our acquisitions in both countries and making significant progress in executing our sales, product and manufacturing synergies. To increase our distribution, we are gaining customer commitments to expand sales across all channels and price points using the combined product portfolio.

In each country we are utilizing the assets of our legacy business and acquisitions to broaden our product offering. We have completed the information systems conversion in Mexico and the system consolidation in Brazil will be completed by the end of the year, enabling further operational improvements. In Flooring Rest of World, our margins benefited from declines in energy and raw material costs, partially offset by lower price and mix. Sheet vinyl continues to outperform other categories as it provides a lower cost alternative and we have increased production to meet higher demand. With operational improvements underway, our Eastern European sheet vinyl acquisition is delivering higher style products and increased sales. Our laminate and LVT sales are under pressure in the softer market and we are introducing new products, merchandising and select promotions to optimize volumes.

We have executed the restructuring to support the conversion of our residential LVT offering from flexible to rigid cores, which is positively impacting our results. We are pursuing additional flooring sales, reducing costs and aligning production with demand to manage the current conditions. Our panels business has slowed due to a decline in remodeling activity, construction projects and industrial demand. Lower industry sales are affecting both our selling prices and volumes. Our material costs are declining and we are also benefiting from improved productivity and green energy production. Sales of our higher margin HBO collections are growing as our customer base expands. Our sales and operational synergies are progressing in both our board and mezzanine acquisitions.

Our insulation business position is positioned for longer term growth as governments require greater energy conservation for new construction and remodeling. Insulation is less impacted than our other product categories as consumers and businesses invest to minimize their energy costs. Industry pricing has declined, along with input costs with regional variation caused by new plants coming online. In the third quarter, our volume improved and our margins were in line with the prior year. In Australia and New Zealand, the industry slowed during the quarter and our sales in both countries were down slightly. Our results were impacted by mix pressure in the residential channels as consumers sought lower cost flooring options to maintain their project budgets.

To increase sales and protect our margins, we are introducing enhanced collections across fiber categories, elevating the market of our high-end products and implementing targeted promotions to meet evolving demand. Commercial sales in New Zealand remains strong and our broad product offering is helping us secure larger specified projects. In our Flooring North America segment, pricing and mix were under additional pressure as competition increased across all product categories. The impact on our results was partially offset by lower input costs, restructuring and productivity initiatives. To expand our retail presence in all flooring categories, we continue to invest in both products and merchandising systems. We are increasing our participation in the new home construction channel with regional and national builders.

Across the segment, we are implementing many projects to reduce costs, improve efficiencies and maximize material utilization. We are reengineering products with alternative materials and increasing recycled content. We have completed many of our restructuring initiatives to lower our cost and better align with current conditions. In residential carpet, to improve our mix, we are expanding our premium collections, which provide superior styling and features for the more discerning consumer. For the value conscious homeowners, we are increasing our environmentally-friendly recycled polyester offering. We have completed the integration of our non-woven flooring acquisition and are expanding their customer relationships. In resilient, our sheet vinyl collections continued to perform well as a preferred choice for budget oriented consumers.

As an alternative to PVC-based products, we introduced a new resilient polymer core that is more environmentally-friendly and scratch resistant. In the third quarter, our imported LVT sales were disrupted by U.S. customs actions and to satisfy customer orders we substituted higher cost alternatives. We anticipate an increase in LVT inventories in the fourth quarter to improve service. We are continuing to ramp up our West Coast LVT production and the new extrusion process in Georgia. We anticipate both projects will be substantially operational in the first quarter. In addition, the proprietary technology we are implementing in these plants will enable us to introduce unique styling and features to the market. We are expanding our distribution of laminate in the retail and builder channels, our RevWood collections are being more widely accepted as waterproof flooring alternative with superior visuals.

Our new laminate product launches have been well received as consumers seek premium visuals at accessible price points. We are offering selective promotions to improve volumes in a soft market. Our trim and stair accessories business is growing as we broadened the range of our re-patented products across all channels. Though U.S. commercial activity slowed in the quarter as financing became more difficult, our commercial performance is holding up better than residential, led by the hospitality sector. Our carbon-neutral product collections with industry-leading recycled content provide superior performance and design options to architects and designers. Our EcoFlex ONE carpet tile technology is gaining rapid adoption in the specifier community due to its acoustics, comfort and ease of installation.

We are expanding the sales and distribution of our recent flooring accessories acquisition through our existing commercial partners. Our business development group has leveraged our product and service advantages to cultivate new relationships with major retail, healthcare, senior living and real estate development customers. I will return the call to Jeff for his closing remarks.

Jeff Lorberbaum: Thanks, Chris. In the present industry downturn, we are managing the controllable aspects of our business while adjusting to regional market conditions. In all of our geographies, elevated interest rates and persistent inflation are restricting consumer discretionary spending, resulting in postponed remodeling projects and new home purchases. Similar pressures are beginning to reduce commercial investments as business sentiment declines. Competition for sales to utilize plant capacity is increasing in all of our markets and lower input costs should offset the impact. With enhanced products and merchandising, selective promotions and expanded participation in the best performing sales channels, we are maximizing our volumes while managing our margins and operating expenses.

Across the enterprise we are implementing productivity cost reductions and restructuring initiatives to lower our expenses and improve our results. We continue to manage our working capital management to optimize our cash flow. We expect foreign exchange rates to continue to be an earnings headwind. Given these factors, we anticipate our fourth quarter adjusted EPS to be between $1.80 and $1.90, excluding any non-recurring charges. With this, our full year 2023 adjusted EPS should exceed $9. Historically, the flooring industry undergoes greater cyclical peaks and troughs than other building products due to its postponable nature. Our business fundamentals remain strong and we will benefit from significant pent-up demand when the industry rebounds.

Given the aging U.S. housing stock, more than 80% of homeowners who responded to recent JPMorgan surveys indicated they are planning renovation projects in the near-term. In addition, after years of construction trailing demand, substantial new homebuilding will be required for many years to come. Commercial activity will expand as the economic outlook improves. As the world’s largest flooring provider, Mohawk is well positioned to capitalize on these opportunities. We will now be glad to answer your questions.

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Operator: [Operator Instructions] Our first question today comes from Matthew Bouley from Barclays. Please go ahead with your question.

Matthew Bouley: Hey. Good morning, everyone. Thanks for taking the question. Did I hear you correctly that the reduction in input costs actually exceeded the decline in price mix during the quarter? I guess, correct me if I misheard that. But how do you anticipate price mix versus cost to play out into 4Q and perhaps any early thoughts on 2024 there? Thank you.

James Brunk: Thank you, Matt. Yeah. Let me frame that. So the cost started gradually falling in late 2022 and it takes usually three months to six months to flow through our P&L. In Q3 and I will provide some numbers here that will also be in our 10-Q, lower costs led by material and energy totaled $112 million, offsetting the weaker price mix of $106 million. Now sequentially, cost declined $65 million, exceeding the lower price mix of $29 million. In the fourth quarter, we would anticipate lower costs should continue to flow through the P&L.

Matthew Bouley: Got it. Okay. That’s super helpful. Thank you for that, Jim. Then, secondly, you mentioned, maybe zooming into Europe and natural gas and ceramic there specifically, I know you mentioned, certainly the costs have come down quite a bit from the extreme levels last year, but now European natural gas seems like it’s creeping higher again clearly in a market that seems like it’s a little more competitive. So, how do you anticipate specifically cost and price playing out in that market, European ceramic? Thank you.

Jeff Lorberbaum: Well, the — you are correct that the cost for gas has come down a lot, but in Europe, the business continues to face pressure with declining retail traffic and new construction. We are responding to conditions with promotions and we also have premium slabs continue to grow and we are optimizing our new slab line. We are also initiating restructuring actions to eliminate older assets and improve our cost and utilization. And then we will just have to see how the gas levels out, it’s definitely a lot lower than last year.

Matthew Bouley: All right. Thanks guys. Good luck.

Jeff Lorberbaum: Thank you.

Operator: Our next question comes from John Lovallo from UBS. Please go ahead with your question.

John Lovallo: Good morning, guys. Thank you for taking my questions. Maybe just following up on Matt there, did the lower material and input costs offset the declines in price mix across segments in the quarter. I am more curious, I guess, about Global Ceramic there specifically. And then as we move into the fourth quarter, how should we think about margins by segment, is there anything outside of normal seasonality that we should consider there.

James Brunk: Well, in the quarter, the lower material and energy offset price mix in Flooring North America and Flooring Rest of the World. As Global Ceramics still has some higher cost material that is flowing through, it should kind of complete hitting the P&L in the third quarter.

John Lovallo: Got it. And then any factors we should consider on margin in the fourth quarter outside of sort of normal seasonality?

James Brunk: No. If you look at the fourth quarter, we still have elevated interest rates and inflation, we anticipate constrained discretionary spending with postponed remodeling and home purchases. Remember, obviously, it’s seasonally slows due to the holidays. Margins are expected to be higher than last year with greater pricing pressure and increased shutdowns. We do anticipate lower input costs, as I noted, and we should be continuing to implement productivity and cost reductions, and don’t forget, foreign exchange, we anticipate will continue to be a headwind in the quarter.

Jeff Lorberbaum: The higher volumes in the quarter deleverage the margins as we pick up later, sorry, that’s not this quarter. In the quarter, you have got it right, I am sorry.

John Lovallo: Okay. Thank you. And then as a follow-up, the $620 million in full year CapEx implies a pretty good step-up I think around $250 million in the fourth quarter. Is that just timing or is there anything going on there in particular that we should consider?

James Brunk: It’s really timing. As we end the quarter, in terms of 2023 — between 2023 and 2024, our focus continues to be investing and optimizing the future of the business with the growth investments that we have talked about really making up $200 million to $250 million. Of that maintenance CapEx would be another $250 million and then the balance of that budget for the year are on cost reductions, product innovation and acquisitions.

John Lovallo: Okay. Thank you, guys.

Operator: Our next question comes from Joe Ahlersmeyer from Deutsche Bank. Please go ahead with your question.

Joe Ahlersmeyer: Hey. Good morning, everybody. Thanks for taking the questions.

Jeff Lorberbaum: Good morning.

Joe Ahlersmeyer: A couple of peers of yours have offered some early assumptions on residential U.S. end-markets into next year, might call it a flattish outlook on balance. And for simplicity, let’s just maybe take the international markets aside for a second and the commercial as well and just talk about North America residential across your segments. Question is, I guess, do you agree with that assessment that the market could be relatively flat next year within that and what the sources of upside and downside to that might be?

Jeff Lorberbaum: We look forward at it or the flooring industry has actually been in a downturn since mid-2022. We believe that we are going to see an improvement in the middle of the year as inflation moderates and financing improves. When these occur we think consumer confidence will improve and the industry has started to get better. So we see the first half basically as a continuation of where we are with improvement as we go through the year and then depending upon how strong when it occurs, we will determine what the volume is versus this year.

Joe Ahlersmeyer: That’s very helpful. Jeff, appreciate that. So maybe a — seemingly a follow-up here. From late 2020 to early 2022, you bought back $1.4 billion of your stock, around $170 a share, even stretching there where you are buying it at $200. You stopped buying it back last March and I know there was cash flow softened, you are investing in CapEx and you had some maturities in there. But on several calls now and especially on this one you are talking about the health of the category, your competitive position not having changed much. So just how might an investor who is the incremental buyer of your stock today reconcile that sentiment with seemingly the hesitancy around buying back your stock right now?

Jeff Lorberbaum: At the moment, there’s still a lot of economic uncertainty in the world. The financing conditions are still difficult, there’s regional conflicts that can affect everything. So we believe that at the moment having excess capacity is preferred. But we are continuing to review it and would consider buying stock as our visibility improves from where it is today.

Joe Ahlersmeyer: All right. Thank you, Jeff.

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

Susan Maklari: Thank you. Good morning, everyone.

James Brunk: Good morning,

Jeff Lorberbaum: Good morning.

Susan Maklari: Jeff, maybe just building off of Joe’s question, as you think about 2024, you are going to go into the year with some excess capacity. I know you mentioned that you think the market can improve in the middle of the year. But how do you think about the company’s specific efforts that you detailed in your remarks around cost cutting in new products and how those will be layered in over the course of 2024 and what they could mean for Mohawk?

Jeff Lorberbaum: Let’s say, as we look through it, higher volumes as we go and the business improves, we will leverage the SG&A overhead and the productivity will all improve. We expect improvements in the average selling prices as margins expand. Customers start trading up and buying better product will also see benefits from the restructuring and take-outs that will come through when all that occurs. And then in addition, we have multiple acquisitions we have done recently. Those have also been compressed. Those will also — the volume will come up and we expect them to significantly help our performance. And finally, the investments in the growth areas will add to our sales ability as we come out of this. So as we think through the whole thing, we see the margins expanding significantly as the business improves.

Susan Maklari: Okay. That’s helpful color. And then, as part of that, you have mentioned the macro in some of these markets, especially some of your newer markets is hopefully maybe taking a bit of a turn for the better next year. As you think about the opportunities in some of those areas and those categories, anything that is interesting to you that we should be thinking about over the next year and a half or so?

Jeff Lorberbaum: If you look at Latin America, in this cycle, they actually raised rates more aggressively than the rest of the world and further. So we are actually starting to see them starting to lower rates and we think there could be significant rate decreases in Mexico and Brazil even this year. So those things — they might come out of this earlier than others. Business in Australia has held up better for us. There is a less competitive environment in the marketplace and we have been able to hold on to margins a little better. Europe is really difficult to know what’s going to happen. The consumer confidence remains low and it’s going to take something to help it move. And different than the United States and Europe, the average worker got much higher increases. So they covered more than inflation and we do. So it’s really a confidence issue in Europe.

Susan Maklari: Okay. Thank you for the color and good luck with everything.

Jeff Lorberbaum: Thank you, Susan.

Operator: Our next question comes from Stephen Kim from Evercore. Please go ahead with your question.

Stephen Kim: Yeah. Thanks very much guys. I appreciate all the color you gave — given so far. Jeff, you have laid out pretty clearly in both your press release and what you have said today. The factors that drive your business to be rather cyclical. Right now you have got a lot of challenges that are coming from all quarters, with competitors try to leverage their fixed costs in a tough market and drive pricing and all that. And then also on the way up everything gets better. I think you just were talking about with Susan. More broadly, my question is, how important is it to you to drive changes in your business that may deliberately reduce this embedded cyclicality in your business over the longer haul?

Jeff Lorberbaum: Well, the cyclicality is based on the — they are really two things, one is, how sensitive we are to interest rates, and then the other part is, these high capital fixed cost that the industry, including our company, our competitors and we tend to move up and down trying to minimize these things. I think if you are going to stay in the industry it’s part of it as if. Now we are getting into other things like the insulation business that we are in Europe. It doesn’t have as much — the fixed costs are much less for instance and the margins hold up better in it. So we are in different business and different categories that react differently today.

James Brunk: And remember, as these are not purchases that are canceled. These are deferred. So, if you see a pent-up demand and with the aging stock of housing, and as Jeff said in prepared remarks, the building just being behind, the need for housing, we feel like we are in a great position over that mid to longer term.

Jeff Lorberbaum: For the first two years or three years after this thing is over, the pent-up demand for houses — for housing, for improvements and remodeling that hasn’t been done, we don’t lose it, it just comes back later.

Stephen Kim: Yeah. Yeah. There’s no — I certainly agree that there is a somewhat longer term rebound on the way. And so getting to that, I think, you are — I think Joe was asking about the timing of a rebound or maybe somebody else, but you talked about it with the U.S. I think you said you are looking for — you are bracing for a tough one first half next year, you think by midyear it’s going to materialize. Let’s say, you are right and it does actually start to materialize by midyear. I am curious how you are planning to run your — carry your inventory levels. I think of relatively higher levels of inventory as being something that leads to strong service levels as soon as demand rebounds and I am curious as to whether you are planning around inventory in the U.S. particularly is going to be such that you sort of like to build inventories or carry higher inventories than maybe normal in anticipation of wanting to try provide strong service levels maybe at the beginning of 3Q.

And then also could you just broaden your view beyond the U.S. to, let’s say, Europe and LatAm. Do you similarly think midyear next year is when we may see a turn?

Jeff Lorberbaum: Let’s start with the first part. The inventory levels are based on two things, one is what the market is and other is in our ability to respond. Given the low volume rates we are at presently, we have a significant upside in capacity to react to it and so we probably won’t build much inventory until we see it coming and then we think we have the ability to utilize the capacity that we already have to solve it to satisfy it as it goes up. On the other side, the different regions. I think that is possible, Latin-America will come out of this first and then Europe is a little hard to know. I would guess Europe may trail, the U.S. If I had to pick Latin-America may come out of it earlier, U.S. in the middle and maybe Europe a little later, would be my present guests, but we will have to see how it evolves.

James Brunk: And Stephen, one thing…

Stephen Kim: Okay.

James Brunk: … on your regional question is, well, the restructuring actions that we are taking, part of that is to lower — permanently lower our cost structure which then does help us in good times and bad.

Stephen Kim: Okay. Yeah. It makes sense. Thanks very much guys.

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

Keith Hughes: Thank you. Question on the — you changed your LVT product rigid to direct expansion, in terms of the direct extrusion. Can you talk a little bit more about that, what kind of cost savings and how long it’s going to take to do the conversion?

Chris Wellborn: Yeah. Keith, our Georgia rigid production is presently being converted to direct extrusion to lower our costs. We are also installing new technology in both plants that will provide unique styling and features and these changes will give us more flexibility to ship the products from both the east and west plants and we will have savings of more than $20 million annually when it’s executed.

Keith Hughes: And it — will this change all of your rigid LVT production to this method versus the partial conversion?

Chris Wellborn: No. It will all be changed to this.

Keith Hughes: Okay. And does — what — does this drive just more efficient machine time or how do you get the savings from it?

Chris Wellborn: Well, we are changing from a heated press technology to an extrusion process and this allows for a lower cost formulation and it’s just currently in the startup phase. We should be substantially operational in Q1.

Keith Hughes: Q1. Okay. All right. Thank you very much.

Operator: And our next question comes from Phil Ng from Jefferies. Please go ahead with your question.

Phil Ng: Hey, guys. Energy prices have kind of bounced off the bottom. Are you starting to see any upward pressure on your input costs more broadly? I know it’s somewhat tied to oil, presumably there’s a lag. And have you started seeing your price mix in your different respective business stabilize here or there is still some pressure as we kind of look forward?

Jeff Lorberbaum: Let’s see if we can answer it in few different ways. One is, we think that the material costs have probably bottomed at this point, as well as there’s a good chance maybe the pricing is also maybe bottomed, but we will have to see. As the oil and energy prices go up, is that — the basic cost of it, but also supply and demand. So I am not sure how it’s going to actually flow through given the low demand of the industry and categories using the different chemicals, it may take a little longer for it to flow through this time than normal. Usually, as we come out of the recession, what happens is, the demand goes up and then the chemicals have to recover their margins as it goes through and when that occurs we have to pass through the increase in costs as it goes — as it happens.

Phil Ng: Okay. That’s helpful. And then a few more questions on LVT. With the investment you are making in extruding side and with Mexicali coming online early next year, how does your product stack up from a cost and quality standpoint versus imports coming out of Asia? And does your LVT manufacturing business now at this point, early next year stack up from a margin standpoint versus North American Flooring, is it accretive, neutral, still a headwind? How should we think about all those things?

Chris Wellborn: Let me see. We — first of all, we think the new products that we are coming out with in the LVT are going, especially the high-end, we are going to be definitely competitive with imports.

Jeff Lorberbaum: The pricing has declined substantially to import prices with both lower freight, as well as lower material costs. Our U.S. manufacturing costs are also coming down with it. We still have other things going on like service disruptions from China, given the U.S. in different pieces and so next year our margins should expand and we expect the profitability of the business to improve.

Chris Wellborn: And we also introduced a new resilient polymer core that’s environmentally-friendly with superior scratch resistant, that’s doing really well.

Phil Ng: Okay. And some of the friction, you mentioned in terms of imports coming in from Asia, how does that position Mohawk, especially as you ramp up some of those domestic capacity. Is it a good guy or just broadly your cost goes up, because at the end of day, you are still importing from Asia, maybe not directly from China.

Jeff Lorberbaum: The combination of both, as you would suspect, the lower cost we are getting through with the imports that we do. We are also getting lower cost here is the material costs fall, energy prices here fall also. On the other hand, competition is increased with the lower volumes and pricing’s come down.

Phil Ng: Okay. I appreciate all the great color. Thank you.

Operator: Our next question comes from Michael Rehaut from JPMorgan. Please go ahead with your question.

Andrew Harvey: Hi, guys. This is Andrew Harvey on for Mike. Thanks for taking my question. I appreciate you guys show yourself in your press release. I just wanted to ask maybe from a pricing standpoint, any markets in particular that you have concerns for that prices will fall more significantly or maybe even vice-versa.

Jeff Lorberbaum: Most of the markets, as a matter of fact, all the markets we are in, the pricing has declined. You have a combination of the cost of the material is coming down, the energy price is coming down and there is unabsorbed overhead that we have talked about the industry. So the pricing has come down. The question is, is it at the bottom today and/or will it go down or not. We think it may be at the bottom as we speak, and as things improve going forward, we think that there will be pressure must-see once the industry improves to increase the material prices from our supply base and we will react to that when it occurs, but that’s usually after the industry does. At the same time, you have the world events with oil and gas and how that affects everything, that one is anybody’s guess, we just have to react to it.

Andrew Harvey: Thanks, Jeff. I guess in terms of lower input costs and energy costs, are you seeing any further sequential declines into next quarter and maybe any thoughts on next year and how quickly pricing has been aligning with energy crisis?

James Brunk: Well, again, from a total material and energy costs, in the fourth quarter versus the prior year, we should continue to see the positive impact of the flow through to the P&L offsetting the lower price mix. That’s from a year-over-year perspective.

Andrew Harvey: Thanks. I appreciate it.

Operator: Our next question comes from Adam Baumgarten from Zelman. Please go ahead with your question.

Adam Baumgarten: Hey, guys. Just one from me. Good morning. Just wondering if the recent [inaudible] carpet payment terms and the removal of some of the discounts you guys have historically had as an industry will have a positive impact on the Flooring North American segment going forward?

Jeff Lorberbaum: The industry has changed some of the terms within it. Depending upon where you are, it has helped the margins a little bit. We are staying aligned with our customers in many cases and we have — we didn’t try to push through an increase like some of the other guys did. So we are trying to use it to improve our position within the customers.

Adam Baumgarten: Okay. Got it. Thank you.

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

Kathryn Thompson: Hi. Thank you for taking my question today. Just focusing on the commercial end-markets, we looked at some resi focused stocks traded better on less bad news this year, early this year and then you have past for this week you had more commercial focused sewing manufacturer also trade up on less bad news in the commercial space, relatively less bad news. What are you seeing in terms of your pipeline of your business in North America with commercial end-market and what have you done to shift your business and focus towards certain end-markets that are performing relatively better than the traditional office and retail? Thank you.

Jeff Lorberbaum: Commercial business is holding up better than the residential business. We are seeing softening in the marketplace in different categories. The ABI Index which predicts the new parts coming online is showing declines. So as in other recessions, typically a year-to-year and a half later, the commercial start softening as the commercial projects finish up. So we are starting to see that. On the other hand, in commercial you have a much more differentiated product offering. So the pricing is more resilient than it is in the residential business and different categories, government, senior care, hospitality, restaurants are all doing better and we are emphasizing our participation in those.

Kathryn Thompson: Okay. Yeah. I have a full understanding of the timing difference between residential and non-res, it was really — it was helpful to some extent, but just we are getting a better understanding of that mix shift for you and now, certainly, importantly, what does it look like going forward because, for instance, we are having industry contacts you are saying, listen, we are starting to see projects being not just postponed, but canceled, but we are able to shift mix to adjust. One other follow-up question, as you have obviously made a lot of efforts over the past trailing 12 months to right-size operations and to make various restructuring charges, but stepping back and looking at the bigger picture, from a long-term standpoint what is the industrial logic for having the global footprint, as you mentioned, the business going forward. What’s the argument for keeping the global footprint as it is currently? Thanks very much.

Jeff Lorberbaum: The global footprint allows us to participate in the same categories across the world. It allows us to leverage the knowledge of what we can do with product innovation, styling design, distribution concepts in order to optimize the businesses. In the businesses that we have such as ceramic, we used the technology — we have different businesses that are in high, medium and low, the high ones lead it and then it flows down through to the other ones to help us increase our mix and distribution in the business. In different businesses we get into, we can help, if they are strong in residential, we can help them show to how to maximize their commercial business. We have other categories that we get benefits out of just the processes, running warehouses and distribution, information systems. So there’s a lot of synergies that you can do to help the acquired businesses.

Kathryn Thompson: Okay. Great. Thank you.

Operator: Our next question comes from Truman Patterson from Wolfe Research. Please go ahead with your question.

Truman Patterson: Hey. Good morning, everyone, and thanks for taking my questions. First, whenever I am looking at the fourth quarter EPS guidance sequentially versus 3Q, it implies a bit worse than normal seasonal decline. I am just hoping you could help us discuss from a high level, the buckets that got worse throughout the quarter that really led to that guide. And then also I believe you mentioned Brazil, Australia, but are there any areas, product categories, pricing, et cetera, where you are perhaps seeing some stability, if you will?

Jeff Lorberbaum: You covered a lot of ground. Let’s see if I can — most of it. Starting out with the elevated interest rates and inflation are constraining the spending and it’s postponing the remodeling and home purchases. Our assumptions are that it’s more difficult in the period. You are also in the time where the seasonality. So there’s more holidays. Given the control of the inventories and lack of need for manufacturing ahead, there’s more shutdowns being planned in the period. We are assuming increasing pressure in commercial in the fourth quarter versus the third quarter. The margins on a year-over-year are higher than they were, but we think there’s still going to be this greater pressure and less covering the absorbed overheads as we control the inventories and working capital.

We are implementing productivity and cost reductions, and then we expect the foreign exchange, our present assumptions are that it’s a similar headwind with what was happening in the third quarter.

James Brunk: Yeah. So sequentially, that gap that you are talking about, if you look back over time, from 2018 forward, you got mid-20% difference from Q3 to Q4. It’s a little bit more this year and in our implied in our guidance. And I’d say the additional shutdowns and the foreign exchange certainly are two headwinds that maybe a little bit unusual than prior years.

Jeff Lorberbaum: Another also differences, in normal years, we would normally fully inventory down in the end of the third quarter, the start of the fourth quarter and then be building back as we come out of the quarter. So we are not doing — that didn’t happen this year.

Truman Patterson: Okay. Thanks for that. And then just wanted to follow-up on kind of a prior question. You all have been generating a lot of cash flow this year, $2.6 billion in debt. It seems pretty manageable. And Jeff, I think you mentioned earlier that, that, perhaps you might not step into share repurchase today. I am just hoping you could discuss potential for M&A, any geographies or product categories of focus, as well as how you might balance that with your own current valuation of your share price, balance M&A in lieu of share repurchases?

Jeff Lorberbaum: First, before we get into the new M&A, we have the two recent acquisitions we have done in Brazil and Mexico which we are integrating and taking costs out. We have three or four bolt-on acquisitions that are also being put together with the business. All of those should give us significant upside as we come up and the volumes go up in the businesses. As we come out of this in the future, you are correct that the value of the business today allows to purchase a stock and give significant opportunity which will — which we consider as soon as we make sure there’s not another worldwide problem that’s about to occur with all that events going on as we go through and then we will have to see what that looks like versus other alternatives that arise.

Truman Patterson: Asked another way, any M&A deals flowing across your desk, are those valuations more attractive than your current valuation for Mohawk?

Jeff Lorberbaum: The only businesses that tend to sell in this environment are ones that are seriously distressed and don’t have any options as if these valuations, most companies don’t do many — don’t try to sell their businesses.

Truman Patterson: Okay. Perfect. Thank you.

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

Laura Champine: Thanks for taking my question. You called out in your press release the negative impact on Europe from the conflict in Ukraine. Can you give us more information on the Russian business, what are your plans for that and is that business a material hit to earnings this year?

James Brunk: Well, the answer is no to that. But in Russia, we are all following — we are following all the sanctions, we are adjusting our strategies to be — to adjust to these more difficult market conditions. We are also leveraging our leading styling and distribution to maximize our sales in that market.

Jeff Lorberbaum: Remember, that’s — Russia is less than — all the Russian businesses together are less than 5% of our business.

Laura Champine: Understood. Thank you.

Operator: Our next question comes from Eric Bouchard from Cleveland Research. Please go ahead with your question.

Eric Bouchard: Hi. Thank you. Two things. First of all, Jeff, you have talked about this being the bottom of price and then a potential improvement in the middle of 2024. I am just curious what you are seeing in the business now that supports both of those thoughts?

Jeff Lorberbaum: First is the pricing decreases are following the material costs, the material costs we believe are at a bottom. So we believe that will change the pricing from falling significantly more going forward. And then what was the other part of the question?

Eric Bouchard: The second part was the comment about the first half being similar to today and then the path for improvement in the back half of 2024, what you are seeing in the business today that informs that?

Jeff Lorberbaum: I guess that — we don’t have a crystal ball any more than you do. We are making the assumption that the present circumstances continue, we believe we have line of sight into the first quarter. After that, given the dynamics that’s going on in the world that anything could happen.

James Brunk: What we are quoting there is there’s numerous people that have come out and said that, you see some strengthening in the back half of the year. But again, you can get an argument going the other way as well. So it’s really one scenario, Eric.

Eric Bouchard: Okay. And then, secondly, the goodwill write-off is a component of that or I am just curious, the catalyst for this, is there some component of this relates to a reduced future earnings of the business or are there other dynamics that explain right after they start…

James Brunk: It really starts. Yeah. Eric, it really starts with the volatility on the macro side. The higher interest rates, inflation, deterioration in the market conditions negatively impacted our business, which reduced our market capitalization. Then you go through an internal review of the stock price compared to that, it triggered the goodwill impairment that was required. Remember, that’s a non-cash charge in the quarter and it’s across all the segments. There will be more detail for you to see in the 10-Q that’s filed after the call.

Eric Bouchard: Okay. Thank you.

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

Rafe Jadrosich: Hi. Thanks for taking my questions. That’s great. The first thing I wanted to ask, just what are you seeing in terms of industry capacity, particularly in the U.S. Are you seeing other competitors start to pull back in any of the segments or are you seeing any foreign competition continuing to add capacity?

Jeff Lorberbaum: Across all the different categories, there have been capacity taken out of some pieces of the industry in different places and LVT over the past year, there have been some increases in capacity in the U.S. marketplace. What else was the rest of the question?

Rafe Jadrosich: Are you seeing any of the foreign competitors opening capacity in the U.S., is there any incremental capacity investments there and then are the domestic manufacturers reducing capacity on categories like carpet or hardwood?

Chris Wellborn: Well, just to comment, in ceramic there have been a couple that have added new plants, but in generally, the capacity that’s in the United States is slightly underutilized, I would say, in ceramic.

Jeff Lorberbaum: In ceramic one, probably, about 50% — in excess of 50% is imported. So there is some of the foreign companies are opening some capacity here, which he is talking about. LVT would be similar to the same situation where there’s some of the ones have opened up capacity here, trying to find ways to optimize their service levels from where they are. And then some of the other product categories, there have been some capacities taken out of the industry.

Rafe Jadrosich: Okay. Got it. That’s helpful. And then just on the new construction outlook, can you just remind us your exposure to multifamily versus single-family and then what you are seeing on between those two segments?

Jeff Lorberbaum: Not sure I have those numbers in front of me. The new construction, homebuilding, I think, it’s around 20%, 25% of our business. I don’t have the number in front of me, the multifamily piece.

James Brunk: Yeah. Rafe, we don’t have that. We don’t usually break that out. We kind of include it in the new construction number that Jeff quoted.

Jeff Lorberbaum: It’s either in the new construction number or it’s in the remodeling number as it gets replaced as we go forward.

Rafe Jadrosich: Is there — if — it seems like based on what kind of homebuilders are saying now that we will still see single-family construction probably rise next year. But it looks like the multifamily outlook is pretty soft and we could see some pretty significant declines. Do you have meaningful exposure on the multifamily side? I mean, is there any margin difference between single-family, multifamily or is it relatively small compared to single-family?

Jeff Lorberbaum: Multifamily typically is lower. They typically use lower quality products than the single-family home construction. On the other hand, the multifamily gets replaced much more frequently, typically after they change over tenants in it. It depends on where they are and what it could be replaced every few years where the home newbuilding could be a seven-year to 10-year cycle. So there’s a big difference in replacement cycles, as well as the quality of products going into each.

James Brunk: As we said earlier, we see an expanding presence in U.S. Ceramic and new construction, and the commercial channels, and also in Flooring North America as well, our relationship with the builders is stronger.

Jeff Lorberbaum: The other thing you mentioned the multifamily, the new starts are coming but the typical multifamily takes minimum of a year and a half and could be two and a half years to finish. There is a huge number of projects that are coming through that haven’t been finished yet and our product category is last one to go in.

James Brunk: Yeah. So similar to commercial, it has a long tail to be completed.

Rafe Jadrosich: Okay. Got it. So there’s still a backlog there.

Jeff Lorberbaum: Yeah.

Rafe Jadrosich: That’s very helpful. Thank you.

James Brunk: Yes. Correct. Thank you.

Operator: And ladies and gentlemen, at this time we will be concluding today’s question-and-answer session. I’d like to turn the floor back over to Mr. Lorberbaum for closing remarks.

Jeff Lorberbaum: Yeah. We are managing the controllable costs that we have been discussing, we continue to react to changing market conditions which are volatile, we see significant upside when the market returns and we think we are well positioning ourselves for that to occur. We appreciate you joining us. Have a great day.

Operator: And ladies and gentlemen, with that we will conclude today’s conference call. We thank you for attending today’s presentation. You may now disconnect your lines.