RPM International Inc

NYSE:RPM

Good day, and welcome to the Mohawk Industries Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to James Brunk, Chief Financial Officer. Please go ahead.

Thank you, Wyatt. Good morning, everyone. Welcome to Mohawk Industries' quarterly investor conference call. Joining me on the call are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Chris Wellborn, our Vice Chairman.

Today, we'll update you on the company's fourth quarter and full year performance and provide guidance for the first quarter of 2025. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP numbers, 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 his opening remarks. Jeff?

Thank you, Jim. Our fourth quarter results exceeded our expectations as sales actions, restructuring initiatives and productivity improvements benefited our performance. Additionally, the sales impact from U.S. hurricanes was limited to approximately $10 million.

Net sales for the quarter were approximately $2.6 billion, consistent with the prior year with 2 additional shipping days, partially offset by the strengthening U.S. dollar. While residential demand remains soft in our markets, our product introductions last year and our marketing initiatives contributed to our sales performance around the globe. Our adjusted EPS for the quarter was $1.95, in line with the prior year from productivity, additional shipping days, lower interest expense offset by unfavorable pricing, product mix and inflation.

For the full year, our net sales were approximately $10.8 billion, down approximately 3% as reported and on a constant basis with an adjusted EPS of $9.70 as we progress through the year, our industry deteriorated from higher interest rates, lower housing turnover and reduced remodeling. In response to these conditions, we took additional actions to optimize sales and launch initiatives to reduce overhead, enhanced productivity and restructure operations to maximize our performance.

Last year, 55% of our sales were in the U.S. and 45% were in other geographies with leading flooring positions on 4 continents. The fourth quarter environment was an extension of the conditions our industry faced throughout last year. Consumers continue to limit large discretionary purchases and consumer confidence remain constrained by cumulative inflation, economic uncertainty and geopolitical tensions.

During '24, home sales across the world saved suppressed while U.S. homeowners remain locked in place with low mortgages and existing U.S. home sales fell to a 30-year low. Central banks in the U.S., Europe and other regions lowered interest rates during the latter part of last year, though the impact on housing turnover was negligible in most regions. Consumers who did initiate remodeling were more affluent or completing essential projects.

New home construction was also constrained around the world with higher home costs and interest rates impacting starts. Many U.S. builders increased sales by buying down mortgage rates to make monthly payments more affordable. Throughout the year, investments in the commercial sector slowed, though they remain stronger than residential remodeling. These factors reduced market demand and created heightened industry competition for volume. This also resulted in greater unabsorbed overhead and shutdown costs as we manage production and inventory.

Given these conditions, we focused on stimulating sales with innovative new products, marketing actions and promotional programs. Our product launches delivered style and performance at affordable prices as well as unique premium products to incentivize remodeling. Last year, we initiated significant restructuring actions and operational improvements that are lowering our costs and will benefit our longer-term results.

During 2024, we focused capital expenditures on projects driving sales, reducing costs and maintaining our assets. Through these actions, we delivered full year increase of approximately 6% in adjusted earnings per share in a soft market. For the year, we generated free cash flow of $680 million and repurchased 1.3 million shares of stock for $161 million. We ended the year with available liquidity of $1.6 billion and debt leverage of 1.1x. We are well positioned to manage this market cycle, pursue opportunities for long-term profitable growth and emerge stronger when the housing markets improve. We are taking actions in areas we control to optimize our current performance and improve sales and profits when volumes rebound. Now Jim will review our financial details.

Thank you, Jeff. Sales for the quarter were just over $2.6 billion. That's a 1% increase as reported and a 1% decrease on a constant basis. Gross margin as reported was 23.6% and SG&A as a percentage of sales was 18.6%, giving us an operating income margin on a reported basis of 4.6% with nonrecurring charges of $38 million during the quarter, primarily related to previously announced restructuring actions across all 3 segments, which when completed, will yield cost savings of approximately $285 million.

Operating income on an adjusted basis was $160 million or 6.1%, which is a decline of 60 basis points versus the prior year due to unfavorable price mix of $51 million, higher input costs of $20 million, partially offset by stronger productivity of $37 million and increased volume of $22 million, mainly due from the additional shipping days. Interest expense was $10 million for the quarter, a decrease versus prior year due to a stronger free cash flow and lower overall debt levels. Non-GAAP tax rate was 17.8% versus 21.3% in the prior year. Looking forward, we expect Q1 and the full year 2025 tax rate to be between 20% and 22%. That gave us an earnings per share on a reported basis of $1.48 and on an adjusted basis, $1.95, in line with the prior year in a very difficult environment. Turning to the segments. Global Ceramic had sales of just over $1 billion.

That was a 1.5% increase as reported and 1.2% on a constant basis as the benefit of favorable mix and the additional shipping days were only partially offset by pressures on pricing and FX headwinds. Operating income on an adjusted basis was 5.3%. That's a 50 basis point increase over the prior year, with productivity gains of $17 million and increased volume of $8 million were only partially offset by unfavorable price mix of $12 million and increased shutdown costs. In Flooring North America, sales were just over $930 million.

That's a 2.8% increase as reported and declined 0.5% on a constant basis as positive volume gains in our laminate, residential soft and LVT businesses were offset by continued pressure on price and mix. Operating income on an adjusted basis was 5.7%. That's a decline of 120 basis points versus the prior year as the impact of that price and mix pressure of $25 million and higher input costs of $11 million were only partially offset by improved volume of $15 million and strengthening productivity of $11 million. Finally, in Flooring Rest of the World, sales were just shy of $700 million. That's a 2.1% decrease as reported and declined 4.8% on a constant basis as the strength of our laminate, LVT and panels businesses were offset by weakness in insulation and sheet vinyl and continued price pressure across the segment.

Operating margin on an adjusted basis was 10%, declining 60 basis points versus the prior year, primarily due to the impact of unfavorable price and mix of $14 million and slightly higher input costs, only partially offset by improved productivity of $9 million. Corporate and eliminations were $16 million for the quarter as our corporate expenses were in line with our full year expectations of approximately $50 million.

Looking at the balance sheet. Cash and cash equivalents were $667 million with free cash flow of over $230 million in the quarter and $680 million for the full year. In addition, in the quarter, we repurchased approximately $74 million of shares in the period. Inventories were just over $2.5 billion and decreased approximately $40 million primarily due to FX as days increased to 134 days versus 130 in the prior year, primarily due to increases in sourced products with the potential of port strikes and tariffs.

Property, plant and equipment were just over $4.5 billion with CapEx of $161 million in the quarter, and the company plans to invest approximately $520 million in 2025, primarily focused on product innovation and cost reduction projects. The balance sheet overall remains very strong with strong free cash flow, net debt of $1.6 billion and leverage of 1.1x. Now Chris will review our Q4 operational performance.

Thank you, Jim. For the quarter, our Global Ceramic segment delivered solid results despite slow demand and industry competition impacting pricing across our regions. The segment's operating income benefited from improved productivity, partially offset by pricing and shutdowns. We implemented many cost containment initiatives, which included reengineering products, improving processes and rationalizing higher cost operations. In a softer market, we increased distribution by expanding our customer base across sales channels, including residential builders, specifiers and specialty retailers. In the quarter, we improved our mix with products launched in 2024, higher commercial sales and expansion of premium collections. We are elevating our product offering through more advanced printing, polishing and rectifying technologies that create industry-leading visuals.

In the U.S., we are leveraging our ceramic service centers to grow contractor sales and increasing our position with kitchen and bath dealers nationwide. We are introducing new high-end quartz countertop collections in advance of our new U.S. production line opening later this year. In Europe, our specifier team, showrooms for the A&D community and premium products are driving commercial sales growth, and we are increasing export sales outside the region.

In both Mexico and Brazil, the integration of our acquisitions has improved our product offering, sales organizations and market strategies and our Brazilian exports are strengthening as the currency weakened. Our Flooring Rest of World segment saw improved sales of laminate, LVT and panels versus the prior year, though insulation faced additional headwinds. Our margins were compressed due to competitive industry pricing and rising material and labor costs that were partially offset by productivity gains and lower energy expenses. Our restructuring initiatives in the segment are progressing and improving our cost position and productivity as we rationalize less efficient assets, streamline our product portfolio and reduce administrative overhead.

We also contained costs in the quarter by enhancing manufacturing and logistics efficiencies and continuing to manage inventory levels. In December, the European Union introduced tariffs of more than 40% on Chinese wood flooring, which should benefit our sales of laminate, LVT and wood. We grew the sales and mix of our premium laminate and LVT collections through increased advertising that attracted consumers to our retailers.

In addition, we increased product placement with our customers in Central Europe that will improve our LVT sales. In our panels business, volumes held up as we took more aggressive promotional actions and our more differentiated decorative panels performed better given stronger nonresidential projects. Our insulation business experienced weak demand and margin pressure from increased competition and material costs. In line with the market, we have announced price increases in insulation to partially offset rising material costs. In our panels and insulation businesses, we are investing to expand our geographic footprint and are developing new products to satisfy those markets. In our Flooring North America segment, we maintained sales in a declining market with benefits from our successful 2024 product launches in our fashion categories.

Year-over-year, our margins were reduced by lower pricing and product mix and higher inflation, partially offset by higher volume, stronger productivity and cost reduction actions. During the quarter, we completed our LVT restructuring initiatives, which will enhance operations and provide significant savings. We focused on increasing volume across sales channels, optimizing our SG&A spend and expanding both the home center and residential construction channels. In the quarter, our hard surface sales grew in all channels as a result of increased distribution of our 2024 product introductions.

Sales of our recycled PVC-free resilient flooring expanded as a high-performance LVT alternative. Our residential carpet collections gained market share with the sales of our PET premier polyester collections and fashion categories leading our performance. In the commercial channel, our carpet tile products led our sales with their appealing designs and sustainable properties. Hospitality sales remained strong as new construction and renovation projects were completed. With that, I'll return the call to Jeff for his closing remarks.

As a reminder, we announced Chris would be retiring from his position in February and has agreed to ensure a smooth transition in a consulting role. We appreciate Chris' many contributions to Mohawk's success over the past 2 decades. Under his leadership, Mohawk's ceramic business became the largest in the world with leading positions on 3 continents.

We're pleased Chris will remain on our Board of Directors and will continue to benefit from his expertise. With Chris' retirement, Paul De Cock is taking over the role of Chief Operating Officer after serving as President of our Flooring North America segment for the past 6 years. Paul will focus on enhancing our sales and operating plans across the enterprise. Paul is presently in Europe working with our Flooring Rest of World team, and he will deliver the operational reports next quarter.

Now returning to the outlook. Our industry has been in a cyclical downturn for multiple years, and we are confident that our markets will return to historical levels, though the inflection point remains unpredictable. We expect ongoing softness in our markets during the first quarter due to elevated interest rates and weakness in housing.

Intense competition for volume will continue to pressure our pricing, though our mix should benefit from differentiated products launched last year, premium collections and our commercial offering. Increased material and labor costs will reduce our margins in the quarter as we can only partially pass through the higher cost to the market. Our businesses are finding additional ways to reduce expenses and improve processes, which will help to reduce the impact of inflation. We are restructuring our Mexican ceramic business to improve our operational performance, which will save approximately $20 million a year. Our cumulative restructuring actions will generate annualized savings of approximately $285 million when complete in 2026.

Our capital expenditures this year are focused on maximizing sales, improving product mix and reducing costs. As we indicated in our January 24 8-K filing, the Flooring North America segment implemented a new order management system, which had more issues than anticipated.

The conversion did not impact our manufacturing or financial systems. The majority of the system processes have been corrected and our shipments are currently aligned with our order rates. Our invoicing was delayed, and we are addressing shipping and invoicing errors with customers that mainly occurred in the beginning of the implementation. At this point, we estimate the impact on the first quarter operating income from missed sales and extraordinary costs will be between $25 million and $30 million.

We are working closely with our customers to remediate any issues or concerns. We believe the impact of extraordinary costs will be limited to the first quarter. It is difficult to estimate the sales impact on future periods, though we do not anticipate it will have a meaningful long-term impact on our customer relationships. The U.S. dollar has strengthened significantly, which will negatively impact our translated results this year. As a reminder, our first quarter is seasonally the lowest during the year, and it will have 2 fewer days compared to last year.

Given these factors, we expect our first quarter adjusted EPS will be between $1.34 and $1.44, excluding any restructuring or other onetime charges. This includes an estimated EPS impact of $0.35 per share due to the Flooring North America system issues. Historically, cyclical downturns in our industry are followed by strong rebounds as flooring demand returns to historical levels.

All of our regions need increased home construction to address growing household formations and aging homes will require significant updating after several years of postponed remodeling. As the economy strengthens, business investment will increase in commercial channels. As the world's largest flooring manufacturer, we're uniquely positioned due to our geographic scope, leading innovation, comprehensive portfolio and financial strengths. When the industry recovers, higher volumes will leverage our manufacturing and overhead costs to enhance our results. Additionally, our product mix will improve, pricing will strengthen and margins will expand. We are well prepared to manage through the short term and maximize our results as the category recovers. We'll now be glad to take your questions.

[Operator Instructions]. Our first question comes from Trevor Allinson with Wolfe Research.

Congratulations to Chris on the retirement. It appears 1Q earnings guidance looks like it's roughly in line with normal seasonal trends that you guys saw prior to the pandemic between 4Q and 1Q, excluding the impact of the order management system. As we think about the moving parts of this year moving forward. Should we think that 1Q to 2Q then also exhibits normal seasonality moving forward, again, excluding any of the impacts from the order management system?

The second quarter, we don't anticipate any changes in the present market conditions, and we do expect normal seasonal improvements. We'll continue to seek volume to maximize absorbtion of our cost structures. We will benefit from the cost reductions, restructuring and lower shutdowns, though pressures from pricing mix and higher costs will continue in the second quarter.

We're investing in new products and sales activities to improve both the mix and distribution. Don't forget the dollar has strengthened, and it's also going to lower our translated foreign results. And as we said, we don't expect any additional cost from Flooring North America system, though it's difficult to estimate, if any sales impact on the future periods at this point.

Okay. Makes sense, and that's helpful color. And then second on natural gas prices, they come up pretty rapidly here in recent weeks. Can you talk about what you're expecting from a price/cost standpoint in global ceramics specifically moving forward? And are you expecting to be able to push enough pricing to offset those potential inflationary headwinds moving forward?

Well, U.S. gas prices have increased with higher cost impact in Q1. In Europe, natural gas costs increased, though it's still dramatically lower than the peak. We've hedged a portion of it in Europe to limit our cost volatility.

We're trying to recover some of the cost of it through cost takeouts and improved mix, but we think it's going to be difficult to get it all back in passing prices through in this environment.

And just remember, as natural gas or energy or material costs change, it takes about a quarter to kind of flow through to the P&L based on their inventory turns.

And the next question will come from Mike Dahl with RBC Capital Markets.

Just sticking with the Flooring North America issue, maybe it would help us could break out to the extent you can, like if you call it, $25 million to $30 million hit on income between the extraordinary costs and the sales impact. How much of that $25 million to $30 million is kind of this onetime cost versus the sales and sales leverage impact?

Yes, Mike. So if you look, we said about $25 million to $30 million. If you look at the extraordinary costs, involved with correcting the system, additional man hours to address issues, manual processes and such. We believe that's about $15 million to $20 million of the impact. And we anticipate a sales impact, so a sales impact of about $25 million to $50 million in the quarter.

Got it. Okay. That's helpful, Jim. And then I appreciate kind of the context and qualitative pieces around thinking beyond 1Q. I think it would it'll probably be really helpful if there's any way, like there's always a lot of these moving pieces. When you add all this together, do you think you will be in a position to grow earnings on a year-on-year basis in 2Q?

Well, as we look to the whole year, we start out with the industry has really been in a down cycle longer than most in history. These downturns are typically followed by strong rebounds in flooring as demand returns and postponed projects are initiated. Just like you, we're unable to predict the inflection point, but we're confident over time that we will return to the historical levels. At this point, we haven't seen any signs in our markets that the rebound is starting or improving at this point, and we're taking a cautious approach about when the recovery will occur at this point.

Given that, this year, we're expecting mix improvements significant productivity initiatives and specific pricing actions where we can get them should offset the negative pressures of rising costs and headwinds from the stronger dollar. And then absent the Flooring North America change, we should see a slight improvement in overall earnings given those assumptions.

Yes. And adjusting for the impact of the system conversion if you look Q1 to Q2, I would look more at historical growth on sales and on margins. So very typical normal seasonality.

And the next question will come from Eric Bosshard with Cleveland Research.

You talked a bit about competition, your competition as a limiting factor, competition in U.S. tile as a limiting factor. And I know there's always competition in these markets. But I'm just curious, is there anything different from a competitive dynamic that is limiting either pricing or share and then also add into this, any influence of tariffs in consideration of that in the same vein?

Well, first, and just in terms of pressure, the underutilization in the category puts pressure on pricing. But if you look at our business, we benefited from a strong operational performance and then the restructuring actions that we have taken. Our commercial business is holding up with continued strength in our builder channel. We've leveraged our ceramic service centers to grow contractor sales and increasing our position with kitchen and bath dealers and our domestically produced quartz countertops are outperforming other work surfaces.

Just to remind you that ceramic industry, a large part of the U.S. comes from around the world and these excess capacities from around the world are ending up in this market, too.

And the next question will come from Susan Maklari with Goldman Sachs.

Taking a longer-term type of view, you've talked in the past about getting the business to a 10% margin. And then even moving higher from there. As you just think about all the cost actions and the things that you are driving in the business from both a product and a margin perspective, do you still think that you are on track get to that? And can you get there even if things do remain a bit more challenged just given what's going on in the business fundamentally?

At the moment, the industry is at very difficult conditions given we're at the cyclical bottom of the cycle. Here in the U.S., the housing sales are at the lowest point since 1995, which is creating the pressure on everything. we expect that a recovery we're going to get back to, it will take multiple years to get back to the historical trend lines and that the postponed remodeling, higher home sales, improved business investment at the time will significantly improve the utilization of our assets.

It will increase the average mix of what we're doing. And then to remind you again, flooring in general, has a much higher correlation to home turnovers because when people right before they remodel, right before they sell the home, they tend to remodel or right after they move in, they tend to remodel. So we're getting -- our category is more impacted by that. On the other hand, when we come out of it, it's going to help us much more. At the same time, when a consumer purchases the product, they purchase higher-quality products in the retail remodeling part of the business, which is the most impacted by the categories at the moment.

Just to state the obvious, all of our regions are really experiencing the same substantial declines in volume and margin compression that I assume they're going to come out slightly different as we go forward, but we're expecting them to help us get leverage on the restructuring, which is going to be about $285 million when it's all complete. The leverage goes up, our manufacturing cost should drop, and we should get leverage on our SG&A, which will help us get back to the higher margins that we want to be at.

Okay. That's helpful. And then turning to the cash flows in the balance sheet. It was nice to see you buying back stock again this quarter. The business has been generating approximately $700 million of free cash in the last 2 years, even with all the pressure that you've been under. Can you talk a bit about how you're thinking about the uses of cash going forward? How buybacks could fit into that and how you're thinking about M&A as well, perhaps?

Yes, Susan. As we look at the generation of free cash flow, we would expect to increase our investments in the business as the market improves to take advantage and grow both from a product innovation, which kind of sets us apart in the marketplace and also cost reductions. we should see more opportunities, as you just said, to acquire more businesses as the environment strengthens. Right now, the M&A activity in our sector, at least is very quiet, as you would expect. And we'll continue to buy shares as we have in the past as part of our cash usage and our strategy as we move forward. If you think about just one other point. Since 2020, we have purchased about 14% of our outstanding shares at a total cost of about $1.6 billion. So we will continue to utilize that as part of our strategy.

Next question will come from Stephen Kim with Evercore ISI.

Appreciate all the color so far, and best of luck, Chris, with everything. I guess my first question relates to the outage that you experienced in Flooring North America. I understood what you said about your impacts in the 1Q. What I thought was a little interesting was that I might have expected that some of the missed sales in 1Q would actually lead to a sort of a better-than-normal trend opportunity in 2Q or maybe 2Q, 3Q, something like that. But it sounds like you're sort of leaving the door open for perhaps a little bit of continued sales impact. Just wanted to see if I could -- if we could explore that a little bit. Why is it that you wouldn't get actually a rebound and better-than-normal sales cadence on the other side ofit?

See. A lot of the business is for immediate jobs. And the question is, did you miss the immediate jobs that are there? Or is it going to be postponed. The customers who carry significant inventories, the amount of time that we were behind was very limited. So we're back to normal. We are able to ship them whatever they want today.

So the real question is, do we lose any relationships that are there. We think that long term, we haven't. But it's only been a limited period of time to evaluate the actual what's going to happen. So we'll know better over the next couple of months.

All right. That's fine. And then a broader question. I know that we're all waiting for the turn in R&R, and we talked about in the past how that typically comes hand-in-hand with better mix because people tend to -- those kinds of people tend to buy higher quality products. But in the U.S., there's sort of an odd situation where you're seeing a lot of relatively greater strength in the move-up price points right now. I'm talking for houses. And the entry level of the market is obviously very locked up. because of the mortgage rates and that -- and at the lower price points, the homeowners literally can't move up because they just can't afford that jump in mortgage rate.

So I think the lock-in effect is probably more prevalent at the lower price point. And so what I guess I'm saying is that if we were to see the -- an improvement in existing home sales, might it be that you see more of an improvement in -- with consumers who actually are not going to be paying up as much for products, and therefore, you might actually not see the typical product mix, a positive product mix that you would normally expect to see when a cycle recovers.

I'm just curious if you've consider that, if that's something you think is a valid thing? And then lastly, is this dynamic just simply a U.S. phenomenon where you have sort of this relative -- much greater relative weakness at the entry level rather than the move-up?

See, to take the question, we are seeing more strength at the bottom at the top, which goes along with what you're saying as we see it. Also the large home construction companies are trying to keep the prices of homes down. So that part of the market is using very low-quality products to get by with a limited spending as they can.

We think that the consumer who owns the house has been postponing remodeling of it. And usually, they don't go to the lower price point that you use in either some of the new construction or some of the multifamily things that have been doing well. So when they come in, we think that it's going to come into the middle part of the market and some of the middle will trade up more than they're doing now since they're concerned about the future.

The people with money always have money, but the bottom end of that market, they tend to trade down to when they get concerned or postponed. So we believe that we're still going to see an improvement in the mix as we come out of this.

The next question will come from Sam Reid with Wells Fargo.

So I wanted to talk for North America margins here a little bit. It sounds like volumes were again positive in the segment, if I heard you guys correctly, but we did see a year-over-year margin pullback. I realize there's some input cost pressures that muddy the water here.

But could you give us a sense as to where some of those incremental volumes that you're getting are coming from? It sounds like it's a function of kind of lower margin channels or end markets, perhaps homebuilders and home centers. Just want to understand sort of what those dynamics actually look like and sort of why incremental volumes aren't necessarily driving an improvement in F&A margins?

Volumes have gone up, but we've been more aggressive in the marketplace with pricing. We've been able to improve the mix somewhat, but the pricing and mix are more than offsetting the volume that's hanging in where it is in general is it. Also, the -- remember that there were extra days in the period that you have to take to get it on an equalized basis.

The other side, Sam, is, you are seeing cost increase as well, which is we have strong productivity in the segment, but that's being really used or countered by increasing costs that we've seen in materials start to flow through the P&L. So that's also putting pressure on those incremental margins that you're speaking of.

No, that helps. And maybe just switching gears. You talked a little bit about capacity utilization at a high level on the call already. But maybe just to put a finer point on that. Could you unpack where those utilization rates sit today, especially for some of these really important categories like U.S. carpet and U.S. ceramics. And then kind of the knock-on question there would be, where would we need to see capacity utilization go before the category would be in a position to take price?

In general, the capacity utilizations tend to be ranging from 70% to 80% at this point. If you go to historically when the markets are operating like they have in recoveries, we're operating in 90 or more is it so you get a lot of leverage out of the cost when that happens. What was the other part of the question?

And you get less pressure on pricing as utilization goes up because that means you have strengthening demand.

The competitors and we are taking lower margins trying to operate and reduce the unabsorbed overhead costs. So that's compressing the margins. And then you have the other part, which is the lower mix, which the categories that are doing better are under more pressure.

Our next question will come from Keith Hughes with Truist.

Just wanted to ask about the $200 and I believe you said $85 million of restructuring saves. How much of that is realized in '24? Do you have a view of how much will be saving in '25?

So in terms of the restructuring plans across the business, in 2024, we realized about $80 million from a year-over-year perspective. And in '25, our expectation is to see that grow to about $100 million from a year-over-year perspective. And just to remind you the segments, we're exiting a combination of unprofitable products, closing plants, taking out inefficient assets along with streamlining our distribution and warehouses, lowering administrative costs and reducing product complexity, which is key to helping grow that productivity.

Okay. Just to make sure. The $100 million is income and in '25 is incremental, that would be $180 million over the 2 years. Is that the what you're saying it?

That's what I'm saying, yes. And then as we said, the projects will finish up by the end of -- or during 2026.

'26. Okay. And 1 question for you, Jeff. You mentioned in '25, it was something about -- you thought you might have some more positive mix. I just want to make sure I heard that right. Where do you think you would see that?

The positive mix is coming from the new introductions that we're putting out and the have higher average selling prices and margins on the old ones, so the churning of the product line does -- helps the mix.

The next question will come from Michael Rehaut with JPMorgan.

First, I just wanted to clarify an earlier comment, I think, Jim, that you made about 2Q seeing normal seasonality off of the first quarter in both sales and margins. I assume -- does that kind of -- when you talk about normal seasonality sequentially, is that off of the adjusted numbers, if you were to add back that $0.35 and the various impacts of that, just trying to understand the baseline there.

Absolutely, Mike. The baseline here is absent any impact of the Flooring North America system issue I'm just doing an apples-to-apples. So if you set that aside and you look at the move from Q1 to Q2, what I am saying is that from a -- I would expect that it would be in line with historical growth, both on sales and from an EBIT margin perspective.

Great. Great. And then I also thought it would be pretty helpful if you could break out, if possible, what the impact on -- from currency and the natural gas costs that have kind of risen, how -- if there's any way to kind of quantify or roughly quantify what those impacts are expected to be on first quarter and how those might persist over the next quarter or 2?

Yes. So as I said before, you'll see some lag of that higher cost flowing through the P&L. So I would expect, I would see, a ramp-up of the cost impact in quarters 2 and 3 right now would be our projection, inflation would be a headwind, also material costs as well.

From a currency standpoint, it continues to evolve, as you well know, with the strengthening dollar. But I would expect that to continue to be a drag on operating income it could be in the mid-single digits from our total earnings that we get outside of the U.S.

So just to make sure I'm understanding, you're saying -- I apologize, kind of mid-single digits -- is that in the millions of dollars? Or is that an EPS number? And then also in terms of the natural gas, you said that it would be likely higher in 2Q and 3Q. Again, just trying to get any type of quantification off of that and what might -- what might it be both of these issues, again, impacting earnings in the first quarter guide?

Yes. It tough to -- on the first quarter, it's difficult to absolutely quantify our assumption is that we'll have limited impact in the first quarter on energy. It will be more in the second quarter as it flows through the P&L. And on the impact of FX, as I said, that would be an operating income level. So you could be in the high single digits of operating income, so somewhere around $7 million and $10 million of an impact in the first quarter.

Next question will come from Tim Wojs with Baird.

I guess there's a lot of moving pieces kind of in the market and kind of underlying. But as you look at the 3 segments as you report it. Is there a way to kind of talk about what you think those markets grew on an underlying basis in 2024 relative to what you've reported from a growth perspective?

So looking at each of -- it is difficult because you've got the influence of both the U.S. market and outside of the U.S. We normally look at the U.S. that Flooring grows kind of close to GDP, but it's been so under pressure with demand. What we've seen is our hard surface business. So laminate and LVT have grown at a much faster pace than soft surfaces.

Ceramics, as Jeff indicated earlier, is very impacted by the imports in the U.S., but we continue to maintain very high level of share in the U.S. Outside the U.S. and Europe, the ceramic business continues to improve from a mix perspective, even though pricing and demand is very much under pressure. So our porcelain slab business is doing well and helping that mix. But the demand and pricing is certainly under pressure.

And then as you go kind of South, Latin America is seeing that same price and mix pressure with their interest rates, Brazil actually increased their interest rates in the midst of this. So demand levels are very much constrained in those regions as well.

The high interest rates around the world trying to reduce inflation impacted all the markets the same. The volumes all decreased. The pressure on the utilization of all the factories decreased, the pressure on pricing was very similar from one market to the next and to improve our position, it's mostly focused on driving either increasing the distribution on one hand or improving the mix to try to get the average price up given that it's very difficult to get pricing in all the markets. So there's not a lot of difference in them.

Okay. I mean I guess my question was more around like do you feel like you're gaining share in the majority of your markets? Or do you feel like you're growing more in line with the market?

And it's different by market. I think in most markets, we're either flat or gained a little.

Okay. Good. And then just a quick one. Just in Flooring North America, just like high level, could you just give us a sense for how big hard surface versus soft surfaces right now.

I don't have those numbers in front of me.

Yes. As we disclosed, hard surfaces is still running below soft surfaces, residential soft and commercial soft still our larger, but laminate and LVT combined are certainly catching up.

The next question will come from John Lovallo with UBS.

Maybe just from a high level, obviously, existing home turnover has been a headwind. One of the things that's been interesting is that rates have been high, but the prime rate has come in a bit. There's been a little bit more talk about potentially folks kind of leaning into home equity a little bit more than they have in the recent past. I mean, given the high-ticket nature of flooring, I mean, how are you thinking about that dynamic playing out as we move through 2025?

Well, looking at interest rates, central banks have cut rates. So we're really not seeing housing turnover improve that much. In the U.S., you're also seeing mortgage rate spreads increase, which is really offsetting some of the short-term declines. The recovery really, as Jeff has indicated, will be different by region. And we're taking, obviously, many actions to improve our results, whether that be in sales or cost. But certainly, as the industry recovers, we're going to see an increase in our utilization and the ability to expand our margins.

At this point, with our plans, we don't have a significant recovery showing up, but we're hoping it does.

Got you. I mean, I guess I was wondering just about on the ability for folks to extract equity from their homes and use that as a catalyst for R&R. If you had any thoughts around that.

When the confidence raises, they have significant money available to them given the price of houses. And so it should help the recovery when it occurs.

Okay. Fair enough. And then maybe the second question is the flooring industry, as you mentioned in a tough spot here for a few years. Your balance sheet is been really good shape. I mean it seems like it could create an opportunity for you guys to take advantage of the situation. I mean how are you thinking about the ability to be a little bit more acquisitive in 2025, expanded into new products or regions or whatever it may be?

At this point, given the compression of the earnings, most people that are doing okay, are not aggressively looking to sell. So usually, as you coming out of these downturns and the margins start going up, more opportunities show up, and we agree that we're well positioned to take advantage of them.

Next question comes from Phil Ing with Jefferies.

Jim, I appreciate the color that the nat gas impact will be more impactful from a P&L standpoint, 2Q, 3Q. But any way to size that up in terms of gas input or just broader inflation in general. And certainly, the million question is around pricing. It's a tough environment, but you're seeing costs go higher have you or your competitors taking price and then in your markets? And from a mix comment, you talked about new products, but should we think of mix holistically up overall? Any color would be helpful.

Well, in terms of the gas impact, I'll just reiterate that in the U.S., we have seen the higher costs, and we'll see some limited impact certainly as we get into the first quarter. In Europe, the gas cost has increased, but still dramatically below the peak. We have -- as we've said in the past, we do some prebuying in Europe to try to help limit the volatility of that -- of those increases. Pricing, you're right, is very difficult, and we're doing it in very strategic areas, maybe more on the higher-end products. But again, there's a lot of competition for volume because of where the demand is at this point.

As we said, we think that the mix improvements, productivity initiatives and specific pricing actions are going to basically help cover the rising costs and the headwinds from the stronger dollar is it. And we think we're going to have to have some pricing to help us get the margins back where we want. The question is, will the market allow it or not this year. we're assuming it's going to be difficult to pass through most of it.

Yes. And remember what Jeff said earlier on the call is that absent the impact of the system issue, we should see a slight improvement in overall earnings and the only way we get there is the balance between productivity offsetting inflation and then some favorability on the mix side.

Okay. Great. That's helpful color. In terms of tariffs, appreciating it's a very fluid situation. I guess, how do you see that impacting your business, right? When you look at your peers, you're competing with largely players ex carpet importing product in. Is that going to be a good guy from a pricing standpoint? And remind us how you're set up from a Mexico exposure. You got an LVT facility, ceramic as well. So holistically, tariffs that's proposed, is this a good guy from a price margin standpoint? And then anything that we be mindful from an operation and supply chain standpoint as well?

Well, let's start out that we have no idea what they're going to be, how they're going to be executed and what's going to happen. Other than that, we have a clear view. Presently, so breaking it down, we import products from Mexico where we make ceramic and LVT. Both of those were reviewing alternatives to move to other factories that we own, and we're also looking at potentially outsourcing them as well as what you would be able to do with pricing if there were significant changes in it.

In China, we have very limited we buy out of China. And what we do, we're actually moving large pieces of it already to other places. And so those are the big pieces. We think that when it occurs, if it occurs like it is, when it occurred with China a few years ago, you had also a change in the exchange rates. So it's possible that a part of it will be offset by exchange rates going on. And then depending upon what it is, we'll just have to react to it as it occurs, but it's impossible to know what to do at this moment.

Yes, if you think it's a net positive, neutral or a modest headwind for you guys because your competitive landscape is largely importing.

I think the imports we're doing from Mexico, it will be negative 2%. On the other hand, that might give us some positives in manufacturing in U.S. should help some of those and how it balances out as anybody to guess what's going to happen since we don't even know what it is.

The next question comes from Laura Champine with Loop Capital.

It's actually a follow-up on let's call them potential tariffs on North America. What percentage of your overall sales are imported from Mexico? And then a little more Farfetch, but totally possible. I know that you export product from the U.S. to Canada. What percentage of your sales is in that bucket?

So we import somewhere around $300 million from Mexico, and we export approximately $200 million to Canada.

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

We appreciate everyone joining us. The recovery is going to come and will significantly improve our results as the market rebounds back to where it was historically. Thanks for joining us again, and have a good day.

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