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Good day, and welcome to the Mohawk Industries, Inc. First Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to James Brunk. Please go ahead.

Thank you, Dave. Good morning, everyone. Welcome to Mohawk Industries' quarterly investor call. Joining me on today's call are Jeff Lorberbaum, Chairman, Chief Executive Officer; and Chris Wellborn, President and Chief Operating Officer. Today, we'll update you on the company's first quarter performance and provide guidance for the second 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. This call may include a 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'll now turn the call over to Jeff for opening comments.

Thanks, Jim. For the first quarter of 2023, Mohawk's net sales were $2.8 billion, down approximately 6.9% as reported or 5.9% on a constant basis, and our adjusted EPS for the quarter was $1.75. All of our businesses are adapting our strategies to a more challenging environment. We're managing our costs while investing for both short- and long-term growth. We exceeded our earnings expectations with the businesses maintaining higher pricing and mix and Flooring Rest of World outperforming the other segments. The commercial channel continues to be stronger than residential with home remodeling projects being postponed and new housing construction being impacted by higher mortgage rates. Our balance sheet remains strong, and we generated over $125 million of free cash flow. We strategically invested in new product innovation, enhanced merchandising in customer trade shows to improve sales. We are continuing to reduce costs across the enterprise by enhancing productivity, streamlining processes and controlling administrative expenses. Our customers remain conservative in their inventory commitments and all of our operations are running at lower utilization levels, creating higher costs from unabsorbed overhead. We see increased competition as industry capacity utilization and input costs decline. In Europe, natural gas prices have dropped dramatically, though they remain at almost double the historical levels. We expect consumer spending to improve as wages rise, inflation slows and energy costs fall. Our new product introductions provide more value options for budget conscious consumers. In the U.S. limited supply, high interest rates and persistent inflation have suppressed the housing market. Lower home sales and changing consumer spending habits are impacting their modeling category. We are maximizing our commercial business with new introductions, marketing initiatives and targeted promotions. And our other geographies, demand is similarly slowing with residential more affected than commercial. Though the Mexican economy faces challenges, our business there is holding up better, while Brazil slowed more with higher interest rates and reductions in consumer inventories. Our restructuring actions are on track in the Flooring North America and Flooring Rest of World segments and should improve the results of our business. We are limiting our other capital investments to those providing significant sales, margins and process improvements. We're expanding our constrained category that have the greatest growth potential when the economy recovers. These include LVT, premium laminate, quartz countertops, porcelain slabs and insulation products. We completed 2 acquisitions in ceramic in Brazil and Mexico that had combined sales of approximately $425 million, almost doubling our existing market share in those geographies. We are developing strategies to increase our sales by providing broader product offering and using combined brands to satisfy all price points. In each country, we're beginning to consolidate the businesses to reduce costs, improve efficiencies and optimize production. We also continue to improve the small bolt-on acquisitions in Europe and U.S. that we completed last year. Despite falling energy prices, natural gas and electricity inflation remained a headwind in the first quarter, though our future results will benefit as lower costs flow through the P&L. Our sustainable strategy includes investments in both production of green energy from biomass, wind and solar, which reduces both our carbon -- our expenses in our carbon footprint. Our 2 biomass energy plants lowered our cost and improved our results in the quarter. We also purchased some of our European energy at various times to reduce future cost volatility. Italian energy subsidies have been extended at reduced levels through the second quarter. I'll turn the call over to Jim for his review of our financial performance.

Thank you, Jeff. Sales for the quarter were just over $2.8 billion. That's a decrease of 6.9% as reported or 5.9% on a constant basis, driven by a reduction in volume and unfavorable FX as compared to Q1 2022, which was still benefiting from the COVID pandemic rebound in residential remodeling activity. The decrease was partially offset by favorable price, mix and acquisitions. Global Ceramic with a larger percentage of commercial and new construction had the strongest quarter. Gross profit as a percentage of sales was 22.9% as reported and excluding onetime items, was 24.1% versus 26.6% in the prior year. The year-over-year decline was due to the impact of inflation, lower volume, the related temporary plant shutdowns and unfavorable FX, partially offset by stronger price, mix and productivity gains. The actual detailed amounts of these items will be included in the MD&A of our 10-Q which will be filed after the call. SG&A as a percentage of sales was 18.4% as reported. The year-over-year dollar increase in SG&A was driven by inflation, primarily in employee expenses, increased costs in product development and marketing to drive future sales, volume and unfavorable price, mix, partially offset by favorable FX and productivity initiatives. Operating margin as reported was 4.5%. Restructuring, acquisitions and other charges were $36 million in the quarter, of which $6 million was cash. These charges are primarily related to the previously announced initiatives, mainly in Flooring North America and Flooring Rest of the world. Operating margin, excluding charges, was 5.8% and similar to gross margin, the year-over-year decline is driven by higher inflation, lower volumes and related temporary plant shutdowns and costs associated with investments in new product development and marketing, partially offset by favorable price, mix and productivity gains. Interest expense for the quarter was $17 million, increasing year-over-year, primarily due to the higher interest rates. Our non-GAAP tax rate for the quarter was 22.6% versus 22.3% in the prior year. We expect Q2's tax rate to be approximately 19% to 20% and the full year rate to be between 21% and 22% with quarterly variations. That leads us to an earnings per share as reported of $1.26 and excluding charges of $1.75. Turning to the segments. In Global Ceramic, sales were just shy of $1.1 billion. That's a 0.5% decrease as reported and 1.2% decrease on a constant basis. Volume declines across all regions were only partially offset by favorable price, mix, FX gains and acquisitions. Overall, the U.S. business had the strongest year-over-year performance as commercial and new home construction outperformed residential remodeling. Operating margin, excluding charges, was 6.3%, declining year-over-year due to the slowing economies and higher interest rates impacting all geographies, resulting in lower volumes and short-term plant shutdowns, partially offset by favorable price, mix and productivity gains. We are focusing on expanding markets, integration of our acquisitions in Mexico and Brazil, differentiated products and growth CapEx to drive future results. In Flooring North America, sales were $953 million. That's an 11.1% decrease as reported and on a constant basis. We saw weakness across all product categories compared to a very robust Q1 of 2022, led by residential soft surface products as our commercial and laminate businesses, while still down versus prior year, had the strongest year-over-year volumes in the segment. Operating margin, excluding charges, was 0.5%. The decline in operating margin was due to the weakening in the housing market with consumers deferring home improvement projects and trading down to meet constrained budgets, leading to lower volumes and temporary plant shutdowns. In addition, the segment's margins were compressed as it absorbed peak material costs from prior periods. In the quarter, we also invested in new product development and marketing initiatives to expand future sales. These headwinds were partially offset by favorable price, mix and productivity gains. And finally, Flooring Rest of the World with sales of $793 million. That's a 9.7% decline as reported including unfavorable FX and 6% on a constant basis as housing-related purchases significantly declined, negatively impacting our flooring products as compared to our installation business, which maintained a positive year-over-year growth, driven by the push to further conserve energy. Operating margin, excluding charges, was 12.6%, declining versus prior year due to the higher inflation, lower volumes and temporary plant shutdowns, partially offset by favorable price, mix and benefit from our green energy production. We are implementing selective promotion, executing our restructuring actions and increasing supply chains outside of Europe to drive sales and margin growth. Corporate expense and eliminations were $10 million, in line with the prior year and I would expect full year corporate expenses should be approximately $45 million. Turning to the balance sheet. Free cash flow for the period was $129 million versus a $75 million use of cash in the prior year. Receivables were just shy of $2.1 billion, with DSO at 56 days versus 54 in the prior year, but improving from 60 days as of the end of the year of 2022. Inventories were just over $2.7 billion. Now excluding the impact of acquisitions, inventories decreased $114 million versus Q4 of 2022. Inventory days stand at 128 days versus 111 in the prior year, but improving from 138 days at the end of 2022. Property, plant and equipment was just over $4.9 billion, and Q1 CapEx was $128 million, with D&A at $170 million. Full year, our '23 forecast includes CapEx of $570 million and D&A of approximately $600 million. And finally, gross debt of $3.3 billion and leverage at 1.7x adjusted EBITDA gives us the strength and flexibility to manage through this uncertain market. Now I will turn the call over to Chris to review our Q1 operational performance.

Thank you, Jim. The Global Ceramic segment spans many countries with each having their own unique economic conditions. All of our regions are being impacted by slowing economies and higher interest rates. The commercial channel is strongest and new home construction held up better than residential remodeling as consumers reduce discretionary purchases. In this softening environment, our customers are lowering their inventory levels with significant differences in each region. As industry volumes decline, we are facing additional competitive pressures in our markets. Our pricing has lagged our cost changes, though we are seeing decreases in energy and material expenses, which should benefit our future results. The U.S. is performing better than our other ceramic markets due to our greater sales in the commercial sector. Our domestic production is more reliable than imported alternatives, which is benefiting our sales, particularly in our premium collections, which compare favorably to European alternatives. We are shifting our sales force focus to target opportunities in the multifamily and exterior channels and are expanding our commercial and builder distribution with curated collections for immediate delivery. To increase our countertop volume, we are expanding our business with national accounts, contractors and kitchen and bath retailers. We are reengineering our entry-level quartz to countertop to lower our cost and enhance the value. To manage through the slowing environment, we continue to reduce our costs across the business, including overhead and discretionary spending. Our ceramic business in Europe remains under pressure as demand has declined due to ongoing inflation and higher interest rates. We maintained higher average selling prices than we anticipated, partially due to our new introductions. Our overall [Technical Difficulty].

We have lost our speaker connection. Please stand by while we reconnect.

David, have you reconnected him?

I have now brought Chris Wellborn back in, and the conference can continue.

Pressure as demand has declined due to ongoing inflation and higher interest rates. We maintained higher average selling prices than we anticipated, partially due to our new introductions. Our overall volumes were down in the quarter with all markets impacted by slowing residential remodeling. As the market slows, competition is becoming more aggressive in all channels. We are increasing porcelain slab production to support continued sales growth through enhanced visuals and specialized textures. A drop in fourth quarter energy prices benefited our cost in this quarter and subsidies from the Italian government helped to offset the impact of energy inflation. We continue to focus on cost containment, including productivity projects and R&D initiatives. Our other ceramic markets are slowing, and we are reducing our production to align with demand. Sales trends improved as we progress through the quarter, and we expect these markets will continue to improve. Our 2023 product launches with new sizes, unique visuals and polished finishes are being well accepted in the market. The integration of our acquisitions is progressing and we are implementing specific sales, marketing and operational plans to improve the businesses. This year, we will convert the acquisitions to our information systems to enable operating as a single business and enhance efficiencies. In our Flooring Rest of World segment, our European business have been compressed as high energy prices and inflation impacted consumer budgets. In the first quarter, higher volumes reduced shutdowns, lower energy costs and production of green energy improved our business from the fourth quarter. The contraction in the housing market has reduced volume levels in our industry as consumers change spending priorities and customers' adjusted inventory levels. We are increasing promotions to attract additional volume and expanding product options for more constrained consumer budgets. We have increased controls to manage our cost and reduce our inventories. We are reengineering our formulations and expanding our supply base to improve our competitive position. We are executing our restructuring actions to adapt to the current environment. As input costs decline, we anticipate greater competitive pressures in the market. As consumers have deferred residential remodeling projects, our flooring category was most impacted during the quarter. Both laminate and LVT volumes were lower in the quarter, and we are controlling our cost and production levels in response. We have begun the conversion of our residential LVT from flexible to rigid and are preparing to restructure the operations. Our sheet vinyl increased in volume as consumers sought options to lower remodeling costs. We are improving the product offering at our new Eastern European sheet vinyl acquisition with updated styling as we enhance the facility's production efficiencies. Our panels business has slowed with market and inventory reductions in the channel. Our margins are higher than anticipated due to stronger pricing, lower input costs and benefits from our biomass energy plans. We are making progress on achieving our planned synergies of our French panels plant and our recent mezzanine flooring acquisition. Our insulation category performed the best in this segment as energy efficiency has become a greater priority. Government regulations around energy conservation continue to increase, and our polyurethane products provide the greatest heat-resistant properties. We have integrated our insulation acquisition in Ireland and the U.K., and our new facility is ramping up ahead of schedule. In Australia and New

Thanks, Chris. Our industry is operating in a completely different environment than a year ago. Around the world, Central Banks are raising interest rates to slow their economies and reduce inflation. These actions lower our industry volume as new home sales and residential remodeling are postponed. The commercial sector has remained stronger than residential, though higher interest rates and tighter lending requirements could affect business investments as the year progresses. We're maximizing our sales and distribution by focusing on better performing channels, introducing differentiated products and providing enhanced service and value. We are proactively managing our spending and cost structures to optimize our results. We anticipate that industry volume and pricing will remain under pressure across our markets. We expect seasonal improvement in demand along with reduced energy material costs to improve our future results. Given these factors, we anticipate our second quarter adjusted EPS to be between $2.56 and $2.66, excluding any restructuring, acquisition and other charges. The industry down -- this industry downturn is unique with employment remaining high, businesses continuing to invest and homes maintaining their valuations. We are conservatively managing the near term, while we invest in the long-term growth through product innovation, capacity expansions and acquisitions. Our strong balance sheet enables us to navigate the current downturn as we prepare for the industry rebound that follows. Longer term, all of our regions require the updating of aging homes and significant new home construction to satisfy market needs. With our strength across regions, markets and products, we anticipate capturing increased opportunities when the recovery occurs in the housing market and the economy. We'll now be glad to take your questions.

[Operator Instructions]. The first question comes from Joe Ahlersmeyer with Deutsche Bank.

Congrats on the solid start to the year. Jeff, the headwinds impacting results and the reasons to continue to be cautious as we go forward here, those reasons are well understood. And even as we look to make our own predictions about your business, it's probably not fair to expect you to make any definitive predictions beyond what you've given us in the guidance for the upcoming quarter. But you've also said in the past that managing the business as it's emerged from contractions gives you the confidence that it will recover, but that also means you're probably among the best position to help investors conceptualize those scenarios realistically. So especially, since you've no doubt contemplated this as you've taken actions to position your business and you touched on this a bit in your conclusion to your prepared remarks there. But my first question is simply, without necessarily getting into when specifically, we see a recovery, can you just offer some thoughts on how that might realistically manifest maybe by category, your end market or geography?

When you go through a cycle, our industry always goes through a similar direction. So going into the cycle, the first thing that slows down is the residential remodeling because the consumers can immediately postpone it and it's followed by the new housing construction and then by the commercial businesses that take longer to execute. When you come out of the cycle, it comes out in the same order for the same reason. So to their remodeling piece should pick up first and do better. This cycle is not typical of the other cycles. Historically, by this point, employment would be down significantly, and it still remains strong. You have wages are still increasing. We have housing is in short supply and mortgage rates are limiting people to move. These things, combined with aging homes and higher home values, should support more remodeling and commercial projects continue to be initiated. So when you take all this together, we're expecting the rebound on the other side to be stronger and faster than it has in past cycles because we're not under the same compression that we've been in these areas we just discussed.

All right. Thank you, Jeff, for those thoughts. Jim, we've discussed in the past, the trade-offs and running the business with respect to choices you make around price cost, market share, production and inventory levels. And then it's probably unrealistic actually to assume that as the industry recovers, you'd face earnings headwinds from all of these things at once. And so without making this a specific question about your volumes or price cost relationship in any one quarter, particularly beyond the next quarter, are you able to give investors any guardrails around Mohawk's annualized earnings power once we've maybe seen markets recover, we see a more typical input cost environment, but after you've then made choices around market share, pricing and production capacity?

I think, Joe, you would start with looking at the relationship between materials, energy, and pricing, as you kind of alluded to. If you think about it, the cost really started to gradually fall for us late in 2022. And it takes anywhere from 3 to 6 months for it to flow through the P&L. What we would expect in 2023 is that inflation to become a more kind of declining headwind and become a benefit in the second half with price and mix weakening with more competition from lower industry volumes. Volume itself -- it was interesting in the first quarter, it was lower against some very, very strong comps in the prior year with pricing lighting inflation. Another point is, as we had indicated, we did not build inventory as normal. And so some of the shutdowns compressed our margins, though it improved sequentially. In the second quarter, we would anticipate higher production and fewer shutdowns. And as I said before, kind of all the details of this certainly will be in our 10-Q in terms of the bridge items. But also one other point would be around the growth investments. Our current expansion projects, we are focused on future sales opportunities and capacity constraints, very focused on laminate, LVT, quartz, countertops, ceramic slabs and their installation businesses. They are postponing other investments until visibility improves, but these investments should really set us up along with their acquisitions to help our business in '24 and beyond.

Our next question comes from Tim Wojs with Baird.

Maybe just the first question I had, as you kind of think about energy prices, how would you expect that to kind of mechanically kind of work through the P&L? I would imagine maybe you get some benefit early and then pricing kind of starts to react to that. But how quickly do you think pricing reacts to energy prices? I mean is it pretty immediate? Or do you think it's more like what you would see with like oil-based inputs in like Flooring North America, for example?

Well, as I just said, now with Joe's, it takes some time for it to flow through the P&L. So sequentially, if you think about that, you would see improvement from -- we saw some from Q4 to Q1 on input costs. I would expect from Q1 to Q2 for that to be even stronger because of Flooring North America having to absorb in the first quarter, most of that peak material cost. So that's raw materials. But obviously, we also have energy in there as well on the inflation. So from Q1 to Q2, you would see that improvement. But the pricing and mix would continue to be under pressure as competition steps up, especially with the lower industry volumes.

Okay. So is it fair to say it would kind of be like normal input costs? We just haven't seen this type of energy inflation before. So that's what I'm trying to ask.

Yes, even though it's down, I would expect you'll see some -- you've saw the headwinds in Q1. And then from a year-over-year perspective, in Q2, get we better turning -- if it stays on the trajectory, it is right now from a year-over-year perspective, that energy should turn to a tailwind in the back half of the year.

Okay. Okay. Good. And then on price/mix, just kind of holding up better than you thought in the quarter? I mean, is that -- do you think that's due to the overall consumer not trading down as much as maybe you thought? Or is it something that Mohawk's kind of done internally around product mix or channel mix that has kind of held that up a little bit better?

Well, there's a third option, too, which includes our expectations and we're having to outguess the future. So we're trying to be conservative about our future guesses and take everything that account. So we turned -- we were a little more conservative than it turned out. There's still continued pressure on pricing and mix. The lower volumes in the industry always drives -- people trying to run their assets, including us, we expect in this environment to continue to have more competition and promotions, but the input costs are going to decline. And with that, we're really expecting as we go through the next quarter or 2 for some of that to get passed through and lower pricing by the industry.

Don't forget also, you were seeing falling ocean freights, which is reducing the cost of imports to the U.S. So the weaker dollar certainly will partially offset.

Our next question comes from Susan Maklari with Goldman Sachs.

My first question is, appreciating that you've got limited visibility to the second half. But can you talk contextually about how you're thinking about the operating environment as it relates to housing activity, R&R, commercial and then even maybe the U.S. versus Europe? And are you still expecting that we will see more normal seasonality as we move through the balance of this year?

As you said, the visibility is really limited. We're expecting economic growth to still be under pressure as we go through the year. Presently, we're anticipating remodeling being somewhat better. We think the new housing part will be stabilizing, and we're anticipating commercial slowing down somewhat as it -- with the same thing as we've just talked about, we are expecting the price and mix, to continue to be under pressure with plant utilization improving from the first quarter, which was low. In Europe, most people believe that the demand -- the consumer demand could increase because these high energy costs were such an impact to people. And second is in Europe, the wages are rising at a higher rate than they are in the United States. When you look through the normal seasonality, remember, the third quarter is always affected outside the United States by vacations and then we're assuming the normal seasonal decline as we go through the year. A little longer term, we expect the recovery when we rebound from it our industry, you postpone purchases, you don't lose them. And so during this time that it's going to be down, we're expecting those to create a significant upturn on the other side as it always does. And in this time, right now, we're investing more in growth investments, which we haven't done in prior cycles, which should put us in a better position we come out and the new acquisitions should also be helping us a year from then.

Okay. That's helpful. And then focusing in on the Flooring North America segment. Obviously, that's been under pressure recently, just given the reduced production there. But as you think further out and the strategic initiatives you've been taking the cost actions, all the various things that have been going on there. Where do you think that margin can get to? And any thoughts on how that might compare to what we've seen more recently from that segment?

Well, the segment was impacted more with the oil and energy costs than the other businesses, which impacted the material costs all through it. We were still -- we raised the inventories, trying to catch up to help people in the first halves of the last year. So we came out with high inventories, and we never anticipated the thing collapsing like it did. So the -- the pricing is leading the -- the pricing we're going -- we've never recovered the total price at the peak and then the promotions and things are causing the pricing to flow through faster than the material costs are flowing through in the first quarter. We're expecting to see that turn in the second quarter as the margins expand will help. And then in most of the categories, we're expecting the margin -- the cost decreases to help us recover the margin we didn't cover in a lot of the categories in the fall of last year. So the margin should increase as we go through and we're expecting all the businesses to do better in the rest of the year.

The next question comes from John Lovallo with UBS.

The first one on SG&A was a little bit higher than we were looking for in the quarter. And I think you guys noted a few items, including higher employee expense and some investment spend. But is there anything in the first quarter SG&A number that you think won't repeat? And maybe if you could just help us think about SG&A dollars or as a percentage of sales as we move into the second quarter?

First, you have to remember on the comparisons, we came out of '21, the inventories were low. We were having trouble getting materials. We were hitting limitations with employees. So we went into the first quarter of last year with low inventories, and our customers also had low inventories. So we didn't put out as many new products. We didn't spend as much in marketing and merchandising. And so this year, we're going back to a more normal level. It's always heavier in the first quarter, and then we expect it to come down as we go through the year. We're putting investments in new merchandising and product categories across the businesses, trying to upgrade the product and mix and maximize the opportunities that are here in the environment that we're in.

And we're also doing that with the balancing the administrative side and trying to control that cost, making sure that we emphasize the selling and the marketing aspects as we go forward.

Makes sense. Okay. And then just on the commercial channel remaining pretty resilient here in the first quarter. There's obviously some growing concern of slowing activity in U.S. commercial. And Jeff, I think you talked to your expectation that, that could slow a bit. Are you seeing any signs right now that things are moderating on the commercial side in Mohawk's business?

There is some slight slowing in the category, but it's still doing reasonably well. Hospitality is outperforming the other categories. You have health care and education are still strong. But the cycle, there's other categories that aren't performing as well. We like you are looking at the architectural billing index and we see some weakening in it. So we're assuming that it's going to weaken with lower investments as we enter the second half of the year, but we'll have to see.

Our next question comes from Stephen Kim with Evercore ISI.

I believe you mentioned in the multifamily business or in the F&A business that you were sort of leaning into multifamily increasing your participation there. I was curious if you could describe what kind of actions you're taking there? And then related to that, multifamily completions are really lagging multifamily starts and the pipeline is still growing, it appears from the national numbers. And so I think your products tend to go in later kind of closer to completion. So does that mean that the surge in demand from this multifamily category is still ahead of you? If you can just sort of talk about how you'd see the shape demand there you?

Usually, you go into cycles, the multifamily will slow down as well and then people start having to move around as jobs get harder. We haven't seen that here. So what you have is the multifamily. The vacancy rates are still reasonably low. You still have more completions coming in and we're trying to maximize our share in what we think is going to be one of the stronger parts of the business this year.

Right. Any specific kind of actions are you increasing your sales force? If you have made any other kind of changes that you could describe that would -- you can provide a little color around that?

In the multifamily side, they tend to have lower value products because they're trying to control the cost of the rentals. So we have a broad selection in carpet LVT and laminate that are all going into the category and -- as well as sheet vinyl. And I'm not -- we're not doing much different with the products because we've always had a broad offering to satisfy it. We're just being more aggressive in our selling.

Okay. That makes sense. And then secondly, you've been pretty active on the acquisition front, not so much the big ones, although I know you just bought Vitromex and Elizabeth, it looks like they look like they're closing in 1Q. So a couple of questions regarding acquisitions. First of all, I think, Vitromex and Elizabeth, you said $425 million in annual sales. What was the purchase price combined for that? And then secondly, I think in the last couple of years, you've spent about $330 million on acquisitions of various kinds. Can you quantify what the general annualized sales benefit you think are coming from all of those businesses?

So in the first quarter, you're right, we closed on Vitromex and Elizabeth purchase price is just over $500 million combined. If you step back, we did about 5 bolt-on acquisitions last year in 2022, plus 2 ceramic acquisitions that we just completed. And to frame it from a sales perspective, it should be in the $600 million range on an annual basis given normal conditions. Obviously, the markets are a little bit tighter in Brazil and Mexico, like they are in other geographies. So what we gave you was their sales from the prior year.

Got you. And that's excluding Vitromex and Elizabeth -- sorry, including Vitromex and Elizabeth's $425 million, right, in that $600 million?

Yes. All in, it's about a little over $600 million.

So there were small acquisitions, but then some of the sales are also included in last year.

Our next question comes from Keith Hughes with Truist.

You had said in the prepared comments, taking less down production days in the second quarter versus the first. Is that just a function of seasonality or do you have inventories kind of where demand is and that's not quite as necessary in the second quarter?

Combination of everything. First is that we did take some inventories down. The second is we expected -- we expect an improvement from seasonal improvements from one or the other, so where there are less shutdowns across the business all over.

Okay. And one other question. You said in answer to another question, in the second half of the year, energy turning. I think you said energy turning in your favor. I just want to make sure you're talking about energy, are you talking about energy and input costs?

I was speaking about the question, Keith, was on energy. That was the comment on energy.

What's your view on raw material cost? Is that something where we could see some deceleration in the second half of the year?

In total, if you take energy and raw materials, again, that should be really a declining headwind as you go through from Q1 to Q2 and becoming a benefit in the second half of the year. And that's also leading to some price/mix weakening as well with competition with lower input costs and volumes being lower.

Our next question comes from Michael Rehaut with JPMorgan.

First, I just wanted to, if possible, get a little bit of quantification on how you're thinking about the incremental benefit from lower energy costs in 2Q itself? And you talked about it turning into a tailwind in the back half. So how much do you expect energy costs, if you could kind of quantify it would benefit margins in 2Q versus 1Q? And incrementally, what would flow through further into the back half?

Well, sequentially, is what I think you're asking from Q1 to Q2, energy, the savings of the lower-cost energy will pick up from the prior quarter. So it should become -- sequentially, it will be a benefit in the quarter -- in the second quarter compared to the first quarter.

And I appreciate that, but any way to quantify that benefit?

The headwind that you're going to see. Well, let me put it in terms of the total inflation, again, from a year-over-year perspective that we saw in the first quarter, it was about $158 million. So you'll see that detail later today. And so I would expect that total inflation from a year-over-year perspective to be significantly lower than that in the second quarter.

Okay. And then maybe just on the restructuring benefits, any -- also any way to quantify how you're thinking about the dollars in terms of benefits in 2023 and where we are in terms of the percentage realization of that in the second -- what you expect to have in the second quarter versus by year-end?

So we have -- so if you step back, we've announced the 2 restructuring plans early last year. And the total cost is somewhere between $135 million and $140 million, only about $25 million of that is cash. So we're going to save a little bit over probably $60 million annually. That will be ramping up as you go through this year. Most of the savings for Flooring North America, the actions are on track. And you'll see that in the Florida North America results as you go Q2 and Q3 and to the end of the year. The actions in Flooring Rest of the World which are really around phasing out our residential flexible LVT and turning that in concentrating on rigid. That will take a little bit longer as you go through 2023.

Okay. One last quick one, if I could squeeze it in. As you look at the sales patterns for the rest of the year given that you have easier comps in each of the next 3 quarters, if you were to take current sales patterns today or sales trends today, would you expect first quarter's 7% decline to lessen and potentially even turn positive as you get to the fourth quarter?

It depends whether you're looking sequentially or year-over-year. So last year, you had, it slowed down. So as we go through the year, year-over-year.

Year-over-year, Jeff?

Yes, year-over-year, the volume will improve as you go through the year with the comparisons.

Yes. So we have an easier -- a very difficult comp in the first -- the first half of the year, and then that will become a little bit easier as you get to the back half of the year. So you would see those -- you would assume if we stay where we are in terms of the recovery that those percentages would decrease the difference would decrease as you go through the back half of the year.

Our next question comes from Adam Baumgarten with

I believe you guys talked about some European ceramic competitors shutting down production when natural gas prices were spiking. Have you seen those competitors reenter the market at this point?

The gas prices have declined substantially. Each of the competitors have different purchasing strategies. So I don't know exactly where the costs are today. And when they purchased the gas prices, but Europe, the market is still under pressure because the demand from the consumers is significantly down. Chris, you want to add some more?

Well, I would say, especially those competitors that were producing at the low end -- pricing at the low end, Spain, other places have been under particular pressure with the natural gas. And yes, there have been a few competitors that have fallen out of the market, but we don't have really good visibility on that. None of the major ones have gone out. It would be smaller ones.

Okay. Got it. And then just on LVT, just given some of the declines you guys talked about on imported product. Maybe just if you could help us walk through your cost competitiveness of the U.S. and Mexico capacity that you guys are now bringing up?

Well, on the LVT, we have a broad offerings for both residential and commercial and all price points are rigid and flexible. And our local production is valued for faster, more consistent service. We're improving our operations and differentiating it with features. And our West Coast plant efficiencies will increase over time.

And overall market is tough as resetting prices with the materials and freight costs moving, there's still a significant inventory in the channels. And then right at the moment, there's this thing we talked about, about the U.S. government stopping some shipments impact on service, and it's really difficult to tell what impact that's going to have on the supply and the marketplace today.

The next question comes from Mike Dahl with RBC.

Jeff, just as a follow-up to that, around the -- with import dynamic, I know it's tough to tell how it could resolve. But in terms of what's currently sitting at ports, is there any way you can quantify kind of how much supply has currently been stopped from coming into the domestic market? And then do you have any insight on whether this issue has significantly stemmed the flow of ships on the water making their way to the U.S. at this point?

That's about -- the only thing I can tell you is one of the largest suppliers in the United States, all those products have been stocked. And so the question, what we don't know is how many others are going to be impacted. And then the reverse side is, we don't know what will take to get them released and come back in. So I mean you're really just at the start of it and we're going to have to see what happens with the government.

Okay. Got it. And then as a follow-up to kind of the price conversation. I mean, you mentioned that price/mix came in better than you guys had forecast during the quarter. Wondering, as you went through the quarter, have you seen price/mix evolve in a way that was closer to your expectations, i.e., you have referenced still seeing some pressure. So are you seeing the pressures that you initially expected now coming through? Or is it still better than you expected? And if I could kind of add a second part to that question in response to Mike's question around volumes. Presumably, the price/mix comp will get worse as the year progresses even as the volume comp gets better. So from a total revenue standpoint, just should we think that the declines in total revenues also get better? Or does the worsening price mix offset the easier volume costs?

How to answer that one? The first is our expectations coming in we had -- we didn't know how much the channel inventories were declined and how much they were going to -- how much more where they were going to decline. And then the other part was pricing and mix, it was a combination of both and it wasn't as depressed as we expected to be. The pricing and mix is getting more difficult as you have these low volumes. And depending upon which category you're in, as you would suspect, where you have really high capital investments, people try to keep running the investments, and that pushes the prices down. You have more competition and promotions coming on as the input cost decline. And then you have the mismatch between the flow-through of inventory and the pricing that happens to us. So we're trying to estimate all those things at the same time.

That's the bottom line. If you're talking just the sales line, then you also have -- so you have the improvement in comps in terms of volume, which will help as well as the acquisitions we described. So those helped on the top line.

Most people in Europe are expecting that due to the substantial decline in energy that the consumers have pulled back dramatically because of the cost of heating -- heating their homes and the use of energy over they got so high. They're expecting that the demand is going to improve as we go through the year, and we are, too.

Our next question comes from Eric Bosshard with Cleveland Research.

Two things. First of all, Jeff, I think you made a comment that you had a more favorable view on North American remodel activity in the second half. I just want to clarify, is that -- did I hear that right? And what are you seeing that supports that viewpoint?

We just thought that the postponement of projects had gotten really significant at this time that people aren't moving as much as they normally do that they might be getting more comfortable with the interest rate. So we just thought it was at a depressed level. And we -- in our things, we're assuming there's going to be some relief as we go through the year, but we'll have to see.

And I would just add to that, that the activity in the Daltile service centers has been higher. And the comment would be that the people coming in are very serious about getting projects done.

And probably one last thing, Eric, as Jeff said earlier, this cycle is a little bit different with the employment remaining strong, wages increasing and housing, obviously, remaining in short supply and people staying in their homes. And as they get more comfortable from a consumer confidence standpoint if that evolves, then they would come back to the remodeling.

Okay. And then secondly, the guidance from 90 days ago, you ended up doing $0.40 better, and it sounds like it was price/mix was better than your assumption. As you look into this next 90 days, and Jeff, I guess we all appreciate your comment on predicting the future is not that easy. But in terms of how you've made this assumption with the 2Q guidance relative to the 1Q, have you considered price/mix differently? Or is it a similar conservative price/mix viewpoint that you had for 1Q?

The 1Q -- the question was how much was the inventory and the channel is going to change also? We are assuming at this point that most of the inventory and the channels are aligned around the world, we're expecting that. And then we're expecting the raw material prices to benefit us, but we're expecting that with competition, some of that's going to get passed through. So we're expecting the price/mix to decline as the competition increases with the general economy. .

Our next question comes from Truman Patterson with Wolfe Research.

First on Rest of World, margins inflected pretty nicely from 4Q. You mentioned some increased promotion to help your sales activity there. Maybe a bit better consumer trends in Europe and you reduce costs I would imagine that a lot of that you're also doing in North America. I'm just hoping you can give us a little bit more color on the Rest of World margin inflection?

Yes. So in Q1, our margin expanded from Q4 was seasonal growth. We had fewer shutdowns. We had lower energy and the green production. Our pricing and mix were a little better than we expected. Going forward, we anticipate greater competitive pressures as the input cost decline. And -- but we're implementing selective promotions. We're doing a lot to control our cost and we're also doing some restructuring.

Okay. Perfect. And then Jeff, not necessarily looking for guidance here. Always enjoy getting your kind of big picture view on the cycle and everything. I'm just hoping you can help us think through 2024, how that might trend primarily on the residential side? Do you think we're kind of in the eye of the storm here in 2023 with the volume declines and you're expecting or positioning the company for some improvement in '24 volumes? I'm just trying to see where your head is at here because clearly, there's a lot of moving parts with inflation, Fed actions, war in Europe, but there's still a pretty healthy job and wage -- job growth and wage gains right now. So I just want to kind of wrap my head around that.

What, I guess, multiple parts. One is what you know as well as I do, there's different views on what's going to happen with the economy. One is that the economy is going to slow down and that the Fed is going to start lowering rates at the end of the year, the first of next year and start the improvement in the whole housing cycle. The second says it's going to take longer, and they're going to keep rates up longer. I can't tell you when it's going to occur. I know that every time that this happens, all these consumers that pull back that don't like the way their houses look, they postponed the purchases. And if you go back historically, the volume increases substantially in the first 2 years coming out of a downturn because of this. We've been in a downturn now for close to 9 months and the rest of the economy hasn't reacted as much. We're in a industry that is really affected by interest rates as people postpone things. So we're looking that when it does occur, that it's going to be greater than normal. We are investing in the categories that are the highest growth categories and constrained growth, and we expect to get benefit out of all those as it comes up.

Perfect. And just a follow-up there on kind of the resi R&R side. In your view, the typical downturn a year or 2 years normally?

I mean, typically, they go from 12 to 18 months is the general range, some go longer and shorter.

Our next question comes from Phil Ng with Jefferies.

Jeff, your comments on demand feels like things have bottom here and in general little more up beat about the back half. When you think about the recovery within your end markets, products or regions, the other view where you think things could potentially pick up faster. And then from a pricing standpoint, any markets in particular that you have more concerns that prices will fall a little more significantly?

Happy go around the world. I mean Europe was so impacted by energy costs, which they're still double what they were before we started. But if you go back to 5 months ago, they were 10, 12x where we started. So the energy impact on Europe has been dramatic. How to figure that in with the war and what's going on, it's hard to guess. The other side that's different, we're seeing in Europe, the increase in wages is generally higher than the U.S. There are some countries that we know the wages are going up 10% or more is there. So as the wages increase, it's possible that they have less impact on their consumption. And we're assuming that it's going to get better as we go through this year. All the other markets, they've all gone through a similar downturn. The interest rates are being raised everywhere. The -- as in every market, the residential fell off substantially in all of them and the commercial is trailing. Some of the areas like Mexico, the economy is held up better. There's things moving in as we have problems with China. So the Mexican market is doing better. The Brazilian market, for instance, turned down later, but it turned down later. And in our marketplace, the last quarter, there's been huge changes in the inventories in the channel as we go through. So each one is different, but it looks like the whole world is more interconnected and they're more closely aligned than they have been in the past 20, 30 years.

In any markets where you -- or products you see more pricing pressure?

There's pricing pressure in all of them. And as the markets -- again, as the markets slow down, all of us, where we have large capital investments, try to find ways to minimize the unabsorbed overhead. And typically, we pass through the decreases and work on lower margins in prior cycles. So I don't see it be any different this one.

Got it. And your ceramics business has held up very well. What's relative strength? You see that business holding up pretty good from here and now. Pricing in particular has been strong. You've had a nice pricing umbrella from inflation. Now that energy prices and ocean freight container prices have come down, how are you thinking about competition or pricing pressure from imports on the ceramic side of things?

Well, on the ceramic side, we have performed better than our other ceramic markets in the U.S., one due to a greater mix of commercial. Our domestic production has been reliable or is reliable, more than the imported alternatives, and that's helped us. We've developed premium collections that have been used versus Italian imports, and we're increasing our focus on the multifamily exteriors, kitchen and bath channels. And we're also enhancing our commercial and builder markets with curated collections. . Having said that, the imported ceramic prices are decreasing with freight, which has partially been offset by weakening dollar. We do have more of our sales in the mid- to high-segment, which has insulated us a little. But no doubt, it will be under pressure as we go through the year with imports coming down.

The next question comes from Rafe Jadrosich with Bank of America.

I wanted to just follow-up on some of the comments on the import restrictions on LVT from China. Can you remind us sort of your exposure to Chinese imports on the LVT side? Maybe how does that compare to competitors? And just given your higher domestic production, and if there are additional restrictions, is there a share gain or pricing opportunity there?

Our imports from China are fairly limited, but it's affecting not only the local producers. They've extended this thing back to the raw materials and some of the surrounding countries use raw materials out of China, and that's also causing the problem with the supply outside of China.

Got it. Okay. That's helpful. And then on commercial, can you remind us of your exposure overall? And then is there any regional difference you hire commercial exposure in Europe relative to the U.S.? Then what's the typical lag time between when a commercial project starts and when your products go in? So if commercial is slowing today, like when would we actually expect that to have an impact on your revenue?

Well, from a percentage basis, it runs different by segment. We have more commercial exposure in global ceramics especially in the U.S. that could have over 35% or so of its business in ceramic -- or excuse me, in ceramic being in commercial in the U.S. And then in Flooring North America would be the next largest with limited exposure in Flooring Rest of the World.

The commercial sales typically fall off later because and it depends on which projects. They can take anywhere from 12 months to 3 years to complete. So all these different projects have started. It tends not to fall off for at least about a year after residential starts falling off. And this one is different because you have really sectors in the commercial business that are still going up like the hospitality pieces. So it's really an unusual environment.

This concludes our question-and-answer session. I would like to turn the conference over to Jeff Lorberbaum for any closing remarks.

Thank you very much. We appreciate all of you joining us. We're navigating the current environment, and we're investing to optimize our results when the economy improves. Thank you for joining us. Have a good day.