Mohawk Industries Aktie

Good morning, everyone, and welcome to the Mohawk Industries First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded.

At this time, I'd like to turn the floor over to Nick Manthey, Chief Financial Officer. Please go ahead.

Thanks, Jamie. Good morning, everyone, and welcome to Mohawk Industries quarterly investor conference call. Joining me today on the call are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Paul De Cock, President and Chief Operating Officer.

Today, we'll update you on the company's first quarter performance and provide guidance for the second quarter of 2026. I'd like to remind everyone that our press release and statements that we make during the 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 the call over to Jeff for his opening remarks.

Our performance for the first quarter was in line with our expectations despite a challenging environment. Our adjusted EPS was $1.90, up approximately 25% versus the prior year. Our results include benefits from productivity, restructuring and product mix, offset by inflation and volume. Last year was emptied by the system conversion and had 4 fewer days. Our net sales were approximately $2.7 billion, an increase of 8% as reported or decreased 2.6% on a constant basis. Across our regions, the commercial sector continue to outperform residential, new home construction remains soft and consumers continue to defer home purchases and remodeling projects due to economic uncertainty.

We're implementing productivity actions and executing our previously announced restructuring projects to enhance our results. During the quarter, we repurchased 607,000 shares of stock for $64 million as part of our current stock buyback authorization. Our strong balance sheet provides strategic and operational flexibility to take advantage of opportunities that arise. At the end of February, the conflict in the Middle East intensified increasing volatility in global energy markets. The full impact of the conflict is unpredictable given the disruption to the worldwide supply of oil and natural gas. Higher gasoline and diesel prices were the fastest and most visible impact of supply disruptions and are contributing to a more cautious consumer outlook. Energy prices as well as the cost of oil and natural gas derivatives are also increasing, which affects the cost of many of our products.

Depending on the duration of the conflict, the economic impact will vary across our markets, with increased inflation reducing consumer sentiment and discretionary spending. U.S. natural gas prices have been less impacted due to the significant domestic production, though oil prices in the U.S. have risen as they follow worldwide trends. In the U.S., 10-year treasury yields have increased, creating a corresponding rise in mortgage rates. The European continent will be more affected due to the dependence on oil and gas from the Middle East, and we have made forward purchases to limit our exposure. European governments are reviewing initiatives to lessen the impact on businesses and consumers such as cutting energy taxes, implementing fuel price caps and coordinating European gas storage. The energy markets will remain volatile until the global supply normalizes.

We're implementing price increases across many products and geographies and further pricing cases could be required. The impact of higher cost of raw materials will be greater in the second half of the year due to our flow-through of our inventory. We are continuing to launch new product collections with industry-leading designs and features to enhance our sales and margins. We're implementing operational strategies that we've used to navigate past disruptions which prioritize adaptability and cost control. We're maintaining flexibility to align with evolving demand, supply availability and volatile costs. We're focused on the controllable parts of our business, including sales initiatives inventory levels and discretionary spending and investments.

Now Nick will provide the details of our financial performance for the quarter.

Thanks, Jeff. Looking at our Q1 2026 financial results. Net sales for the quarter were $2.7 billion, up 8% as reported and a decrease of 2.6% on a constant basis. Our Global Ceramic segment delivered stronger mix and we lapped the impact of the order management system conversion in Flooring North America, which partially offset the slower market conditions across our markets. Gross margin was 23.5% as reported and 24.8% on an adjusted basis. This is up 70 basis points from prior year as the benefit of restructuring and productivity initiatives of $32 million and favorable FX of $20 million offset the increased input costs of $28 million.

SG&A expenses were 19.4% as reported and 19.3%, excluding charges, in line with prior year levels. That gave us an operating income as reported of $112 million or 4.1% of net sales. We had $38 million in nonrecurring charges primarily related to our restructuring actions initiated last year. Our adjusted operating income was $149 million or 5.5% of sales that's an increase of 70 basis points versus prior year. The benefits of lapping the prior year order management system conversion of $30 million and our restructuring and productivity initiatives of $36 million were partially offset by increased input costs of $38 million. Lower volumes given the weaker market conditions were offset by extra days in the quarter.

Interest expense was $2 million, a decrease compared to prior year due to the reduction in short-term debt and the benefit of increased interest income. Our adjusted tax rate was 19.4%, and we are forecasting the full year tax rate for 2026 to be between 19% and 20%. That gave us an earnings per share on both a reported and adjusted basis of $1.90.

Turning to the segments. Global Ceramic had net sales just under $1.1 billion. That's a 10.4% increase as reported and basically flat on a constant basis. The ceramic business delivered positive price/mix, given strength in the commercial channel and continued success in the countertop business, offset by lower volumes in the residential channel. Adjusted operating income was $55 million or 5% of sales -- that's an improvement of 20 basis points compared to the prior year as the combination of productivity initiatives of $21 million and positive price/mix of $13 million were only partially offset by an increase in input costs of $30 million.

Flooring North America net sales were $880 million. That's a 2% increase as reported or 4.1% decrease on a constant basis as sales were impacted by slower conditions in both new residential construction and residential remodeling. We had an adjusted operating income of $35 million or 4% of sales. That's an improvement of 100 basis points compared to prior year, as we lap the impact of the order management system conversion of $30 million, which was partially offset by increased input costs of $13 million and the net impact of lower volumes. In Floor and Western World, we had sales of $751 million as reported. That's a 12.2% increase or a decrease of 4.4% on a constant basis. With the decrease in volumes in the residential remodeling market impacting our flooring categories, partially offset by volume growth in both our panels and insulation businesses. Adjusted operating income was $74 million or 9.8% of sales. That's an improvement of 70 basis points compared to prior year as the combination of productivity gains and lower input costs of $14 million were more than enough to offset negative price/mix.

Corporate expenses and eliminations were $14 million in the quarter, and we estimate the full year 2026 expenses to be between $52 million and $55 million.

And now looking at the balance sheet. Cash and cash equivalents ended the quarter at $872 million, with free cash flow of $8 million in the quarter, which is in line with seasonal trends. Inventories were just shy of $2.7 billion up less than 1% compared to prior quarter due to inflation. Property, Plant & Equipment ended the quarter at just under $4.7 billion. CapEx spending in the quarter was $102 million, and we plan to invest approximately $480 million in 2026, focused on cost reduction initiatives, product innovation and maintenance.

The balance sheet remains in a very strong position with net debt of $1.2 billion and a net debt-to-EBITDA ratio of 0.9. In summary, our strong balance sheet provides us flexibility to navigate a challenging macro environment, while staying positioned to pursue opportunities as the market recovers.

Now Paul will review our Q1 operational performance.

Thank you, Nick. Our Global Ceramic segment delivered improved sales and profitability year-over-year. All regions are responding to their local markets with new styles and sizes that are improving our average price and distribution in both residential and commercial. Our premium collections increased our mix with advanced technologies that enhance the visuals. Across all regions, productivity improvements and restructuring actions or improving our results. In the U.S., we benefited from stronger commercial sales and increased retail partnerships, which offset ongoing weakness in the builder channel. In March, we introduced our spring collection, which emphasizes higher end the corrective volatile and large polished floor tile to enhance our mix. We announced price increases on ceramic Dagan cars countertops to offset the higher material and transportation costs.

We continue to expand our countertop business with quartz volume growing as we ramp up our new production and introduce higher-value products. The U.S. International Trade Commission recently ruled that imported cars countertops from around the world are harming domestic production and the commission is determining tariffs and quotas to safeguard the industry. In our European ceramic business, we delivered solid sales and margin improvement with investments in sales personnel, showrooms and new collections. In the region, we have greater participation in the commercial channels, which is outperforming the residential markets. The industry has announced limited price increases at this point given the market softness. We have purchased a portion of our natural gas requirements this year, which will reduce the impact of higher energy prices.

Our Latin American ceramic businesses have been less impacted by the conflict. We are raising prices in Mexico and Brazil in response to increasing natural gas and transportation costs. In Mexico, our volume improved as we expanded distribution, improved service times and grew sales with large-sized polished porcelain collections. In Brazil, our new product introductions are improving our mix with growth in the higher value porcelain category. U.S. reciprocal tariffs on Brazil were significantly reduced, which will improve our export volumes to the United States. Brazil's economy remains sluggish and the Central Bank is now cutting interest rates to stimulate growth.

Our Flooring Rest of the World segment result were driven by productivity, cost improvements and additional days in the period. As the new year began, the European market was showing some improvement after multiple central bank rate cuts and lower inflation. With the war in Iran, consumer confidence declined as fuel and energy costs increased. We are implementing price increases to offset the higher costs impacting our business. In the quarter, our laminate sales benefited from growing retail partnerships and the success of our new collections, which combine elevated style and performance. We updated our LVT designs added offerings at new price points and expanded our retail distribution.

Our sheet vinyl sales to the Middle East were disrupted and alternative transport options are improving shipments. Our panels business improved sales and margins with our premium products, and we implemented price increases. We have since announced additional price increases to cover further inflation. Our new MDF recycling plant is expanding production and will further benefit our costs. Our insulation business performed well and improved our cost by reengineering our products. We're growing our installation sales in Germany and Eastern Europe to support the start-up of our manufacturing facility in Poland.

Our businesses in Australia and New Zealand improved results with favorable pricing mix and cost. Our new carpet collections, national promotions and increased participation in the new construction channel enhanced our performance. Our Flooring North America segment remained slow during the quarter, given lower remodeling and new construction activity and inventory reductions in the channel. Our results were positively impacted by restructuring, system improvements and additional days in the period, partially offset by lower volume and inflation. Commercial continued to outperform residential and we are improving our position in retail and new construction channels. During the quarter, we announced pricing actions in response to material, energy and transportation increases.

Mortgage rates rose almost 0.5 point in March, leading to slower new home sales and declining builder sentiment. While new home sales softened, we have increased our presence in the top national and regional builders. We improved our hard surface mix with our best-in-class laminate hybrid and LVT collections. Our proprietary accessories coordinate with our hard surface offering, increasing complementary sales. Our new corporate introductions are being well received with a focus on our premium polyester and SmartStrand collections. In February, we launched the industry's first carpet collections certified by the Asthma and Allergy Foundation to significantly reduce household allergens using natural probiotics. Our commercial order backlog has seasonally improved with our carpet tile collections outperforming our recently acquired rubber flooring products are being embraced by architecture designers and are creating additional specification opportunities for our other commercial products.

And I will now return the call to Jeff.

One month into the second quarter, we continue to adapt our business to changes caused by the Middle East conflict. Thus far, we've announced price increases across much of our portfolio due to inflation, and our order backlog has continued to grow. Across our regions, the commercial channel remains solid, while residential remodeling and new home construction could be impacted by lower consumer confidence. Our high-end collections are performing better in the market and our new products are enhancing our mix. We're maximizing our flexibility to react to changes in our supply chain, operating costs and market demand.

Presently, we're containing cost reengineering products and limiting capital expenditures. We'll not see the full impact of our pricing actions and rising costs until the third quarter, the degree to which the Middle East conflict will impact our markets depends on the duration of the disruptions and the inflationary pressure. Given these factors and 1 less shipping day in the second quarter, we expect our adjusted EPS to be between $2.50 and $2.60 excluding restructuring or other onetime charges.

We are managing our aspects of the business we can control and responding to market changes as they arise. In the past, Mohawk has adapted the cyclical changes as well as dramatic market disruptions while enhancing our business for the long term. Increased new home construction is necessary to satisfy growing household formations, and we expect deferred remodeling of aging housing stock across our regions will significantly increase flooring demand. As we navigate the current conditions, we're prepared to capitalize on the rebound in our industry that lies ahead. We'll now be glad to take your questions.

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

Jeff, I appreciate there's a lot of uncertainty in the market right now. At times in the past, you've given a range of outcomes for your business. Can you talk about what that range of outcomes looks like here as we move through '26 and into early next year, what drives the high end versus the low end? And how are you running your business today to account for the uncertainty and prepare for either in the best spectrum?

There's a lot of uncertainty in the marketplace, and we're preparing for multiple options and staying flexible. If we look at the best case as we think forward, the supply to the Middle East could open up in the near-term and could return the supplies to normal over the next 6 months. This would remove the economic uncertainty and would improve the category in the flooring industry in the second half.

We would expect the inflationary pressures to remain tough throughout the year. The alternative view is that the disruption in the Middle East stays for a significant period of time. The inflation continues to increase, and it could result in a pullback by both consumers and businesses. In this case, we have alternative plans to adjust our business strategy to manage through at lower rates. Our strategy is to remain flexible and to adapt to the changes that occur. As a reminder, most flooring projects being initiated today are really to meet the changing needs because they've been down since '22 and should limit some of the downside if it gets worse, we expect a significant cover given these 4 years of postponed flooring purchases.

Okay. That was very helpful. And then a second question, perhaps related to those comments last quarter, you talked about expecting both sales and adjusted earnings to be up on a year-over-year basis in 2026. -- just given all the macro uncertainty, should we still think that is a good base case for you guys to be able to grow those sales in adjusted earnings this year?

On February, we had expected the category to improve -- so we're really focused on maximizing the opportunities this year with the war interrupting things, the environment has really changed and we're focused on managing the inflation impact on our margins. At this point as we just went through the potential impacts are really unpredictable and is sorry to tell where it's going to end up. We'll have to see how the conditions evolve.

Our next question comes from John Lovallo from UBS.

The first 1 is, can you provide some additional color on just maybe the magnitude of the price increases across regions and some of the key products? And what type of realization are you expecting given some of the challenges from a volume standpoint in the market?

Well the Middle East conflict has really dramatically increased our material, energy and transportation costs across all the different product categories. We're seeing some differences in each region and product categories given the different dynamics and as you'd expect, Europe is more effective given that the use of the energy from the Middle East. Some of our products are also we deliver are delivered -- so we have to increase the prices to cover the freight cost as well. We've announced increases across the businesses generally in the mid- to high single digits with significant variations by both product and geography. And just to note, the imported products that we and the industry have really long supply chains and the price increases due to that will lag some of the others.

Got it. And then maybe just to push a little bit more on this, if I can. Let's just say that things stay as they are today, do you believe that you have enough pricing in the market to offset -- excuse me, the current level of inflation? Or would additional pricing be needed just to offset what we know today?

Yes, John, thanks. I think if you look at Q1, our price mix and productivity offset the impact of inflation, we expect similar dynamics -- as Jeff outlined, we announced some more price increases in response to the inflation. And we'll really see the full impact of both the inflation and the pricing in the second half and we will adjust as necessary as the environment evolves.

Our next question comes from Susan Maklari from Goldman Sachs.

My first question is around the benefits of the new products. Can you talk about how the momentum you're seeing there is helping you to enhance the mix and incrementally perhaps offset some of that inflationary pressure that you're seeing? And do you also think that you're continuing to gain share with these new products?

In each of the different businesses, the new product introductions, there's a significant portion of them that are higher-value products with more differentiation and command higher prices in the marketplace. With that, each of the different businesses is introducing unique products with different features and benefits. Ceramic is driven a lot by technologies of different sizes as well as different visuals with different decorating technologies to be able to create them.

On the other side, we're introducing LVT collections with all the latest technologies and multiple alternatives for PVC in the marketplace with better performance, better scratch resistance and other characteristics. The carpet categories we're introducing premium products in polyester and the anti-allergen carpets, which have never been done, which is a concern by many consumers. And in each of the categories, I could go on with you, there's different products in each 1 to provide reasons for the consumers to trade up and spend more money.

Okay. And then turning to the margins done a lot in terms of cost cutting and you're realizing some nice productivity across the business despite the headwinds. Can you talk about the ability to continue to see further productivity? And then any thoughts on how we should think about second quarter margins across the 3 segments?

Yes, Susan. So I think on the productivity, we generated over $200 million of productivity and restructuring savings last year. This year, we have another $50 million to $60 million of restructuring savings that we should realize. And then in addition to that, over the last few years, we've had additional productivity ranging from $80 million to $100 million -- we'll continue to evaluate different ways to rationalize our cost structure as we go forward and the environment changes. I think you asked about Q2 we're really assuming the present demand trends continue through the second quarter, and there's somewhat of a limited impact from the conflict -- the market volumes have been declining, and we've seen oil and gas prices increase, which will begin to impact our costs in Q2. We do expect price and mix will improve and help address that higher inflation and then back to your original point, productivity and restructuring, we'll continue to lower our costs similar to Q1.

Okay. So is it reasonable to assume that you see a fairly normal seasonal sequential lift in the margins?

Yes. Typically, Q2 is our strongest quarter of the year. So going from Q1 to Q2, that's what you would expect.

Our next question comes from Adam Baumgarten from Vertical Research.

Just a question on input cost headwinds. Can you maybe size as it stands today, what you're thinking about for the back half as you said, you're going to kind of see the peak levels at that time frame?

Yes. I think we're seeing inflation across the different materials and energy and transportation. We're not going to quantify a precise impact given it's changing pretty much daily. And really, as you said, in terms of cadence, the impact will begin in Q2 and ramp up into Q3.

If you look at each of the different product categories, they're all driven by different things. So you have our carpet, LVT and installation that are oil-based and energy intensive. So the materials are being driven by the changes in gas and oil and the materials as well. In the ceramic business, it is really heavily caused by natural gas and transportation costs and the transportation costs are both for raw materials as well as for shipping our products. And the other businesses are wood based, which is laminate, wood and panels, they have significant chemical costs in them to put them all together as well as energy and transportation costs for those.

We said before, just to remind you that we're assuming -- I'm assuming the inflation in Europe is higher, and we purchased a portion of the natural gas ahead to limit the volatility -- we do see that U.S. and Mexico have more stable natural gas prices and are less affected by it. And we've announced price increases to cover all this again as we go through it.

Okay. Great. That's helpful. And then just -- I believe you guys and maybe your competitors had some price increases out on certain products earlier in April, and we've been about a month. Just curious how those are going as it advances today.

Yes, that's correct. We've recently announced more price increases of mid- to high single digits. And with this level of inflation, the industry must pass them through.

In the marketplace, I mean all the prices are going up. The market seems to be understanding it, and we think we're going to have to push them through because we need it. And it's possible given what's going on with the energy markets, we could need more.

Our next question comes from Stephen Kim from Evercore.

I think I heard you say in Flooring Rest of World that inputs were a positive, even though I think for the company as a whole, it was a headwind of, I think you said $38 million. So just trying to understand, can you give us some context around that -- and I imagine you're anticipating that will probably flip negative again based on your comments, but could you just provide some context around the inputs in Flooring Rest of World.

Yes, Steve. We did see some positivity in Q1 on a year-over-year basis. And you're right, we're seeing -- given the conflict, we're seeing the natural gas and oil prices go up in Europe. And so we would expect that inflation to begin in Q2 and ramp up in the back half.

Okay. And okay. That's helpful. Secondly, and maybe a little more broadly, I want to touch on the innovation comments that you made. There was a comment in your press release about reengineering products, and I wanted to get some understanding of what that meant like are there certain products that you particularly want to call out?

And then maybe at a higher level, we don't -- there's a lot about the wars, the lingering impact of the word that we don't know. But the 1 thing we do know is that it's put a pause on shipments and yet innovation is continuing, I assume, uninterrupted. And so what I'm curious is do you actually have a situation where that delay, this pause, if you will, in actually production and shipping could actually be a positive for you as you continue to work on innovation and R&D. Is this something that could actually lead to a competitive advantage for you as you develop new products such that when the conflict ends when consumer confidence improves, you could actually capitalize on the R&D that was done during, let's say, a more quiet period. Is that a reasonable way of thinking about it? Or is that not?

It's a continuous process. And when you bring new products to market, it depends on which market it takes anywhere from 9 months to 1.5 years to put them into the marketplace and then to mature over time. So it's not an immediate impact to get them pushed through the marketplace as normal is it. So I mean the other part is just the big piece is that the industry and categories started going down in '22. It started with consumers pushing out things, housing sales going down around the world and there's a huge kind of demand and need for people in housing. The housing stock continues to get older and when the more confidence comes back, we're expecting many years of catch-up from what hasn't been spent the last 3 or 4.

And the role of new products in that and particularly, I'm thinking in areas like the hybrid products in North America, for example. I'm curious as to whether or not you think that, let's say, that category will be more -- a little more settled and allow you to scale up production better than if, let's say, the consumer response had occurred last year, for example. Is that a reasonable way of thinking about it?

I don't think there's going to be that much difference relative to the new products because we're going to have -- we have the capacity to support whatever is needed in the marketplace and react to it as we go through. So I think what the bigger impact is helping us increase the margins as the business increases and you get leverage and all the fixed costs over the business as it occurs.

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

Just to start, can you give an update on the Russia business, just like how big it is and then how it's been performing.

We don't break it out in that detail, but the Russian business has been performing well. There's been no impacts on the business and how we operate it. We continue to generate cash in the business. The business has slowed down with the general economy over there, and we're adapting to it. We have a leadership position in the category and we're complying with all the regulations.

Okay. That's helpful. And then I think last quarter, you gave a little bit of color like what you're expecting full year for inflation. And obviously, it's like the environment is moving around a lot. Is there any way to sort of quantify the level of inflation in the first half relative to what you're expecting in the second half?

Yes, Rafe, the inflation will really begin to increase in Q2 and ramp up into the second half. Our pricing and other actions are intended to pass through those costs. As Jeff outlined, it really varies by product and region and we will adjust our pricing as the levels of inflation change.

Just asking click another way. Just the first half, do you have an aggregate like what's the inflation, I guess, embedded in the first half?

Yes. I mean we're not going to break it out in that detail, but we do have inflation in the first half of the year, just given the different aspects of our input costs.

Our next question comes from Phil Ng from Jefferies.

I think it's more of a recent practice, but any color on how much you buy ahead in Europe on the gas side of things? And were able to lock in some of that price before the war. And then, Jeff, I think in 2022, some of your competitors in Italy had some issues on the gas side of things in Italy is the big imported LNG. Are any of your competitors having trouble sourcing energy? Are they hedged? I was a little surprised on the comment that pricing in Europe for ceramics was a bit more muted.

Yes, we are -- we did buy gas before it went up. We continue to buy gas in the period, and we continue to make decisions of what to buy on a going-forward basis to reduce the volatility of the European gas prices. We'll have to see what happens in the marketplace with the inventories and the gas prices and the volatility if the gas keeps going up, the industry will have to respond to as we go through. There are other areas around the world like India where they don't have enough natural gas that cut back the industry and the ceramic production, we believe is off almost by 80% because they don't have the gas to do it, that should also create opportunities as we go around.

Okay. That's helpful. On the North American carpet, I believe you and your biggest competitor have a large concentration in share there's a bunch of the smaller guys. Can you give us some perspective, how does the cost curve look for Carp in the U.S. between the 2 of you guys? And does that drop off pretty hard -- and just given where raws are kind of shaping up in the back half, if you don't see much traction, I mean, are Sunday smaller guys like cash flow negative, like operating and loss? And how would you guys kind of stack up in that situation as well?

Yes. Thank you for the question. The market is softer in carpet in general. -- remodeling and new construction sales have slowed, and we've announced the price increases to cover the inflation. We're introducing the new products to also improve our mix and we're taking further actions to cut our costs. And carpet volumes, we expect should improve as the market recovers.

There has been some limited capacity taken out in the industry by other than others. -- and there have been some smaller ones to go out, but not enough to change anything.

Our next question comes from Sam Reid from Wells Fargo.

I just wanted to circle back to the prepared remarks. I heard a comment about your order backlog growing. I'm just curious is that restricted to any particular end markets or categories we just love some additional context there. And then I also heard a comment about some of your channel partners reducing inventories. So perhaps 2 things that might be a little diametrically opposed there, just want to flush those out.

Lance, Well, first, the -- as we came into the new year, the expectations for way in the entire industry was greater than they've turned out with the war. So as we came into the year, there were channels that started lowering some of their inventories as we started into the year. The backlog, as we've gone through what we've said is the trends of our business from March to April haven't changed. The incoming orders are similar to those. The backlog has actually increased in April. And so we don't see any dramatic change in it.

Now on the other side, when you have price increases like we're having. There is some pull forward of it, but we don't have enough view into the inventories of our customers to know how much that is.

That's helpful. And maybe switching gears. It's great to hear the commercial end market strength. Maybe just restricting the question to the U.S. In the past, you've called out institutions and hospitality as areas where you've been growing. Just curious what's the latest on commercial end markets and where are the areas where you're seeing the most strength?

Yes. So around the world, we see the commercial channel continuing to outperform residential. And so the segments that are performing better would be the hospitality segment, Education segment and also health care and government are doing well. And so to increase specifications, we are expanding our showrooms, product features and specialized sales forces to go after those segments.

Our next question comes from Collin Verron from Deutsche Bank.

I just wanted to follow up there on the April backlog building. Is that across the portfolio? Or are you seeing pockets of weakness and strength just given what's going on in the Middle East. I thought it sounded like there was probably a little bit of caution so maybe some downside volume trends into April, but it sounds like they're building. I guess just any clarification there would be helpful.

It's generally across all the businesses. The backlogs are generally higher than they were a month or so ago. And again, we're having difficulty separating the ongoing business trends from inventory changes in the customers and we're not going to be able to know that for a while.

Okay. That's helpful. And then just following up on the natural gas, is there any way to help us understand how much of the gas you have already hedged for this year versus how much you would need to buy just a service sort of production levels for the remainder of the year?

It's different by business. It's different by country. In some countries, you can't do it that the country purchase it and the price is the same in other countries we can purchase a head. So it's not as simplistic and answer as you'd like to have.

And our next question comes from Mike Dahl from RBC.

This is Mike, just a follow-up on the near-term demand comments. What are you guys specifically assuming in the 2Q guide in terms of demand trends? It sounds like -- is it more of the same from what you've seen in April? And then on that order backlog comment and the sequential increase, is there any way you could help frame that on a year-over-year basis?

Yes. Thanks, Mike. So again, we're really assuming that the present demand trends continue through the second quarter, and there's a limited impact from the conflict market volumes are declining now for a little while. And so we don't expect any big change in Q2. So at this point, we haven't seen a decrease in the sales and order trends is it. And we're going to have the impact of the increase in prices as we go through starting the second quarter and ramping up in the third quarter. And we just have to see how things evolve. The core question, which we all have to answer is what's going to happen to the consumer confidence and spending patterns given the inflation that's coming through the marketplace and how is the consumer going to react. We're all going to get to find out together.

Right. Fair enough. And I guess just on that, the -- from all the pricing that you've announced, are there regions or products where you can kind of rank order where you think the most pricing power versus the lease or if it's easier, just by segment, when we think about modeling the pricing tailwind?

I'm not sure there's a dramatic difference in any of them. The biggest differences would be the amount of inflation based on how big the cost increases impact each product category. And then it may sound different, the ones with the highest ones may be the easiest because the industry has to force through more is that on the other side, as we said earlier, the imported products with loan backlog was long supply chains, those product categories it's going to take a while before the chemical costs flow through it, but they're going to flow through it.

Our next question comes from Michael Rehaut from JPMorgan.

First question, I just wanted to circle back to the price increases relative to the cost inflation that you expect to see in the back half. Just wanted to be sure of 2 things. First, when you talk about the cost increases, it's the ones that you've already announced in April, mid- to high single digits, if that's really -- at this point, what we're talking about.

And second, as you see the cost inflation today is the -- are the price increases sufficient to offset the back half cost inflation.

Yes, Mike, I think, again, our pricing that we've announced, along with other cost actions are intended to offset the higher costs. We have announced mid- to high single digits across most of our categories. And that as inflation is really changing daily and weekly, we will adjust and adapt as we go through the second half of the year, but our intent is to pass them through.

As possible, we'll have to announce additional price increases if the things keep inflating.

Right, right. Okay. And I guess, the second question just on mix. If you're seeing any green shoots of mix, I'm really thinking about North America here, ceramic and North America flooring, how do you characterize the mix trends in residential? Have they improved at all? And could this be any help at all as well in the back half as you combat some other margin pressures.

Let me try to frame it. the consumers today, the higher-end consumer has more money and it's spending more. So that's happening on 1 side. On the other side, the guys in the middle are either postponing or trading down, and there is huge pressure in the builder market to put in low-cost products in order to keep the price of the home. So you have both things going at the same time. I think that the people with money, we'll continue to spend. We talk to some of our retailers, they say, some of them have the traffic slower, but the people coming in are spending more money. So we're going to have to see how the whole thing evolves. A lot of it is really around consumer confidence and how they react to all this stuff. We could show you some help from some positive comments out of our leadership.

Our next question comes from Keith Hughes from Truist.

Last time we saw this kind of inflation a couple of years ago during Covid saw some pretty significant debt on mix. Is there anything that's changed in the industry? Any reason we wouldn't feel at least some of that pressure is a pretty significant price increases you're talking about.

It's possible that we could see some declining mix in the piece, but we're raising all the product categories to cover it, but it's not abnormal that some of the customers trade down as given the -- as I said before, the higher-end customers have money. So it's not going to affect them. So the higher end of the business has been doing better. But it is possible there will be some mix decline as people try to maintain budgets.

Okay. And we talked a lot about price increases and cost increases on this call. is carpet where you're seeing the biggest inflation coming right now just based on the fibers that you use.

No. We see inflation across the board in all the different categories. And we have all the chemical input costs going up with similar levels. And as that filters through, we'll have to take up the prices. And then in Europe, we see higher increases, like we said, the impact of energy in Europe is much more significant. And so in some of our product categories, we see much higher impact than on the flooring side, and we are acting appropriately.

So if I had to pick 1 that was highest. We have in Europe a polyurethane insulation business and the chemical is a large part of it, and there are some shortages in the marketplace -- so I mean we're putting through really significant increases in the category along with the competitors in the marketplace.

Our next question comes from Matthew Bouley from Barclays.

You have Nikki on for Matt today. So first off, we've seen industry peers announce price increases over the past few months. But as they too see some degree of incremental cost inflation, have you seen a continuation in disciplined pricing across the industry? Or is there evidence of share gain coming at the expense of price, either for Mohawk or competitors across LVT, carpet and ceramic.

The increases are flowing through the marketplace. It takes a while to go through. We will not see the full impact of them for another few weeks or even more. So we'll have to see. But so far, we're seeing more discipline than normal given the amount of the increases, everybody needs more to cover the costs.

Okay. That's helpful. And then second, I wanted to talk a little bit more about the setup in Europe. So you mentioned Europe has understandably become -- it's more impacted following the Middle East complex. Any color on the trends you guys are seeing since last quarter, specifically are consumers deferring projects? Or is it more a function of mix down?

The market was showing some improvements in January following the multiple rate cuts that the European Central Bank had executed -- but after the start of the word, consumer confidence declined and so that reduced the discretionary spend in the market. As we discussed, energy prices are higher in Europe, they're causing growth, greater inflation, and we'll have to push up the prices more but consumers have record savings and mortgage rates are much lower in Europe, and that should support growth as the confidence come back.

Our next question comes from Brian Biros from TRG.

I guess how quickly -- can you pass on price in today's market relative to previous price increases? Inflation pressures are well known, but the demand side isn't really there. So curious how those conversations go and kind of just how quickly that can be reflected in today's market once you announce an increase?

The entire world knows this is going on. Our customers know what's going on. Our competitors have the same pressures we do -- so the marketplace understands it has to happen. And in some cases, it may feel a little easier up to this point or not, but we're not through fully implementing it. On the other side, there is a concern that there's more to come at. And so all of those things are affecting the way the industry at.

And then margins expanded in Q1. I think that might be the first time in maybe 5 or 6 quarters here. So it's nice to see some level of expansion even after all the restructuring efforts and that was on lower volumes still -- so it feels like there's still going to be pressures for the rest of the year. But do you guys look at Q1 as some type of indicator of kind of what financials you can put up when things start to turn. I'm kind of putting that in context would be helpful if you're thinking about Mohawk beyond the next few quarters?

Yes. I think Q1, the market conditions were still very pressured. And so we think that looking forward, in the near term, our margin will depend on how the conflict evolves, we'll have the inflation, and we're taking price to mitigate it. As Jeff mentioned, consumer confidence could be lower and could impact volumes, but we're really focused on our productivity and restructuring efforts to lower our costs. And we do believe that over the long term, there is a potential for margins to grow from here.

As we started earlier, we talked about potential good outcomes and bad outcomes either 1 is still possible, and we have to be prepared to adapt to either one, we're hoping for the best.

Our next question comes from David MacGregor from Longbow Research.

I guess I wanted to focus on the commercial business for a moment, and maybe it's a strategic question, Jeff. But just given the relative resilience of the commercial business as well as maybe a different competitive structure and more opportunities for growth in that market segment. Have you considered allocating capital to the expansion of that side of your business and bringing the residential commercial mix more into balance?

The commercial business is much smaller than the residential business. The opportunities are much less. So achieving at the same market share as the commercial business is dramatically smaller than the other. With that, we continue to invest more money in product innovation in the commercial market it's easier to sell and promote features and benefits that are differentiated. So we continue to invest to create differentiated offerings that we can specify in the marketplace -- we're investing in more showrooms. We're investing in our sales organization to create more specifications. So we agree with you that it's a good place to be.

I guess I was sort of asking the question more from an M&A standpoint.

Yes. From M&A, we would consider the right commercial businesses that fit with ours that we think we can add value to and their opportunities should arise over time in both the U.S. markets as well as the world markets.

Got it. Okay. Second question is just the obligatory tariff expense question, I guess, a lot of noise and moving parts on this, but what's your current expectation for 2026 gross tariff expense prior to mitigating actions?

Yes. The tariffs were reduced from a few months ago, but really with the inflation occurring because of the conflict, the net effect is our costs are going to increase and that's why we're taking the pricing adjustments to mitigate the higher costs.

Okay. But you haven't quantified that for -- the Street?

No, I think the tariff environment is changing. And so we'll see how it evolves.

And with that, ladies and gentlemen, we'll be concluding today's question-and-answer session. I'd like to turn the conference call back over to Jeff Lorberbaum for any closing remarks.

We've been -- we've managed global turmoil many times in our history, and it's always followed by an industry recovery, and we expect multiple years of above growth trend when it happens this time. As that occurs in our industry, the pricing and margins increased, our mix improves with people buying higher-value products, and we have significant leverage off of our cost structures and all the actions we've taken over the past few years.

We appreciate you taking the time and being with us today. Thank you very much.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

Good day, and welcome to the Mohawk Industries Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to James Brunk, Chief Financial Officer. Please go ahead, sir.

Thanks, Rocco. Good morning, everyone, and welcome to Mohawk Industries' quarterly investor conference call. Joining me on today's call are Jeff Lorberbaum, Chairman and Chief Executive Officer; Paul De Cock, President and Chief Operating Officer; and Nick Manthey, who will succeed me as Chief Financial Officer on April 1.

Today, we'll update you on the company's fourth quarter and full year performance and provide guidance for the first quarter of 2026. I'd like to remind everyone that our press release and statements that we make during the 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 the call over to Jeff for his opening remarks.

Thank you, Jim. Our fourth quarter net sales were approximately $2.7 billion, an increase of 2.4% as reported and a decrease of approximately 3.3% on a constant basis versus the prior year and in line with our expectations. Across our markets, commercial demand remained stable during the quarter, though continued weakness in housing turnover and sluggish home construction in the U.S. impacted our volume.

Our adjusted EPS for the quarter was $2, up approximately 3% versus the prior year, with benefits from productivity, restructuring initiatives, product mix and lower interest expense offset by market pressures and increased input costs. For the quarter, we managed the impact of the U.S. tariffs covering the cost as planned. For the full year, our sales were approximately $10.8 billion, flat with the prior year as reported.

Approximately 55% of our sales were in the U.S., 30% were in Europe and 15% in other geographies. Our adjusted EPS for the full year was $8.96, a decrease of approximately 7.5%. For the year, we generated free cash flow of approximately $620 million and repurchased approximately 1.3 million shares of our stock for [ $149 million ] as part of our current stock buyback authorization. The fourth quarter reflected a continuation of the macroeconomic factors our industry has faced since the second half of 2022. Housing turnover in our major regions remains at historical lows due to affordability challenges and economic uncertainty.

Consumer confidence remained weak due to inflation, employment concerns and geopolitical tensions. As a result, many of our large discretionary investments such as home renovations continue to be postponed. Remodeling activity that did take place was primarily driven by more affluent customers or those addressing essential needs. Throughout 2025, most central banks took actions intended to stimulate economic growth in housing markets, including recent interest rate cuts by the U.S. Federal Reserve.

While 2025 U.S. existing home sales did not improve, sales in December increased over the prior year. Currently, U.S. mortgage rates are at their lowest levels since September 2022, and we anticipate these lower rates, combined with potential government actions, will benefit housing turnover. In Europe, interest rates are also the lowest since late 2022. In addition, consumers have built record inventory, record levels of savings, inflation has eased and employment has remained steady.

These conditions should support greater participation in the housing market as consumer confidence improves. Across our markets, housing construction levels have not kept pace with household formations since the great financial crisis. In the U.S., builders completed fewer homes in the fourth quarter as they focused on reducing inventories and lowering the supply of new homes.

In Europe, high building cost and land shortages and labor constraints continue to impede residential construction. Completed housing units in Europe have declined in 2025,though moderate building recoveries in Southern and Eastern Europe have emerged. As housing demand increases, European governments are evaluating options to stimulate construction. The commercial channel outperformed residential throughout the year with strengths in health care, education and hospitality.

We anticipate that lower interest rates will encourage additional investments in commercial construction and renovation. In response to ongoing conditions, we took actions during the year to stimulate sales and enhance our mix in soft markets through innovative product introductions, marketing actions and promotional activity. Our premium product launches deliver differentiated design and performance features to incentivize remodeling and our new commercial collections help us gain momentum in both new construction and remodeling projects. As residential demand remains weak, heightened competition to absorb the industry fixed cost continues to observe pressure on pricing.

To partially cover inflation, we took pricing actions in regions and product categories as market conditions allow. In the U.S., we managed the impact of tariffs through pricing actions and supply chain optimization. If necessary, we will adjust our strategies based on the Supreme Court's upcoming rulings and changes in the global trade landscape. During 2025, we initiated numerous restructuring actions and operational improvements that lowered our cost position and will benefit our longer-term performance. In 2025, our markets did not improve. And in response, we reduced capital spending to $435 million, about 30% below our depreciation levels. We continue to take the proper actions to manage the present environment, pursue profitable growth opportunities and strengthen our position when housing markets rebound. Now Jim will share our financial report.

Thank you, Jeff. Sales for the quarter at $2.7 billion or 2.4% increase as reported and a decrease of approximately 3% on a constant basis. The Global Ceramics segment, led by improved channel and product mix and favorable FX had the strongest year-over-year sales performance. Gross margin for the quarter was 23% as reported and 24.3%, excluding charges, in line with the prior year as the benefit from our productivity and restructuring initiatives of $41.5 million, favorable FX of $21 million and improved price and mix offset weaker volume of $29 million and increased input costs of $22 million.

SG&A expense was 19.8% as reported and 18.7%, excluding charges, also in line with prior year levels. That gave us an operating income as reported of $68 million or 2.5%. Our nonrecurring charges were $84 million during the quarter, primarily related to restructuring actions undertaken by all segments and legal settlements. That gave us an operating income on an adjusted basis of $152 million or 5.6%. That was only 50 basis points decline versus prior year as the benefits from our productivity and restructuring initiatives of $51 million, our pricing actions to offset the impact of new U.S. tariffs and improved product mix were offset by the reduction in volume of $29 million, competitive market conditions and an increase in input costs of $32 million.

Interest expense for the quarter was $1 million. That's a decrease versus prior year due to a reduction in short-term debt and a benefit of increased interest income. Non-GAAP tax rate for the quarter was 17.1% versus 17.8% in the prior year, and we're forecasting the full year tax rate for 2026 to be between 18.5% and 19.5%. That gave us an earnings per share on a reported basis of $0.68 or an adjusted basis of $2.

Turning to the segments. Global Ceramic had sales of just under $1.1 billion. That was a 6.1% increase as reported and basically flat on a constant basis. We experienced softening in the U.S. builder channel, offset by gains in our international markets led by Europe as well as improvements in price and mix driven by the U.S. and our European operations. Operating income on an adjusted basis was $63 million or 5.9%. That was an increase of 60 basis points as the combination of our productivity initiatives of $22 million and the benefit of improvement in price and mix of $16 million offset the increase in input costs of $22 million and decreased volume of $13 million.

In Flooring North America, our sales were $893 million. That was a 4.8% decrease as reported or 6.2% on a constant basis. The decrease was primarily in our residential soft surface business directly impacted by the slower builder channel, partially offset by our hard surface performance through home centers and retail, which were relatively flat versus the prior year. Gave us an operating income of $39 million or 4.4%. That was a decrease of 130 basis points as the lower volume of $12.5 million in conjunction with an increase in shutdown costs of $12 million and input costs of $17 million offset the benefit of productivity and restructuring actions of $24 million and an improvement in price and mix.

And in Flooring Rest of the World, we had sales of $737 million or 6.5% increase as reported and a 3.5% decrease on a constant basis, with the decrease in volume, especially seen in residential remodeling impacting our flooring categories as both our panels and insulation business units saw an increase in year-over-year volumes. That gave us an operating income of $65 million or 8.8%, excluding all charges for a 120 basis point decrease from the prior year. This was led by a weakening in price and mix of $15 million and lower volume, partially offset by increases in productivity and lower input costs.

Corporate and eliminations were $15 million for the quarter, in line with the prior year. In 2026, we estimate the full year impact of corporate expenses to be between $52 million and $55 million. And now the balance sheet. Looking at cash and cash equivalents of $856 million with free cash flow of $270 million in the quarter and $620 million on a year-to-date basis. Inventories were just shy of $2.7 billion. The growth in inventory year-over-year was mainly a result of the weakening dollar as inventory days ended the year at 139 days. Property, plant and equipment was just shy of $4.8 billion, with CapEx for Q4 at $180 million -- $189 million and full year at $435 million.

The company plans to invest approximately $480 million in 2026 with D&A of $626 million. The capital expenditures will be focused on product innovation, cost reduction and general maintenance of the business. The balance sheet ends the year in a very strong position with gross debt of $2 billion and leverage of 0.9x adjusted EBITDA. The company enters 2026 well positioned to leverage the housing recovery.

Now Paul will review our Q4 operational performance.

Thank you, Jim. Our Global Ceramic segment delivered improved sales and profitability year-over-year as each region executed specific strategies to overcome market challenges. Across our geographies, our performance benefited from successful product launches over the past 2 years. In particular, our premium collections improved our mix and helped to offset pricing pressures from competition. We extended our advantage at the high end of the market by combining advanced design expertise with proprietary printing technologies to deliver collections with more sophisticated visuals and textures.

Though residential remodeling and construction remains soft in most of our regions, our innovative commercial collections continue to enhance our results. We have worked in all markets to expand our customer base across channels by emphasizing the breadth of our product offering and our superior service. Operationally, we continue to find ways to drive productivity gains, reengineer products and contain SG&A costs to protect margins against higher input costs and pricing compression. In the U.S., our volumes were challenged as new home construction slowed in the quarter. We offset this impact through productivity gains as well as improved product and channel mix. Our price increases mitigated the effect of tariffs on our sourced offering.

With lower ocean freight costs and suppliers absorbing some of the expense, tariffs have thus far impacted the U.S. ceramic market less than expected. As our countertop business continues to grow, the ramp-up of our new quartz production line remains on schedule and will deliver higher-value products through an advanced [ veiling ] technology that creates unique visuals. In Europe, we improved our volumes despite soft demand as we increased sales in the higher-end categories. Spending on large discretionary purchases remains under pressure from consumer uncertainty related to geopolitical events.

Pricing weakened during the quarter as excess industry capacity led to heightened competition. We partially offset this through improved mix, productivity gains and lower energy costs. The commercial channel remains stronger than residential in most parts of Europe, though we also saw improvements in our higher-end residential offering. We enhanced our porcelain slab production with state-of-the-art printing technology that delivers higher-value products. In Latin America, demand remains soft and competitors are pursuing volume with aggressive pricing. In Mexico, we are expanding our customer base, improving service with our expedited shipping programs and gaining sales with our large-sized polished collections.

And lastly, in Brazil, the Central Bank's restrictive policies have increased the benchmark interest rates to 15%, compressing the flooring market. In our Flooring Rest of the World segment, our panels and insulation businesses delivered improved sales and margins, while the flooring category experienced lower volumes as well as pressure on our pricing and product mix. Rising building costs, elevated home prices and economic uncertainty continue to suppress both residential remodeling and new construction. To manage these factors, we continue to reduce our cost structure through product reengineering, supply chain optimization and SG&A controls. While we pursued volume to improve plant utilization, we also selectively announced price increases in most product categories to offset higher input costs.

To benefit our flooring category, we expanded our presence in home centers and extended our participation in better-performing geographies. In the European LVT market, we maintained our volume through expanded retail partnerships, and we are enhancing our rigid and loose lay collections this year. Our panel business increased volume, grew sales and expanded margins across product categories. We are improving the production and operational processes at our new MDF recycling plant, which will improve our material costs when optimized. Though insulation markets remain soft, we increased volumes in most geographies and continue to prepare for the start-up of our new plant in Poland with expanded distribution and growth in Germany and Eastern Europe.

Our Flooring North America results this quarter varied by channel. In the quarter, we saw inventory reductions in the retail channel given softer conditions. In the builder channel, sales declined as new home and multifamily construction remained weak and builders slowed new home starts. With lower interest rates improving affordability, we do expect residential construction to improve slightly as we progress through the year. Our commercial business remained stable with strength in hospitality, education and health care, offsetting softness in office and Main Street.

Given this, overall volume for the quarter was lower, though productivity gains and benefits from our restructuring actions helped offset the impact of the decline. We initiated pricing actions across most residential product categories to mitigate higher material, labor and tariff costs. Our hard surface category continued to outperform, driven by our laminate, hybrid and LVT collections, which are expanding across sales channels. Our PureTech PVC-free hybrid flooring is growing as an alternative with authentic visuals, better scratch resistance, waterproof performance and dimensional stability.

The success of our hard surface portfolio is also benefiting our accessories sales as consumers select coordinating trim, stair threads and moldings. In residential soft surfaces, our high-end fashion collections improved our product mix, and we are expanding our premium polyester collections to grow sales in the mid-price range. To offset higher input costs and tariffs, our commercial business announced selective price increases. The commercial order backlog remains solid and our enhanced commercial LVT offering will create additional opportunities for the business. To support sales growth in the high-performance commercial channel, we acquired Hero Flooring, a small niche U.S. rubber flooring company and authorized licensee of products made with Nike Grind rubber.

I will now return the call to Jeff for his closing remarks.

Thank you, Paul. As we previously announced, Jim Brunk will retire as CFO in April and will continue with us in a consulting role to ensure a smooth transition. Jim has been with Mohawk for 20 years and has played a leading role in growing our business into the world's largest flooring company. His leadership is reflected in the strength of our financial team as well as our financial position. In April, Nick Manthey many will assume the CFO role after serving as VP of Corporate Finance and Investor Relations for the past year and leading the Flooring North American finance team for the prior 5 years. Nick brings to the role strong financial expertise and extensive knowledge of our business.

Now turning to our outlook. First quarter market conditions thus far have been similar to the fourth quarter. While home renovation remains soft, the NAHB remodeling index has shown improvement for the last 2 quarters. We expect our markets to remain competitive, and we are implementing price increases across most regions and product categories. We continue to manage the impact of tariffs through pricing actions and supply chain optimization. We anticipate benefits from product mix, productivity and cost reductions to offset headwinds from higher energy and labor costs. Our 2026 product introductions are entering the market throughout this quarter, and the initial feedback has been positive.

Our first quarter seasonality is our slowest, and this year includes 4 additional shipping days. Given these factors, we expect our first quarter adjusted EPS will be between $1.75 and $1.85, excluding any restructuring or onetime charges. The global flooring industry has been in a recession for almost 4 years, and historically, we have multiple years of higher growth as markets recover. This year, we anticipate economies in most of our regions will improve with housing markets benefiting from mortgage rates and greater availability. We expect some increases in industry volume as we proceed through the year, though pricing pressures are likely to remain.

In response, we'll execute our announced restructuring actions and continue to implement productivity initiatives to lower our cost. Given this, we expect our 2026 sales and earnings to improve. The extent of our growth this year will depend on economic conditions, interest rates, geopolitical events and most importantly, the degree to which residential remodeling rebounds. With our global reach, product advantages and operational strengths, Mohawk is uniquely positioned to deliver long-term profitable growth as we transition into the recovery cycle.

We'll now be glad to take your questions.

[Operator Instructions] And today's first question comes from Eric Bosshard with Cleveland Research.

Just curious, as you look into '26, what you're expecting in terms of price and mix and mostly focused on receptivity of retail and what the actions of consumers are in terms of trading up or trading down?

Well, Eric, as we look at price and mix, we're anticipating continued pressure in the market. Inflation levels should be somewhat similar to '25, really led by energy, labor and tariffs. For the year, we would see both the combination of pricing, improved mix and productivity should help offset that inflation.

That's helpful to know that there's an offset. Is that -- can you just give us a sense of the magnitude of the assumption on price and mix? Is that in the market today? Mostly trying to figure out, is that a number that's there? Or is that a number that has some degree of risk to it based on how the consumer or retail behaves?

The price increases are being implemented, the market conditions are pressured, some have been postponed as the competitive environment evolves and we react to it. We anticipate covering tariffs with pricing and supply chains with all the actions that we're taking.

And our next question comes from Philip Ng with Jefferies.

Jim, congratulations. Thanks for all the great help. Really appreciate the partnership.

I guess to kind of kick things off, demand obviously trailed off a bit in the fourth quarter. Some of that is the builders seeing a weakness, and you called out some destocking. Any early read out of the gates in terms of how the channel is managing inventory ahead of spring selling season, whether it's wholesale, retail or the builders? Any green shoots to call out, I guess, at this point?

The inventories were taken down in the fourth quarter by different to the channels as the business softened. We think most of the inventory has been taken out and is close to where they need it to be. We're in the middle of the different shows we're in, and we're a little surprised at the optimism that many of the customers are expecting this year.

Jeff, any color between channels in terms of optimism? Is it more heavy in R&R, retail, just builder side of things? Just give us a little more perspective on that front.

The residential side of the business, people are optimistic about customers coming back into the market that the existing home sales will pick up a little bit. And on the other side, the commercial and builder is mostly expectations are stable, which is in line with most of the forecast by the marketplace.

And our next question today comes from Mike Dahl at RBC Capital Markets.

I guess just to start picking up on that last comment, Jeff, I'm still trying to square like what's an expectation versus what you're seeing because your comments are that 1Q is actually tracking similar to 4Q, but then there's this hope or this optimism that things can get better. Is the -- so what you're hearing from the customers, are they actually seeing activity come back or they're just expressing the same type of hope, hey, look at these macro indicators, maybe things can get better because the consumer confidence readings and some of the recent housing readings certainly don't seem to have inflected.

I think it's the -- what I'm reflecting is the attitude that people are giving us in the -- that I'm getting feedback from the sales organization in all the markets that we're having. As an overview, our view is that 2026, we call it a transitional year with some improvement in the remodeling activity. The expectation we have is that the lower mortgage rates, higher home equity levels and the increased housing supply should benefit existing home sales. There's pent-up demand for large renovations that have been postponed since '22. We're anticipating both pricing mix as well as volume increasing somewhat as we go through the year. Our restructuring and productivities will lower our own cost structures. And given that where our expectations are, which we've said is to exceed last year's earnings.

Okay. Got it. The second question, I guess, just drilling down on that expectation. And then, Jim, I think I heard you say that inflation levels similar in '26 as '25 and that price mix productivity should help to offset. So when we think about the earnings bridge, I guess 2 questions. One would be when you make that comment about earnings expected to improve, you did have the headwind in 1Q '25 from the systems conversion. So is that relative to the [ $896 million ] or are you also saying relative to kind of a further adjusted number ex that conversion? And then on that point about inflation and productivity and price mix, are you suggesting that, that net combination will be neutral to slightly negative for the year?

No. On the contrary, so 2 parts to your question. One is the increase in earnings would be against that adjusted number, number one. And number 2 is that the -- my comment on the combination of price/mix and inflation -- or excuse me, price/mix and productivity that will offset the inflation. Because remember, what you have also in there is in both price actions and inflation, tariffs is included in that number.

And our next question today comes from Susan Maklari with Goldman Sachs.

My first question is going back to some of the product side of things. Can you talk a bit about what you're seeing in terms of your ability to gain share, especially perhaps with the home centers and how that's helping you in the channel? And then with that, you remarked about some of the momentum you're seeing on hard surfaces. Can you talk about how that's coming through and the benefits you'll see this year?

Yes, Susan, so on the home center side, the home center channel is very important to us, and we are providing leading products, leading innovation, leading merchandising. We're supporting their efforts to grow their business on the consumer side and the Pro side with differentiating products. And so we're continuing to optimize our business together. And then the comment on the hard surfaces, yes, our hard surface business is doing well. That is fueled by our waterproof laminate business that continues to provide an excellent alternative to LVT.

And our domestic laminate is also benefiting from the tariff increases that have increased the cost of other alternatives. And in general, in LVT, our new hybrid alternatives with improved visuals and performance are being very well respected and accepted by the market. And in general, we see the LVT category kind of continuing to perform in line with the flooring market.

Okay. That's helpful color. And then maybe a question for Nick. As you step into that CFO role, can you talk about how you're thinking of the initiatives and the areas of focus there and any change to capital allocation? And also I want to add my congrats to Jim on your retirement.

Thank you, Susan.

Thank you, Susan. From a strategy perspective, I don't think there's really any change at this point. We're obviously navigating a difficult business environment, and so we'll continue our focus on cost and capital discipline. And we'll also continue to invest in new products and they'll able to take advantage when the market recovers.

And our next question today comes from Michael Rehaut with JPMorgan.

Jim, great working with you. All the best. And Nick, congrats on the promotion.

First question, I wanted to focus on the outlook for '26. Jeff, I believe you said that you expect price, mix and volume all to be up. And so I was wondering how that squares with the market outlook and underlying market outlook? And if -- what are the reasons for that optimism aside from maybe some of the optimism that you quoted in the channel, which could arguably be somewhat premature just relative to what we're seeing at least in the fourth quarter into the first.

Pricing, we have announced a lot of initiatives across the marketplace to try to recover some of the inflation that we've been having. We have the tariff pricing that we're putting through. So we see pricing compared to the prior year improving. We have our mix, which are internal actions to create higher-value products that have more margin in them. And then our view is, as we've stated earlier, that we see the commercial business and the new construction business being relatively stable, and we are anticipating some improvement in the remodeling business as we go through -- along with the existing home sales, which are supposed to increase somewhat.

Okay. I appreciate that. I guess, secondly, I'm curious around the outlook for ceramic in the U.S. Obviously, there's been a lot of movement with tariffs. And I believe you kind of said that the impact of tariffs from a cost standpoint have been less than anticipated. I'm curious if there's been any share shifts as a result of your domestic manufacturing and advantage there or if the impact of tariffs being a little bit more muted did not kind of translate to any type of significant share shifts because of your manufacturing advantage?

We believe that we're doing better than the marketplace in our U.S. ceramic business. We have a much larger commercial business in that business than the other parts of our U.S. businesses. So the commercial business is doing better. We have been enhancing our style and design using the knowledge that we have in our Italian businesses so that we're able to offer higher-value products and replace some of the products that are coming in at higher cost from Europe as we go through.

As you know, the volumes declined recently with the residential new construction markets. So we're getting -- the balance is we're getting improvements out of price and mix, and then we've been able to have better service than the importers bringing the stuff in as well. We're also increasing our participation in the countertop business where we put in a new quartz countertop line to enable us to expand that business further.

And our next question today comes from Stephen Kim, Evercore ISI.

I guess you referred a couple of times to, I guess, a higher end or a high-end proprietary printing technology. And you just mentioned, Jeff, about the Italian style and design allowing you to compete better against imports. I'm just kind of curious if you can talk a little bit more about the innovation that you have been working on over the last few years. Are we at a point now where you're starting to see a particularly significant impact or benefit from some of these innovations, whether it be this state-of-the-art printing technology or whether it be this hybrid [ PVC ] freeze. I think this is -- I just want to make sure that we understand how significant in your mind these innovations are as they come into the market this year.

It's not just an immediate process. We've been doing this for a period of time -- so in the ceramic industry, as in other ones, it takes specific equipment to make higher-end products and the complexity is dramatically different as you go up in the scale. And so we've been investing in new equipment as well as the ability to execute the complexity in the factories, which have allowed us to improve our higher-end business. At the same time, you're making both larger sizes, which the equipment has to be modified. And if you go to the other extreme, think of a 2-inch piece is much different than handling something that's 3 feet by 3 feet.

So all of it is very specialized. In all of our different markets across the world, we are enhancing the style and design and sizing across, which is helping us get product mix to offset some or a lot of the inflation, which at different times, we're not able to pass through. In our other product categories, you mentioned hybrid products that are made out of different materials than LVT. And so those come with different performance features as well. In all the categories, we're putting in new designs and strategies to differentiate them as you go through.

And in each category, we're trying to find new ways like in the countertop business, where it's moving from stone products to man-made products, and we're putting in new equipment that has design capabilities we're introducing as we speak that aren't in the market at this point. So every division is taking different strategies to get there.

Yes. That's really helpful. I wanted to switch gears, if I could, to your -- the transportation side of your business. Yesterday, there was a lot of noise about AI potentially dramatically reducing deadhead rates and things of that nature. I was curious if you could talk a little bit about the distribution side, if you will, or the transport side of your company? And to what degree that you have been seeing improved deadhead rates over the past, let's say, the past year? Has that been something notable to call out? And is there -- do you expect AI tools to be a needle mover to your input costs this year?

The ability to find freight back and forth and enabling it to lower the cost has been going on for a significant period of time. And AI will just add another incremental improvement over the top of it. The biggest freight differences right now are the international freight coming in where the freight rates have dropped as the capacity has increased and the volume has decreased. So those are making up for a lot of the tariff costs or a significant portion of the tariff costs.

And then in our own system, most of our system set up with our own transportation from our factories to our regional distribution points. In most cases, we're backhauling our own raw materials. And that gives us a significant advantage on the fill rates and the time it takes to go through, which is why it costs us less to run our operations than it does to go on third parties.

Our next question today comes from Keith Hughes at Truist.

You talked a lot about input costs going up in this call -- or costs going up in the call. Can you talk or give us kind of just rank order of what -- where you're facing the most inflation causing this finished good increase to offset?

Well, for the full year, when you look 226 versus '25, the first thing you always have is you have wage and benefit increases. So that's probably looking at this year, number one. Also, we've seen energy costs, as Jeff said in the prepared remarks, kind of fluctuate. So you see energy, especially in the U.S. somewhat spiking. So we'll have to see how that kind of materializes over the full year.

Obviously, tariffs is part of that, as I said, that inflation footprint as well and then just kind of general expenses. The wildcard right now is really on material costs as I think I said earlier, it kind of varies across our different regions. In some cases, we're seeing reductions. But in others, we're still seeing some inflation.

So following up on that, we've seen crude come off and moving down pretty ratably through the year. Is there any sign that carpet or LVT inputs are starting to lighten up as we head into the new year?

We anticipate continued inflation in the cost. The -- at this point, at least for the first 4, 5 months, whatever we have in inventory is what's going to flow through our costs as we go through. And so how they evolve over time, we'll have to see if they come down or not. Most of the manufacturers supplying us, we think their margins are very low. So we'll have to see how it evolves in the market cost.

Our next question today comes from Sam Reid at Wells Fargo.

Congrats, Jim, on the pending retirement. Great partnership there. I wonder if you could text a little bit on the benefit you're expecting to get in 2026, specifically from productivity. You've done a good job of pulling costs out of the business. So I just love to see how big of a lever productivity could be in isolation in 2026. And then remind us, but I believe you have about $60 million to $70 million in restructuring savings planned for this year. Just want to double confirm and make sure that's the right number.

Yes. It's a good place to start, Sam. On restructuring, as both Jeff and Paul said, we've taken numerous actions over the last few years. We've delivered in 2025, about $115 million cumulative savings from restructuring. You're right, we're looking at somewhere in that $60-plus million range of carryover into '26. And we also did announce some additional actions in the fourth quarter, most of which it's about $30 million of savings. Most of that will actually help and carry over into 2027 given the timing of those projects.

In addition, we continue across the company, both in manufacturing and on the administrative side to look for ways to reduce our day-to-day operating costs. So we also have on top of that, just normal productivity. For the year, when you look at '25 versus '24, we hit over about $200 million, '25 or '26 versus '25. Certainly, we will be building and working towards achieving the highest level we can. But again, it's kind of restricted to restructuring about that $60 million range and then other projects.

No, that's all helpful, Jim. And then maybe switching gears here. It does sound like the builder channel was particularly weak in the fourth quarter. Obviously, we know the builders are pushing back aggressively on price in particular. Can you contextualize maybe what the pricing backdrop looks like specifically within that piece of your business? And I'm obviously talking here in the context of the U.S. business.

As you described, the category is weak. There's plenty of pressure to maintain prices with it. Our input costs are going up, and we're trying to get some of it covered through the marketplace as we go through. We've announced targeted price increases in the different pieces to offset inflation. And as you said, it's not easy.

Our next question today comes from John Lovallo at UBS.

I guess, Jim, embedded in that first quarter EPS outlook of $1.75 to $1.85, I mean how are you kind of thinking about sales and margins ideally by segment, either year-over-year or sequentially? And can you confirm that there's 4 extra selling days year-over-year and 1 extra day sequentially?

Yes. So you are correct that there is 1 extra day sequentially and 4 extra days from a year-over-year perspective. With respect to the guidance, a couple of things I would say is as we're coming into January and Q1, we've said that market conditions are expected to remain soft and lower volumes right now versus the prior year. Obviously, in the first quarter, you have -- tend to have a slower in terms of sales and volume and weather obviously never helps the situation as well.

Housing turnover and consumer confidence are continuing right now to constrain the industry, but we are taking actions, and Jeff talked about a number of them on the product side and on the cost side to try to protect our earnings the best we can. The international markets continue to be pressured by geopolitical events as well. And overall, we will, again, continue to see benefits from our productivity and restructuring initiatives.

Okay. Got you. And then you guys generated $620 million of free cash flow in '25. Is it fair to assume that you're targeting above that for this year? And along those same lines, I think there was $40 million of stock repurchased in each quarter over the past 3 quarters. In the event that free cash flow is stronger, I mean, would you anticipate being able to step up the repurchase activity?

We did, as you said, generated about $620 million of free cash flow in '25 with CapEx of about $435 million. CapEx, we do expect, as I said in the prepared remarks, to be a little bit higher at $480 million, and that's a combination of about 80% is cost reduction, product innovation and maintain the business. And then we're also looking at about 20% on targeted growth initiatives, mainly around the quartz, laminate, porcelain slab and then also investing in new insulation production as well. We should continue in 2026 to see and generate strong cash flow. And with respect to the share buybacks, we will continue to use that as part of our strategy as we move forward.

Our next question today comes from Rafe Jadrosich with Bank of America.

You mentioned that tariff impacted a little bit less than you were expecting. Can you just quantify what the mitigated and unmitigated headwind was in '25? And then what you expect for '26?

Well, the tariffs that we're paying range from about 15% to 50%. We've taken action to offset them in all different ways in the supply chain with the freight rates we talked about earlier. We've announced price increases as required to go with them and offsetting those as we go through. We're continuing to implement more price increases as we speak, and we have to adjust to the market conditions that we're in the middle of, and we're expecting to cover all the costs of them with all those actions combined.

I think earlier in '25, you mentioned $50 million of -- is there a dollar amount that we should be thinking about for '25 versus -- for '26 versus '25 that you need to cover?

Well, I think you need -- Rafe, you need to look at kind of over the span of when this started on annualized impact, we had said that we're about $100 million of cost impact. As Jeff said, over '24 or '24 to '25, '25 to '26, we have taken actions both in pricing, supply chain management, freight costs coming down from an ocean freight standpoint is helpful as well. But our commitment is to offset that over that time period.

And our next question today comes from Collin Verron with Deutsche Bank.

Congratulations, Jim and Nick. I guess just wanted to start on Flooring Rest of World. That's seen a lot of price pressure. I guess, any comment on to how has pricing stabilized sequentially and sort of how you're thinking about prices on a full year basis in 2026? And do you see any further margin pressure in that business in '26? Or have margins really bottomed here?

Yes. So in general, the geopolitical events in Europe are still impacting consumer confidence as we speak. Markets continue to see slow demand, and there is a strong price competition. That being said, in a lot of our geographies and a lot of product categories, we have announced targeted price increases, and we are at such low levels that they seem to be sticking as we speak. So we think we will have a slightly positive price effect as we move through the year in our Rest of World segment.

Okay. That's helpful. And then just a clarification question on the EPS growth expectation in 2026. After you add back the system conversion, can you grow EPS if volumes are flat? Or does that growth expectation include volumes growing in 2026?

Yes. It includes the assumption that the top line would grow as well in terms of volumes at least somewhat.

And our next question comes from Matthew Bouley with Barclays.

So I just want to follow up on the pricing side. I mean you've spoken about some being implemented. I think I heard you say some postponed and obviously, the overall comments around the competitive environment. So maybe just be specific around soft surface, hard surface, commercial, residential, just kind of the specific categories where you're most confident that price is going to increase in 2026 versus kind of which categories may still be a bit softer.

We've announced price increases generally in the range of 3% to 5% across most of the categories in different places. In some cases, we have focused more on the higher-value products and different pieces that have less competition. The pricing is going in the market as we speak, and we are having to react to competitive situations as we always do. No surprises there.

And Matt, I think you have to also remember, you're kind of dividing those price increases. One, you have very specific tariff situations, and we talked about LVT and some of the -- and ceramic that some of the price increases that we announced in '25 and then having to react to the changes in those tariff rates. So you have kind of a box of tariff-related pricing actions. And then as Jeff just pointed out, you also have general inflation that we're having to attack as well.

Okay. Got it. Secondly, maybe if we look back on the tariffs and how that's impacted your competitive positioning. I guess I'm looking for sort of a postmortem on it. Maybe that's too strong a word. But can you point to, at this point, tariffs, you guys are a domestic manufacturer. Any specific areas where the tariffs have really led to share wins or better margins as you've raised price? Or we're still kind of too early in this to see any of that happening?

We have seen benefits in different areas. The ceramic imports out of Europe, we've been able to increase our share of higher-value products and help our mix in those categories, for instance, we talked about the difference in the sizes and design pieces. We're seeing our laminate business having some benefits from the LVT prices going up in some cases as we go through. We think that the service levels and pieces are helping us when the markets have difficulty with getting the products in and keeping them in stock. So we have seen some pieces with -- in the categories, and we have picked up some business with individual accounts.

That concludes the question-and-answer session. I'd like to turn the conference back over to Jeff Lorberbaum for any closing remarks.

Mohawk is well positioned today to take advantage of the recovery when it occurs. We can't predict the inflection point, but we're going to have to come off the bottom that we've been at for a long time. We appreciate you joining us, and have a nice weekend.

Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Good day, everyone, and welcome to the Mohawk Industries Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded.

At this time, I'd like to turn the floor over to James Brunk, Chief Financial Officer. Please go ahead.

Thank you, Jamie. Good morning, everyone. Welcome to Mohawk Industries quarterly investor conference call. Joining me on the call are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Paul De Cock, President and Chief Operating Officer. Today, we'll update you on the company's third quarter performance and provide guidance for the fourth quarter of 2025.

I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our 8-K and press release in the Investors section of our website.

I'll now turn the call over to Jeff for his opening remarks.

Thank you, Jim. Our third quarter net sales of $2.8 billion were in line with our expectations, slightly ahead of prior year as reported and flat on a constant basis. Though economic conditions across our regions weakened more than anticipated compared to the prior quarter, we believe we outperformed in most of our markets. Our sales and product mix continue to benefit from the success of our premium residential and commercial offering and collections introduced during the past 2 years.

Our adjusted earnings per share of $2.67 reflected benefits from ongoing productivity and restructuring initiatives as well as the impact of favorable currency exchange and lower interest expense, offset by higher input costs and temporary plant shutdown. Across our markets, material and energy expenses are now improving from peak levels, though higher costs from early in the year will still impact our fourth quarter earnings as expected.

With our markets remaining challenged, we're executing targeted actions across the organization to drive performance such as operational enhancements, administrative process improvements and technology advancements. We are lowering our cost structure without impacting our long-term growth potential when the market recovers. We've identified additional restructuring opportunities to rationalize less efficient assets and streamline logistics operations and administrative functions. These new actions will result in annualized savings of approximately $32 million at a net cash cost of approximately $20 million after asset sales. Combined with our previously announced restructuring actions, we anticipate delivering $110 million in savings this year.

During the quarter, we continue to focus on our working capital management and generate approximately $310 million in free cash flow. We repurchased 315,000 shares in the quarter for approximately $40 million as part of our current stock buyback authorization. Year-to-date, we've purchased $108 million of our outstanding shares. Across our geographies, consumer uncertainty continues to limit discretionary spending on large projects, particularly if financing with debt is required. Postponement of large renovation projects and declining home sales have been the primary driver of weakness in the residential remodeling during the current cycle, while the commercial sector has remained stronger.

And most of our market central banks have lowered interest rates to encourage economic growth and benefit housing turnover. The Federal Reserve's September rate cuts and potential future actions should benefit the U.S. housing market by bringing in potential buyers who have waited for better rates. As the supply of existing homes on the market rises, price increases have slowed, which should benefit future sales.

Builders are attempting to offset weakness in the new home sales with price cuts, rate buydowns and closing cost assistance. The Fed's actions should also stimulate future business investment in nonresidential new construction and remodeling. European consumers have accrued record levels of savings since the pandemic and are now experiencing lower inflation rates, both of which should encourage greater discretionary spending. To address the ongoing housing shortage in Europe, several governments are initiating programs to incentivize new home construction.

Our industry is currently at various stages of passing through the impact of higher tariffs on imported products and should compensate for increased product costs over time. As previously stated, we continue to address the situation by optimizing our supply chain and implementing price adjustments on affected product categories. Ocean freight costs have been declining and are partially offsetting the tariff impact for U.S. importers. Based on the recent changes, engineered wood and laminate imports will now be subject to reciprocal tariffs like our other flooring product categories, which should benefit domestically produced products. Because the evolving tariff situation will require some time to reach equilibrium, we will continue to adjust our strategies with the changing rates and market conditions.

With that, Jim will review our financials for the quarter.

Thank you, Jeff. Sales for the quarter were just shy of $2.8 billion. That's a 1.4% increase as reported and flat on a constant basis, as our hard surface and commercial business continued to outperform the overall residential channels. In addition, FX benefited our business on a reported basis.

As we noted in the earnings release, Q4 has one additional shipping day. And for planning purposes, Q1 of 2026 will have 4 additional shipping days and Q4 of '26 will have 4 less. Gross profit for the quarter was 23.7% as reported and 25.3%, excluding charges, as strengthening productivity of $57 million and favorable impact of FX of $15 million were offset by higher input costs of $39 million, continued pressure on price mix of $20 million and lower volume and temporary shutdown costs of $23 million.

SG&A expense for the quarter was 18.8% as reported and 17.9%, excluding charges. That gave us an operating income as reported of 5%.

Nonrecurring charges for the quarter were $69 million, primarily related to our ongoing restructuring initiatives. Combining the projects announced in Q3 with our previous actions, we should have savings of approximately $110 million this year. That gave us an operating income on an adjusted basis of 7.5%. That's a decrease of 130 basis points as the impact of inflation of $52 million, lower volume temporary shutdown costs of $22 million and unfavorable price mix of $20 million offset the benefit of productivity and restructuring actions of $62 million for the quarter. Interest expense was $5 million. That's a decrease versus prior year due to lower overall debt balance and the benefit of our interest income activity.

Our non-GAAP tax rate was 17% versus 19.8% in the prior year, mainly due to geographic dispersion of our income. We are forecasting in Q4 and for the full year, a tax rate of approximately 18%. That resulted in earnings per share as reported of $1.75 and on an adjusted basis of $2.67.

Turning to the segments. Global Ceramic had sales of just over $1.1 billion. That's a 4.4% improvement as reported and 1.8% on an adjusted basis due to favorable price mix in both channel and product categories, partially offset by lower unit volume. Operating income on an adjusted basis was $90 million or 8.1%, which was a decline of approximately 50 basis points, as higher input costs of $31 million and lower sales volume were partially offset by favorable price/mix of $8 million and strong year-over-year productivity gains of $24 million.

Flooring North America had sales of $937 million. That's a 3.8% decrease as residential new construction and remodeling remain under pressure. From a product perspective, our LVT and our laminate categories continued with positive gains versus prior year. Operating income on an adjusted basis was $68 million or 7.2%, which is 190 basis points decline versus the prior year as productivity gains of $29 million were offset by higher input costs of $22 million and the impact of lower sales and increased temporary shutdown costs of $17 million and unfavorable price/mix of $10 million.

In Flooring Rest of the World had sales of $716 million. That's a 4.3% increase as reported and an increase of 0.9% on an adjusted basis. The volume growth was driven by expansion in our Insulation and Panels business as well as in our laminate flooring category, partially offset by continued pressure in price and mix. Operating income on an adjusted basis was $59 million or 8.3%. It's a 220 basis point decline versus the prior year, primarily due to unfavorable price mix of $18 million, partially offset by continued productivity gains of approximately $8 million. Corporate costs for the quarter were $12 million, in line with the prior year and for the full year should be approximately $50 million.

Turning to the balance sheet. Cash and cash equivalents were $516 million, with free cash flow for the quarter of $310 million. Inventories were just shy of $2.7 billion. That's an increase of approximately $80 million, primarily due to the impact of foreign exchange and inflation and some increase in imported goods. Property, plant and equipment were just shy of $4.7 billion with CapEx of $76 million and D&A of $170 million in the quarter. We have lowered our full year CapEx plans to approximately $480 million with D&A of $640 million.

Overall, the balance sheet is in a very strong position with gross debt of $1.9 billion and leverage at 1.1x positioning the company to be able to take full advantage of the changing market conditions.

Now Paul will review our Q3 operational performance.

Thank you, Jim. In the Global Ceramic segment, our performance benefited from our premium collections, commercial sales and expanded distribution. All of our markets faced pricing pressure due to excess industry capacity, though we were able to offset due to the strength of our product and channel mix.

Across our markets, our commercial business is stronger as the A&D community embraces our industry-leading product innovation and design. Tire market trends are shifting to 3D surface applications that create premium visuals and our advanced technology and design expertise position us to lead the market in this transition. We are the only manufacturer in our markets to offer coordinated collections for very small to oversized options for both floors and walls, which makes selecting our products for a project easier for consumers.

In the U.S., our commercial performance outpaced residential due to growth in the hospitality, health care and education sectors. We are leveraging our national distribution footprint to expand our relationships with contractors, specialty retailers and commercial specifiers. In the period, we announced price adjustments based on the current tariff rates. Due to importers building inventories earlier in the year, the tariffs have not significantly impacted the U.S. ceramic market at this point.

Our countertop business grew in the quarter through new retail and high-end builder partnerships that will support increased production from our new [indiscernible] line that features advanced veining technology for greater realism.

In Europe, we improved sales volume in a difficult market. Pricing pressure persists with low market demand and our mix and productivity gains offset higher-than-anticipated input costs. Residential remodeling and new construction remain constrained, while the commercial channel shows continued strength, particularly in hospitality. Across Europe, our regional showrooms and education sessions for architects and designers are enhancing sales of premium collections and our commercial participation.

Our porcelain panel sales continue to grow due to our advanced printing technology, yielding more authentic marble and stone looks. In Latin America, markets have softened due to persistent inflation and weakness in housing. In Mexico, we are capturing volume by introducing new textures and a wider variety of sizes and expanding our distribution. In Brazil, our volumes increased across most channels as we enhance promotional activity. In both markets, we are enhancing our product offering to improve our mix and lowering our costs with productivity and restructuring actions.

In our Flooring Rest of the World segment, our results benefited from strength in panels and insulation with rising volumes increasing plant utilization. Our core European markets continued to experience weak remodeling and new construction, which is constraining flooring sales. In response to these conditions, we implemented selective price increases continue to reduce our cost structure and lower input costs by optimizing our supply chain.

In the segment, we are rationalizing less efficient assets consolidating operations and reducing administrative and manufacturing overhead. During the quarter, sales outside Western Europe were more stable, with the U.K. performing better as the government [ increased ] investments in social housing. With the laminate category remaining under pressure, we have increased participation in the DIY channel, and we are expanding our distribution in Southern and Eastern Europe.

Pricing and mix remained difficult during the quarter, and we are executing promotional activities to optimize our sales. The European LVT market is becoming more competitive, and we are addressing this with product innovation, including new [ battling ] technology and [ park at wood ] looks. We're expanding sales of both [indiscernible], which is used in commercial applications.

We are also reorganizing our sales teams to maximize opportunities with residential builders. In a difficult market, our Panels division delivered sales growth in MDF boards and decorative panels, which we are expanding into new markets.

Our installation business delivered solid results in a competitive market. We increased our customer base and volumes, which improved our utilization. To support our forthcoming insulation plant in Poland, we are growing sales in Eastern Europe, where the economy is growing faster.

In Australia, our expanded hard surface offering is gaining traction with our customer base, while pricing actions and productivity initiatives benefited our soft surface results. We have entered into an agreement to purchase a small New Zealand manufacturer of premium wool carpet, which we will integrate into our existing business.

In our Flooring North America segment, we believe Mohawk's hard surface categories outperformed the overall market due to our growing relationships with major retailers and builders, successful promotions and our innovative products with superior visuals and performance features. Our restructuring projects in the segment remain on track as we retire high-cost assets, consolidate logistics operations and reduce overhead. We delivered productivity gains that offset higher energy, material and labor costs flowing through.

Retail volume was affected by low consumer confidence that continues to impact large purchases, though some retailers reported improvement in store traffic as the quarter progressed. Market pricing remained competitive, and in response to recent tariff changes, we announced pricing adjustments. To address pressure from input and labor costs, the industry also announced price increases in carpet collections.

Our hard surface volume rose during the quarter as we expanded placement of our industry-leading laminate, hybrid and LVT product offering. As we expand our accessories portfolio, consumers are increasing attachment of these accessories with our hard surface collections. To grow our commercial participation, we continue to increase sales and marketing activities to expand our customer base. We are implementing promotions to grow volume in Main Street soft surface sales and we also enhanced our commercial LVT offering to align with current decorating trends.

I will now return the call to Jeff for his closing remarks.

Thank you, Paul. All of our markets face a shortage of avasable housing as supply has failed to keep pace with household formation. To meet growing demand, new home construction and remodeling must expand, which will also lower housing inflation pressures. Most central banks have shifted from prioritizing inflation reduction to stimulating economic growth. Declining interest rates in the U.S. and around the world should gradually encourage increased home sales and remodeling. While we believe these actions will benefit the housing market over time, we remain focused on optimizing the controllable aspects of our business including our sales strategies, product innovation and operational productivity.

Our previously announced restructuring initiatives continue to benefit our results by streamlining our operations and reducing our cost structure. We have identified additional restructuring projects that should deliver approximately $32 million in annualized savings. We are leveraging the scope of our product portfolio, distribution advantages and industry-leading brands to expand our relationships with current and new customers. Our product mix continues to benefit from our premium collections and commercial sales, which is mitigating some of the pricing pressures in our markets.

We are managing the impacts of tariffs on our U.S. imported product offering through pricing actions and supply chain optimization, and we are reinforcing the value of our domestic manufacturing.

Based on current trends in our regions, we believe that market volume should remain soft through the end of the year. Given these factors, we expect our fourth quarter EPS to be between $1.90 and $2, with 1 additional shipping day and excluding any restructuring or other onetime charges. For more than 3 years, the flooring industry has been impacted by both consumers postponing large discretionary purchases and low home sales, which have reduced new construction and remodeling activity. Housing turnover has a significant effect on our industry with U.S. consumer spending an estimated 5x as much on remodeling their flooring in the first year after buying a home than non-movers.

Declining interest rates, increased disposable income and higher home equity should support greater home sales and remodeling in our markets. The housing stock in our regions is aging and requires significant renovation to preserve property values. During the cycle, we have enhanced our operations, cost position and product offering to capitalize on the future market recovery. While the inflection point remains unpredictable, market fundamentals, significant pent-up demand and Mohawk's unique business strengths support long-term profitable growth.

We'll now be glad to take your questions.

[Operator Instructions] And our first question today comes from John Lovallo from UBS.

The first one is, in July, I believe you guys noted that 4Q EPS could potentially outpace the normal seasonal decline of about 20% quarter-over-quarter. I guess the question is, what do you view as the most significant changes that have occurred since then that sort of lower those expectations? And how are you thinking about revenue and margins by segment embedded in that outlook?

John, conditions did weaken since we last talked during the quarter, with interest rates remaining elevated. The other aspect is consumer confidence decline, which affected our remodeling. Builders have actually slowed a little bit from a construction standpoint and international markets have softened. Inflation has eased, but our costs are still higher than the prior year.

Got it. Okay. That's helpful. And then there was a couple of mentions of outperforming the market. I know hard services in North America was one area you called out in particular. But just curious if there were other product categories and regions where you guys outperformed, what do you kind of attribute the outperformance to?

Our ceramic sales in the third quarter grew. We think more than the markets due to our improved product and channel mix, we have a larger commercial business than our other segments, which also enhances it. We benefited from new product introductions as well as operational improvements. And then we continue to get benefits from the restructuring in the Flooring Rest of World. As we mentioned in the original remarks, we also had the insulation business and the Board's businesses volumes were up. And then across the business in the U.S., we had our hard surface business and we're doing well as some examples.

Our next question comes from Matthew Bouley from Barclays.

Question on the price increases that are related to the tariffs. I'm curious, it sounded like some of the initial price increases may not be fully flowing through yet, if I heard you correctly, given some of the inventory in the channel. So if you can just kind of delve into a little detail on kind of what's happened with the initial price increases and then some of these additional price increases that you've announced, when might those begin to benefit you guys?

Yes. So the priorly announced price increases are flowing. And so we have also announced in the third quarter additional price increases, both to recover the tariffs and to recover inflation in carpet for the tariffs, we announced an additional price increase between 5% and 10%. And for carpet, we have announced approximately 5%. And so as they are now announced and as we see realization of that, that will take us some time until it reaches equilibrium.

And then given the volatility, we will also adjust our strategies if tariffs would change or market conditions would change because things are quite volatile, as you know.

Just as a comment, most of our tariffs today range between 15% and 50% of the pieces. We've taken actions to optimize the supply chain, which is negotiating different pieces, moving products between countries, dropping and adding different product categories, and we're implementing price increases to offset the balance. We've also got some benefit from lower freight rates that have been declined during the period, which is helping, and it will take some time for the market to equilibrate as he said.

Okay. Got it. Maybe I guess that then leads to the tariff question then. Just curious since the reciprocal tariffs ended up in place. So over the summer, if there's an update or if you can quantify perhaps sort of the mitigated or unmitigated headwind and if any of that is in your fourth quarter guide? Or we should think about more of a Q1 impact as those tariffs flow through?

If you take the average of what we're paying, it's probably approximately 20% on all the imported products in general. That relates to, on an annual basis, about $110 million impact before any mitigations that we've done is with the -- we just talked about the different things we were doing is that we have announced price increases, and it will take a while for them to flow through in the markets to absorb them as we go through. So we think as we go into next year, we're hoping to have everything aligned.

Yes. Matt, right now, to answer to the second part of your question, we have seen some impact from a cost perspective. In the third quarter, I expect to see it continue in the fourth quarter. But also, we've seen the benefit of the initial price increases both in the third quarter and the fourth. And yes, it is contemplated in our guidance.

Our next question comes from Collin Verron from Deutsche Bank.

You guys also called out raw material and energy costs have come down from their peak. Can you just help us think about the magnitude of decline that you see in your raw material costs? And maybe how early in 2026, they'll begin to help margin just given the normal lag from when it will move from your balance sheet to your P&L? And maybe touch on the order of magnitude you can expect in each segment?

From an inflation standpoint, in the fourth quarter, we will see raw material prices easing from their peak earlier in the year. Energy and wages will continue to be higher than last year. And as I just noted, tariffs will also increase our costs. We do anticipate continued inflation in our input costs next year. And those can be across both from a material perspective, wages and benefits and energy.

Okay. Understood. That's helpful color. And then Rest of World, they reported adjusted sales growth, I believe, in the quarter. It was a little bit better than normal seasonality from 2Q to 3Q. I was just wondering if you could comment on -- you think you found the bottom here in Rest of World. And are you anticipating year-on-year growth in the fourth quarter in that segment?

Yes, conditions in general in Europe and the housing market in Europe have continued to be slow. We also have the geopolitical events in Europe that are reducing consumer confidence. And most of the Western European countries budgets are stretched. And so we think with the decreasing interest rates down to 2% in Europe, that housing should improve over time. We also know that households have built record savings levels and that inflation is coming down in Europe. And so both of those would fuel a recovery.

And then lastly, also, energy prices are continued to decline a little bit in Europe. That's kind of the European conditions we see at this moment.

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

I just wanted to follow up on the last question. Just on the material costs, like looking at oil prices have come down and natural gas come down, I think some of recycled like poly is lower. I'm understanding like just a lag when you guys realize it like what's sort of the visibility on inflation into 2026, -- like could there be a relief as we go into next year?

Well, to answer the first part of your question, it usually takes 3 to 4 months for it to cycle through the inventory. And as I stated, as we look forward into Q1, you'll have the normal wage and benefit increases. And right now, we still see impact on the tariffs, obviously impacting Q1 and still some minor impact on the higher material costs.

Got it. Okay. And then can you just -- the cost savings initiatives that you've previously announced and then the additional one that you just announced this quarter. Can you just walk us through like the cumulative tailwind to the fourth quarter and then what you expect to carry into 2026. And then just remind us, do you expect additional productivity on top of that? Or is that inclusive?

Sure. As we previously said, we were looking at savings about $100 million, fairly evenly spread across the quarters with the additional actions we announced, plus with a little better performance on the previous ones, we're up to about $110 million. So a little bit more in the fourth quarter. As I look forward to 2026, just from the restructuring actions, we should have approximately $60 million to $70 million favorable impact next year. And again, fairly evenly spread across the quarters.

In addition to that, you are correct that we continue to have our normal ongoing productivity initiatives really across the business.

Our next question comes from Susan Maklari from Goldman Sachs.

My first question is going back to the new products. and knowing that there's a lot that's going on across the business, but maybe focusing mostly on the North America piece. Can you talk about where those launches are in terms of their life cycle, how much more momentum we could see next year? And any plans for additional products that could come through that could allow you to realize favorable mix or even outgrow the market in 2026, if macro and the housing environment stay more challenging?

Every one of the businesses has product innovation coming through it. So in ceramic, the business is going towards three-dimensional tiles and different surface textures to make them look different. There's also new decorating technologies to enhance them further. In the LVT collections, they are updating the decorating trends as well as with introducing PVC alternatives that we just lump into a group we call hybrid. And we have a new quartz countertop line that's coming in that should be helpful today with the increased tariffs on those, especially because a large part comes out of India [indiscernible] so that's starting up, and it has new technology that will introduce new looks that I don't believe anyone else in the world can make.

And then we continue to always increase the realism in the laminate introduce new formats and sizes and shapes and then continually all the businesses are incrementally improving the offering.

Okay. That's helpful. And then, Jeff, can you talk a bit about how you're thinking about the path for margins next year? How do we think about what the businesses can achieve given the company specific elements in the macro that you'll likely be facing? And how that compares to the longer-term target that you've set for the business in kind of that high single, low double-digit range?

Jim and I can get that together for you. First and next year, we're looking at next year as being a transitional year from the cyclical low and we're expecting it to improve somewhat as we go through. Central banks, we believe with the lower interest rates everywhere should improve spending on housing around the world. We see the mortgage rates are declining. There's high home equity rates as the price of houses have gone up and the increased housing supply around the world should help them benefit the category.

There's also where we're going into and this is a really long cycle. I don't remember, but one, I think, in my career that's lasted more than 3 years like this one has, and so there's a huge pent-up demand in the remodeling business as people have postponed larger projects. We anticipate with this higher volume and improved pricing and mix next year. We should see the restructuring and productivity initiatives that Jim talked about earlier should help lower our cost and improve the margins. And the exact point of the inflection point and when it's going to happen, we don't know exactly when, but we know what it's going to. And then when it happens, there's usually multiple years of above-trend growth as we recover from the bottom of the cycle.

And I would build on to that, certainly emphasizing the cost structure reductions that we've made to leverage our margins as we start to see those volumes increase. Input costs as we go into the first quarter of next year, as I said, we'll continue to go up in total. But productivity and tariff price increases should help us offset. As Jeff said, tough to predict when the turn actually happens, but we're anticipating better results for the year based on the combination of our product innovation and our cost reduction actions.

Our next question comes from Sam Reid from Wells Fargo.

Wanted to know if you could quantify the benefit to ceramic volumes in the third quarter from that new Daltile initiative into Lowe's. And then any sense as to whether there's plans for additional sell-in benefits in the fourth quarter that might be embedded in the guidance?

Lowe's purchased ADG and so we are a long-standing partner of both of them. At this point, it really hasn't impacted the business in the third quarter one way or the other. Our goal with every -- like with every customer is to optimize our business together and maximize our results together.

That helps. And then maybe just more of a housekeeping question. But if I heard correctly, I believe there's going to be 4 additional shipping days in the first quarter and then a corresponding 4 fewer days in the last quarter of '26. Can you be able to just quantify the impact from those shipping days, maybe the top line and bottom line, especially in that first quarter, just so we have some context there for modeling?

It is a reset year for us in terms of the calendar. And those 4 additional days from a year-over-year perspective, it's about 6.5% benefit on the sales line. And obviously, it really depends on by segment, the flow-through of which products and such for a margin perspective. But from a sales perspective, you can plan on kind of every day is roughly 1% to 1.5% change. And then to [indiscernible] obviously has, as you pointed out, it has the same reduction in days.

Our next question comes from Keith Hughes from Truist.

[indiscernible] Paul's comments about some improved retail traffic in the quarter and really didn't show up on sales, it looks like you talk more about that, where you're seeing it and has that continued into October?

Yes. As we went through the quarter, we saw slightly improving retail traffic. We had some information from our customers. But in general, the current consumer uncertainty continues to limit remodeling activity. And so the postponement of large discretionary projects and also the declining home sales have significantly reduced the flooring sales through the specialty retailers. And so we are now like just said, 3 years in to consumers deferring these projects. And so we anticipate when it turns that it could lead to a relatively strong recovery in that channel.

Our next question comes from Michael Rehaut from JPMorgan.

I just wanted to start off -- wanted to start off with maybe just going back to tariffs for a moment. And wanted to better get a sense of -- I think it kind of started to quantify a little bit of the impact from a cost standpoint on your own business. Just wanted to make sure -- maybe if you could just repeat those numbers? And what I'm really looking for is if you kind of think about 1Q, 2Q, 3Q now, what the cost impact has been on your business. And for each of those quarters, what have you been able so far to recover in price? I understand you expect 2026 for it to be fully offset. But kind of where we are today in that quarter by quarter?

As Jeff talked about earlier, right now, we're doing -- we're seeing about an average impact of about 20% or just over $100 million to $110 million before the mitigating action. Again, that's an annualized amount. We started to see in Q3, as I previously stated, some impact on from a cost perspective. But as planned, we are offsetting that with pricing, both in Q3 and in Q4. And then we'll continue, I imagine to see it build as you go into the first quarter of next year. But remember, from a pricing perspective, we are on our second price increase due to the tariffs on those specific products that are impacted.

Okay. I appreciate that. I guess, secondly, I just wanted to shift to the balance sheet and capital allocation. I know you kind of edged down, I believe, your CapEx outlook for this year. Your balance sheet remains pretty strong. I know you bought back a little bit more stock this quarter. Just trying to get a sense of what's kind of holding you back for being a little more aggressive in the share repurchase department. I know historically, all else equal, if it's a healthy market, you have a pretty active M&A program and certainly like to keep a certain amount of dry powder. I'm wondering if the reason for maybe this more continued restrained share repurchase approach, it is you have eyes on the M&A market over the next couple of years, if there are certain assets that are coming up because otherwise, I feel like people might have expected a little bit more on the share repurchase side?

Well, really, from share repurchases to recap, we've bought about $108 million back year-to-date. And that's on free cash flow from a year-to-date perspective of about $350 million. We're going to continue to use that as part of our overall capital allocation strategy, and we expect to continue investments in our businesses as the market improves. Remember, that's one of our priorities to try to drive an increase in our margins and our results. We will optimize our product offering and continue to increase productivity during that period.

We should see, to your point, more opportunities to acquire businesses as the environment strengthens. And again, share buybacks will continue to be part of our strategy as we go forward.

Our next question comes from Adam Baumgarten from Vertical Research.

Given some kind of relative stability on the tariff front, again, relative beating the key term. Are you kind of the industry now is a bit more coordinated from a tariff-driven price increase perspective versus maybe over the summer when things are a bit more hectic and everyone was trying to figure things out, maybe it's a bit more kind of broad-based at this point?

I'm not sure it's coordinated. The whole industry has the same impacts from the tariffs going up. The industry, like other ones tried to increase inventories, not knowing what's going to happen to reduce it. So there's high inventories going into it. So -- and then with the changes in place, we put through an increase to the first of the year. At the moment, most of the industry has announced increases about now going into the fall, and it has to flow through all the pieces and get done. And we're assuming it will take until the first of the year for it to level out, given there's -- everybody has got different inventories and different strategies. But we assume that somewhere about the first of the year that'll equalize out.

Okay. Got it. And then just on commercial, I know that's been a nice outperformer relative to residential for a while now. But you had at least last quarter, kind of talked about maybe some leading indicators pointing to some potential slowing. Are you actually seeing any signs of that demand in that channel slowing at this point?

So yes, you're correct. Around the world in the different markets and segments that we are active. The commercial channel continued relatively to outperform the residential market and our backlogs have remained stable. But we also see in some markets and segments some slowing activity. And so we are trying to compensate that by pushing our higher-end products with unique advantages, which helps in pricing and in margins. And in general, also, our ceramic segment and our ceramic businesses have a higher exposure to the commercial segment than Flooring North America and Flooring Rest of World.

Our next question comes from Philip Ng from Jefferies.

Now that you actually have a better view on where tariffs could land. Remind us how you stack up from a cost standpoint in the U.S. in some of your major categories versus your competitors, like whether it's ceramic, laminate, LVT and then, of course, [indiscernible] you kind of pointed out, a lot of that is coming from India. So there's some pretty sizable tariffs coming in. Is your laminate product becoming even more competitive versus [indiscernible] products and a better substitute for LVT? And have you started seeing any new placement from your channel partners, whether it's the builders, retailers or the [indiscernible] set of things?

Yes. So you're right. Our waterproof laminate collections continues to be an excellent alternative to LVT, and we are indeed seeing builders shifting to our laminate given its performance and aesthetic and also installation advantages. And so with imported laminate, now also included in the reciprocal tariffs this should benefit us because, as you know, all our laminate products are produced here in the U.S.

Okay. Do you have a big cost advantage for most of these at this point, our products, some of these bigger categories that are impacted by tariffs?

I mean, laminate is a very good value-oriented product in the market compared to other options. And so with our domestic assets in North Carolina, we have a very competitive setup in that category.

And then in ceramic, most of our portfolio comes -- is manufactured in the U.S. and Mexico, which is advantage as tariffs increase.

Okay. That's helpful. And then a lot of moving pieces. Certainly, there's a price cost element lag with your prices coming through early next year. And then obviously, input costs have come down, and there's a lag associated with that as well, and you got the productivity gains. I think, Paul, in your prepared remarks, you mentioned the word equilibrium. And then Jim, can you kind of help us unpack all that? I know a lot of moving pieces here. But when we look to early next year, is the goal that productivity, restructuring plus price cost is kind of neutral? And then whatever volume growth you have will ultimately drive EBITDA and profitability. Is that the right way to think about things?

Jim will answer, but the equilibrium we were talking about was in the tariffs and the passing the tariffs through and the industry equilibrating so that it's a little confusing with the different inventories and strategies as people implement them. So we think by the first of the year, the tariff situation will equate. Jim, do you want to answer the second part?

The second part, Phil, is if we kind of start with Q1, we'd expect somewhat normal seasonality, obviously, adjusting for the 4 shipping days I noted. Input costs -- and again, when we say input costs, it's everything. So it's not only material, it's wages, it's labor, it's energy and shipping costs, and that should continue to go up, but productivity and tariff price increases really should offset. And although it's difficult to kind of predict the volume trajectory, we do anticipate that the results should improve from a year-over-year perspective.

So Jim, did I hear you correctly, so the productivity and price not that should offset inflation. That's like in equilibrium. Is that right?

Yes. The combination of all those, that is the plan right now that they should -- should be able to basically offset.

Our next question comes from Stephen Kim from Evercore ISI.

This is Atish on for Stephen. Just going back to the commercial question. Can you give us an idea of how large the commercial piece is for the company overall and by segment as well? And then which of the larger verticals, maybe like on a dollar profit basis, are you seeing strength in and which ones are the most challenged?

Well, overall, from a company perspective, we have about 25% exposure to commercial, but a larger piece of that is in our Global Ceramic segment. And so you see strength not only in the U.S., but in Europe as well. And then in our U.S. business in Flooring North America, you have seen the backlog remained fairly stable led by the government and education channels.

The Rest of World channel has the lowest amount, very limited commercial in it.

That's helpful. And then -- just kind of taking a step back, overall, during this kind of challenge period, how are you managing your sales force? And then is there any distinction between how that's managed between commercial and resi? Any kind of color there would be helpful.

[indiscernible] what you're looking for. The sales forces, we have different sales forces in each business in each region, depending upon the region and the size of the business, they are more or less specialized depending on where it is. The most specialized ones would have very specific sales groups calling on retail. They have national accounts that would have multifamily would be separate and builder and you would have a unique sales force calling on each one of those. And then same thing and you get in the commercial categories. They would be broken down by different segments, and each of the segments would have specialists in it to be able to convey the value of the products to each. Now those would be the most specific, and then depending upon country and product category and how big it is, it could be a very limited segmentation up to the extreme of every category segmented.

Our next question comes from Trevor Allinson from Wolfe Research.

A follow-up question on the latest round of restructuring. Can you just talk about what you're accomplishing with this round that you didn't complete with the previous restructuring? Is it just incremental capacity coming off line? And does the recent restructuring impact either different product categories or geographies and previous actions? Just how should we think about that being distributed across your [indiscernible]?

It's fairly spread, Trevor, across all 3 segments. The segments continue to kind of challenge each of their structures. And so there's not necessarily specific, but we're looking at unprofitable products or plants that we could do a consolidation in as well as just exiting inefficient assets.

And it's also taking out costs in the administration as well as sales and marketing in addition to the operational costs everywhere.

Okay. That's helpful. And then I think Paul mentioned the LVT market in Europe becoming more competitive. Do you think that's due to more products moving into Europe from Asia due to the U.S. tariffs? Or is it simply just due to a weaker European market overall?

Yes. The LVT is the largest imported category in Europe. And although it's a lot smaller than in the U.S. It's also growing a little faster than the market. And so imports from China are growing and the market continues to be competitive. And then in Europe, we are combining both manufactured and sourced products to optimize our position in the market.

And our next question comes from Mike Dahl from RBC Capital Markets.

It's Chris on for Mike. Just going back to North America price mix. I'm just trying to get a better sense of net of the tariff dynamics, the key drivers there. Could you just provide a little more color on the competitive pricing pressures you talked about, how much of that is driving the inflection lower in price mix this quarter? And how much is just mixed down?

Sure. What we're seeing, obviously, is demand is lower and less than last year that's creating competition is very aggressive and promotions are being used. Residentiary modeling has probably impacted the most by consumer confidence, which is deferring projects and also creating some trade down. Internationally, political events are certainly constraining those markets. And in the midst of all this, we are continuing to see our ceramic with its commercial penetration, outperforming the other segments.

Got it. Okay. And then in terms of the outlook on price mix and layering in the tariff pricing out there. Do you guys have a best guess in terms of when we could see that segment return to positive price mix or some of the offsets and uncertainty around tariffs and so leave that uncertain?

From an overall company perspective, I would anticipate from a year-over-year variance that we will see some improvement in the fourth quarter as more pricing comes online. And then again, as we go into next year, continued improvement in that area.

And just to clarify, is that improvement sequentially in terms of full year in headwind, but moderating or year-on-year growth?

I'm talking about year-on-year.

We do have 1 additional question. It looks like it's from Timothy Wojs from Baird.

Maybe just 1 clarification and 1 question. So the clarification just on Phil's question, when you were talking, Jim, about kind of pricing and productivity kind of offsetting material costs. Were you talking more as you kind of enter 2026? Or were you kind of saying that should kind of be the expectation for '26?

I was talking about it as we entered 2026 looking at the first quarter into even the second quarter, depending on obviously what happens to material prices as we exit the year.

Okay. Okay. And then the second question, just in areas like ceramic, where your competition is raising prices because of tariffs and you're advantaged. How are you kind of approaching situations like that with regard to kind of optimizing price and volume? Are you trying to take price at the same time? Or are you kind of keeping price consistent and really pushing for volume in placements?

This is really a balance between all of them. You have to take each market, each product and what's going on and depending, you can see in our carpet business, the industry has been absorbing the pricing for 3 years. We haven't had a price increase. We have inflation every year. So the industry -- we announced prices and the whole industry has announced prices to try to get some of the coverage of the inflation back. We have to go through each product and category and evaluate it at the time.

And ladies and gentlemen, with that, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Jeff Lorberbaum for our closing remarks.

Mohawk is taking many actions to prepare for the recovery of the markets that we're in. We are at the bottom of the cycle. We can't determine the exact inflection point, but there is significant demand for housing, remodeling that's been postponed and with the interest rates coming down, we know we're going to see better times ahead. We just can't pick the moment.

We appreciate you joining our call, and thank you for taking time to be here.

And ladies and gentlemen, that will conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

Good day, and welcome to the Mohawk Industries Second Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded.

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

Thank you, Asia. Good morning, everyone, and welcome to Mohawk Industries quarterly investor conference call. Joining me on the call today are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Paul De Cock, President and Chief Operating Officer. Today, we'll update you on the company's second quarter performance and provide guidance for the third quarter of 2025.

I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission.

This call may include discussion of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP 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.

Thanks, Jim. In challenging conditions across our regions, our results reflect the impact of our ongoing operational improvements, cost containment actions and market development initiatives. Our net sales for the second quarter were $2.8 billion, essentially flat as reported and on a constant basis.

Our premium residential and commercial products and new collections introduced during the past 24 months benefited our performance. We generated second quarter adjusted earnings per share of $2.77 with strong productivity and restructuring actions as well as favorable FX impact and lower interest expense, offset by higher input costs and plant shutdowns.

Our restructuring actions are on schedule and delivering expected savings as we close high-cost operations, eliminate inefficient assets streamline distribution and leverage technology to improve our administrative and operational costs. Our global operations team continued to identify productivity initiatives to lower our costs through enhancements to equipment conserving energy, optimizing our supply chain and reengineering our products. Our industry faced continued pricing pressure from lower market volumes, which we mitigated through strengthening product and mix.

During the quarter, we generated approximately $125 million in free cash flow, and we purchased about 393,000 shares of our stock for approximately $42 million. Our Board recently approved a new authorization to acquire $500 million of the company's outstanding stock. We have confident in our strategies to deliver long-term profitable growth as the industry recovers from this cyclical downturn.

A dominant trend across our geographies is consumers' deferral of large discretionary purchases, which has reduced demand in our industry for almost 3 years. geopolitical events, inflation and low housing turnover are contributing to market uncertainty that is limiting residential remodeling and new construction. The commercial channel continues to outperform residential However, the Architectural Billing Index in the U.S. is forecasting slowing conditions. Available U.S. housing inventory has risen to its highest level since 2007, though elevated housing costs and high interest rates are constraining sales of both new and existing homes.

In this challenging market, builders are offering price reductions and buying down interest rates to encourage purchases. While housing turnover has historically driven remodeling, we believe that families remaining in their homes longer and increasing multigenerational household will require additional renovation to meet evolving family needs.

The Federal Reserve has postponed interest rate cuts while monitoring inflation and employment trends. Forecasters believe that Fed will cut rates twice in the second half of this year, given potential market weakness. In June, the European Central Bank cut rates to 2% to stimulate the economy and the housing market. The ECB move comes as inflation has slowed to their target lower interest rates should support increased consumer spend, discretionary spending and business investment. The European housing market varies by region, though a shortage of units and affordability are common issues.

In June, Germany's new government approved legislation to expand home construction by removing barriers at the Lake building projects. Since the pandemic, European households have built up record levels of savings which combined with lower interest rates should encourage housing sales.

Given the increase in tariffs, we're emphasizing the benefits of our locally produced collections and leading position as a North American manufacturer, we have begun to address the implemented tariffs through price adjustments and supply chain optimization. Earlier this month, the U.S. government set a new deadline of August 1 for countries to complete tariff negotiations while also announcing specific tariffs on key trading partners. We are continuing to monitor the changing tariff levels and will adjust our strategies as they evolve.

On July 15, we released our annual sustainability report, which is currently available on our website, embracing sustainable processes and products aligns our commitment to improve our operations and provide industry-leading features and benefits. We continue to invest in product circularity material optimization and green energy to benefit our customers, the environment and our results. This year, major media outlets have recognized Mohawk for reducing our carbon footprint, fostering innovation and developing a talented organization.

Now Jim will review our financial details for the quarter.

Thank you, Jeff. Sales for the quarter were just over $2.8 billion. That was flat versus the prior year as reported and on a constant basis due to favorable product and channel mix led by our hard surface business in Flooring North America in our commercial business across the enterprise, partially offset by negative volume and continued price pressure.

Gross margin for the quarter was 25.5% as reported and excluding charges, was 26.4% and a decrease of approximately 70 basis points versus the prior year, primarily due to higher input costs of $44 million, lower sales volume of $22 million and increased shutdown costs of $18 million partially offset by productivity gains of $47 million and favorable FX of $15 million.

SG&A expense as reported was 18.8% of sales and excluding charges was 18.5%, relatively close to the prior year. It gives us an operating income as reported of 6.7%. Nonrecurring charges for the quarter were $34 million related to restructuring actions and the associated costs undertaken by all segments which, in total, will result in annual cost savings in 2025 of approximately $100 million. That gave us an operating income on an adjusted basis of $223 million or 8% of sales. That's a decrease of approximately 120 basis points as the benefit from strengthening productivity and restructuring initiatives of $57 million and FX of $9 million were offset by the increased input cost of $63 million lower sales volume impact of $21 million and higher shutdown costs of $18 million.

Interest expense for the quarter was $5 million, a decrease from the prior year level due to lower overall debt balance and a benefit of interest income across the business. Our non-GAAP tax rate for Q2 was 19.3% versus 20.9% in the prior year due to geographic dispersion of our income and certain onetime benefits. We are forecasting a Q3 and full year tax rate to be approximately 19%. We that gave us an earnings per share as reported of 2.34% and on an adjusted basis of $2.77.

Turning to the segments. Global Ceramic has sales that just exceeded $1.1 billion. That was a 0.5% increase as reported or 1.1% on a constant basis as our product and channel mix performance offset the weakness in volume. The segment benefited from our new product introductions, leading decorating technology and the strength of our commercial business.

Operating income on an adjusted basis was $90 million or 8.1%. That's a decrease of approximately 40 basis points on an adjusted basis as the benefit from price and mix of $27 million and strong productivity of $70 million was offset by an increase in input costs of $36 million and lower sales volume of $16 million in the quarter.

Flooring North America had sales of $947 million. That's a 1.2% decrease due to lower volumes, mainly in our soft surfaces, partially offset by favorable product and channel mix, driven by our resilient and laminate businesses. In the U.S., residential modeling remains slow with the commercial channel still outperforming. Operating income on an adjusted basis was $69 million or 7.3% for a decrease of approximately 130 basis points versus the prior year as higher input costs of $23 million, unfavorable net impact of price and mix of approximately $9 million and increased shutdown costs of $11 million were partially offset by the benefit of strengthening productivity of $32 million.

Flooring Rest of the World had sales of $734 million. That's a 1% increase as reported and 3% decrease on a constant basis. The decrease is primarily due to the continued pricing pressure in the residential remodeling channel as consumers defer large discretionary purchases. The ECP though, has lowered rates further, but has not yet driven increases in housing or remodeling activity. Operating income on an adjusted basis was $76 million or 10.4% of a decrease of 220 basis points versus the prior year, primarily due to unfavorable net price and mix of $19 million partially offset by productivity gains of approximately $8 million.

Given the weak residential market, we are lowering costs by removing inefficient assets and reducing operational and administrative expenses. Corporate and eliminations was $13 million for the quarter, in line with the prior year, and our full year 2025 expenses are estimated to be approximately $50 million.

Taking a brief look at the balance sheet. Cash and cash equivalents were $547 million for the quarter, with free cash flow of $126 million in the quarter as we also repurchased shares of approximately $42 million. Inventories were just increased above $2.7 billion. That's an increase of $130 million for the quarter, primarily due to FX and an increase in imported inventory due to new tariffs.

Property plant and equipment with just above $4.7 billion, with Q2 CapEx of $80 million compared to a D&A of $156 million. The company has reduced its planned investments to approximately $500 million in 2025 and with D&A for the full year forecasted at approximately $610 million. 40% of the projects focused on cost reduction and product innovation and 40% on maintenance and other with the remaining 20% to complete our growth initiatives. Overall, the balance sheet and cash flow outlook remains very strong with current net debt of $1.7 billion and leverage at 1.2x.

Now Paul will review our Q2 operational performance.

Thank you, Jim. In our Global Ceramic segment, our results in challenging market conditions benefited from sales of our premium products strength in commercial projects, expanded distribution and operational improvements. We have pressure on pricing from excess industry capacity and pressure from imports. Our product and channel mix strengthened from our superior product portfolio and brand leadership.

In the quarter, we minimized the impact of inflation on input costs through select price increases and restructuring projects as well as numerous productivity initiatives, including refinements to manufacturing processes, supply chain optimization and increasing distribution efficiencies. In the U.S., our commercial performance was solid, while residential sales remain challenged from softness in remodeling and new construction.

We are leveraging the strength of our nationwide distribution system to target a wider range of contractors, specialty retailers and commercial projects. To counter rising input costs, we made pricing adjustments on higher-value products while increasing productivity actions. As tariffs are evolving, we are promoting our domestically produced floor and wall and our expansion of quartz countertop capacity in Tennessee will allow us to produce more of our offering in the U.S. Home remodeling in Europe remains constrained, while the commercial channel continues to perform well, led by the hospitality sector.

In major European cities or designer showrooms and educational events for architects and designers have increased our participation in commercial projects and boosted sales of our premium collections. Sales of our porcelain slabs with more realistic visuals or growing in both traditional channels as well as for use in countertops and furniture manufacturing.

In Brazil, higher interest rates have slowed the domestic market, though exports benefited sales and our mix improved. We offset higher input costs through productivity gains from operational enhancements and realigning manufacturing assets. The Mexican market remains soft, and we have implemented select price increases introduced more porcelain and innovative polished collections to enhance mix and partner with distributors to add more [ Delta-branded ]stores. restructuring initiatives in our Mexican operations are on track to improve our market position and lower our costs, with benefits anticipated in the second half of the year.

Our Flooring Rest of the World segment managed through difficult market conditions with additional operational enhancements and cost containment actions. Residential remodeling remains soft in Europe and new construction has not kept up with population growth. A rebound in home building and renovation will be needed to meet growing demand. Pricing and mix pressure remains strong in this challenging market, and we are executing promotions to optimize our results. We took many actions to increase productivity in our operations and supply chain as well as enhance our material costs. We are removing inefficient assets, reducing operational and administrative costs and consolidating operations. We continue to invest in recycling waste and green energy to reduce costs.

In the flooring category, our laminate performance improved as we have progressed through the quarter. We are expanding our LVT distribution across channels with new collections and customer relationships. While our commodity panels business remains under pressure from excess capacity in the market, our mix benefited from the expansion of our high-end decorative collections and entry into new geographies. We increased our sales volume of insulation boards despite soft demand, and we are expanding distribution in Germany and Poland to prepare for a new Eastern European plant.

In Australia, our hard surface offering performed well, and we are expanding our LVT alternatives. Carpet sales remained under pressure, and the recent election has improved the economic outlook and orders are strengthening. We implemented price increases in June and are improving efficiencies in our operations.

Flooring North America segment sales were about flat for the quarter, with strong performance in hard surface categories across all channels. rising housing inventory and lower mortgage rates could improve home sales and residential remodeling. While pricing pressure remains strong in the market we minimized the impact with enhanced product mix and cost reductions from stronger material yields, supply chain optimization and reduced marketing costs. we are managing inventories with reduced production and are making targeted investments to support sales and improve operations.

Our restructuring actions have streamlined our operations by rationalizing inefficient assets closing higher cost production and simplifying our product offering. We continue to work with customers and suppliers to manage the impact of tariff costs as the situation evolves. We had strong sales growth in the quarter from our LVT, laminate and hybrid products with retailers and builders embracing our superior visuals and features. Manufacturing enhancements at our East and West Coast LVT operations have increased operational efficiencies, improving our cost position with a strong domestic portfolio to support our growing LVT sales.

Our premium fashion and value collections led our soft surface performance as residential corporate sales remain under pressure due to reduced renovation. Our commercial capital and hard surface order backlog is strong, led by the education and hospitality sectors.

I'll now return the call to Jeff for his closing remarks.

Thanks, Paul. As we focus on market development, operational improvements and cost containment, we are continuing to take actions that will optimize our performance in the current market. Ongoing inflation and low consumer confidence are constraining industry sales and the timing of the inflection point remains unpredictable. To improve sales, we're leveraging the strength of our portfolio, superior service and brand value to expand our business with current and new customers. Through pricing -- the pricing pressure in our markets remains elevated we are improving our mix through our premium collections, commercial sales and recent product introductions.

Input cost pressures will continue with the impact peaking in the third quarter as they flow through our inventory. To mitigate these higher costs, our teams will continue to execute productivity initiatives in all aspects of our operations. Our restructuring actions should deliver approximately $100 million in benefits this year while strengthening our operations for the future. Evolving U.S. trade policy should benefit Mohawk for approximately 85% of our U.S. business is produced in North America.

We will manage the impact of tariffs through supply chain enhancements, cost optimization and price adjustments. Our guidance does not include the potential impact from new tariffs, which have not been finalized at this time. Given these factors, we expect our third quarter EPS will be between $2.56 and $2.66 excluding any restructuring or onetime charges.

Historically, down cycles in our industry are followed by several years of sales growth from pent-up demand. During the past 3 years, we have made targeted investments to improve our operational performance, cost position and our product features. Through these actions, we are strategically positioned to respond to today's challenges and capitalize on opportunities as the industry recovers.

We'll now be glad to take your questions.

[Operator Instructions] The first question comes from Mike Dahl with RBC Capital Markets.

I want to start with foreign North America pricing environment or competitive environment. I think it's interesting because in 1Q, price/mix was positive and the comp was easier in 2Q. You've got all the premium collections that seems to be doing better. Can you just help us understand a little more of that inflection back to negative net price/mix, maybe quantify kind of how you fared versus the market or give us a little more color on that dynamic on price mix and how we should be thinking about through the back half of the year and for North America?

Yes. So in Flooring North America, our segment sales were about flat for the quarter, with stronger performance in the hard surface categories. Residential remodeling remains slow and commercial continues to outperform our residential business, LVT enhancements have improved our efficiency and costs, and our teams continue to execute productivity initiatives across our operations. Our restructuring actions have enhanced our operations by rationalizing inefficient assets, closing higher cost production and simplifying our product offering.

Now from a margin perspective, we have a lot of productivity initiatives ongoing, and our mix improvements in the quarter were offset by cost inflation, price pressure and lower production. Our productivity initiatives and restructuring actions are progressing as expected, and they are lowering our costs, and we are continuing investments in new products to prepare for the recovery of the category.

And Mike, from a second half perspective, I would expect that the favorable mix, both product and channel would minimize the impact of the pricing pressures. So I would expect the year-over-year see improvement as you go through Q3 and Q4.

Okay. Yes, that's very helpful. And then my second question, the comments about this guidance does not include any potential impacts from the new tariffs, I think, clearly, the way things roll through your P&L, it seems like that would take a little bit of time to flow through anyway. But just based on all the moving pieces, if tariffs were to stay in place at the at the currently articulated rates that you see around the globe, do you have any updated or refined sense of how much cost pressure that you would have to offset?

I mean if you start out with the initial tariffs were about 10%, and we're implementing changes presently in the marketplace, and we'll continue doing that. The present reciprocal tariffs have been announced from 10% to 50%. The negotiations are continuing on these tariffs almost changing by the day. And given that we don't know what they are and it looks like they're going to have significant differences from where they're starting, we're not going to know until we get to the end.

You're right that assuming that they don't get implemented until late in the third quarter, the impact will be practically none as it no matter what they are, and we're going to adjust when they're finalized as they're needed. In addition to that, I guess, we won't know the impact that they're going to have on the economy until later and if it will have any impact on our industry.

The next question comes from Sam Reid with Wells Fargo.

The release -- sticking on the topic of competitive pricing, the release and the prepared remarks did make a few references to competitive price dynamics. I just wanted to drill down and talk through kind of where you're seeing competitive pricing most acutely in the U.S. Are there any indications that some of your peers have been pushing through price from tariffs? Or are you finding that, in general, the peers are more or less kind of holding or perhaps even pulling back on price given what we're seeing from a volume standpoint.

Thank you for your question. We've announced 8% increases that we are implementing in the market as we speak. The industry will have to increase further with higher tariffs. There's currently some delays on impact with inventory in the system, and we're obviously also reviewing other alternatives to optimize our supply chain to compensate for the tariffs.

That's very helpful. And switching gears here, I believe, as part of your ERP transition that you might actually have better visibility and real-time data into some of your kind of smaller customers, particularly some of your mom-and-pop specialty retail customers. Just curious, one, if that's the case. And then just two, kind of how you might be able to leverage that data? Is there an opportunity here to perhaps better manage pricing and inventories in that channel presumably now that you might have a better read on real-time trends?

We have some better analysis that we can see of the different customers. We're trying to use it to understand it and make better decisions through it. But in general, it hasn't dramatically changed our strategies and what we're doing at this point.

The next question comes from Susan Maklari with Goldman Sachs.

My first question is going back to the product. You mentioned several times in your prepared remarks, the benefits that you're starting to see from the newer collections that you've launched, can you talk a bit about where those products are in terms of getting into the channels? And any thoughts on how they could perhaps drive share gains and some more benefits to result in the upcoming quarters?

Yes, we've been introducing different products over the last few years. The recent introductions in the first part of the year are going into the market now and growing in what they're doing. We've introduced a lot of things because we think we're positioning ourselves as we come out of the recovery. Some of the big things in it would be ceramic, we have significant investments in new digital printing technologies that create 3-dimensional visuals, it's able to have different color intensity as well as different ways to create surface textures.

In LVT, we've introduced multiple alternatives for vinyl PVC that actually give better performance to the consumer and laminate. We've introduced the next generation of aesthetics as we go through we are introducing in countertops, new veining technology as well as getting ready to start up a new plant in the third quarter. And in carpet, we put in a whole new collection on super premium collection just as limited examples of the things that we're doing.

Okay. That's helpful. And then when we look at the margins this quarter, it was nice to see how they came together even with the pressures that you're facing in the operating environment. Any thoughts on how we should be expecting profitability to trend in the back half of this year? And then any thoughts on the outlook further as you think about conditions perhaps improving over time?

Let's see if I can give you some color to think about. We do anticipate that the second half conditions are going to remain challenging. At this point, we don't see any improvement in the market conditions. Mortgage rates, inflation and consumer confidence are still constraining the industry. We're taking a lot of actions to self-help ourselves with -- through our sales actions, leveraging our product offering. We just talked about executing productivity initiatives across all the parts of the business.

We are selectively increasing prices across our various geographic portfolios where we can get price. We expect the third quarter to follow the same historical seasonality given that European vacations impact sales when they all go on vacation in August. Around the world, central banks are reducing interest rates, which we believe could stimulate spending in housing sales. We'll continue to benefit from our restructuring actions that will total over $100 million this year. Inflation should peak in the third quarter and given higher input costs from the earlier period should flow through our cost in the third period, we have to respond to increases in tariffs as required once we know what they are and can understand the impact of different supply points. Assuming no changes in the present trend, we expect improvement in our fourth quarter results over last year.

The next question comes from Timothy Wojs with Baird.

Maybe just in the U.S. or in North America, specifically in hard surface, as you look at kind of the first half, how do you feel that Mohawk is performing relative to the market, specifically in the hard surface category in the U.S. based on what you can see?

Yes, we're performing well compared to the market. Our premium -- waterproof laminate sales are expanding. And the product is perceived as an excellent alternative to LVT in both residential remodeling and new construction. Our price and mix improved but was partially offset by cost inflation. And we think that our domestic laminate should benefit as import tariffs increase other alternatives.

And also on the LVT side, our sales increased as we enhanced our portfolio. We are expanding both our sourced and manufactured volumes. And our new hybrid vinyl alternatives with improved visuals and higher performance are being very well accepted in the market.

Okay. Okay. Great. And then just, I guess, kind of piggybacking on the answer from the last question just on Q4, maybe being better on a year-over-year basis. What would be kind of the key drivers to that on a year-over-year basis? Is it just lower shutdown costs and productivity kind of driving that? Is it something around kind of price cost? Just any more kind of details as you kind of see it today.

Thanks, Tim. We -- first of all, we expect normal sales seasonality from Q3 to Q4. As Jeff mentioned, the peak inflation that should hit in Q3 should ease as we go through the fourth quarter, so that's going to help benefit. We'll also see favorable impact from price increases, the stronger mix that we've achieved so far this year, restructuring and productivity actions. And so assuming no changes from those present trends, we do expect the fourth quarter results to be better than the prior year.

The next question comes from Michael Rehaut with JPMorgan.

So just to clarify on the comment from before, Jim, when you talk about results or profitability in 4Q being better year-over-year, is that -- I would assume that applies to not just EPS, but consolidated margins as well?

Yes, because you're looking at inflation still being in place but lower than the peak in Q3. We're still getting the benefit from productivity, both from the restructuring and ongoing initiatives. We see favorability and mix as well. So all those things will help in terms of both the sales and the margins.

Great. No, that's good to hear. Secondly, I was hoping to go back to a prior question about competitive pricing perhaps in the U.S. and in other regions as well. Just would love to dial down and get a little bit better sense. I think the question was around which product categories perhaps you're seeing competitive pricing in? And how pervasive is that? I know you -- I think been discussing this before, you guys talked about maybe what you're trying to do to address it in terms of price increases, if I heard right, I just wanted to better understand which price points and which product categories you're seeing that, particularly in the U.S. and how that's evolved over the past year, perhaps?

I think the best way to try to start it is that with the industry volumes being down for 3 years and the low volumes that the industry is at with a high capital cost and fixed cost levels that the industry has, there is -- we think we're at the bottom. The prices have declined to where we think there's nowhere for them to go in general as we go through. In addition, the industry -- and now you get into each segment and each geography, there's different pricing pressures in different ones and some of the products and categories.

We've announced price increases and the industry has in different markets. And so we're raising prices where the industry allows us to get it. And -- but -- and it's going to help us. But the inflation is still here. If you look at energy prices, chemical prices, I think they tended to peak in the first part of the year, and those are flowing through our cost now, and we think we'll be get some help from it as we get on to the fourth quarter, but I don't leave you, there's still plenty of inflation that we have to recover within it.

The -- getting back to the tariffs, the tariffs we have to understand before the last move, what these geography is going to be and where they are to determine what the best options are available to us, and we'll take whatever actions we need to. We believe that the rates are so high that the industry will pass them through and it's being a little confused by inventory in the channel. So there's some a little earlier and later than others, but they're all going to have to move.

And Mike, it's very, very important. Obviously, any discussion that we have about tariffs is to remind and remind you that we have substantial local production in ceramic carpet, laminate cheap, LVT and court contorta, which represents about 85% of our U.S. business. So it's really critical to hone in on track that we have that strong local footprint.

Yes. No, I appreciate that. I mean maybe just to squeeze one last one in. Have you seen in the last -- in this past quarter, or 2 or to the extent you've seen it, I'm curious if you expect it to continue into the third quarter. Any type of abnormal competitive actions by importers either stuffing the channel or being more aggressive in the near term in response to tariffs that -- and what type of impact that might have had on your results?

I think the best way to answer it is, you have to separate out the importers are trying to raise their inventories ahead of ahead of anything as we are. And you can see in our numbers, we've raised the inventory. So we're all purchasing it ahead to try to give us time to get the execution of it. many of our customers and their customers, the business hasn't been as aggressive as they thought.

So to tell you the truth, I don't think there's been as much buying as I thought there would be given what they've done even prior because you started out back in January. So I think that describes what's happening at this point.

The next question comes from Keith Hughes with Truist.

Switching to Flooring Rest of World. You talked about some pressure in your panels business. I guess if we x that out, how is the kind of core flooring business in Rest of World? Was it -- was some of the downside pressure less without those panels?

You're right. The industry volumes in our panel business remained slow, and we have continued price pressure in that business, although we can offset some of that with our higher-end decorative panels, which are growing and which are improving our mix.

And then the second question on the European flooring market. The European flooring market remains difficult with low demand and price pressures in the market. There's a lot of promotional activities that are being utilized to maximize the volumes. We had improving laminate performance as we progress through the quarter. And we also installed a new laminate press that is more efficient and can produce the next generation of product features. And we're also continuing to expand our LVT distribution across multiple channels with new collections and customer relationships to compensate for the slow market conditions.

With EBIT in the flooring part of Flooring Rest of the World, would it have been up without panels or still would have been down like the whole segment?

I hate to speculate on the margin profile. But certainly, as Paul said, the improvement in laminate as we progress through the quarter and LVT would be margin accretive to our business.

Next question comes from Trevor Allinson with Wolfe Research.

It sounds like commercial end markets are still outperforming for you. At the same time, the leading indicator has been soft for a while here. So I'm curious on the pipeline there. Do you expect commercial to continue outperforming for the remainder of 2025 or anticipating that business is off from here moving forward?

You're right that our U.S. commercial business performed well, and our U.S. commercial carpet tile and hard surface backlog at this moment remains strong, and that is led by the education and hospitality segments. We're making additional investments in sales activities to expand our specified business and our new product introductions, both in hard and soft categories have been very well accepted.

The ABI index is currently below 50 and has been for a while. And we do expect going forward to the market to slow down a little bit. Our Rest of World segment has limited exposure to commercial, as you know, and so they're more exposed to residential.

Okay. That's very helpful. And then a question on pricing in your U.S. ceramics business, given there's a decent amount of import competition there as well. Are you taking prices higher in U.S. ceramics or expecting to push prices higher in that business? And then you called out some positive price mix in ceramics overall in the second quarter. How much of that was a mix tailwind versus like-for-like pricing increases?

The U.S. ceramic business, a large part of the world business, the industry's business is imported, they have the same impact of tariffs going up that they have to absorb and pass through. The U.S. business, we delivered solid results in hours, and we have put through selective price increases in our higher-value products earlier in the year to compensate for the inflation.

Just to remind you the -- it has really high energy costs as part of it and the gas prices are up significantly over last year. And so around the world, we are implementing price increases selectively as we can to offset the rising costs.

In the U.S., it was fairly balanced between both price and mix.

Next question comes from Phil Ng with Jefferies.

Good to see the buyback in the quarter and upping the authorization. When you kind of think about the business as it recovers, free cash flow still pretty strong here. You guys have talked about being at the bottom of the cycle. What's your appetite to kind of dial at it up? And how do you kind of envision deploying capital in the next, call it, 12 to 18 months? Is it more geared towards buybacks or M&A, reinvesting in the business, kind of help us think through how you're going to prioritize that next 12 to 18 months?

Well Phil, we'll continue really with a balanced approach on capital allocation in that we did buy back about $42 million in the second quarter. And with the new authorization, we'll continue to use that as part of our strategy. We'll increase investments in our business as the market improves. And hopefully, we'll have more opportunities to also acquire businesses as the environment strengthens.

Okay. Super. And then obviously, not a lot of visibility on tariffs yet, but at least it seems to have a potential positive impact on price. But what type of conversations are having -- are you having with your customers? Are you having more conversations to add shelf space just given your exposure on the U.S. side, manufacturing here? Does that create a better pricing umbrella.

And when we think about the back half, you guys kind of alluded to perhaps there's some inventory in the channel, getting in front of tariffs. Is that something that we need to be mindful of that's a risk factor for you guys when you think about your business?

Yes. So we are indeed exploring commitments with customers in this environment to fully utilize our domestic capacity. And then to come back to the question, I think that Jeff already commented on, we didn't really see that much pre-buying from our customers. They have the ability to do that when prices increase but currently, demand is slower than they expected, and they are limiting these additional purchases and our forecast includes that estimate.

The next question comes from Eric Bosshard with Cleveland Research.

A lot of conversation about price increases year-to-date and bullishness in the back half on price increases from you and from the industry. I'm curious what you're observing with consumer response to price increases, I guess, retailer distributor dealer as well as consumer response. If you're seeing units change in response to the price increases, if you're seeing mix change in response to the price increases? Or is it just as simple as passing through price increases and that sticking?

One is that the price increases are just flowing into the marketplace and understanding the reaction to it and what's going to happen with the consumer, it's too early to tell at this point. We believe that the imported products though will have to go up to reflect the costs and that our local manufacturing positions will be advantaged in that environment as we go through. The inventories in the system are all over and depending upon different companies' actions or not, it just makes it a little confusing as the prices flow through, but it will level out on a limited time.

What is your assumption in regards to -- as this pricing gets into the market, does it have an impact on volume? Does it have an impact on mix?

Well, we don't know the answer, the question and it's a valid question. The question to the whole economy is, but if you push all this price through, what's going to happen to the consumer and buying and is it going to be enough to stop it. On the other side, you have our category housing is at a cyclical low that people have postponed remodeling projects and that people need to change their living to match the way their lives have changed and they postponed it. So irrelevant of the economy, our category is at such a low point, we have to come out of it as people align with their needs.

Okay. And then the last question on -- I appreciate there's a lot of uncertainty around tariffs. The China tariffs seem a bit less uncertain. That seems pretty clear where those stand. In terms of how that is impacting your business and how that's impacting the competitive dynamic Curious what you're observing LVT imports, for example, from China. What's going on with the price pass-through and what impact is that having in the market?

Most of the industries LVT indeed, is sourced from Vietnam, China, South Korea and Thailand. And so people are waiting for the final outcome of the tariff negotiations and will then adopt their supply chains. Currently, a number has been confirmed on China and so we have seen people move out of China into some of these other geographies that we have mentioned. But given the new tariff rates have not been finalized, we will have to adjust as required and see where things go from here.

The next question comes from Stephen Kim with Evercore ISI.

Just wanted to drill down a little bit more in Flooring North America. I guess, starting with volume, momentum had been building a little bit there, ex the order taking [indiscernible] in 1Q, but we saw that kind of slow in this quarter. And so I'm curious, which products -- product categories in Flooring North America, would you say the slowdown was concentrated in? And on the flip side, you had a pretty exciting high-end launch in Flooring North America. I was curious if you could give us an update on how that's going.

So in the Flooring North America segment, definitely, our corporate performance and the industry volumes in corporate are at low levels, and that led to reduced manufacturing volumes and pricing pressure. And then the weak carpet performance was offset by strong performance in our laminate business and also by strong performance in our LVT business. So we really had hard surface outperforming soft surface.

And the high-end launch?

So the high-end launch is doing well. Like we said, we introduced a lot of high-end fashion products in the market, which is a market segment that they're still doing well. And so that launch is going in the market as we speak. And we have high expectations, and the launch is going very well.

Okay. And then Price/mix was a headwind in Flooring North America in the quarter. I was curious how the breakdown -- how was the breakdown between price and mix? Did we actually see mix positive in the quarter?

Yes. So in Flooring North America for Q2, there was some favorable mix, but as Paul pointed out, with the pressures on pricing, it was offset by those pressures.

Okay. Got you. And then lastly, I had a question regarding the M&A pipeline. Basically, how is that looking? I know in the past, Jeff, you've talked about the fact that folks who owners are kind of reluctant to sell when the market is down. But as you pointed out, this is kind of in 3 years, and there are life situation changes that occur that oftentimes create opportunities. So I'm curious if you could give us an update on how your M&A pipeline is looking now?

They're still limited at this point. People's earnings are compressed. You have all the housing industry low, and there's a limited number of people and activity going on at this point. We would expect that to change significantly the same as it did in -- I think it was 2010 or '11 when it changed dramatically and came out, there were a lot of opportunities.

The next question comes from John Lovallo with UBS.

Maybe going back to Flooring Rest of World, it's pretty clear that some of the margin pressure was driven by the competitive pricing. But I wanted to kind of poke at it is that the sales were actually up about 10% quarter-over-quarter, which seems like it's better than normal seasonality and in fact, probably the best second quarter performance in a number of years. So just kind of curious what drove that strength in the top line.

Well, don't forget, John, you have to also consider the FX impact. So if you're just doing it on a reported basis, the euro really strengthened from where we started. If you go back to the last time we talked in the beginning of May to today, we saw considerable strength. So that certainly had an impact. And as Paul related earlier, our laminate business did perform better as we moved through the quarter as well.

Okay. Understood. And then in terms of the fourth quarter, you said that on a year-over-year basis, consolidated margins and EPS would be better year-over-year. I guess the question is, I think historically, EPS has sequentially declined by, call it, 20% quarter-over-quarter in the fourth quarter. I mean, would you expect a little bit better than that? Or does that seem like that's still a fairly decent bogey for this year?

I think there will be differences this year with the impact of price increases, some of the favorable mix, but especially the restructuring benefits that we talked about earlier on the call. So the $100 million is fairly evenly split across the quarters. So that is kind of abnormal to the seasonality from Q3 to Q4. And one element that is helping when you look at our improvement or should improve from the prior year. Again, that also assumes there's no changes in the present trends.

The next question comes from Brian Biros with Thompson Research Group.

This is Katherine Thompson in today for Brian. Stepping back and just taking a look at the bigger picture when it comes to imports and tariffs, I know that there's a lot of focus. But what percentage of your production for sales in North America today are manufactured in North America today versus, say, 6 to 8 years ago.

Obviously, that's been evolving over that time period, especially with the introduction of LVT. And you, of course, know how much market LVT has taken over time. Our focus is on today and as we've said, that when you look across all our product categories, about 85% of that production in the U.S. comes from the local manufacturing in North America. And again, that includes the Mexico operations, which fall under the USMCA.

Okay. So I guess what you're saying is it's difficult to put a number on that? Is there -- or even directionally, is there more net produced now because I do understand the LVT market share, James, but is it not more or less manufacturing in North America today versus 6 to 7 years ago.

It is difficult to say because of just the change in profile of all the products, but something that's been very consistent is our ceramic certainly, our carpets laminate products continue to be made predominantly in North America. So that has not changed over time.

Yes, understood. That would be a great detail to have just to be able to kind of assess the impact. Moving on to the recent build that was passed, have you quantified or outlined potential ways that you could benefit? Or do you see this still as a benefit, particularly for taking advantage of accelerated depreciation?

Well, if you think about the tax bill that was just passed, what it's doing is quantifying the changes that started in 2017. So we will take and continue to take full advantage of items like accelerated depreciation, R&D credits and such. But I think we're very much aligned with the articles in the bill to manage our tax exposure.

Okay. And I guess final question for today, a lot of focus on pricing actions and market share gains or losses and inventory. But on that, when you look at on how much of the market share gains or losses rather or attribute both the changes in the channel. So just shifting between yourself and others? And how do you see that progressing over the next 12 months given changes just in the mechanics of the channel?

If you're speaking just about North America, again -- so in Flooring North America, we think that we are in a solid position when it comes to each of the product categories, especially around, and that's why we focused on expansion in our laminate business, in our courts countertop business to really leverage that manufacturing footprint.

In the channels, if you look at a broad based, the commercial channel continues to do better than the others. You have the new construction business, like all the data is slowing down. And then you have the multifamily business where you have a slowing of the construction that has been coming on for a long period of time. And then residential remodeling has been at a low point, and it's remaining at a low point. We need a catalyst for it to change.

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

I just wanted to follow up on John Lovallo's question earlier, what is normal seasonality from 3Q to I think you said you expect normal seasonality for sales. Just what would that be, and sort of the same question for you, what would you consider normal?

When I look at sales from Q3 to Q4, normal seasonality is anywhere kind of a 5% to 6% decrease in sales that at a consolidated level.

And are there any shifts of like days or anything this year?

No. From a year-over-year perspective, there's not.

Got it. And then on EBIT, what would be the normal seasonality?

On an EBIT basis, when you look back over time, I mean, because of the holidays and Q4 across the globe, you could see a decrease again in the 25-plus percent area. And as I pointed out, the difference when our statement on Q4 is the benefit that we are yielding from our restructuring actions.

Got it. So better than that normal seasonality?

Yes.

And then I just wanted to just follow up on tariffs. If tariffs are sort of as they are in place today, like with what the current announcements are, how would you expect that to impact the short-term results? Obviously, like because it's FIFO accounting near term, you have -- your cost doesn't go up, but I think there might be more pricing. So would that actually help you near term? Or would you see cost inflation that comes through before you realize the pricing. Just how do you think about that, how that could play out if the tariffs hold as they are today?

The goal is to have them align and the question is do the industry act rationally and push it through, how do your inventory levels compared to different ones. And we're hoping that everything aligns like it's supposed to. But first, we have to find out what it is, and then we have to see how the marketplace acts upon it, and we'll take whatever actions to make sure we're competitive in the marketplace.

And as Jeff said earlier, because of the timing of the cost and it would be very minimal in the current year. And Rafe, you were asking about days. I just want to make sure which quarter you were talking about Q3 over Q3 in terms of last year, there is no difference. Q4 versus the prior year, there is 1 additional day in 2025.

Okay. That's really helpful. And then just one more on the tariff side. The channel inventory that you spoke about last quarter how there's been some pull forward ahead of that, both from you and competitors. Like where is that today. Do you think that's mostly been worked down? Or just how would -- what's the update?

Well, in general, the importers are heavy on inventory because they wanted to get ahead of all the tariff announcements. And then from a sell-out perspective, as we said, some of our customers when we increase prices have the ability to prebuy. But given the slow environment with demand, they are making limited additional purchases...

Because they made them earlier. They already raised them and they don't -- can't do anymore as it...

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

Thank all of you for your participation this morning. We're well positioned for the recovery that will occur and have a great weekend.

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