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Operator: Good day, and welcome to the Mohawk Industries Inc. Fourth Quarter 2022 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to James Brunk. Please go ahead.

James Brunk: Thank you, Jason. Good morning, everyone, and welcome to Mohawk Industries’ Quarterly Investor 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 fourth quarter and full year performance and provide guidance for the first quarter of 2023. I’d like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission.

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

Jeff Lorberbaum: Thank you, Jim. For the full year of 2022, Mohawk’s net sales were $11.7 billion, up approximately 4.8% as reported or 8.8% on a constant basis. And our adjusted EPS for the year was $12.85. The flooring industry entered 2022 with momentum from strong housing markets supported by record home sales, low interest rates and rising household formations. High home equity levels, shifts to larger homes and the desire to customize living spaces during the pandemic were driving remodeling investments. As the year progressed, the U.S. housing market declined under pressure from rising interest rates and inflation. In Europe, energy and overall inflation escalated and consumers reduced discretionary spending to pay for essentials.

In the first half of the year, the company implemented pricing actions and production that offset the inflation we incurred. With reduced home sales and remodeling in the second half of the year, our Flooring volumes decreased. Our pricing did not cover material and energy inflation. Throughout the year, commercial and new construction and remodeling activity outperformed residential. Even with the housing industry slowing during the second half of the year, we concluded 2022 with a strong balance sheet, low net debt leverage of 1.3 times EBITDA and available liquidity of approximately $1.8 billion to manage the current environment and optimize our long-term results. We acquired five bolt-on businesses during the year that extend the scope of our product offering and our distribution.

These include sheet vinyl, mezzanine flooring and wood veneer plant in Europe, a nonwoven flooring manufacturer and a flooring accessories company in the U.S. When we complete the integration of these acquisitions, we will expand their sales opportunities, enhance their operations and improve their efficiencies. We’ve just acquired Elizabeth in Brazil and are awaiting regulatory approval to close Vitromex in Mexico, Both of which will almost double our local market positions in ceramic, expand our customer base and product offering and improve our manufacturing capabilities. The teams are preparing to integrate the businesses, which will create significant sales and operational synergies. Turning to the fourth quarter results. Mohawk net sales were $2.7 billion, down 4% as reported or approximately 1.3% on a constant basis, and our adjusted EPS was $1.32.

Our revenues were driven by price increases and strength in commercial channel. Our sales across all our businesses were slower than we expected in the quarter as Residential sales contracted with rising interest rates, declining home sales and lower consumer confidence. As a consequence, our customers lowered their inventory levels and consumers reduced their spending for renovation. Unlike other products, Flooring does not require immediate replacement. So purchases can be deferred more than other durable goods. Commercial sales continued stronger than residential in the quarter, benefiting from ongoing remodeling and new construction projects. In the quarter, our Global Ceramic segment outperformed the others due to a higher level of commercial and new construction sales.

Our Flooring Rest of the World segment softened as higher inflation and energy costs reduced demand in Europe. Our Flooring North America segment sales declined with lower residential activity and a reduction in customer inventory levels. The combination of weakening sales, plant shutdowns and the consumption of higher cost inventory decreased the segment’s performance for the quarter. In response, we reduced production rates and lowered our inventory, which increased unabsorbed overhead expenses. We curtailed spending across the enterprise, though inflation offset many of our initiatives. In both Flooring North America as well as Flooring Rest of the World, we’re taking restructuring actions in specific areas to align our operations with the present market conditions.

During the quarter, energy and material costs around the world began to decline which should positively affect our future results. While we’re managing the present economic cycle, we’re operating with a long-term perspective and expanding capacities in areas where we have the greatest growth potential when markets rebound. These include LVT, laminate, quartz countertops, porcelain slabs and insulation. We have reduced our planned capital spending until we see greater certainty in our markets around the world. We recently announced an agreement to resolve the securities class action lawsuit filed in January 2020. Though we believe the case is without merit, further litigation would be burdensome and expensive. We reached a settlement of $60 million, a significant portion of which will be covered by insurance and is subject to court approval.

We also settled a dispute with the Belgian Tax Authority regarding royalty income. Though we believe our position is correct, we settled the $187 million assessment for EUR3 million. I’ll turn the call over to Jim for a review of our fourth quarter financial performance.

James Brunk: Thank you, Jeff. Sales for the quarter were just under $2.7 billion. That’s a 4% decrease as reported or 1.3% on a constant basis. Favorable price/mix in the quarter was offset by reduced volume and unfavorable FX. The decrease was primarily driven by weakness In the U.S. as residential markets slowed more than expected in the quarter. Gross margin, as reported, was 20.9% and excluding one-time items, was 22.4% versus 26.8% in the prior year. The year-over-year decrease was primarily driven by higher inflation of $263 million, offset by stronger price/mix of $269 million and productivity of $16 million. The fourth quarter margin was further negatively impacted by a weaker volume of $95 million, temporary plant shutdowns of $69 million and FX headwinds of $12 million.

SG&A as reported was 18.6% of sales. And excluding one-time items was 17.9%, inline with the prior year. On dollar basis, the favorable impact of FX of $12 million and volume of $3 million was partially offset by price/mix of $6 million and inflation of $3 million. Operating margin as reported was 2.3% for the quarter. Restructuring and one-time charges, $58 million, including initiatives in Flooring North America and Flooring Rest of the World and our disclosed litigation settlements. The restructuring charges combined the initiatives announced in Q2 and a new project in Flooring Rest of the World to better align our LVT assets with market conditions. Operating margin, excluding charges, was 4.5%, and the year-over-year decline in operating income was primarily driven by higher inflation of $266 million, offset by price/mix of $263 million, productivity of $15 million, lower start-up and other items of $8 million, although these were not enough to counter the weaker volume of $92 million and increasing temporary plant shutdowns of $69 million.

Interest expense for the quarter was $15 million, and other income — other expense was a $10 million expense due to unfavorable impact of transactional FX. In the fourth quarter, our non-GAAP tax rate was 12.6% versus 18.9% in the prior year. We are forecasting the full year 2023 tax rate to be between 21% and 22% with some quarterly variations. Earnings per share, as reported, was $0.52 and excluding charges, was $1.32. Turning to the segments. Global Ceramics had sales of $988 million, that’s a 4% increase as reported and 5% on a constant basis. Actions to drive favorable price and mix across the segment and improved year-over-year volume in the U.S. offset weakening unit volumes in other geographies. Operating income, excluding charges, was $70 million, which is a 16.7% increase versus prior year and operating margin at 7.1% improved 70 basis points due to improved price/mix of $111 million, productivity gains of $17 million and favorable FX and other items of $8 million, offsetting the increase in inflation of $85 million, lower volume of $28 million and related increased temporary plant shutdowns of $14 million.

Flooring North America had sales of $946 million. That’s a 6.8% decrease versus prior year as weaker volumes was only partially offset by favorable price/mix. The volume decrease was primarily a result of declines in residential channels and customers lowering inventory levels with consumers deferring discretionary spending. On an adjusted basis, Flooring North America’s operating margin was approximately breakeven. The year-over-year decline in profitability was driven by weakening volume of $32 million, Temporary plant shutdowns of $33 million, and the impact of higher cost inventory and other inflation flowing through the P&L of $109 million, only being partially offset by price/mix of $71 million and productivity of $8 million. We expect many of these issues to carryover to Q1 then in Q2 with seasonally stronger sales, lower costs and increased production levels, we should see a solid improvement in profitability.

And finally, Flooring Rest of the World had sales of $717 million. That’s a 9.9% decrease as reported and 2% on a constant basis. Installation products continued with strong growth in the quarter, but it was not enough to compensate for declines seen in the flooring categories, primarily laminate and LVT as inflation resulted in consumers reducing discretionary spending and in turn, customers lowering inventory levels. Operating margin, excluding charges, was 7.7% for the quarter. Operating income declined versus prior year. It was a result of the decrease in volumes of $32 million, temporary plant shutdowns of $22 million, which contributed to lower productivity of $10 million and increases in inflation of $79 million, only partially offset by price/mix actions of $81 million for the quarter.

With the business concentrated in residential channels, we expect a number of these issues to impact Q1, which results improving as we move through the year as lower energy and material costs should drive higher consumer spending. Corporate and eliminations was $6 million in Q4 and $37 million for the full year. Moving to the balance sheet. The company generated free cash flow of $91 million in the fourth quarter and over $165 million in the second half of 2022. Receivables for the quarter ended at $1.9 billion with the DSO at 60 days versus 56 days in the prior year, due in part to customer and channel mix. Inventories ended at just under $2.8 billion or a 17% increase versus prior year, but declined 4% versus the third quarter. The year-over-year growth in inventory was primarily due to a spike in inflation.

And sequentially, the decrease is primarily due to lowering of production levels to better align with demand. Inventory days ended at 138 days for the current year versus 131 in the third quarter. Property, plant and equipment ended at just shy of $4.7 billion and capital for the quarter was $151 million versus D&A of $159 million. For the full year, CapEx ended at $581 million and D&A of $595 million. Our current view for 2023 is a forecast of $560 million for CapEx and D&A of $592 million, but we will adjust with the changing environment. And finally, the company maintains a strong overall balance sheet with gross debt of $2.8 billion and leverage at 1.3 times adjusted EBITDA. This strength gives us the flexibility to manage through the challenging environment.

And with that, I’ll turn it over to Chris.

Christopher Wellborn: Thank you, Jim. The Global Ceramic segment increased sales and earnings with a higher mix of new residential construction and commercial sales than our overall business. Residential ceramic sales in all geographies are slowing and operating margins are contracting due to lower volumes and manufacturing shutdowns. The cost of energy and transportation are declining, which will benefit our margins as these costs flow through our inventory. In the U.S., Ceramic sales and volume both increased as we benefited from our premium product offering, price increases and growing countertop business. Our collections with larger sizes and unique finishes, combined with specialized structures and shapes are enhancing our sales and mix.

We’re increasing our sales efforts in growing categories, including health care, hospitality and fitness as well as multifamily and build-for-rent homes. Cost inflation increased as higher energy and transportation expenses from prior periods were incurred. We are optimizing material supply chains and reengineering formulations to improve our costs. We reduced our inventories during the quarter by lowering production and enhancing our import strategies. We are reducing discretionary spending and limiting capital investments. To support additional growth in our quartz countertop sales, we are adding manufacturing capacity by the end of this year. Our countertop mix continues to improve as we expand our premium collections featuring our advanced painting technology.

Our Ceramic business in Europe remains under pressure with slowing demand, customer inventory reductions and inflation. Our cost in the quarter were impacted by peak energy prices in the third quarter and reductions in plant volumes from temporary shutdowns. We are receiving energy subsidies in Italy, but we remain disadvantaged to some competitors who have long-term energy contracts. Natural gas prices have declined substantially, though disruptions could impact future costs. As Ceramic sales slow, the market is becoming more competitive. We are introducing new technologies to enhance surface textures, expand design capabilities and improve our costs. We are completing the expansion of our large porcelain slabs to support continued growth and enhance our styling.

We have successfully reformulated our body composition to use alternative materials. Sales in both Mexico and Brazil decelerated in the quarter as inflation and increasing interest rates reduced residential demand. We anticipate continued near-term weakness and have reduced production levels in both countries. To cover inflation, we are managing mix and pricing. Natural gas prices in the regions are declining in line with the worldwide market and will lower cost as it flows through inventory. We have completed the acquisition of Elizabeth in Brazil and are awaiting regulatory approval to close Vitromex in Mexico. These acquisitions will position us as top producer in two of the world’s largest ceramic markets. We anticipate significant synergies in all aspects of the businesses, which will enhance our sales and margins.

We should be well positioned to leverage our combined strengths when the markets emerge from this downturn. During the fourth quarter, our Flooring Rest of World segment was impacted by high inflation in energy prices and consumers reduced investments in Home Improvement. This caused a decline in Residential sales, which comprise a majority of the segment’s business. As consumer spending slowed, our customers further reduced their inventory levels, which lowered market demand even more. In response, we implemented temporary plant shutdowns and reduced our inventory levels, compressing our margins. Natural gas prices in Europe peaked at an unprecedented level in the third quarter, raising our material and production costs. Our pricing and mix did not fully cover inflation, which remains a headwind.

We remain focused on optimizing volume with selective promotions as well as controlling costs until the business improves. To enhance our competitive position, we are increasing our supply chain from outside the European Union. We have initiated additional restructuring actions to align with current conditions. Since the beginning of 2023, gas prices have declined substantially and material costs should follow. Assuming this trend holds, Europe should see lower overall inflation with higher wages, consumer spending should increase. During the quarter, all of our European Flooring categories experienced significant volume declines with many residential remodeling projects being postponed as inflation eroded consumer discretionary spending. Our product/mix was impacted as homeowners purchased lower-priced flooring to maintain their budgets.

We are launching new product collections and expanding promotional activities to improve our sales. Higher cost inventory will compress our margins until it flows through our costs. Our sheet vinyl sales outperformed our other flooring categories as consumers chose lower-priced alternatives. We are improving the small polish sheet vinyl plant we acquired in the third quarter by increasing its output, reducing its cost and expanding its distribution. We are expanding our rigid LVT offering as it takes some share from flexible. We are increasing our existing operations and improving our formulation to lower our costs. We’re adding new rigid production that make smaller runs with additional patented features. We will phase out of the residential-flexible LVT products and will close the supporting production.

The cost of this new restructuring initiative is approximately $45 million with a cash cost of approximately $7.5 million, resulting in annualized cost savings of $15 million and significantly increased sales. Our Insulation business is growing as conserving energy has become a higher priority and building requirements have increased. We selectively increased pricing to cover higher material costs, and we lowered production in the fourth quarter to reduce inventory levels. We are growing our sales and distribution in the U.K. as we start up our new insulation plan. Our Panels business has faced the same pressures as our other categories with softening demand and rising material prices. During the quarter, our customers continued to reduce their inventory levels, further impacting our sales.

Anticipating higher winter wood and energy costs, we maintained our inventory levels going into the first quarter. Our investments in green energy have benefited our performance by reducing our reliance on higher cost gas and electricity. The integration of our recent mezzanine acquisition in Germany is progressing as planned. We are defining best practices and utilizing our own manufacturing to replace source boards. Our business in Australia and New Zealand are slowing with the local economies as inflation and mortgage rates are impacting foreign sales. We are taking actions to align our cost and inventory levels with the expected volume decline. We have announced additional price increases and are initiating selective promotions to maximize our sales.

We are updating our product offering and enhancing our merchandising to capture greater market share. As in other categories, commercial sales are stronger than residential and we are increasing our participation in specified projects. For the quarter, Flooring North America sales decreased faster than anticipated, primarily due to declines in residential channels, rug and customer inventory reductions. With inflation and interest rates at high levels, many consumers defer discretionary spending or traded down to lower cost products. Earnings in the segment were compressed due to lower sales, consumption of higher-cost materials, reduced inventory levels and temporary plant shutdowns. Our hard surface products outperformed soft and the commercial sector remains stronger than residential with hospitality showing the most growth.

In response to slower market conditions, we are completing our restructuring actions, deferring capital projects and reducing discretionary spending. During 2022, we reduced our costs through process enhancements and rationalization of less efficient facilities while absorbing historically high inflation. We continue to adjust our strategies to manage the near-term market conditions, reductions in energy and materials should become a tailwind in the second quarter. Our commercial business remains solid as remodeling and new construction projects continue. We maintained strong margins in the quarter with pricing and mix offsetting inflation. Our flexible LVT products are a preferred alternative that provides versatile styling with easy installation.

The combination of our carpet tile and LVT collections enables the customization of commercial spaces with unique designs. Our integration of a small flooring accessories acquisition is proceeding well. The company produces rubber baseboards and stair treads used in commercial installations and broadens our current flooring accessory business. In the fourth quarter, sales of residential soft services declined more than other categories, sales weakened as retailers reduced inventory with declining consumer sentiment and home sales. The multifamily channel was the strongest performer, and we are realigning resources focused more on this sector. As demand dropped in the quarter, we increased temporary shutdowns, which resulted in higher, unabsorbed costs.

We have significantly lowered inventories in the fourth quarter and are reducing costs by eliminating less efficient manufacturing, enhancing productivity and adjusting production to demand. Participation in our recent flooring roadshows was at a record level with leading retailers expressing optimism about the year ahead. Our rug sales were lower as national retailers continue to adjust inventories with reduced consumer spending. We are restructuring our rug operations to lower cost and align production with demand. The integration of our nonwoven rug and carpet acquisition is progressing well and provides new opportunities with our existing customers. Our resilient sales grew in the quarter as we leveraged our WetProtect and antimicrobial technologies to differentiate our collections.

We offset inflation through pricing and mix, though increased plant shutdowns resulted in higher unabsorbed costs and lower margins. We are introducing new collections to expand our offering while eliminating less productive SKUs. Our sheet vinyl sales were higher as consumers pursued budget friendly flooring options and the multifamily channel strengthened. The first phase of our new West Coast LVT plant is operating at expected levels. We are preparing new technologies that will improve our cost and add differentiated features. We will install additional production lines and train personnel throughout this year. Our Premium Laminate sales were impacted by slowing retail traffic and customer inventory adjustment. Our laminate is gaining acceptance as an alternative waterproof product in all channels.

During the quarter, we offset inflation through pricing and mix, though our margins were impacted by lower absorption from temporary shutdowns as we reduced our inventory. We are beginning to see reductions in material inflation, which should help us recover our costs. Our new manufacturing line, which began last year, is operating at planned levels and will deliver our next generation of laminate features. With its industry-leading design and performance, our laminate business is in an excellent position to capitalize on the growing waterproof flooring category. Now I’ll return the call to Jeff for his closing remarks.

Jeff Lorberbaum: Thank you, Chris. The flooring industry is slowing due to higher interest rates, sustained inflation and low consumer confidence. The visibility of the depth and duration of this cycle is limited and conditions differ across the world. Mohawk has a strong record of managing these downturns by proactively executing the necessary actions. We’re adjusting our business for the current conditions by reducing production level, inventory, cost structures and capital expenditures. We’re implementing restructuring actions in both Flooring North America and Flooring Rest of the World to streamline operations, reduce SG&A and rationalize higher-cost assets. In the first quarter, we anticipate more pressure on pricing and mix due to the low industry volumes.

Our inventory costs remain elevated in most products due to the higher material and energy that we incurred in earlier periods. Additionally, we will not raise production as normal in the first quarter to prepare for future demand, increasing our unabsorbed costs. Our cost of energy have fallen and should benefit our global margins as our inventory turn. Our second quarter results should have sequentially stronger improvement with seasonally higher sales, increased production and lower material costs. Significantly lower cost of energy in Europe should enhance consumer spending, discretionary purchases and flooring demand. We’re refocusing our sales teams on the channels that are performing the best in the current environment. We’re introducing new innovative collections and merchandising as well as targeted promotions to improve sales.

Given these factors, we anticipate our first quarter EPS to be between $1.24 and $1.34, excluding restructuring and other charges. Around the world, the long-term demand for housing will require significant investments in new construction and remodeling. Mohawk is uniquely positioned with a comprehensive array of innovative products, industry-leading distribution and strength in all sales channels. We’re implementing structural changes to navigate the industry’s challenges while optimizing our future results. We anticipate coming out of this downturn in a stronger position as we benefit from our bolt-on acquisitions, enhanced market positions in Brazil and Mexico and strategic expansion of our high-growth product categories. Our balance sheet is well positioned to manage the current cycle and to drive future growth and profitability.

We’ll now be glad to take your questions.

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Operator: Our first question comes from Phil Ng from Jefferies. Please go ahead.

Phil Ng: Jeff, a quick question. In terms of your price/cost despite demand is actually weaker last year, you managed price/cost actually really well, but you did highlight you’re seeing a little more competition on pricing. But raws are falling as well and kind of flowed through a little more in 2Q. So how should we think about that price/cost equation looking in the current backdrop in 2023 and how that progresses through the year? Any pockets where we’re seeing a little more pricing competition in particular you want to flag?

Jeff Lorberbaum: So the energy and material costs are moving. The low amount of volume we’re seeing across the world, we’re seeing additional promotions and pieces. So far, it’s been controlled pieces across most of the marketplaces, and so we think that’s going to continue. In our first quarter, we said we expect more pressure on pricing and mix at the lowest part of the year. And then we think that we’re going to see some balancing of the cost and pricing better in the second quarter as the costs flow through inventory. We’ll have to see how the rest of the year goes. We’re going to have to continue to manage it and change as required.

James Brunk: And Phil, from a year-over-year perspective, we would expect that you still have the higher cost inventory layers that are going to come off in the first quarter. And with that renewed pressure on price and mix, I would expect the gap between price/mix and inflation to be greater in the first quarter than the fourth quarter, and that was included in our guidance.

Phil Ng: Got you. So it feels like your margins are going to bottom out in 1Q and get progressively better throughout the year. That’s really good color. And then help us think through productivity. You talked about you’re rolling out some restructuring efforts in North America and the Rest of World. But demand is a little weaker and you’re seeing more start-up costs with new capacity coming on. So give us a little color how to think about productivity for this year? And then how is the acceptance of some of these new capacity that’s coming on? I think you’re bringing on laminate, you got some LVT coming on as well. How’s the product acceptance so far?

Jeff Lorberbaum: The productivity piece is driven by multiple pieces as we slowdown — some of it we isolate — some of the costs we isolate into temporary shutdowns, but we don’t catch them all. So the productivity ends up a catch-all for all of those things that change as they go through. We think due to the volume — the volume differences between last year and this year, the productivity is going to be less in almost all the businesses. If you remember last year, we were coming out of COVID in the first half, we were building inventories and running most of the businesses at very high levels. This year, we’re going to be running at much lower levels and that’s what’s going to show up in the productivity decrease as we go through.

I think your other question was around the new investments. The new investments are all in areas that are growing and that we’ve had capacity limitations, and we think they’re preparing this for a growth cycle as we go to the — as we come out of this cycle at the other end, we’re putting in — the pieces are — so we’re adding laminate, which has been a growing category in the pieces as we go through. And it’s expanding because it is becoming more accepted as a waterproof option, which is a technology we’ve brought in as an alternative to LVT and it’s actually more resistant to scratches and more durable. We’re increasing our quartz countertop business, which our lines has been running full. We’ve been supplementing with imported products to support greater sales, and that should be starting up at the end of this year.

The investments in LVT In the western part of the country should support broader U.S. — broader local-based production of it and should give us advantages by having both East Coast and West Coast production. And then we can supplement or not, source products we’re doing with the same equipment. We are out of production in our ceramic slab businesses, which is based in Europe. it’s a growing category that’s taking the high-end marketplace as another alternative. And so we’re increasing it. And finally, we’ve just started up a new insulation plant in Europe. in the U.K. It puts us in a new region that we haven’t been in, and it’s starting up now and expanding its production. So we’ve chosen the parts of the business that have the growth — largest growth potential.

And we think as we go into ’24, it’s going to pay us a lot of benefit.

Phil Ng: Just a point of clarification on that productivity comment, Jeff. you said it’s a catch-all, less productivity versus last year, but on a year-over-year basis, is that still a good guy or you would expect it to be a negative headwind on a year-over-year basis?

James Brunk: On a year-over-year basis, when we get outside the first quarter, it should become more of a positive. Again, what you have is when you’re running the facilities, even if it’s not a complete shutdown, if you’re running slower, you do have inefficiencies both in labor and material that are going to come through the productivity line.

Phil Ng: Okay. Super. Thanks a lot for the color.

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

Susan Maklari: Thank you. Good morning.

Jeff Lorberbaum: Good morning, Susan.

Susan Maklari: My first question is, can you help us think about that sequential lift that you expect for the second quarter relative to what we normally see in sort of historical years? Should it be bigger than what we’ve otherwise seen, given some of the factors that you outlined? And then how do we think about the cadence through the year? Is it reasonable to think that first quarter should be the low point?

Jeff Lorberbaum: So going into the first quarter, residential sales are slowing and customers are minimizing the inventory. So we’re expecting them to keep their inventories low at this point. We are using high-cost inventory levels in the first quarter. Production volumes are lower than last year when the business benefited from a rebound we just talked about. There’s more pressure on pricing and mix due to the industry volume and competition trying to utilize facilities as we are. We see inflation impacting our labor costs around the world as we start raising the labor rates, and we’re actually putting some more investments in new products to reposition some of the pieces to optimize our volume this year. With this, we’re anticipating improving conditions as we go into the second quarter with lower costs.

To remind you, normally, margins expand as we go into the second quarter. We think that will expand a little more this year because of seasonally stronger volume and mix. In both our Flooring Rest of the World and North American segments, we’re expecting the margins to improve as the cost and pricing better align from this inventory flow-through. We believe that European demand will also improve. In Europe, their wages are increasing at a higher rate than they are in the United States. And then over the winter, their energy costs were so high that it really impacted their discretionary spending. So we see that changing as the new gas prices flow through the economy. With all that, we see the input being a tailwind. Production levels should increase from where they are in the second — first quarter to the second quarter.

We see restructuring should start benefiting us more as we go through. And then — so I guess last as we go through — and we go into the fall of the year, the fall comparison should be weaker and we think that the category could improve with inflation declining, wages being higher and potentially housing starts improving from the bottom.

Susan Maklari: Okay. That’s very helpful color, Jeff. And then my second question is how do you think about the longer-term trajectory for your Flooring North America margins? You obviously made up a lot of ground in the last couple of years relative to where we were before the pandemic. How much of that do you think you can hold on to as things normalize? And how should we be thinking about what that new rate of profitability could look like?

Jeff Lorberbaum: First, where we are today, you have those peak costs that we didn’t — we weren’t able to cover. So the cost peaked in the third quarter. It’s still flowing through our inventory. The pricing never got aligned with it as the inventories were falling off. So that impacted the margins. As we go through, the cost and prices should more align helping the margins. And then overtime, we expect them to continue increasing. But in this environment, there’s pressure on everything. So we’ll have to get through this year, and they should improve significantly as we go into next year.

James Brunk: Just to remind you, this cycle is a little bit different. It’s not typical like other cycles. The employment remains strong with wages increasing. Housing remains in short supply and low mortgages will kind of limit people moving as much, aging homes, higher home values should support future remodeling and strengthen the rebound or the pent-up demand. Commercial projects continue to be initiated, that’s holding at this point. And inflation is slowing and interest rates may actually be near peak.

Susan Maklari: Okay. So is it reasonable to assume then that you can sustainably operate at a higher level than you were at, say, in 2019 or so, but maybe still holding a bit below the peaks that we’ve seen earlier — in the earlier years?

Jeff Lorberbaum: I don’t have the numbers in my head to compare them like you’re asking. I think that in this year, what you have is all the lack of visibility, and we don’t exactly know what the volumes are going to be and the competition is going to be. So we’ll have to adjust as we go forward.

Susan Maklari: Okay. All right. Thank you, Jeff. Good luck.

Operator: Our next question comes from Eric Bosshard from Cleveland Research Company. Please go ahead.

Eric Bosshard: Thank you. A couple of things. First of all, you talked about the pressure on price/mix, which still look to be, I think, ahead of cost as was here in 4Q. But I’m curious, Jeff, in prior cycles, is it — this changes for — it sounds like it’s — there’s some pressure for a quarter or two and then it improves. How should we think about how price /mix behaves through sort of this phase of the cycle, not just 1Q, but throughout kind of 2023?

Jeff Lorberbaum: Price /mix, first of all, you have a channel change as you go through. As you go through the cycles, the highest -margin businesses we have, with the retail replacement business, remodeling businesses and those slowdown first. So those margins slow down, and that impacts the mix as we go through. So that’s having one part of it. The margins have been affected by these lower throughput through the plant as our cost increase and then we have to make conscious decisions over what we do with the infrastructure and how far you cut it back in order to make sure that you’re able to operate as the business improves on the other side of the pieces. So we’re managing those and keep changing the strategy based on what the volume levels do.

The other thing, I guess, going on this year is you have — recently, all the channel inventories were taken down. We think they should be bottomed out about now. We think the energy and inflation in Europe is going to be a big change in it as it flows through the economy over there. We see residential remodeling and home sales improving as we go through the year. And with that, we expect the mix to improve as the other categories improve.

Eric Bosshard: Okay. So the favorable price /mix, which was $270 million or thereabouts in the quarter, that number from what you’re saying, that doesn’t have to necessarily step down meaningfully in 2023. That number can still — I guess the question is, is there a trade down? Is there this change? Does that number deflate or contract meaningfully from the level that it’s at now? Or is that not how it works?

James Brunk: You are going to — Eric, and we’re seeing it right now, you’re going to see some trade down. Again, it depends if you’re looking sequentially versus year -over-year. But in the first quarter year -over-year, you do have some still favorable price /mix from all the pricing that was initiated in Q2, Q3 and Q4 of last year. And then you are going to get to a point where you start overlapping the initiatives from 2022. The point is, and especially in the first quarter with the lower volumes and until that starts to pick up, you’re going to continue to see pricing pressure in the marketplace.

Eric Bosshard: Okay. And then the second question just relates to the competitive environment. I think you talked about some restructuring of your Europe LVT business. Is transport costs, and specifically, I’m thinking ocean costs of bringing containers of LVT to the U.S. has changed. I’m curious how you’re seeing the U.S. competitive dynamic supply situation. I guess, narrowly in LVT, different now or ask differently, how the global supply of LVT is influencing the market and your expectations for 2023?

Chris Wellborn: Yes. I’ll comment on that. So specifically related to imports, the import prices have been declining, but also our production cost in the U.S. has been declining. As you look at the competitive situation, we have a broad offering for both Residential and Commercial. We participate in all price points of rigid and flexible LVT. Imports are declining and the U.S. material and energy costs are also falling. Our local costs are higher than imports, but we get a premium for better service versus supply chains that can be three months or longer. We’re improving our production and adding features like WetProtect that protects subfloors and antimicrobial to differentiate. And then lastly, our West Coast plant will — cost will continue to fall as that plant comes up. Operator Our next question comes from Truman Patterson from Wolfe Research. Please go ahead.

Truman Patterson: I’ll just ask a multipart question and keep mine to one. But following up on some of the prior questions, clearly, nat gas was a large headwind for Ceramics throughout 2022. It’s clearly nosedived here recently, both in the U.S. and Europe. I know you all have that high -cost inventory you need to work through. You all were hedged partially in Europe in the fourth quarter. But any chance nat gas, ceramics — any chance you can help us think through some of the potential cost tailwinds as we move through the year and we get through some of these items? And do you primarily give these cost tailwinds back through pricing, trying to stimulate demand? Or are there any offsets that you all think you might be able to maintain pricing and kind of recapture that price cost?

Chris Wellborn: Well, let’s talk about the cost first. So as the — as we get in the back half of the year, our costs should be more in line with our competitors. We should be pretty much equal.

Jeff Lorberbaum: The European comment.

Chris Wellborn: Yes. European and then there will be — we do think there’s going to be volume pressure in the market. But as those energy costs continue to come down and wages go up, we think demand could be higher in Europe going forward. So it just depends on how that works out.

Jeff Lorberbaum: And then around the world, the energy prices are continuing to come down everywhere, and it will impact the cost. We’re going to have to see what happens with the competitive environment, given the slowing conditions around the world.

Truman Patterson: Okay. Should I extrapolate that for North America, U.S. as well?

Jeff Lorberbaum: Correct.

Truman Patterson: All right. Thank you, all.

Jeff Lorberbaum: Thank you.

Operator: Our next question comes from Mike Dahl from RBC Capital Markets. Please go ahead.

Mike Dahl: Good morning. Thanks for taking my questions. Sorry to beat the dead horse here on the price /cost stuff, but I’ll ask one more. On the pricing side, I guess, correct me if I’m wrong, but some of the pricing last year, we were under the assumption, it was almost kind of like surcharge pricing that layered in pretty quickly in relation to some of the energy cost increases on both product and maybe on some of the logistics also. So I guess the question is, to what extent is it more kind of quantitative or mathematic in terms of how much pricing comes off as some of those costs come down and maybe those surcharges roll off?

Jeff Lorberbaum: You’re correct that we did in different markets on different products have some of it is temporary surcharges. It was both on product and on freight, and most of those surcharges have now gone away, and they don’t exist anymore at this point. And the majority of the increases though were put through by price increases in the marketplace, and we’re having to — we’ll just have to manage those relative to the competition to stay competitive with the world changes.

Mike Dahl: Okay. That’s helpful. And my second question, just in relation to the channel inventories and then your own production, where is your sense of where channel inventories are, obviously, just cover a rough range of products and geographies, so either kind of high level or by region, do you think you — are you back at normal levels? Are you below normal levels? I was just trying to gauge the risk of further destock here in part?

Jeff Lorberbaum: As a general statement, we think there was a significant amount taken out in the fourth quarter and the third quarter. And we believe in most markets, they should be close to the bottom. There’s some where the costs and prices and supply was a little tighter and longer. So there may be some in a few regional markets. But for the most case, we are assuming they’re close to the bottom at this point, but we’ll know after this quarter.

Mike Dahl: Got it. Thanks.

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

Stephen Kim: Yes. Thanks very much for all the info. I’m going to sort of follow up on that last question there regarding inventory. With respect to the plant shutdowns and your planned inventory reduction, I understand that market forces are driving some of this. But it also seems like there’s a bit of an opportunistic aspect, perhaps, where you’re shifting the timing of your annual production into periods with lower commodity cost. So in other words, what I’m curious about is, if commodity costs were not declining as they are, would you still take the same amount of shutdowns? Or are you planning to take a little bit more than you would otherwise do because of the trajectory of commodity costs? And then finally, can we get some guidance about where your inventories and dollars could go over the next couple of quarters?

Jeff Lorberbaum: So in the fourth quarter, we made conscious decisions to decrease the inventories in some of the businesses, given our forward view of the commodity prices. And so we took them down even knowing that our customers were also taking them down, which also hurt our margins in the quarter. And some of the businesses in Europe, we made a choice not to take them down. At the time we were looking at it, and we didn’t know whether there was going to be a spike in the energy costs and we actually left some of the inventories higher in anticipation of higher costs in the first quarter, which we are going to reverse out in the first quarter now that didn’t — it didn’t happen like we thought. So we actually — if we knew what would happen, we probably would have taken those down sooner as if. So we are making those decisions on a constant basis based on our future view of the dynamics of the business. I forgot the other part of your question.

James Brunk: So the other part, Stephen, in terms of our view of kind of our inventory plan for 2023, presently, we would expect the year to be kind of at year-end to be slightly below where we ended in 2022. Obviously, it really depends upon the demand conditions as we go through second quarter and the second half of the year and the pace of inflation.

Stephen Kim: Okay. So that’s a year -end comment. In terms of the trajectory here over the next couple of quarters, though, can you give us an idea of what we might expect, Jim?

James Brunk: I mean the goal is to try to keep the inventory levels and production very close to demand. So that was the principle — one of the principles behind not building the inventory as we normally do in Q1.

Stephen Kim: Second question relates to mix; not price per se, but mix. You’ve mentioned that you’ve seen trade down across your categories, reflecting pressure that the average consumer is feeling with their rising household expenses. And so basically, the consumer’s P&L, if you will, is driving negative mix. But on the other hand, certainly in the U.S., but in many other markets, I think you’ve seen homeowners balance sheet strengthen dramatically due to much higher home equity levels. And so my question is, do you expect this to show up eventually in favorable mix as folks tap into that home equity? And are you positioning your product assortments in any way to be able to capitalize on an eventual move to higher -end products or a richer mix, which is different from what you’re seeing like right now?

Jeff Lorberbaum: Yes, to your question, it’s really a question of timing. At this point, we see we’re towards the front end of it. I mean it started with the housing slowing down in the third quarter. So we’re seeing at the front end so we would be doing all that later in the year.

Chris Wellborn: We’re also — Stephen, I know in LVT and Ceramic like in Ceramic, we’ve got new collections with larger sizes and specialized shapes, all that are helping the mix. And we’re also doing some of that in LVT as well. So we are doing things to take advantage of a higher mix.

Stephen Kim: Perfect. Thanks very much, guys.

Operator: The next question comes from Keith Hughes from Truist Security. Please go ahead.

Keith Hughes: Thank you. Question, you talked about this a little bit earlier, but just some more clarification. This sequential rise into the second quarter, is that going to be felt in all three segments? And which one would you say would feel at the most?

Jeff Lorberbaum: The two ones that will feel at the most, as we said before, will be Flooring North America and Flooring Rest of the World as their costs better aligned with the pieces as you go through and then the Ceramic business has held up better because of the different mix it has. So it won’t have the same change in the other as the other two. So we think those two will be much more than the other ones for those reasons.

Keith Hughes: And one other question, just within that, will it be returning to normal production that’s the biggest risk? Or is it other — what would be the biggest kind of one, two factors that would cause a sequential?

James Brunk: Well, I’d say it’s a combination, really. And so you have seasonally higher demand, so that’s going to help me on the volume. My production increases. So then my plants just by the nature of it are going to run better. So I don’t have that unabsorbed expenses shutdowns. And then the last one would be the cost kind of align. So inflation is not as impactful is the hope as you go through Q2.

Keith Hughes: Okay. Thank you.

Operator: The next question comes from Michael Rehaut from JPMorgan. Please go ahead.

Unidentified Participant: Hi, guys. This is Andrew on for Mike. I guess I just wanted to head on in terms of multiyear acquisition strategy. Where are you seeing any opportunity in terms of products or geographies?

Jeff Lorberbaum: Let’s see. We just — we’re in the midst of concluding two ceramic acquisitions. We talked about in Brazil and Mexico. We think those are really good ones for us because we have positions in both marketplaces, and it will put us in either the first or second position in each marketplace. They are huge ceramic markets and the combination of the two businesses will enable us to have a complete offering from top to bottom in both marketplaces and the companies tend to be in different — focus on different areas of the business. In both markets, we tend to be a little higher in the product offerings. And so they fill in the lower parts of the market for us to help us get the biggest opportunities out of them. So we see both of them really helping us once we get the two businesses put together.

Other than that, usually, in this environment, you don’t do a lot of acquisitions when people’s margins are low. Unless they’re in real trouble, they tend not to want to sell given both their margins and the market multiple. So I wouldn’t assume that we’re going to do much until you get to the other side where you’re coming out and the multiples go up and the margin starts expanding.

Unidentfied Participant: Okay. Thank you for that.

Operator: The next question comes from John Lovallo from UBS. Please go ahead.

John Lovallo: Hey, guys. Thank you for putting me in here. The first question is on cash flow conversion this year, given similar CapEx levels and entering the year at sort of higher working capital levels. How are you guys thinking about free cash flow conversion?

James Brunk: So a couple of things to note there. In the second half of the year, we generated a little over $165 million coming into 2022, obviously, we’re behind on inventory, so we had to kind of build up inventory. So for 2023, our visibility is limited. We do expect cash flow to improve, but it’s worthy to note that we’re investing in growth categories and acquisitions to try to improve the long -term results.

John Lovallo: Got you. Okay. And then the second question is, it sounds like the Commercial business has held up really well. Are you seeing any signs of slowing in that business?

Jeff Lorberbaum: You start with the ABI Index, which I’m sure we’re all watching, it’s been under 50 for several months. So it looks like there’s less projects going to be — most of those projects tend to have at least a time before we get to them, a minimum of a year and some up to three years. So it takes a while for the projects that come through to know what’s going on. Some categories in Commercial are performing better than others, like hotels didn’t invest during the whole time. There’s still investments in hotels going on to update them and keep them and it’s performing the best. So — and it all depends on the economy. But again, it’s got a long tail to it.

John Lovallo: Got it. Thank you, guys.

Operator: Next question comes from Rafe Jadrosich from Bank of America. Please go ahead.

Rafe Jadrosich: Hi, there. It’s Rafe at BofA. Thanks for taking my question. I just wanted to follow up on a comment you made earlier in terms of the Europe natural gas input. I think you said that you saw costs would be more in line with competitors by year -end. I thought while raw material costs were going up, your competitors were hedged, so they had lower input costs. I would have thought as the kind of gas prices come down, and they’re hedged, you would actually have sort of a benefit there, lower gas prices. Is there a window where your input costs will be lower because they’re hedged and they don’t get the benefit from the falling raw material cost?

Jeff Lorberbaum: First is that the comment was around our European Ceramic business, not all our businesses. And so in European Ceramic, the cost of gas prior to this was about 15% of the manufacturing cost. It peaked somewhere over 40%. And what we’ve said was going into this thing that we have not hedged gas prices historically. It has given us an advantage by not doing it. But as you went through these things as gas prices went up by 8 times to 10 times over there, we’re competing against people that had hedged it at much lower prices. The comments were around this year as the gas prices have dropped substantially that we believe by the fall flowing through inventory, we should be on a competitive level with those companies that had hedged before this whole thing started.

Rafe Jadrosich: Got it. So because they’re still hedged, will they have higher gas prices at the end of the year?

Chris Wellborn: I think where they are hedged will be more like what the market will be, is the way to look at that.

Jeff Lorberbaum: We think their average hedging price will be similar because we’re assuming that they hedged more during — if you have a hedging policy that we’re assuming that their average hedge prices will be similar to where our purchase prices will be.

Rafe Jadrosich: Okay. That’s really helpful. And then just in terms of the planned CapEx, can you just break out how much of it is maintenance versus growth? Then within that growth component, like how much is Flooring categories versus some of the other growing lines like countertops? Thank you.

James Brunk: Well, the growth investments, I would say, are between $200 million and $250 million, depending on timing. Most of that would be in the Flooring area. Maintenance CapEx approximately is $250 million. And then the balance is on cost reductions, product innovation and acquisitions.

Rafe Jadrosich: Thank you. Very helpful.

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

Adam Baumgarten: Hey, everybody. Just a question on first quarter EPS given that’s roughly in line — expected to be in line with 4Q, should we expect from the segment level the performance to be similar as well?

James Brunk: Similar — explain your question a little bit more, please.

Adam Baumgarten: You said your EPS guidance is really the same in 1Q versus what you put up in 4Q. So just from a segment fundamentals and performance, should that look similar as well?

James Brunk: So I would say Flooring North America, given the market conditions and such remains slow and they — we do anticipate more pressure on pricing and mix with the higher cost inventory still being used. Production levels will still be low and labor inflation will increase. But given this, I still expect margins in Q1 should be slightly better and then strengthened in Q2 when the costs align and volume seasonally increases.

Adam Baumgarten: Got it. Thanks. And then just on the LVT piece, shutting down or exiting the business out of Europe, do you see — do you foresee a similar move in North America at some point? And also just on the European exit in flexible, are you able to repurpose that capacity for the rigid manufacturing?

Chris Wellborn: Yes. Let’s — just to isolate that one question, so in Europe, we’re replacing our residential flexible with rigid. We’ll continue to produce flexible for the commercial market, and then in the U.S., you won’t have that because we have a much larger commercial presence where we use our flexible LVT.

Adam Baumgarten: Okay. Got it. That’s helpful. Thanks.

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

Laura Champine: Good morning. Thanks for taking my question. In Flooring North America, are you holding share versus your competition?

Jeff Lorberbaum: We think that the carpet industry, we are in line with the industry.

Laura Champine: Got it. And is the issue there more that carpet is losing share versus other Flooring categories? And do you think that — if so, is that just a function of the mix shift towards Commercial? Or are there other factors still at play there?

Jeff Lorberbaum: I think it’s a few different pieces. One is you’re comparing to the fourth quarter, the prior year where we had really significant pent -up demand that the inventories were low, all the plants were running as much as we could get labor and material to run and you’re comparing that now to an environment and our customers’ inventories were low, and they were actually trying to build their inventories, which continued into the first half of the year. So you’re comparing that to an environment where the opposite is occurring. Our customers are lowering inventories, the environment is slower. And so that’s exacerbating the decrease, but it is still losing share to hard surface as it has been.

Laura Champine: Understood. Thank you.

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

Brian Biros: Hey. Good afternoon. It’s actually Brian Biros on for Kathryn. Thank you for taking my questions. It seems like after Q1, maybe starting in Q2 or even midyear, things are expected to ramp up from the current low levels going on now. What indicators do you guys look at to understand when and how much to ramp up production? There’s obviously just seasonality lift. But beyond that, is it strictly just orders coming in? Or are there other metrics you look at to kind of get a sense of how do we get ahead of this retail customer, the new resi activity that picks up to be ready for the ramp -up and not just reacting to it?

Jeff Lorberbaum: We act differently based on the capacity utilization. So in a slow marketplace, you have excess capacity and you can react to it so you don’t have to anticipate it more. Earlier in the call, we talked about in some period — we usually build inventory in the first quarter to cover the peaks in the rest of the year, which would be a typical year. So this year, we’re not acting the same way because of the capacity availability that we have.

Brian Biros: Okay. That’s helpful. And second question, I guess, is given the restructuring plans you guys have, adjustments of product, operating lines, plants, is there a way to think about kind of the new Mohawk capacity going forward here, a lot of moving pieces, especially since you’re also adding some products as well. But is there just a way to understand what the company is able to serve going forward now versus what it was previously? Maybe something like we took out 5% of capacity or across our footprint. Just any color on that kind of dynamic would be helpful.

Jeff Lorberbaum: I think that the — on the capacity side, what we’ve done is we’ve reduced some of the carpet less -efficient plants. We’re aligning the rug business with lower volumes in it. And we said we were taking out the — some capacity and flexible in Europe. So those are the decreases in the business. The increases are in the main growth categories, which we’ve been telling you about, and I can repeat them again or I think you have them already.

Brian Biros: We got them. Thank you. Okay. So that’s helpful. Thank you.

Operator: Our next question comes from Matthew Bouley from Barclays. Please go ahead.

Matthew Bouley: Good afternoon, everyone. Thanks for taking the questions. Another one on the Q1 earnings guide, just to make sure we got all this right. It sounds like you’re speaking to some additional kind of headwinds that might be worse sequentially. Price/cost, I heard you mentioned, obviously, reducing production and all that. You’re guiding to earnings flat sequentially, roughly, and historically, Q1 is below that of Q4. So I’m just curious what else we’re missing there? What might be a little bit better than you typically see seasonally? Thank you.

Jeff Lorberbaum: I don’t think that we’re anticipating Q1 being significantly better. We are trying to tighter manage our inventories given that our future view is weaker and that we don’t want to build inventory. We think that the commodity prices and energy prices will stay low. So we’re not trying to build the inventories in the first quarter.

James Brunk: Matt, sequentially, when you think about it, so the two benefits that you have sequentially is the lower cost Q4 to Q1 and then less shutdowns Q4 to Q1. And so those are being offset partially with — as we talked about, the price/mix, which is kind of all kind of leading you back to relatively flat quarter-to-quarter performance.

Matthew Bouley: Okay. That makes a lot of sense. That’s very helpful there. And then secondly, back on the pricing environment in European Ceramic. And just any thoughts kind of if you kind of educate us historically, how does the market kind of typically react there to reductions in input costs and you mentioned the competitive environment. Just I know it’s prognostication, but any thoughts from you guys on how you think the competitive environment will evolve, given the reduction in costs there? Thank you.

Chris Wellborn: I’ll give you sort of an overview. Our business is under pressure there with slow demand, customer inventory reductions and inflation. Our results in the quarter were impacted by energy prices from the third quarter and temporary shutdowns. The market is still being supported with energy subsidies. And we still are, at least in the first part of the year, disadvantaged because of the hedging. I think as that — as you go through the year, what we would hope to happen is that energy costs come down, that the consumer will be able to have a better situation with wages going up and energy costs going down. But I still think it will be a competitive situation in Italy for the short term.

Jeff Lorberbaum: Some of you don’t keep up with Europe, there were people that their energy costs were more than their mortgages. I mean, it’s a huge drag on the economy.

Matthew Bouley: Yes. Got it. All right. Thanks everyone.

Operator: Our next question comes from David MacGregor from Longbow Research. Please go ahead.

David MacGregor: Good morning, everyone. Jeff, just a question on the Commercial business here. How are you thinking about your competitive position in North American commercial flooring? And do you see sustainably better flooring fundamentals in this category and therefore, you invest more aggressively to gain share? Or do you attribute the relative strength you’re seeing in Commercial to just timing and the typical lag of the categories to start showing behind changes in Residential and therefore, you kind of go forward with what you have. Just curious on how you’re thinking longer term about capital allocation in the Commercial Flooring.

Jeff Lorberbaum: We’ve been supporting the Commercial business with both products and capacity to satisfy the demand that we think we have, and we haven’t been restricting it. Typically, in these cycles, though, as we talked about Commercial is the last thing to fall off, this is really an unusual cycle because you — typically all categories are in lower shape. In this thing, you have the hospitality that’s doing really well at the moment where other categories are doing really poorly, the airline business is doing really well. We provide airline carpets. I mean, this is a really unusual environment that we haven’t seen in prior cycles. We’re going to have to see how the whole thing works out, but we continue to invest in the Commercial business. We have strong relationships. We have a broad product offering, and we’ll continue to do so.

David MacGregor: Okay. If I could just ask a follow -up, really, just trying to calibrate here. Within your first quarter guidance, what do you assume for U.S. Residential for industry unit growth?

James Brunk: It depends if you’re looking year -over-year or sequentially. So sequentially, we would expect the volume to improve generically across the business from a sales volume perspective, but certainly, year -over-year, it’s going to be under pressure.

Jeff Lorberbaum: It will be significantly below last year.

James Brunk: Yes. Year-over-year going to be significantly below because remember, this time last year, we were still in a very hot market.

David MacGregor: Right. Yes, I think you discussed that previously on the call. I’m just trying to get some sense of what maybe quantitatively you’re looking for, so we can calibrate against the guidance.

James Brunk: I don’t really have a good number to give you just on specific on residential units.

David MacGregor: Okay. Thanks very much, gentlemen. Good luck.

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

Jeff Lorberbaum: Thank you very much for joining us. We are in a strong position to manage through this period. It’s going to be slower for the near term, and we’re continuing to invest to optimize the long -term results, and we think we’re in a very good position to improve our business as we come out. Thank you very much.