Mohawk Industries Inc Q2 2023 Earnings Call July 28, 2023

Operator

Good morning. My name is Alan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries Second Quarter 2023 Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, the 28th of July 2023.

I would like now to introduce Mr. James Brunk. Mr. Brunk, you may begin your conference.

James F. Brunk

Thank you, Alan. Good morning, everyone. Welcome to Mohawk Industries quarterly investor conference call. Joining me on today's call are Jeff Lorberbaum, chairman and Chief Executive Officer; and Chris Wellborn, President and Chief Operating Officer.

Today, we'll update you on the company's second quarter performance and provide guidance for third 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 by 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 amounts, please refer to our Form 8-K and press release in the Investors section of our website.

With that, I'll turn over the call to Jeff for his opening remarks.

Jeffrey S. Lorberbaum

Thanks, Jim. Mohawk's second quarter net sales were $2.95 billion, down approximately 6.4% as reported or 9.6% on a constant and legacy basis, primarily due to continued pressure in residential remodeling across all of our regions. Our adjusted EPS was $2.76, as our margins across the enterprise expanded sequentially due to seasonal improvements, increased production, productivity initiatives and lower input costs. We generated over $145 million of free cash flow during the quarter, further strengthening our financial position.

Typical of housing recessions, higher interest rates and inflation are significantly impacting flooring sales around the world. To manage, we are selectively investing to increase sales and reducing expenses by enhancing productivity, consolidating distribution points and improving administrative efficiencies. In the quarter, we initiated restructuring and integration actions that will save $35 million annually at a cost of approximately $17 million. We anticipate approximately half of the estimated savings should be realized in the current year, partially offsetting the weak residential remodeling activity.

In addition, we're limiting future capital investments to those delivering significant sales, margin and operational improvements. In all of our regions, we're taking actions to increase sales, including promotions, retailer incentives and selective product launches. The integration of our recent acquisition is progressing as we combine strategies and enhance our manufacturing and product offering. While managing lower market demand, we're preparing for the rebound that historically follows cyclical declines in our industry.

Our LVT premium laminate, quartz countertop, porcelain slab, insulation, manufacturing expansion should deliver the greatest growth as the market recovers. Across our regions, we continue to see strong results in the commercial sector than in Residential. Residential remodeling remains the industry's greatest headwind due to lower home sales and deferred improvement projects. We believe channel inventories have declined and could be at a bottom.

Price competition is increasing with declining industry volume, mix and input costs. In the U.S., the housing markets remain under pressure due to limited supply, high interest rates and continued inflation. Existing homeowners are not moving at historical levels to maintain their low mortgage rates. In Q2, new home starts increased to $1.45 million, showing the first quarterly increase since the beginning of last year. We believe the trend in housing starts will continue and will positively impact flooring shipments in the future.

In our regions, home sales and remodeling are also declining due to inflation and interest rates. In Europe, energy prices have continued to decline, though persistent inflation in other categories is limiting consumer remodeling. In the quarter, we benefited from lower energy prices that flow through our P&L. Our investments in biomass, solar and wind energy production reduced our operational expenses and carbon footprint positively impacting our performance.

During the second quarter, the Italian government provided energy subsidies at a reduced level and the program will not be continued. In May, USA Today write Mohawk is one of America's businesses that made the greatest reductions in our global emissions over the past 3 years. Mohawk was the only flooring company recognized reinforcing our position as a global leader in sustainability.

Earlier this month, we announced that Bernard Thiers will be stepping down as President of Flooring Rest of World next year and will continue with the company in a senior advisory role to support a smooth transition. Bernard has made many important contributions to the success of the business since we acquired Unilin in 2005. He has led the Flooring Rest of World segment for the past 14 years and delivered profitable growth by expanding our product offering, entering new geographies and bringing new product innovation to the market. I'm proud of the exceptional team that Bernard has assembled across this segment.

Wim Messiaen will be joining Mohawk in October after he completes his contractual notice period. He will become President of Flooring Rest of World on February 1. Wim has more than 30 years of leadership experience with multinational packaging, building products and flooring manufacturers in Europe, Asia and Australia. He has considerable experience driving both growth organically and through acquisitions. Wim will complement our strong leadership team with a passion for innovation, strong customer focus and a commitment to sustainability.

Jim will now cover our financial performance for the second quarter.

James F. Brunk

Thank you, Jeff. Sales exceeded $2.9 billion for the quarter. That's a 6.4% decrease as reported and 9.6% on a legacy and constant basis, as global inflation and higher interest rates significantly impacted the flooring industry volumes, especially in residential remodeling channel. Our global ceramic business had the strongest year-over-year sales performance in part due to a greater exposure to commercial and new home construction, which outperformed residential remodeling.

Gross margin for the quarter was 24.8% as reported and excluding onetime items, was 25.9% versus 27.7% in the prior year. The year-over-year decline is due to softening volume, temporary plant shutdowns, unfavorable price/mix, higher inflation and the net impact of FX, partially offset by 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 this call.

SG&A expense as a percentage of sales was 19.6% as reported and excluding onetime items, was 17.6% versus 16% in the prior year. The increase in SG&A expense was primarily attributable to higher inflation the net impact of acquisitions, partially offset by productivity gains. Operating income as reported was 5.2%. Restructuring, integration and other items were $91 million for the quarter, comprised of legal settlements and reserves as disclosed in our quarterly filing, costs associated with restructuring actions announced in 2022, and acquisition and integration costs, primarily for our ceramic acquisitions in Mexico and Brazil.

Also in the quarter, we have taken additional actions across the enterprise to lower our costs and strengthen our results. The total cost of these actions is $17 million for an annual savings of approximately $35 million once completed. Operating margin, excluding charges, was 8.3% for the quarter. The decline year-over-year was primarily driven by the lower sales volume and higher inflation along with temporary plant shutdowns, and negative price mix and the unfavorable net impact of FX, partially offset by productivity gains.

Sequentially, though, we saw significant margin expansion as seasonal volume helped strengthen our quarterly sales and reduce our manufacturing shutdowns. And lower costs, especially in raw material and energy, combined with increased productivity, offset weakening price and mix. Interest expense for the quarter was $23 million, increasing from the prior year, mainly due to the higher interest rates.

Non-GAAP tax rate was 19.5% versus 22% in the prior year. Our forecasted Q3 tax rate is between 18% and 19%, and the full year rate is forecasted to be 19% to 20%. Earnings per share as reported were $1.58 and excluding charges were $2.76.

Turning to the segments. Global Ceramic Segment had sales just shy of $1.2 billion. That was basically flat as reported and a decrease of 6.7% on a legacy and constant basis. Weaker volume and unfavorable FX were only partially offset by positive price and mix. Compared to the prior year, our business in the U.S. held up the strongest in the quarter led by its performance in commercial and new construction. Operating margin excluding charges was 8.6% as higher interest rates and inflation are impacting the flooring industry across our regions to varying degrees, leading to lower volumes and increased plant shutdowns, partially offset by productivity gains, positive price mix and the favorable impact of FX.

Turning to Flooring North America. Sales just exceeded $1 billion. That was an 8.9% decrease as reported and 12% on a legacy basis. Especially in the residential remodeling channel and negative impact of price mix along with the lower volume. In the quarter, the year-over-year weakening conditions were felt the most in our residential soft surface businesses. Operating margin, excluding charges, was 6% as current economic conditions with reduced inventory volumes and increased competition is driving negative price mix, lowering sales volume and creating more temporary plant shutdowns, partially offset by decreasing input costs. It should be noted that sequentially, we saw strong margin expansion in both Global Ceramic and the Flooring North American segments.

Lastly, Flooring Rest of the World sales is just over $790 million. That's an 11.4% decrease as reported and 10.2% on a legacy and constant days basis. The decrease was primarily attributable to lower volume, negative price mix and unfavorable FX. The weakness in residential remodeling was felt the most in our Laminate and Wood businesses. In addition, our insulation and panels business was negatively impacted by the deferral of new projects.

Operating margin, excluding charges, was 12.1%. As consumer spending in our category has not improved at this point and market competition increases, we are negatively impacted by the lower volume, temporary plant shutdowns and unfavorable net impact of FX, partially offset by productivity gains. Corporate and eliminations was $12 million for the quarter. And on a full year basis, corporate expenses should be approximately $45 million.

Turning to the balance sheet. Cash and cash equivalents were $571 million for the quarter, with free cash flow of $147 million in Q2 versus a use in the prior year. Free cash flow year-to-date is over $275 million. Receivables were just shy of $2.1 billion with a DSO of 58 days versus 56 in the prior year and prior quarter. Inventories for the quarter finished at just over [$2.6 billion] and excluding the impact of acquisitions, inventories decreased $277 million versus Q2 of 2022. Inventory days are at 120 days versus 116 in the prior year, but has decreased from the 128 days in the prior quarter.

Property, plant and equipment is just shy of $5 billion. Q2 CapEx was $117 million with D&A of $157 million. For the full year, our forecast includes CapEx of approximately $600 million with D&A of $595 million.

Finally, gross debt finished just shy of $3.1 billion with leverage at 1.8x adjusted EBITDA. This provides us the flexibility and strength as we look forward to the rebound in our industry.

Now Chris will review our Q2 operational performance.

William Christopher Wellborn

Thank you, Jim. Our Global Ceramic Segment's result improved from the first quarter with increased sales, higher production and lower energy costs. Around the globe, high interest rates and inflation are reducing housing sales and remodeling investments to varying degrees based on local conditions. We believe that most of our customers have now aligned their inventory levels with market conditions. Our asset utilization remained low with compressed demand, and we further reduced our inventory and working capital. Our P&L benefited from lower materials and energy flowing through the inventory. This reduction was partially offset by greater market competition and lower mix, which impacted our selling prices.

While energy costs around the world have substantially decreased, they continue to be highly volatile. In our acquisitions in Brazil and Mexico, we are realigning the organization's, defining new sales and product strategies and executing cost reductions. Our U.S. Ceramic business benefited from a greater participation in the commercial and new construction channels, enhanced styling and more consistent service. As energy and freight cost decline and industry volumes weaken, the market is becoming more competitive. We are introducing higher-style products to improve our mix and are focusing on stronger sales channels. We have expanded our customer base, which is helping to offset the weakness in residential remodeling.

In the quarter, we further reduced our inventory while maintaining high service levels. The decline in energy prices will improve our cost as it flows through our inventory. We have taken cost reduction actions in response to increased competition and other inflation. As we prepare for the start of the additional countertop capacity, we are enhancing our product portfolio and expanding our kitchen and bath channel with complementary tile and countertop selections.

Our Ceramic business in Europe remains under pressure as residential remodeling remains slow. Our volumes in the quarter improved sequentially, and our results benefited from sales of premium residential collections, commercial products and exports. Competition is becoming more intense in all channels due to low industry volume and declining energy costs. We are adjusting to the changing environment and using promotional activities to deliver additional volume. To utilize our new porcelain slab capacity, we are broadening our portfolio with innovative visuals and will manufacture products we have been outsourcing. We continue to focus on cost containment, including overhead reductions, productivity projects and alternative formulations.

As with our other regions, our Latin American ceramic businesses are also being pressured by higher interest rates, which have compressed residential remodeling. We are making progress integrating our existing businesses and new acquisitions, and we have begun to leverage sales of our total product portfolio to expand our distribution. The combined synergies we are realizing are partially offsetting the weakening market conditions. By the end of the year, we should complete the migration of our acquisitions onto our existing information systems, which will facilitate further sales and cost opportunities.

Of the 2 regions, Mexico is performing better due to the economy and lower interest rates, while Brazilian ceramic industry is now being more impacted by economic conditions after holding up longer. We are taking additional sales and operational actions to manage the softening environment. The Brazilian government has recently announced that it will subsidize low interest rate mortgages to support new home construction and help the economy.

Our Flooring Rest of World segment continues to successfully manage a difficult environment. Consumer spending has not improved as we expected. Confidence remaining low given inflation, higher interest rates in the war in Ukraine. Sequentially, our sales volume and production rates improved from the first period. With low manufacturing utilization and declining input costs, industry pricing and mix continues under pressure. During the quarter, energy and raw material costs decline, partially offsetting weakening conditions. To manage lower volumes, we're pursuing additional sales, reducing cost and aligning production with demand. The segment's third quarter is seasonally impacted by extended vacations, which will reduce our sales and earnings in the period.

Though our flooring sales are under pressure, our sheet vinyl collections are outperforming as consumers trade down to lower price alternatives to minimize project costs. To meet rising demand across our regions, we are increasing our sheet vinyl production. The integration of our Eastern European sheet vinyl acquisition has significantly progressed. We have enhanced its offering with higher performance products, sped up its operations and added another manufacturing shift to support growing volume. We are managing production of laminate and LVT to align with present demand and are introducing new products, merchandising and specific promotions to expand sales volumes. We have begun to transition our residential LVT offering from flexible rigid cores and are executing the previously announced restructuring to support this conversion.

In our panels business, fewer projects are being initiated and industrial use has decreased due to slower market conditions. We are increasing sales of our higher-margin decorative HPL products as we expand our customer base. Our plant utilization remains low, and our selling prices are declining, partially offset by lower material costs, improved productivity and our green energy production. We have made considerable progress integrating our small board and mezzanine acquisitions, including enhancing their operations, aligning sales strategies and combining administrative functions.

Long-term prospects for our insulation business remains strong, supported by increasing energy conservation and government regulations. Presently, demand is declining as residential and commercial investments are being deferred and new industry capacity is increasing competition in some of our markets. Industry pricing is declining as input costs fall and we are reducing expenses to adjust market conditions.

Similar to our other regions, the Australia and New Zealand housing markets have softened due to inflation and higher interest rates. Our results for the quarter were impacted by lower volumes and mix in our residential channels, and we are introducing new products and selective promotions to increase sales volume. Our commercial sales in New Zealand were stronger, and we are leveraging our innovative collections to capture larger projects.

Our Flooring North America segment has faced the same challenging conditions as inflation, high interest rates and more conservative lending practices have impacted the U.S. housing market and our industry. As we anticipated, the segment's margin sequentially expanded in the quarter due to seasonality and lower costs flowing through the inventory. To control costs, we have enhanced productivity, streamlined administrative functions and initiated restructuring actions. With weak residential remodeling and softer mix, retailers continue to tightly manage their inventory levels, further impacting demand in the quarter.

With energy and raw material costs declining, market competition is increasing. New single-family home starts have begun to increase with some builders subsidizing interest rates to attract buyers. In retail, we are providing new product options to trade up consumers and value alternatives for those with budget constraints. To increase sales, we're initiating selective promotional activity, enhancing our product offering and introducing more consumer-friendly displays.

The U.S. commercial sector has proven more resilient as businesses continue to invest in new construction and remodeling projects. The July Architectural Billing Index reflected a stable environment for new projects. We are experiencing some mix pressure in commercial as customers seek to maintain budgets. The hospitality and Main Street channels performed best in the quarter, and we are expecting our participation in the health care channels.

Our unique products, which are certified carbon neutral are growing as they deliver superior performance with a negative carbon footprint. Our commercial accessories acquisition is performing well as we leverage our relationships to enhance its product sales. Mohawk is the leading producer of premium laminate due to our more realistic visuals and waterproof performance. We continue to see a broader adoption of our Redwood products in both retail and builder channels. We have increased our offering of our revolutionary signature technology, which enhances the richness of our Pergo and Karastan collections. We are aligning production with current conditions, implementing cost reductions and managing pricing and mix to optimize our results.

In Residential carpet, we've seen a sequential improvement in sales and production, along with the decline in input costs, which improved our margins from the first quarter. We have enhanced our luxury Karastan and Godfrey Hirst collections and are providing retailer incentives to grow volumes. Our expanded solution-dyed polyester carpet portfolio is increasing our position with multifamily developers and single home builders, negatively impacting our product mix. We have integrated our recent non-woven acquisition and are improving its sales and operations.

With the decline in ocean freight costs, market pressure for LVT are increasing and the U.S. Forced Labor Protection Act is impacting some shipments. Higher cost inventory reduced our margins as we adapted to the changing market. Our new rigid LVT introductions with updated visuals, WetProtect and antimicrobial technologies differentiate us in the market and our sheet vinyl sales rose as consumers selected more affordable options. Our West Coast LVT plant will continue to ramp up throughout the rest of the year.

With that, I'll return the call to Jeff.

Jeffrey S. Lorberbaum

Thanks, Chris. Mohawk's second quarter performance reflected the positive impact of many initiatives we're executing across our business. We're managing the current market conditions while preparing for the rebound in demand that follows cyclical downturns. Central banks have raised interest rates to reduce inflation and are signaling that additional rate hikes are possible. In the U.S., we've seen a rise in builder confidence and housing starts will increase our residential new construction business. We expect the commercial sector to outperform the residential category through this year, even with continued weakness in the office category. Though employment remains strong, remodeling and existing home sales are being delayed due to limited housing availability, higher interest rates and inflation.

Historically, when the economy recovers, these postponed remodeling projects fuel greater industry growth. Our new restructuring initiatives could save $35 million per year, and our recent acquisitions will add greater benefit to our results as we optimize their performance. In this competitive market, we expect continued pressure on pricing and mix, partially offset by the flow-through of lower material and energy costs.

Our third quarter seasonally weakened through the summer holidays, lower consumer spending and lower production in Europe. Given these factors, we anticipate our third quarter adjusted EPS to be between $2.62 and $2.72, excluding any restructuring acquisition and other charges. At Mohawk, we're taking the necessary steps to manage today's challenges while preparing for tomorrow's opportunity. When Central Bank shift their focus to a more balanced approach, our business will accelerate as the industry recovers. In all of our regions, housing is in short supply, aging homes are in need of remodeling and businesses will invest to grow in more favorable conditions. These factors will create higher growth for flooring and our investments in capacity expansion and our recent acquisitions will further enhance our results.

We'll now be glad to take your questions.

Question and Answer Session

Operator

(Operator Instructions) Your first question comes from Phil Ng of Jefferies.

Philip H. Ng

Jeff, you've been in the business for some time now. You've talked about potentially the R&R cycle turning. Any color on the bidding activity you've seen through the last few months? And then when you look at the past cycles, what are some of the things that you're looking to kind of inform your view that it's inflecting? Is that existing homes turning rates coming down? Any color on that front would be really helpful.

Jeffrey S. Lorberbaum

I guess as you look at the cycles, what happens is as we go through these downturns, the -- all the activity is postponed, our product category of flooring, nothing has to be replaced as it, from either braking or anything else. So when people get uncomfortable, it gets postponed. This cycle, though, is not really typical of the other ones, as you go through. What we believe is that when central banks changed a more balanced approach you'll see all the pent-up demand from these postponed purchases coming through, and that will expand the volume.

At the same time, the mix improves as retail increases, the retail channel tends to have higher margins because customers pick higher-value products. And it's most effective now. So as that turns, you get an increase in it. And then the use of the asset goes up and reduces the cost per unit and the margins expand at the same time. This time, we think also that our new investments in expansion will allow us to increase the categories of the business that are growing the most, and we should see acquisitions help us position us as we come out of this because we should have them integrated about the time of things starts coming together. So we're optimistic about the long term.

Philip H. Ng

Got you. Have you seen the order activity for the R&R set of things at least flatten out here? Or it's still TBD free?

Jeffrey S. Lorberbaum

We're hoping it's at a bottom. Consumers, when they have inflation and they start managing their budgets, again, our category is more postponable than most. So we're hoping it's going to get better, but I can't say that we've seen it yet.

James F. Brunk

Yes. If you look at also the fill the inventories in the channel across our region, customers did reduce inventory and did become more conservative. We believe most channels have largely aligned with the current conditions.

Philip H. Ng

Okay. That's a perfect segue, Jim, to my next question. It sounds like inventory is flushed out to the channel. What about your inventory? Is your inventory at a good spot? The reason why I asked is because you started curtailing production pretty heavily last year and you're starting to lap that. It was a pretty negative headwind. So does that flip positive? Are you at a pretty good spot? Any color there would be really helpful.

James F. Brunk

So from a year-over-year perspective, you heard that certainly inventory is down for the quarter. What is key to us is sequentially from Q2 -- from Q1 to Q2, the inventory decreased about $110 million. About 60% of that was volume and 40% was the lower cost. We do anticipate further inventory decreases this year. Certainly depending on demand and inflation. But what we're doing is we're keeping the inventory low, you get better churn in the plant operations, which helps with that unabsorbed overhead.

Philip H. Ng

Okay. But you're still curtailing production in the back half. Is that what you're saying, Jim, on a year-over-year basis?

James F. Brunk

Yes. If you look at -- you have to consider the seasonality as well. So you have certain shutdowns in the third quarter, mostly associated with Europe and the shutdowns. And then obviously, in the fourth quarter, you will also have shutdowns associated with holidays. Now in the fourth quarter, though, we would expect that the shutdowns would be less than in the prior year.

Operator

Our next question comes from Keith Hughes of Truist.

Keith Brian Hughes

You've made some comments on Europe on pacing and demand. I might be confused in the geographies. If you could just go back over where you think particularly European consumer demand is trending during the quarter and here in July?

Jeffrey S. Lorberbaum

We had expected when we came out of the first quarter that the decline in energy prices, which was a huge burden on the consumer that we had expected it to come down and that the consumer would be positively impacted. At this point, we haven't seen the demand in flooring reflect that. Like here, there are more vacations being taken and other things experiences they're doing. But in our category, we haven't seen an improvement yet.

Keith Brian Hughes

Okay. And you've talked about lower input costs, lower energy costs. Are you seeing any more sequential declines as we head into the second half of the year on those costs?

James F. Brunk

Yes. So Keith, if you kind of step back sequentially, if you look Q1 to Q2, inflation or deflation, was about $55 million from Q1 to Q2, which offset the reductions in price and mix of about $36 million, which helped us expand the margins as the cost declined. Now I would expect to see, as we go through the second quarter to the third quarter, also that same phenomena of lower input costs, lower inflation, helping offset the price mix again, from a sequential standpoint.

Operator

Our next question comes from Eric Bosshard of Cleveland Research.

Eric Bosshard

First of all, if we could just circle back on that comment, the path forward on cost getting better and price getting worse is -- did I interpret what you just said to say that the savings and inputs more than paid for the impact or pressure from price mix. Am I saying that right?

James F. Brunk

Yes. Sequentially is what I was focused on is from Q1 to Q2, you saw that. From Q2 to Q3, we expect the same to occur. Again, that's sequentially. It's very -- it's an interesting year where looking at sequential changes are actually more important. You can see the flow through quicker as the lower cost material and energy offsetting the pressure on price mix.

Eric Bosshard

And then secondly, I guess, related to that and somewhat answered within that statement, the -- Jeff, you talked a good bit kind of globally about price mix pressure either related to demand or influenced by what's going on with inputs. In terms of what you're seeing from consumers or your customers, is that path a steady one per the comment that was just made? Is it increasing? Is it stabilizing? Just trying to figure what the slope of that curve looks like?

Jeffrey S. Lorberbaum

I mean it's being caused by the low utilization rates in a different depending on geography and product category. To remind you, the industry, all the different pieces are -- tend to be highly capital-intense with high fixed costs. So the participants tend to try to maximize volume to cover the overhead. With the energy and material are declining, and we're tending to pass through the majority of that to the customers. At the same time, you have a mix change that's going on with, as we said before, the retail has higher margins. And as the retail is declining more, it's impacting the margins and average prices as well.

Eric Bosshard

Okay. And then the last, Jeff, you spoke to it today and was in the release about signs of a bottom and hoping for a bottom as well. And I guess I look at the channel, the retailers taking inventory out would suggest their position more conservative. In normal cycles do, I guess historically, we would look to see that inventories would increase and mix would get better, and that would be a sign of a more bullish consumer. What should we be watching for if it's not inventories and price mix to suggest more bullishness from either your customers or the end consumers about better demand?

Jeffrey S. Lorberbaum

I guess to begin with -- we're hoping that the demand is maybe at a bottom for the cycle. But as you said, the cycle is not exactly typical of prior ones. Unusual to have the employment remaining strong and our category be so pressured, which it is this time. The whole housing market is totally different than prior ones. And so you see right now, the housing is starting to -- the new starts are going up. It's going to take 4 to 9 months for us to see that depending upon which house and how long it flows through before we see that.

On the longer-term side, when people's confidence, historically, the consumer confidence is also a good indicator of when they start spending more money because as that goes up, they'll start taking these postponed projects that they have and doing them. So far, the commercial is still holding up. We're assuming it's going to weaken as we go through the fall, but we'll have to see how it goes. So far, the index or the billing index for the architects doesn't show it declining yet, but we're anticipating it's going to get weaker.

Operator

Our next question comes from Susan Maklari from Goldman Sachs.

Susan Marie Maklari

To start with, when we think about your third quarter guide, can you help us walk through each of the segments and how we should be thinking about the sequential changes coming through from a seasonality perspective in terms of the top line as well as the margins?

Jeffrey S. Lorberbaum

Yes. I think Jim and I, I think both of us to do that one for you. In the third quarter, everybody didn't look like they built in the European decline that we always have. And given the vacation they take, our volumes over there drop and our margins dropped as well. We expect lower industry volumes will continue pressuring pricing and mix across the whole industry. And at this time, we're not building in any catalyst for remodeling to improve. At some point, it will, but we don't have it in any of our expectations at this point.

The period will continue to benefit from lower material and energy costs as well as our restructuring actions. We're going to keep controlling the inventory relative to the demand. We've talked a few times about the retail margins impacting our mix. And then we also think that the currency changes have been going on, it could have an impact of another $5 million to $15 million just in the currency changes.

Jim, do you want to sort of give up between the different segments?

James F. Brunk

So Flooring Rest of the World, obviously, is most exposed to the European holidays. So from -- again, sequentially from Q2 to Q3, you would expect to see a margin decline in their business. Global Ceramic has some exposure to Europe, but the largest component and piece of that segment is the U.S. So margins from Q2 to Q3 could be flat to slightly down. And then in Flooring North America, usually Q3 is one of their strongest quarters. So we expect to see margin expansion from Q2 to Q3.

Susan Marie Maklari

Okay. That's very helpful color. And then perhaps as we think about 2024, as that approaches, understanding that it's hard to understand where the global macros will go and some of these demand factors. But when you think about all the cost actions that you have taken across the business in the last, call it, 3 or 4 years. You think about some of the capacity changes that you've made in there as well. Any thoughts, Jeff, on how the business can perform across the different end markets and segments that you have at some sort of a level?

Jeffrey S. Lorberbaum

First, I don't think I'm capable of calling the turn. I don't know when it's going to happen, it will happen. It usually follows the interest rates peaking and starting to fall. And I don't know if that's going to happen at the end of this year or sometime the end of next year, or anywhere in between. With that, the next year, all of the things you mentioned is right. We should have, as we talked about before, the volume should jump significantly. Usually, you have significant increase in the industry volume making up for the decreases that we've had as you come out. We think the margins will expand in all the businesses.

Typically, the sales also go up further because our suppliers start raising our costs, and we pass those through. So those help the top line further and you have an expansion of the volume and expansion of selling prices and then you have the margins expanding as the leverage in the businesses go. This time, we also have more capacity in what we think are going to be the high-growth areas for our business. And then again, we should have -- there's going to be very limited accretion in the acquisitions until the business turn. But when it turns, we should have the cost take out. We should have restructured the product portfolios, and those should be ready to expand. So we're expecting a significant improvement as we come out of this.

Operator

Our next question comes from Laura Champine from Loop Capital.

Laura Allyson Champine

First on the Ceramic business. Your press release calls out inflation. I'm assuming that's year-on-year. Is that just flowing through the higher cost inventories? Are you still seeing product cost inflation for that segment?

William Christopher Wellborn

No. Energy has started to come down. So what you're seeing in the third quarter is the flow-through of the higher cost inventory that we had.

Laura Allyson Champine

And is this the last quarter where you would expect to see that impact?

William Christopher Wellborn

I think most of it will be finished through the -- after the third quarter.

Laura Allyson Champine

After the third quarter. Got it. And then on CapEx, there's language in the press release about sort of being careful on projects and needing a serious return. However, the budget doesn't seem to have shifted. So maybe what did change, if anything, this quarter versus last on your CapEx plans?

James F. Brunk

Well, we're very focused on investing to optimize the future of the business. The growth investments that we talked about, they make up about -- almost about $250 million of the 2023 budget depending on timing. Maintenance CapEx for the business is roughly $200 million, $250 million as well. Now we're also focused the balance really is on the quick kind of return projects on cost reductions, our focus on product innovation and then also some projects on acquisitions. What we were speaking about is now looking forward into next year about being very, I guess, diligent looking at the CapEx budget for next year.

Laura Allyson Champine

Got it. And is it too early to give us kind of a first look on the direction there?

James F. Brunk

Yes, it's a little bit early, but we're working with all the teams as we speak.

Operator

Our next question comes from Truman Patterson with Wolfe Research.

Truman Andrew Patterson

Clearly, you all have been pretty open about increased pricing competition globally. Do you think you could discuss just some of the big buckets where you're seeing this occur either product category or region as well as perhaps how this has evolved versus your expectations through the year?

Jeffrey S. Lorberbaum

Sure. So in the U.S., you have with the decline in import prices, which affect both LVT and ceramic. So those are moving down, and we're adjusting as we have to do those. Some of that is impacting our margins as we have higher cost inventory. In our European business, our Ceramic businesses, they've been at very low levels. So the marketplace is getting very aggressive trying to run the assets that are there. So the market pricing there is under pressure.

In our Flooring business in Europe, it's more of a mix problem than a pricing problem. On the other hand, you have growth in the lower cost product categories. So we're bringing people down rather than lowering prices. And then our panels and insulation businesses tend to go up and down with the material and energy prices, and those are being passed through as they occur.

Truman Andrew Patterson

Okay. Perfectly. And then in North America, with oil coming down quite a bit, understood. If I look at your margins kind of sequentially, it seems like that raw material deflation versus pricing benefit probably occurred in North America, a little bit more than some of the other regions. But could you help us think through what's built into your third quarter guide regarding raws in the North American segment specifically?

James F. Brunk

Well, in Flooring North America, similar to the other segments, from Q1 to Q2, you're absolutely right. We're starting to see sequentially the benefit of the lower cost coming through, not only in raw materials, but in energy as well. In our view of Q2 to Q3, we still see some of that, maybe a slower pace sequentially, but you still get a benefit of lower cost in raw material, energy and also freight as you look in the U.S. as well. So those are the assumptions around Flooring North America.

Operator

The next question comes from John Lovallo of UBS.

John Lovallo

Just want to make sure I have the cadence right here on the input cost inflation and price mix. So in terms of the input cost inflation, it looks like sequentially, we'll see improvement in the third quarter. Should we expect sort of a leveling off as we move into the fourth quarter? And should the third quarter and fourth quarter on a year-over-year basis be improved? And then in the price mix, are we still expecting sequential deterioration as we move through the third quarter and the fourth quarter?

James F. Brunk

Yes. So John, you've kind of asked 2 different time periods there. So let me tackle sequentially first. So again, sequentially, from Q1 to Q2, we benefited where you had lower cost versus the impact of lowering price and mix. I would expect a similar occurrence albeit maybe a less impact, but a similar occurrence in Q2 to Q3 and also in Q3 to Q4. Again, that's sequentially. Now year-over-year, you're absolutely right. What we've said is that we have a tailwind in the back half of the year, again, year-over-year from lower materials and lower energy. But price mix and the pressure on both will continue in the third and fourth quarter. The gap from a year-over-year perspective will close by the end of the year, but it will still exist from a little bit.

John Lovallo

Okay. That's helpful. And then on the $17 million in restructuring charges that will generate the $35 million in annual savings, are those related to headcount? I'm just curious how -- it sounds like the savings are going to come through pretty quickly here. And if that is the case, I mean, are you at all concerned that could negatively impact your ability to react if activity does pick up a little faster than anticipated?

James F. Brunk

No. These actions are really focused around headcount reductions, as you said, in both administrative and manufacturing functions along with some consolidation of distribution points. So most of that cash is -- will occur in the third, fourth quarter of this year.

Operator

Our next question comes from Michael Rehaut of JPMorgan.

Michael Jason Rehaut

So just wanted to make sure I understood right in terms of your prior comments. If you kind of think about price mix versus cost. Just want to make sure I'm understanding that it sounds like you're saying will be negative in the next 2 quarters, but perhaps that negative gap moderating or lessening as you get to the fourth quarter versus the third. Is that the right way to think about it?

James F. Brunk

If you're speaking about it from a year-over-year perspective, that is a correct statement. The benefit and the lower cost compared to the pressure on price and mix, that differential will lessen we anticipate as we move through the balance of the year. That's why, Mike, I think, sequentially is so important to look at because you see more in real time, the benefit of the lower cost offsetting the impact of price mix.

Michael Jason Rehaut

Right. And then -- but at the same time, it sounds like at least for the third quarter, you've pointed to that historical seasonality kicking in where on a broad basis, inclusive of even price cost. But on a broad basis, you're looking for margins to decline on a consolidated basis in 3Q versus 2Q. And it would sound that even if the price cost gap is narrowing in 4Q on a year-over-year, I would assume you're still expecting, again, consistent with the typical seasonality you're expecting in the 3Q further sequential margin contraction in 4Q. Is that fair to say?

James F. Brunk

Well, Mike, it really first of all, it depends on that demand cycle, what we talked about. And from a fourth quarter perspective, yes, you'll have seasonally lower production with Christmas vacations. The industry volume, though may be at a bottom, the pricing pressure could continue. Higher cost inventory by then should relatively be consumed, as Chris indicated earlier. We do have a bump, as you well heard and seen on new home construction, which could help us increase Flooring sales. We have the restructuring that's going to benefit our cost structures. And last year, as I noted earlier, we included much more shutdowns than normal, so that should help us in the fourth quarter as well.

Jeffrey S. Lorberbaum

We're also, as we've said before, anticipating commercial to weaken somewhat as we go through the year. That we'll have to see. Hopefully, we're wrong.

Michael Jason Rehaut

Right. And maybe just one last quick one. The Italian subsidies, does that end right on June -- at the end of 2Q? And if you could just quantify what that meant on a quarterly basis?

James F. Brunk

Yes. So as we've said before, it's about $15 million to $20 million per quarter. The government did stop it at the end of the second quarter, but it will flow through my inventory into my P&L. So I'll get some benefit at a lower level in Q3 and then by Q4, it's basically gone.

Jeffrey S. Lorberbaum

But the energy prices have continued to drop without those. So they were making up for high energy costs, so the energy costs have dropped substantially. So the difference will not be dramatic.

James F. Brunk

Yes. So with that lower cost, we are expecting to be aligned with the competition as well.

Operator

The next question comes from Mike Dahl of the Royal Bank of Canada.

Michael Glaser Dahl

Sorry to beat the horse a little bit on the pricing comments. It seems like the sequential versus year-on-year is obviously that we are just given the magnitude of all the changes. But it would seem like on a year-on-year basis, your cost tailwinds should step up significantly in 4Q versus 3Q, again, on a year-on-year basis. I just want to make sure I heard correctly that even in 4Q, you're still assuming that the price cost is slightly negative. And then I guess, how do we think about -- kind of an exit rate, do you think you'll get back to neutral by year-end as you think about kind of '24 planning? Or -- because it seems to imply still some sequential price decline through the year or accelerating declines there, I should say.

James F. Brunk

So let me kick that off, Mike. So you're absolutely right. The benefit from a year-over-year perspective should peak -- in terms of this year should peak in the fourth quarter. That's why I said the gap will close significantly between the inflation and price mix. It's very difficult at this point to say it's going to be flat, slightly negative, but we'll have to see as the pricing evolves and the mix over the balance of the year. But certainly, the inflation gets -- or the lower cost flowing through the P&L gets much more substantial in the fourth quarter.

Michael Glaser Dahl

Got it. Okay. And then my second question is just related to kind of the LVT [and poor] dynamics and some of the puts and takes around the Forced Labor Act. Can you just -- you mentioned it in the opening comments, but just elaborate a little bit more on kind of how you've seen that evolve and whether supply chains have shifted enough and you've gotten product on port or competition has gotten product into ports? Just what's the update on that?

William Christopher Wellborn

Yes. We're seeing market pressures increasing with lower volumes and declining freight. Higher cost inventories, reducing our margin as it flows through. We also have -- our West Coast operations will be in the start-up phase at the end of the year, but that Forced Labor Act is still impacting some of the sales and timing of our new introductions.

Jeffrey S. Lorberbaum

It is stopping product from coming in. They seem to be doing it on an individual business supplier base. They keep adding to it over time. It has stopped shipments from coming in. We, in particular, stopped hours. It's impacted our service level on existing sales. And it's also impacted our new product introductions, which got stopped. It's difficult to tell how it's going to evolve.

Operator

Our next question comes from Stephen Kim of Evercore.

Stephen Kim

Appreciate the color. My line cut out a couple of times, so apologies if this was happened, I don't think it was. But I wanted to ask you about the impact or the benefit we can anticipate when volume ultimately returns. I know you're not giving a specific time frame for when that will be, but when it does occur inevitably, I'm curious about what we might see from productivity and temp shutdowns, in particular. Regarding productivity, we've usually seen a positive boost to your EBIT from productivity when volumes rising. But recently, you've actually generated positive productivity when volume was going down. And so I'm curious, when volume ultimately inflect up, is it reasonable to think that we could still get positive productivity year-on-year?

And then similarly, with temp shutdowns, you mentioned, I think, that in 4Q, shutdowns, you won't have shutdowns, but it will be less than the prior year. What I'm interpreting that to be is that you're going to get an EBIT benefit year-on-year from reduced shutdown. So when you move forward and volume picks up, I assume you won't have any shutdowns. And so that should also be a benefit on top of whatever volume benefit you would get. I just want to make sure that both of those are true.

Jeffrey S. Lorberbaum

Yes, they are all true as the utilization of the factories goes up, that will reduce the fixed overhead costs. Usually, the productivity of the plants also increases as well. We usually get leverage in the sales cost as well as it all turns. And then somewhere along the line as it goes in, we'll start raising prices as our suppliers start trying to expand their margins as we go forward. So all those things occur.

Stephen Kim

Yes. Great. That's -- yes, we look forward to that day. All right. So the second question for me is in ceramic, we've seen over the years or so, we've seen a pretty big rise in ceramic imports from India. You all have obviously moved stepped into LatAm pretty significantly, Brazil, Mexico, et cetera. And I'm curious if you could help us understand, are there any salient differences either in product quality or other costs of doing business that favor Latin America for -- as a place to import for you or ship products to the U.S. from versus other parts of Asia?

Jeffrey S. Lorberbaum

Just as a comment before he answers that one. The -- our investments in Latin America are primarily for the Latin American markets is it. We do ship some into the United States, but the majority of it is for the local markets. Chris, do you want to answer for the rest?

William Christopher Wellborn

The other thing I would say, Stephen, is that the -- from India right now, the freight rates are really low, which we don't think are sustainable. But in the U.S., we've done a lot of work on our mid and premium product to reduce the impact of the changes in that imported product.

Jeffrey S. Lorberbaum

But right now, India does have an advantage with freight.

Operator

Our next question comes from Matthew Bouley of Barclays.

Matthew Adrien Bouley

I think you mentioned a few times that commercial has been outperforming, but that you expected commercial to weaken later this year. I guess, how is that dynamic evolving for you specifically? You're actually starting to see signs of, I don't know, weakening orders in the commercial end market? And just how might you expect that to play out from a volume and price perspective?

Jeffrey S. Lorberbaum

First, you have to go back to other cycles. I've never seen a cycle where the commercial business didn't fall off, and it usually falls off about a year after the other one. So it's possible you get through this without it, but hard to believe. So there is some indications of some weakening new projects being started and new orders. So we're going to have to see how it evolves, there's a chance that could keep going through it. But at least in our expectation we're assuming there's going to be some weakening show up.

Matthew Adrien Bouley

Got it. Okay. That's helpful. And then secondly, on the $35 million of savings actions. I think you said half would be realized this year. I mean, should we assume that you're kind of reaching the run rate really in Q4, or are you already starting to realize a lot of that in Q3? How does that kind of phase between the next 2 quarters?

James F. Brunk

It's fairly split between Q3 and Q4. I would say, by the run rate, you're correct is you will see it as we get through Q4.

Operator

The next question comes from Adam Baumgarten from Zelman.

Adam Michael Baumgarten

Just curious if you could walk through where you're seeing the biggest negative mix impacts across the various products and geographies?

James F. Brunk

Right now, in the second quarter, the price mix was unfavorable from a year-over-year perspective. And the largest part in the second quarter was in Flooring North America and LVT with the pricing declines driven by imports.

Adam Michael Baumgarten

Okay. Got it. And then just as we think about the restructuring actions, maybe how to think about that across the various segments as you spread it across the different businesses?

James F. Brunk

Well, if you back up a little bit. So we announced in 2022 and Q2 and Q4, restructuring actions that you should see as we go through this year and the next about $60 million, that was mainly split between Flooring North America and Flooring Rest of the world as they took out higher-cost assets around reducing work production, phasing out the residential flexible LVT in Europe as well as some other initiatives. And then this current action that we just announced is fairly spread between Flooring North America and Global Ceramic.

Operator

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

Rafe Jason Jadrosich

When you look at the dealers that you sell through in the U.S., sort of the smaller independent ones, just can you talk about the health of that sort of network? Obviously, like the industry sales have been under pressure, and I'm sure they're sitting on some -- or they were sitting on some high cost inventory and prices have come down. How is like the health of that retail channel for you? And are you seeing any consolidation there?

Jeffrey S. Lorberbaum

The -- most of the retailers have been able to -- you go through the last year, they were able to pass through the costs. They were able to pass through the higher labor installation rates. And in some cases, many of their margins expanded is it. So for the most part, most of them are in fairly good shape at this point.

Rafe Jason Jadrosich

Okay. That's good to hear. And then the second question was just on -- as pricing comes down with the lower input costs like you're talking about in the second half here, what have you historically seen in terms of volumes with lower pricing? Like what is the demand elasticity to price? Do you ever get an uptick in volumes because the pricing is lower?

Jeffrey S. Lorberbaum

Usually in these environments, we're lowering prices in reaction to the marketplace and to people start taking -- trying to take isolated pieces and increasing their share. And then as you would suspect, the other participants are trying to hold their share. So typically, as prices decline, we passed through much of the lower cost to our customers as we're all trying to run at that.

Rafe Jason Jadrosich

Is this pricing competitive environment different than other like is it kind of a similar level that you would have anticipated, like more competitive, less competitive than what you've seen historically?

Jeffrey S. Lorberbaum

I think it's probably typical. The difference will be in Europe. You have a much lower environment. And so I think in Europe, it might be more aggressive than historical. But also the costs were up higher, much higher in Europe, too, you have both dynamics.

Operator

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

Jeffrey S. Lorberbaum

We'd like to thank everyone for joining us. We are focused on managing the short term, and we think we're well positioning the business to maximize the long-term growth in earnings. Thank you again.