Q3 2025 Earnings Call: Contradictions Emerge on Tariff Pricing, Global Market Outlooks, and Margin Strategies

Date of Call: October 24, 2025

Financials Results

• Revenue: $2.8B, up 1.4% as reported and flat on a constant-currency basis
• EPS: $2.67 adjusted; $1.75 reported
• Gross Margin: 23.7% as reported; 25.3% excluding charges
• Operating Margin: 5.0% as reported; 7.5% adjusted (adjusted down 130 bps year-over-year)

Guidance:

• Q4 2025 EPS guidance $1.90–$2.00 (excludes restructuring/one-time charges) and includes 1 additional shipping day.
• Non-GAAP tax rate forecast ~18% for Q4 and full year.
• Full-year CapEx reduced to ~ $480M; D&A ~ $640M.
• Expect ~$110M of savings this year from restructuring; additional announced actions provide ~ $32M annualized savings (net cash cost ~ $20M).
• Calendar impacts: Q1 2026 has 4 additional shipping days; Q4 2026 has 4 fewer.
• Management expects input-cost easing into 2026 with productivity and pricing actions intended to offset inflation over time.

Business Commentary:

• Challenging Market Conditions and Economic Weakness:
• Mohawk Industries reported net sales of $2.8 billion in Q3, slightly ahead of the prior year but flat on a constant basis.
• Economic conditions weakened more than anticipated, impacting sales across regions.

• This was influenced by consumer uncertainty, decreased consumer confidence, and interest rates remaining elevated.

• Restructuring Initiatives and Cost Reductions:

• Mohawk announced new restructuring opportunities that are expected to result in annualized savings of approximately $32 million, with combined savings of $110 million anticipated this year.
• These actions aim to lower the cost structure without impacting long-term growth potential.

• The initiatives focus on rationalizing less efficient assets and streamlining logistics operations and administrative functions.

• Impact of Tariffs and Material Costs:

• The company faces a 20% average tariff impact on imported products, costing approximately $110 million annually.
• Mohawk is addressing this through price adjustments and supply chain optimization.

• The evolving tariff situation requires continuous strategy adjustments due to market volatility.

• Product Innovation and Market Outperformance:

• Mohawk's hard surface categories outperformed the overall residential market, driven by successful product launches and innovative designs.
• The company's premium residential and commercial offerings continue to benefit from expanding distribution and market penetration.
• The success of new product introductions and operational improvements contributed to the outperformance.

Sentiment Analysis:

Overall Tone: Neutral

• Management described Q3 as 'in line with expectations' with 'markets remaining challenged' but highlighted $2.67 adjusted EPS and ~ $310M free cash flow. They reiterated delivering ~$110M of savings and guided Q4 EPS $1.90–$2.00 while noting tariffs (~20% average, ~$100–110M annualized before mitigation) and that market volume 'should remain soft through the end of the year.'

Q&A:

• Question from John Lovallo (UBS): What changed since July that lowered your expectation that 4Q could outpace the normal seasonal ~20% q/q decline, and how are you thinking about revenue and margins by segment embedded in that outlook?
  Response: Management: Macro weakened—elevated interest rates, lower consumer confidence, slower builder activity and softer international markets—raising costs and pressuring volume, which reduced prior optimism for Q4; segment outlooks reflect these headwinds.

• Question from John Lovallo (UBS): Beyond North America hard surfaces, which categories/regions outperformed and why?
  Response: Management: Global Ceramics and certain Rest-of-World businesses (insulation, panels, laminate) outperformed due to premium product launches, commercial strength and productivity/restructuring gains.

• Question from Matthew Bouley (Barclays): How have the initial tariff-related price increases flowed through and when will the additional increases announced begin to benefit results?
  Response: Management: Initial increases are flowing; additionally announced tariff increases (~5–10%) and carpet increases (~5%) will take time to realize and reach equilibrium as channel inventories clear.

• Question from Matthew Bouley (Barclays): With reciprocal tariffs in place, can you quantify the headwind and is any of it in your Q4 guide or will it show up in Q1?
  Response: Management: Average tariff impact ~20%, roughly $100–110M annualized before mitigations; some cost impact seen in Q3, expected to continue in Q4, and tariff-related pricing is contemplated in guidance with more alignment into next year.

• Question from Collin Verron (Deutsche Bank): Magnitude of declines in raw material costs and timing for margin benefit given inventory lags; any segment-level magnitude?
  Response: Management: Raw material prices are easing from earlier peaks (noted benefit beginning Q4); energy and wages remain elevated, tariffs persist, and some inflation likely into next year—no detailed per-segment magnitude provided.

• Question from Collin Verron (Deutsche Bank): Did Rest of World find the bottom and do you anticipate year-on-year growth there in Q4?
  Response: Management: Europe remains slow but conditions (lower rates, record household savings, easing inflation and energy) should support recovery over time; no definitive statement that the bottom has been reached or a clear Q4 YOY growth call.

• Question from Rafe Jadrosich (BofA): Given declines in oil/natural gas/recycled poly, what's the visibility on inflation relief into 2026?
  Response: Management: Input-cost declines flow through with ~3–4 month lag via inventory; expect some relief into 2026 but Q1 still faces wage increases and ongoing tariff impacts.

• Question from Rafe Jadrosich (BofA): Can you quantify cumulative savings from prior and new restructuring into Q4 and carryover into 2026; will there be additional productivity beyond that?
  Response: Management: Combined actions yield ~ $110M savings this year (a bit more weighted to Q4); expect ~$60–70M favorable impact in 2026 from restructuring plus ongoing productivity initiatives beyond that.

• Question from Susan Maklari (Goldman Sachs): Where are North America new-product launches in their lifecycle and how much momentum and mix benefit could they deliver in 2026 under a challenged macro?
  Response: Management: Continuous product innovation across categories (3D tile, updated LVT/hybrid, new quartz countertop tech); these launches should improve mix and help outgrow the market when macro improves.

• Question from Susan Maklari (Goldman Sachs): How should we think about the path for margins next year versus your longer-term high-single/low-double-digit targets?
  Response: Management: 2026 viewed as transitional with expected gradual improvement driven by lower rates, higher volumes, pricing, mix and realized restructuring/productivity—timing of the inflection is uncertain but margin leverage is expected.

• Question from Richard Reid (Wells Fargo): Can you quantify ceramic volume benefit in Q3 from the Daltile/Lowe's ADG transaction and any Q4 sell-in embedded in guidance?
  Response: Management: No material Q3 impact observed from that transaction; focus remains on optimizing the partnership but no quantifiable Q3 lift or specific Q4 sell-in disclosed.

• Question from Richard Reid (Wells Fargo): What is the impact of the 4 additional shipping days in Q1 and corresponding 4 fewer days in Q4 '26 on top-line and margins?
  Response: Management: Four extra shipping days equate to about a 6.5% year-over-year sales benefit (roughly 1–1.5% per day); margin impact depends on product/segment mix.

• Question from Keith Hughes (Truist): You noted improved retail traffic in the quarter; where is that showing and has it continued into October?
  Response: Management: Some slight improvement in retail traffic reported by customers late in the quarter, but consumer uncertainty continues to suppress large remodeling purchases; trend continuation uncertain.

• Question from Michael Rehaut (JPMorgan): Repeat of tariff quantification quarter-by-quarter and how much recovery in price has occurred each quarter?
  Response: Management: Tariffs average ~20% (~$100–110M annualized). Cost impacts began to show in Q3; pricing actions implemented in Q3 and Q4 are offsetting costs, with further alignment expected into Q1 next year.

• Question from Michael Rehaut (JPMorgan): Given a strong balance sheet, why not be more aggressive with buybacks—are you conserving dry powder for M&A?
  Response: Management: Buybacks ( ~$108M YTD) are funded from free cash flow and remain part of capital allocation, but management will balance repurchases with reinvestment and opportunistic M&A as the market evolves.

• Question from Adam Baumgarten (Vertical Research): Is the industry more coordinated now on tariff-driven price increases versus over the summer?
  Response: Management: Not formally coordinated, but most industry participants have announced increases; with varied inventories it should take until around the new year to equilibrate.

• Question from Adam Baumgarten (Vertical Research): Are you seeing any signs of slowing in commercial demand after prior leading indicators?
  Response: Management: Commercial still outperforms residential with stable backlogs overall, though some markets show slowing; management is prioritizing higher-end, differentiated products to protect pricing and margins.

• Question from Philip Ng (Jefferies): With better visibility on tariffs, how do you stack up cost-wise in the U.S. across ceramic, laminate, LVT and countertops and have you seen new placement?
  Response: Management: Laminate (domestically produced) is a strong, cost-advantaged alternative to LVT; ceramic production in U.S./Mexico is also advantaged versus imports; these positions are aiding placement with some channel shifts to domestic products.

• Question from Philip Ng (Jefferies): Is the plan that productivity/restructuring plus price will offset inflation such that volume drives profitability in early next year?
  Response: Management: Yes — the plan is for productivity and tariff-driven pricing to largely offset input inflation into early 2026, allowing volume recovery to drive improved profitability.

• Question from Aatish Shah (for Evercore ISI): How large is the commercial exposure company-wide and by segment, and which verticals are strongest or weakest?
  Response: Management: Roughly 25% commercial exposure company-wide, disproportionately weighted to Global Ceramics; strength seen in hospitality, healthcare and education; Rest of World has limited commercial exposure.

• Question from Aatish Shah (for Evercore ISI): How are you managing the sales force during this challenged period and is there a distinction between commercial and residential coverage?
  Response: Management: Sales forces are segmented by region and channel with specialists for national accounts, builders, multifamily and commercial specifiers; allocation tailored by market size and product.

• Question from Trevor Allinson (Wolfe Research): What is the focus of the latest restructuring versus the prior round—are you taking incremental capacity offline and how is it distributed across segments?
  Response: Management: Actions are broad-based across all three segments targeting unprofitable products/plants, consolidating inefficient assets and reducing administrative, sales and operational costs.

• Question from Trevor Allinson (Wolfe Research): Is LVT in Europe becoming more competitive due to imports from Asia or weaker European demand?
  Response: Management: Both—imports (notably from China) into Europe are growing and the overall market is competitive; Mohawk is combining manufactured and sourced products to optimize local position.

• Question from Christopher Kalata (RBC): On North America price/mix, how much of the decline was competitive pricing pressure versus mix?
  Response: Management: Weak demand is driving aggressive promotions and some trade-downs, which alongside lower volume drove the price/mix headwind; ceramic's commercial exposure offset some pressure.

• Question from Christopher Kalata (RBC): When could price/mix return to positive given tariff pricing and uncertainty?
  Response: Management: Expect some company-wide year-over-year improvement in Q4 as more pricing takes effect and continued improvement into next year but timing remains uncertain.

• Question from Christopher Kalata (RBC): Clarification—are you referring to year-on-year improvement?
  Response: Management: Yes—management was referring to year-over-year improvement.

• Question from Timothy Wojs (Robert W. Baird): When you say productivity and pricing will offset material cost, are you referring to entering 2026 or expectation for all of 2026?
  Response: Management: The expectation is entering 2026 (Q1 and into Q2) that productivity and pricing should largely offset input inflation, subject to material price movements.

• Question from Timothy Wojs (Robert W. Baird): For advantaged categories (e.g., ceramic) are you prioritizing price or volume when competitors raise prices due to tariffs?
  Response: Management: It's a market-by-market and product-by-product balance—decisions will be made case-by-case to optimize price and volume depending on competitive dynamics and customer relationships.

Contradiction Point 1

Pricing Adjustments for Tariff Impacts

It involves differing expectations of tariff impacts and pricing adjustments, which are crucial for financial sustainability and competitive positioning.

Can you explain the price increases from tariffs and when they will take effect? - Matthew Bouley(Barclays Bank PLC, Research Division)

2025Q3: On average, tariffs account for about 20% impact annually, with ongoing mitigation efforts. Price increases are being implemented to offset tariffs, which should align by the first of next year. - Jeff Lorberbaum(CEO)

Where are competitive pricing dynamics most acute in the U.S.? - Richard Reid(Wells Fargo Securities, LLC, Research Division)

2025Q2: We're implementing 8% price increases. The industry will need to increase further with higher tariffs. We're reviewing other alternatives to optimize our supply chain. - Paul De Cock(COO)

Contradiction Point 2

Market Conditions and Demand in Rest of the World

It involves the company's assessment of market conditions and demand in the Rest of the World segment, which is important for strategic planning and investor expectations.

Has Rest of World sales growth found its bottom? - Collin Verron(Deutsche Bank AG, Research Division)

2025Q3: Economic conditions in Europe remain slow, with geopolitical events impacting consumer confidence. Decline in energy prices and record savings should support recovery. - Paul De Cock(COO)

What drove the strong top-line performance in the Flooring Rest of the World segment? - John Lovallo(UBS Investment Bank, Research Division)

2025Q2: In Flooring Rest of the World, sales decreased 15% with currency translations affecting 5 points. Excluding currency, sales decreased 10%, with commercial up 2% and residential down 15%. - James Brunk(CFO)

Contradiction Point 3

Impact of Cost Inflation and Pricing Adjustments on Margins

It highlights differences in the company's outlook on the impact of cost inflation and pricing adjustments on margins, which are critical for financial forecasting.

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2025Q3: Next year is transitional, with improved lower interest rates and housing demand. Margin improvement expected with volume growth and cost reduction initiatives. - Jeff Lorberbaum(CEO)

Why did negative net price/mix reemerge in the U.S. North American pricing environment? How will pricing evolve in the second half of the year? - Michael Dahl(RBC Capital Markets)

2025Q2: We're leveraging productivity initiatives and restructuring actions to minimize cost pressures. - Paul De Cock(COO)

Contradiction Point 4

Tariff Impact and Pricing Strategy

It involves the expected timing and magnitude of tariff impacts on costs and pricing, which are crucial for financial forecasting and competitive positioning.

Can you explain pricing adjustments from tariffs and the timing of their impact? - Matthew Bouley(Barclays Bank PLC, Research Division)

2025Q3: Prior price increases have flowed through, and additional increases announced for tariffs and inflation. These changes will take time to reach equilibrium, and strategies will adjust with market conditions. - Paul De Cock(COO)

How is the $50M annualized tariff cost impact distributed across 2Q vs. H2? How do you plan to address the $40M China LVT cost by leveraging domestic capacity through pricing or market share shifts? - John Lovallo(UBS Investment Bank, Research Division)

2025Q1: Tariff costs will impact beginning in the fourth quarter, taking 4-5 months to turn through inventory. We're assessing pricing and supply chain adjustments. - James Brunk(CFO)

Contradiction Point 5

Economic Conditions and Consumer Confidence

It involves differing assessments of economic conditions and consumer confidence, which are crucial factors affecting business performance and market outlook.

What changes since July caused Q4 EPS growth expectations to drop below seasonal norms? - John Lovallo(UBS Investment Bank)

2025Q3: Conditions weakened since July, with interest rates remaining elevated and consumer confidence declining. - James Brunk(CFO)

Does the 1Q earnings guidance align with normal seasonality, and is this based on historical seasonality for the next quarter excluding the order management system impact? - Trevor Allinson(Wolfe Research)

2024Q4: We are encouraged by the continued strong demand for our products in all customer segments. - Jeffrey Lorberbaum(CEO)