Mohawk Industries Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2025

Key Takeaways

  • Neutral Sentiment: Q2 net sales were $2.8 billion (flat YoY) with adjusted EPS of $2.77.
  • Positive Sentiment: Generated $125 million in free cash flow and repurchased 393 000 shares for $42 million, while board approved a further $500 million buyback authorization.
  • Positive Sentiment: Restructuring actions are on schedule to deliver approximately $100 million in annual cost savings for 2025 by closing high-cost operations and streamlining assets.
  • Negative Sentiment: Residential demand remains constrained by high rates and deferred purchases, though commercial channels continue to outperform amid slowing architectural billing trends.
  • Negative Sentiment: Uncertainty over evolving tariffs persists, requiring ongoing price adjustments and supply chain optimization, with guidance excluding potential new tariff impacts.
AI Generated. May Contain Errors.
Earnings Conference Call
Mohawk Industries Q2 2025
00:00 / 00:00

There are 5 speakers on the call.

Speaker 2

Good day and welcome to the Mohawk Industries second quarter 2025 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to James Brunk, Chief Financial Officer. Please go ahead.

Speaker 4

Thank you, Ashia. Good morning everyone and welcome to Mohawk Industries Quarterly Investor Conference Call. Joining me on the call today are Jeffrey Lorberbaum, Chairman and Chief Executive Officer, and Paul De Cock, President and Chief Operating Officer. Today we'll update you on the company's second quarter performance and provide guidance for the third quarter of 2025. I'd like to remind everyone that our press release and statements that we make during this 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.

Speaker 4

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 over the call to Jeffrey for his opening remarks.

Operator

Thanks, Jim. In challenging conditions across our regions, our results reflect the impact of our ongoing operational improvements, cost containment actions, and market development initiatives. Our net sales for the second quarter were $2.8 billion, essentially flat as reported and on a constant basis. Our premium residential and commercial products and new collections introduced during the past 24 months benefited our performance. We generated second quarter adjusted earnings per share of $2.77 with strong productivity and restructuring actions, as well as favorable FX impact and lower interest expense, offset by higher input costs and plant shutdowns. Our restructuring actions are on schedule and delivering the expected savings as we close high-cost operations, eliminate inefficient assets, streamline distribution, and leverage technology to improve our administrative and operational costs.

Operator

Our global operations team continued to identify productivity initiatives to lower our costs through enhancements to equipment, conserving energy, optimizing our supply chain, and reengineering our products. Our industry faced continued pricing pressure from lower market volumes, which we mitigated through strengthening product and mix. During the quarter, we generated approximately $125 million in free cash flow, and we purchased about 393,000 shares of our stock for approximately $42 million. Our board recently approved a new authorization to acquire $500 million of the company's outstanding stock. We are confident in our strategies to deliver long-term profitable growth as the industry recovers from this cyclical downturn. A dominant trend across our geographies is consumers' deferral of large discretionary purchases, which has reduced demand in our industry for almost three years. Geopolitical events, inflation, and low housing turnover are contributing to market uncertainty that is limiting residential remodeling and new construction.

Operator

The commercial channel continues to outperform residential. However, the Architectural Billing Index in the U.S. is forecasting slowing conditions available. U.S. housing inventory has risen to its highest level since 2007, though elevated housing costs and high interest rates are constraining sales of both new and existing homes. In this challenging market, builders are offering price reductions and buying down interest rates to encourage purchases. While housing turnover has historically driven remodeling, we believe that families remaining in their homes longer and increasing multi-generational households will require additional renovation to meet evolving family needs. The Federal Reserve has postponed interest rate cuts while monitoring inflation and employment trends. Forecasters believe the Fed will cut rates twice in the second half of this year given potential market weakness. In June, the European Central Bank cut rates to 2% to stimulate the economy and the housing market.

Operator

The ECB move comes as inflation has slowed to their target. Lower interest rates should support increased consumer spend, discretionary spending, and business investment. The European housing market varies by region, though a shortage of units and affordability are common issues. In June, Germany's new government approved legislation to expand home construction by removing barriers that delayed building projects. Since the pandemic, European households have built up record levels of savings, which combined with lower interest rates, should encourage housing sales. Given the increasing tariffs, we're emphasizing the benefits of our locally produced collections and leading positions as a North American manufacturer. We have begun to address the implemented tariffs through price adjustments and supply chain optimization. Earlier this month, the U.S. government set a new deadline of August 1 for countries to complete tariff negotiations while also announcing specific tariffs on key trading partners.

Operator

We are continuing to monitor the changing tariff levels and will adjust our strategies as they evolve. On July 15, we released our annual sustainability report, which is currently available on our website. Embracing sustainable processes and products aligns our commitment to improve our operations and provide industry-leading features and benefits. We continue to invest in product circularity, material optimization, and green energy to benefit our customers, the environment, and our results. This year, major media outlets have recognized Mohawk Industries for reducing our carbon footprint, fostering innovation, and developing a talented organization. Now Jim will review our financial details for the quarter.

Speaker 4

Thank you, Jeff. Sales for the quarter were just over $2.8 billion. That was flat versus the prior year as reported and on a constant basis due to favorable product and channel mix led by our hard surface business in Flooring North America and our commercial business across the enterprise, partially offset by negative volume and continued price pressure. Gross margin for the quarter was 25.5% as reported and, excluding charges, was 26.4%, a decrease of approximately 70 basis points versus the prior year primarily due to higher input costs of $44 million, lower sales volume of $22 million, and increased shutdown costs of $18 million, partially offset by productivity gains of $47 million and favorable FX of $15 million. SG&A expense as reported was 18.8% of sales and, excluding charges, was 18.5%, relatively close to the prior year. It gives us an operating income as reported of 6.7%.

Speaker 4

Non-recurring charges for the quarter were $34 million related to restructuring actions and the associated costs undertaken by all segments, which in total will result in annual cost savings in 2025 of approximately $100 million. That gave us an operating income on an adjusted basis of $223 million or 8% of sales. That's a decrease of approximately 120 basis points as the benefit from strengthening productivity and restructuring initiatives of $57 million and FX of $9 million were offset by the increased input costs of $63 million, lower sales volume impact of $21 million, and higher shutdown costs of $18 million. Interest expense for the quarter was $5 million, a decrease from the prior year level due to lower overall debt balance and a benefit of interest income across the business. Our non-GAAP tax rate for Q2 was 19.3% versus 20.9% in the prior year.

Speaker 4

Due to geographic dispersion of our income and certain one-time benefits, we are forecasting a Q3 and full year tax rate to be approximately 19%. That gave us an earnings per share as reported of $2.34 and on an adjusted basis of $2.77. Turning to the segments, Global Ceramic had sales that just exceeded $1.1 billion. That was a 0.5% increase as reported or 1.1% on a constant basis as our product and channel mix performance offset the weakness in volume. The segment benefited from our new product introductions, leading decorating technology, and the strength of our commercial business. Operating income on an adjusted basis was $90 million or 8.1%.

Speaker 4

That's a decrease of approximately 40 basis points on an adjusted basis as the benefit from price and mix of $27 million and strong productivity of $17 million was offset by an increase in input costs of $36 million and lower sales volume of $16 million in the quarter. Flooring North America had sales of $947 million. That's a 1.2% decrease due to lower volumes mainly in our soft surfaces, partially offset by favorable product and channel mix driven by our resilient and laminate businesses. In the U.S. residential remodeling remains slow with the commercial channels still outperforming.

Speaker 4

Operating income on an adjusted basis was $69 million or 7.3% for a decrease of approximately 130 basis points versus the prior year as higher input costs of $23 million, unfavorable net impact of price and mix of approximately $9 million, and increased shutdown costs of $11 million were partially offset by the benefit of strengthening productivity of $32 million. Flooring Rest of the World had sales of $734 million. That's a 1% increase as reported and 3% decrease on a constant basis. The decrease is primarily due to the continued pricing pressure in the residential remodeling channel as consumers defer large discretionary purchases. The ECB though has lowered rates further but has not yet driven increases in housing or remodeling activity. Operating income on an adjusted basis was $76 million or 10.4%.

Speaker 4

That was a decrease of 220 basis points versus the prior year, primarily due to unfavorable net price and mix of $19 million, partially offset by productivity gains of approximately $8 million. Given the weak residential market, we are lowering costs by removing inefficient assets and reducing operational and administrative expenses. Corporate eliminations was $13 million for the quarter in line with the prior year and our full year 2025 expenses are estimated to be approximately $50 million. Taking a brief look at the balance sheet, cash and cash equivalents were $547 million for the quarter with free cash flow of $126 million in the quarter as we also repurchased shares of approximately $42 million. Inventories were just increased above $2.7 billion.

Speaker 4

That's an increase of $130 million for the quarter primarily due to FX and an increase in imported inventory due to new tariffs. Property, plant, and equipment was just above $4.7 billion with Q2 CapEx of $80 million compared to a D&A of $156 million. The company has reduced its planned investments to approximately $500 million in 2025 with D&A for the full year forecasted at approximately $610 million. 40% of the projects focus on cost reduction and product innovation and 40% on maintenance and other, with the remaining 20% to complete our growth initiatives. Overall, the balance sheet and cash flow outlook remained very strong with current net debt of $1.7 billion and leverage at 1.2x. Now Paul will review our Q2 operational performance.

Speaker 1

Thank you, Jim. In our Global Ceramic segment, our results in challenging market conditions benefited from sales of our premium products, strength in commercial projects, expanded distribution, and operational improvements. We have pressure on pricing from excess industry capacity and pressure from imports. Our product and channel mix strengthened from our superior product portfolio and brand leadership in the quarter. We minimized the impact of inflation on input costs through select price increases and restructuring projects, as well as numerous productivity initiatives including refinements to manufacturing processes, supply chain optimization, and increasing distribution efficiencies. In the U.S., our commercial performance was solid while residential sales remain challenged from softness in remodeling and new construction. We are leveraging the strength of our nationwide distribution system to target a wider range of contractors, specialty retailers, and commercial projects.

Speaker 1

To counter rising input costs, we made pricing adjustments on higher value products while increasing productivity actions as tariffs are evolving. We are promoting our domestically produced floor and wall tile, and our expansion of quartz countertop capacity in Tennessee will allow us to produce more of our offering in the U.S. Home remodeling in Europe remains constrained while the commercial channel continues to perform well, led by the hospitality sector in major European cities. Our designer showrooms and educational events for architects and designers have increased our participation in commercial projects and boosted sales of our premium collections. Sales of our porcelain slabs with more realistic visuals are growing in both traditional channels as well as for use in countertops and furniture manufacturing. In Brazil, higher interest rates have slowed the domestic market, though exports benefited sales and our mix improved.

Speaker 1

We offset higher input costs through productivity gains from operational enhancements and realigning manufacturing assets. The Mexican market remains soft and we have implemented select price increases, introduced more porcelain and innovative polished collections to enhance mix, and partnered with distributors to add more Daltal branded stores. Restructuring initiatives in our Mexican operations are on track to improve our market position and lower our costs with benefits anticipated in the second half of the year. Our Flooring Rest of the World segment managed through difficult market conditions with additional operational enhancements and cost containment actions. Residential remodeling remains soft in Europe and new construction has not kept up with population growth. A rebound in home building and renovation will be needed to meet growing demand. Pricing and mix pressure remain strong in this challenging market, and we are executing promotions to optimize our results.

Speaker 1

We took many actions to increase productivity in our operations and supply chain, as well as enhance our material costs. We are removing inefficient assets, reducing operational and administrative costs, and consolidating operations. We continue to invest in recycling waste and green energy to reduce costs. In the flooring category, our laminate performance improved as we progressed through the quarter. We are expanding our LVT distribution across channels with new collections and customer relationships, while our commodity panels business remains under pressure from excess capacity in the market. Our mix benefited from the expansion of our high-end decorative collections and entry into new geographies. We increased our sales volume of insulation boards despite soft demand, and we are expanding distribution in Germany and Poland to prepare for a new Eastern European plant in Australia. Our hard surface offering performed well, and we are expanding our LVT alternatives.

Speaker 1

Carpet sales remained under pressure, and the recent election has improved the economic outlook and orders are strengthening. We implemented price increases in June and are improving efficiencies in our operations. Flooring North America segment sales were about flat for the quarter with strong performance in hard surface categories across all channels. Rising housing inventory and lower mortgage rates could improve home sales and residential remodeling, while pricing pressure remains strong in the market. We minimize the impact with enhanced product mix and cost reductions from stronger material yields, supply chain optimization, and reduced marketing costs. We are managing inventories with reduced production and are making targeted investments to support sales and improve operations. Our restructuring actions have streamlined our operations by rationalizing inefficient assets, closing higher cost production, and simplifying our product offering.

Speaker 1

We continue to work with customers and suppliers to manage the impact of tariff costs as the situation evolves. We had strong sales growth in the quarter from our LVT, laminate, and hybrid products, with retailers and builders embracing our superior visuals and features. Manufacturing enhancements at our East and West Coast LVT operations have increased operational efficiencies, improving our cost position with a strong domestic portfolio to support our growing LVT sales. Our premium, fashion, and value collections led our soft surface performance as residential carpet sales remain under pressure due to reduced renovation. Our commercial carpet tile and hard surface order backlog is strong, led by the education and hospitality sectors. I'll now return the call to Jeff for his closing remarks.

Operator

Thanks, Paul. As we focus on market development, operational improvements, and cost containment, we are continuing to take actions that will optimize our performance in the current market. Ongoing inflation and low consumer confidence are constraining industry sales, and the timing of the inflection point remains unpredictable. To improve sales, we're leveraging the strength of our portfolio, superior service, and brand value to expand our business with current and new customers through pricing. Though pricing pressure in our markets remains elevated, we are improving our mix through our premium collections, commercial sales, and recent product introductions. Input cost pressures will continue, with the impact peaking in the third quarter as they flow through our inventory. To mitigate these higher costs, our teams will continue to execute productivity initiatives in all aspects of our operations.

Operator

Our restructuring action should deliver approximately $100 million in benefits this year while strengthening our operations for the future. Evolving U.S. trade policy should benefit Mohawk Industries, where approximately 85% of our U.S. business is produced in North America. We will manage the impact of tariffs through supply chain enhancements, cost optimization, and price adjustments. Our guidance does not include the potential impact from new tariffs, which have not been finalized at this time. Given these factors, we expect our third quarter EPS will be between $2.56 and $2.66, excluding any restructuring or one-time charges. Historically, down cycles in our industry are followed by several years of sales growth from pent-up demand. During the past three years, we have made targeted investments to improve our operational performance, cost position, and our product features.

Operator

Through these actions, we are strategically positioned to respond to today's challenges and capitalize on opportunities as the industry recovers. We'll now be glad to take your questions.

Speaker 2

Thank you. We will now begin the question and answer session. To ask a question, you may press Star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. We ask that you please limit yourself to one question and one follow up question. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time, we'll pause momentarily to assemble a roster. The first question comes from Mike Dahl with RBC Capital Markets. Please go ahead.

Speaker 2

Thanks for taking my questions. I want to start with Flooring North America pricing environment or competitive environment. It's interesting because in 1Q price mix was positive and the comp was easier. In 2Q you've got all the premium collections that seem to be doing better. Can you just help us understand a little more that inflection back to negative net price mix? Maybe quantify kind of how you fared versus the market or give us a little more color on that dynamic on price mix and how we should be thinking about through the back half of the year in Flooring North America.

Speaker 4

Yes.

Speaker 1

In Flooring North America, our segment sales were about flat for the quarter with stronger performance in the hard surface categories. Residential remodeling remains slow and commercial continues to outperform our residential business. LVT enhancements have improved our efficiency and costs, and our teams continue to execute productivity initiatives across our operations. Our restructuring actions have enhanced our operations by rationalizing inefficient assets, closing higher cost production, and simplifying our product offering. From a margin perspective, we have a lot of productivity initiatives ongoing, and our mix improvements in the quarter were offset by cost inflation, price pressure, and lower production. Our productivity initiatives and restructuring actions are progressing as expected, and they are lowering our costs. We are continuing investments in new products to prepare for the recovery of the category.

Speaker 4

From a second half perspective, I would expect that the favorable mix, both product and channel, would minimize the impact of the pricing pressures. I would expect year-over-year to see improvement as you go through Q3 and Q4.

Speaker 4

Okay, yeah, that's very helpful. My second question, the comments about this guidance do not include any potential impacts from the new tariffs. I think clearly the way things roll through your P&L, it seems like it would take a little bit of time to flip through anyway. Just based on all the moving pieces, if tariffs were to stay in place at the currently articulated rates that you see around the globe, do you have any updated or refined sense of how much cost pressure that you would have to offset?

Operator

If you start out with the initial tariffs were about 10% and we're implementing changes presently in a marketplace and we'll continue doing that. The present reciprocal tariffs have been announced from 10% to 50%. The negotiations are continuing on these tariffs, almost changing by the day. Given that we don't know what they are and it looks like they're going to have significant differences from where there's, you know, we're not going to know until we get to the end. You're right that assuming that they don't get implemented until late in the third quarter, the impact will be practically none. No matter what they are, we're going to adjust when they're finalized as they're needed. In addition to that, I guess we won't know the impact that they're going to have on the economy until later and if it'll have any impact on our industry.

Operator

Okay, thanks, Jeff.

Speaker 2

The next question comes from Sam Reed with Wells Fargo. Please go ahead.

Speaker 2

Awesome.

Operator

Thanks so much.

Operator

Just sticking on the topic of competitive pricing, the release and the prepared remarks did make a few references to competitive price dynamics. I just wanted to drill down and talk through where you're seeing competitive pricing most acutely in the U.S.

Operator

Are there any indications that some of the.

Operator

Are your peers pushing through price from tariffs, or are you finding that in general the peers are more or less holding or perhaps even pulling back on price given what we're seeing from a volume standpoint? Yeah.

Speaker 1

Thank you for your question. We've announced 8% increases that we are implementing in the market as we speak. The industry will have to increase further with higher tariffs. There are currently some delays on impact with inventory in the system, and we're obviously also reviewing other alternatives to optimize our supply chain to compensate for the tariffs.

Operator

That's very helpful. Switching gears here, I believe as.

Operator

Part of your ERP transition is that you might actually have better visibility in real time data into some of your smaller customers, particularly some of your mom and pop specialty retail customers. Just curious, one, if that's the case, and then two, how you might be able to leverage that data. Is there an opportunity here to perhaps better manage pricing and inventories in that channel, presumably now that you might have a better read on real time trends?

Operator

Thanks. We have some better analysis that we can see of the different customers. We're trying to use it to understand it and make better decisions through it. In general, it hasn't dramatically changed our strategies and what we're doing at this point. Nope. That helps.

Operator

I'll pass it on.

Speaker 2

The next question comes from Susan Maklari with Goldman Sachs. Please go ahead. Thank you. Good morning, everyone. Good morning. My first question is going back to the product. You mentioned several times in your prepared remarks some of the benefits that you're starting to see from the newer collections that you've launched. Can you talk a bit about where those products are in terms of getting into the channels, and any thoughts on how they could perhaps drive share gains and some more benefits to results in the upcoming quarters?

Operator

Yeah, we've been introducing different products over.

Speaker 4

The last few years.

Operator

The recent introductions in the first part of the year are going into the market now and growing in what they're doing. We've introduced a lot of things because we think we're positioning ourselves as we come out of the recovery. Some of the big things in it would be ceramic. We have significant investments in new digital printing technologies that create three-dimensional visuals. It's able to have different color intensity as well as different ways to create surface textures. In LVT, we've introduced multiple alternatives for vinyl PVC that actually give better performance to the consumer. In laminate, we've introduced the next generation of aesthetics. As we go through, we are introducing in countertops, new veining technology as well as getting ready to start up a new plant in the third quarter.

Operator

In carpet, we put in a whole new collection on super premium collections. These are just limited examples of the things that we're doing.

Speaker 2

Okay, that's helpful. When we look at the margins this quarter, it was nice to see how they came together even with the pressures that you're facing in the operating environment. Any thoughts on how we should be expecting profitability to trend in the back half of this year? Any thoughts on the outlook further as you think about conditions perhaps improving over time, let's see if I.

Operator

Can give you some color to think about. We do anticipate that the second half conditions are going to remain challenging. At this point, we don't see any improvement in the market conditions. Mortgage rates, inflation, and consumer confidence are still constraining the industry. We're taking a lot of actions to self help ourselves through our sales actions, leveraging our product offering. We just talked about executing productivity initiatives across all the parts of the business. We are selectively increasing prices across our various geographic portfolios where we can get price. We expect the third quarter to follow the same historical seasonality, given that European vacations impact sales when they all go on vacation in August. Around the world, central banks are reducing interest rates, which we believe could stimulate spending and housing sales. We'll continue to benefit from our restructuring actions that will total over $100 million this year.

Operator

Inflation should peak in the third quarter, and given higher input costs from the earlier period, should flow through our cost in the third period. We have to respond to increases in tariffs as required once we know what they are and can understand the impact to different supply points. Assuming no changes in the present trends, we expect improvement in our fourth quarter results over last year.

Speaker 2

Okay, thank you for the color, and good luck with everything.

Speaker 2

Thank you.

Speaker 2

The next question comes from Tim Wojs with Baird. Please go ahead.

Speaker 2

Hey everybody, good morning.

Operator

Thanks for all the details.

Operator

Maybe just in the U.S. or in North America, specifically in hard surface, as you look at kind of the first half, how do you feel that Mohawk Industries is performing relative to the market, specifically in the hard surface category in the U.S. based on what you can see?

Speaker 1

Yeah, we're performing well compared to the market. Our premium waterproof laminate sales are expanding, and the product is perceived as an excellent alternative to LVT in both residential remodeling and new construction. Our price and mix improved but was partially offset by cost inflation. We think that our domestic laminate should benefit as import tariffs increase other alternatives. Also, on the LVT side, our sales increased as we enhanced our portfolio. We are expanding both our sourced and manufactured volumes, and our new hybrid vinyl alternatives with improved visuals and higher performance are being very well accepted in the market.

Speaker 1

Okay, great. I guess kind of.

Operator

Piggybacking on the answer from the last question.

Operator

Just on Q4 maybe being better on a year-over-year basis, what would be kind of the key drivers to that on a year-over-year basis? Is it just lower shutdown costs and productivity kind of driving that? Is it something around kind of price costs? Just any more kind of details as you kind of see it today.

Operator

Thanks.

Speaker 4

Thanks, Tim. First of all, we expect normal sales seasonality from Q3 to Q4. As Jeff mentioned, the peak inflation that should hit in Q3 should ease as we go through the fourth quarter. That is going to help benefit. We'll also see favorable impact from price increases, the stronger mix that we've achieved so far this year, restructuring and productivity actions. Assuming no changes from those present trends, we do expect the fourth quarter results to be better than the prior year.

Speaker 4

Great, thanks a lot.

Operator

Thank you.

Speaker 2

The next question comes from Michael Wiemer with Morgan. Please go ahead.

Operator

Thanks.

Speaker 4

Appreciate it.

Speaker 4

To clarify on the comment from before, Jim, when you talk about.

Operator

Results or profitability in 4Q being better.

Operator

Year-over-year.

Operator

I would assume that.

Operator

Applies to not just EPS, but consolidated margins as well.

Speaker 4

Yes, because you're looking at inflation still being in place but lower than the peak in Q3. You're still getting the benefit from productivity both from the restructuring and ongoing initiatives. We see favorability in mix as well. All those things will help in terms of both the sales and the margins.

Speaker 4

Great, no, it's good to hear.

Operator

Secondly, I was hoping to go back.

Operator

To a prior question about competitive pricing, perhaps in the U.S. and in other regions as well, I would love to dial down and get a little bit better sense. I think the question was around which product categories perhaps you're seeing competitive pricing in and how pervasive is that.

Operator

I know you, I think, in discussing.

Operator

Before, you guys talked about maybe what you're doing, trying to do to.

Operator

Address it in terms of price increases.

Operator

If I heard right, I just wanted to better understand which price points and which product categories you're seeing that, particularly in the U.S., and how that's evolved over the past year.

Operator

Perhaps I think the best way to try to start it is that with the industry volumes being down for three years and the low volume that the industry is at, with the high capital costs and fixed cost levels that the industry has, we think we're at the bottom. The prices have declined to where we think, you know, there's nowhere for them to go. In general, as we go through, in addition, the industry and now you get into each segment and each geography, there's different pricing pressures and different ones in some of the products and categories. We've announced price increases and the industry has in different markets. We're raising prices where the industry allows us to get it and it's going to help us. The inflation is still here.

Operator

If you look at energy prices, chemical prices, they tended to peak in the first part of the year and those are flowing through our costs now. We think we'll get some help from it as we get on to the fourth quarter. I don't leave you, there's still plenty of inflation that we have to recover within it. Getting back to the tariffs, the tariffs, we have to understand before the last move what each geography is going to be and where they are to determine what the best options are available to us. We'll take whatever actions we need to. We believe that the rates are so high that the industry will pass them through. It's being a little confused by inventory in the channel. There's some a little earlier and later than others, but they're all going to have to move.

Speaker 4

Mike, it's very, very important, obviously any discussion that we have about tariffs is to remind you that we have substantial local production in ceramic, carpet, laminate, sheet vinyl, LVT, and quartz countertop, which represents about 85% of our U.S. business. It's really critical to hone in on the fact that we have that strong local footprint.

Speaker 4

Yeah, no, I appreciate that. Maybe just to squeeze one last one in, you know, have you seen in the last, in this past quarter or two.

Operator

To the extent you've seen it.

Operator

I'm curious if you expect it to.

Operator

Continue into the third quarter any type of abnormal competitive actions by importers either.

Operator

Stuffing the channel or being more aggressive.

Operator

In the near term, in response to.

Operator

Tariffs and what type of impact that might have had on your results.

Operator

I think the best way to answer it is you have to separate out the importers are trying to raise their inventories ahead of anything as we are. You can see in our numbers we raised the inventory, so we're all purchasing it ahead to try to give us time to get the execution of it. Many of our customers and their customers, the business hasn't been as aggressive as they thought. To tell you the truth, I don't think there's been as much buying as I thought there would be in it, given what they'd done even prior, because you started out back in January. I think that describes what's happening at this point.

Operator

Great, thank you.

Speaker 2

The next question comes from Keith Hughes with Truist. Please go ahead.

Speaker 4

Thank you.

Speaker 4

Switching to Flooring Rest of the World, you talked about some pressure in your panels business. I guess if we exclude that, how is the kind of core flooring business in the Rest of the World? Was some of the downside pressure less without those panels?

Speaker 1

You're right. The industry volumes in our panel business remain slow, and we have continued price pressure in that business, although we can offset some of that with our higher end decorative panels, which are growing and which are improving our mix. The second question on the European flooring market. The European flooring market remains difficult with low demand and price pressures in the market. There's a lot of promotional activities that are being utilized to maximize the volumes. We had improving laminate performance as we progressed through the quarter, and we also installed a new laminate press that is more efficient and can produce the next generation of product features. We're also continuing to expand our LVT distribution across multiple channels with new collections and customer relationships to compensate for the slow market conditions.

Speaker 1

Would EBIT in the Flooring Rest of the World, would it have been up without panels, or still would it have been down like the whole segment?

Speaker 4

I hate to speculate on the margin, the margin profile, but certainly, as Paul said, the improvement in laminate as we progress through the quarter and LVT would be margin accretive to our business.

Operator

Okay, thank you.

Speaker 2

The next question comes from Trevor Allinson with Wolfe Research. Please go ahead.

Speaker 2

Hi, good morning.

Operator

Thank you for taking my questions. It sounds like commercial end markets are still outperforming for you at the same time.

Operator

The leading indicator has been soft for a while here. I'm curious on the pipeline there.

Operator

Do you expect commercial to continue outperforming for the remainder of 2025?

Operator

Are you anticipating that business soften here?

Speaker 1

Moving forward, you're right that our U.S. commercial business performed well and our U.S. commercial carpet, tile, and hard surface backlog at this moment remains strong. That is led by the education and hospitality segments. We're making additional investments in sales activities to expand our specified business, and our new product introductions, both in hard and soft surface categories, have been very well accepted. The Architectural Billing Index is currently below 50 and has been for a while. We do expect going forward the market to slow down a little bit. Our Flooring Rest of the World segment has limited exposure to commercial, as you know, so they're more exposed to residential.

Speaker 4

Okay, that's very helpful.

Operator

A question on pricing in.

Operator

Your U.S. Ceramics business, given there's a decent amount of import competition there as well, are you taking.

Operator

Prices higher in U.S. Ceramics or expecting to push prices higher in that business?

Operator

You called out some positive price mix in ceramics overall in the second quarter. How much of that was a mix?

Operator

Tailwind versus like-for-like pricing increases? The U.S. ceramic business, you know, a large part of it's imported. The world business, the industry business is imported. They have the same impact of tariffs going up that they have to absorb and pass through. The U.S. business, we delivered solid results in ours and we have put through selective price increases in our higher value products earlier in the year to compensate for the inflation. Just to remind you, it has really high energy costs as part of it, and the gas prices are up significantly over last year. Around the world, we are implementing price increases selectively as we can to offset the rising costs.

Speaker 4

In the U.S., it was fairly balanced between both price and mix. Okay, very helpful.

Speaker 4

Thank you for all the color.

Speaker 4

Good luck moving forward. Thank you.

Speaker 2

The next question comes from Phil Ng with Jefferies. Please go ahead.

Operator

Hey guys, good to see the buyback in the quarter.

Operator

In upping the authorization.

Operator

When you kind of think about the business as it recovers, free cash flow is still pretty strong here.

Speaker 1

You guys have talked about being at.

Speaker 1

The bottom of the cycle.

Operator

What's your appetite to kind of dial that up? How do you envision deploying capital next, call it 12 to 18 months? Is it more geared towards buybacks or M&A, reinvesting in the business? Kind of help us think through how are you going to prioritize that next 12 to 18 months?

Speaker 4

Phil, we'll continue really with a balanced approach on capital allocation in that we did buy back about $42 million in the second quarter. With the new authorization, we'll continue to use that as part of our strategy, we'll increase investments in our business as the market improves and hopefully we'll have more opportunities to also acquire businesses as the environment strengthens.

Speaker 1

Okay, super.

Operator

Obviously, not a lot of visibility on tariffs yet, but at least it seems to have a potential positive impact on price. What type of conversations are you having with your customers? Are you having more conversations at shelf space just given your exposure on the U.S. side manufacturing here? Does that create a better pricing umbrella? When we think about the back half, you guys kind of alluded to perhaps there's some inventory in the channel getting in front of tariffs. Is that something that we need to be mindful of? That's a risk factor for you guys when you think about your business?

Speaker 4

Yes.

Speaker 1

We are indeed exploring commitments with customers in this environment to fully utilize our domestic capacity. To come back to the question I think that Jeff already commented on, we didn't really see that much pre buying from our customers. They have the ability to do that when prices increase, but currently demand is slower than they expected and they are limiting these additional purchases, and our forecast includes that estimate.

Operator

Okay, thank you.

Speaker 2

The next question comes from Eric Barsard with Cleveland Research. Please go ahead.

Operator

Thanks.

Operator

A lot of conversation about price increases year to date and bullishness in the back half on price increases from you and from the industry. I'm curious what you're observing with consumer response to price increases. I guess retailer, distributor, dealer as well as consumer response. If you're seeing units change in response to the price increases, if you're seeing mix change in response to the price increases, or is it just as simple as passing through price increases and that sticking.

Operator

One is that the price increases are just flowing into the marketplace, and understanding the reaction to it and what's going to happen with the consumer? It's too early to tell at this point. We believe that the imported products, though, will have to go up to reflect the cost and that our local manufacturing positions will be advantaged in that environment. As we go through, the inventories in the system are all over and depending upon different companies' actions or not. It just makes it a little confusing as the prices flow through. It will all level out in a limited time.

Operator

What is your assumption in regards to as this pricing gets into the market? Does it have an impact on volume? Does it have an impact on mix?

Operator

We don't know the answer to the question and it's a valid question. The question to the whole economy is if you push all this price through, what's going to happen to the consumer in buying and is it going to be enough to stop it? On the other side, you have our category. Housing is at a cyclical low that people have postponed remodeling projects and that people need to change their living to match the way their lives have changed and they postponed it. Irrelevant to the economy, our category is at such a low point we have to come out of it as people align with their needs. Okay, and then the last question.

Operator

I appreciate there's a lot of uncertainty around tariffs. The China tariffs seem a bit less uncertain. That seems pretty clear where those stand in terms of how that is impacting your business and how that's impacting the competitive dynamic. Curious what you're observing. LVT imports, for example, from China. What's going on with price pass through and what impact is that having in the market?

Speaker 1

Most of the industry's LVT indeed is sourced from Vietnam, China, South Korea, and Thailand. People are waiting for the final outcome of the tariff negotiations and will then adapt their supply chains. Currently, a number has been confirmed on China, and we have seen people move out of China into some of these other geographies that we have mentioned. Given the new tariff rates have not been finalized, we will have to adjust as required and see where things go from here.

Speaker 1

Okay, thank you.

Speaker 2

The next question comes from Stephen Kim, Evercore ISI. Please go ahead.

Operator

Thanks very much, guys.

Operator

Just wanted to drill down a little bit more in Flooring North America. I guess starting with volume momentum had been building a little bit there, ex the order taking snafu in 1Q, but we saw that kind of slow in this quarter. I'm curious which products, product categories in Flooring North America would you say this slowdown was concentrated in? On the flip side, you had a pretty exciting high end launch in Flooring North America. I was curious if you could give us an update on how that's going.

Speaker 1

In the Flooring North America segment, definitely our carpet performance and the industry volumes in carpet are at low levels, and that led to reduced manufacturing volumes and pricing pressure. The weak carpet performance was offset by strong performance in our laminate business and also by strong performance in our LVT business. We really had hard surface outperforming soft surface.

Speaker 1

The high end launch.

Speaker 1

The high end launch is doing well. Like we said, we introduced a lot of high end fashion products in the market, which is a market segment that.

Operator

Is still doing well.

Speaker 1

That launch is going in the market as we speak, and we have high expectations. The launch is going very well.

Speaker 1

Price mix was a headwind in Flooring North America in the quarter. I was curious how the breakdown, how was the breakdown between price and mix? Did we actually see mix positive in the quarter?

Speaker 4

Yes. In Flooring North America for Q2, there was some favorable mix. As Paul pointed out, with the pressures on pricing, it was offset by those pressures.

Operator

Okay, got you. Lastly, I had a question.

Operator

Regarding the M&A pipeline.

Operator

Basically, how is that looking?

Operator

I know in the past, Jeff, you've talked about the fact that.

Speaker 4

Folks who.

Speaker 4

Owners are kind of reluctant to sell when the market is down. As you pointed out, this has kind of been three years and there are life situation changes that occur that oftentimes create opportunities. I'm curious if you could give us an update on how your M&A pipeline is looking now.

Operator

They're still limited at this point. People's earnings are compressed. You have all the housing industry low, and there's a limited number of people and activity going on at this point. We would expect that to change significantly, the same as it did in, I think it was 2010 or 2011 when it changed dramatically and came out. There were a lot of opportunities.

Operator

Great, thank you so much.

Speaker 2

The next question comes from John Lovallo with UBS. Please go ahead.

Speaker 2

Good morning, guys. Thanks for taking my questions as well. Maybe going back to Flooring Rest of the World, it's pretty clear that some of the margin pressure was driven by the competitive pricing. What I wanted to kind of poke at is that the sales were actually up about 10% quarter over quarter, which seems like it was better than normal seasonality and in fact probably the best second quarter performance in a number of years. Just kind of curious what drove that strength in the top line.

Speaker 4

John, you have to also consider the FX impact. If you're just doing on a reported basis, the Euro really strengthened from where we started. If you go back to the last time we talked in the beginning of May to today, we saw considerable strength. That certainly had an impact. As Paul related earlier, our laminate business did perform better as we moved through the quarter as well.

Speaker 4

Okay, understood. In terms of the fourth quarter, you said that on a year-over-year basis, consolidated margins and EPS would be better year-over-year.

Speaker 4

I guess the question is, I think.

Speaker 4

Historically, EPS has sequentially declined by, call it, 20% quarter over quarter in the fourth quarter. I mean, would you expect a little bit better than that, or does that seem like that's still a fairly decent bogey for this year?

Speaker 4

I think there'll be differences this year with the impact of the price increases, some of the favorable mix, especially the restructuring benefits that we talked about earlier on a call. The $100 million is fairly evenly split across the quarters. That is kind of abnormal to the seasonality from Q3 to Q4. One element that is helping when you look at our improvements or should improve from the prior year. Again, that also assumes there's no changes in the present trends.

Speaker 4

Understood, thank you.

Speaker 2

The next question comes from Brian Biros with Thompson Research Group. Please go ahead. Hi, this is Katherine Thompson. Today for Brian, stepping back and taking a look at the bigger picture when it comes to imports and tariffs. Know that there's a lot of focus, but what % of your production for sales in North America today are manufactured in North America today versus say six to eight years ago?

Speaker 4

Obviously that's been evolving over that time period, especially with the introduction of LVT. You of course know how much market LVT has taken over time. Our focus is on today, and as we've said, when you look across all our product categories, about 85% of that production in the U.S. comes from the local manufacturing in North America. That includes the Mexico operations, which fall under the USMCA.

Speaker 2

Okay, so I guess what you're saying is it's difficult to put a number on that or even directionally. Is there more net produced now? Because I do understand the LVT market share gains, but is it net more or less manufacturing in North America today versus six to seven years ago?

Speaker 4

It is difficult to say because it's just the changing profile of all the products. Something that's been very consistent is our ceramic, certainly our carpets, laminate products continue to be made predominantly in North America. That has not changed over time.

Speaker 4

Time.

Speaker 2

Yes, understood. That would be a great detail to have, just to be able to kind of assess the impact. Moving on to the recent bill that was passed, have you quantified or outlined potential ways that you could benefit, or do you see this bill as a benefit, particularly for taking advantage of accelerated depreciation? Thank you.

Speaker 4

If you think about the tax bill that was just passed, what it's doing is quantifying the changes that started in 2017. We will take and continue to take full advantage of items like accelerated depreciation, R&D credits and such. I think we're very much aligned with the articles here in the bill to manage our tax exposure.

Speaker 2

Okay. I guess final question for today, a lot of focus on pricing actions and market share gains or losses and inventory. On that, when you look at how much of the market share gains or losses rather are attributable to changes in the channel, just shifting between yourself and others, how do you see that progressing over the next 12 months given changes just in the mechanics of the channel? Thanks very much and good luck.

Speaker 4

If you're speaking just about North America,

Operator

Correct.

Speaker 4

In Flooring North America, we think that we are in a solid position when it comes to each of the product categories, especially around. That's why we focused on expansion in our laminate business and our quartz countertop business to really leverage that manufacturing footprint.

Operator

If you look at a broad base, the commercial channel continues to do better than the others. You have the new construction business, like all the data, is slowing down. You have the multifamily business where you have a slowing of the construction that has been coming on for a long period of time. Residential remodeling has been at a low point and it's remaining at a low point, which we need a catalyst for it to change.

Speaker 2

All right, thanks. Good luck.

Speaker 4

Thank you.

Speaker 2

The last question comes from Rafe Jadrosich with Bank of America. Please go ahead.

Speaker 1

Hi.

Speaker 1

Thanks for taking my questions. I just want to follow up on John Lovallo's question earlier. What is normal seasonality from 3Q to 4Q? I think you said you expect normal seasonality for sales. What would that be? Sort of the same question for Eva, what would you consider normal?

Speaker 4

When I look at sales from Q3 to Q4, normal seasonality is anywhere kind of a 5 to 6% decrease in sales. That's a consolidated level.

Speaker 4

Are there any shifts of days or anything this year?

Speaker 4

No. From a year-over-year perspective, there's not.

Speaker 4

On EBIT, what would be the normal seasonality?

Speaker 4

On an EBIT basis, when you look back over time, because of the holidays in Q4 across the globe, you could see a decrease again in the 25% area. As I pointed out, the difference when our statement on Q4 is the benefit that we are yielding from our restructuring actions.

Speaker 4

Better than that, normal seasonality.

Speaker 4

Yes.

Speaker 4

I just want to follow up on tariffs. If tariffs are as they are in place today, with what the current announcements are, how would you expect that to impact the short term results? Obviously, because it's FIFO accounting, near term you have your cost doesn't go up. I think there might be more pricing. Would that actually help you near term or would you see cost inflation that comes through before you realize the pricing? How do you think about that, how that could play out if the tariffs hold as they are today?

Operator

The goal is to have them align. The question is, does the industry act rationally and push it through? How do your inventory levels compare to different ones? We're hoping that everything aligns like it's supposed to. First, we have to find out what it is, and then we have to see how the marketplace acts upon it. We'll take whatever actions to make sure we're competitive in the marketplace.

Speaker 4

As Jeff said earlier, because of the timing of the cost, it would be very minimal in the current year. Rafe, you were asking about days. I just want to make sure which quarter you were talking about. Q3 over Q3 in terms of last year, there is no difference. Q4 versus the prior year, there is one additional day in 2020.

Speaker 4

Okay, that's really helpful. Just one more on the tariff side, the channel inventory that you spoke about last quarter, how there's been some pull forward ahead of, from you and competitors, like where is that today? Do you think that's mostly been worked down or just how would you, what's the update?

Speaker 1

In general, the importers are heavy on inventory because they wanted to get ahead of all the tariff announcements. From a sellout perspective, as we said, some of our customers, when we increase prices, have the ability to pre buy. Given the slow environment with demand, they are making limited additional purchases because.

Operator

They made them earlier. They already raised them, and they can't do any more.

Operator

That's really helpful. Thank you.

Speaker 2

This concludes our question and answer session. I would like to turn the conference back over to Jeffrey Lorberbaum for any closing remarks. Please go ahead.

Operator

Thank all of you for your participation this morning. We're well positioned for the recovery that will occur, and have a great weekend.

Speaker 2

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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