Image source: The Motley Fool.
DATE
Friday, Oct. 24, 2025 at 11 a.m. ET
CALL PARTICIPANTS
Chairman & Chief Executive Officer — Jeffrey S. Lorberbaum
Chief Financial Officer — James F. Brunk
President — Paul De Kock
Need a quote from a Motley Fool analyst? Email [email protected].
RISKS
Consumer demand constraints — Management noted that "consumer uncertainty continues to limit discretionary spending on large projects, particularly if financing with debt is required," according to James F. Brunk, leading to postponed large renovation projects and declining home sales impacting residential remodeling.
Tariff impacts — James F. Brunk stated, "we're seeing an average impact of about 20%, or just over $110 million annualized, before mitigating actions." reflecting significant cost pressures even as mitigation continues.
Pricing and margin pressure — Adjusted operating income margin fell to 7.5%. due to Inflation of $52 million, lower volume and temporary shutdown costs of $22 million, and unfavorable price mix of $20 million offset the benefit of $62 million in productivity and restructuring actions. according to James F. Brunk
TAKEAWAYS
Adjusted EPS -- $2.67 adjusted earnings per share, supported by productivity gains, restructuring, favorable FX, and lower interest expense, but offset by higher input costs and temporary plant shutdowns.
Operating Income -- 7.5% adjusted operating income margin, down 130 basis points, reflecting continued inflation, lower volume, and price mix challenges partially offset by cost reduction actions.
Free Cash Flow -- $310 million in free cash flow generated, primarily from a focus on working capital.
Share Repurchases -- 315,000 shares repurchased for approximately $40 million; $108 million repurchased year-to-date under current authorization.
Gross Margin -- 23.7% as reported; 25.3% excluding charges, with $57 million in productivity gains and $15 million FX benefit offsetting $39 million in higher input costs, $20 million in price mix pressure, and $23 million in volume and shutdown costs.
Segment Results—Global Ceramic -- Sales of just over $1.1 billion, up 4.4% as reported and 1.8% on an adjusted basis; Adjusted operating income margin of 8.1%, a decline of approximately 50 basis points mainly due to $31 million in higher input costs.
Segment Results—Flooring North America -- $937 million in sales, down 3.8%; Adjusted operating income margin of 7.2%, deteriorating 190 basis points, pressured by weaker residential demand despite gains in LVT and laminate.
Segment Results—Flooring Rest of the World -- $716 million in sales, up 4.3% as reported and 0.9% on an adjusted basis; Adjusted operating income margin at 8.3%, down 220 basis points, impacted by unfavorable price mix despite productivity gains.
Tariffs -- Imported products faced a blended average tariff impact of 20%, equating to a $110 million annualized cost before mitigation, with average tariffs on key items ranging 15%-50% of value.
Pricing Actions -- Additional price increases announced of 5%-10% for tariffs and approximately 5% for carpet, with management expects industry-wide equilibrium by early 2025.
Tax Rate -- Non-GAAP effective tax rate at 17% (vs. 19.8% year ago), with the company forecasting approximately 18% for Q4 and full year.
Capital Expenditures -- CapEx at $76 million;
Balance Sheet -- gross debt of $1.9 billion;
Q4 Guidance -- Expected EPS between $1.90 and $2.00 for Q4 2025, excluding restructuring or other one-time charges and including an additional shipping day.
SUMMARY
Mohawk Industries (MHK 7.38%) management stated that productivity and pricing actions are planned to fully offset inflation and tariff pressures as the company enters 2026, with volume growth seen as the primary lever for improved profitability, particularly in the first and potentially second quarter of 2026. New restructuring initiatives will provide $32 million in annual savings, complementing $110 million in total targeted cost reductions for the current year. The company is strategically managing tariffs through supply chain optimization, domestic manufacturing advantages, and phased price increases, with industry equilibrium anticipated in early 2025. Capital allocation priorities remain balanced across share repurchases, investment in operations, and selective M&A.
Paul De Kock addressed European LVT competitiveness, noting that "imports from China are growing, and the market continues to be competitive," while the segment uses both manufactured and sourced products to optimize positioning.
Jeffrey S. Lorberbaum indicated a focus on premium product collections and commercial exposure to help offset weak residential markets and persistent pricing pressure.
"Across our markets, our commercial business is stronger," De Kock said, citing stable backlogs in global ceramic and government and education channels within North America.
Brunk indicated that approximately 25% of revenue is exposed to commercial, with greatest weighting in global ceramic and less in Rest of the World.
Management described ongoing repositioning of sales forces by region and business line, increasing specialist focus among channels such as retail, builder, and commercial segment.
The planned acquisition of a premium wool carpet manufacturer in New Zealand will be integrated into existing operations, expanding the company's product offerings in Australia and Oceania.
INDUSTRY GLOSSARY
LVT (Luxury Vinyl Tile): A resilient flooring product category, offering realistic wood or stone visuals and frequently competing against laminate and other hard surfaces.
Hybrid Flooring: Flooring products combining properties of LVT and laminate for enhanced durability and moisture resistance, often used as an alternative to traditional LVT.
MDF (Medium-Density Fiberboard): Engineered wood panel used in decorative panels and flooring, referenced within the company's panels business.
DIY Channel: Retail sales channel targeting consumers engaged in do-it-yourself home improvement projects, notable for flooring volume shifts.
Full Conference Call Transcript
Jeffrey S. Lorberbaum: Thank you, Jim. Our third quarter net sales of $2.8 billion were in line with our expectations, slightly ahead of the 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 offerings and collections introduced during the past two 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 shutdowns.
Across our markets, material and energy expenses are now improving from peak levels, though higher costs from earlier in the year will still impact our fourth quarter earnings as expected. With our markets remaining challenged, we are 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 as the market recovers. We have identified additional restructuring opportunities to rationalize less efficient assets and streamline logistics operations and administrative functions.
James F. Brunk: 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, we anticipate delivering $110 million in savings this year. During the quarter, we continued to focus on our working capital to 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 have 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 drivers of weakness in the residential remodeling during the current cycle, while the commercial sector has remained stronger. In most of our markets, 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 new home sales with price cuts, rate buy-downs, 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.
James F. Brunk: Thank you, Jeff. Sales for the quarter were just shy of $2.8 billion, 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, 2026 will have four additional shipping days and '26 will have four less. Gross profit for the quarter was 23.7% as reported and 25.3% excluding charges.
Strengthening productivity of $57 million and a favorable impact of FX of $15 million offset 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, giving us an operating income as reported of 5%. Non-recurring 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.
It gave us an operating income on an adjusted basis of 7.5%, a decrease of 130 basis points as the impact of inflation of $52 million, lower volume and 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, a decrease versus the 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, 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%, 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, a 3.8% decrease as residential new construction and remodeling remain under pressure. From a product perspective, our LVT and laminate categories continued with positive gains versus the prior year. Operating income on an adjusted basis was $68 million or 7.2%, a 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, sales of $716 million, 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%, a 220 basis points 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, 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 1.1 times, positioning the company to be able to take full advantage of the changing market conditions. Now Paul will review our Q3 operational performance.
Paul De Kock: 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. Tile 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 due to growth in the hospitality, healthcare, 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 quartz 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, expanding our distribution. In Brazil, our volumes increased across most channels as we enhanced promotional activity. In both markets, we are enhancing our product offering to improve our mix and lowering our cost 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 continue to experience weak remodeling and new construction, which is constraining flooring sales.
In response to these conditions, we implemented selective price increases, continued to reduce our cost structure, and lowered 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 UK 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 beveling technology and parquet wood looks. We are expanding sales of both loose lay and glue-down LVT, 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 insulation business delivered solid results in a competitive market. We increased our customer base and volumes, which improved our utilization. To support our forthcoming installation plant in Poland, we are growing sales in Eastern Europe, where the economy is growing faster.
James F. Brunk: 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 offerings. 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.
Jeffrey S. Lorberbaum: Thank you, Paul. All of our markets face a shortage of available 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, 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 $2.00, with one additional shipping day and excluding any restructuring or other one-time charges. For more than three 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. consumers spending an estimated five times as much on remodeling their flooring 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 renovations 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 will now be glad to take your questions.
Operator: Ladies and gentlemen, we will now begin the question and answer session. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. We do ask that you please limit yourselves to one question and a single follow-up. To withdraw your questions, you may press star and two. At this time, we will pause momentarily to assemble the roster. Our first question today comes from John Lovallo from UBS. Please go ahead with your question.
John Lovallo: Good morning, guys. Thanks for taking my questions. The first one is, in July, I believe you guys noted that 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 lowered those expectations? And how are you thinking about revenue and margins by segment embedded in that outlook?
James F. Brunk: Good morning, 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.
John Lovallo: Got it. Okay. That's helpful. And then, you know, 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 and what do you kind of attribute the outperformance to?
Jeffrey S. Lorberbaum: 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 the world. As he mentioned in the original remarks, we also had the insulation business and the boards business whose volumes were up. And then across the business in the U.S., we had our hard surface businesses doing well as some examples.
John Lovallo: Great. Thanks, guys.
James F. Brunk: Thank you, John. Our next question comes from Matthew Bouley from Barclays. Please go ahead with your question.
Matthew Bouley: Good morning, everyone. Thank you for taking the questions. 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 you can just delve into a little detail on 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? Thank you.
Paul De Kock: 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 5-10%. 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.
Jeffrey S. Lorberbaum: Just as a comment, most of our tariffs today range between 15-50% of the pieces. We have taken actions to optimize the supply chain, which is negotiating different pieces, moving products between countries, dropping and adding different product categories. And we are implementing price increases to offset the balance. We have 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.
Matthew Bouley: Okay. Got it. Thank you for that, Jeff and Paul. Maybe I guess that then leads to the tariff question then. Just curious since the reciprocal tariffs ended up in place over the summer, if there's an update or if you can quantify perhaps the mitigated or unmitigated headwinds, 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? Thank you.
Jeffrey S. Lorberbaum: If you take the average of what we are paying, it's probably approximately 20% on all the imported products in general. That relates to, on an annual basis, about a $110 million impact before any mitigations that we have done. As we just talked about the different things we were doing, 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. We think, as we go into next year, we are hoping to have everything aligned.
James F. Brunk: Yeah. And, Matt, right now, the 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 have seen the benefit of the initial price increases both in the third quarter and the fourth. And, yes, it is contemplated in our guidance.
Matthew Bouley: Jim and Jeff. Good luck, guys. Our next question comes from Collin Verron from Deutsche Bank. Please go ahead with your question.
Collin Verron: Good morning. Thanks for taking my question. 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 declines that you have seen in your raw material costs? And maybe how early in 2026 they will 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 we can expect in each segment.
James F. Brunk: 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 cost. 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.
Collin Verron: Okay. Understood. That's helpful color. And then Rest of World, they reported adjusted sales growth, I believe, the quarter. It was a little bit better than normal seasonality from 2Q to 3Q. I was just wondering if you could comment on if you think you found the bottom here in Rest of World? And are you anticipating year-on-year growth in that fourth quarter in that segment?
Paul De Kock: 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.
Collin Verron: Great. Appreciate the color. Thank you. Our next question comes from Rafe Jason Jadrosich from Bank of America. Please go ahead with your question.
Rafe Jason Jadrosich: Hi. Good morning. Thanks for taking my question. I just wanted to follow-up on the last question. Just on the material cost, like, looking at oil prices have come down and natural gas has come down. I think some of recycled, like, poly is lower. Understanding, like, there's a lag for when you guys realize it, like, what's sort of the visibility on inflation into 2026? Like, should there be relief as we go into next year?
James F. Brunk: Well, to answer the first part of your question, it usually takes three to four months for it to cycle through the inventory. And as I stated, as we look forward into Q1, you will 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.
Rafe Jason Jadrosich: Got it. Okay. And then, can you just the cost savings initiatives that you have previously announced and then the additional one that you just announced this quarter. Can you just walk us through 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 product on top of that, or is that inclusive?
James F. Brunk: 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 to $70 million of 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.
Rafe Jason Jadrosich: Great. Thank you.
James F. Brunk: Our next question comes from Susan Marie Maklari from Goldman Sachs. Please go ahead with your question.
Susan Marie Maklari: Thank you. Good morning, everyone. Good morning, Monica. My first question is going back to the new products. And knowing that there's a lot that's going on across the business, 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 the macro and the housing environment stay more challenging?
Jeffrey S. Lorberbaum: 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 trend 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.
So that's starting up, and it has new technology that'll introduce new looks that I don't believe anyone else in the world can make. And then we continue to always increase the realism and the laminate introduce new formats and sizes and shapes, and then, continually, all the businesses are incrementally improving the offering.
Susan Marie Maklari: 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?
Jeffrey S. Lorberbaum: Let's see if Jim and I can get that together for you. First, in 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 prices of houses have gone up. And the increased housing supply around the world should help and benefit the category.
There's also where we're going into, and this is a really long cycle, I don't remember one, I think, in my career that's lasted more than three 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 of productivity initiatives that Jim talked about earlier. Should help lower our costs and improve the margins. And you know, the exact point of the inflection point and when it's gonna happen we don't know exactly when, but we know it's going to.
And then when it happens, there's usually multiple years of above-trend growth as we recover the bottom of the cycle.
James F. Brunk: 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 cost as we go into the first quarter of next year, as I said, will continue to go up in total. But productivity and tariff price increases should help us offset. And as Jeff said, tough to predict when the turn happens, but we're anticipating better results for the year. Based on the combination of our product innovation and our cost reduction actions.
Susan Marie Maklari: Okay. That's very helpful color. Thank you both. Good luck with the quarter.
James F. Brunk: Thank you.
Operator: Our next question comes from Richard Samuel Reid from Wells Fargo. Please go ahead with your question.
Richard Samuel Reid: Thanks. Wanted to know if you could quantify the benefit to ceramic volumes in the third quarter from that new dial tile 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?
Jeffrey S. Lorberbaum: Lowe's purchased ADG, and so we were 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 customer is to optimize our business together and maximize our results together.
Richard Samuel Reid: That helps. And then maybe just more of a house question. But if I heard correctly, I believe there's gonna be four additional shipping days in the first quarter and then a corresponding four fewer days in the '26. Could you be able to just quantify the impact from those shipping days maybe the top line and to bottom line, especially in that first quarter, just so we have some context there for modeling?
James F. Brunk: Well, it is a reset year for us in terms of the calendar, and so those four additional days from a year-over-year perspective, it's about a 6.5% benefit on the sales line. And, obviously, it really depends on by segment flow through of which products and such for a margin perspective. But from a sales perspective, you could plan on, you know, kind of every day is roughly a point to a point and a half percent change. And then the quarter, obviously, has, as you pointed out, has the same reduction in days.
Richard Samuel Reid: No. That's helpful. I'll pass it on. Thanks.
Operator: Our next question comes from Keith Brian Hughes from Truist. Please go ahead with your question.
Keith Brian Hughes: Thank you. One of Paul's comments about some improved retail traffic in the quarter. It didn't show up on sales, it looks like. You talked more about that, where you're seeing it as that continued in October.
Paul De Kock: 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 Jeff said, three years into consumers deferring these projects. And so we anticipate when it turns that it could lead to a relatively strong recovery in that channel.
Keith Brian Hughes: Okay. Thank you.
Paul De Kock: Thank you, Keith.
Operator: Our next question comes from Michael Jason Rehaut from JPMorgan. Please go ahead with your question.
Michael Jason Rehaut: Thanks. Good morning, everyone. Thanks for taking my questions. Good morning. Good morning. Just wanted to start off with, maybe just going back to tariffs for a moment. And wanted to better get a sense of, you know, I think it kinda 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, you kinda think about 1Q, 2Q, 3Q now, what cost impact has been on your business and, you know, 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, you know, fully offset, but kinda where we are today in that, you know, quarter by quarter.
James F. Brunk: You know, as Jeff talked earlier, right now, we're seeing about an average impact of about 20%. Or just over $110 million. Before the mitigating action. Again, that's an annualized amount. You know, we started to see in Q3, as I previously stated, some impact 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, you know, we are on our second price increase due to the tariffs on those specific products that are impacted.
Michael Jason Rehaut: Okay. Appreciate that. I guess, secondly, just wanted to shift to the balance sheet and capital allocation. I know you kinda 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, you know, all else equal, if it's a healthy market, you know, you have a pretty active M&A program and certainly like to keep a certain amount of dry powder.
I'm wondering if, you know, the reason for maybe this more continued restrained share repurchase approach is, you know, 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.
James F. Brunk: Well, really from, you know, share repurchase to recap, you know, we've bought about $108 million back year to date. And that's on free cash flow from a year-to-date perspective about $300 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'll optimize our product offering, continue to increase productivity during that period. We should see, to your point, more opportunities to acquire businesses as the environment strengthens.
And again, buybacks will continue to be part of our strategy as we go forward.
Michael Jason Rehaut: Great. Thank you.
Operator: Our next question comes from Adam Baumgarten from Vertical Research. Please go ahead with your question.
Adam Baumgarten: Hey. Good morning, everyone. Given some kind of relative stability on the tariff front, again, relative being the key term, are you finding that the industry now is a bit more coordinated from a tariff-driven price increase perspective versus maybe over the summer when things were 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?
Jeffrey S. Lorberbaum: 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 gonna happen to reduce it. So there's high inventories going into it. So and then with the changes in place, you know, we put through an increase the first of the year. At the moment, most of the industry has announced increases, you know, about now going into the fall. And it has to flow through all the pieces and get done. And we're assuming it'll take till the first of the year for it to level out given there's everybody's got different inventories and different strategies.
But we assume that, somewhere about the first of the year, it'll all equalize out.
Adam Baumgarten: 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, kinda talked about maybe some leading indicators pointing to some potential slowing. Are you actually seeing any signs that demand in that channel is slowing at this point?
Paul De Kock: 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 segments than Flooring North America and Flooring Rest of World.
Adam Baumgarten: Great. Thanks. Good luck.
James F. Brunk: Yes. Thank you.
Operator: Our next question comes from Philip H. Ng from Jefferies. Please go ahead with your question.
Philip H. Ng: Hey, guys. 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 quartz countertop, as you kinda pointed out, a lot of that's coming from India. So there's some pretty sizable tariffs coming in. Is your laminate product becoming even more competitive versus other laminate 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 on our side of things?
Paul De Kock: Yes. So you're right. Our waterproof laminate collections continue to be an excellent alternative to LVT. And we are indeed seeing builders shifting to our laminates 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.
Philip H. Ng: Okay. You have a big cost advantage for most of these at this point, your product some of these bigger categories that are impacted by tariffs?
Paul De Kock: 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.
Philip H. Ng: And then in ceramic, most of our portfolio is manufactured in the U.S. and Mexico, which is advantaged as tariffs increase.
Philip H. Ng: Okay. That's helpful. 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 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 a neutral? And then whatever volume growth you have will ultimately drive EBITDA and profitability.
Is that the right way to think about things?
Jeffrey S. Lorberbaum: 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, you know, 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, you wanna answer the second part?
James F. Brunk: Yeah. The second part, Phil, is if you kind of start with Q1, we'd expect somewhat normal seasonality. Adjusting for the four extra shipping days I noted. You know, input costs, and again, when we say input costs, it's everything. 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 kinda predict the volume trajectory, we do anticipate that the results should improve from a year-over-year perspective.
Philip H. Ng: So, Jim, did I hear you correctly? So the productivity and price and all that such should offset inflation. That's, like, in equilibrium? Is that...
James F. Brunk: Yeah. The combination of all those, that is the plan right now. They should be able to basically offset.
Philip H. Ng: Okay. Thank you so much. Appreciate it.
Operator: Our next question comes from Stephen Kim from Evercore ISI. Please go ahead with your question.
Atish: Hi. This is Atish on for Stephen. Thanks for taking the question. Just going back to the commercial question, 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?
James F. Brunk: Well, overall, from a company perspective, you know, 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 know, you have seen the backlog remained fairly stable led by the government and education channels. And then the rest of world channel has the lowest amount with very limited commercial in it.
Atish: That's helpful. Thank you. 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.
Jeffrey S. Lorberbaum: Sure. You're looking for. The Salesforce is we have different Salesforce's 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'd have national accounts. They 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 very limited segmentation up to the extreme of every category segmented.
Atish: Got it. Thank you.
Operator: Our next question comes from Trevor Scott Allinson from Wolfe Research. Please go ahead with your question.
Trevor Scott Allinson: Hi. Good morning. Thank you for taking my questions. Follow-up question on the latest round of restructuring. Can you talk about what you're accomplishing with this round that you didn't complete with the previous restructuring? Is it just incremental capacity coming offline? And does the recent restructuring impact either different product categories or geographies in previous actions? Just how should we think about that being distributed across your segment?
James F. Brunk: Yeah. It's fairly spread, Trevor, across all three segments. The segments continue to kind of challenge each of their structures. And so there's nothing 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. It is also taking out costs in the administration as well as sales and marketing. In addition to the operational costs everywhere.
Trevor Scott Allinson: Okay. Thank you. 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 product moving into Europe from Asia? Do the U.S. tariffs? Is it simply just due to a weaker European market overall? Thanks.
Paul De Kock: 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're combining both manufactured and sourced products to optimize our position in the market.
Trevor Scott Allinson: Thank you for all the color and good luck moving forward.
James F. Brunk: Thank you.
Operator: Our next question comes from Michael Glaser Dahl from RBC Capital Markets. Please go ahead with your question.
Chris: Hi. This is Chris on for Mike. Going back to North America price mix, 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? Thanks.
James F. Brunk: Sure. You know, what we're seeing, obviously, is demand is lower and less than last year. That's creating, you know, competition is very aggressive and promotions are being used. Residential remodeling is 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, you know, we are continuing to see our ceramic, with its commercial penetration, outperforming the other segments.
Chris: Got it. Okay. Thanks for that. 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 deposit price mix or some of the offsets and uncertainty around tariffs? So leave that uncertain.
James F. Brunk: Yeah. From an overall company perspective, I would anticipate from a year-over-year variance that we'll 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.
Chris: And just to clarify that improvement, sequentially in terms of so you're on your headwind, but moderating or year-on-year growth?
James F. Brunk: I'm talking about year-on-year.
Chris: Got it. Okay. Thank you. Appreciate the color.
Operator: We do have one additional question. It looks like it's from Timothy Ronald Wojs from Baird. Please go ahead with your question.
Timothy Ronald Wojs: Hey, everybody. Thanks. Good morning. Maybe just one clarification and one question. So the clarification just on sales question when you were talking, Jim, about, you know, kind of pricing and productivity kinda offsetting, you know, material costs. Were you talking more as you kind of enter 2026, or were you kind of saying, you know, that should be the expectation for '26?
James F. Brunk: I was talking about as we enter 2026, we're looking at, you know, the first quarter into even, you know, the second quarter depending on, obviously, what happens to material prices as we exit the year.
Timothy Ronald Wojs: Okay. Thanks. 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 keeping price consistent and really pushing for volume and placements?
Jeffrey S. Lorberbaum: This is really a balance between all of them. You have to take each market, each product, and what's going on. Depending on you can see in our carpet business, the industry's been absorbing the pricing for three years. We haven't had a price increase. We have inflation every year. So the industry or we announce prices, and the whole industry has announced to try to get some of the coverage of the inflation back. Have to go through each product and category and evaluate it at the time.
Timothy Ronald Wojs: Okay. Understood. Thanks a lot.
Operator: 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 Jeffrey S. Lorberbaum for our closing remarks.
Jeffrey S. Lorberbaum: Mohawk's taking many actions to prepare for the recovery of the market 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.
Operator: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.