MBC earnings call transcript, November 5, 2026

in the quarter, including 356 million dollars of contribution from American Woodmark. Legacy master brand net sales were 681 million dollars, down 2.5 percent year over year against end markets we estimate were down mid to high single digits year over year. Against that backdrop, we can. We continued to see unfavorable mix and trade downs, which we partially offset with share gains and favorable net average selling price due to the flow through of tariff. Adjusted EBITDA for the quarter was 86 million dollars. With an adjusted EBITDA. margin of 8.3 percent, including approximately 11 million dollars of IEPA duty refunds and approximately 9 million dollars of integration synergies. Compared to Legacy Master Brand's prior year results, the quarter reflects lower volume and the related unfavorable. fixed cost leverage, inflation that outpaced our pricing actions, and unfavorable mix, partially offset by the contribution from American Woodmark, the IEPA duty refunds, our continuous improvement efforts, and previously announced cost actions and integration synergies. For the quarter, free cash flow was $61 million compared to $40 million per standalone master brand in the prior year quarter, primarily reflecting disciplined working capital management and contribution from American Woodmark, which more than offset lower net income. Let me now briefly review our end markets. Weak consumer sentiment remains a defining factor in the third quarter, with affordability pressure weighing on both new construction and repressure intensified at the end of the quarter when the Federal Reserve raised rates in September and 30-year fixed rates.

Mortgages moved above 7% for the first time since early 2025. Demand decelerated in September, a shift seen across the home building industry, and that softness continued into the fourth quarter. With rates expected to remain elevated into next year, we expect these headwinds to persist. In single family new construction, the market softened further in the third quarter, down mid to high single digits. Single family starts were down mid single digits year to date through September, and single family permits reached their lowest level since early 2023. New home sales picked by the end of November, and the next week. Up in August, but builders are leaning heavily on incentives to drive those sales, and they're protecting margins by remaining cautious on new starts and completions and working down spec inventory. Industry forecasts now call for single family. to reach their lowest level since 2018. Because cabinets are purchased and installed late in the build, completions are largely what drive our volume. Against that backdrop, our legacy master brand new construction business declined mid-single digits, continuing to outperform the broader market. As we outlined last quarter, we're a far applying the same disciplined approach that has driven legacy master brand's outperformance to the legacy American Woodmark new construction business, and we're seeing early results. The flagship Timberlake Direct brand performed in line with the market this quarter.

Our combined new construction business outperformed the broader market, reflecting strong service levels and continued demand within the stock and value semi-custom range. We still have work to do to stabilize legacy American Woodmark in this market, but we're encouraged by our progress to date. In repair and remodeling, demand from our dealer and retail customers followed a similar pattern to our new construction channels. Low existing home turnover, limited move-related remodeling, and weak consumer sentiment held homeowners back from committing to large discretion. Showroom traffic remains slow for dealers, and in home centers, smaller repair prices held up better than full kitchen and bath remodels. Trade-down behavior and promotional activity across the market continued, contributing to the unfavorable mix we saw in the quarter. Despite these headwinds, our legacy master brand repair and remodel business declined low single digits. Outperforming the broader market. Legacy American Woodmark also outperformed in this market, showing the value of our end-to-end product portfolio and market coverage. In addition to these market dynamics, inflation has remained elevated and accelerated in the final month of the quarter and continued into the fourth. Driven in part by the ongoing conflict in the Middle East and resulting in elevated costs for fuel, freight, and petroleum-linked inputs. These costs have intensified more than we anticipated, consistent with the broader rise in producer prices this year.

Pricing actions take time to reach the market, so in an inflationary environment, our pricing tends to lag. We saw that with rising materials and freight costs continuing in the quarter, and we have mitigation actions underway to close that gap. Looking ahead, the September softness has continued into the fourth quarter, and we now expect our end markets to be down high single digits. for 2026, compared with the mid-single-digit decline we anticipated last quarter. That reflects a high single-digit decline in the fourth quarter, with no improvement in demand assumed through year end. Today, we are introducing an outlook for the fourth quarter, which Mark will walk through. It reflects these demand trends. Particularly in new construction, continued inflation, the impact of lower volume on manufacturing performance, and the actions we're taking to manage through the current market environment. Now, turning to the progress we're making on integration. Our conviction in this combination has only grown. We've brought together two customer-centric platforms with highly complementary strengths, and we're focused on integrating the two businesses and realizing the expected benefits across the new construction and repair and remodel end markets. In new construction, we continue to gain share in our legacy master brand. product lines, and have made progress in steadying the share loss at American Woodmark. By bringing together our commercial teams early in the integration process, we have been able to combine our industry-leading service platform and product offering, allowing us to lean into available opportunities in the market. While there's still work to be done,

we're starting to see the benefits of our combined platform. In repair and remodel, both legacy businesses outperformed the market in a quarter. Our combined portfolio and scale allow us to offer customers broader, shorter lead times and a simpler way for consumers to We're putting those benefits to work, cross-selling premium legacy master brand products to legacy American Woodmark dealers, and moving quickly to make our combined portfolio simpler for customers to navigate, and we're encouraged by the early results. Turning to integration and cost synergies. Five months after close, integration is ahead of schedule. We've completed the majority of our organizational actions and streamlined layers of our leadership structure, begun integrating enterprise systems across the business. Launched cross-selling to dealers, and have footprint actions underway at five plants to remove excess capacity and improve fixed cost absorption. As a result, synergies are coming in faster than planned, led by headcount and overhead reductions and procurement optimization. This quarter, we can... We continue to take action to align capacity with demand across our manufacturing network, including optimization actions at three of our facilities in Mexico. We've continued that work since quarter end, announcing plans to consolidate production at our Kinston facility and to other plants in our network.

And the consolidation of a production line at our gas city facility. These actions are designed to reduce future production down days that weigh on our fixed cost absorption this year. We expect the savings to build into early 2027 as we complete the wind downs. As I mentioned, we realized approximately $9 million. cost synergies in the third quarter, bringing our total to approximately $11 million year to date. As of quarter end, we've initiated or completed actions that we expect to drive more than $50 million of annual run rate cost synergies. Moving year one following close, with the full benefit phasing in over time. We're tracking ahead of the $15 million of realized second half savings we outlined last quarter, and we expect to exit 2026 at an annualized synergy run rate. ahead of our original plan. In total, we remain on track to deliver over $100 million of annual run rate cost synergies by the end of year three post-close, and that target does not include the commercial opportunities like dealer cross-selling that we're starting. The progress we're making on synergies and costs is helping us absorb market pressure. As that progress builds, we believe it gives us more room to manage through a market we expect to remain soft. Turning to capital allocation. Our top priority is the balance sheet. Every level we are pulling from synergy capture and cost actions to disciplined capital spending and working capital management. When we close the merger, we set a target of net leverage below two times by the end of 2028.

That target reflected marking conditions at that time and did not assume the scheduled increase in Section 232 tariffs on kitchen cabinets and vanities to 50 percent. Since then, our integration has progressed ahead of plan and synergies are... are coming in faster than we expected. Over the same period, the external environment has changed. The market has weakened further, and we are now planning for the tariff increase to take effect on January 1, 2027. As a result, we are now targeting net leverage below... two times by the end of 2029. While the timeline has moved, our commitment to the target is not, and we plan to continue to prioritize debt reduction until we get there. We expect our financial flexibility to grow as synergies build and integration progress. Before I turn it over to Mark, I want to touch on the earnings potential of this business. Last quarter, I outlined four levers that give us a path to structurally higher profitability, independent of a market recovery, resetting our product portfolio and supply chain.

legacy American Woodmark users and systems onto common platforms and started moving to one financial calendar and one finance system as we finalize our ERP roadmap. With a larger platform, each dollar we invest in technology goes further. Taken together, we believe these actions are building a stronger, more resilient... One position to perform through the cycle and capture upside when the market recovers. With that, I'll turn it over to Mark for a detailed review of our financial results and outlook.

Thanks, Dave, and good afternoon, everyone. I'll start by reviewing our third quarter results and close with our fourth quarter... First, a brief note on reporting conventions. Our third quarter results include a full quarter of contribution from American Woodmark, and prior year results reflect legacy master brand only. As we've stated previously... Purchase accounting estimates remain preliminary and subject to finalization within the one-year measurement period. Additionally, American Woodmark's results have been conformed to master brand's fiscal calendar and account categorizations. We are increasingly operating as one master brand. As we continue to integrate our operations by right-sizing our manufacturing footprint, coordinating procurement, and streamlining overhead, we believe distinguishing between the legacy businesses becomes increasingly less meaningful. Beginning this quarter, we are presenting results below net sales on a... combined basis, and we will continue to provide American Woodmarks net sales contribution through the anniversary of the close. To help with year-over-year comparisons, we have included unaudited pro-forma combined results for the third quarter of 2025 in the... of today's presentation. Now, turning to our third quarter results. Net sales in the third quarter were $1.04 billion. Legacy MasterBrand net sales were $681.1 million, down 2.8 million.

compared to $698.9 million in the same period last year, reflecting a mid-to-high single-digit market decline, unfavorable mix and trade downs, partially offset by share gains across our end markets, and favorable net average price from tariff pricing. American Woodmark net sales were... $355.7 million, down nearly 9% compared to the prior year period on a pro-forma basis, with weakness concentrated in the new construction business, as Dave outlined previously. Gross profit was... ...compared to $218.2 million in the same period last year, primarily reflecting the contribution from American Woodmark, $10.9 million of IEPA duty refunds, and integration synergies. Gross profit margin was 24.6%, down 660 basis points year-over-year, reflecting lower volume and the related... unfavorable fixed-cost leverage, inflation that outpaced pricing, unfavorable mix and trade-downs, and the inclusion of American Woodmark's lower gross margin. SG&A expenses total $224 million, compared to $167.5 million in the prior year. primarily reflecting the inclusion of American Woodmark and higher freight-out and distribution costs, partially offset by lower merger-related costs, the flow-through of cost actions taken in the first half, integration synergies, and lower volume-related costs. Interest expense was $20. $24.4 million, compared to $18.2 million in the same period last year, reflecting the term loan A used to retire American Woodmark's debt at close. Our effective tax rate in the quarter was 25.8% and 15.3% year-to-date. We continue to expect a full year.

A year effective tax rate of 12 to 15%. Net loss for the quarter was $9.2 million compared to net income of $18.1 million in the same period last year. Net loss margin was negative 0.9% compared to a net income margin of 2.6% in the prior year, reflecting the factors impacting gross profit, higher interest expense, and the inclusion of American Woodmark SG&A, partially offset by lower merger-related costs, the flow-through of cost actions taken in the first half of the year, and integration synergies. Adjusted EBIT up for the quarter was $86 million and adjusted EBIT to market. The margin was 8.3%, compared to $90.6 million and 13%, respectively, in the prior year period. The 470 basis point decline reflects lower volume and the related unfavorable fixed cost leverage. Inflation that outpays prices and unfavorable mix. Partially offset by the contribution from American Woodmark, the IEPA duty refunds, our continuous improvement efforts, previously announced cost actions, and integration synergies. The diluted loss per share with negative 5 cents in the third quarter, based on 203.5 million diluted shares outstanding, reflecting the shares issued at close. This compares to earnings per share of 14 cents in the third quarter of 2025, based on 129.5 million diluted. Diluted shares outstanding. Adjusted diluted earnings per share were 10 cents in the current quarter, compared to 33 cents in the prior year period. Turning to the balance sheet. We ended the quarter with 139.7 million dollars of cash on hand.

And 554.5 million dollars of liquidity available under our revolving credit facility. Net debt at the end of the third quarter was 1.09 billion dollars. The trailing 12 month net leverage ratio, including American Woodmark's full. Trailing 12 month adjusted EBITDA was 4.3 times. We remained in full compliance with all of our financial covenants. We expect leverage to remain elevated through this stage of the integration, including in the fourth quarter, and we are managing it closely with a focus on. Preserving liquidity. We have no near-term debt maturities, which we believe gives us runway as integration benefits bill. Turning to cash flow and capital expenditures. Net cash provided by operating activities with... ...$8.2 million year-to-date, compared to $108.8 million in the prior year period. For the same period, pre-cash flow is $43.6 million, compared to $65 million in the same period last year. Primarily reflecting... Lower earnings and merger-related costs, partially offset by disciplined working capital management. Year-to-date capital expenditures were $36.6 million. We continue to prioritize high-return projects and eliminate... planned spending in overlapping areas of the network, and we have deferred approximately $15 million of planned capital spending. As a result, we now expect second-half capital expenditures of approximately $56 million, compared to $71 million previously disclosed.

On synergies and cost actions, we remain on track for more than $100 million in annual run rate cost synergies by the end of year three post-close, roughly 60% in cost to get sold and 40% in SG&A and indirect. We continue to expect one-time cost. to achieve these synergies of roughly one times the run rate target in cash costs, including approximately $30 million in the second half. Turning to the cost environment. Section 232 tariffs on wood and wood products remain the primary driver. of our tariff exposure. While we continue to expect to offset the combined company's tariff exposure on a dollar-for-dollar run rate basis as we exit the year, the Section 338 tariffs on certain Canadian goods that took effect in August add another layer of cost that we are working to mediate. additional the Section 232 increase on kitchen cabinets and vanities to 50% remains scheduled for January 1, 2027, and we are planning based on the assumption that it takes effect. on a gross basis, the increase would add to our tariff exposure. However, the irrigation actions we already have in place, we expect the net impact to be less significant than the initial 25%. We have additional contingency plans ready, including further sourcing changes and pricing actions, so those actions would take time to flow. through to our results. That said, the increase would affect the industry broadly as cabinet prices rise across the market, which could weigh further on demand in 2027. We collected $10.9 million of IEPA.

duty refunds in the quarter, recorded as a reduction in cost of goods sold. Since the quarter end, we have received an additional $1.3 million, which is included in our fourth quarter outlook. That brings us to $13.4 million year-to-date of the $14.9 million we expect in total, with the remaining $1.5 million expected. We continue to recognize these refunds as they are collected. Tariffs are one part of a broader inflationary environment. Since we put our tariff mitigation actions in place, we have seen additional inflation in fuel, freight, and... Trillium-linked inputs tied to the conflict in the Middle East, along with continued pressure on net average sign price from trade-downs and unfavorable mixed ships. Taken together, our pricing has not yet kept pace with total cost increases. While we have further... ...interactions underway to close that gap, we expect to continue chasing inflation in the near term. Turning to our outlook. For the fourth quarter, we expect net sales of $958 to $988 million and adjusted EBITDA of $38 to $40 million. For an adjusted EBITDA margin of 4.0 to 4.9%. Together with our third quarter results, this implies second half net sales below the range we provided in August with the adjusted EBITDA midpoint at the lower end of our prior. The step down from the third quarter reflects four factors. First, we expect the softer demand we saw late in the third quarter to persist through year end. New construction is weakened further, which we are seeing in builder and distributor orders heading into the quarter, and repair and remodel remains soft. Second, we expect to utilize additional down days in the quarter.

to align production with demand, several of which occur during the holiday season and will weigh on fixed cost absorption and overall plan performance. Third, we expect to receive a lower amount of tariff refunds as compared to the third quarter. Fourth, we expect further inflationary pressures. materials and freight to persist in the near term, with pricing actions underway but lagging the pace of input increases. In response, we are reducing shifts at certain plants, have implemented further fuel surcharges, and have taken additional organizational cost actions that we expect to deliver approximately $10 million of annual savings, most of which are expected to benefit 2027. Our outlook includes continued synergy capture, keeping us ahead of the approximately $15 million of second-half savings we outlined last quarter, and the approximately $1.3 million. of IEPA duty refunds we have already received in the fourth quarter. We expect fourth-quarter interest expense of approximately $24 million and adjusted diluted loss per share of negative 12 cents, negative 8 cents, with 203.6 million diluted shares outstanding at year end. Finally, we expect free cash flow for 2026 to be approximately breakeven. Stepping back, our focus for the remainder of the year is disciplined execution on costs and synergies, maintaining liquidity, and managing our balance sheet. As we look to 2027, several building blocks are already in motion. The annualized benefit of the synergies and footprint actions executed this year, the full-year benefit of the cost actions we took in 2026, including organizational, labor, and shift.

Reductions we are taking in the fourth quarter and continued tariff mitigation. We expect the market to remain soft, and the scheduled Section 232 increase would be a headwind to cost, particularly in the first part of the year as pricing flows through, which could further suppress demand. Against that backdrop, we are entering the year with a clear focus on the levers that we believe are within our own control. Now, I would like to turn the call back to Dave.

I'll close where I started. In the first full quarter as a combined company, we... delivered on our expectations, realized synergies ahead of schedule, took steps to make our manufacturing footprint leaner, and continued to outperform the market. The market remains challenging, and due to the impact of additional tariffs, a recovery may be pushed out further. But we're focused on what we believe we can control. We expect the actions we took this quarter will build through 2027 as synergies ramp, we complete our plant consolidations, and we bring the rest of both companies to more customers. That gives us confidence in our path to structurally higher profitability, independent of a market recovery, and the earnings power of this business when the market does recover. Now with that, I'll open up the call to Q&A. Thank you. If you would like to register a question, please press star one. If you're using a speakerphone, please leave your hands up.

Thank you. And your first question comes in the line of McLaren Hayes from Zellman & Associates. Please go ahead.