Mohawk Industries, Inc. (MHK) Q3 2025 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Mohawk Industries Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to James Brunk, Chief Financial Officer. Please go ahead.

Thank you, Jamie. Good morning, everyone. Welcome to Mohawk Industries quarterly investor conference call. Joining me on the call are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Paul De Cock, President and Chief Operating Officer. Today, we'll update you on the company's third quarter performance and provide guidance for the fourth quarter of 2025. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our 8-K and press release in the Investors section of our website. I'll now turn the call over to Jeff for his opening remarks.

Thank you, Jim. Our third quarter net sales of $2.8 billion were in line with our expectations, slightly ahead of prior year as reported and flat on a constant basis. Though economic conditions across our regions weakened more than anticipated compared to the prior quarter, we believe we outperformed in most of our markets. Our sales and product mix continue to benefit from the success of our premium residential and commercial offering and collections introduced during the past 2 years. Our adjusted earnings per share of $2.67 reflected benefits from ongoing productivity and restructuring initiatives as well as the impact of favorable currency exchange and lower interest expense, offset by higher input costs and temporary plant shutdown. Across our markets, material and energy expenses are now improving from peak levels, though higher costs from early in the year will still impact our fourth quarter earnings as expected. With our markets remaining challenged, we're executing targeted actions across the organization to drive performance such as operational enhancements, administrative process improvements and technology advancements. We are lowering our cost structure without impacting our long-term growth potential when the market recovers. We've identified additional restructuring opportunities to rationalize less efficient assets and streamline logistics operations and administrative functions. These new actions will result in annualized savings of approximately $32 million at a net cash cost of approximately $20 million after asset sales. Combined with our previously announced restructuring actions, we anticipate delivering $110 million in savings this year. During the quarter, we continue to focus on our working capital management and generate approximately $310 million in free cash flow. We repurchased 315,000 shares in the quarter for approximately $40 million as part of our current stock buyback authorization. Year-to-date, we've purchased $108 million of our outstanding shares. Across our geographies, consumer uncertainty continues to limit discretionary spending on large projects, particularly if financing with debt is required. Postponement of large renovation projects and declining home sales have been the primary driver of weakness in the residential remodeling during the current cycle, while the commercial sector has remained stronger. 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 the new home sales with price cuts, rate buydowns and closing cost assistance. The Fed's actions should also stimulate future business investment in nonresidential new construction and remodeling. European consumers have accrued record levels of savings since the pandemic and are now experiencing lower inflation rates, both of which should encourage greater discretionary spending. To address the ongoing housing shortage in Europe, several governments are initiating programs to incentivize new home construction. Our industry is currently at various stages of passing through the impact of higher tariffs on imported products and should compensate for increased product cost over time. As previously stated, we continue to address the situation by optimizing our supply chain and implementing price adjustments on affected product categories. Ocean freight costs have been declining and are partially offsetting the tariff impact for U.S. importers. Based on the recent changes, engineered wood and laminate imports will now be subject to reciprocal tariffs like our other flooring product categories, which should benefit domestically produced products. Because the evolving tariff situation will require some time to reach equilibrium, we will continue to adjust our strategies with the changing rates and market conditions. With that, Jim will review our financials for the quarter.

Thank you, Jeff. Sales for the quarter were just shy of $2.8 billion. That's a 1.4% increase as reported and flat on a constant basis as our hard surface and commercial business continued to outperform the overall residential channels. In addition, FX benefited our business on a reported basis. As we noted in the earnings release, Q4 has 1 additional shipping day. And for planning purposes, Q1 of 2026 will have 4 additional shipping days and Q4 of '26 will have 4 less. Gross profit for the quarter was 23.7% as reported and 25.3%, excluding charges, as strengthening productivity of $57 million and favorable impact of FX of $15 million were offset by higher input costs of $39 million, continued pressure on price/mix of $20 million and lower volume and temporary shutdown costs of $23 million. SG&A expense for the quarter was 18.8% as reported and 17.9% excluding charges. That gave us an operating income as reported of 5%. Nonrecurring charges for the quarter were $69 million, primarily related to our ongoing restructuring initiatives. Combining the projects announced in Q3 with our previous actions, we should have savings of approximately $110 million this year. It gave us an operating income on an adjusted basis of 7.5%. That's a decrease of 130 basis points as the impact of inflation of $52 million, lower volume 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. That's a decrease versus prior year due to lower overall debt balance and the benefit of our interest income activity. Our non-GAAP tax rate was 17% versus 19.8% in the prior year, mainly due to geographic dispersion of our income. We are forecasting in Q4 and for the full year a tax rate of approximately 18%. That resulted in earnings per share as reported of $1.75 and on an adjusted basis of $2.67. Turning to the segments. Global Ceramic had sales of just over $1.1 billion. That's a 4.4% improvement as reported and 1.8% on an adjusted basis due to favorable price/mix in both channel and product categories, partially offset by lower unit volume. Operating income on an adjusted basis was $90 million or 8.1%, which was a decline of approximately 50 basis points as higher input costs of $31 million and lower sales volume were partially offset by favorable price/mix of $8 million and strong year-over-year productivity gains of $24 million. Flooring North America had sales of $937 million. That's a 3.8% decrease as residential new construction and remodeling remain under pressure. From a product perspective, our LVT and our laminate categories continued with positive gains versus prior year. Operating income on an adjusted basis was $68 million or 7.2%, which is 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 had sales of $716 million. That's a 4.3% increase as reported and an increase of 0.9% on an adjusted basis. The volume growth was driven by expansion in our insulation and panels business as well as in our laminate flooring category, partially offset by continued pressure in price and mix. Operating income on an adjusted basis was $59 million or 8.3%. It's a 220 basis point decline versus the prior year, primarily due to unfavorable price/mix of $18 million, partially offset by continued productivity gains of approximately $8 million. Corporate costs for the quarter were $12 million, in line with the prior year and for the full year should be approximately $50 million. Turning to the balance sheet. Cash and cash equivalents were $516 million with free cash flow for the quarter of $310 million. Inventories were just shy of $2.7 billion. That's an increase of approximately $80 million, primarily due to the impact of foreign exchange and inflation and some increase in imported goods. Property, plant and equipment were just shy of $4.7 billion with CapEx of $76 million and D&A of $170 million in the quarter. We have lowered our full year CapEx plans to approximately $480 million with D&A of $640 million. Overall, the balance sheet is in a very strong position with gross debt of $1.9 billion and leverage at 1.1x, positioning the company to be able to take full advantage of the changing market conditions. Now Paul will review our Q3 operational performance.

Thank you, Jim. In the Global Ceramics 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 residential due to growth in the hospitality, health care and education sectors. We are leveraging our national distribution footprint to expand our relationships with contractors, specialty retailers and commercial specifiers. In the period, we announced price adjustments based on the current tariff rates. Due to importers building inventories earlier in the year, the tariffs have not significantly impacted the U.S. ceramic market at this point. Our countertop business grew in the quarter through new retail and high-end builder partnerships that will support increased production from our new 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 and 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 continued 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 U.K. performing better as the government increased investments in social housing. With the laminate category remaining under pressure, we have increased participation in the DIY channel, and we are expanding our distribution in Southern and Eastern Europe. Pricing and mix remained difficult during the quarter, and we are executing promotional activities to optimize our sales. The European LVT market is becoming more competitive, and we are addressing this with product innovation, including new battling technology and parquet wood looks. We're 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 insulation plant in Poland, we are growing sales in Eastern Europe, where the economy is growing faster. In Australia, our expanded hard surface offering is gaining traction with our customer base, while pricing actions and productivity initiatives benefited our soft surface results. We have entered into an agreement to purchase a small New Zealand manufacturer of premium wool carpet, which we will integrate into our existing business. In our Flooring North America segment, we believe Mohawk's hard surface categories outperformed the overall market due to our growing relationships with major retailers and builders, successful promotions and our innovative products with superior visuals and performance features. Our restructuring projects in this segment remain on track as we retire high-cost assets, consolidate logistics operations and reduce overhead. We delivered productivity gains that offset higher energy, material and labor costs flowing through. Retail volume was affected by low consumer confidence that continues to impact large purchases, though some retailers reported improvement in store traffic as the quarter progressed. Market pricing remained competitive and in response to recent tariff changes, we announced pricing adjustments. To address pressure from input and labor costs, the industry also announced price increases in carpet collections. Our hard surface volume rose during the quarter as we expanded placement of our industry-leading laminate, hybrid and LVT product offering. As we expand our accessories portfolio, consumers are increasing attachment of these accessories with our hard surface collections. To grow our commercial participation, we continue to increase sales and marketing activities to expand our customer base. We are implementing promotions to grow volume in main street soft surface sales, and we also enhanced our commercial LVT offering to align with current decorating trends. I will now return the call to Jeff for his closing remarks.

Thank you, Paul. All of our markets face a shortage of 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 impact of tariffs on our U.S. imported product offering through pricing actions and supply chain optimization, and we are reinforcing the value of our domestic manufacturing. Based on current trends in our regions, we believe that market volume should remain soft through the end of the year. Given these factors, we expect our fourth quarter EPS to be between $1.90 and $2 with 1 additional shipping day and excluding any restructuring or other onetime charges. For more than 3 years, the flooring industry has been impacted by both consumers postponing large discretionary purchases and low home sales, which have reduced new construction and remodeling activity. Housing turnover has a significant effect on our industry with U.S. consumers spending an estimated 5x as much on remodeling their flooring in the first year after buying a home than nonmovers. Declining interest rates, increased disposable income and higher home equity should support greater home sales and remodeling in our markets. The housing stock in our regions is aging and requires significant renovation to preserve property values. During the cycle, we have enhanced our operations, cost position and product offering to capitalize on the future market recovery. While the inflection point remains unpredictable, market fundamentals, significant pent-up demand and Mohawk's unique business strengths support long-term profitable growth. We'll now be glad to take your questions.

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

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

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

Got it. Okay. That's helpful. And then there was a couple of mentions of outperforming the market. I know hard surfaces 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?

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

Our next question comes from Matthew Bouley from Barclays.

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

Yes. So the priorly announced price increases are flowing. And so we have also announced in the third quarter additional price increases, both to recover the tariffs and to recover inflation in carpet. For the tariffs, we announced an additional price increase between 5% and 10%. And for carpet, we have announced approximately 5%. And so as they are now announced and as we see realization of that, that will take us some time until it reaches equilibrium. And then given the volatility, we will also adjust our strategies if tariffs would change or market conditions would change because things are quite volatile, as you know.

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

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

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

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

Our next question comes from Collin Verron from Deutsche Bank.

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

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

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

Yes. Conditions in general in Europe and the housing market in Europe continue 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 have continued to decline a little bit in Europe. That's kind of the European conditions we see at this moment.

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

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

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

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

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

Our next question comes from Susan Maklari from Goldman Sachs.

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

Every one of the businesses has product innovation coming through it. So in ceramic, the business is going towards 3-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 we're introducing PVC alternatives that we just lump into a group we call hybrid. 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 is it. So that's starting up, and it has new technology that will introduce new looks that I don't believe anyone else in the world can make. And then we continue to always increase the realism in the laminate, introduce new formats and sizes and shapes. And then continually, all the businesses are incrementally improving the offering.

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

Jim and I can get that together for you. First, 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 3 years like this one has. And so there's a huge pent-up demand in the remodeling business as people have postponed larger projects. We anticipate with this higher volume and improved pricing and mix next year, we should see the restructuring and productivity initiatives that Jim talked about earlier should help lower our costs and improve the margins. And the exact point of the inflection point and when it's going to happen, we don't know exactly when, but we know it's going to. And then when it happens, there's usually multiple years of above-trend growth as we recover from the bottom of the cycle.

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

Our next question comes from Sam Reid from Wells Fargo.

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

Lowe's purchased ADG. And so we 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 -- like with every customer is to optimize our business together and maximize our results together.

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

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

Our next question comes from Keith Hughes from Truist.

One of Paul's comments about some improved retail traffic in the quarter. I didn't show up on sales it looks like. Can you talk more about that, where you're seeing it? And has that continued into October?

Yes. As we went through the quarter, we saw a 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, 3 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.

Our next question comes from Michael Rehaut from JPMorgan.

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

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

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

Well, really from share repurchase, just to recap, we bought about $108 million back year-to-date, and that's on free cash flow from a year-to-date perspective of about $350 million. We're going to continue to use that as part of our overall capital allocation strategy, and we expect to continue investments in our businesses as the market improves. Remember, that's one of our priorities to try to drive an increase in our margins and our results. We'll optimize our product offering and continue to increase productivity during that period. We should see, to your point, more opportunities to acquire businesses as the environment strengthens. And again, share buybacks will continue to be part of our strategy as we go forward.

Our next question comes from Adam Baumgarten from Vertical Research.

Given some kind of relative stability on the tariff front, again, relative 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?

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

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

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

Our next question comes from Philip Ng from Jefferies.

Now that you actually have a better view on where tariffs could land, remind us how you stack up from a cost standpoint in the U.S. in some of your major categories versus your competitors, like whether it's ceramic, laminate, LVT and then of course countertops, as you kind of 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 R&R side of things?

Yes. So you're right. Our waterproof laminate collections continues to be an excellent alternative to LVT, and we are indeed seeing builders shifting to our 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.

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

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

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

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

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

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

So Jim, did I hear you correctly, the productivity and price and all that should offset the inflation that's like in equilibrium? Is that?

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

Our next question comes from Stephen Kim from Evercore ISI.

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

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

And the Rest of World channel has the lowest amount with very limited commercial in it.

That's helpful. And then just kind of taking a step back, overall, during this kind of challenged 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.

[ Shah ] what you're looking for. The sales forces -- we have different sales forces in each business in each region. Depending upon the region and the size of the business, they are more or less specialized depending on where it is. The most specialized ones would have very specific sales groups calling on retail. They have national accounts. 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.

Our next question comes from Trevor Allinson from Wolfe Research.

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

It's fairly spread, Trevor, across all 3 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.

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

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

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

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

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

Sure. What we're seeing, obviously, is demand is lower and less than last year that's creating -- competition is very aggressive and promotions are being used. 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, we are continuing to see our ceramic with its commercial penetration outperforming the other segments.

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

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

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

I'm talking about year-on-year.

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

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

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

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

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

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

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

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