모호크 인더스트리스(MHK) 2026년 3분기 실적발표 콘퍼런스 콜: 현금흐름, 자사주 매입 및 4분기 전망

핵심 요약

• 모호크 인더스트리(Mohawk Industries)는 2026년 3분기 순매출이 28억 달러를 기록해 보고 기준 1% 증가했으며, 환율 변동과 추가 출하일 효과를 조정하면 사실상 보합세를 나타냈다고 밝혔다. 출하량은 4% 감소한 반면 가격 및 제품 믹스는 4% 개선되었다.
• 조정 EBITDA는 3억 5,300만 달러, 이익률은 12.7%를 기록했다. 조정 영업이익은 전년 동기 대비 500만 달러 감소한 2억 달러를 기록했으며, 조정 EPS는 2.72달러였다.
• 8,500만 달러의 가격 및 믹스 개선 효과와 4,700만 달러의 생산성 향상 효과가 약 1억 1,700만 달러의 기초 투입 원가 인플레이션을 상쇄하고도 남았다.
• 3분기 잉여현금흐름은 전년 동기 대비 26% 증가한 3억 9,000만 달러를 기록했다. 연초 이후 누적 잉여현금흐름은 6억 2,600만 달러로 78% 증가했다.
• 모호크는 이번 분기 동안 2억 6,100만 달러 규모의 자사주를 매입하여 발행 주식 수를 3% 이상 줄였다. 이사회는 5억 달러 규모의 신규 자사주 매입 프로그램을 승인했다.
• 2026년 4분기에 대해 경영진은 출하일수가 4일 줄어들고 수요가 둔화되었음에도 불구하고, 조정 순매출이 전년 동기 대비 한 자릿수대 초반의 성장을 기록하고 조정 EPS는 1.35~1.45달러가 될 것으로 예상하고 있다.

핵심 재무 데이터

부문별 실적

사업 및 운영 실적

모호크는 분기 말 미국 수요가 약화되었으며 10월에도 특히 건설업체 채널을 중심으로 약세가 지속되었다고 밝혔다. 주거용 신축 시장은 주택담보대출 금리 상승, 주택 가격 부담성 제약, 건설업체 심리 위축 등이 활동에 부담을 주면서 가장 힘든 최종 시장으로 작용했다.

미국 전문 리테일 부문은 상대적으로 나은 실적을 거두었다. 주거용 카펫을 선두로 대부분의 제품 카테고리에서 점유율을 확대했다. 라미네이트는 해당 카테고리 성장률을 계속 상회했고, 세라믹 리모델링은 4개월 연속 개선되었다. 조리대(카운터톱) 매출 역시 신규 디자인과 컨시어지 프로그램에 힘입어 성장했다.

상업용 수요는 신규 프로젝트 수주가 둔화되었음에도 불구하고 주거용 수요보다 회복력을 유지했다. 상업용 LVT(럭셔리 비닐 타일)는 6개월 연속 주문 성장을 기록했으며, 카펫 타일, 부자재 및 고무 플랫폼 판매도 증가했다.

유럽 소비 수요는 주택 활동 및 전시장 방문객 감소로 인해 약세를 유지했다. 다만 프리미엄 컬렉션, 대형 세라믹 제품, 슬랩 제품은 양호한 실적을 냈다. 모호크는 3분기 초 이후 천연가스 가격이 대략 2배로 상승함에 따라 세라믹 제품 인상을 앞당겨 실시했으며, 유럽 패널 및 시공 부자재 제품의 11월 가격 인상을 발표했다.

경영진은 시장 상회 성과, 제품 혁신 및 브랜드 경쟁력, 수익성 및 운영 우수성, 규율 있는 자본 배분을 통한 현금 창출에 중점을 둔 4대 핵심 전략을 도입했다. 또한 시장 매력도, 경쟁 우위, 현금 수익성 및 투입자본수익률(ROIC)을 기준으로 포괄적인 포트폴리오 검토에 착수하고 있다.

경영진 가이던스

2026년 4분기에 대해 경영진은 다음과 같이 예상합니다.

• 환율 변동 및 출하일수를 조정한 전년 동기 대비 한 자릿수대 초반의 조정 순매출 성장.
• 조정 EPS 1.35~1.45달러.
• 3분기 수준과 유사한 기초 인플레이션.
• 가격, 믹스 및 생산성 향상을 통해 인플레이션 영향을 1:1 비율로 상쇄.
• 2025년 4분기 대비 출하일수 4일 감소, 2026년 3분기 대비 3일 감소. 경영진은 출하일수 감소로 인한 전년 동기 대비 매출 역풍을 약 6%로 추산함.

모호크는 2026년 연간 자본적 지출(Capex) 전망치를 기존 4억 6,000만 달러에서 약 4억 4,500만 달러로 하향 조정했다.

2027년 계획수립 목적으로, 경영진은 내년 진입 시 시장 출하량이 감소하고 기초 매출원가 인플레이션이 한 자릿수 중반대를 유지할 것으로 가정하고 있다. 이는 공식 가이던스가 아닌 예비 가정이다. 회사는 영업 실적, 운전자본 관리, 자본적 지출 감소에 힘입어 견조한 잉여현금흐름이 지속될 것으로 기대하고 있다.

모호크는 유지보수, 생산성 향상, 혁신을 포함한 기준 연간 자본적 지출 수요를 약 3억 7,500만 달러로 추정한다. 경영진은 단기적인 대규모 설비 증설 없이도 기존 생산능력으로 수년간의 수요 회복을 지원할 수 있다고 밝혔다.

회사는 경기 순환 위험 및 투자적격 신용등급 유지를 조건으로 장기 순부채 대비 조정 EBITDA 상한선을 최대 2배로 설정했다. 고수익 자체 투자나 규율 있는 볼트온(bolt-on) 인수합병에 사용되지 않는 자본은 지속적인 자사주 매입을 통해 환원될 예정이다.

리스크 및 주요 관전 포인트

• 미국 주거용 수요는 3분기 말 약화되어 10월에도 약세를 보였으며, 특히 건설업체 및 다세대 주택 채널이 큰 압박을 받았다.
• 소비자들이 대규모 리모델링 프로젝트를 계속 미루면서 기존 주택 매매 및 대형 리테일 동향이 약세를 유지했다.
• 유럽 주거용 주택 활동과 전시장 방문객 수는 계속 둔화된 상태를 유지했다.
• 인플레이션은 원자재, 운임, 연료, 에너지, 인건비 전반에 걸쳐 광범위하게 발생했다. 투입 원가는 일반적으로 4~5개월의 시차를 두고 모호크의 손익계산서에 반영된다.
• 4분기 수익성은 출하일수 감소, 출하량 감소, 고정비 흡수율 약화, 통상적인 계절적 영향으로 인해 압박을 받고 있다.
• 경영진은 현재 계획 가정하에 2027년 시장 출하량이 감소할 것으로 예상하고 있다.

애널리스트 Q&A 하이라이트

• 자본 배분: 경영진은 현금 환원 및 추가적인 투입자본수익률(ROIC)을 강조했습니다. 모호크는 유지보수, 안전, 생산성 및 혁신에 필요한 자금을 충분히 집행하는 한편 여유 현금은 자사주 매입에 활용할 것입니다.
• 자사주 매입 여력: 경영진은 레버리지를 2배 상한선까지 높이는 시점에 대한 일정을 제시하지는 않았으나, 현금이 집행됨에 따라 시간이 지나면서 레버리지가 상승할 것이라고 밝혔습니다. 4분기 초에 3,400만 달러를 추가 매입하며 이전 승인 한도를 완료했습니다.
• 인플레이션 및 가격 책정: 회사는 새롭게 발표된 가격 인상의 실제 반영 수준이 이전 조치들과 일관될 것으로 예상합니다. 경영진은 인플레이션이 계속 상승할 경우 추가 조치가 필요할 수 있다고 밝혔습니다.
• 포트폴리오 검토: 모든 사업 부문이 동일한 기준에 따라 평가될 예정입니다. 경영진은 기대에 미치지 못하는 사업에 대해 위치를 재조정하거나 개선 또는 재검토를 진행할 수 있습니다.
• 생산성: 모호크는 2026년 분기당 약 4,000만 달러의 생산성 절감 효과를 창출했습니다. 이전에 발표된 구조조정 프로그램은 연간 6,000만 달러의 절감 효과를 낼 것으로 예상되며, 상당 부분이 2027년 실적에 기여할 것입니다.
• 소비자 믹스: 경영진은 미국 고급 전문 리테일 부문이 저가형 부문보다 나은 실적을 거두고 있다고 밝혔습니다. 제품 혁신과 신규 진열 확대는 인플레이션 시기에 일반적으로 발생하는 카테고리 내 트레이드다운(저가품 선호) 현상을 상쇄하는 데 도움이 되었습니다.

실적 발표 전화회의 전사록 전문

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전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

Good day, and welcome to the Mohawk Industries Third Quarter 2026 Earnings Conference Call. [Operator Instructions] 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.

Joseph Ahlersmeyer

Thanks, Chloey. 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 Investors section of our website.

I'll now turn the call over to Paul for his opening remarks.

Paul De Cock

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 4 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 impact 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. And 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 remained 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 card 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 homebuilders 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 1/4 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, health care 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 installation 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 services 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 4 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 4 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 that our team members found 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 3 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 towards 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.

And with that, I will turn it over to Nick.

Nicholas Manthey

Thanks, Paul, and good morning, everyone. In a moment, I will talk about our capital deployment priorities in support of our newly defined strategy. But 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%. And 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 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% of 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 0.7x 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'd also expect 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.

And finally, we allow for the possibility that inflation could rise further. And as it has, we have responded appropriately.

So looking ahead to the fourth quarter, which has 4 fewer shipping days versus the prior year and 3 fewer days versus the third quarter of the current year, we assume flowing 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.

Together, we expect the fourth quarter -- 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'll 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 realized 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 towards creating the greatest long-term value for shareholders.

And with that, I'll turn it back to Paul.

Paul De Cock

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 strength 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.

And with that, we are happy to answer your questions.

Operator

[Operator Instructions] The first question today comes from Phil Ng with Jefferies.

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Philip Ng

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? And then 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 on that growth not going forward?

Paul De Cock

Phil, I'll take the first part, and then Nick can follow up on the second part. So we have provided our capital allocation framework and it's 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. And so we are hyper-focused on cash returns around the globe in all our businesses, and we'll be very disciplined and consistent in how we allocate our cash. And the whole leadership team has bought into this cash-based mindset.

Nicholas Manthey

Yes. Thanks, Phil. And regarding your your comment around CapEx, we've provided in the past that roughly about 80% of our spend this year is focused on maintenance, productivity and innovation. So that all stays fully funded. Maintenance and safety are obviously mission-critical and innovation and productivity are persistent enablers of our business. And so all of these are important, and that's why we've grouped them.

Our current footprint position us well to support volumes in a multiyear demand recovery scenario. So I think we feel comfortable with that.

Philip Ng

Helpful. And then honestly, the concern here is obviously energy price is great that's really dialed up. Remind us, just given the lag, when does that flow through? Is it going to kick in largely in 1Q? And it's pretty impressive that you're expecting price plus productivity to offset that. So any color you're comfortable sharing guidance in terms of early feedback in terms of pricing and support from competitors, certainly, it's still a pretty challenging demand environment right now?

Nicholas Manthey

Yes. On the first part, given our inventory turns, the input prices flow through our P&L on an average of 4 to 5 months later, and that will vary by -- a little bit by business and product. For context, input prices stepped up in the first half of the year. And so 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's expected to remain there both in the fourth quarter and entering next year.

So the key point there is we've taken actions in the business to offset inflation, and that's a combination of the pricing actions some mix improvements in productivity, and that's both in the third quarter and year-to-date, and we intend to continue that.

Operator

The next question comes from Michael Reha with Melius Research.

Unknown Analyst

Wanted to zero in first on the 4Q outlook and just confirm the on a smaller detail side that the 4 less shipping days that represents about a 6% year-over-year headwind. But secondly, more bigger picture, against the soft market backdrop, you're expecting core sales to grow low single digits. I just want to understand where that strength is coming from? If you could give a little more color if it's across all 3 segments? Or are there particular end markets that you feel like that you're executing some share gains or relative strength?

Nicholas Manthey

Yes. Thanks, Mike. I'll take the first part of that and Paul add some color. Just in terms of the shipping days versus prior year, that's really the largest single factor in EPS versus prior year. We have 4 fewer days. So we have 61 versus 65 to be precise, and that represents about a 6% headwind. And so you're 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.

Paul De Cock

Yes. And then 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's really a bright spot. The teams are executing well in our retail business. And I would say the same on the commercial side. Our commercial business has outperformed residential for years in current market circumstances. And when you look at commercial, it's really driven by renovation projects rather than new construction activity, and we have performed well in that segment.

Unknown Analyst

Great. Secondly, just on the capital allocation framework that you laid out, going from 0.7 leverage net debt to EBITDA to 2x 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 2x leverage? Is that something that you would anticipate could happen relatively quickly, like over the next 12 months or maybe a longer time frame?

Nicholas Manthey

Thanks, Mike. So we aren't going to guide to specific timing, and we're not committing to a specific pace. But I'd point you to a couple of 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 repurchase. And so 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.

Operator

The next question comes from Stephen Kim with Evercore.

Stephen Kim

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 a 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 then so forth. But at this state, if we were to see a situation like today at some point in the future, what would you regard as appropriate generally leverage target at that time?

Nicholas Manthey

Yes. So thanks, Steve. Our balance sheet is 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. And so 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.

Stephen Kim

Okay. 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?

Nicholas Manthey

Aside from free cash flow, we have a range of options to manage liquidity as we execute on our capital deployment priorities. So we have flexibility in the near term, and we'll work through the right capital structure over the long term.

Stephen Kim

But specifically, with respect to those maturities, would your expectation be to refinance those?

Nicholas Manthey

Yes, 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'd just reinforce the net leverage target is up to 2.0.

Operator

The next question comes from Adam Baumgarten with Vertical Research Partners.

Adam Baumgarten

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?

Paul De Cock

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, and 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.

Adam Baumgarten

Okay. Great. And then just on the days impact in 4Q, you're 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?

Nicholas Manthey

I think it's similar incremental decremental to what we provided in the past in the past in that 20% to 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.

Operator

Next question comes from Trevor Allinson with Wolfe Research.

Trevor Allinson

Question on your expectations for price, mix and productivity to again offset inflation headwinds as we get into 1Q '27. You've got 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?

Paul De Cock

Yes, you're correct that we had to announce further increases given the inflationary environment. And 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. And so if inflation keeps rising, we will have to take further actions as we have throughout the year, and our teams have really been doing a fantastic job implementing those increases and supporting our efforts to keep up with inflation

.

Nicholas Manthey

And, Trevor, just to reinforce the point you made earlier of the offset to inflation is really a combination of price, mix and productivity. And so we're -- our intent is to offset that on a dollar-for-dollar basis.

Trevor Allinson

Okay. And then second question is related to what you just mentioned, Nick, on the mix side. You've 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. So just any color there? And are there any elasticity or trade down headwinds expected as you push more pricing over the next year?

Paul De Cock

Trevor, thank you for the question. I will take that one. So broadly speaking, we don't expect our increases to meaningfully impact the consumer demand. I think the market right now has an overhang on housing affordability and consumer confidence. And so I think these trends are more influential on the short-term intent to purchase floors than really the list plies of flooring on the shelf. And specifically to mix, what you normally see in highly inflationary environments is that you see slight demixing in the different categories, but we've been able to outperform that through our innovations and new placements and new product strategies that we put out in the market. And so we've been able to offset that market mix, I would say, with strong delivery of innovation in our markets.

Operator

The next question comes from John Lovallo with UBS.

John Lovallo

Maybe starting off just on the 4-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 kind of a basic time line of how you're thinking about achieving kind of the full run rate or full -- hitting full stride for each of these components?

Paul De Cock

Well, the 4 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. And it's our goal to be very disciplined in our capital allocation. And so these are really the pillars on how our organization runs the business. And that there is no specific time line to that. It is a continuous evaluation of opportunities and a continuous progress on these pillars, and we will provide proof along the way with examples and with successes on how we outperform the market focusing on those 4 pillars.

John Lovallo

Okay. Understood. And then the implied fourth quarter operating margin outlook seems to imply being down about 100 basis points or so year-over-year, which 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. So what do you attribute the margin pressure, too?

Nicholas Manthey

John, it's Nick. I think, as I said earlier, the big piece is the 4 fewer shipping days, along with the weaker market condition is really driving lower volumes. And so the cost of both the lower volume and the fewer days is certainly the margin but also the fixed cost absorption, and that's all on top of our normal seasonally slower Q4 dynamics that we have.

And I'd just say that as a reminder, that the price/cost comments are on a dollar neutral basis. And so that would potentially imply some margin pressure, and that's consistent with what we've said in the past.

Operator

The next question comes from Matthew Bouley with Barclays.

Matthew Bouley

Just wanted to ask another one on the CapEx side, the $375 million of baseline CapEx is, I guess, something like 3.5% of sales. And for Mohawk, that's a number that, I guess, once upon a time, 15, 20 years ago, we used to see. Just maybe you kind of unpack a little around sort of what's changed around the need for CapEx in the overall business?

Paul De Cock

I think where we are in the cycle today and with the current capacity utilization, I think we don't see a need for significant capacity increases in the near future. And so that, I think, is a very important part of it. And then 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. And so 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.

Matthew Bouley

Okay. Got it. I appreciate that color, Paul. 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. And so 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 '27 relative today? It would just seem like maybe there's a range around mid-single digits, but it would seem like it's moving higher. So maybe just kind of unpacking that a little bit.

Nicholas Manthey

Thanks, Matt. So 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. And so we have visibility to that. Given our inventory turns, I think the key point as well, the takeaway is that we're taking actions in the business to offset that through the combination of price, mix and productivity. And so 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.

Operator

The next question comes from Mike Dahl with RBC Capital Markets.

Michael Dahl

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 bit more about how your -- like 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, it's been -- Europe in particular, I think it's been hard for the industry to generally sustained price there. So what's different this time?

Paul De Cock

Yes. We have a variety of strategies really to handle inflation. And so in Europe on natural gas, forward buying is one of them. We've incorporated various assumptions in our outlook and our commentary, including energy in Europe. And the drivers of overall inflation across our business or 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.

And so natural gas, we handled through these forward buys and it's been helping us to postpone somewhat the filtering through of the inflation.

Michael Dahl

And Paul, just a quick clarification or a follow-up then. Is it your sense that competitors are doing the same there?

And my second question is just back on the capital return. I mean, I think it's 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. And so I fully appreciate longer term, the deployment of capital and your framework around that. But I guess from a near-term standpoint, given conditions continue to to weaken, can you elaborate more on why the prudent decision in the near term would be to relever into this environment?

Paul De Cock

So 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. And as far as the timing on the repurchases, I think we're not going to comment on the timing. I just point you back to the comments we've already made on the repurchases. They will be consistent. We have stepped them up significantly. We've done EUR 300 million so far in the second half. We have a new authorization, and we will work with that.

Operator

The next question comes from Sam Reid with Wells Fargo.

Richard Reid

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?

Paul De Cock

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 your go-to-market capabilities and really focusing on the most attractive market segments to outgrow the markets we serve. And 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.

And so the baseline capital expenditures we laid out include all of those investments to continue to grow and outperform our markets. And 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.

Nicholas Manthey

And Sam, I would just add that in terms of your question on the hurdles, I mean, ultimately, we're maximizing value per share. And so that's the ultimate hurdle, Sam.

Richard Reid

Really helpful. Switching gears, just looking at productivity. Historically, you've been able to generate, I guess, around $80 million to $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?

Nicholas Manthey

Yes, 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 will fall into 2027. But I'd say also, keep in mind, we'll see less year-over-year benefit from the previous restructuring programs. And so 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 as it becomes margin expansion, and it's not just needed when we need to cover inflation.

Operator

The next question comes from Susan Maklari with GS.

Susan Maklari

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 we guess that also goes back to then building the brand, especially in an industry where maybe brand is underappreciated?

Paul De Cock

Yes. Thank you, Susan. A very good question. Look, innovation is very important for Mohawk. That's why it's a pillar in our framework. And when we focus on our capabilities to generate innovation and create unique services, we're really trying to create unique products, and we're always trying to create those products through a unique combination of 3 things, what customers and consumers are looking for. They're always looking for a superior aesthetic or a superior realism. So the product needs to look good. They're always looking for a differentiated performance that caters to their use, and they're always looking for some improved sustainability characteristics, and that's really where Mohawk leads.

And so if you come through really through decades of experience in our 3 global innovation hubs that we have, we combine all these different things in unique products. And 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.

And as I think about innovation and how we take that to market, I think as a company, we will, step-by-step, be evolving kind of from a manufacturer of their designs to a designer that develops and delivers customer solutions. And as you do that, brands are indeed very important. And so our brands are a fantastic vehicle to bring that message to market.

Susan Maklari

Okay. That's great color, Paul. And 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've seen this quarter in the last couple of years?

And then within that, what is the optimal level of cash that you are comfortable carrying through the cycle?

Nicholas Manthey

Susan, it's Nick. When I think about the strategic pillars, they're really all in support of cash generation and obviously, capital discipline and increasing value per share, as we mentioned, we're focused on EBITDA growth, we're focused on free cash flow growth and returning that to shareholders. And so when we outlined 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'll manage that appropriately.

Operator

The next question comes from Keith Hughes with Truist.

Keith Hughes

Thank you, Paul, at the beginning of this call, you talked about some strength at retail in 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?

Paul De Cock

Yes. Thank you, Keith. 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 bit 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. And 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's a difficult environment. And then 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.

Keith Hughes

Okay. One other question, the guidance for fourth quarter has a tax rate of 23.5%. That's a good bit higher than what we've historically seen. Is that due to lower days? Or what's driving the higher tax rate?

Nicholas Manthey

Keith, I'd say the rate moves quarter-to-quarter with the geographic mix of our earnings plus some discrete items that can shift in the quarter. So if you look at our full year 2026 tax rate, it's consistent with our prior expectations. Q3 was a little bit lower at 19.3%, and as you mentioned, Q4 seems 23.5%. So on a full year basis, it's in line with our expectations.

Operator

The last question today comes from Rafe Jadrosich with Bank of America.

Rafe Jadrosich

Can you just talk about the third quarter volume in Rest of World. What was the headwind there? Did you see any destocking? Was there a pull forward? And then how do we think about that into 4Q?

Paul De Cock

Yes, we saw some soft residential demand across Europe, but also in Australia and New Zealand. And -- but 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. And so we had a little bit of headwind as we were comparing year-over-year. And 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. And so we are navigating very difficult market circumstances, but I think we're doing it in a very successful way.

Rafe Jadrosich

That's helpful. And then I think for the fourth quarter, the low single-digit growth on an organic basis that you're talking about, I think you are lapping a destock from last year. Can you just remind us sort of what happened last year? And then is there any color by segment in terms of like what the growth outlook is for the fourth quarter? Or any other like considerations that we should have?

Nicholas Manthey

Yes. Rafe, I'd just say that generally across all of our segments, they are facing challenging market conditions. And so I think that's pretty consistent across the U.S. and Europe and our other markets. We're -- our goal here is to outperform even in those weak markets. And so I think that generally, we think we'll all be in the relatively similar range.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Paul De Cock for any closing remarks.

Paul De Cock

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.

Operator

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