MasterBrand, Inc. Q3 FY2025 earnings call

• Disciplined execution in challenging demand environment with progress on integration initiatives.
• Net sales declined due to mid- to high single-digit end market contraction, offset by pricing actions and share gains.
• Adjusted EBITDA decreased due to lower volume, fixed cost absorption, and tariffs, but partially offset by continuous improvement, pricing, and Supreme synergies.
• Progress on Supreme integration and planning for American Woodmark merger, with expected $90 million run rate cost synergies by year 3 post-close.
• Las Vegas facility start-up completed, and continuous improvement programs exceeded plan. Tariff mitigation efforts underway for Section 232 lumber tariffs.

In the third quarter, MasterBrand generated net sales of $699 million, a 3% decrease compared to the same period last year. Adjusted EBITDA was $91 million, down from $105 million in the third quarter of the previous year, with an adjusted EBITDA margin of 13%, a 160 basis point decline year-over-year. Demand in retail and dealer channels was soft, particularly in stock cabinetry, while semi-custom offerings performed better. Canada's third quarter performance was down mid-single digits. Net sales contribution: retail/dealer channels soft, semi-custom relatively better; Canada down mid-single digits.

• Full-year 2025 net sales expected to be approximately flat overall, with organic net sales down mid-single digits, partially offset by Supreme's mid-single-digit contribution.
• Updated adjusted EBITDA guidance to $315 million to $335 million, with an adjusted EBITDA margin of 11.5% to 12%.
• Updated full-year adjusted diluted earnings per share guidance to $1.01 to $1.13.

• Tariff implications including Section 232 lumber tariffs and potential future increases, with unmitigated exposure in the fourth quarter.
• Potential demand destruction from pricing actions and impact on housing affordability.
• Regulatory uncertainties related to additional trade measures like countervailing and antidumping duties on plywood.

Q: 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.

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.