Mohawk Industries, Inc. ($MHK)

Good morning, everyone, and welcome to the Mohawk Industries First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Nick Manthey, Chief Financial Officer. Please go ahead.

Thanks, Jamie. Good morning, everyone, and welcome to Mohawk Industries quarterly investor conference call. Joining me today on the call are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Paul De Cock, President and Chief Operating Officer. Today, we'll update you on the company's first quarter performance and provide guidance for the second quarter of 2026. I'd like to remind everyone that our press release and statements that we make during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. For 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 Jeff for his opening remarks.

Our performance for the first quarter was in line with our expectations despite a challenging environment. Our adjusted EPS was $1.90, up approximately 25% versus the prior year. Our results include benefits from productivity, restructuring and product mix, offset by inflation and volume. Last year was emptied by the system conversion and had 4 fewer days. Our net sales were approximately $2.7 billion, an increase of 8% as reported or decreased 2.6% on a constant basis. Across our regions, the commercial sector continue to outperform residential, new home construction remains soft and consumers continue to defer home purchases and remodeling projects due to economic uncertainty. We're implementing productivity actions and executing our previously announced restructuring projects to enhance our results. During the quarter, we repurchased 607,000 shares of stock for $64 million as part of our current stock buyback authorization. Our strong balance sheet provides strategic and operational flexibility to take advantage of opportunities that arise. At the end of February, the conflict in the Middle East intensified increasing volatility in global energy markets. The full impact of the conflict is unpredictable given the disruption to the worldwide supply of oil and natural gas. Higher gasoline and diesel prices were the fastest and most visible impact of supply disruptions and are contributing to a more cautious consumer outlook. Energy prices as well as the cost of oil and natural gas derivatives are also increasing, which affects the cost of many of our products. Depending on the duration of the conflict, the economic impact will vary across our markets, with increased inflation reducing consumer sentiment and discretionary spending. U.S. natural gas prices have been less impacted due to the significant domestic production, though oil prices in the U.S. have risen as they follow worldwide trends. In the U.S., 10-year treasury yields have increased, creating a corresponding rise in mortgage rates. The European continent will be more affected due to the dependence on oil and gas from the Middle East, and we have made forward purchases to limit our exposure. European governments are reviewing initiatives to lessen the impact on businesses and consumers such as cutting energy taxes, implementing fuel price caps and coordinating European gas storage. The energy markets will remain volatile until the global supply normalizes. We're implementing price increases across many products and geographies and further pricing cases could be required. The impact of higher cost of raw materials will be greater in the second half of the year due to our flow-through of our inventory. We are continuing to launch new product collections with industry-leading designs and features to enhance our sales and margins. We're implementing operational strategies that we've used to navigate past disruptions which prioritize adaptability and cost control. We're maintaining flexibility to align with evolving demand, supply availability and volatile costs. We're focused on the controllable parts of our business, including sales initiatives inventory levels and discretionary spending and investments. Now Nick will provide the details of our financial performance for the quarter.

Thanks, Jeff. Looking at our Q1 2026 financial results. Net sales for the quarter were $2.7 billion, up 8% as reported and a decrease of 2.6% on a constant basis. Our Global Ceramic segment delivered stronger mix and we lapped the impact of the order management system conversion in Flooring North America, which partially offset the slower market conditions across our markets. Gross margin was 23.5% as reported and 24.8% on an adjusted basis. This is up 70 basis points from prior year as the benefit of restructuring and productivity initiatives of $32 million and favorable FX of $20 million offset the increased input costs of $28 million. SG&A expenses were 19.4% as reported and 19.3%, excluding charges, in line with prior year levels. That gave us an operating income as reported of $112 million or 4.1% of net sales. We had $38 million in nonrecurring charges primarily related to our restructuring actions initiated last year. Our adjusted operating income was $149 million or 5.5% of sales that's an increase of 70 basis points versus prior year. The benefits of lapping the prior year order management system conversion of $30 million and our restructuring and productivity initiatives of $36 million were partially offset by increased input costs of $38 million. Lower volumes given the weaker market conditions were offset by extra days in the quarter. Interest expense was $2 million, a decrease compared to prior year due to the reduction in short-term debt and the benefit of increased interest income. Our adjusted tax rate was 19.4%, and we are forecasting the full year tax rate for 2026 to be between 19% and 20%. That gave us an earnings per share on both a reported and adjusted basis of $1.90. Turning to the segments. Global Ceramic had net sales just under $1.1 billion. That's a 10.4% increase as reported and basically flat on a constant basis. The ceramic business delivered positive price/mix, given strength in the commercial channel and continued success in the countertop business, offset by lower volumes in the residential channel. Adjusted operating income was $55 million or 5% of sales -- that's an improvement of 20 basis points compared to the prior year as the combination of productivity initiatives of $21 million and positive price/mix of $13 million were only partially offset by an increase in input costs of $30 million. Flooring North America net sales were $880 million. That's a 2% increase as reported or 4.1% decrease on a constant basis as sales were impacted by slower conditions in both new residential construction and residential remodeling. We had an adjusted operating income of $35 million or 4% of sales. That's an improvement of 100 basis points compared to prior year, as we lap the impact of the order management system conversion of $30 million, which was partially offset by increased input costs of $13 million and the net impact of lower volumes. In Floor and Western World, we had sales of $751 million as reported. That's a 12.2% increase or a decrease of 4.4% on a constant basis. With the decrease in volumes in the residential remodeling market impacting our flooring categories, partially offset by volume growth in both our panels and insulation businesses. Adjusted operating income was $74 million or 9.8% of sales. That's an improvement of 70 basis points compared to prior year as the combination of productivity gains and lower input costs of $14 million were more than enough to offset negative price/mix. Corporate expenses and eliminations were $14 million in the quarter, and we estimate the full year 2026 expenses to be between $52 million and $55 million. And now looking at the balance sheet. Cash and cash equivalents ended the quarter at $872 million, with free cash flow of $8 million in the quarter, which is in line with seasonal trends. Inventories were just shy of $2.7 billion up less than 1% compared to prior quarter due to inflation. Property, Plant & Equipment ended the quarter at just under $4.7 billion. CapEx spending in the quarter was $102 million, and we plan to invest approximately $480 million in 2026, focused on cost reduction initiatives, product innovation and maintenance. The balance sheet remains in a very strong position with net debt of $1.2 billion and a net debt-to-EBITDA ratio of 0.9. In summary, our strong balance sheet provides us flexibility to navigate a challenging macro environment, while staying positioned to pursue opportunities as the market recovers. Now Paul will review our Q1 operational performance.

Thank you, Nick. Our Global Ceramic segment delivered improved sales and profitability year-over-year. All regions are responding to their local markets with new styles and sizes that are improving our average price and distribution in both residential and commercial. Our premium collections increased our mix with advanced technologies that enhance the visuals. Across all regions, productivity improvements and restructuring actions or improving our results. In the U.S., we benefited from stronger commercial sales and increased retail partnerships, which offset ongoing weakness in the builder channel. In March, we introduced our spring collection, which emphasizes higher end the corrective volatile and large polished floor tile to enhance our mix. We announced price increases on ceramic Dagan cars countertops to offset the higher material and transportation costs. We continue to expand our countertop business with quartz volume growing as we ramp up our new production and introduce higher-value products. The U.S. International Trade Commission recently ruled that imported cars countertops from around the world are harming domestic production and the commission is determining tariffs and quotas to safeguard the industry. In our European ceramic business, we delivered solid sales and margin improvement with investments in sales personnel, showrooms and new collections. In the region, we have greater participation in the commercial channels, which is outperforming the residential markets. The industry has announced limited price increases at this point given the market softness. We have purchased a portion of our natural gas requirements this year, which will reduce the impact of higher energy prices. Our Latin American ceramic businesses have been less impacted by the conflict. We are raising prices in Mexico and Brazil in response to increasing natural gas and transportation costs. In Mexico, our volume improved as we expanded distribution, improved service times and grew sales with large-sized polished porcelain collections. In Brazil, our new product introductions are improving our mix with growth in the higher value porcelain category. U.S. reciprocal tariffs on Brazil were significantly reduced, which will improve our export volumes to the United States. Brazil's economy remains sluggish and the Central Bank is now cutting interest rates to stimulate growth. Our Flooring Rest of the World segment result were driven by productivity, cost improvements and additional days in the period. As the new year began, the European market was showing some improvement after multiple central bank rate cuts and lower inflation. With the war in Iran, consumer confidence declined as fuel and energy costs increased. We are implementing price increases to offset the higher costs impacting our business. In the quarter, our laminate sales benefited from growing retail partnerships and the success of our new collections, which combine elevated style and performance. We updated our LVT designs added offerings at new price points and expanded our retail distribution. Our sheet vinyl sales to the Middle East were disrupted and alternative transport options are improving shipments. Our panels business improved sales and margins with our premium products, and we implemented price increases. We have since announced additional price increases to cover further inflation. Our new MDF recycling plant is expanding production and will further benefit our costs. Our insulation business performed well and improved our cost by reengineering our products. We're growing our installation sales in Germany and Eastern Europe to support the start-up of our manufacturing facility in Poland. Our businesses in Australia and New Zealand improved results with favorable pricing mix and cost. Our new carpet collections, national promotions and increased participation in the new construction channel enhanced our performance. Our Flooring North America segment remained slow during the quarter, given lower remodeling and new construction activity and inventory reductions in the channel. Our results were positively impacted by restructuring, system improvements and additional days in the period, partially offset by lower volume and inflation. Commercial continued to outperform residential and we are improving our position in retail and new construction channels. During the quarter, we announced pricing actions in response to material, energy and transportation increases. Mortgage rates rose almost 0.5 point in March, leading to slower new home sales and declining builder sentiment. While new home sales softened, we have increased our presence in the top national and regional builders. We improved our hard surface mix with our best-in-class laminate hybrid and LVT collections. Our proprietary accessories coordinate with our hard surface offering, increasing complementary sales. Our new corporate introductions are being well received with a focus on our premium polyester and SmartStrand collections. In February, we launched the industry's first carpet collections certified by the Asthma and Allergy Foundation to significantly reduce household allergens using natural probiotics. Our commercial order backlog has seasonally improved with our carpet tile collections outperforming our recently acquired rubber flooring products are being embraced by architecture designers and are creating additional specification opportunities for our other commercial products. And I will now return the call to Jeff.

One month into the second quarter, we continue to adapt our business to changes caused by the Middle East conflict. Thus far, we've announced price increases across much of our portfolio due to inflation, and our order backlog has continued to grow. Across our regions, the commercial channel remains solid, while residential remodeling and new home construction could be impacted by lower consumer confidence. Our high-end collections are performing better in the market and our new products are enhancing our mix. We're maximizing our flexibility to react to changes in our supply chain, operating costs and market demand. Presently, we're containing cost reengineering products and limiting capital expenditures. We'll not see the full impact of our pricing actions and rising costs until the third quarter, the degree to which the Middle East conflict will impact our markets depends on the duration of the disruptions and the inflationary pressure. Given these factors and 1 less shipping day in the second quarter, we expect our adjusted EPS to be between $2.50 and $2.60 excluding restructuring or other onetime charges. We are managing our aspects of the business we can control and responding to market changes as they arise. In the past, Mohawk has adapted the cyclical changes as well as dramatic market disruptions while enhancing our business for the long term. Increased new home construction is necessary to satisfy growing household formations, and we expect deferred remodeling of aging housing stock across our regions will significantly increase flooring demand. As we navigate the current conditions, we're prepared to capitalize on the rebound in our industry that lies ahead. We'll now be glad to take your questions.

[Operator Instructions] Our first question today comes from Trevor Allinson from Wolfe.

Jeff, I appreciate there's a lot of uncertainty in the market right now. At times in the past, you've given a range of outcomes for your business. Can you talk about what that range of outcomes looks like here as we move through '26 and into early next year, what drives the high end versus the low end? And how are you running your business today to account for the uncertainty and prepare for either in the best spectrum?

There's a lot of uncertainty in the marketplace, and we're preparing for multiple options and staying flexible. If we look at the best case as we think forward, the supply to the Middle East could open up in the near-term and could return the supplies to normal over the next 6 months. This would remove the economic uncertainty and would improve the category in the flooring industry in the second half. We would expect the inflationary pressures to remain tough throughout the year. The alternative view is that the disruption in the Middle East stays for a significant period of time. The inflation continues to increase, and it could result in a pullback by both consumers and businesses. In this case, we have alternative plans to adjust our business strategy to manage through at lower rates. Our strategy is to remain flexible and to adapt to the changes that occur. As a reminder, most flooring projects being initiated today are really to meet the changing needs because they've been down since '22 and should limit some of the downside if it gets worse, we expect a significant cover given these 4 years of postponed flooring purchases.

Okay. That was very helpful. And then a second question, perhaps related to those comments last quarter, you talked about expecting both sales and adjusted earnings to be up on a year-over-year basis in 2026. -- just given all the macro uncertainty, should we still think that is a good base case for you guys to be able to grow those sales in adjusted earnings this year?

On February, we had expected the category to improve -- so we're really focused on maximizing the opportunities this year with the war interrupting things, the environment has really changed and we're focused on managing the inflation impact on our margins. At this point as we just went through the potential impacts are really unpredictable and is sorry to tell where it's going to end up. We'll have to see how the conditions evolve.

Our next question comes from John Lovallo from UBS.

The first 1 is, can you provide some additional color on just maybe the magnitude of the price increases across regions and some of the key products? And what type of realization are you expecting given some of the challenges from a volume standpoint in the market?

Well the Middle East conflict has really dramatically increased our material, energy and transportation costs across all the different product categories. We're seeing some differences in each region and product categories given the different dynamics and as you'd expect, Europe is more effective given that the use of the energy from the Middle East. Some of our products are also we deliver are delivered -- so we have to increase the prices to cover the freight cost as well. We've announced increases across the businesses generally in the mid- to high single digits with significant variations by both product and geography. And just to note, the imported products that we and the industry have really long supply chains and the price increases due to that will lag some of the others.

Got it. And then maybe just to push a little bit more on this, if I can. Let's just say that things stay as they are today, do you believe that you have enough pricing in the market to offset -- excuse me, the current level of inflation? Or would additional pricing be needed just to offset what we know today?

Yes, John, thanks. I think if you look at Q1, our price mix and productivity offset the impact of inflation, we expect similar dynamics -- as Jeff outlined, we announced some more price increases in response to the inflation. And we'll really see the full impact of both the inflation and the pricing in the second half and we will adjust as necessary as the environment evolves.

Our next question comes from Susan Maklari from Goldman Sachs.

My first question is around the benefits of the new products. Can you talk about how the momentum you're seeing there is helping you to enhance the mix and incrementally perhaps offset some of that inflationary pressure that you're seeing? And do you also think that you're continuing to gain share with these new products?

In each of the different businesses, the new product introductions, there's a significant portion of them that are higher-value products with more differentiation and command higher prices in the marketplace. With that, each of the different businesses is introducing unique products with different features and benefits. Ceramic is driven a lot by technologies of different sizes as well as different visuals with different decorating technologies to be able to create them. On the other side, we're introducing LVT collections with all the latest technologies and multiple alternatives for PVC in the marketplace with better performance, better scratch resistance and other characteristics. The carpet categories we're introducing premium products in polyester and the anti-allergen carpets, which have never been done, which is a concern by many consumers. And in each of the categories, I could go on with you, there's different products in each 1 to provide reasons for the consumers to trade up and spend more money.

Okay. And then turning to the margins done a lot in terms of cost cutting and you're realizing some nice productivity across the business despite the headwinds. Can you talk about the ability to continue to see further productivity? And then any thoughts on how we should think about second quarter margins across the 3 segments?

Yes, Susan. So I think on the productivity, we generated over $200 million of productivity and restructuring savings last year. This year, we have another $50 million to $60 million of restructuring savings that we should realize. And then in addition to that, over the last few years, we've had additional productivity ranging from $80 million to $100 million -- we'll continue to evaluate different ways to rationalize our cost structure as we go forward and the environment changes. I think you asked about Q2 we're really assuming the present demand trends continue through the second quarter, and there's somewhat of a limited impact from the conflict -- the market volumes have been declining, and we've seen oil and gas prices increase, which will begin to impact our costs in Q2. We do expect price and mix will improve and help address that higher inflation and then back to your original point, productivity and restructuring, we'll continue to lower our costs similar to Q1.

Okay. So is it reasonable to assume that you see a fairly normal seasonal sequential lift in the margins?

Yes. Typically, Q2 is our strongest quarter of the year. So going from Q1 to Q2, that's what you would expect.

Our next question comes from Adam Baumgarten from Vertical Research.

Just a question on input cost headwinds. Can you maybe size as it stands today, what you're thinking about for the back half as you said, you're going to kind of see the peak levels at that time frame?

Yes. I think we're seeing inflation across the different materials and energy and transportation. We're not going to quantify a precise impact given it's changing pretty much daily. And really, as you said, in terms of cadence, the impact will begin in Q2 and ramp up into Q3.

If you look at each of the different product categories, they're all driven by different things. So you have our carpet, LVT and installation that are oil-based and energy intensive. So the materials are being driven by the changes in gas and oil and the materials as well. In the ceramic business, it is really heavily caused by natural gas and transportation costs and the transportation costs are both for raw materials as well as for shipping our products. And the other businesses are wood based, which is laminate, wood and panels, they have significant chemical costs in them to put them all together as well as energy and transportation costs for those. We said before, just to remind you that we're assuming -- I'm assuming the inflation in Europe is higher, and we purchased a portion of the natural gas ahead to limit the volatility -- we do see that U.S. and Mexico have more stable natural gas prices and are less affected by it. And we've announced price increases to cover all this again as we go through it.

Okay. Great. That's helpful. And then just -- I believe you guys and maybe your competitors had some price increases out on certain products earlier in April, and we've been about a month. Just curious how those are going as it advances today.

Yes, that's correct. We've recently announced more price increases of mid- to high single digits. And with this level of inflation, the industry must pass them through.

In the marketplace, I mean all the prices are going up. The market seems to be understanding it, and we think we're going to have to push them through because we need it. And it's possible given what's going on with the energy markets, we could need more.

Our next question comes from Stephen Kim from Evercore.

I think I heard you say in Flooring Rest of World that inputs were a positive, even though I think for the company as a whole, it was a headwind of, I think you said $38 million. So just trying to understand, can you give us some context around that -- and I imagine you're anticipating that will probably flip negative again based on your comments, but could you just provide some context around the inputs in Flooring Rest of World.

Yes, Steve. We did see some positivity in Q1 on a year-over-year basis. And you're right, we're seeing -- given the conflict, we're seeing the natural gas and oil prices go up in Europe. And so we would expect that inflation to begin in Q2 and ramp up in the back half.

Okay. And okay. That's helpful. Secondly, and maybe a little more broadly, I want to touch on the innovation comments that you made. There was a comment in your press release about reengineering products, and I wanted to get some understanding of what that meant like are there certain products that you particularly want to call out? And then maybe at a higher level, we don't -- there's a lot about the wars, the lingering impact of the word that we don't know. But the 1 thing we do know is that it's put a pause on shipments and yet innovation is continuing, I assume, uninterrupted. And so what I'm curious is do you actually have a situation where that delay, this pause, if you will, in actually production and shipping could actually be a positive for you as you continue to work on innovation and R&D. Is this something that could actually lead to a competitive advantage for you as you develop new products such that when the conflict ends when consumer confidence improves, you could actually capitalize on the R&D that was done during, let's say, a more quiet period. Is that a reasonable way of thinking about it? Or is that not?

It's a continuous process. And when you bring new products to market, it depends on which market it takes anywhere from 9 months to 1.5 years to put them into the marketplace and then to mature over time. So it's not an immediate impact to get them pushed through the marketplace as normal is it. So I mean the other part is just the big piece is that the industry and categories started going down in '22. It started with consumers pushing out things, housing sales going down around the world and there's a huge kind of demand and need for people in housing. The housing stock continues to get older and when the more confidence comes back, we're expecting many years of catch-up from what hasn't been spent the last 3 or 4.

And the role of new products in that and particularly, I'm thinking in areas like the hybrid products in North America, for example. I'm curious as to whether or not you think that, let's say, that category will be more -- a little more settled and allow you to scale up production better than if, let's say, the consumer response had occurred last year, for example. Is that a reasonable way of thinking about it?

I don't think there's going to be that much difference relative to the new products because we're going to have -- we have the capacity to support whatever is needed in the marketplace and react to it as we go through. So I think what the bigger impact is helping us increase the margins as the business increases and you get leverage and all the fixed costs over the business as it occurs.

Our next question comes from Rafe Jadrosich from Bank of America.

Just to start, can you give an update on the Russia business, just like how big it is and then how it's been performing.

We don't break it out in that detail, but the Russian business has been performing well. There's been no impacts on the business and how we operate it. We continue to generate cash in the business. The business has slowed down with the general economy over there, and we're adapting to it. We have a leadership position in the category and we're complying with all the regulations.

Okay. That's helpful. And then I think last quarter, you gave a little bit of color like what you're expecting full year for inflation. And obviously, it's like the environment is moving around a lot. Is there any way to sort of quantify the level of inflation in the first half relative to what you're expecting in the second half?

Yes, Rafe, the inflation will really begin to increase in Q2 and ramp up into the second half. Our pricing and other actions are intended to pass through those costs. As Jeff outlined, it really varies by product and region and we will adjust our pricing as the levels of inflation change.

Just asking click another way. Just the first half, do you have an aggregate like what's the inflation, I guess, embedded in the first half?

Yes. I mean we're not going to break it out in that detail, but we do have inflation in the first half of the year, just given the different aspects of our input costs.

Our next question comes from Phil Ng from Jefferies.

I think it's more of a recent practice, but any color on how much you buy ahead in Europe on the gas side of things? And were able to lock in some of that price before the war. And then, Jeff, I think in 2022, some of your competitors in Italy had some issues on the gas side of things in Italy is the big imported LNG. Are any of your competitors having trouble sourcing energy? Are they hedged? I was a little surprised on the comment that pricing in Europe for ceramics was a bit more muted.

Yes, we are -- we did buy gas before it went up. We continue to buy gas in the period, and we continue to make decisions of what to buy on a going-forward basis to reduce the volatility of the European gas prices. We'll have to see what happens in the marketplace with the inventories and the gas prices and the volatility if the gas keeps going up, the industry will have to respond to as we go through. There are other areas around the world like India where they don't have enough natural gas that cut back the industry and the ceramic production, we believe is off almost by 80% because they don't have the gas to do it, that should also create opportunities as we go around.

Okay. That's helpful. On the North American carpet, I believe you and your biggest competitor have a large concentration in share there's a bunch of the smaller guys. Can you give us some perspective, how does the cost curve look for Carp in the U.S. between the 2 of you guys? And does that drop off pretty hard -- and just given where raws are kind of shaping up in the back half, if you don't see much traction, I mean, are Sunday smaller guys like cash flow negative, like operating and loss? And how would you guys kind of stack up in that situation as well?

Yes. Thank you for the question. The market is softer in carpet in general. -- remodeling and new construction sales have slowed, and we've announced the price increases to cover the inflation. We're introducing the new products to also improve our mix and we're taking further actions to cut our costs. And carpet volumes, we expect should improve as the market recovers.

There has been some limited capacity taken out in the industry by other than others. -- and there have been some smaller ones to go out, but not enough to change anything.

Our next question comes from Sam Reid from Wells Fargo.

I just wanted to circle back to the prepared remarks. I heard a comment about your order backlog growing. I'm just curious is that restricted to any particular end markets or categories we just love some additional context there. And then I also heard a comment about some of your channel partners reducing inventories. So perhaps 2 things that might be a little diametrically opposed there, just want to flush those out.

Lance, Well, first, the -- as we came into the new year, the expectations for way in the entire industry was greater than they've turned out with the war. So as we came into the year, there were channels that started lowering some of their inventories as we started into the year. The backlog, as we've gone through what we've said is the trends of our business from March to April haven't changed. The incoming orders are similar to those. The backlog has actually increased in April. And so we don't see any dramatic change in it. Now on the other side, when you have price increases like we're having. There is some pull forward of it, but we don't have enough view into the inventories of our customers to know how much that is.

That's helpful. And maybe switching gears. It's great to hear the commercial end market strength. Maybe just restricting the question to the U.S. In the past, you've called out institutions and hospitality as areas where you've been growing. Just curious what's the latest on commercial end markets and where are the areas where you're seeing the most strength?

Yes. So around the world, we see the commercial channel continuing to outperform residential. And so the segments that are performing better would be the hospitality segment, Education segment and also health care and government are doing well. And so to increase specifications, we are expanding our showrooms, product features and specialized sales forces to go after those segments.

Our next question comes from Collin Verron from Deutsche Bank.

I just wanted to follow up there on the April backlog building. Is that across the portfolio? Or are you seeing pockets of weakness and strength just given what's going on in the Middle East. I thought it sounded like there was probably a little bit of caution so maybe some downside volume trends into April, but it sounds like they're building. I guess just any clarification there would be helpful.

It's generally across all the businesses. The backlogs are generally higher than they were a month or so ago. And again, we're having difficulty separating the ongoing business trends from inventory changes in the customers and we're not going to be able to know that for a while.

Okay. That's helpful. And then just following up on the natural gas, is there any way to help us understand how much of the gas you have already hedged for this year versus how much you would need to buy just a service sort of production levels for the remainder of the year?

It's different by business. It's different by country. In some countries, you can't do it that the country purchase it and the price is the same in other countries we can purchase a head. So it's not as simplistic and answer as you'd like to have.

And our next question comes from Mike Dahl from RBC.

This is Mike, just a follow-up on the near-term demand comments. What are you guys specifically assuming in the 2Q guide in terms of demand trends? It sounds like -- is it more of the same from what you've seen in April? And then on that order backlog comment and the sequential increase, is there any way you could help frame that on a year-over-year basis?

Yes. Thanks, Mike. So again, we're really assuming that the present demand trends continue through the second quarter, and there's a limited impact from the conflict market volumes are declining now for a little while. And so we don't expect any big change in Q2. So at this point, we haven't seen a decrease in the sales and order trends is it. And we're going to have the impact of the increase in prices as we go through starting the second quarter and ramping up in the third quarter. And we just have to see how things evolve. The core question, which we all have to answer is what's going to happen to the consumer confidence and spending patterns given the inflation that's coming through the marketplace and how is the consumer going to react. We're all going to get to find out together.

Right. Fair enough. And I guess just on that, the -- from all the pricing that you've announced, are there regions or products where you can kind of rank order where you think the most pricing power versus the lease or if it's easier, just by segment, when we think about modeling the pricing tailwind?

I'm not sure there's a dramatic difference in any of them. The biggest differences would be the amount of inflation based on how big the cost increases impact each product category. And then it may sound different, the ones with the highest ones may be the easiest because the industry has to force through more is that on the other side, as we said earlier, the imported products with loan backlog was long supply chains, those product categories it's going to take a while before the chemical costs flow through it, but they're going to flow through it.

Our next question comes from Michael Rehaut from JPMorgan.

First question, I just wanted to circle back to the price increases relative to the cost inflation that you expect to see in the back half. Just wanted to be sure of 2 things. First, when you talk about the cost increases, it's the ones that you've already announced in April, mid- to high single digits, if that's really -- at this point, what we're talking about. And second, as you see the cost inflation today is the -- are the price increases sufficient to offset the back half cost inflation.

Yes, Mike, I think, again, our pricing that we've announced, along with other cost actions are intended to offset the higher costs. We have announced mid- to high single digits across most of our categories. And that as inflation is really changing daily and weekly, we will adjust and adapt as we go through the second half of the year, but our intent is to pass them through.

As possible, we'll have to announce additional price increases if the things keep inflating.

Right, right. Okay. And I guess, the second question just on mix. If you're seeing any green shoots of mix, I'm really thinking about North America here, ceramic and North America flooring, how do you characterize the mix trends in residential? Have they improved at all? And could this be any help at all as well in the back half as you combat some other margin pressures.

Let me try to frame it. the consumers today, the higher-end consumer has more money and it's spending more. So that's happening on 1 side. On the other side, the guys in the middle are either postponing or trading down, and there is huge pressure in the builder market to put in low-cost products in order to keep the price of the home. So you have both things going at the same time. I think that the people with money, we'll continue to spend. We talk to some of our retailers, they say, some of them have the traffic slower, but the people coming in are spending more money. So we're going to have to see how the whole thing evolves. A lot of it is really around consumer confidence and how they react to all this stuff. We could show you some help from some positive comments out of our leadership.

Our next question comes from Keith Hughes from Truist.

Last time we saw this kind of inflation a couple of years ago during Covid saw some pretty significant debt on mix. Is there anything that's changed in the industry? Any reason we wouldn't feel at least some of that pressure is a pretty significant price increases you're talking about.

It's possible that we could see some declining mix in the piece, but we're raising all the product categories to cover it, but it's not abnormal that some of the customers trade down as given the -- as I said before, the higher-end customers have money. So it's not going to affect them. So the higher end of the business has been doing better. But it is possible there will be some mix decline as people try to maintain budgets.

Okay. And we talked a lot about price increases and cost increases on this call. is carpet where you're seeing the biggest inflation coming right now just based on the fibers that you use.

No. We see inflation across the board in all the different categories. And we have all the chemical input costs going up with similar levels. And as that filters through, we'll have to take up the prices. And then in Europe, we see higher increases, like we said, the impact of energy in Europe is much more significant. And so in some of our product categories, we see much higher impact than on the flooring side, and we are acting appropriately.

So if I had to pick 1 that was highest. We have in Europe a polyurethane insulation business and the chemical is a large part of it, and there are some shortages in the marketplace -- so I mean we're putting through really significant increases in the category along with the competitors in the marketplace.

Our next question comes from Matthew Bouley from Barclays.

You have Nikki on for Matt today. So first off, we've seen industry peers announce price increases over the past few months. But as they too see some degree of incremental cost inflation, have you seen a continuation in disciplined pricing across the industry? Or is there evidence of share gain coming at the expense of price, either for Mohawk or competitors across LVT, carpet and ceramic.

The increases are flowing through the marketplace. It takes a while to go through. We will not see the full impact of them for another few weeks or even more. So we'll have to see. But so far, we're seeing more discipline than normal given the amount of the increases, everybody needs more to cover the costs.

Okay. That's helpful. And then second, I wanted to talk a little bit more about the setup in Europe. So you mentioned Europe has understandably become -- it's more impacted following the Middle East complex. Any color on the trends you guys are seeing since last quarter, specifically are consumers deferring projects? Or is it more a function of mix down?

The market was showing some improvements in January following the multiple rate cuts that the European Central Bank had executed -- but after the start of the word, consumer confidence declined and so that reduced the discretionary spend in the market. As we discussed, energy prices are higher in Europe, they're causing growth, greater inflation, and we'll have to push up the prices more but consumers have record savings and mortgage rates are much lower in Europe, and that should support growth as the confidence come back.

Our next question comes from Brian Biros from TRG.

I guess how quickly -- can you pass on price in today's market relative to previous price increases? Inflation pressures are well known, but the demand side isn't really there. So curious how those conversations go and kind of just how quickly that can be reflected in today's market once you announce an increase?

The entire world knows this is going on. Our customers know what's going on. Our competitors have the same pressures we do -- so the marketplace understands it has to happen. And in some cases, it may feel a little easier up to this point or not, but we're not through fully implementing it. On the other side, there is a concern that there's more to come at. And so all of those things are affecting the way the industry at.

And then margins expanded in Q1. I think that might be the first time in maybe 5 or 6 quarters here. So it's nice to see some level of expansion even after all the restructuring efforts and that was on lower volumes still -- so it feels like there's still going to be pressures for the rest of the year. But do you guys look at Q1 as some type of indicator of kind of what financials you can put up when things start to turn. I'm kind of putting that in context would be helpful if you're thinking about Mohawk beyond the next few quarters?

Yes. I think Q1, the market conditions were still very pressured. And so we think that looking forward, in the near term, our margin will depend on how the conflict evolves, we'll have the inflation, and we're taking price to mitigate it. As Jeff mentioned, consumer confidence could be lower and could impact volumes, but we're really focused on our productivity and restructuring efforts to lower our costs. And we do believe that over the long term, there is a potential for margins to grow from here.

As we started earlier, we talked about potential good outcomes and bad outcomes either 1 is still possible, and we have to be prepared to adapt to either one, we're hoping for the best.

Our next question comes from David MacGregor from Longbow Research.

I guess I wanted to focus on the commercial business for a moment, and maybe it's a strategic question, Jeff. But just given the relative resilience of the commercial business as well as maybe a different competitive structure and more opportunities for growth in that market segment. Have you considered allocating capital to the expansion of that side of your business and bringing the residential commercial mix more into balance?

The commercial business is much smaller than the residential business. The opportunities are much less. So achieving at the same market share as the commercial business is dramatically smaller than the other. With that, we continue to invest more money in product innovation in the commercial market it's easier to sell and promote features and benefits that are differentiated. So we continue to invest to create differentiated offerings that we can specify in the marketplace -- we're investing in more showrooms. We're investing in our sales organization to create more specifications. So we agree with you that it's a good place to be.

I guess I was sort of asking the question more from an M&A standpoint.

Yes. From M&A, we would consider the right commercial businesses that fit with ours that we think we can add value to and their opportunities should arise over time in both the U.S. markets as well as the world markets.

Got it. Okay. Second question is just the obligatory tariff expense question, I guess, a lot of noise and moving parts on this, but what's your current expectation for 2026 gross tariff expense prior to mitigating actions?

Yes. The tariffs were reduced from a few months ago, but really with the inflation occurring because of the conflict, the net effect is our costs are going to increase and that's why we're taking the pricing adjustments to mitigate the higher costs.

Okay. But you haven't quantified that for -- the Street?

No, I think the tariff environment is changing. And so we'll see how it evolves.

And with that, ladies and gentlemen, we'll be concluding today's question-and-answer session. I'd like to turn the conference call back over to Jeff Lorberbaum for any closing remarks.

We've been -- we've managed global turmoil many times in our history, and it's always followed by an industry recovery, and we expect multiple years of above growth trend when it happens this time. As that occurs in our industry, the pricing and margins increased, our mix improves with people buying higher-value products, and we have significant leverage off of our cost structures and all the actions we've taken over the past few years. We appreciate you taking the time and being with us today. Thank you very much.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.