Mohawk Industries, Inc. (MHK) Earnings

Management highlights

### Overall Performance & Leadership Transition - Q2 2026 net sales hit $3 billion, up 6.8% year-over-year as reported (5% constant currency), with reported EPS of $3.22 and adjusted EPS of $3.67, including a 63 cent benefit from unforecasted tariff refunds. Results significantly exceeded management expectations, driven by volume growth, pricing actions, and favorable product mix. - Long-time CEO Jeff Lorberbaum announced his retirement, with current President and COO Paul De Cock set to take over as CEO; Jeff will remain as Chairman of the Board. - The company repurchased over 600,000 shares for approximately $60 million during the quarter as part of its ongoing share buyback program. ### Market Position & Operational Updates - Residential flooring channels remained soft, but Mohawk outperformed the broader market and gained share in most regions. The commercial sector continued to outperform residential, and the company's differentiated product offering improved overall mix and margins. - The new home construction market remains pressured, and existing home sales continue to face affordability challenges. Management is proactively managing controllable business factors, including sales strategy, pricing, operations, inventory levels, and costs. - New cost reduction initiatives focused on operational simplification, organizational realignment, warehouse consolidation, and capacity optimization are expected to generate $60 million in permanent annual cost reductions, mostly completed by the end of 2027, with $50 million in total one-time cash restructuring costs. - Mohawk completed all 2025 sustainability goals, reducing emission intensity by 31%, waste to landfill intensity by 55%, and water intensity by 50% from the base year, as detailed in the company's 17th annual impact report. ### Segment-Specific Operational Progress - Global Ceramic: Gained momentum with new premium tile and countertop placements in the U.S., grew volumes and improved market positioning in Latin America, and leverages Italian R&D center innovation for global product development. - Flooring North America: Gained market share in both hard and soft surfaces, with new product introductions driving soft surface growth and expanded channel presence for hard surfaces; laminate products remain a strong value offering for home builders. - Flooring Rest of the World: Launched new LVT and laminate collections to strengthen its position in the premium segment; insulation and panels businesses delivered strong results via disciplined pricing and cost management. ### Financial Health - Year-to-date free cash flow is $236 million, with strong cash generation expected to continue in the second half of 2026. 2026 full-year capital expenditures are projected at $460 million, focused on cost reduction, product innovation, and maintenance. - The balance sheet remains strong, with net debt just under $1.1 billion and a net debt to EBITDA ratio of 0.8x.

Guidance

- Management expects third quarter 2026 market conditions to remain challenging, with commercial continuing to outperform residential and higher-end offerings continuing to improve product mix. A sequential seasonal sales decline from Q2 to Q3 is expected, and this decline will likely be more pronounced than historical averages due to Q2's stronger-than-anticipated performance. - Adjusted Q3 2026 EPS (excluding restructuring and one-time charges) is guided to a range of $2.50 to $2.60, which includes approximately 12 cents from additional already-received tariff refunds. Excluding tariff refunds, the baseline EPS range is $2.38 to $2.48. - Input cost inflation is expected to step up sequentially from Q2 to Q3 by a similar magnitude as the $35 million step-up seen from Q1 to Q2. Q4 2026 input costs are expected to remain elevated at roughly Q3 levels, with no large additional sequential step-up currently projected. - Management expects the combination of price increases, favorable product mix, and productivity gains to fully offset full-year 2026 input inflation. Additional price increases may be required later in 2026 if input costs rise further. - Full year 2026 corporate expenses are projected to be approximately $55 million, and 2026 full-year capital expenditures are projected to be approximately $460 million. - FX benefits that boosted first half 2026 results are not expected to continue in the second half of the year.

Segment performance

1. Global Ceramic: Net sales of $1.2 billion, up 7.9% as reported and 4.6% on a constant currency basis. This segment contributed 40% of total company net sales, achieved 3% volume growth, with adjusted operating income of $99 million and an adjusted operating margin of 8.2%. 2. Flooring North America: Net sales of $976 million, up 3.1% as reported and 4.7% on a constant currency basis. This segment contributed 32.5% of total company net sales, with adjusted operating income of $111 million and an adjusted operating margin of 11.4%. 3. Flooring Rest of the World: Net sales of $806 million, up 9.7% as reported and 6.2% on a constant currency basis. This segment contributed 26.9% of total company net sales, with adjusted operating income of $97 million and an adjusted operating margin of 12% (a 160 basis point improvement year-over-year). Corporate eliminations and expenses were $17 million for the quarter, with full year 2026 corporate expenses projected to be approximately $55 million. Total company net sales for Q2 2026 was $3 billion.

Risks & headwinds

- Persistent macroeconomic headwinds: The new home construction market remains pressured, existing home sales face ongoing affordability challenges, and global residential flooring demand remains near multi-decade lows, with no near-term demand recovery expected. - Inflation and input cost volatility: Higher materials, energy, and transportation costs continue to pressure margins, with inflation expected to increase through the second half of 2026. European natural gas prices remain particularly volatile, creating uncertainty for European operations. - Geopolitical uncertainty: The ongoing Middle East conflict has created market volatility and uncertainty, and escalating tensions could lead to further input cost increases. - Competitive pressure: Slow end-market demand has increased competition for volume, which could impact the ability to implement and pass through planned price increases. - Additional price increases may be required later in 2026 if input costs continue to rise, which could impact demand in the already soft market environment.

Analyst Q&A

• Q: The company achieved impressive share gains in Q2. Which product categories and end markets are driving these gains, and what are incoming CEO Paul De Cock's initial priorities after the leadership transition?

  A: Innovation across both commercial and residential lines is driving share gains. The new Hero rubber flooring made from recycled Nike regrind won three Best of Neocon awards, demonstrating the company's innovation capabilities that have delivered strong new product placement gains in Q2. De Cock will continue building on Mohawk's existing strengths: operational excellence, customer focus, product innovation, and leading global market positions. The company's strong balance sheet and cash flow provide flexibility to invest in growth while continuing to return capital to shareholders.

• Q: Why is the expected Q3 sequential sales decline more pronounced than usual, and what is the outlook for additional pricing actions to offset inflation?

  A: Q2 strength came primarily from initial stocking of new product placements rather than large-scale pre-buying ahead of price increases, so the limited pre-buy impact is already factored into the Q3 outlook, and Q2 was just stronger than typical seasonally. The entire industry needs to implement pricing to cover rising costs, and pricing realization so far has been in line with expectations. With inflation expected to keep rising in the second half, the combination of price, mix, and productivity is still expected to offset full-year inflation, but additional pricing actions may be needed if costs keep increasing.

• Q: What drove the sharp acceleration in Flooring Rest of the World core revenue growth, and will this growth level continue into Q3?

  A: The acceleration came from implemented price increases to offset high European inflation, plus strong demand for new premium LVT and laminate collections that improved product mix, with outperformance from panels and insulation businesses. FX tailwinds that boosted first half results are not expected to continue in the second half, but positive price and mix benefits are expected to persist into Q3.

• Q: What is the opportunity from proposed countertop import tariffs, and is there any change to Mohawk's capital allocation approach under new leadership?

  A: The ITC has proposed 25% minimum tariffs on imported countertops, with a final presidential decision expected soon. Mohawk has already expanded a second U.S. domestic countertop manufacturing line that is expected to ramp up quickly to capture share from imports. The capital allocation framework remains unchanged: first invest in organic growth, innovation, and productivity, evaluate acquisition opportunities that meet strategic and financial return thresholds, and continue share repurchases as a key capital use going forward.