Good day, and welcome to the Mohawk Industries third quarter 2026 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 Joe Ahlersmeyer, Vice President of Finance Investor Relations. Please go ahead.
Thanks, Chloe. Good morning, everyone, and thank you for joining the call. With me today are Paul De Cock, Chief Executive Officer, and Nick Manthey, Chief Financial Officer. Today, management will detail our new strategic and capital allocation framework, discuss an update on the company's third quarter performance, and provide guidance for the fourth quarter of 2026. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements, which are subject to various risks and uncertainties, including but not limited to those set forth in our press release and our filings with the SEC. This call may include discussion of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8-K and press release in the investor section of our website. I'll now turn the call over to Paul for his opening remarks.
Thank you, Joe. Good morning, everyone, and thank you for joining us today on my first earnings call as CEO. Before we get started, let me first thank Jeff Lorberbaum for his leadership, drive, and passion for Mohawk. The leadership transition has been seamless, and we are fortunate to have his continuing support as Chairman. This morning, I will begin with our results for the quarter and the market conditions we are navigating across our businesses. I'll then share my vision for Mohawk, the actions already underway to drive outperformance, and what you can expect from me and my leadership team. Let me start with our results. We delivered a solid quarter, and I'm proud of how our teams executed. Our overall operating result was in line with our expectations, even as demand softened late in the quarter. The quarter reflected progress in four main areas.
We grew sales and executed price increases in response to rising inflation. Growth in Global Ceramic was led by U.S. retail and Countertops, and in Flooring North America, by retail and commercial. Flooring Rest of the World sustained pricing gains despite lower market volumes. We acted decisively to offset the impacts of higher underlying inflation with the combination of price, mix, and productivity more than offsetting the impacts of higher underlying inflation. We converted our performance into cash, generating cash from operations of $471 million and free cash flow of $390 million in the quarter, bringing our year-to-date free cash flow to $626 million. We substantially increased share repurchases, returning $261 million to shareholders in the quarter, more than double what we did in the first half. Now, let me take you through the performance of our end markets.
In our U.S. market, where we generate a little more than half of total company sales, market conditions remain challenging. Following the recent rises in rates, demand weakened exiting the quarter and has remained soft across most products and channels during October, particularly in the builder channel. We are executing well and are focused on improving our leading market positions across all channels. We continue to differentiate our products and service advantages. In residential repair and remodel, which we estimate represents approximately half of our U.S. sales, consumers continue to defer larger projects, and the outlook for existing home sales has weakened, entering seasonally slower months. Activity through the specialty retail channel is holding up better and improved sequentially, while larger format retail point of sale trends remain slow.
Even in this environment, our retail business grew in the quarter and gained share across most of our product categories, led by residential carpet, where adoption of our industry-first asthma and allergen-friendly carpet is exceeding our expectations. Our Laminate business continues to outgrow the category on scratch resistance and real wood visuals. Our Ceramic remodel business improved for a fourth consecutive month, and Countertops grew on new quartz designs and our concierge program. Our market-leading accessories assortment continues to build attachment across our hard surface platforms. In residential new construction, which we estimate represents about 1/4 of our U.S. sales, the builder market continues to soften. Single-family starts have fallen with higher mortgage rates and declining builder confidence. Affordability is constraining buyers in most regions, and large builders are managing construction costs.
This is the most challenging environment across our end markets, and we expect it to remain so in the near term. We added new builder program wins in both Ceramic and Laminate during the quarter. Our Laminate is gaining with home builders as a better-performing alternative to LVT, and our stair and accessory solutions are becoming part of builder specifications. While these wins do not fully offset the market decline, they strengthen our position in this important channel, and we expect them to compound when the market improves. Finally, in commercial, which we estimate represents the remaining fourth of our U.S. sales, demand is more constructive than residential, with repair and remodel activity holding up better than new development. Industry activity among architects and designers is soft, as new project awards slowed in August and September.
In Ceramic, commercial sales declined as projects were deferred, and we are responding by concentrating on the active segments. Hospitality, healthcare, and education are the most active segments, and return to office continues to support carpet tiles, driving strong performance in office. Our commercial LVT category continued to build momentum, delivering a sixth consecutive month of order growth, while sales of carpet tile, commercial accessories, and our rubber platform also grew in the quarter. Now pivoting to Europe. In Europe, which represents approximately 1/3 of our total company sales, consumer demand remains soft, with weak residential activity and showroom traffic, though commercial projects are holding up better. Our premium collections continue to outperform, and in Ceramic, our large-format and slab offerings are growing. In Laminate, our innovation leadership continues to win with customers.
European natural gas prices have roughly doubled since the start of the third quarter, and we have responded quickly, bringing our Ceramic price increase forward and announcing November price increases in our European Panels and Insulation businesses to recover even higher energy and chemical costs. Outside of the U.S. and Europe, which represents the rest of total company sales, demand remains soft, with consumers pressured by inflation and high rates, although we continue to outperform. These market conditions reinforce why our focus must remain on the actions within our control. As the largest flooring and design surfaces company globally, Mohawk has built many unique strengths and advantages, which include our leading market positions, our recognized brands, our innovation expertise, our strong customer relationships, and the scale and efficiency of our manufacturing and distribution operations. Our strategy builds upon these strengths and advantages.
We are aligning our actions and investments to a strategic framework comprising four pillars, each supporting our goal of delivering more value to our customers, along with more value per share for our investors. Now let me take you through the four pillars. The first pillar is outperforming our markets. This is our catalyst for compounding value creation through demand cycles. We estimate that our industry grows low single digits annually on average over the long term. We participate in cyclical end markets, but our team members find ways to succeed and perform against any market backdrop. When the industry is expanding, we must grow faster than the market, and when it is contracting, we will relentlessly pursue share wins that will compound through the next expansion. Our go-to-market approach will be consistent through cycles, focused on the most attractive segments of the market.
We will deepen customer relationships and solidify Mohawk as the vendor of choice across all channels. We will use digital tools to create downstream demand and pull our product offerings through the value chain. We are committed to continuously improving our competitive position through expanded partnerships, new customer wins, and growth in differentiated routes to market. We will be transparent about conditions, but our focus, like the expectations I have set for our leaders, will be outperformance through cycles and over the long term. The second pillar, product innovation and brand strength, deals with the solutions that drive the first pillar. Innovation is a core competency underpinned by our three global innovation hubs: Ceramic surfaces in Italy, hard surfaces in Belgium, and soft surfaces in the U.S. We own a portfolio of patented technological innovations that further support our advantage.
We will continue to build on the strength of our brands, and we see immense opportunities in the evolution of consumer preferences toward high-quality, trusted brands over commoditized offerings. Our focus will be on bringing more distinctive products and solutions to the categories and channels where we can create the greatest value. The third pillar, profitability and operational excellence, is how we will aim to ensure the highest level of service to our customers while we continuously improve margins and incremental returns. We will be defining Mohawk's operating model, building around a culture of productivity, continuous cost improvement, and operational excellence, supported by strong digital capabilities. We believe our quality and service will extend our competitive lead and deepen our relationships with the retailers, distributors, and contractors who sell and install our products.
The fourth pillar, cash generation and capital discipline, deals with how we convert profitable growth into cash and how effectively we redeploy that capital to enhance shareholder value. We will have a sharp orientation toward cash returns, timing, and risk, and this is not unique to capital expenditures. Every dollar of deployable cash we have will pass through a strict framework, from operating expenses to capital investments to inorganic investments. We will invest sufficiently in the core business, exercise discipline in evaluating inorganic opportunities, and return capital to shareholders through consistent share repurchases. My team and I are energized by the opportunity ahead and committed to demonstrating strategic traction, delivering operationally, and deploying capital in ways that meaningfully enhance shareholder value. With that, I will turn it over to Nick.
Thanks, Paul, and good morning, everyone. In a moment, I will talk about our capital deployment priorities in support of our newly defined strategy. First, let me cover the results and outlook for the fourth quarter, as well as a few preliminary planning assumptions for 2027. Net sales for the third quarter were $2.8 billion, up 1% as reported, and essentially flat adjusting for foreign exchange and an extra shipping day. Volumes were down 4% due to soft market demand, while the combination of price and mix was up 4% as we benefited from price increases to offset the impacts of inflation, along with positive mix. Net earnings for the quarter were $163 million, or 5.9% of net sales. Adjusted EBITDA was $353 million, and adjusted EBITDA margin was 12.7%.
Operating income was $188 million, and adjusted operating income was $200 million, down $5 million versus the prior year. The combination of price and mix of $85 million and productivity gains of $47 million was sufficient to offset underlying input cost inflation of approximately $117 million, which was in line with our expectations. Earnings per share was $2.72, and adjusted earnings per share was $2.72. Now, turning to the segments. In Global Ceramic, net sales were $1.1 billion, up 2% and up slightly, excluding favorable currency and an additional shipping day. Volumes were down 1% on a constant basis, despite the soft market conditions impacting demand across geographies. Price mix improved 2%, benefiting from our inflation-driven price increases as well as positive mix.
Operating income was $66 million, and adjusted operating income was $74 million, or 6.5% of sales, a decrease of 160 basis points versus the prior year, driven by $53 million of underlying inflation, primarily from higher energy and fuel costs, partially offset by price mix of $19 million and productivity of $22 million. Year-to-date, the combination of price, mix, and productivity of $108 million has offset the majority of the $117 million of underlying inflation impacting Global Ceramic. In Flooring North America, net sales were $950 million, up 1%. Excluding the 2% benefit from an additional shipping day versus the prior year, adjusted net sales were down less than 1%. Volumes declined approximately 3% on a constant basis, and price mix improved by approximately 3%, benefiting from our inflation-driven price actions and positive mix.
Operating income was $72 million, and adjusted operating income was $77 million, or 8.1% of net sales, up 80 basis points year-over-year. Productivity gains of $24 million, price and mix of $15 million, and tariff refunds of $10 million were partially offset by underlying inflation of $25 million. The combination of lower constant volumes and an extra shipping day was a $3 million net headwind. During both the third quarter and year-to-date, price, mix, and productivity collectively have been sufficient to fully offset total underlying inflation, and we expect that to continue through the fourth quarter. In Flooring Rest of the World, net sales were $707 million, down approximately 1%. Excluding unfavorable currency of less than 1% and an additional shipping day, adjusted net sales declined approximately 2%. Volumes were down approximately 10% on a constant basis, primarily due to soft market demand.
Strong gains in price and mix continued from the second quarter into the third, contributing approximately 7% to sales growth, the result of price increases implemented earlier this year. Operating income was $66 million, and adjusted operating income was $66 million, or 9.3% of sales, up 100 basis points, as positive price and mix of approximately $51 million were partially offset by inflation of approximately $35 million and a combined $14 million net headwind from lower constant volumes and an extra shipping day. Year-to-date, the combination of price, mix, and productivity has more than offset total inflation, though in the fourth quarter, we expect these to be more in line as higher costs work through inventory. Now, turning to cash flow and capital deployment.
In the quarter, cash from operations was $471 million, and capital expenditures were $81 million, resulting in third-quarter free cash flow generation of $390 million, up 26% versus the prior year. That brings our year-to-date free cash flow to $626 million, up 78% versus the prior year. We now anticipate the full-year 2026 capital expenditures of approximately $445 million versus our prior expectation of $460 million. We returned $261 million to shareholders in the quarter through repurchases, reducing our outstanding shares by more than 3%, while our net debt leverage improved sequentially to 0.7 x at the end of the quarter. Thus far in the fourth quarter, we have already returned an additional $34 million to shareholders, completing the previous share repurchase authorization. Now, turning to our outlook. On the second quarter call, we shared the following assumptions with you.
We had assumed soft market conditions. Demand remained challenging and weakened further as we exited the quarter. We had indicated that sales could decline sequentially by more than typical seasonality, which played out as anticipated as volumes normalized following the initial placement benefit in the second quarter. We had also expected that our pricing actions, along with productivity, would be sufficient to offset inflation for the year, and our year-to-date execution has positioned us well to deliver that. Finally, we allow for the possibility that inflation could rise further, and as it has, we've responded appropriately.
Looking ahead to the fourth quarter, which has four fewer shipping days versus the prior year and three fewer days versus the third quarter of the current year, we assume flooring market conditions will remain challenging, and our outlook reflects recent trends that suggest demand will be softer in the fourth quarter relative to the third. We anticipate single-digit adjusted net sales growth versus the prior year. Our total underlying inflation on a year-over-year basis is expected to be similar to the third quarter, and we are committed to fully offsetting inflation through the combination of price, mix, and productivity actions. Altogether, we expect fourth-quarter adjusted earnings per share to be between $1.35 and $1.45. Further assumptions embedded in this guidance can be found in our earnings release. Now, turning to some thoughts going into next year.
We will provide a more formal outlook in our February call, but we feel it is important to provide some planning assumptions. On demand, we are planning for market volumes to decline next year. Assuming that backdrop, we believe we can continue to outperform. Setting aside tariff refunds that we received during 2026, our underlying cost of sales inflation accelerated from low single digits in the first half of 2026 to mid-single digits in the third quarter, and is expected to remain up mid-single digits in the fourth quarter. We will carry the same rate of underlying cost of sales inflation into early 2027, and we have taken actions across the business that we believe position us to keep up with inflation and continue offsetting it on a dollar-for-dollar basis. Three things support that belief.
First, carryover benefits from realized pricing we announced earlier this year, as well as new pricing actions we are taking now. Second, mix improvement across many products and geographies. And finally, productivity initiatives that we expect will improve our cost structure. Next year, we expect to continue generating strong free cash flow as we have in recent years, benefiting from solid operational performance, focused working capital management, and lower capital expenditures. As we move forward, we are committed to a disciplined and consistent deployment of this capital in support of our strategic framework. Now, let me outline our capital deployment priorities. First, we will invest in the highest-returning organic opportunities to sustain our core strengths and enable our strategy. This includes maintenance, productivity initiatives, and innovation projects.
With limited need for any added capacity, we estimate the baseline capital expenditure needs of the business to be approximately $375 million annually. Second, we will be disciplined in evaluating bolt-on inorganic investments that align with our growth strategy. And third, capital that is not deployed in support of the above will be returned consistently through share repurchases. The board of directors has approved a new $500 million share repurchase authorization, enabling us to continue executing on this priority. In addition, we will maintain a strong and efficient balance sheet with a long-term net debt to adjusted EBITDA target of up to 2x, subject to a continuous assessment of cyclical risk and a commitment to our investment-grade ratings.
Taken together, this framework is designed to give us the flexibility to invest through the cycle while ensuring that the stable and durable cash flow generated by our business is allocated purposefully toward creating the greatest long-term value for shareholders. With that, I'll turn it back to Paul.
Thank you, Nick. Let me close with the thesis, because it is simple. Our markets will recover, but we are not waiting for that recovery to act. Our focus is on outperforming in any market, leading with our innovation and brands, driving operational excellence, and converting profit into cash and turning cash into value per share. The strengths that built this company remain firmly in place. The discipline around them gets sharper. Our framework for investing and deploying our capital is clear. We will return cash to shareholders where it does not earn a high incremental return. With that, we are happy to answer your questions.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If at any time you would like to withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. The first question today comes from Phil Ng with Jefferies. Please go ahead.
Hey, guys. Paul, Nick, congrats on your new roles and a lot of exciting news today. I guess, Paul, to kind of kick things off, when allocating capital to different business units going forward, how is that process perhaps different now from a guardrail standpoint, the decision-making process? When you've laid out the CapEx framework for the next few years, it's about 80% of what you guided earlier in the year. Is that enough to kind of drive growth as the market recovers? Is there a big R&D piece that we need to appreciate as you kind of get back in that growth mode going forward?
Yeah. Good morning, Phil. I will take the first part, and Nick can follow up on the second part. We have provided our capital allocation framework, and it is really built around disciplined investment and high return on capital. I think our job as capital allocators is as important as our operating responsibilities at Mohawk, and the value creation that we will generate is directly tied to the incremental returns we generate on the capital we deploy. We are hyper-focused on cash returns around the globe in all our businesses, and we will be very disciplined and consistent in how we allocate our cash. The whole leadership team has bought into this cash-based mindset.
Yeah. Thanks, Phil. Regarding your comment around CapEx, we have provided in the past that roughly about 80% of our spend this year is focused on maintenance, productivity, and innovation. That all stays fully funded. Maintenance and safety are obviously mission-critical, and innovation and productivity are persistent enablers of our business. All of these are important, and that is why we have grouped them. Our current footprint position as well to support volumes in a multi-year demand recovery scenario. I think we feel comfortable with that.
Okay. Helpful. Obviously, the concern here is obviously energy prices, freight, and all that are really dialed up. Remind us, just given the lag, when does that flow through? Is it going to kick in largely in 1Q? It is pretty impressive that you are expecting price plus productivity to offset that. Any color you are comfortable sharing, guys, in terms of early feedback, in terms of pricing and support from competitors? Certainly, it is still a pretty challenging demand environment right now.
Yeah. On the first part, given our inventory turns, the input prices flow through our P&L on an average of four to five months later, and that will vary a little bit by business and product. For context, input prices stepped up in the first half of the year, and when you look at our underlying cost of sales inflation, it went from low single digits in the first half of the year to mid-single digits in the third quarter, and it is expected to remain there both in the fourth quarter and entering next year. The key point there is we have taken actions in the business to offset inflation, and that is a combination of the pricing actions, some mix improvements in productivity, and that is both in the third quarter and year-to-date, and we intend to continue that.
The next question comes from Michael Rehaut with Melius Research. Please go ahead.
Thanks for taking my questions. Good morning, everyone. Wanted to zero in first on the 4Q outlook and just confirm on the smaller detail side that the four less shipping days, that represents about a 6% year-over-year headwind. Secondly, more bigger picture, against the soft market backdrop, you are expecting core sales to grow low single digits. Just want to understand where that strength is coming from, if you can give a little more color, if it is across all three segments, or are there particular end markets that you feel like that you are executing some share gains or relative strength?
Yeah. Thanks, Mike. I will take the first part of that and let Paul add some color. Just in terms of the shipping days versus prior year, that is really the largest single factor in our Q4 EPS versus prior year. We have four fewer days, so we have 61 versus 65, to be precise, and that represents about a 6% headwind. You are correct that we expect adjusted net sales to be up low single digits in the fourth quarter, and that is days and FX adjusted, consistent with how we define that in our release.
Yeah. From the demand in some of our end markets, we really see new construction to be the most impacted here in the short term by the higher interest rates, and we even see greater impact in multifamily with lower starts and permits. Our retail business grew, and we gained share, and so that is really a bright spot. Teams are executing well in our retail business. I would say the same on the commercial side. Our commercial business has outperformed residential for years in current market circumstances. When you look at commercial, it is really driven by renovation projects rather than new construction activity, and we have performed well in that segment.
Great. Thanks for that color. Secondly, just on the capital allocation framework that you laid out, going from 0.7x leverage, net debt to EBITDA, to 2 x implies a pretty big potential for incremental share repurchase. Just wanted to get your sense of the timing, let's say, of getting to that 2 x leverage. Is that something that you would anticipate could happen relatively quickly, like over the next 12 months, or maybe a longer timeframe?
Thanks, Mike. We aren't going to guide the specific timing, and we're not committing to a specific pace. But I'd point you to a couple things. We repurchased $261 million in the third quarter, and so that's a demonstration of our commitment to deploy capital through share repurchases. We also said that we'd be consistent in our repurchases. Given, as you mentioned, our leverage ratio and the free cash flow generation of the business, we have capital to deploy above that over time.
Great. Thanks so much.
Thanks, Mike.
The next question comes from Stephen Kim with Evercore. Please go ahead.
Yeah. Thanks a lot, guys. Appreciate the color. I'm going to follow up on that leverage question that Mike was just asking about. I'm curious about the 2x. Is that a firm ceiling or not? How long would you be willing to stay above that level in the event of an M&A transaction that took you above that? Or is your intention to, even with any opportunistic M&A, to still stay below that? And relatedly, I assume you have some sort of level of leverage that you regard as appropriate given the current environment. I know you've indicated you'd be dynamically evaluating and so forth. But at this state, if we were to see a situation like today, some point in the future, what would you regard as appropriate, generally, leverage target at that time?
Yeah. Thanks, Steve. Our balance sheet's in a strong place. Maybe to answer the second part of your question, we'll be sensible about how much leverage we carry from a risk management perspective. That said, we believe it could be more efficient, and we'd be comfortable operating up to 2x net debt to adjusted EBITDA over time. So, think of it as more of a ceiling. Even in down markets, we've generated very strong and durable free cash flow, and we'll continue to do that. As I mentioned earlier, we're not going to commit to a specific pace, only that it will move higher over time as we deploy cash flow.
Okay. That's good. I guess, let me ask another question about your leverage. You got a couple of debt maturities, I think, coming up in the next couple of years. Are you planning to refinance those? Or would you be willing to take on additional debt in order to bring leverage into whatever targeted range you have at the time?
Yeah. Aside from free cash flow, we have a range of options to manage liquidity as we execute on our capital deployment priorities. We have flexibility in the near term, and we'll work through the right capital structure over the long term.
Specifically, with respect to those maturities, would your expectation be to refinance those?
Yeah. I think we'll manage as we go through. We obviously are doing planning, and so we will work through the right capital structure, and we believe we have the right level of flexibility. I just reinforce that the net leverage target is up to 2.0x.
Yeah. Yeah, got that. Okay, great. Thanks, guys.
The next question comes from Adam Baumgarten with Vertical Research Partners. Please go ahead.
Hey, guys. Good morning. Just on sort of the current portfolio of businesses you guys have, do you expect to take a hard look at that and maybe divest some potentially underperforming assets over time?
Yeah. Good morning, Adam. Yes, we are beginning a comprehensive portfolio analysis of our businesses, and so every business will go through the same screen. We'll look at market attractiveness. We'll look at the competitive advantages we have in each of those businesses. We'll look at cash profitability and also return on invested capital. Then we'll reposition some of the businesses. We might have to fix some of the businesses. We might have to rethink some of the businesses that fall short of our expectations. And we will share our conclusions if we have decisions to communicate on the future calls.
Okay, great. Thanks. And then just on the days impacted 4Q, it's pretty straightforward on the 6% top line hit, but can you remind us how we should think about the EBIT impact there? Should we use sort of where margins are in terms of the flow-through, or should it be more of a sort of incremental or decremental margin, I guess, in this case?
I think it's similar, incremental, decremental to what we provided in the past, in that 20%-30% range. Given Q4 is a seasonally slower quarter and a smaller quarter, it might be slightly worse, but I'd say think about it in terms of the decremental margins.
Okay, great. Thanks a lot, guys.
The next question comes from Trevor Allinson with Wolfe Research. Please go ahead.
Hi, good morning. Thank you for taking my questions. A question on your expectation for price mix and productivity to again offset inflation headwinds as we get into 1Q 2027. You've got a January price increase out there across categories in the U.S. You talked about some pricing internationally. How should we think about the realization necessary on those increases to offset inflation? Are you expecting to be similar to what you saw over the summer for those increases, or just how should we think about what you need to get in order to offset those inflation headwinds as we step into early next year?
Yes, you are correct that we had to announce further increases given the inflationary environment. Our expectation is that the realization on these future increases will be in line with our expectations on the past increases. We believe the whole industry needs to absorb the same inflation, and we need pricing to recover it. If inflation keeps rising, we will have to take further actions as we have throughout the year. Our teams have really been doing a fantastic job implementing those increases and supporting our efforts to keep up with inflation.
Trevor, just to reinforce the point made earlier of the offset to inflation is really a combination of price, mix, and productivity. Our intent is to offset that on a dollar-for-dollar basis.
Okay. Thank you for all of that. My second question is related to what you just mentioned, Nick, on the mix side. You have had a number of price increase announcements. Can you talk about how elasticity or any trade-down has played out versus what you would expect? I think you called out mix as being a positive tailwind. Just any color there, and are there any elasticity or trade-down headwinds expected as you push more pricing early next year?
Yeah. Trevor, thank you for the question. I will take that one. Broadly speaking, we do not expect our increases to meaningfully impact consumer demand. I think the market right now has an overhang on housing affordability and consumer confidence. I think these trends are more influential on the short-term intent to purchase floors than really the list price of flooring on the shelf. Specifically to mix, what you normally see in highly inflationary environments is that you see slight de-mixing in the different categories. But we have been able to outperform that through our innovations and new placements and new product strategies that we put out in the market. We have been able to offset that market de-mix, I would say, with strong delivery of innovation in our markets.
Thank you for all the color, and good luck moving forward.
Thanks, Trevor.
Thank you.
The next question comes from John Lovallo with UBS. Please go ahead.
Good morning, guys. Thanks for taking my question as well. Maybe starting off just on the four-point plan. Curious, with each of the different facets, some seem a little bit more short-dated than perhaps some of the others. Curious if you have a basic timeline of how you're thinking about achieving the full run rate or hitting full stride for each of these components.
Well, the four pillars are really the long-term strategy on how we are building our performance in the market. It's our goal to continue to outperform the market. It's our goal to continue to deliver very strong innovation to the market. It's our goal to stay operationally excellent, and our capital budget provides for that. It's our goal to be very disciplined in our capital allocation. These are really the pillars on how our organization runs the business. There is no specific timeline to that. It is a continuous evaluation of opportunities and a continuous progress on these pillars. We will provide proof along the way with examples and with successes on how we outperform the market, focusing on those four pillars.
Okay. Understood. The implied fourth quarter operating margin outlook seems to imply it being down about 100 basis points or so year-over-year, which it would be an acceleration from the third quarter, despite the fact that you guys are expecting price mix productivity versus cost to be positive and adjusted net sales to be up low single digits. What do you attribute the margin pressure to?
Hey, John. It's Nick. I think, as I said earlier, the big piece is the four fewer shipping days along with the weaker market condition is really driving lower volumes. The cost of both the lower volume and the fewer days is certainly the margin, but also the fixed cost absorption. That's all on top of our normal seasonally slower Q4 dynamics that we have. I'd just say that, as a reminder, that the price cost comments are on a dollar-neutral basis. That would potentially imply some margin pressure, and that's consistent with what we've said in the past.
Okay. Understood. Thank you, guys.
Thanks, John.
The next question comes from Matthew Bouley with Barclays. Please go ahead.
Morning, everyone. Thank you for taking the questions. I wanted to ask another one on the CapEx side, the $375 million of baseline CapEx is, I guess, something like 3.5% of sales. For Mohawk, that is a number that, I guess, once upon a time, 15 years, 20 years ago, we used to see. Maybe you kind of unpack a little around what has changed around the need for CapEx in the overall business. Thank you.
I think where we are in the cycle today and with our current capacity utilization, I think we don't see a need for significant capacity increases in the near future. That, I think, is a very important part of it. Besides that, we are full gas on innovation. We're full gas on cost reduction and productivity in our factories and in our operations and our distribution activities. The current amount that we've disclosed that we think is sufficient for the next few years will provide ample opportunity to continue to fuel improvement in the business.
Okay, got it. Appreciate that color, Paul. Thank you. Secondly, on inflation, you gave some commentary that it had stepped up to mid-single digits, and it sounded like you're expecting that to continue, both in Q4 and also early 2027. My question is really just sort of looking at where oil and European natural gas and everything else is. Why wouldn't that mid-single-digit inflation number be any different in the beginning of 2027 relative to today? It would just seem like maybe there's a range around mid-single digits, but it would seem like it's moving higher. Maybe just kind of unpacking that a little bit. Thank you.
Thanks, Matt. There is obviously a range around mid-single digits. I just would maybe say that the impacts of inflation have been pretty broad-based, touching not just raw materials, but freight, fuel, energy, labor costs across a variety of different markets and different segments. We have visibility to that, given our inventory turns. I think the key point, as well, the takeaway is that we're taking action in the business to offset that through the combination of price mix and productivity. We've done that year-to-date, we've done that in the third quarter, and we expect that to occur in Q4 and into early next year.
All right. Thanks, Nick. Good luck, guys.
Thank you.
Thank you, Matt. Thank you.
The next question comes from Mike Dahl with RBC Capital Markets. Please go ahead.
All right. Thanks for taking my questions. One more on the cost side and maybe specifically to European nat gas. I think you have kind of a hedging program in place there, and in the past, there have been situations where there were differences in hedging strategies that caused some disruptions in the market. Can you just talk a little more about how your mitigation strategy. Obviously, you've talked about, "We're going to take price," but just on the hedging side, what you're doing, what you think the industry is doing. And again, Europe in particular, I think it's been hard for the industry to generally sustain price there, so what's different this time?
Yes. Good morning, Mike. We have a variety of strategies, really, to handle inflation. In Europe, on natural gas, forward buying is one of them. We have incorporated various assumptions in our outlook and our commentary, including energy in Europe. The drivers of overall inflation across our business are wide, and natural gas is only one of the components. We have other components with raw materials and logistics and energy and labor that are also significant at this time. Natural gas, we handle through these forward buys, and it has been helping us to postpone somewhat the filtering through of the inflation.
Paul, just a quick clarification or follow-up then. Is it your sense that competitors are doing the same there? My second question is just back on the capital return. I think it is admirable that your company has got the leverage position it has in a downturn like this. I think a lot of other companies would actually be envious of that. I fully appreciate longer term, the deployment of capital and your framework around that. I guess from a near-term standpoint, given conditions continue to weaken, can you elaborate more on why the prudent decision in the near term would be to re-lever into this environment? Thanks.
On your first comment, I cannot really talk about how the competition is hedging. I think everybody manages his business how he thinks he should manage the business. As far as the timing on the repurchases, I think we are not going to comment on the timing. I just point you back to the comments we have already made on the repurchases. They will be consistent. We have stepped them up significantly. We have done $300 million so far in the second half. We have a new authorization, and we will work with that.
Okay, thanks.
The next question comes from Sam Reid with Wells Fargo. Please go ahead.
Thanks, everyone. I'll start off with a big-picture question, circling up on your pillars. You talked about there being some hurdles for organic growth opportunities. It sounds like there's going to be some discipline in evaluating those. Can you just talk through maybe some of the specific hurdles you're looking at?
Well, the first pillar is about outperforming our markets, and this pillar really is about having a growth mindset in the company. It's about leveraging our go-to-market capabilities and really focusing on the most attractive market segments to outgrow the markets we serve. We can do that in a lot of multiple ways. We can do that with richer channel mix, better product mix. We can do that through share gains within categories, and we can do that also by expanding on our customer relationships with new technological and digital solutions. So, the baseline CapEx we laid out include all of those investments to continue to grow and outperform our markets. As far as the operating expenditures to support the pillar, we also don't have any meaningful plans to augment our operating expenditures in support of the pillars.
These funds exist in our current cost base today, and we will reallocate as appropriate to fund the initiatives.
Sam, I would just add that in terms of your question on the hurdles, ultimately, we're maximizing value per share. That's the ultimate hurdle, Sam.
Really helpful. Switching gears, just looking at productivity, historically, you've been able to generate, I guess, around $80 million-$100 million in annualized productivity. Any sense as to what that could potentially look like in 2027? It sounds like you are planning to start the year off with kind of consistent productivity, but just curious how that lands as we go through the year.
Yeah, Sam, so it's obviously a little early to guide 2027, but we'll continue to focus our efforts on both identifying and executing on our productivity initiatives, our continuous improvement initiatives, our restructuring initiatives. This year, we have executed on productivity savings that have run at about $40 million a quarter. A large part of next year, we announced a restructuring program last quarter with $60 million in annualized savings. A large part of that'll fall into 2027. But I'd say also keep in mind, we'll see less year-over-year benefit from the previous restructuring programs. The restructuring savings we've realized over the last few years are out of our structural cost base, and they're not coming back, but they'll make the year-over-year tougher as we go forward.
I think in the future, how we think about productivity is it becomes margin expansion, and it's not just needed when we need to cover inflation.
Helpful context. Thanks so much.
Thanks, Sam.
The next question comes from Susan Maklari with GS. Please go ahead.
Thank you. Good morning, everyone. My first question is on the innovation and the brand pillar within those initiatives that you outlined. Can you give us a bit more detail on how you're thinking about driving innovation in the business and how that contributes to your ability to build brand strength, and then how you're also communicating the value that these products provide to the consumer to make sure that people are understanding what you're bringing to the market, and how, I guess, that also goes back to then building the brand, especially in an industry where maybe brand is underappreciated?
Yes. Thank you, Susan. Very good question. Look, innovation is very important for Mohawk. That is why it is a pillar in our framework. When we focus on our capabilities to generate innovation and create unique surfaces, we are really trying to create unique products, and we are always trying to create those products through a unique combination of three things, what customers and consumers are looking for. They are always looking for a superior aesthetic or a superior realism, so the product needs to look good. They are always looking for a differentiated performance that caters to their use, and they are always looking for some improved sustainability characteristics, and that is really where Mohawk leads. So, if you come through, really through decades of experience in our three global innovation hubs that we have, we combine all these different things in unique products.
So, you really need the right people, and in our case, that is the right people across the world with decades of experience to really bring those unique products to market, to develop them, to patent them, and our industry cannot always replicate that. As I think about innovation and how we take that to market, I think as a company, we will step-by-step be evolving from a manufacturer that designs to a designer that develops and delivers customer solutions. As you do that, brands are indeed very important. So, our brands are a fantastic vehicle to bring that message to market.
Okay. That is great color, Paul. Thank you. Then turning to the cash balance, as you think about executing on these pillars, what does that mean in terms of the ability to generate cash, which is obviously already really strong given what we have seen this quarter and the last couple of years? Then within that, what is the optimal level of cash that you are comfortable carrying through the cycle?
Hey, Susan. It is Nick. When I think about the strategic pillars, they are really all in support of cash generation and obviously capital discipline and increasing value per share, as we mentioned. We are focused on EBITDA growth, we are focused on free cash flow growth, and returning that to shareholders. So, when we outline things in the pillars like outperformance, things like product innovation, brand strength, operational excellence, I certainly see that as an opportunity to profitably grow the business and profitably grow cash flow over time. In terms of cash balance, we want to be efficient, and so we will manage that appropriately.
Okay. Thank you for the color, and good luck with the quarter.
Thank you, Susan.
Thank you, Susan.
The next question comes from Keith Hughes with Truist. Please go ahead.
Thank you. Paul, at the beginning of this call, you talked about some strength at retail, and I assume that is the United States. Could you talk a little bit more about that? What types of retailers are doing well? What kind of markets are they winning at right now?
Yes. Thank you, Keith. Good morning. Yes, specialty retail was performing pretty well for us. I think we grew the business in the U.S. We gained share, although our momentum slowed a little in September, as we said in our opening comments. I think you also have a K-shaped economy that has been talked about. The higher end is performing significantly better than the low end. With our brands and with our products, I think we are benefiting from that. That being said, consumers are still deferring larger projects, and it is a difficult environment. When you compare specialty retail to home centers, the home center point of sale remains slow, and that market is more impacted maybe also by the K-shaped economy.
Okay, thank you. One other question. The guidance for fourth quarter has a tax rate of 23.5%. That is a good bit higher than what we have historically seen. Is that due to lower days, or what is driving the higher tax rate?
Hey, Keith. I would say the rate moves quarter- to- quarter with the geographic mix of our earnings, plus some discrete items that can shift in the quarter. If you look at our full-year 2026 tax rate, it is consistent with our prior expectations. Q3 was a little lower at 19.3%, and as you mentioned, Q4 assumes 23.5%. So, on a full-year basis, it is in line with our expectations.
Okay, thank you.
Thank you, Keith.
The last question today comes from Rafe Jadrosich with Bank of America. Please go ahead.
Great. Thanks for taking my questions. Can you just talk about the third quarter volume in Rest of the World? What was the headwind there? Did you see any destocking? Was there pull forward? How do we think about that into 4Q?
Yeah, we saw some soft residential demand across Europe, but also in Australia and New Zealand. If we look year-to-date, volumes have been trending in line with the market. We were also comping some strong volume performance in the prior year in Insulation and Panels, so we had a little bit of headwind as we were comparing year-over-year. With weak volumes, I want to point out that profit came in above our expectations. The team is really managing the cost environment very well, and they're also managing the price environment very well. So, we are navigating very difficult market circumstances, but I think we're doing it in a very successful way.
Thank you. That is helpful. Then, I think for the fourth quarter, the low single-digit growth on an organic basis that you are talking about, I think you are lapping a destock from last year. Can you just remind us what happened last year? Is there any color by segment in terms of what the growth outlook is for the fourth quarter, or any other considerations that we should have?
Rafe, I would just say that generally across all of our segments, they are facing challenging market conditions. I think that is pretty consistent across the U.S. and Europe and our other markets. Our goal here is to outperform even in those weak markets, so I think that generally, we think we will all be in the relatively similar range.
Thank you.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Paul De Cock for any closing remarks.
Thank you for joining us today. Our teams are focused on executing our strategy, and we really look forward to updating you further in February on our progress. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.