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” Loop Capital Markets LLC, Research Division

Good afternoon, and welcome to MasterBrand's Third Quarter 2025 Earnings Conference Call. Please note that this conference call is being recorded. I would now like to turn the call over to Henry Harrison, Senior Director of Corporate Financial Planning and Analysis. Please go ahead.

Thank you, and good afternoon. We appreciate you joining us for today's call. With me on the call today are Dave Banyard, President and Chief Executive Officer of MasterBrand; and Andrea Simon, Executive Vice President and Chief Financial Officer. We issued a press release earlier this afternoon disclosing our third quarter 2025 financial results. This document is available on the Investors section of our website at masterbrand.com. I would like to remind you that this call will include forward-looking statements in either our prepared remarks or the associated question-and-answer session. These forward-looking statements are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. Additional information regarding these factors appears in the section entitled Forward-Looking Statements in the press release we issued today. More information about risks can be found in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our full-year 2024 Form 10-K and our subsequent 2025 Form 10-Qs, which will be available once filed at sec.gov and at masterbrand.com. The forward-looking statements in this call speak only as of today, and the company does not undertake any obligation to update or revise any of these statements, except as required by law. Today's discussion includes certain non-GAAP financial measures. Please refer to the reconciliation tables, which are in the press release issued earlier this afternoon and are also available at sec.gov and at masterbrand.com. Our prepared remarks today will include a business update from Dave followed by a discussion of our third quarter 2025 financial results from Andy, along with our 2025 financial outlook. Finally, Dave will make some closing remarks before we host a question-and-answer session. With that, let me turn the call over to Dave.

Thank you, and good afternoon, everyone. We appreciate you joining us for today's call. Our third quarter results reflect disciplined execution in a persistently challenging demand environment and proactive management of evolving trade dynamics. Amid these conditions, our team made significant progress on our integration initiatives and has continued to deliver for our customers while strengthening MasterBrand's foundation for both near-term stability and long-term growth. In the third quarter, we generated net sales of $699 million, a 3% decrease compared to the same period last year, consistent with our expectations. The decline reflected mid- to high single-digit end market contraction, partially offset by the continued flow-through of previously implemented pricing actions and share gains in our distributor and builder channels. Demand across our retail and dealer channels remained soft, particularly in stock cabinetry, while semi-custom offerings performed relatively better as consumers with discretionary income continue to seek value within the midrange of the portfolio. We delivered adjusted EBITDA of $91 million compared to $105 million in the third quarter of last year, representing an adjusted EBITDA margin of 13%, a 160 basis point decline year-over-year due to lower volume and related fixed cost absorption as well as tariffs, partially offset by continuous improvement efforts net of inflation, continued net average selling price improvements and Supreme synergies. While margin was slightly below expectations, we view this as a solid performance in a difficult operating environment. Free cash flow for the quarter was $40 million compared to $65 million in the same period last year, driven by lower net cash provided by operating activities and higher capital expenditures related to the integration of Supreme. We continue to expect free cash flow for the full-year to exceed net income, consistent with our long-term objectives of balancing investment in growth with strong cash conversion.…

Thanks, Dave, and good afternoon, everyone. I'll begin with a review of our third quarter financial results, and then I'll provide more detail on our updated full-year 2025 outlook. Notably, this quarter marked the anniversary of our Supreme acquisition, which closed on July 10, 2024. Because the transaction occurred at the beginning of the quarter, Supreme's results did not materially impact our year-over-year comparisons. However, integration synergies continue to support our overall performance. As Dave noted, with the Supreme integration progressing as expected, our integration team is focused squarely on applying the same proven framework to American Woodmark integration planning, where we continue to expect approximately $90 million in run rate cost synergies by the end of year 3 post close. Now on to our third quarter results. Net sales were $698.9 million, a 2.7% decrease compared to $718.1 million in the same period last year. The continued softness across end markets, which was down mid- to high single digits was partially offset by the anticipated flow-through of prior pricing actions and continued share gains, particularly in the new construction market. Notably, approximately 40% of the volume decline was mitigated by price and another 20% was offset by share gains. Gross profit was $218.2 million, down 8.3% from $238 million in the same period last year, and gross profit margin was 31.2%, down 190 basis points year-over-year, primarily reflecting lower volumes, related unfavorable fixed cost leverage and tariffs. These headwinds were partially offset by higher net average selling price improvement from prior pricing actions, our continuous improvement efforts net of inflation and Supreme integration synergies. Tariffs had a negative impact of nearly 100 basis points to our gross margin in the quarter, though we were able to offset approximately 90% of this impact through mitigation actions. I'll provide an update…

Thanks, Andy. As we close out the third quarter, it's clear that we continue to operate in a challenging environment. While demand remains uneven and new tariffs are adding near-term pressure, our operating discipline, strong customer partnerships and proven execution give us the ability to manage through volatility while continuing to strengthen our business for the future. Optimization and integration planning for our proposed merger with American Woodmark are well underway. We continue to expect the proposed transaction to close in early 2026, and we remain confident in our ability to unlock and deliver meaningful value with speed, agility and diligence through our combined strengths and resources. Looking ahead, the MasterBrand Wave continues to guide how we operate, keeping us focused, accountable and ready to adapt. We have a talented team, a resilient model and a long-term strategy built to deliver value as the market stabilizes and growth returns. Thank you to our associates for their continued commitment and to our customers, partners and shareholders for their ongoing support. Now with that, I'll open up the call to Q&A.

[Operator Instructions] Our first question comes from Garik Shmois with Loop Capital Markets.

Just first on the sales guidance for the full-year, the revision, you're at flat now versus down low single digits previously. Just curious if you can go into the reason for the revision on the sales side.

Yes. I think, Garik, the main revision is I think that the pace that we're seeing is we kind of -- as we were evaluating the rest of the year a couple of months ago, we were kind of keeping our eye on what happened last year. I think that as we've come into the fourth quarter here, we don't see that same dynamic. I think it will be still a slightly down quarter, but I think we've performed coming through Q3 and into Q4 from a revenue standpoint a little better. Plus, we do have the pricing actions that we've been taking over the past year to deal with the first round of tariffs are starting to really come through, and so that kind of bolsters us a bit there. Probably, the only question we have in terms of the fourth quarter is the impact of any additional pricing that we're working on for this latest round of tariffs, and what impact that would have on demand. It's too soon in the market to see that. Otherwise, I think in the middle point, I think we're comfortable that flat is the outcome that we're going to have for the year.

Speaking on pricing, as you've been pushing pricing to offset initial tariffs and you need to push additional pricing to offset current tariffs and future inflation. I was wondering if you can just speak to any unforeseen challenges in your ability to realize pricing and if you've seen any demand destruction as a result of price increases up until this point?

Yes. I think the -- that's a fair question. I think the odd part about this round of tariffs is it's not even neither was the last for the most part. We do a lot of sourcing domestically, and we do a lot of manufacturing domestically. But these rounds of tariffs, particularly Mexico and Canada, have an outsized effect on those product categories. Those are the ones that, a, have the biggest impact on the total bill that we're faced with from a tariff perspective, but it also is the one that's the biggest challenge, I think, from a pricing standpoint. On the flip side, I think that's where we're focusing a lot of our energy on mitigation outside of price, and so remember, our mitigation efforts here are not just price. There are a wide range of things that we're working on doing, some of which are going to take some time, but the idea is to try to mitigate as much as we can operationally and then the remainder is what we put out in price. I'll give you a specific example. We import almost all of our bathroom vanities from Mexico as a finished good. That product category is really not viable at a 50% price increase. We're working on mitigating that, but if we can't get some of the price that we need because we can't mitigate all of it, we're going to have to evaluate whether that product is viable. That's not factored into our guidance. We'll talk more to that when we come with 2026 guidance. We should have better clarity at that point. The rest of it is, though, that there's a lot of other -- this is going to impact the whole market. We have to see, and that's not apparent yet what that's going to do, so we have to see how the overall market responds to all this. I think just for your planning and thinking, it's just remember, it's just a lag effect for us, and that's the hardest part of this tariff regime as it comes in fairly quickly, and it takes us time to mitigate it. We're going to have that dynamic for a couple of quarters as we work through this.

Just lastly, just to follow-up on that last point. You mentioned, the net unmitigated exposure, I believe, is $20 million to $25 million in the fourth quarter. It's certainly difficult to predict how all this is going to play out in '26 and not to ask you for kind of a guidance for next year, but how should we think about maybe the phasing of your unmitigated exposure as you move into next year beyond the fourth quarter?

Well, I mean, the easy part is the bill started coming due on October 14 and then the next round starts on January 1. That's when the cost starts coming in. I think I would -- if I were you I'd go back and look at our performance through the highly inflationary years of COVID, different in that it wasn't announced inflation. It just started happening to everyone in the industry, but the dynamic and the timing will be similar. Andy highlighted in her remarks, some mitigation takes a month, some takes 12 months, so it's going to spread out through the year. We'll go as fast as we can, but ultimately, we want to make sure we're not disrupting the customer and doing it in a controlled way, and that's going to take some time.

We have reached the end of our question-and-answer session, which concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.