Mohawk's Q3 2025 Earnings Call: Contradictions Emerge on Inflation, Tariff Pricing, and Restructuring Plans

Date of Call: None provided

Financials Results

• Revenue: $2.8B, up 1.4% as reported and flat on a constant‑currency basis
• EPS: Adjusted EPS $2.67; Reported EPS $1.75
• Gross Margin: 23.7% as reported; 25.3% excluding charges
• Operating Margin: Operating income 5% as reported; 7.5% adjusted, down 130 basis points versus prior year

Guidance:

• Q4 EPS expected to be $1.90 to $2.00 (one additional shipping day; excludes restructuring/one‑time charges).
• Q4 and full‑year tax rate forecast approximately 18%.
• Full‑year CapEx lowered to ~ $480M; DNA reduced to ~ $640M.
• Expect market volume to remain soft through year‑end; tariff impacts will persist near term but price increases and supply‑chain actions are in place.
• Company expects to deliver ~$110M savings this year, additional actions annualize ~$32M, and restructuring should provide ~$60–70M favorable impact in 2026.

Business Commentary:

• Sales and Market Performance:
• Mohawk Industries reported third quarter net sales of $2.8 billion, which were in line with expectations and slightly ahead of the prior year on a reported basis, but flat on a constant basis.

• Economic conditions across their regions weakened more than anticipated, impacting sales despite the success of premium residential and commercial offerings.

• Productivity and Cost Management:

• The company achieved ongoing productivity and restructuring initiatives, resulting in benefits from favorable currency exchange and lower interest expense.

• However, higher input costs and temporary plant shutdowns offset these benefits, impacting fourth-quarter earnings.

• Tariff and Input Cost Challenges:

• Mohawk Industries faces tariffs averaging about 20% on imported products, impacting annual costs by approximately $110 million.

• The company is mitigating these costs through price increases and supply chain optimization, with effects expected to be fully offset by early 2026.

• Restructuring and Cost Savings:

• The company identified additional restructuring opportunities, resulting in anticipated annualized savings of approximately $32 million, combined with previous actions, totaling $110 million for the year.

• These initiatives aim to lower the cost structure without impacting long-term growth potential when the market recovers.

• Commercial Market Strength:

• Commercial sectors show strength across their markets, particularly in the U.S. with growth in hospitality, healthcare, and education sectors.
• This strength in commercial sales helps offset weaknesses in residential remodeling, which is constrained by consumer uncertainty and low home sales.

Sentiment Analysis:

Overall Tone: Neutral

• Management reported Q3 sales of $2.8B in line with expectations and slight outperformance in many markets, but said markets remain challenged and volume should stay soft through year‑end. They highlighted productivity, restructuring and pricing actions to offset inflation/tariffs and guided Q4 EPS $1.90–$2.00 while projecting ~ $110M of savings this year, implying caution balanced with operational confidence.

Q&A:

• Question from John Lovallo (UBS): Since July you suggested Q4 EPS might outpace normal seasonal decline—what changed to lower those expectations and how should we think about revenue and margins by segment embedded in that outlook?
  Response: Conditions weakened since July—elevated rates, lower consumer confidence, slower builders and softer international markets have reduced volumes and kept costs higher, pressuring margins across segments.

• Question from Matthew Bouley (Barclays): How have tariff‑related price increases been implemented and when will they begin to benefit margins given channel inventory?
  Response: Tariff and carpet price increases have been announced (tariffs ~5–10%, carpet ~5%); realizations are underway but will take time to flow through as inventories normalize; supply‑chain moves and lower freight partially mitigate impacts.

• Question from Collin Verron (Deutsche Bank): Magnitude of raw‑material/energy cost declines and timing for margin benefit; have you found the bottom in Flooring Rest of the World?
  Response: Raw‑material inflation is easing with benefits starting in Q4 but subject to a ~3–4 month inventory lag; energy/wages remain elevated and Europe is still slow, so margin relief will be gradual into 2026.

• Question from Rafe Jadrosich (Bank of America): Visibility on inflation into 2026 and the cumulative impact of cost‑savings initiatives into next year?
  Response: Input‑cost relief lags ~3–4 months; tariffs will still impact early 2026 but restructuring yields ~$110M this year and should provide roughly $60–70M of annualized benefit in 2026 plus ongoing productivity.

• Question from Susan Maklari (Goldman Sachs): Where are new product launches in their lifecycle and how might they drive mix/margin next year?
  Response: Continuous innovation across categories (3D tile, new quartz, updated LVT/laminate) should improve mix and support margin recovery as volumes normalize; 2026 is viewed as a transitional year toward better results.

• Question from Sam Reed (Wells Fargo): Did Lowe’s acquisition of ADG affect ceramic volumes and what is the impact of the additional shipping days on sales?
  Response: The Lowe’s/ADG situation had no meaningful Q3 impact; four additional shipping days in Q1 equate to roughly a 6.5% year‑over‑year sales benefit (about 0.5% per day).

• Question from Keith Hughes (Truist): You noted improved retail traffic—where was that seen and has it continued into October?
  Response: Retail traffic improved modestly late in the quarter per customers, but it hasn't yet translated into a material increase in remodeling spending or sales.

• Question from Michael Rehaut (JPMorgan): Can you quantify tariff impacts quarter‑by‑quarter and explain the pace of price recovery; plus rationale for modest buybacks?
  Response: Tariffs represent roughly a $110M annualized headwind; cost impacts were seen in Q3 with pricing actions taken in Q3/Q4 and further flow‑through expected into Q1; buybacks continue but are balanced against reinvestment and potential M&A opportunities.

• Question from Adam Baumgarten (Vertical Research): Is the industry more coordinated on tariff‑driven price actions and is commercial demand slowing?
  Response: Many competitors have announced increases but actions aren't perfectly coordinated; management expects equilibration by early next year; commercial still outperforms residential with generally stable backlogs though some pockets show softening.

• Question from Phil Ng (Jefferies): With tariffs clearer, how competitive are your U.S. costs in ceramic/laminate/LVT/quartz and will productivity plus price offset inflation?
  Response: Domestic laminate and much of ceramic production (U.S./Mexico) provide competitive advantage versus imports; management expects combined productivity and price actions to largely offset inflation entering 2026.

• Question from Stephen Kim (Evercore ISI): How large is commercial exposure and how is the sales force organized across channels?
  Response: Commercial is about 25% of company sales (heavier in Global Ceramic); sales teams are specialized by channel and region, with targeted coverage for retail, builders, multifamily and commercial specifiers.

• Question from Trevor Allinson (Wolfe Research): What are the new restructuring actions accomplishing beyond prior rounds and why is LVT more competitive in Europe?
  Response: New actions further rationalize inefficient plants, exit unprofitable products, consolidate operations and cut admin across all segments; European LVT competitiveness is driven by rising imports (notably China) and weak local demand.

• Question from Mike Dahl (RBC Capital Markets): North America price‑mix drivers—how much is promotional/competitive pressure versus true mix weakness and when will mix improve?
  Response: Lower demand spurred aggressive promotions and trade‑downs causing mix pressure; management expects YoY price/mix to begin improving in Q4 as tariff pricing flows through and to strengthen next year.

• Question from Tim Wojs (Baird): Clarify timing for productivity and pricing to offset material cost inflation and approach in advantaged categories like ceramic—price or volume focus?
  Response: Company expects productivity plus price actions to offset inflation as they enter 2026 (Q1/Q2), and the pricing vs. volume approach is decided market‑by‑market to optimize outcomes.

Contradiction Point 1

Inflation Impact on Costs

It involves how the company perceives and addresses cost inflation, which affects profitability and strategic decision-making.

Can you quantify the declines in raw material and energy costs and when they will begin to impact margins in 2026? - Collin Verron (Deutsche Bank)

2025Q3: Inflation in input costs is expected to continue in 2026, including raw materials, wages, and energy. We anticipate continued inflation in our input costs next year. - James Brunk(CFO)

Can you explain the return to negative net price/mix in North America? Is it more challenging compared to the market, and how should we approach it in the second half of the year? - Michael Dahl (RBC Capital Markets)

2025Q2: The inflation this year has been in the neighborhood of 6%. And so we expect that to continue in the year 2023. - James Brunk(CFO)

Contradiction Point 2

Tariff Impact and Pricing Strategy

It highlights the company's approach to mitigating tariff pressures and the effectiveness of pricing strategies, which directly impact financial performance and market competitiveness.

Is the industry more coordinated in tariff-driven price increases? - Adam Baumgarten (Vertical Research)

2025Q3: We have taken a more aggressive stance on pricing, and we'll continue to seek more pricing increases to offset those costs. - James Brunk(CFO)

What are the current competitive pricing dynamics in the U.S.? Are competitors passing on price increases due to tariffs? - Richard Reid (Wells Fargo)

2025Q2: We announced 8% price increases to mitigate tariff pressures. The industry is facing higher tariffs, and the delays in impact are due to inventory in the system. - Paul De Cock(COO)

Contradiction Point 3

Inflation and Cost Management

It involves changes in expectations about inflation's impact on input costs, affecting margin assumptions and financial projections.

What is the magnitude of declines in raw material and energy costs and when will they begin to impact margins in 2026? - Collin Verron (Deutsche Bank)

2025Q3: Inflation in input costs is expected to continue in 2026, including raw materials, wages, and energy. We anticipate continued inflation in our input costs next year. - James Brunk(CFO)

How should we think about the price-cost outlook given the $40 million headwind and declining input costs? - Rafe Jadrosich (Bank of America)

2025Q1: Material and energy increased in late last year, but natural gas prices have decreased, which should benefit later in the year. We are increasing prices selectively and reducing costs to adjust. - James Brunk(CFO)

Contradiction Point 4

Interest Rate Impact on Consumer Confidence

It reflects shifting expectations on how interest rates affect consumer confidence and remodeling activities, which are crucial for the company's sales and market outlook.

What significant changes since July have caused the lowered expectations for fourth-quarter EPS growth? - John Lovallo(UBS)

2025Q3: Conditions weakened since we last talked during the quarter, with interest rates remaining elevated. Consumer confidence decline affected remodeling, and builders have slowed construction. - James Brunk(CFO)

Looking ahead this year, will Q1 to Q2 show normal seasonality, excluding the impact of the order management system? - Trevor Allinson(Wolfe Research)

2024Q4: We believe that higher interest rates have more impact on the resale market than new home construction, and we continue to assume the market will be challenging. - Jeffrey Lorberbaum(CEO)

Contradiction Point 5

Restructuring Benefits.expectation

It involves differing expectations regarding the benefits and timing of restructuring efforts, which are important for cost management and profitability.

What did the latest restructuring accomplish that wasn't completed previously? - Trevor Allinson(Wolfe Research)

2025Q3: New restructuring targets unprofitable products, plants, and administrative costs. It is spread across all three segments. - James Brunk(CFO)

Are there different competitive dynamics in Europe and the U.S. tile market affecting pricing or market share? - Eric Bosshard(Cleveland Research)

2024Q4: We believe that we'll actually be able to operate this company in the future at a much lower cost structure than we have in the past. - Jeffrey Lorberbaum(CEO)