Mohawk (MHK) Q3 2026 Earnings Call Transcript

We converted our performance into cash generating cash from operations of $471 million and free cash flow of $390 million in the quarter, bringing our year to date free cash flow to $626 million And we substantially increased share repurchases returning $261 million to shareholders in the quarter more than double what we did in the first half. Now let me take you through the performance of our end markets. In our US market, we generate a little more than half of total company sales, market conditions remain challenging. Following the recent rises in rates, demand weakened exiting the quarter and has remained soft across most products and channels during October. Particularly in the builder channel.

We are executing well and are focused on improving our leading market positions across all channels. We continue to differentiate our products and service advantages. In residential repair and remodel, which we estimate represents approximately half of our US sales, consumers continue to defer larger projects. And the outlook for existing home sales has weakened entering seasonally slower months. Activity through the specialty retail channel is holding up better and improved sequentially, while larger format retail point of sale trends remained slow. Even in this environment, our retail business grew in the quarter and gained share across most of our product categories, led by residential carpet, where adoption of our industry-first asthma and allergen friendly carpet is exceeding our expectations.

Our laminate business continues to outgrow the category on scratch resistance and real wood visuals, our ceramic remodel business improved for a fourth consecutive month and countertops grew on new quartz designs and our concierge program. Our market leading accessories assortment continues to build attachment across our hard surface platforms. In residential new construction, which we estimate represents about 1/4 of our US sales, the builder market continues to soften. Single family starts have fallen with higher mortgage rates and declining builder confidence. Affordability is constraining buyers in most regions, and large builders are managing construction costs. This is the most challenging environment across our end markets we expect it to remain so in the near term.

We added new builder program wins in both ceramic and laminate during the quarter. Our laminate is gaining with homebuilders as a better performing alternative to LVT and our stair and accessory solutions are becoming part of builder specifications. While these wins do not fully offset the market decline, they strengthen our position in this important channel and we expect them to compound when the market improves. Finally, in commercial, which we estimate represents the remaining 1/4 of our US sales, demand is more constructive than in residential, with repair and remodel activity holding up better than new development. Industry activity among architects and designers is soft, as new project awards slowed in August and September.

In ceramic, commercial sales declined as projects were deferred and we are responding by concentrating on the active segments. Hospitality, healthcare, and education are the most active segments, and return to office continues to support carpet tiles, driving strong performance in office. Our commercial LVT category continued to build momentum delivering a 6th consecutive month of order growth while sales of carpet tile commercial accessories and our rubber platform also grew in the quarter. Now pivoting to Europe. In Europe, which represents approximately 1/3 of our total company sales, consumer demand remains soft. With weak residential activity and showroom traffic.

Though commercial projects are holding up better, Our premium collections continue to outperform and in ceramic, our large format and slab offerings are growing. In laminate, our innovation leadership continues to win with customers. European natural gas prices have roughly doubled since the start of the third quarter and we have responded quickly bringing our ceramic price increase forward and announcing November price increases in European panels and installation businesses to recover even higher energy and chemical costs. Outside of the U.S. and Europe, which represents the rest of total company sales, demand remains soft with consumers pressured by inflation and high rates, although we continue to outperform.

These market conditions reinforce why our focus must remain on the actions within our control. As the largest flooring and design services company globally, Mohawk has built many unique strengths and advantages which include our leading market positions, our recognized brands, our innovation expertise, our strong customer relationships and the scale and efficiency of our manufacturing and distribution operations. Our strategy builds upon these strengths and advantages. We are aligning our actions and investments to a strategic framework comprising 4 pillars, each supporting our goal of delivering more value to our customers, along with more value per share for our investors. Now let me take you through the 4 pillars. The 1st pillar is outperforming our markets.

This is our catalyst for compounding value creation through the demand cycle. We estimate that our industry grows low single digits annually on average over the long term. We participate in cyclical end markets, but our team members find ways to succeed and perform against any market backdrop. When the industry is expanding, we must grow faster than the market And when it is contracting, we will relentlessly pursue share wins that will compound through the next expansion. Our go to market approach will be consistent through cycles, focused on the most attractive segments of the market. We will deepen customer relationships solidify Mohawk as the vendor of choice across all channels.

We will use digital tools to create downstream demand and pull our product offerings through the value chain. We are committed to continuously improving our competitive position through expanded partnerships, new customer wins and growth in differentiated routes to market. We will be transparent about conditions, but our focus like the expectations I have set for our leaders, will be outperformance through cycles and over the long term. The 2nd pillar, product innovation and brand strength deals with the solutions that drive the first pillar. Innovation is a core competency, underpinned by our 3 global innovation hubs. Ceramic surfaces in Italy, hard surfaces in Belgium, and soft surfaces in the U.S.

We own a portfolio of patented technological innovations that further support our advantage. We will continue to build on the strength of our brands and we see immense opportunities in the evolution of consumer preferences toward high quality, trusted brands over commoditized offerings. Our focus will be on bringing more distinctive products and solutions to the categories and channels where we can create the greatest value. The 3rd pillar, profitability and operational excellence, is how we will aim to ensure the highest level of service to our customers, while we continuously improve margins and incremental returns. We will be defining Mohawk's operating model building around a culture of productivity, continuous cost improvement and operational excellence, supported by strong digital capabilities.

We believe our quality and service will extend our competitive lead and deepen our relationships with the retailers, distributors and contractors who sell and install our products. The 4th pillar, cash generation and capital discipline deals with how we convert profitable growth into cash, and how effectively we redeploy that capital to enhance shareholder value. We will have a sharp orientation toward cash returns, timing and risk, and this is not unique to capital expenditures. Every dollar of deployable cash we have will pass through a strict framework. From operating expenses to capital investments to inorganic investments, We will invest sufficiently in the core business, exercise discipline in evaluating inorganic opportunities, and return capital to shareholders through consistent share repurchases.

My team and I are energized by the opportunity ahead and committed to demonstrating strategic traction delivering operationally, and deploying capital in ways that meaningfully enhance shareholder value. And with that, I will turn it over to Nick.

Nicholas Manthey:Thanks, Paul, and good morning, everyone. In a moment, I will talk about our capital deployment priorities in support of our newly defined strategy. But first, let me cover the results and outlook for the fourth quarter as well as a few preliminary planning assumptions for 2027. Net sales for the third quarter were $2.8 billion up 1% as reported and essentially flat adjusting for foreign exchange and an extra shipping day. Volumes were down 4% due to soft market demand, while the combination of price and mix was up 4% as we benefited from price increases to offset the impacts of inflation along with positive mix. Net earnings for the quarter were $163 million 5.9% of net sales.

Adjusted EBITDA $353 million adjusted EBITDA margin was 12.7%. Operating income was $188 million and adjusted operating income was $200 million, down $5 million versus the prior year. The combination of price and mix of $85 million and productivity gains of $47 million was sufficient to offset underlying input cost inflation of approximately $117 million which was in line with our expectations. Earnings per share was $2.72 and adjusted earnings per share was $2.72 Now turning to the segments. In global ceramic, net sales were $1.1 billion up 2% and up slightly excluding favorable currency and an additional shipping day. Volumes were down 1% on a constant basis, the soft market conditions impacting demand across geographies.

Price/mix improved 2%, benefiting from our inflation driven price increases as well as positive mix. Operating income was $66 million and adjusted operating income was $74 million or 6.5% of sales, a decrease of 160 basis points versus the prior year, driven by $53 million of underlying inflation, primarily from higher energy and fuel costs partially offset by price mix of $19 million and productivity of $22 million Year to date, the combination of price mix and productivity of $108 million has offset the majority of the $117 million of underlying inflation impacting Global Ceramic. In Flooring North America, net sales were $950 million, up 1%.

Excluding a 2% benefit from an additional shipping day versus the prior year, adjusted net sales were down less than 1%. Volumes declined approximately 3% on a constant basis, and price mix improved by approximately 3%. Benefiting from our inflation driven price actions and positive mix. Operating income was $72 million and adjusted operating income was $77 million or 8.1% of net up 80 basis points year over year. Productivity gains of $24 million price and mix of $15 million and tariff refunds of $10 million were partially offset by underlying inflation of $25 million The combination of lower constant volumes an extra shipping day was a $3 million net headwind.

During both the third quarter and year to date, price mix and productivity collectively have been sufficient to fully offset total underlying inflation. And we expect that to continue through the fourth quarter. In Flooring Rest of the World, net sales were $707 million down approximately 1%. Excluding unfavorable currency of less than 1% and an additional shipping day, adjusted net sales declined approximately 2%. Volumes were down approximately 10% on a constant basis, primarily due to soft market demand. Strong gains in price and mix continued from the second quarter into the third, contributing approximately 7% of sales growth. The result of price increases implemented earlier this year.

Operating income was $66 million and adjusted operating income was $66 million or 9.3% of sales. up 100 basis points as positive price and mix of approximately $51 million were partially offset by inflation of approximately $35 million and a combined $14 million net headwind from lower constant volumes and an extra shipping day. Year to date, the combination of price mix and productivity has more than offset total inflation. Though in the fourth quarter, we expect these to be more in line as higher costs work through inventory. Now turning to cash flow and capital deployment.

In the quarter, cash from operations was $471 million capital expenditures were $81 million resulting in third quarter free cash flow generation of $390 million up 26% versus the prior year. That brings our year to date free cash flow to $626 million up 78% versus the prior year. We now anticipate the full year 2026 capital expenditures of approximately $445 million versus our prior expectation of $460 million We returned $261 million to shareholders in the quarter through repurchases, reducing our outstanding shares by more than 3% while our net debt leverage improved sequentially to 0.7x at the end of the quarter.

Thus far in the fourth quarter, we have already returned an additional $34 million to shareholders, completing the previous share repurchase authorization. Now turning to our outlook. On the second quarter call, we shared the following assumptions with you. We assume soft market conditions. Demand remained challenging and weakened further as we exited the quarter. We would indicated that sales could decline sequentially by more than typical seasonality, which played out as anticipated as volumes normalized following the initial placement benefit in the quarter. We would also expect that our pricing actions along with productivity would be sufficient to offset inflation for the year. And our year to date execution has positioned us well to deliver that.

And finally, we allow for the possibility that inflation could rise further. And as it has, we have responded appropriately. So looking ahead to the fourth quarter, which has 4 fewer shipping days versus the prior year, and 3 fewer days versus the third quarter of the current year, we assume flooring market conditions will remain challenging and our outlook reflects recent trends that suggest demand will be softer in the fourth quarter relative to the third. We anticipate single digit adjusted net sales growth versus the prior year.

Our total underlying inflation on a year over year basis is expected to be similar to the third quarter and we are committed to fully offsetting inflation through the combination of price, mix, and productivity actions. Together, we expect fourth quarter adjusted earnings per share to be between $1.35 and $1.45 Further assumptions embedded in this guidance can be found in our earnings release. Now turning to some thoughts going into next year. We will provide a more formal outlook in our February call. But we feel it is important to provide some planning assumptions. On demand, we are planning for market volumes to decline next year. Assuming that backdrop, we believe we can continue to outperform.

Setting aside tariff refunds that we received during 2026 our underlying cost of sales inflation accelerated from low single digits in first half of 26 to mid single digits in the third quarter, and is expected to remain up mid single digits in the fourth quarter. We will carry the same rate of underlying cost of sales inflation into early 27. And we have taken actions across the business that we believe position us to keep up with inflation and continue offsetting it on a dollar-for-dollar basis. 3 things support that belief. First, carryover benefits from realized pricing we announced earlier this year. As well as new pricing actions we are taking now.

Second, mix improvement across many products and geographies. And finally, productivity initiatives that we expect will improve our cost structure. Next year, we expect to continue generating strong free cash flow as we have in recent years. Benefiting from solid operational performance, focused working capital management, and lower capital expenditures. As we move forward, we are committed to a disciplined and consistent deployment of this capital in support of our strategic framework. Now let me outline our capital deployment priorities. First, we will invest in the highest returning organic opportunities that sustain our core strength and enable our strategy. This includes maintenance, productivity initiatives, and innovation projects.

With limited need for any added capacity, we estimate the baseline capital expenditure needs of the business to be approximately $375 million annually. Second, we will be disciplined in evaluating bolt on inorganic investments that align with our growth strategy. And third, capital that is not deployed in support of the above will be returned consistently through share repurchases. The Board of Directors has approved a new $500 million share repurchase authorization enabling us to continue executing on this priority.

In addition, we will maintain a strong and efficient balance sheet with a long term net debt to adjusted EBITDA target of up to 2x subject to a continuous assessment of cyclical risk and a commitment to our investment grade ratings. Taken together, this framework is designed to give us the flexibility to invest through the cycle while ensuring that the stable and durable cash flow generated by our business is allocated purposefully toward creating the greatest long term value for shareholders. And with that, I will turn it back to Paul.

Paul F. De Cock:Thank you, Nick. Let me close with the thesis because it is simple. Our markets will recover. But we are not waiting for that recovery to act. Our focus is on outperforming in any market leading with our innovation and brands, driving operational excellence and converting profit into cash and turning cash into value per share. The strengths that built this company remain firmly in place The discipline around them gets sharper. Our framework for investing and deploying our capital is clear. We will return cash to shareholders where it does not earn a high incremental return. And with that, we are happy to answer your questions.

Operator:We will now begin the question and answer session. If at any time you would like to withdraw your question, please press * then 2. Please limit yourself to 1 question and 1 follow-up. The first question today comes from Philip Ng with Jefferies. Please go ahead.

Philip Ng:Hey, guys. Well, Paul, Nick, congrats on your new role and a lot of exciting news today. I guess, Paul, to kind of kick things off, when allocating capital to different business units going forward, how is that process perhaps different now from a guardrail standpoint, the decision making process? And then when you have laid out the CAPEX framework for the next few years, it. it is about 80% of what you guided earlier in the year. Is that enough to kind of drive growth as the market recovers? Is there a big R and D piece that we need to appreciate as you get back in that growth mode going forward.

Paul F. De Cock:Yeah. Good morning, Philip. I will take the first part, and then Nick can follow-up on the second part. So we have provided our capital allocation framework and it is really built around disciplined investment and high return on capital. I think our job as capital allocators is as important as our operating responsibilities at Mohawk. And the value creation that we will generate is directly tied to the incremental returns we generate on the capital we deploy. And so we are hyper focused on cash returns around the globe in all our businesses, and we will be very disciplined and consistent in how we allocate our cash. And the whole leadership team has bought into this cash based mindset.

Nicholas Manthey:Yep. Thanks, Philip. And regarding your comment around CapEx, we have provided in the past roughly about 80% of our spend this year is focused on maintenance, productivity, and innovation. So that all stays fully funded. Maintenance and safety are obviously mission critical. And innovation and productivity are persistent enablers of our business. And so all of these are important, and that is why we have grouped them. Our current footprint positions us well to support volumes. In a multiyear demand recovery scenario. So I think we feel comfortable with that.

Philip Ng:Helpful. And then, obviously, you know, the concern here is obviously energy prices, freight, and all that is really dialed up. Remind us, just given the lag, when does that flow through? Is it gonna kick in, largely in 1Q? And it is pretty impressive that you are expecting price plus productivity to offset that. So any color you are comfortable sharing, guys, in terms of early feedback, in terms of pricing, and, support from competitors. Certainly, it is still a pretty challenging demand environment right now.

Nicholas Manthey:Yes. On the first part, you know, given our inventory turns, the input prices flow through our P&L on an average of 4 to 5 months later, and that will vary by a little bit by business and product. You know, for context, input prices stepped up in the first half of the year. And so when you look at our underlying cost of sales inflation, it went from low single digits in the first half of the year to mid single digits in the third quarter, and it is expected to remain there both in the fourth quarter and entering next year.

So, you know, the key point there is you have taken actions in the business to offset inflation, and that is a combination of the pricing actions. You know, some mix improvements in productivity, and that is both in the third quarter and year to date, and we intend to continue that.

Operator:The next question comes from Michael Jason Rehaut with Melius Research. Please go ahead.

Michael Jason Rehaut:Thanks for taking my questions. Good morning, everyone. Wanted to zero in first on the 4Q outlook and just confirm the, on a smaller detail side that the 4 less shipping 6% year-over-year headwind But secondly, more bigger picture, you know, against the soft market backdrop, you are expecting core sales to grow low single digits. Just want to understand where that strength is coming from, if you can give a little more color if it is across all 3 segments or are there particular end markets that you feel like you are executing some share gains or relative strength?

Nicholas Manthey:Yeah. Thanks, Mike. I will take the first part of that, and Paul will add some color. Just in terms of the shipping days versus prior year, that is really the largest single factor in our Q4 EPS versus prior year. We have 4 fewer days So we have 61 versus 65 to be precise, and that represents, about a 6% headwind. And so you are correct that, you know, we expect adjusted net sales to be up low single digits in the fourth quarter. And that is days and FX adjusted consistent with how we define that in our release.

Paul F. De Cock:Yeah. And then from the demand in some of our end markets, we really see new construction to be the most impacted here in the short term by the higher interest rates. And we even see greater impact in multifamily with lower starts and permits. Our retail business grew and we gained share, and so that is really a bright spot Teams are executing well in our retail business. I would say the same on the commercial side. Our commercial business has outperformed residential for years in market circumstances. And when you look at commercial, it is really driven by renovation projects rather than new construction activity. And we have performed well in that segment.

Michael Jason Rehaut:Great. Thanks for that color. Secondly, just on the capital allocation framework that you laid out, you know, going from 0.7 leverage net debt to EBITDA to 2x implies a pretty big potential for incremental share repurchase. Just wanted to get your sense of the timing, let's say, of getting to that 2 times leverage is that something that you would anticipate could happen relatively quickly, like over the next 12 months or maybe a longer time frame?

Nicholas Manthey:Thanks, Mike. So we are not going to guide specific timing, and we are not committing to a specific pace. But I would point you to a couple things. We repurchased $261 million in the third quarter. And so that is a demonstration of our commitment to deploy capital through share repurchases. We also said that we would, you know, be consistent in our repurchases. And so, you know, given, as you mentioned, our leverage ratio, and, the free cash flow generation of the business, We have, you know, capital to deploy above that over time. Great. Thanks so much. Thanks, Mike.

Operator:The next question comes from Steven Kim with Evercore. Please go ahead.

Stephen Kim:Yeah. Thanks a lot, guys. Appreciate the color. I am going to follow-up on that. Leverage question that Mike was just asking about. I am curious, about the 2x. You know, is that a firm ceiling or not? You know, how long would you be willing to stay above that level in the event of an M&A transaction, you know, that took you above that? Or is your intention to even with any opportunistic M and A to still stay below that? And relatedly, I assume you have some sort of level of leverage that you regard as appropriate given the current environment. I know you have indicated you would be dynamically evaluating and then so forth.

But at this state, if we were to see a situation like today, some point in the future, what would you regard as appropriate generally leverage target at that time?

Nicholas Manthey:Yeah. So thanks, Steve. You know, our balance sheet's in a strong place. Maybe to answer the second part of your question, we will be sensible about how much leverage we carry from a risk management perspective. You know, that said, we believe it to be more efficient, and we would be comfortable operating up to 2 times net debt to adjusted EBITDA over time. So think of it as more of a ceiling. You know, even in down markets, we have generated very strong and durable free cash flow, and we will continue to do that.

And so you know, as I mentioned earlier, we are not going to commit to a specific pace, only that it will move higher over time. As we deploy cash flow.

Stephen Kim:Okay. that is good. I guess. Let me ask another question. About your leverage. You got a couple of debt maturities, I think, coming up in the next couple of years. Are you planning to refinance those? Or would you be willing to take on additional debt? In order to bring leverage into whatever targeted range you have at the time? Aside from free cash flow, we have a range of options to manage liquidity as we execute on our capital deployment priorities. So we have flexibility in the near term, and we will work through the right capital structure over the long term. But specifically, with respect to those, maturities, would your expectation be to refinance those?

Nicholas Manthey:Yeah. I think we will manage as we go through. Know, we obviously are doing you know, planning, and, so we will you know, work through the right capital structure, and we believe we have the right level of flexibility. I just. To reinforce it, that, you know, the net leverage target is up to 2 point o. Yeah, got that. Okay. Great. Thanks, guys.

Operator:The next question comes from Adam Baumgarten with Vertical Research Partners. Please go ahead.

Adam Baumgarten:Hey guys, good morning. Just on sort of the current portfolio of businesses you guys have, you expect to take a hard look at that and maybe divest some potentially underperforming assets over time?

Paul F. De Cock:Yeah. Good morning, Adam. Yes, we are beginning a comprehensive portfolio analysis of our businesses. And so every business will go through the same screen We will look at market attractiveness, We will look at the competitive advantages we have in each of those businesses. We will look at cash profitability. And also return on invested capital. And then we will reposition some of the businesses, we might have to fix some of the businesses. We might have to rethink some of the businesses that fall short of our expectations. And we will share our conclusions if we have decisions to communicate on future calls. Okay. Great. Thanks.

Adam Baumgarten:And then just on the days impacting 4Q, you know, pretty straightforward on the 6% top line hit. But can you remind us how we should think about the EBIT impact there? Should we use sort of where margins are in terms of the flow through? Or should it be more of a incremental or decremental margin, I guess, in this case?

Nicholas Manthey:I think it is similar, you know, decremental to what we have tried in the past in the past, you know, in that 20% to 30% range, you know, given Q4 is a seasonally slower quarter and a smaller quarter, might be slightly worse. But you know, I would say think about it in terms of the decremental margins. Okay. Great. Thanks a lot, guys.

Operator:The next question comes from Trevor Allinson with Wolfe Research. Please go ahead.

Trevor Allinson:Question on your expectation for price mix and productivity to again offset inflation headwinds as we get into 1Q 2027. You have got January price increase out there across categories in the U.S. You talked about some pricing internationally. How should we think about the realization necessary on those increases to offset inflation? Are you expecting to be similar to what you saw over the summer for those increases? Or just how should we think about what you need to get in order to offset those inflation headwinds as we step into early next year?

Paul F. De Cock:Yes. You are correct that we had to announce further increases given the inflationary environment. And our expectation is that the realization on these future increases will be in line with our expectations on the past increases. We believe the whole industry needs to absorb the same inflation and we need pricing to recover it. And so if inflation keeps rising, we will have to take further actions as we have throughout the year And our teams have really been doing a fantastic job implementing those increases and, you know, supporting our efforts to keep up with inflation.

Nicholas Manthey:And, Trevor, just to reinforce, the point made earlier of you know, the offset to inflation is really a combination of price mix and productivity. And so we are you know, our intent is to offset that on a dollar for dollar basis. Okay. Thank you for all of that.

Trevor Allinson:And then second question is related to what you just mentioned, Nick, on the mix side. You have had a number of price increase announcements. Can you talk about how elasticity or any trade down has played out versus what you would expect? I think called out mix as being a positive tailwind. So just any color there? And are there any elasticity or trade down headwinds expected as you push more pricing over the next year?

Paul F. De Cock:Yes. Trevor, thank you for the question. I will take that 1. So broadly speaking, we do not expect our increases to meaningfully impact the consumer demand. I think the market right now has an overhang on housing affordability and consumer confidence so I think these trends are more influential on the short term intent to purchase floors than really the list price. Of flooring on the shelf. And specifically to mix what you normally see in highly inflationary environments is that you see slight demixing in the different categories. But we have been able to outperform that through our innovations and new placements and new product strategies that we put out in the market.

And so we have been able to offset that market demix I would say, with strong delivery of innovation in our markets. Thank you for all the color and good luck moving forward. Thanks, Trevor. Thank you.

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

John Lovallo:Maybe starting off just on the 4-point plan. Curious with each of the different facets, some seem a little bit you know, more short dated than perhaps some of the others. Curious if you have a kind of a you know, a basic timeline of how you are thinking about achieving kind of the full run rate or full. Hitting a full stride for each of these components?

Paul F. De Cock:Well the 4 pillars are really the long term strategy on how we are building outperformance in the market. market. it is our goal to continue to outperform the market it is our goal to continue to deliver very strong innovation to the market. it is our goal to stay operationally excellent and our capital budget provides for that. And it is our goal to be very disciplined in our capital allocation. And so these are really the pillars on how our organization runs the business. And that there is no specific timeline to that.

It is a continuous evaluation of opportunity and a continuous progress on these pillars and we will provide proof along the way with examples and with the successes on how we outperform the market focusing on those 4 pillars. Okay, understood.

John Lovallo:And then the implied fourth quarter operating margin outlook seems to imply it being down about 100 basis points or so year over year, which would be an acceleration from the third quarter despite the fact that you guys are expecting price mix productivity versus cost to be positive and adjusted net sales to be up low single digits. So what do you attribute the margin pressure to?

Nicholas Manthey:Hey, John. it is Nick. You know, I think as I said earlier, the big piece is, 4 fewer shipping days along with the weaker market condition is really, driving lower volumes. And so the cost of both the lower volume and the fewer days is certainly the margin, but also the fixed cost absorption. that is all on top of our normal seasonally slower Q4 dynamics that we have. And I would just say that, you know, as a reminder that the price cost comments are on a dollar neutral basis. And so that would potentially apply some margin pressure. And that is consistent with what we have said in the past. Okay. I understood. Thank you, guys.

Thanks, John.

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

Matthew Bouley:Just wanted to ask another 1 on the CapEx side. The $375 million baseline CapEx. I guess, something like 3.5% of sales. And you know, for Mohawk, that is a number that you know, I guess, upon a time, you know, 15, 20 years ago, we used to see. Just maybe you could kind of unpack a little around sort of what is changed around the need for CapEx in the overall business? Thank you.

Paul F. De Cock:I think where we are in the cycle today, and with the current capacity utilization, I think we do not see a need for significant capacity increases in the near future. And so that I think is a very important part of it. And then besides that, we were full gas on innovation, we were full gas on cost reduction and productivity, in our factories and in our operations and our distribution activities. And so the current amount that we have disclosed that we think is sufficient for the next few years will provide ample opportunity to continue to fuel improvement in the business. Okay, got it. Appreciate that color, Paul. Thank you.

Matthew Bouley:Secondly, on inflation, gave some commentary that it had stepped up to mid single digits, and it sounded like you are expecting that to continue. Both in Q4 and also early 27. And so my question is really just looking at where oil and European natural gas and everything else is. Why would not that mid single digit inflation number be any different in the beginning of 2027 relative to today? It would just seem like maybe there is a range around mid single digits, but it would seem like it is moving higher. So maybe just kind of unpacking that a little bit. Thank you.

Nicholas Manthey:Thanks, Matthew. So there is obviously a range around mid single digits. I just would maybe say that the impacts of inflation have been pretty broad based. Touching not just raw materials, but freight, fuel, energy, labor costs across a variety of different markets in different segments. And so we have, visibility to that, given our inventory turns. I think the key point as well to take away is that, you know, we are taking actions in the business to offset that. Through you know, the combination of price mix and productivity. And so we have done that year to date. We have done that in the third quarter.

And we expect, you know, that to occur in Q4 and in the early next year. Alright. Thanks, Nick. Good luck, guys. Thank you, Matthew. Thank you.

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

Michael Dahl:Hi. Thanks for taking my questions. 1 more on the cost side and maybe specifically to European nat gas. I think you have kind of a hedging program in place there and in the past, there had been situations where there were differences in hedging strategies. That caused some disruptions in the market Can you just talk a little bit more about how your, like, your mitigation strategy? Obviously, you are talked about taking price, but just on the on the hedging side, you know, what you are doing, what you think the industry is doing, and, again, in Europe in particular. I think it is been hard for the industry to generally sustain price there.

So what is different this time?

Paul F. De Cock:Yes. Good morning, Mike. We have a variety of strategies really to handle inflation. And so in Europe on natural gas, forward buying is 1 of them. We have incorporated various assumptions in our outlook and our commentary including energy in Europe, And, you know, the drivers of overall inflation across our business are wide. And natural gas is only 1 of the components. We have other components with raw materials and logistics and energy and labor that are also significant at this time. And so natural gas, we handle through these forward buys And it is it is been helping us to postpone somewhat the filtering through of the inflation.

Michael Dahl:And, Paul, just a quick clarification or follow-up then. Is it your sense that competitors are doing the same there? And my second question, is just back on back on the capital return. I mean, I think it is admirable that company has got the leverage position. it has in a downturn like this. I think a lot of other companies would actually be envious of that. And so I fully appreciate longer-term, the deployment of capital and your framework around that. But I guess from a near term standpoint, given conditions continue to weaken, I guess, can you elaborate more on why the prudent decision in the near term would be to relever into this environment. Thanks.

Paul F. De Cock:So on your first comment, I cannot really talk about how the competition is hedging. I think everybody manages its business how it thinks it should manage the business And as far as the timing on the repurchases, I think we are not going to comment on the timing. I just point you back to the comments we have already made on the repurchases. They will be consistent. We have stepped them up significantly. We have done $300 million so far in the second half. We have a new authorization and we will work with that. Okay. Thanks.

Operator:The next question comes from Sam Reid with Wells Fargo. Please go ahead.

Sam Reid:Thanks, everyone. I will start off with a big picture question, circling up on your pillars. You talked about there being some hurdles for organic growth opportunities Sounds like, you there is going to be some discipline in evaluating those. Can you just talk through maybe some of the specific hurdles you are looking at?

Paul F. De Cock:Well, the first pillar is about outperforming our market. And this pillar really is about having a growth mindset in the company. it is about leveraging our go to market capabilities, and really focusing on the most attractive market segments to outgrow the markets we serve. And we can do that in multiple ways, We can do that with richer channel mix, better product mix. We can do that through share gains within categories. We can do that also by expanding on our customer relationships with new technological and digital solutions. And so the baseline capital expenditures we laid out include all of those investments to continue to grow and outperform our markets.

And as far as the operating expenditures to support the pillar We also do not have any meaningful plans to augment our operating expenditures in support of the pillars. These funds exist in our current cost base today and we will reallocate them as appropriate to fund the initiatives.

Operator:And Sam, I would just add that in terms of your question on the hurdles, ultimately, we are maximizing value per share.

Nicholas Manthey:And so that is the ultimate hurdle, Sam. Really helpful.

Sam Reid:Switching gears, you know, just looking at productivity. You know, historically, you have been able to generate, I guess, around $80 to $100 million in annualized productivity. Any sense as to what that could potentially look like in 2027? It sounds like you are planning to start the year off with kind of consistent productivity, but just curious how that lands as we go through the year.

Nicholas Manthey:Yes, Sam. So it is obviously a little early to guide 2027, but we will continue to focus you know, our efforts on both identifying and executing on our productivity initiatives, our continuous improvement initiatives. Our restructuring initiatives, You know, this year, we have, you know, on productivity savings that have run at about $40 million a quarter. You know, a large part of next year, we announced a restructuring program last quarter. with $60 million in annualized savings, you know, a large part of that will fall into 2027. I would say also keep in mind we will see, you know, less year over year benefit from the previous restructuring programs.

And so, you know, the restructuring savings we have realized over the last few years are out of our cost. Structural cost base. And they are not coming back. But they will make the year over year compare tough and tougher as we go forward. I think in the future, how we think about productivity as it becomes margin expansion, and it is not just needed when we have to cover inflation. Helpful context. Thanks so much. Thanks, Sam.

Operator:The next question comes from Susan McIlree with GS. Please go ahead.

Analyst:Thank you. Good morning, everyone. My first question is on the innovation and the brand pillar within those initiatives that you outlined. Can you give us a bit more detail on how you are thinking about driving innovation in the business and how that contributes to your ability to build brand strength, and then how you are also communicating the value that these products provide to the consumer so that people are understanding what you are bringing to the market and how we guess that also goes back to then building the brand, especially in an industry where maybe brand is underappreciated.

Paul F. De Cock:Yes. Thank you, Susan. Very good question. Look, innovation is very important for Mohawk. that is why it is a pillar in our framework. And when we focus on our capabilities to generate innovation and create unique surfaces. We are really trying to create unique products and we are always trying to create those products through a unique combination of 3 things. What customers and consumers are looking for. They are always looking for a superior aesthetic, or a superior realism So the product needs to look good. They are always looking for a differentiated performance that caters to their use. And they are always looking for some improved sustainability characteristics and that is really where Mohawk leads.

And so if you come through. Really through decades of experience, in our 3 global innovation hubs that we have, We combine all these different things in unique products. And so you really need the right people, and in our case, that is the right people across the world decades of experience to really bring those unique products to market to develop them, to patent them, And, you know, and our industry cannot always replicate that. And as I think about innovation and how we take that to market, I think as a company, we will step by step be evolving from a manufacturer of designs to a designer that develops and delivers customer solutions.

And as you do that, brands are indeed very important. And so our brands are a fantastic vehicle to bring that message to market. Okay. that is great color, Paul. Thank you.

Analyst:And then turning to the cash balance, as you think about executing on these pillars, what does that mean in terms of the ability to generate cash, which is obviously already really strong given what we have seen this quarter in the last couple of years. Then within that, what is the optimal level of cash that you are comfortable carrying through the cycle?

Nicholas Manthey:Hey, Susan. it is Nick. Know, when I think about the strategic pillars, they are really all in support of cash generation and cash obviously, capital discipline and increasing value per share, as we mentioned, You know, we are focused on EBITDA growth. We are focused on free cash flow growth. Returning that to shareholders. And so know, when we outline things in the pillars like outperformance, things like product innovation, brand strength, operational excellence, I certainly see that as an opportunity to profitably grow the business and profitably grow cash flow over time. In terms of cash balance, you know, we wanna be efficient And so we will manage that appropriately. Okay.

Thank you for the color, good luck with the quarter. Thank you, Susan.

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

Keith Hughes:Thank you. Paul, at the beginning of this call, you talked about some strength at retail. I assume that is the United States. Could you talk a little bit more about that? What types of retail are doing well? What kind of markets are they winning at right now?

Paul F. De Cock:Yes. Thank you, Keith. Good morning. Yes, specialty retail was performing pretty well for us. I think we grew the business in The U. S. We gained share. Although our momentum slowed a little bit in September as we said in our opening comments. I think you also have a K-shaped economy that has been talked about The higher end is performing significantly better than the low end. And with our brands and with our products, I think we are benefiting from that. That being said, consumers are still deferring larger projects and it is a difficult it is a difficult environment. And then when you compare specialty retail to home centers, the home center point of sale remains slow.

And that market is more impacted, maybe also by the k shaped economy. Okay. Thank you.

Keith Hughes:1 other question. The guidance for fourth quarter has a tax rate of 23.5%. that is a good bit higher than what we have historically seen. Is that due to lower days, or what is driving the higher tax rate?

Nicholas Manthey:Keith, I would say the rate moves quarter to quarter with the geographic mix of our earnings plus some discrete items that can shift in the quarter. So if you look at our full year 2026 tax rate, it is consistent with our prior expectations. You know, Q3 was a little bit lower at 19.3%. And as you mentioned, Q4 assumes 23.5%. So on a full year basis, it is in line with our expectations. Okay. Thank you. Thank you, Keith.

Operator:The last question today comes from Rafe Jadrosich with Bank of America. Please go ahead.

Rafe Jadrosich:Great. Thanks for taking my questions. Can you just talk about the third quarter of volume in Rest of World? What was the headwind there? Did you see any destocking? Was there a pull forward? And then how do we think about that into 4Q?

Paul F. De Cock:Yes, we saw some soft residential demand across Europe but also in Australia and New Zealand. But if we look year to date, volumes have been trending in line with the market. And we were also comping some strong volume performance in the prior year and in insulation and panels, so we had a little bit of headwind as we were comparing year over year. And with weak volumes, I want to point out that profit came in above our expectations that the team is really managing the cost environment very well. And they are also managing the price environment very well.

And so we are navigating very difficult market circumstances, but I think we are doing it in a very successful way. Thank you. that is helpful and then as. I think for the fourth quarter, the low single digit growth on organic basis that you are talking about. I think you are lapping a destock from last year. Can you just remind us sort of what happened last year? And then is there any color by segment in terms of like what the growth outlook is for the fourth quarter?

Nicholas Manthey:Are there any other considerations that we should have Rafe, I just say that, you know, generally across all of our segments, they are facing challenging market conditions. And so I think that is pretty consistent across The US and Europe and our other markets. You know, we are. You know, our goal here is to outperform even in those weak markets. And so I think that, you know, generally, you know, we think they will all be in a relatively similar range. Thank you. Thank you.

Operator:This concludes our question and answer session. I would like to turn the conference back over to Paul F. De Cock for any closing remarks.

Paul F. De Cock:Thank you for joining us today. Our teams are focused on executing our strategy and we really look forward to updating you further in February on our progress. Thank you.

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

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Mohawk (MHK) Q3 2026 Earnings Call Transcript was originally published by The Motley Fool