The operator introduces the conference call for Mohawk Industries' third quarter 2023 performance and introduces the speakers. The speakers remind listeners of the risks and uncertainties involved and discuss non-GAAP numbers. Jeff Lorberbaum then gives an overview of the company's net sales, which were down in line with expectations due to industry pressures and reduced consumer spending.

The company's adjusted EPS for the quarter was $2.72, benefiting from cost reductions and lower input costs. Sales and earnings were impacted by seasonal vacations in Europe and lower material and energy costs offset the decline in price and mix. Central bank actions and high mortgage rates have affected new construction and remodeling, leading to a decline in the housing market and consumer spending on flooring. The company is managing its working capital and taking actions to increase volumes while managing margins and expenses until the expected housing sector recovery occurs.

Mohawk has implemented various strategies to improve their competitiveness, including shutting down older ceramic production and converting U.S. rigid LVT production. These initiatives are expected to result in a non-recurring charge of $55 million but improve profitability by $30 million annually. The company has also expanded production in Europe and the U.S., and is consolidating functions and enhancing operations in Mexico and Brazil. Mohawk has been recognized for its sustainability efforts and received an award for its partnership in fighting breast cancer.

In the third quarter, the company experienced a decrease in sales due to higher interest rates and inflation. However, gross margin improved due to lower input and energy costs and increased productivity. SG&A expenses increased due to acquisitions, investments in new products, and higher inflation. The operating margin was negatively impacted by a non-cash impairment charge and other one-time charges. To enhance their competitive position, the company will be shutting down older ceramic production in Italy and converting their U.S. rigid LVT production to a direct extrusion process.

In the past year, the company has taken actions to improve profitability, resulting in an estimated annual increase of $30 million. However, adjusted operating income declined due to lower sales volume and unfavorable foreign exchange rates. Interest expenses also increased due to global interest rate rises. The company expects a lower tax rate in the next quarter, resulting in an adjusted earnings per share of $2.72. In the Global Ceramic segment, sales decreased due to a slowdown in demand and pressure on prices, but the U.S. business performed well. In Flooring North America, sales also decreased due to higher interest rates and inflation, but the operating margin remained in line with the previous year.

In the Flooring Rest of the World segment, sales decreased by 2.6% due to various economic factors. However, the business in Australia and New Zealand and resilient and insulation products remained strong. Adjusted operating income margin expanded due to lower costs and energy prices. The balance sheet shows strong cash management and a decrease in inventory. Gross debt is at a low level, positioning the business for growth in the future.

Chris Wellborn, speaking on behalf of Global Ceramic, reported that the company had a successful quarter due to new product launches and improved service levels. However, residential remodeling was slower due to lower home sales. The company is focusing on expanding sales in the new home construction and commercial channels, as well as introducing new technologies to increase the value of their products. In Europe, economic uncertainty has affected retail traffic and new construction, leading to more intense competition. The company has adjusted pricing to align with declining natural gas prices and is optimizing production to meet demand. In Latin America, cost structures have been reduced to adapt to slower and more competitive markets.

The company's margins are being impacted by lower industry pricing and inflation in Mexico and Brazil is receding. They are integrating their acquisitions and making progress in executing sales and product synergies. They are also increasing distribution and utilizing assets to broaden their product offering. In Flooring Rest of World, margins benefited from declines in energy and raw material costs, but were offset by lower price and mix. The company is introducing new products, merchandising, and promotions to optimize sales in a softer market. They have restructured to support the conversion of their LVT offering and are pursuing additional flooring sales while reducing costs. The panels business has slowed due to a decline in remodeling and construction activity.

The company's material costs are decreasing and they are seeing improved productivity and growth in their higher margin HBO collections. They are also making progress in their sales and operational synergies. The insulation business is expected to see long-term growth due to government regulations on energy conservation. Sales were down in Australia and New Zealand due to mix pressure and competition, but the company is introducing new collections and targeted promotions to increase sales and protect margins. Commercial sales in New Zealand remain strong and the company is investing in products and merchandising to expand their retail presence. They are also increasing their presence in the new home construction market.

The company is implementing various projects to reduce costs and increase efficiency in their operations. They are reengineering products with alternative materials and increasing recycled content. They have completed restructuring initiatives and are expanding their premium collections for discerning consumers and environmentally-friendly options for value-conscious homeowners. In resilient flooring, they have introduced a new environmentally-friendly and scratch-resistant option. However, their sales of imported LVT were disrupted in the third quarter and they are working to increase inventory and ramp up production. They are also expanding their distribution of laminate flooring and have had successful product launches. They are offering promotions to improve sales in a slow market.

The company's trim and stair accessories business is growing due to the expansion of their product range and partnerships with other businesses. Their carbon-neutral products and EcoFlex ONE carpet tile technology are gaining popularity among architects and designers. The company is also expanding their sales and distribution through recent acquisitions and cultivating relationships with new customers. The company is managing controllable aspects of their business in response to industry downturn and competition, while implementing cost reduction and restructuring initiatives to improve results.

The company is closely managing its working capital to optimize cash flow and expects foreign exchange rates to continue to be a challenge. They anticipate their fourth quarter adjusted EPS to be between $1.80 and $1.90 and their full year 2023 adjusted EPS to exceed $9. The flooring industry is cyclical and the company expects to benefit from pent-up demand when the industry rebounds. They also anticipate growth in the housing and commercial sectors. In the third quarter, the decrease in input costs exceeded the decline in price mix. The company expects this trend to continue into the fourth quarter and beyond.

In the fourth quarter, costs declined by $65 million, exceeding the lower price mix of $29 million. The company expects lower costs to continue in the fourth quarter. In Europe, the business is facing pressure due to declining retail traffic and new construction, but they are responding with promotions and optimizing their new slab line. They are also initiating restructuring actions to improve cost and utilization. The cost of gas in Europe has come down significantly from last year, but the company will have to see how it levels out. In the third quarter, lower material and input costs offset the declines in price mix across segments. For the fourth quarter, margins by segment may be affected by normal seasonality.

In the quarter, James Brunk discusses how lower material and energy costs offset price mix in Flooring North America and Flooring Rest of the World. Global Ceramics is still experiencing higher material costs, but it should be completed by the third quarter. Margins are expected to be higher in the fourth quarter due to pricing pressure and increased shutdowns, but there will be a headwind from foreign exchange. The $620 million in full year CapEx is mainly due to timing, and the focus for 2023-2024 is on growth investments, maintenance CapEx, and cost reductions.

During a conference call, Joe Ahlersmeyer from Deutsche Bank asks Jeff Lorberbaum about his outlook on the North American residential market for the next year. Lorberbaum believes that the flooring industry has been in a downturn since mid-2022, but expects to see improvement in the middle of the year as inflation moderates and financing improves. He also mentions that the company had stopped buying back stock last March due to cash flow and investments in CapEx, but their competitive position has not changed significantly.

The company is currently hesitant to buy back their stock due to economic uncertainty and regional conflicts. However, they are continuously reviewing the situation and may consider buying back stock as their visibility improves. In 2024, they expect improvements in volume, average selling prices, and margins due to cost-cutting efforts, new products, and recent acquisitions. They also anticipate growth from investments in key areas.

The speaker discusses the expansion of margins and improving business, as well as potential opportunities in markets such as Latin America, Australia, and Europe. They also mention the cyclical nature of the business and factors that drive it.

Jeff Lorberbaum and James Brunk discuss the challenges facing their business, including competition and cyclicality. They acknowledge the sensitivity to interest rates and high fixed costs, but also mention their involvement in other industries with different characteristics. They believe that the pent-up demand for housing and remodeling will eventually rebound, and that the industry will benefit in the long term. Stephen Kim asks about the timing of the rebound and they mention the U.S. market specifically.

The speaker asks the CEO about their plans for inventory levels in anticipation of a tough first half of next year. The CEO responds that they will only build inventory when necessary and that they have the capacity to react to increased demand. They also mention that Latin America may recover first, followed by the US and then Europe. The speaker also notes that the company's restructuring actions will help lower costs in both good and bad times.

The speaker, Stephen Kim, thanks the group for their insights and asks a question about the company's change from rigid to direct extrusion in their LVT product. Chris Wellborn explains that this change will result in cost savings of over $20 million annually and will be fully implemented by Q1. Phil Ng asks about the impact of energy prices on input costs and if there has been any stabilization in price mix. Jeff Lorberbaum responds by saying they are monitoring the situation and will provide updates.

The company believes that material costs have hit their low point and there is a possibility that pricing has also hit its low point. However, it may take longer for these changes to flow through due to low demand in the industry. The company's LVT products are expected to be competitive with imports and their margins should improve next year due to lower costs and service disruptions from China.

Mohawk has introduced a new environmentally-friendly polymer core that is scratch resistant and doing well. While they are facing competition from imports coming from Asia, their costs have also gone down due to lower material and energy prices. However, pricing has declined in all markets and it is uncertain if it has reached the bottom or will continue to decrease. Mohawk expects to increase prices once the industry improves.

The speaker discusses the impact of world events, specifically in the oil and gas industry, on the company's performance. They mention the potential for lower input and energy costs in the fourth quarter and how the industry has changed some payment terms. They also mention the performance of different companies in the residential and commercial markets.

Jeff Lorberbaum discusses the current state of the commercial business in North America and how it is performing relatively better than the residential business. He mentions that the commercial market is starting to soften, but the company is focusing on certain end-markets such as government, senior care, hospitality, and restaurants. He also talks about the timing difference between residential and non-residential projects and the company's efforts to right-size operations and make restructuring charges. Kathryn Thompson asks about the long-term logic for keeping the company's global footprint.

Jeff Lorberbaum discusses how the company's global footprint allows them to participate in various categories across the world and leverage their knowledge to optimize business. They use technology and processes to help acquired businesses and increase their mix and distribution. The fourth quarter EPS guidance implies a worse than normal seasonal decline, likely due to elevated interest rates and inflation constraining spending and postponing remodeling and home purchases. There may be some stability in certain areas, such as Brazil and Australia, but overall, the seasonality and holidays are affecting the company's performance.

The company is facing pressure in the commercial sector due to inventory control and planned shutdowns in the fourth quarter. They are implementing cost reductions and expect foreign exchange to be a headwind. There is a larger sequential gap between the third and fourth quarter this year, and the company did not fully inventory down in the third quarter as they normally do. The company has generated a lot of cash flow this year and has manageable debt, but they may not pursue share repurchases at this time and may instead focus on potential M&A opportunities, taking into consideration their current share price.

Mohawk CEO Jeff Lorberbaum discusses recent acquisitions in Brazil and Mexico and potential future M&A opportunities. He also mentions the impact of the conflict in Ukraine on their European business and their plans for their Russian business. The company is adjusting strategies to navigate difficult market conditions and leveraging their leading styling and distribution to maximize sales.

Eric Bouchard, a participant in a conference call with Jeff Lorberbaum and Laura Champine, asks about the potential for improvement in the business in the middle of 2024. Lorberbaum explains that the pricing decreases are following the material costs, which are believed to be at a bottom, and that they are making assumptions based on present circumstances. James Brunk adds that there are various opinions on the potential for improvement in the back half of the year, and the goodwill write-off is related to the volatility in the macro environment.

The company's business was negatively impacted by higher interest rates, inflation, and market conditions, resulting in a decrease in market capitalization. This triggered a non-cash charge for goodwill impairment across all segments. In terms of industry capacity, there have been some capacity reductions in certain categories, while LVT has seen increases in capacity in the US. In the ceramic category, there have been some new plants added by foreign competitors, but overall, the US capacity is slightly underutilized.

The speaker discusses the impact of LVT on the flooring industry and mentions that some product categories have seen a decrease in capacity while others are trying to optimize their service levels. They also mention that new construction accounts for around 20-25% of their business and they do not have specific numbers for the exposure to multifamily versus single-family. They note that multifamily typically uses lower quality products but gets replaced more frequently compared to single-family.

The executives of U.S. Ceramic and Flooring North America discuss their expanding presence in the U.S. market, particularly in new construction and commercial channels. They also mention the slow progress of projects in the multifamily sector and the long timeline for completion. They are focused on managing costs and are prepared for potential market growth in the future. The conference call is then concluded.

This summary was generated with AI and may contain some inaccuracies.