Mohawk Industries, Inc.

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 Frunk, Chief Financial Officer. Please go ahead.

Thank you, Ashia. Good morning, everyone, and welcome to Mohawk Industries Quarterly Investor Conference Call. Joining me on the call today are Jeff Loribond, Chairman and Chief Executive Officer, and Paul DeCock, 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 for reconciliation of any non-GAAP-to-GAAP amounts, please refer to our Form 8K and press release in the investor section of our website. I'll now turn over the call to Jeff for his opening remarks.

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 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. 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 volume 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 the 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. The commercial channel continues to outperform residential. However, the architectural billing index in the US is forecasting slowing conditions. Available US 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 markets. 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 delay 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 position 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 1st for countries to complete tariff negotiations while also announcing specific terms tariffs on key trading partners. We are continuing to monitor the changing tariff levels and will adjust our strategies as they evolve. On July 15th, 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 for reducing our carbon footprint, fostering innovation, and developing a talented organization. Now, Jim will review our financial details for the quarter.

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 Florida, 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%. 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 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 adjusted basis was $90 million, or 8.1%. That's a decrease of approximately 40 basis points on 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. Florida, 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 channel still outperforming. 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 the rest of the world at sales of $734 million. That's a 1 percent increase, as reported, and 3% decrease on a constant basis. The decrease is primarily due to the continued pricing pressure and the residential remodeling channel as consumers defer large discretionary purchases. The ECP, though, has lowered rates further, but it has not yet driven increases in housing or remodeling activity. Operating income on an adjusted basis was $76 million, or 10.4%. 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 just increased above $2.7 billion. 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 equipment was just above $4.7 billion, with Q2 capex of $80 million compared to a DNA of $156 million. The company has reduced its planned investments to approximately $500 million in 2025, with B&A for the full year forecasted at approximately $610 million. Forty percent of the projects focused on cost reduction and product innovation, and 40 percent on maintenance and other, with the remaining 20 percent 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 1.2 times. Now Paul will review our Q2 operational performance.

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 in 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 US, 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. 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 US. 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 or 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. 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 Deltile 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 mixed pressure remain strong in this challenging market and we are executing promotions to optimize our results. 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 have 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. 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. 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 let 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.

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 portfolios, superior service, and brand value to expand our business with current and new customers. The 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 inventories. To mitigate these higher costs, our teams will continue to execute productivity initiatives in all aspects of our operations. Our restructuring actions should deliver approximately $100 million in benefits this year while strengthening our operations for the future. Evolving U.S. trade policy should benefit Mohawk, 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. 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.

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 Tall with RBC Capital Markets. Please go ahead.

Thanks for taking my question. I want to start with foreign North America pricing environment or competitive environment. I think 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 of 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 Florida and North America.

Yes, so in Florida and 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. Now, 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.

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

Okay. Yeah, that's very helpful. And then my second question, you know, the comments about this guidance does not include any potential impacts from the new tariffs. I think clearly the way things roll through your P&L, it seems like that. would take a little bit of time to flip through anyway, but 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?

If you start out with The initial tariffs were about 10%, and we're implementing changes presently in the marketplace, and we'll continue doing that. The present reciprocal tariffs have been announced from 10% to 50%. The negotiations are continuing, and these tariffs are almost changing by the day. And given that we don't know what they are, and it looks like they're going to have significant differences from where they're starting, and 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, as in no matter what they are, and 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 will have any impact on our industry.

Okay, thanks, Jeffrey.

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

Awesome. Thanks so much. 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 kind of where you're seeing competitive pricing most acutely in the U.S. You know, are there any indications that some of your peers have been pushing through price from tariffs? You know, or are you finding that in general the peers are more or less kind of holding or perhaps even pulling back on price, given what we're seeing from a volume standpoint?

Yeah, 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's 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.

That's very helpful. And switching gears here, I believe as part of your ERP transition that you might actually have better visibility in real-time data into some of your kind of smaller customers, particularly some of your mom and pop specialty retail customers. I'm just curious, one, if that's the case, and then just two, kind of 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? 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. But in general, you know, it hasn't dramatically changed our strategies and what we're doing at this point.

Nope, that helps. I'll pass it on.

The next question comes from Susan McClary 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 result in the upcoming quarters?

We've been introducing different products over the last few years. 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. And in carpet, we put in a whole new collection on super premium collections, just as limited examples of the things that we're doing.

Okay, that's helpful. And then 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 this in the back half of this year, and then any thoughts on the outlook further as you think about conditions perhaps improving over time?

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

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

Thank you.

The next question comes from Timothy Wall with Baird. Please go ahead.

Hey, everybody. Good morning. Thanks for all the details. Maybe just in the U.S. or in North America, you know, specifically in hard surface, as you look at kind of the first half, how do you feel that Mohawk is performing relative to the market, you know, specifically in the hard surface category in the U.S., based on what you can see?

Yeah, we're performing well compared to the market. Our premium waterproof laminate sales are expanding significantly. 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. And we think that our domestic laminate should benefit as import tariffs increase other alternatives. And also on the LVT side, our sales increased as we enhanced our portfolio. We're 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.

Okay. Okay, great. And then just, I guess, kind of piggybacking on the answer from the last question, 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. Thanks.

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, so that's 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. And so assuming no changes from those present trends, we do expect the fourth quarter results to be better than the prior year.

Great. Thanks a lot. Thank you.

Thanks. The next question comes from Michael Remar with JP Morgan. Please go ahead.

Thanks. I appreciate it. So just to clarify on the comment from before, Jim, when you talk about results or profitability and FortQ being better year over year, I would assume that applies to not just EPS but consolidated margins as well?

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

Great. No, it's good to hear. Secondly, I was wondering, hoping to go back to a prior question about competitive pricing, perhaps in the U.S. and in other regions as well. Just would love to dial down and get a little bit better sense. I think the question was around, you know, which product categories perhaps you're seeing competitive pricing in and, you know, how pervasive is that? I know you, I think in discussing this before You guys talked about maybe what you're trying to do to address it in terms of price increases, if I heard right. But 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, 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 volumes 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 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, and so we're raising prices where the industry allows us to get it, and it's going to help us, but the inflation is still here. 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, and we think we'll be get some help from it as we get on to the fourth quarter, but 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, and we'll take whatever actions we need to. We believe that the rates are so high that the industry will pass them through and It's being a little confused by inventory in the channels, so there's some a little earlier and later than others, but they're all going to have to move.

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 countertops. which represents about 85% of our U.S. business. So it's really critical to hone in on the fact that we have that strong local footprint.

Yeah, no, I appreciate that. I mean, maybe just to squeeze one last one in, you know, have you seen in this past quarter or two, or to the extent you've seen it, I'm curious if you expect it to continue into the third quarter, any type of abnormal activity competitive actions by importers either stuffing the channel or being more aggressive in the near term in response to tariffs and what type of impact that might have had on your results?

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 And you can see in our numbers, we've 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. So to tell you the truth, I don't think there's been as much buying as I thought there would be given what they'd done even prior because you started out back in January. So I think... That describes what's happening at this point.

Great. Thank you.

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

Thank you. I'm switching to the following rest of the world. You talked about some pressure in your panel's business. I guess if we X that out, how is the kind of core flooring business in the rest of the world? Was some of the downside pressure less without those panels?

You're right. The industry volumes in our panel business remain slow, and we have continued a 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. And then 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. And 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.

Would EBIT in the flooring part of the rest of the world, would it have been up without panels or would it still have been down like the whole segment?

I hate to speculate on 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.

Okay, thank you.

The next question comes from Trevor Allenson with Post Research. Please go ahead.

Hi, good morning. Thank you for taking my questions. It sounds like commercial and markets are still outperforming for you. At the same time, the leading indicators have been soft for a while here, so I'm curious on the pipeline there. Do you expect commercial to continue outperforming for the remainder of 2025, or are you anticipating that business to soften here 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, and 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 categories, have been very well accepted. The ABI index is currently below 50 and has been for a while, and we do expect, going forward, the market to slow down a little bit. Our rest of world segment has limited exposure to commercial, as you know, and so they're more exposed to residential.

Okay, that's very helpful. And then a question on pricing in your U.S. ceramics business, given there's a decent amount of import competition there as well. Are you taking prices higher in U.S. ceramics or expecting to push prices higher in that business? And then you called out some positive price mix in ceramics overall in the second quarter. How much of that was a mixed 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 hours, 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, the... It has really high energy costs as part of it, and the gas prices are up significantly over last year. And so around the world, we are implementing price increases selectively as we can to offset the rising costs.

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

Okay, very helpful. Thank you for all the color, and good luck moving forward.

Thank you.

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

Hey, guys. Good to see the buyback in the quarter and upping the authorization. When you kind of think about the business as it recovers, free cash will feel pretty strong here. You guys have talked about being at the bottom of the cycle. What's your appetite to kind of dial that up, and how do you kind of 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 you're going to prioritize that next 12 to 18 months.

We'll continue, really, with a balanced approach on capital allocation in that we did buy back about $42 million in the second quarter, and 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.

Okay, super. And then obviously not a lot of visibility on tariffs yet, but at least it seems to have a potential positive impact on price. But what type of conversations are you having with your customers? Are you having more conversations to add shelf space, just given your exposure on the U.S. side of manufacturing here? Does that create a better pricing umbrella. And when we think about the back half, you guys kind of alluded to perhaps there's some inventory in a 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?

Yes. So we are indeed exploring commitments with customers in this environment to fully utilize our domestic capacity. And then 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.

Okay. Thank you.

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

Thanks. 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? Thank you.

One is that the price increases are just flowing into the marketplace and understanding the reaction to it and what's going to happen to 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 costs 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, but it will all level out in a limited time.

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 myths?

Well, we don't know the answer. 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 of 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've postponed it. So irrelevant of 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, 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, you know, LBT imports, for example, from China, what's going on with price pass-through and what impact is that having in the markets?

Most of the industries LVT indeed is sourced from Vietnam, China, South Korea and Thailand. And so 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 so we have seen people move out of China into some of these other geographies that we have mentioned. But given the new tariff rates have not been finalized, we will have to adjust as required and see where things go from here.

Okay, thank you.

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

Yeah, thanks very much, guys. Just wanted to drill down a little bit more in Flory North America. I guess starting with volume, you know, momentum had been building a little bit there, you know, X, the order taking a snafu in one queue, but we saw that kind of slow in this quarter. And so I'm curious which products, product categories in Florida, North America, would you say this slowdown was concentrated in? And on the flip side, you had a pretty exciting high end launch in Florida, North America was curious if you could give us an update on how that's going.

So in the floating 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. And then the weak carpet performance was offset by strong performance in our laminate business and also by strong performance in our LVT business. So we really had hard surface outperforming soft surface.

And the high-end launch?

So 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 is still doing well. And so that launch is going in the market as we speak, and we have high expectations, and the launch is going very well.

Okay. And then price mix was a headwind in Florian North America in the quarter last I was curious how the breakdown, how was the breakdown between price and mix? Did we actually see mix positive in the quarter?

Yes, so in Florida and North America for Q2, there was some favorable mix, but as Paul pointed out with the pressures on pricing, it was offset by those pressures. Okay, gotcha.

And then lastly, I had a question regarding the M&A pipeline. Basically, how is that looking? I know in the past, Jeff, you've talked about the fact that owners are kind of reluctant to sell when the market is down. But as you pointed out, this has kind of been three years, and there are life situation changes that occur that oftentimes create opportunities. So I'm curious if you could give us an update on how your M&A pipeline is looking now.

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.

Great. Thank you so much.

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

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

Well, don't forget, John, you have to also consider the FX impact. So if you're just doing it 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.

Okay, understood. And then in terms of the fourth quarter, you said that on a year-over-year basis, consolidated margins in EPS would be better year-over-year. I guess the question is, I think 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?

I think there'll be differences this year with the impact of the price increases, some of the favorable mix, but especially the restructuring benefits that we've talked about earlier on a call. So, the $100 million is fairly evenly split across the quarters. So, that is kind of abnormal to the seasonality from Q3 to Q4, and 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.

Understood. Thank you.

The next question comes from Brian Behr with Thompson Research Group. Please go ahead.

Hi. This is Captain Thompson and today for Brian. Stepping back and taking a look at the bigger picture when it comes to imports and tariffs, I know that there's a lot of focus, but what percentage of your production for sales in North America today are manufactured in North America today versus say six to eight years ago?

Obviously, that's been evolving over that time period, especially with the introduction of LVT. And 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 percent of that production in the U.S. comes from the local manufacturing. you know, in North America. And again, that includes, you know, the Mexico operations, which fall under the USMCA.

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 LBT market share gains, but is it net more or less in North America today versus six to seven years ago?

It is difficult to say because it's just a changing profile of all the products, but something that's been very consistent is our ceramic. Certainly our carpet, laminate products continue to be made predominantly in North America, so that has not changed over time.

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.

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

Okay, and I guess final question for today. A lot of focus on pricing actions and market share gains or losses and inventory. But on that, when you look at how much of the market share gains or losses, rather, or attributable to changes in the channel? So just shifting between yourself and others, and 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.

If you're speaking just about North America, again... Correct. So in Florida, North America... We think that we are in a solid position when it comes to each of the product categories, especially around, and that's why we focused on expansion in our laminate business, in our quartz countertop business, to really leverage that manufacturing footprint.

And the channels, 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. And then you have the multifamily business where you have a slowing of the construction that has been coming on for a long period of time. And then residential remodeling has been at a low point and it's remaining at a low point. We need a catalyst for it to change.

All right. Thanks. Good luck. Thank you.

The last question comes from Ruth Yarosich with Bank of America. Please go ahead.

Hi, thanks for taking my question. 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. Just what would that be? And sort of the same question for you. What would you consider normal?

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

And are there any shifts of, like, days or anything this year?

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

And then on EBIT, what would be the normal seasonality?

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-plus percent area. And as I pointed out, the difference when our statement on Q4 is the benefit that we are yielding from our restructuring actions.

So better than that normal seasonality.

Yes.

And then I just want to just follow up on tariffs. If tariffs are sort of as they are in place today, like 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, your cost doesn't go up, but I think there might be more pricing. So would that actually help you near term? Or would you see cost inflation that comes through before you realize the pricing? Just how do you think about that, how that could play out if the tariffs hold as they are today?

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

As Jeff said earlier, because of the timing of the cost, It would be very minimal in the current year. Ray, if 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 2025.

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

Well, in general, the importers are heavy on inventory because they wanted to get ahead of all the tariff announcements. And then from a sellout perspective... As we said, some of our customers, when we increase prices, have the ability to pre-buy. But given the slow environment with demand, they are making limited additional purchases.

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

That's really helpful. Thank you.

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

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

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