Mohawk Industries, Inc. (MHK) Q4 2025 Earnings Report, Transcript and Summary

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

Thanks, Rocco. Good morning, everyone, and welcome to Mohawk Industries' quarterly investor conference call. Joining me on today's call are Jeff Lorberbaum, Chairman and Chief Executive Officer; Paul De Cock, President and Chief Operating Officer; and Nick Manthey, who will succeed me as Chief Financial Officer on April 1. Today, we'll update you on the company's fourth quarter and full year performance and provide guidance for the first quarter of 2026. I'd like to remind everyone that our press release and statements that we make during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8-K and press release in the Investors section of our website. I'll now turn the call over to Jeff for his opening remarks.

Thank you, Jim. Our fourth quarter net sales were approximately $2.7 billion, an increase of 2.4% as reported and a decrease of approximately 3.3% on a constant basis versus the prior year and in line with our expectations. Across our markets, commercial demand remained stable during the quarter, though continued weakness in housing turnover and sluggish home construction in the U.S. impacted our volume. Our adjusted EPS for the quarter was $2, up approximately 3% versus the prior year, with benefits from productivity, restructuring initiatives, product mix and lower interest expense offset by market pressures and increased input costs. For the quarter, we managed the impact of the U.S. tariffs covering the cost as planned. For the full year, our sales were approximately $10.8 billion, flat with the prior year as reported. Approximately 55% of our sales were in the U.S., 30% were in Europe and 15% in other geographies. Our adjusted EPS for the full year was $8.96, a decrease of approximately 7.5%. For the year, we generated free cash flow of approximately $620 million and repurchased approximately 1.3 million shares of our stock for [ $149 million ] as part of our current stock buyback authorization. The fourth quarter reflected a continuation of the macroeconomic factors our industry has faced since the second half of 2022. Housing turnover in our major regions remains at historical lows due to affordability challenges and economic uncertainty. Consumer confidence remained weak due to inflation, employment concerns and geopolitical tensions. As a result, many of our large discretionary investments such as home renovations continue to be postponed. Remodeling activity that did take place was primarily driven by more affluent customers or those addressing essential needs. Throughout 2025, most central banks took actions intended to stimulate economic growth in housing markets, including recent interest rate cuts by the U.S. Federal Reserve. While 2025 U.S. existing home sales did not improve, sales in December increased over the prior year. Currently, U.S. mortgage rates are at their lowest levels since September 2022, and we anticipate these lower rates, combined with potential government actions, will benefit housing turnover. In Europe, interest rates are also the lowest since late 2022. In addition, consumers have built record inventory, record levels of savings, inflation has eased and employment has remained steady. These conditions should support greater participation in the housing market as consumer confidence improves. Across our markets, housing construction levels have not kept pace with household formations since the great financial crisis. In the U.S., builders completed fewer homes in the fourth quarter as they focused on reducing inventories and lowering the supply of new homes. In Europe, high building cost and land shortages and labor constraints continue to impede residential construction. Completed housing units in Europe have declined in 2025,though moderate building recoveries in Southern and Eastern Europe have emerged. As housing demand increases, European governments are evaluating options to stimulate construction. The commercial channel outperformed residential throughout the year with strengths in health care, education and hospitality. We anticipate that lower interest rates will encourage additional investments in commercial construction and renovation. In response to ongoing conditions, we took actions during the year to stimulate sales and enhance our mix in soft markets through innovative product introductions, marketing actions and promotional activity. Our premium product launches deliver differentiated design and performance features to incentivize remodeling and our new commercial collections help us gain momentum in both new construction and remodeling projects. As residential demand remains weak, heightened competition to absorb the industry fixed cost continues to observe pressure on pricing. To partially cover inflation, we took pricing actions in regions and product categories as market conditions allow. In the U.S., we managed the impact of tariffs through pricing actions and supply chain optimization. If necessary, we will adjust our strategies based on the Supreme Court's upcoming rulings and changes in the global trade landscape. During 2025, we initiated numerous restructuring actions and operational improvements that lowered our cost position and will benefit our longer-term performance. In 2025, our markets did not improve. And in response, we reduced capital spending to $435 million, about 30% below our depreciation levels. We continue to take the proper actions to manage the present environment, pursue profitable growth opportunities and strengthen our position when housing markets rebound. Now Jim will share our financial report.

Thank you, Jeff. Sales for the quarter at $2.7 billion or 2.4% increase as reported and a decrease of approximately 3% on a constant basis. The Global Ceramics segment, led by improved channel and product mix and favorable FX had the strongest year-over-year sales performance. Gross margin for the quarter was 23% as reported and 24.3%, excluding charges, in line with the prior year as the benefit from our productivity and restructuring initiatives of $41.5 million, favorable FX of $21 million and improved price and mix offset weaker volume of $29 million and increased input costs of $22 million. SG&A expense was 19.8% as reported and 18.7%, excluding charges, also in line with prior year levels. That gave us an operating income as reported of $68 million or 2.5%. Our nonrecurring charges were $84 million during the quarter, primarily related to restructuring actions undertaken by all segments and legal settlements. That gave us an operating income on an adjusted basis of $152 million or 5.6%. That was only 50 basis points decline versus prior year as the benefits from our productivity and restructuring initiatives of $51 million, our pricing actions to offset the impact of new U.S. tariffs and improved product mix were offset by the reduction in volume of $29 million, competitive market conditions and an increase in input costs of $32 million. Interest expense for the quarter was $1 million. That's a decrease versus prior year due to a reduction in short-term debt and a benefit of increased interest income. Non-GAAP tax rate for the quarter was 17.1% versus 17.8% in the prior year, and we're forecasting the full year tax rate for 2026 to be between 18.5% and 19.5%. That gave us an earnings per share on a reported basis of $0.68 or an adjusted basis of $2. Turning to the segments. Global Ceramic had sales of just under $1.1 billion. That was a 6.1% increase as reported and basically flat on a constant basis. We experienced softening in the U.S. builder channel, offset by gains in our international markets led by Europe as well as improvements in price and mix driven by the U.S. and our European operations. Operating income on an adjusted basis was $63 million or 5.9%. That was an increase of 60 basis points as the combination of our productivity initiatives of $22 million and the benefit of improvement in price and mix of $16 million offset the increase in input costs of $22 million and decreased volume of $13 million. In Flooring North America, our sales were $893 million. That was a 4.8% decrease as reported or 6.2% on a constant basis. The decrease was primarily in our residential soft surface business directly impacted by the slower builder channel, partially offset by our hard surface performance through home centers and retail, which were relatively flat versus the prior year. Gave us an operating income of $39 million or 4.4%. That was a decrease of 130 basis points as the lower volume of $12.5 million in conjunction with an increase in shutdown costs of $12 million and input costs of $17 million offset the benefit of productivity and restructuring actions of $24 million and an improvement in price and mix. And in Flooring Rest of the World, we had sales of $737 million or 6.5% increase as reported and a 3.5% decrease on a constant basis, with the decrease in volume, especially seen in residential remodeling impacting our flooring categories as both our panels and insulation business units saw an increase in year-over-year volumes. That gave us an operating income of $65 million or 8.8%, excluding all charges for a 120 basis point decrease from the prior year. This was led by a weakening in price and mix of $15 million and lower volume, partially offset by increases in productivity and lower input costs. Corporate and eliminations were $15 million for the quarter, in line with the prior year. In 2026, we estimate the full year impact of corporate expenses to be between $52 million and $55 million. And now the balance sheet. Looking at cash and cash equivalents of $856 million with free cash flow of $270 million in the quarter and $620 million on a year-to-date basis. Inventories were just shy of $2.7 billion. The growth in inventory year-over-year was mainly a result of the weakening dollar as inventory days ended the year at 139 days. Property, plant and equipment was just shy of $4.8 billion, with CapEx for Q4 at $180 million -- $189 million and full year at $435 million. The company plans to invest approximately $480 million in 2026 with D&A of $626 million. The capital expenditures will be focused on product innovation, cost reduction and general maintenance of the business. The balance sheet ends the year in a very strong position with gross debt of $2 billion and leverage of 0.9x adjusted EBITDA. The company enters 2026 well positioned to leverage the housing recovery. Now Paul will review our Q4 operational performance.

Thank you, Jim. Our Global Ceramic segment delivered improved sales and profitability year-over-year as each region executed specific strategies to overcome market challenges. Across our geographies, our performance benefited from successful product launches over the past 2 years. In particular, our premium collections improved our mix and helped to offset pricing pressures from competition. We extended our advantage at the high end of the market by combining advanced design expertise with proprietary printing technologies to deliver collections with more sophisticated visuals and textures. Though residential remodeling and construction remains soft in most of our regions, our innovative commercial collections continue to enhance our results. We have worked in all markets to expand our customer base across channels by emphasizing the breadth of our product offering and our superior service. Operationally, we continue to find ways to drive productivity gains, reengineer products and contain SG&A costs to protect margins against higher input costs and pricing compression. In the U.S., our volumes were challenged as new home construction slowed in the quarter. We offset this impact through productivity gains as well as improved product and channel mix. Our price increases mitigated the effect of tariffs on our sourced offering. With lower ocean freight costs and suppliers absorbing some of the expense, tariffs have thus far impacted the U.S. ceramic market less than expected. As our countertop business continues to grow, the ramp-up of our new quartz production line remains on schedule and will deliver higher-value products through an advanced [ veiling ] technology that creates unique visuals. In Europe, we improved our volumes despite soft demand as we increased sales in the higher-end categories. Spending on large discretionary purchases remains under pressure from consumer uncertainty related to geopolitical events. Pricing weakened during the quarter as excess industry capacity led to heightened competition. We partially offset this through improved mix, productivity gains and lower energy costs. The commercial channel remains stronger than residential in most parts of Europe, though we also saw improvements in our higher-end residential offering. We enhanced our porcelain slab production with state-of-the-art printing technology that delivers higher-value products. In Latin America, demand remains soft and competitors are pursuing volume with aggressive pricing. In Mexico, we are expanding our customer base, improving service with our expedited shipping programs and gaining sales with our large-sized polished collections. And lastly, in Brazil, the Central Bank's restrictive policies have increased the benchmark interest rates to 15%, compressing the flooring market. In our Flooring Rest of the World segment, our panels and insulation businesses delivered improved sales and margins, while the flooring category experienced lower volumes as well as pressure on our pricing and product mix. Rising building costs, elevated home prices and economic uncertainty continue to suppress both residential remodeling and new construction. To manage these factors, we continue to reduce our cost structure through product reengineering, supply chain optimization and SG&A controls. While we pursued volume to improve plant utilization, we also selectively announced price increases in most product categories to offset higher input costs. To benefit our flooring category, we expanded our presence in home centers and extended our participation in better-performing geographies. In the European LVT market, we maintained our volume through expanded retail partnerships, and we are enhancing our rigid and loose lay collections this year. Our panel business increased volume, grew sales and expanded margins across product categories. We are improving the production and operational processes at our new MDF recycling plant, which will improve our material costs when optimized. Though insulation markets remain soft, we increased volumes in most geographies and continue to prepare for the start-up of our new plant in Poland with expanded distribution and growth in Germany and Eastern Europe. Our Flooring North America results this quarter varied by channel. In the quarter, we saw inventory reductions in the retail channel given softer conditions. In the builder channel, sales declined as new home and multifamily construction remained weak and builders slowed new home starts. With lower interest rates improving affordability, we do expect residential construction to improve slightly as we progress through the year. Our commercial business remained stable with strength in hospitality, education and health care, offsetting softness in office and Main Street. Given this, overall volume for the quarter was lower, though productivity gains and benefits from our restructuring actions helped offset the impact of the decline. We initiated pricing actions across most residential product categories to mitigate higher material, labor and tariff costs. Our hard surface category continued to outperform, driven by our laminate, hybrid and LVT collections, which are expanding across sales channels. Our PureTech PVC-free hybrid flooring is growing as an alternative with authentic visuals, better scratch resistance, waterproof performance and dimensional stability. The success of our hard surface portfolio is also benefiting our accessories sales as consumers select coordinating trim, stair threads and moldings. In residential soft surfaces, our high-end fashion collections improved our product mix, and we are expanding our premium polyester collections to grow sales in the mid-price range. To offset higher input costs and tariffs, our commercial business announced selective price increases. The commercial order backlog remains solid and our enhanced commercial LVT offering will create additional opportunities for the business. To support sales growth in the high-performance commercial channel, we acquired Hero Flooring, a small niche U.S. rubber flooring company and authorized licensee of products made with Nike Grind rubber. I will now return the call to Jeff for his closing remarks.

Thank you, Paul. As we previously announced, Jim Brunk will retire as CFO in April and will continue with us in a consulting role to ensure a smooth transition. Jim has been with Mohawk for 20 years and has played a leading role in growing our business into the world's largest flooring company. His leadership is reflected in the strength of our financial team as well as our financial position. In April, Nick Manthey many will assume the CFO role after serving as VP of Corporate Finance and Investor Relations for the past year and leading the Flooring North American finance team for the prior 5 years. Nick brings to the role strong financial expertise and extensive knowledge of our business. Now turning to our outlook. First quarter market conditions thus far have been similar to the fourth quarter. While home renovation remains soft, the NAHB remodeling index has shown improvement for the last 2 quarters. We expect our markets to remain competitive, and we are implementing price increases across most regions and product categories. We continue to manage the impact of tariffs through pricing actions and supply chain optimization. We anticipate benefits from product mix, productivity and cost reductions to offset headwinds from higher energy and labor costs. Our 2026 product introductions are entering the market throughout this quarter, and the initial feedback has been positive. Our first quarter seasonality is our slowest, and this year includes 4 additional shipping days. Given these factors, we expect our first quarter adjusted EPS will be between $1.75 and $1.85, excluding any restructuring or onetime charges. The global flooring industry has been in a recession for almost 4 years, and historically, we have multiple years of higher growth as markets recover. This year, we anticipate economies in most of our regions will improve with housing markets benefiting from mortgage rates and greater availability. We expect some increases in industry volume as we proceed through the year, though pricing pressures are likely to remain. In response, we'll execute our announced restructuring actions and continue to implement productivity initiatives to lower our cost. Given this, we expect our 2026 sales and earnings to improve. The extent of our growth this year will depend on economic conditions, interest rates, geopolitical events and most importantly, the degree to which residential remodeling rebounds. With our global reach, product advantages and operational strengths, Mohawk is uniquely positioned to deliver long-term profitable growth as we transition into the recovery cycle. We'll now be glad to take your questions.

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

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

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

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

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

And our next question comes from Philip Ng with Jefferies.

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

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

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

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

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

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

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

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

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

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

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

Yes, Susan, so on the home center side, the home center channel is very important to us, and we are providing leading products, leading innovation, leading merchandising. We're supporting their efforts to grow their business on the consumer side and the Pro side with differentiating products. And so we're continuing to optimize our business together. And then the comment on the hard surfaces, yes, our hard surface business is doing well. That is fueled by our waterproof laminate business that continues to provide an excellent alternative to LVT. And our domestic laminate is also benefiting from the tariff increases that have increased the cost of other alternatives. And in general, in LVT, our new hybrid alternatives with improved visuals and performance are being very well respected and accepted by the market. And in general, we see the LVT category kind of continuing to perform in line with the flooring market.

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

Thank you, Susan.

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

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

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

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

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

We believe that we're doing better than the marketplace in our U.S. ceramic business. We have a much larger commercial business in that business than the other parts of our U.S. businesses. So the commercial business is doing better. We have been enhancing our style and design using the knowledge that we have in our Italian businesses so that we're able to offer higher-value products and replace some of the products that are coming in at higher cost from Europe as we go through. As you know, the volumes declined recently with the residential new construction markets. So we're getting -- the balance is we're getting improvements out of price and mix, and then we've been able to have better service than the importers bringing the stuff in as well. We're also increasing our participation in the countertop business where we put in a new quartz countertop line to enable us to expand that business further.

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

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

It's not just an immediate process. We've been doing this for a period of time -- so in the ceramic industry, as in other ones, it takes specific equipment to make higher-end products and the complexity is dramatically different as you go up in the scale. And so we've been investing in new equipment as well as the ability to execute the complexity in the factories, which have allowed us to improve our higher-end business. At the same time, you're making both larger sizes, which the equipment has to be modified. And if you go to the other extreme, think of a 2-inch piece is much different than handling something that's 3 feet by 3 feet. So all of it is very specialized. In all of our different markets across the world, we are enhancing the style and design and sizing across, which is helping us get product mix to offset some or a lot of the inflation, which at different times, we're not able to pass through. In our other product categories, you mentioned hybrid products that are made out of different materials than LVT. And so those come with different performance features as well. In all the categories, we're putting in new designs and strategies to differentiate them as you go through. And in each category, we're trying to find new ways like in the countertop business, where it's moving from stone products to man-made products, and we're putting in new equipment that has design capabilities we're introducing as we speak that aren't in the market at this point. So every division is taking different strategies to get there.

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

The ability to find freight back and forth and enabling it to lower the cost has been going on for a significant period of time. And AI will just add another incremental improvement over the top of it. The biggest freight differences right now are the international freight coming in where the freight rates have dropped as the capacity has increased and the volume has decreased. So those are making up for a lot of the tariff costs or a significant portion of the tariff costs. And then in our own system, most of our system set up with our own transportation from our factories to our regional distribution points. In most cases, we're backhauling our own raw materials. And that gives us a significant advantage on the fill rates and the time it takes to go through, which is why it costs us less to run our operations than it does to go on third parties.

Our next question today comes from Keith Hughes at Truist.

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

Well, for the full year, when you look 226 versus '25, the first thing you always have is you have wage and benefit increases. So that's probably looking at this year, number one. Also, we've seen energy costs, as Jeff said in the prepared remarks, kind of fluctuate. So you see energy, especially in the U.S. somewhat spiking. So we'll have to see how that kind of materializes over the full year. Obviously, tariffs is part of that, as I said, that inflation footprint as well and then just kind of general expenses. The wildcard right now is really on material costs as I think I said earlier, it kind of varies across our different regions. In some cases, we're seeing reductions. But in others, we're still seeing some inflation.

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

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

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

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

Yes. It's a good place to start, Sam. On restructuring, as both Jeff and Paul said, we've taken numerous actions over the last few years. We've delivered in 2025, about $115 million cumulative savings from restructuring. You're right, we're looking at somewhere in that $60-plus million range of carryover into '26. And we also did announce some additional actions in the fourth quarter, most of which it's about $30 million of savings. Most of that will actually help and carry over into 2027 given the timing of those projects. In addition, we continue across the company, both in manufacturing and on the administrative side to look for ways to reduce our day-to-day operating costs. So we also have on top of that, just normal productivity. For the year, when you look at '25 versus '24, we hit over about $200 million, '25 or '26 versus '25. Certainly, we will be building and working towards achieving the highest level we can. But again, it's kind of restricted to restructuring about that $60 million range and then other projects.

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

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

Our next question today comes from John Lovallo at UBS.

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

Yes. So you are correct that there is 1 extra day sequentially and 4 extra days from a year-over-year perspective. With respect to the guidance, a couple of things I would say is as we're coming into January and Q1, we've said that market conditions are expected to remain soft and lower volumes right now versus the prior year. Obviously, in the first quarter, you have -- tend to have a slower in terms of sales and volume and weather obviously never helps the situation as well. Housing turnover and consumer confidence are continuing right now to constrain the industry, but we are taking actions, and Jeff talked about a number of them on the product side and on the cost side to try to protect our earnings the best we can. The international markets continue to be pressured by geopolitical events as well. And overall, we will, again, continue to see benefits from our productivity and restructuring initiatives.

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

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

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

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

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

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

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

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

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

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

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

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

And our next question comes from Matthew Bouley with Barclays.

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

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

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

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

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

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

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

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