MOHAWK INDUSTRIES, INC. 3RD QUARTER 2026 EARNINGS CALL - MOHAWK INDUSTRIES INC

Financial Performance:

• Q3 2026 net sales reached $2.8 billion (+1% reported, flat excluding FX and shipping days).
• Volumes declined 4% due to soft demand; price and mix improved 4% to offset inflation.
• Net earnings were $163 million (5.9% of sales); adjusted EBITDA was $353 million with an adjusted EBITDA margin of 12.7%.
• Adjusted operating income was $200 million; adjusted EPS was $2.72.
• Cash flow generation remained robust with $471 million in operating cash flow and $390 million in free cash flow (FCF).
• Year-to-date FCF totaled $626 million (+26% vs. prior year).
• Share repurchases reached $261 million in Q3, bringing year-to-date returns to $300 million; net debt leverage improved to 0.7x.
• Underlying cost inflation was ~$117 million for the quarter, fully offset by $85M in price/mix and $47M in productivity gains.

Guidance and Future Outlook:

• Q4 2026 guidance anticipates single-digit adjusted net sales growth and adjusted EPS between $1.35 and $1.45.
• Q4 outlook factors in a 6% headwind from four fewer shipping days and continued soft market demand.
• Full-year 2026 capital expenditures guidance lowered to ~$445 million from a prior $460 million estimate.
• Planning assumptions for 2027 suggest market volumes may decline; management expects to outperform despite this backdrop.
• Underlying cost inflation expected to remain in the mid-single digits into early 2027, to be offset dollar-for-dollar by price, mix, and productivity.
• Target net debt to adjusted EBITDA ratio set to a long-term ceiling of up to 2.0x, subject to cyclical risk assessment.
• New $500 million share repurchase authorization approved to support capital return strategy.

Business Segments and Product Lines:

• Global Ceramic: Sales $1.1 billion (+2%); volumes down 1% but price/mix up 2%. Adjusted operating margin 6.5%.
• Flooring North America: Sales $950 million (+1%); volumes down ~3% but price/mix up ~3%. Adjusted operating margin expanded 80 bps to 8.1% driven by productivity and tariff refunds.
• Flooring Rest of World: Sales $707 million (-1%); volumes down ~10% on constant basis. Price/mix gains of ~7% offset lower volumes, maintaining 9.3% adjusted operating margin.
• U.S. Residential Repair/Remodel (approx. 50% of US sales): Holding up better than new construction; specialty retail gaining share, led by asthma-friendly carpet and quartz countertops.
• U.S. New Construction (approx. 25% of US sales): Softest segment due to high mortgage rates; added new builder wins in ceramic and laminate.
• Commercial (approx. 25% of US sales): Demand constructive; LVT orders grew for six consecutive months; hospitality, healthcare, and education remain active.
• Europe: Premium collections and large-format ceramic outperforming; energy costs doubling prompted price increases in panels and insulation.

Market and Competitive Landscape:

• U.S. residential demand weakened significantly in late Q3 and October, particularly in the builder channel and single-family new construction.
• European consumer demand remains soft with weak showroom traffic, though commercial projects are holding up better.
• Mohawk continues to gain market share in retail channels despite industry-wide volume declines, benefiting from a "K-shaped" economy where high-end performance outpaces the low end.
• Competition in laminate is shifting toward Mohawk's product as a superior alternative to LVT among home builders.
• Global market growth expected to be low single-digit annually; strategy focuses on outperforming cycles rather than waiting for recovery.

Risks and Challenges:

• Macroeconomic headwinds including high interest rates, weak builder confidence, and inflationary pressure on raw materials, freight, and energy.
• European natural gas prices have roughly doubled since Q3 start, impacting cost structures.
• Potential for further inventory destocking and channel slowdowns in Rest of World markets (Europe, Australia, New Zealand).
• Seasonal slowdown in Q4 combined with fewer shipping days poses margin pressure.
• Inflation trajectory remains volatile, requiring continuous price adjustments to maintain margins.

Management Commentary and Tone:

• CEO Paul DeCock (newly appointed) emphasized a seamless leadership transition from Jeff Loeberbaum.
• Tone is confident and disciplined, focusing on "outperformance" and capital allocation rather than waiting for market recovery.
• Management highlighted a new strategic framework built on four pillars: outperforming markets, product innovation/brand strength, profitability/operational excellence, and cash generation/capital discipline.
• Leadership expressed commitment to maintaining investment-grade ratings while increasing capital returns to shareholders.
• Commentaries underscored that the combination of price/mix and productivity has consistently offset inflation on a dollar-for-dollar basis.

Analyst Questions and Answers:

• Capital Allocation: Clarified that baseline CapEx of ~$375M annually covers maintenance, productivity, and innovation; new growth requires high returns. Leverage target of 2.0x is a ceiling, not a hard cap, with flexibility for opportunistic M&A.
• Inflation & Pricing: Input costs flow through P&L with a 4-5 month lag; price/mix realization expected to remain consistent with prior successful increases; industry is expected to absorb similar inflation.
• Margin Outlook: Q4 margin pressure attributed to lower volumes, fewer shipping days, and fixed cost absorption rather than pricing inefficiencies.
• Portfolio Review: Management initiated a comprehensive portfolio analysis to potentially divest or reposition underperforming assets based on market attractiveness and ROIC.
• Productivity: 2026 productivity run rate ~$40M/quarter; 2027 expected to benefit from a $60M annualized restructuring program, though year-over-year comparisons will face headwinds from prior base.
• Hedging: Europe natural gas costs managed via forward buying; competitors' hedging strategies remain opaque.
• Tax Rate: Q4 2026 effective tax rate expected at 23.5% due to geographic mix and discrete items, though full-year 2026 rate aligns with prior expectations.

Other Key Points:

• Mohawk is evolving from a manufacturer to a "designer that develops and delivers customer solutions," leveraging three global innovation hubs (Italy, Belgium, U.S.).
• Industry innovation focus includes superior aesthetics, differentiated performance (e.g., scratch resistance, allergen-friendly), and sustainability.
• Management reiterated that every dollar of deployable cash will pass through a strict framework prioritizing organic investments, disciplined M&A, and shareholder returns.
• A new restructuring program announced last quarter is expected to contribute significantly to cost savings in 2027.
• The company returned over $600M to shareholders in the second half of 2026 (including Q3 repurchases and dividends), demonstrating strong capital discipline.