MasterBrand Aktie

Good afternoon, and welcome to the MasterBrand's First Quarter 2026 Earnings Conference Call.

[Operator Instructions]

Please note that this conference call is being recorded.

I would like to now turn the call over to Henry Harrison, Senior Director of Corporate Financial Planning and Analysis.

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 Andi Simon, Executive Vice President and Chief Financial Officer.

We issued a press release earlier this afternoon disclosing our first quarter 2026 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 2025 Form 10-K and updated as necessary in our subsequent 2026 Form 10-Q, which are available 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 masterbrand.com. Our prepared remarks today will include a business update from Dave, followed by a discussion of our first quarter 2026 financial results from Andi, along with our second quarter 2026 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 first quarter results reflect the disciplined execution of our near-term priorities against a challenging backdrop. Despite persistent demand softness and ongoing macroeconomic uncertainty, we delivered net sales and adjusted EBITDA in line with our expectations. We continue to advance our tariff mitigation efforts, fully executed our previously announced $30 million cost actions and remain focused on the actions within our control as we navigate near-term headwinds and position MasterBrand to emerge stronger when the market recovers.

In the first quarter, we generated net sales of $618 million, a 6.4% decrease compared to the same period last year. Our performance reflected a mid-single-digit year-over-year market decline and a slower pace of housing completions, partially offset by the continued flow-through of previously implemented pricing actions. Adjusted EBITDA for the quarter was $28 million compared to $67 million in the prior year period, and adjusted EBITDA margin was 4.5%. The lower margin was primarily driven by lower volume and the related unfavorable fixed cost leverage as well as unfavorable product mix across channels as consumers continue to shift towards value products and forgo features in made-to-order categories.

At current volume levels, these mix dynamics carry an outsized impact on margins as reduced fixed cost absorption amplifies the effect of even modest product mix shifts. Compounding these pressures, weather-related disruptions during the quarter resulted in more down days than typical across certain facilities, driving unplanned production downtime that created additional drag on our fixed cost absorption. These headwinds were partially offset by previously announced pricing actions, operational tariff mitigation efforts that progressed ahead of schedule and savings from our ongoing cost reduction initiatives.

As is typical for our first quarter, free cash flow reflected seasonal working capital outflows. This, in combination with our net loss position, resulted in free cash outflow of $146 million compared to a $41 million outflow in the same period last year. Looking ahead, we expect these dynamics to normalize as we move through the year, and we continue to expect free cash flow for the full year to exceed net income.

Turning to our end markets. Demand remained pressured through the first quarter as affordability concerns, elevated interest rates and cautious consumer sentiment continue to constrain activity across both new construction and repair and remodel markets. The ongoing conflict in the Middle East introduced an additional headwind to consumer confidence late in the quarter and further contributed to broader market volatility. In new construction, U.S. single-family new construction was down mid- to high single digits in the quarter as weak consumer sentiment and elevated mortgage rates continue to weigh on buyer activity.

To stimulate sales, builders sustained elevated incentive and rate buydown programs. The market also continued to work through a reset in the spec and quick move-in inventory cycle with completed spec inventory down meaningfully year-over-year. Adding to these headwinds, housing starts outpaced completions on a seasonally adjusted basis for the first time since the fourth quarter of 2024. This dynamic creates an outsized near-term impact on our business as cabinets are typically purchased later in the construction cycle closer to completion. Against this backdrop, MasterBrand results largely tracked broader market trends, while outperforming on a completions basis. Looking ahead, we expect new construction demand to remain under pressure as mortgage rates stay elevated and affordability challenges persist.

In repair and remodel, demand remained soft through the first quarter as low existing home turnover and weak consumer confidence continue to suppress larger discretionary remodel activity. Consumer sentiment towards large household purchases fell to 40-year lows during the quarter. And while rising home prices have supported homeowner equity, this has not yet translated into meaningful remodel spending. Housing turnover remains structurally constrained as well, driven in part by the significant share of homeowners locked into sub-4% mortgages, limiting the remodel activity that typically accompanies a home sale. Where there is remodel activity, we continue to observe trade-down behavior across our portfolio with consumers gravitating towards lower-priced options.

Reflecting this environment, our R&R business declined mid-single digits, consistent with the broader market. Looking ahead, we expect consumer sentiment to remain the primary driver of R&R demand and affordability constraints and low housing turnover to remain the primary headwinds.

In Canada, first quarter conditions remain challenging, mirroring the trends in the U.S. Our Canadian business declined low single digits, consistent with the broader market. With the Bank of Canada holding rates steady, we expect these dynamics to continue weighing on the market through 2026.

Stepping back, we continue to view 2026 as a transitional year with end market demand softness persisting across both new construction and repair and remodel. Affordability pressures, low consumer confidence and the complex and evolving trade environment remain primary headwinds. Federal Reserve is expected to hold rates steady through 2026 amid persistent inflation concerns, limiting the rate relief that would foster a meaningful improvement in housing activity. Additionally, the ongoing conflict in the Middle East introduces further layers of consumer uncertainty and outlook volatility that are difficult to size at this stage. While the near-term outlook remains challenging, we remain confident in the underlying long-term fundamentals that we believe will ultimately drive a recovery across our end markets.

The approximately 3 million homes underbuilt, the millennial generation entering prime home buying years, and aging housing stock prime for remodel activity and rising home equity levels all support our expectation that pent-up demand remains intact. We continue to manage the business responsibly through this period. And while we do not expect the market to begin to recover until 2027, we are focused on ensuring MasterBrand is well positioned to capitalize when conditions do improve.

Turning to the trade environment. Since our last call, the trade landscape has continued to evolve. Following the Supreme Court's ruling that invalidated tariffs imposed under the International Emergency Economic Powers Act, a 10% global tariff was implemented, which effectively returns us to a similar tariff environment as under the reciprocal tariff regime. This tariff is time limited and is set to expire in late July, at which point we anticipate further changes to the tariff landscape. While wood and wood product tariffs remain the primary driver of our overall tariff exposure, tariffs continue to stack across categories and the broader environment remains highly volatile and fluid. We are actively monitoring further developments and remain prepared to adjust our mitigation strategy as the landscape continues to evolve.

In the first quarter, gross tariff costs were approximately $25 million, and I'm pleased to share that our teams executed exceptionally well against these headwinds, delivering mitigation efforts that exceeded our expectations for the quarter. This outperformance was driven primarily by the speed and effectiveness of our supply chain actions, including sourcing flexibility initiatives and supplier engagement efforts that progressed ahead of schedule. While supply chain actions were the primary driver of our first quarter mitigation performance, pricing remains an important and necessary component of our overall mitigation strategy, and we will continue to lean on both levers as we move through the year. We continue to monitor the potential indirect impact of tariffs on consumer demand and housing affordability, which remain inherently difficult to size.

Operationally, our teams navigated a challenging first quarter, managing through demand volatility while working to maintain service levels across our network. We took further actions to align our cost structure with current demand conditions, including targeted line and shift adjustments and workforce actions across our manufacturing network as well as facility closure consistent with our ongoing Supreme integration efforts. On the Supreme integration, we remain on track to achieve our target of $28 million in annual run rate cost synergies by year 3 post-close. We continue to identify additional opportunities to expand the benefits of the merger over time as end markets recover.

During the first quarter, we also fully executed our broader $30 million cost savings initiative with benefits expected to phase in over the remainder of the year. Our continuous improvement efforts delivered strong results in the quarter with notable contributions across our manufacturing network and standout performance from several of our key facilities. Our teams continue to make progress on core efficiency gains using daily management practices, standard work processes and operating discipline. These efforts contributed meaningfully to our financial performance in the quarter, offsetting material, personnel and utility inflation. We're encouraged by the impact of our continuous improvement system, and we remain confident in its ability to drive further gains throughout the year.

Turning to our pending merger with American Woodmark. Our teams continue to make meaningful progress on integration planning and readiness, ensuring we are well positioned to move quickly and capture value following close while maintaining the customer service levels and operational continuity our customers expect. We continue to expect approximately $90 million in annual run rate cost synergies by the end of year 3 post-close based on the assumptions underlying our analysis at the time of announcement. Following close, we plan to assess these estimates in the context of the current operating environment and provide updated guidance as appropriate. We remain confident in the strategic and financial merits of the merger and are progressing through the regulatory review process. As disclosed in our 8-K filed on April 22, we now expect the transaction to close in the second calendar quarter of 2026.

Finally, turning to capital allocation. We remain disciplined in our approach to capital deployment, prioritizing investments that support our operational execution, integration activities and long-term value creation. Capital expenditures in the quarter were in line with our expectations, and our balance sheet and liquidity position remained healthy. We expect our leverage ratio to remain elevated in the near term, primarily reflecting lower trailing 12-month adjusted EBITDA in the current demand environment. Andi will provide additional details in her remarks.

In closing, the first quarter unfolded largely as we expected, a challenging environment defined by persistent demand softness, a complex trade landscape and cautious consumer sentiment. While these conditions are not without difficulty, I'm proud of the way our teams have responded, executing our mitigation strategy ahead of schedule, advancing our cost savings initiatives and maintaining focus on the operational and strategic priorities that will position MasterBrand for the recovery ahead. We have a clear line of sight to the long-term drivers of demand across our end markets, and we remain confident that the actions we're taking today are building a stronger, more resilient MasterBrand.

With that, I'll turn it over to Andi for a detailed review of our financial results and outlook.

Thanks, Dave, and good afternoon, everyone. I'll start with a review of our first quarter financial results, then I'll share more details on our guidance for the second quarter of 2026 and provide some thoughts on the full year. As a reminder, we provide formal guidance on a quarterly basis. Any commentary we make about the full year reflects our current expectations and assumptions and is directional in nature rather than formal guidance.

Now turning to our first quarter results. Net sales were $618 million, a 6.4% decrease compared to $660.3 million in the same period last year, reflecting continued softness across our addressable market and a slower pace of housing completions. Anticipated flow-through of prior pricing actions was outweighed by unfavorable channel and product mix. Gross profit was $156.6 million compared to $202.2 million in the same period last year. Gross profit margin was 25.3%, down 530 basis points year-over-year, primarily reflecting lower volume and the related unfavorable fixed cost leverage and unfavorable product mix.

Material, personnel, fuel and utility inflation, combined with the impact of tariffs, contributed to overall margin pressure. These headwinds were partially offset by continuous improvement initiatives and targeted tariff mitigation actions. As Dave mentioned, gross tariff exposure in the quarter was approximately $25 million. Our mitigation efforts performed better than we initially anticipated, driven by the timing and effectiveness of operational actions taken across the business, a reflection of the strong execution from our teams.

While we are pleased with this progress, tariff costs continue to flow through the business, and we have more work to do, particularly as pricing actions remain a necessary and important component of our go-forward mitigation strategy. The more pronounced headwinds in the quarter came from product mix and continued trade-down activity across certain categories versus historical norms, which reflect broader market conditions. Taken together, these factors have created a challenging operating environment, but we believe we are managing through it thoughtfully.

SG&A expenses totaled $155.9 million in the first quarter compared to $154 million in the same period last year, with the year-over-year increase primarily driven by acquisition-related costs associated with our pending merger with American Woodmark and higher outbound freight expenses reflecting rising fuel costs. Importantly, excluding acquisition-related costs, SG&A decreased year-over-year. As Dave mentioned, we took a number of structural SG&A cost reduction actions during the quarter. While it takes time for the impact of these measures to fully flow through our financial results, we expect our SG&A to net sales ratio, excluding deal and restructuring costs to improve in the second half of 2026 as these benefits phase in.

Interest expense declined to $18.4 million from $19.4 million in the same period last year as we continued to pay down our debt over the last 12 months. Net loss was $15.4 million in the first quarter compared to net income of $13.3 million in the same period last year. Net income margin was negative 2.5% compared to positive 2% in the prior year, reflecting lower gross profit and higher deal-related SG&A expenses, partially offset by the initial benefits of cost actions taken in the quarter. Adjusted EBITDA was $28 million compared to $67.1 million in the prior year period. Adjusted EBITDA margin was 4.5%, a decline of 570 basis points year-over-year, primarily due to lower gross margins, partially offset by reduced SG&A expenses, excluding deal-related costs, reflecting the cost actions implemented during the quarter.

Diluted loss per share was $0.12 in the first quarter based on 127.5 million diluted shares outstanding. This compares to earnings per share of $0.10 in the first quarter of 2025, which was based on 130.7 million diluted shares outstanding. Adjusted diluted earnings per share were $0.06 in the current quarter compared to adjusted earnings per share of $0.18 in the prior year period.

Turning to the balance sheet. We ended the quarter with $138.4 million of cash on hand and $332.3 million of liquidity available under our revolving credit facility. Net debt at the end of the first quarter was $946.5 million, resulting in a net debt to adjusted EBITDA leverage ratio of 3.7x. While net debt remained approximately flat year-over-year, our leverage ratio reflects the impact of lower trailing 12-month adjusted EBITDA in this challenging demand environment.

During the quarter, we proactively amended our existing credit agreement to provide additional flexibility related to our leverage and interest coverage covenants as we navigate the current environment and work towards the planned closing of the American Woodmark transaction. We continue to prioritize debt reduction with available cash, consistent with our track record. Net cash used in operating activities was $133 million for the first quarter of 2026 compared to $31.4 million in the first quarter of 2025, driven by lower net income, less favorable movements in working capital and an increase in our income tax receivable.

Capital expenditures for the first quarter were $13.2 million compared to $9.8 million in the first quarter of 2025, in line with our expectations. As is typical for our first quarter, free cash flow reflected seasonal working capital outflows of $146.2 million compared to outflows of $41.2 million in the same period last year. The year-over-year variance was primarily driven by lower net income, less favorable working capital movements due to timing and an increase in our income tax receivable. We did not repurchase any shares during the quarter. Our merger agreement with American Woodmark restricts share repurchase activity until the transaction closes.

Turning to our outlook. Our second quarter outlook reflects the current uncertainty of the demand environment, driven by ongoing affordability concerns, recent geopolitical tensions and the uncertain trade environment. The outlook incorporates tariffs currently in effect but does not reflect potential implications from other proposed or future trade policy changes. Further, our outlook does not reflect any anticipated financial benefits from the pending merger with American Woodmark nor does it include expected transaction or integration-related costs.

For the second quarter, our end markets are expected to be down mid- to high single digits year-over-year. Despite the market backdrop, we expect a meaningful sequential performance improvement in net sales versus the first quarter, driven by several factors that give us confidence in the outlook.

Net sales are expected to benefit from normal seasonal volume uplift, coupled with an anticipated modest improvement in product mix in addition to the further flow-through from previously implemented pricing actions, including tariff-related pricing. Taken together, these dynamics are expected to position us broadly in line with our end markets on a year-over-year basis in the second quarter. Against that backdrop, we expect second quarter 2026 net sales to be down mid- to high single digits versus the prior year. As I mentioned, to help manage near-term pressure on profitability, we took decisive action on our $30 million cost reduction initiative to align our cost structure with current demand levels.

We completed key implementation steps in the first quarter and expect the full benefit will phase in over the course of 2026. We believe these steps, in combination with our tariff mitigation strategy will help offset margin pressures, preserve liquidity and position MasterBrand to remain resilient through this period of elevated uncertainty. Given these considerations, we expect second quarter adjusted EBITDA to be in the range of $51 million to $61 million, representing an adjusted EBITDA margin of 7.8% to 8.8%. We expect second quarter adjusted diluted earnings per share of $0.03 to $0.13. The wider adjusted diluted earnings per share guidance range for the second quarter reflects a higher-than-normal degree of uncertainty due to potential variability in the effective tax rate. Against low pretax income, the impact of nondeductible deal-related expenses relating to the pending merger with American Woodmark as well as other potential discrete tax items is amplified. As a result, the actual effective tax rate and the adjusted diluted earnings per share may differ materially from the guidance provided.

Looking at the full year, we continue to expect our addressable market in 2026 to be down mid-single digits year-over-year with continued variability across end markets. We continue to expect decremental margins to remain elevated through the first half of 2026, driven by year-over-year volume declines, mix and the timing of tariff mitigation. We anticipate that our decrementals will improve in the second half of the year as our tariff mitigation and cost rationalization actions phase in further. For the full year, we also continue to expect interest expense to be flat to down as we continue to pay down our outstanding debt. Our effective tax rate is expected to be elevated and variable relative to the prior year, primarily reflecting the previously mentioned impact of nondeductible deal-related expenses relating to the pending merger with American Woodmark. Additionally, we continue to expect free cash flow for 2026 to be in excess of net income for the year.

Finally, despite recent changes and based on the trade policies currently in effect, we continue to estimate our unmitigated gross tariff exposure for the full year at approximately 5% to 6% of 2026 net sales. Additionally, we continue to expect to offset 100% of tariff dollar costs on a run rate basis exiting 2026 through our mitigation efforts, which will take time to fully materialize. We will continue to monitor the evolving trade environment while executing our comprehensive mitigation strategy and providing quarterly updates as conditions evolve.

In closing, while near-term conditions remain challenging and the industry continues to navigate an extended period of softer demand and a complicated tariff environment, we are managing the business with discipline and purpose. We are executing against our cost reduction and mitigation initiatives, maintaining financial flexibility and making meaningful progress on the integration planning work that is designed to allow us to move quickly following the close of the pending American Woodmark transaction. These are the right priorities for this moment, and we believe the actions we are taking today are building a more resilient and capable MasterBrand.

Now I'd like to turn the call back to Dave.

Thanks, Andi. While the first quarter brought its share of challenges, our confidence in the long-term outlook for our business remains unchanged. Affordability pressures, cautious consumer sentiment and volatility in the trade environment are shaping near-term outcomes, but they do not change the underlying demand drivers that we believe will fuel a meaningful recovery. Over time, we expect macroeconomic and trade conditions to normalize and demand to recover with the broader market beginning to improve in 2027.

What we are navigating today is a direct reflection of the current market environment, not of our operating model or the underlying strength of the business. Our priorities are clear and our strategy is built for exactly these kinds of cycles, designed to carry us through periods of uncertainty and position us to win when conditions improve. We are executing our mitigation strategies, progressing toward the close of our pending merger with American Woodmark and managing the business with the discipline and accountability that defines the MasterBrand way. With our strong portfolio, resilient operating model and a team that has demonstrated its ability to execute through adversity, we believe we are well positioned to capitalize on the eventual market recovery and deliver long-term value for our shareholders.

Now with that, I'll open the call up to Q&A.

[Operator Instructions]

Our first question is from McClaran Hayes from Zelman & Associates.

So it looks like your outlook for the market in the second quarter is similar to the environment you guys had in the first quarter at down mid- to high single digits. But rates are a bit higher, and it seems like there's more uncertainty now than there was a few months ago. So I guess, does that kind of market outlook tell us that at this point, you haven't necessarily seen any impacts to your consumer, whether that's in order trends or foot traffic patterns?

Yes. I think our outlook is a little bit tilted down. We were saying kind of mid- to high single digits down. I think it's more of a bit of a weight on new construction than R&R. R&R is down. So it's kind of hard to tell over a long period of time how far down is down, but it feels sort of steady, if you will, in this current mode. But I think new construction has been very choppy. The March starts number was a little higher than we expected, which is good. But it's still that market with the reset that they're doing of eliminating spec homes makes our business a bit more choppy. So I think we're going into it with that in mind.

And I think the spring selling season has generally shaped up how we thought it would sort of reflected in our Q1. But I think it's -- in terms of a material difference in behavior over the last, say, month or 2, we haven't necessarily seen that. It's just -- it's not getting better. It's just kind of moving the way it was prior to that.

Okay. Got it. That makes sense. And then on pricing, can you help give us more detail on how pricing trended in the first quarter relative to the fourth quarter? Did it accelerate or stay in a similar range? And also, do you anticipate needing additional pricing given some of the cost inflation that we've seen over the past few months that I imagine might be impacting paints and stains at the minimum in your business?

Yes. I think probably the bigger impact is directly on fuel and logistics, but there's pressure in a number of different spots. So I think the plan is -- we've been executing on our plan for pricing throughout the year. As we've highlighted plenty of times in the past, it does take time for that price to get into the market. So we're continuing to execute on that. We're looking at other options regarding fuel. I mean, obviously, that's the one that everybody sees every day, and that's come up significantly over the past month. And so we're continuing to look at that and using the mechanisms that we have. We have a typical mechanism that you would have for something like that, that's, I'd say, near-term volatile, and we'll have to monitor how that plays out over the coming months with the situation in the Middle East.

Our next question is from Garik Shmois with Loop Capital Markets.

Wondering if you could speak to your view on product mix improving here as you go into the second quarter. I'd love to get a little bit more color on that.

Yes. I think we're continuing to see the general trade down behavior. So I think that there's just a relative -- when you go into the spring selling season with more volume, you tend to see a slightly better mix in all channels. And so that's what's driving that. I think generally speaking, though, the overall market still on a year-over-year basis, will continue to be in a trade down mode, which, again, offsets any benefit that we're getting from price to some extent.

So the price mix, we've seen that, that's a challenge for us. And so we're working on how do we upsell more. Some of those efforts we are going to see here in the second quarter. But I think just in general, the consumer is under pressure. And so you've got to meet them where they are. But generally speaking, with higher volume, we tend to see a slightly better mix. And so that's what we're anticipating here.

Okay. And then just my follow-up question is on incremental margins. You mentioned they're expected to improve in the second half of the year. Should we think about incrementals improving? Is that related to a sequential improvement quarter-on-quarter in the second half of the year? Should we think about incrementals on a year-on-year basis? And any more detail on what kind of level of improvement on incrementals is possible?

Yes. We're not really giving full year guidance at the moment, Garik. But I think when we talk about that, we're talking year-over-year. I mean you're seeing sequential improvement from Q1 to Q2, which is normal seasonality. But again, it goes back to volume is the issue we have. So when you go from Q1 lower volume into Q2 higher volume, you see pretty good flow-through on that. And that's the challenge we face on a year-over-year basis throughout the year. But because of the mitigation on tariffs as we go through the year, we will see better decrementals as the -- as we said, we see the market being down for the full year.

So I would anticipate -- though we're not guiding yet for the full year, I would anticipate revenue to be down through the year. And so -- but we're expecting those decrementals on a year-over-year basis, quarter-by-quarter to improve.

[Operator Instructions]

Our next question is from Steven Ramsey with Thompson Research Group.

I wanted to hear a bit more on the pricing actions that you're taking in response to tariffs and rising fuel costs. First, do you feel like the pricing that you're taking and that you're seeing from competitors is near parity with one another? Or is anyone using this time to maybe take less price to gain some share? And then connected to this, price actions on fuel, you have not taken any so far. So just to clarify, the margin guide for the second quarter does not include that you might take actions for rising fuel costs?

I'll answer the last part first, and that's incorrect. We have taken some action already on rising fuel costs. I'd rather for competitive reasons, not go into the details of how we do that. But suffice to say, we have short-term mechanisms that we use for any kind of, what I'll say, volatile commodity inputs like fuel. In terms of the market, I think it's no different than I highlighted back in the previous earnings call, Steven, which is it's a very competitive market.

And so you've got to meet the consumer where they are. And that involves a number of different aspects of what you're trying to bring to the consumer, and that's why you see a lot of trade down in our mix because we have a lot of different alternatives we can bring to the consumer and the customer. But I think ultimately, that's -- it's more competitive now than it has been. The market is still very fragmented, and we're leaning into that, but I think it's -- we also understand the cost burden that we're facing. And so we -- it's a dual approach.

Okay. That's helpful. And then on the gross tariff cost, $25 million in the first quarter, about 4% of sales and a little bit lower than the full year outlook for the gross tariff cost as a percentage of sales. Do you expect that you kind of get into that 5% to 6% zone in the second quarter and it sustains? Or I know there's a lot of moving parts, but definitely good to see a little bit better to start the year.

Yes. I mean it's a combination of things, Steven. Some of it is our mitigation. It's part of mitigating tariffs is coming up with ways to not have to pay them. So that's part of it. It's also the mix that we're using -- the mix of our portfolio is pretty broad and there are different impacts from tariffs. So I wouldn't necessarily look at that as the run rate moving forward. It's why we reiterated that it's the 5% to 6% because that's what we think it will be. Also, the tariffs have changed slightly.

So we just want to make sure that the changes are understood to not really be material in terms of the different impact to our P&L. So I think it's a combination of part of how we're mitigating these things is coming up with ways to avoid. And then other ways, otherwise, it's mostly mix. And you do see a lower volume in Q1, so you're going to have a lower tariff dollar number as part of that.

This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.

Good afternoon, and welcome to MasterBrand's Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions]. 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.

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 Andi Simon, Executive Vice President and Chief Financial Officer. We issued a press release earlier this afternoon disclosing our fourth quarter and full year 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 updated as necessary in our subsequent 2025 Form 10-Qs, which are available 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 fourth quarter and full year 2025 financial results from Andi, along with our first quarter 2026 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 fourth quarter and full year 2025 results were shaped by ongoing demand pressure and a complex trade backdrop. Despite these pressures, our teams remain focused on supporting customers, advancing our integration efforts and maintaining financial flexibility through targeted cash management. While near-term results remain under pressure, we made meaningful progress on the priorities within our control to navigate ongoing volatility while ensuring MasterBrand remains positioned to capture meaningful upside when demand returns.

In the fourth quarter, we generated net sales of $645 million, a 3.5% decrease compared to the same period last year. Our performance reflected a mid-single-digit year-on-year market decline, partially offset by the continued flow-through of previously implemented price and tariff-related pricing actions. Adjusted EBITDA for the quarter was $35 million compared to $75 million in the prior year period, and adjusted EBITDA margin was 5.4%.

The variance in our results versus our implied fourth quarter outlook was primarily driven by a sharper-than-expected late quarter slowdown in new construction, which pressured price and mix and reduced factory utilization and operating leverage. Free cash flow for the quarter was $53 million compared to $69 million in the same period last year. While cash generation declined year-over-year due to lower profitability and deal-related expenses, we remain focused on preserving liquidity and financial flexibility. Looking ahead, we continue to expect full year free cash flow to exceed net income on an annual basis, reinforcing our long-standing commitment to disciplined cash conversion across cycles.

Turning to our end markets. 2025 marked the third consecutive year of market contraction with elevated interest rates, ongoing affordability concerns and lower consumer confidence continuing to constrain activity across new construction and repair and remodel. U.S. single-family new construction declined high single digits in the quarter and mid-single digits for the full year, with the fourth quarter slowdown sharper than expected. Builders remained under pressure, driven by tighter financing conditions, lower consumer sentiment and greater uncertainty around input costs. However, consistent with prior quarters, MasterBrand's new construction sales again outperformed the broader market, driven by our exposure to production builders, the breadth of our portfolio and our continued focus on service reliability and execution.

We expect current headwinds in the new construction market to continue in 2026 as affordability and uncertainty around trade and pricing continue to influence buyer behavior. In repair and remodel, demand was uneven throughout the fourth quarter, reflecting a consumer that remains pressured. The U.S. cabinet R&R market declined mid-single digits in both the quarter and the full year, with demand constrained by low existing home turnover, which historically underpins larger discretionary kitchen and bath remodel activity. Elevated interest rates, affordability concerns and uncertainty in the job market continue to weigh on consumer confidence. Across our portfolio, we continue to observe trade-down behavior. Stock customers shifted towards our opening price point offerings, while in our premium tier, demand migrated towards semi-custom and value semi-custom options, reflecting a continued focus on value even in traditionally less price-sensitive channels.

Looking into 2026, we anticipate U.S. cabinet R&R demand will remain subdued and closely tied to financing conditions, consumer confidence and housing turnover. We are helping offset these pressures with our broad refreshed portfolio and continued technology investments that enhance the end-to-end experience, making ordering, fulfillment and support more seamless. Until affordability improves and housing turnover normalizes, demand is likely to remain below historical levels, but we remain confident that the long-term structural drivers of R&R are intact. In Canada, market conditions remained challenging in the fourth quarter, driven by the same affordability and turnover dynamics we saw domestically. The Canadian market declined mid-single digits in the quarter and for the full year with new construction and R&R demand both down mid-single digits.

We expect the Canadian market to remain pressured in 2026 with demand continuing to be constrained by consumer sentiment and low resale activity. As in prior periods of subdued demand, our focus remains on disciplined execution and targeted commercial actions to remain competitive and effective. Stepping back, we view 2026 as a continuation of the industry's extended period of muted demand with end market conditions expected to remain soft and decline roughly mid-single digits across most categories as affordability pressures persist. Following multiple years of market contraction and with tariff-related costs still continuing to flow through, we expect competitive discounting to be elevated across the industry. In that environment, our ability to pass through additional pricing could be more limited. Where tariff mitigation actions require incremental pricing, those moves could further weigh on demand in select value-oriented categories, particularly stock cabinetry, adding uncertainty to near-term demand elasticity.

At the same time, historically low existing home turnover is expected to continue to suppress cabinet repair and remodel activity. Looking ahead, we expect market conditions to stabilize and modestly improve in 2027, supported by historically low comps, improving affordability, easing financing conditions and a gradual normalization in housing turnover. As a reminder, because cabinets are typically purchased later in the cycle, we expect a modest lag between the general market recovery and when the momentum is reflected in MasterBrand's results. In the meantime, we're maintaining rigorous cash discipline, pursuing targeted cost reductions and preserving financial flexibility, so we're well positioned to capitalize on an eventual recovery as conditions improve.

As part of these actions, we are implementing $30 million of planned cost reductions in 2026, which Andi will discuss more in detail in a few minutes. Turning to the trade environment, which remains an important and dynamic input to our planning and operations. As a reminder, in October 2025, new Section 232 tariffs on timber, lumber, kitchen cabinets, vanities and related wood products went into effect, introducing meaningful additional duties across our materials and imports. While the scheduled January 1, 2026, tariff rate increase was deferred, the current 25% tariff on cabinets, vanities and related products remains in place throughout 2026, with a 50% tariff rate now scheduled for January 1, 2027, absent further developments.

Although timing has shifted, the trade environment remains challenging. Existing tariffs continue to pressure costs across the system and require ongoing management across sourcing, operations and pricing. As we discussed last quarter, the impact of these measures is not limited to direct cost. It also has the potential to influence housing affordability and consumer behavior over time, effects that tend to emerge gradually rather than immediately. In response, we are continuing to execute a coordinated mitigation strategy across the organization. This includes enhancing sourcing flexibility and supplier engagement to reduce exposure, making targeted manufacturing footprint and operational adjustments to better align with demand and cost dynamics, adjusting product component design to lower overall tariff exposure and maintaining a consistent surcharge methodology where appropriate to provide transparency and predictability for our customers.

These actions require careful sequencing and disciplined execution, and they remain a key focus for our teams. We are closely monitoring ongoing trade and macroeconomic developments and have incorporated the updated tariff time line into our planning assumptions. We expect the benefits of our tariff mitigation and cost reduction actions to phase in over the course of 2026, supporting stronger profitability towards the later part of the year. Andi will provide additional details in her remarks. Operationally, we stayed focused on execution in the fourth quarter and throughout the year, keeping service levels strong, aligning production with demand and continuing to build capability across the organization, even as the external environment remained pressured.

Turning to Supreme. 2025 represented our first full year operating as an integrated organization. We made strong progress capturing the cost synergies we targeted with benefits coming through across procurement, network and logistics efficiencies and overhead alignment. Just as importantly, we've been able to do this while maintaining critical operational continuity and customer service. As we look ahead, we remain on track to realize our target of $28 million in annual run rate cost synergies by year 3 post close, and we continue to see additional opportunity to expand the benefits of the Supreme combination over time, particularly on the commercial side as end markets recover through broader portfolio access, cross-selling and channel expansion. As for the pending American Woodmark transaction, we continue to advance our planning and are encouraged by our progress to date.

Our teams remain focused on the integration planning and readiness work so we can move quickly following close while protecting customer service levels and maintaining continuity. We're excited about the strategic and financial opportunity the combination represents for customers and shareholders, and we anticipate closing the transaction early this year, subject to remaining customary regulatory approvals. Importantly, we continue to expect approximately $90 million in run rate cost synergies by the end of year 3 post close. Finally, turning to our continuous improvement efforts and capital allocation priorities. Our continuous improvement efforts remain a core enabler of operational excellence and long-term value creation. Our programs again outperformed plan, helping to partially offset volume pressure and tariff-related cost impacts. Importantly, continuous improvement broadened and deepened across the organization, gaining traction not only in production, but also in back-office functions.

Collectively, these actions are strengthening productivity, enhancing cost and performance visibility and enabling more consistent decision-making, positioning the organization to sustain and build on these gains over time. From a capital allocation perspective, capital expenditures were in line with expectations in 2025, and we remain focused on operational execution and flexibility, consistent with the MasterBrand Way. Our balance sheet and liquidity position remain healthy, providing the flexibility to support integration activities and long-term shareholder returns. In closing, while near-term market and trade challenges persist, our strategy remains intact and guided by the MasterBrand Way. We have a resilient operating model, strong portfolio and a proven integration playbook. As industry conditions stabilize and demand recovers, we believe MasterBrand is well positioned to emerge stronger and deliver longer-term value. With that, I'll turn the call over to Andi for a detailed review of our financial results and outlook.

Thanks, Dave, and good afternoon, everyone. I'll start with a review of our fourth quarter financial results, followed by a brief recap of the full year. Then I'll share more details on our guidance for the first quarter of 2026 and provide some perspective on the full year ahead. Now turning to our fourth quarter results. Net sales were $644.6 million, a 3.5% decrease compared to $667.7 million in the same period last year. The continued softness across our addressable market, which was down mid-single digits, was partially offset by the anticipated flow-through of prior pricing actions, including tariff mitigation price actions.

Gross profit was $167.5 million, down 17.6% from $203.3 million in the same period last year. Gross profit margin was 26%, down 440 basis points year-over-year, primarily reflecting lower volume, mix and the related unfavorable fixed cost leverage, tariffs net of supply chain mitigation and restructuring-related expenses. These headwinds were partially offset by higher net average selling price improvement from prior pricing actions, including our tariff mitigation actions, our continuous improvement efforts and Supreme integration synergies.

Tariffs had a negative impact of nearly 300 basis points to our gross margin in the quarter, though we were able to offset approximately 1/3 of this impact through mitigation actions. SG&A expenses totaled $186.9 million compared to $152.3 million in the same period last year. This was primarily driven by a $17 million onetime provision for bad debt related to a specific customer, personnel costs and inflation, acquisition-related costs, restructuring-related costs and depreciation costs and continued investments in our strategic initiatives, particularly around digital, technology and marketing, partially offset by lower commission and freight costs following volume decline.

Interest expense declined to $17.6 million from $19.3 million in the same period last year, reflecting progress as we continue to pay down our debt. Net loss was $42 million in the fourth quarter compared to net income of $14 million in the same period last year. Net income margin was negative 6.5% compared to positive 2.1% in the prior year, reflecting the items I just outlined, partially offset by lower interest expense and lower income tax expense. Adjusted EBITDA was $35.1 million compared to $74.6 million in the prior year period.

Adjusted EBITDA margin was 5.4%, a decline of 580 basis points year-over-year due to lower volume and the related unfavorable fixed cost leverage, tariffs net of supply chain mitigation and material freight and personnel inflation, partially offset by continuous improvement savings, the flow-through of our prior pricing actions and Supreme integration synergies. As Dave mentioned, the variance in adjusted EBITDA relative to our implied fourth quarter guide was primarily driven by a late quarter slowdown in new construction. The late quarter demand change created a more unfavorable mix and lower price realization than we had embedded in the outlook we shared in November.

At these lower volume levels, mix has a greater impact on our bottom line. The shift reduced factory utilization, resulting in a mid-single-digit increase in down days versus our plan, which drove fixed cost under absorption and contributed to manufacturing inefficiencies. Given this dynamic, we expect continued margin pressure if trade-down behavior persists across the portfolio or if mix shifts further unfavorably. Diluted loss per share was $0.33 in the fourth quarter of 2025 based on 126.8 million diluted shares outstanding. This compares to earnings per share of $0.11 in the fourth quarter of 2024, which was based on 131.2 million diluted shares outstanding.

Adjusted loss per share was $0.02 in the current quarter compared to earnings per share of $0.22 in the prior year period. Moving to our full year results. We delivered 2025 net sales of $2.7 billion, up 1% versus the prior year, driven by the contribution from Supreme and improvements in net average selling price despite a market that we estimate declined mid-single digits year-over-year. Supreme contributed approximately 5% to full year net sales, consistent with our expectations and pricing contributed to offsetting underlying market pressure. Gross profit was $827.6 million, down 5.6% compared to $877 million in the prior year. Gross profit margin declined 220 basis points year-over-year from 32.5% to 30.3%.

The full year margin decline was due to lower unit volume and the related unfavorable fixed cost leverage, inflation and tariffs. This was partially offset by net average selling price improvements and the full year inclusion of Supreme and its related synergies. Notably, tariffs had a negative impact of approximately 115 basis points to our gross margin throughout the year, and we were able to offset over half of this impact through mitigation actions. SG&A expenses were $667.8 million compared to $603.1 million in the same period last year. This increase was primarily driven by the addition of Supreme's SG&A expenses, the same onetime bad debt provision impacting the quarter, digital and technology investment and freight inflation, partially offset by lower volume-related variable SG&A costs.

Income tax was $19.6 million for the year or a 42.3% effective tax rate compared to $42.4 million or a 25.2% rate in 2024. The increase in effective tax rate was driven by nondeductible expenses and a jurisdiction valuation allowance driven by the tariff impact on products sourced internationally. Without these items, our effective tax rate for the year would have been approximately 23.5%. Net income was $26.7 million compared to $125.9 million in the prior year. The decrease was primarily related to lower gross profit and higher SG&A, partially offset by lower income tax expense. Adjusted EBITDA was $298.2 million in 2025, down 18% compared to $363.6 million in the prior year, and adjusted EBITDA margin declined 260 basis points to 10.9% for the full year compared to 13.5% in the prior year.

These results were driven by lower volume and the related unfavorable fixed cost leverage, inflation, tariffs, net of supply chain mitigation and incremental strategic investments. This was partially offset by net average selling price improvements, including tariff-related pricing and Supreme contributions and integration synergies. Diluted earnings per share were $0.21 in 2025, down from diluted earnings per share of $0.96 in 2024 based on 129.2 million and 130.9 million diluted shares outstanding, respectively.

Adjusted diluted earnings per share were $0.91 compared to $1.40 in the prior year. Despite a soft end market in 2025, we believe our long-term financial targets remain attainable, although delayed as we enter our fourth year of market decline in 2026. As discussed at our 2022 Investor Day, these targets were based on some level of annual market growth. While we continue to execute operationally, position the company for future growth and augment our growth through acquisitions, market growth will be necessary to fully realize the benefits of these efforts and achieve our stated long-term financial targets. Turning to the balance sheet. We ended the year with $183.3 million of cash on hand and $441.9 million of liquidity available under our revolving credit facility.

Net debt at the end of the fourth quarter was $791.2 million, resulting in a net debt to adjusted EBITDA leverage ratio of 2.7x. Despite a sequential reduction in net debt, our leverage ratio increased due to a lower trailing 12-month adjusted EBITDA. Net cash provided by operating activities was $195.7 million for full year 2025 compared to $292 million in the full year 2024, driven by lower net income, increased restructuring-related cash outflows and deal costs. Capital expenditures for the full year 2025 were $78.2 million compared to $80.9 million for the full year 2024, in line with our plan and driven primarily by the Supreme integration. Free cash flow was $117.5 million for the full year 2025 compared to $211.1 million for the full year 2024, reflecting lower net income.

Our merger agreement with American Woodmark restricts share repurchase activity until the transaction closes. Before turning to our outlook, I want to take a moment to address recent tariff developments and the implications for our business. Since our third quarter call in early November, the trade backdrop has become more volatile with actions announced, revised, implemented and postponed in quick succession, directly impacting our industry and increasing near-term uncertainty around cost and timing. As Dave noted earlier, in late 2025, the planned Section 232 tariff rate increase on finished wood products, including kitchen cabinets and bathroom vanities was postponed. To be clear, existing 25% Section 232 tariffs remain in place throughout 2026.

In addition, Mexico announced tariffs on Chinese imports, reflecting further uncertainty in the global trade environment. Finally, countervailing and antidumping duties on hardwood and decorative plywood imports were delayed from the fourth quarter of 2025. The countervailing duties went into effect on January 12, and the antidumping duties are now anticipated to be fully implemented later this month. We are actively managing tariff impacts through targeted price adjustments, supplier renegotiations, alternative sourcing and manufacturing optimization. As I've noted previously, these efforts take 1 to 12 months to fully materialize. As we prepare for the potential combination with American Woodmark, we are also intentionally sequencing certain actions and deferring select decisions to avoid implementing stand-alone changes that could prove disadvantageous post close.

In parallel, we are continuing to monitor potential trade measures, including the antidumping duties on plywood. Above all, we remain focused on minimizing disruption, protecting customer value and sustaining our competitive position. Given the dynamic nature of the recent trade actions we just discussed, the related ongoing macroeconomic uncertainty and actions deferred ahead of the anticipated American Woodmark merger, our visibility into key performance drivers, cost inputs and near-term demand has become more limited. While we have a clear plan and are actively executing mitigation actions, the timing and magnitude of their impact can vary significantly as the trade environment shifts.

As a result, MasterBrand is taking a measured approach to its outlook and transitioning to providing quarterly guidance until longer-term visibility improves. We believe this is the most transparent way to communicate our expectations in the current environment and provide stakeholders decision useful updates as we navigate these changing dynamics. Our financial outlook includes those tariffs currently in effect and the anticipated antidumping plywood duties. It does not reflect potential implications from other proposed or future trade policy changes. Further, our outlook does not reflect any anticipated financial benefits from the pending merger with American Woodmark nor does it include expected transaction or integration-related costs.

With those assumptions in mind, for the first quarter, our end markets are expected to be down mid- to high single digits year-over-year. Against that backdrop, we expect first quarter 2026 net sales to be down mid- to high single digits versus prior year. To help manage near-term pressure on profitability, we are taking action to reduce costs and align our cost structure with current demand levels. We are implementing $30 million of planned cost reductions in 2026 and anticipate we will begin to realize savings in the first quarter with full realization expected by year-end.

We believe these steps, in combination with our mitigation strategy will help offset margin pressures, preserve liquidity and position MasterBrand to remain resilient through this period of elevated uncertainty. Given these considerations, for the first quarter, we expect adjusted EBITDA in the range of $23 million to $33 million, representing an adjusted EBITDA margin of 3.9% to 5.3%. We expect first quarter adjusted diluted loss per share of $0.06 to $0.00. This outlook primarily reflects the impact of lower expected volumes on fixed cost absorption as well as the timing of our tariff mitigation and cost rationalization actions.

Notably, this outlook also reflects our typical fourth quarter to first quarter seasonal step down. Based on our fourth quarter performance and expectations around the first quarter, net debt to adjusted EBITDA leverage at close of the pending American Woodmark transaction is no longer expected to be sub 2x, reflecting the current trade environment and our decision to sequence certain mitigation and integration actions to avoid stand-alone changes ahead of closing. We remain focused on disciplined cash generation and deleveraging post close and continue to expect leverage to trend down towards the end of the year as mitigation actions and synergies are realized.

On the full year, as Dave mentioned, we continue to expect our addressable market in 2026 to be down mid-single digits year-over-year with continued variability across end markets. For the first half of 2026, we expect decremental margins to remain elevated, driven by year-over-year volume declines, mix and the timing of tariff mitigation. We anticipate that our decrementals will improve in the second half as our tariff mitigation and cost rationalization actions phase in further. For the full year, we also expect interest expense to be flat to down as we continue to pay down our outstanding debt. Our effective tax rate is expected to improve year-over-year, primarily due to the absence of certain onetime costs.

Additionally, we continue to expect free cash flow for 2026 to be in excess of net income for the year. Finally, based on our current sourcing profile and product mix, the trade policies currently in effect and the anticipated antidumping duties on plywood, we estimate that our unmitigated gross tariff exposure for the full year is approximately 5% to 6% of 2026 net sales. We anticipate tariff pressures to be partially offset by the benefits of our mitigation efforts, which will take time to fully materialize.

As such, we expect more than 85% of the full year net negative tariff impact to be reflected in the first half of 2026. Importantly, we expect to fully offset 100% of tariff dollar costs on a run rate basis by the end of 2026 through our mitigation initiatives. We will continue to closely evaluate the impact of tariffs and remain committed to executing our comprehensive mitigation strategy, providing quarterly updates as we navigate these dynamics. In closing, while the industry has worked through a prolonged period of soft demand over the past 3 years and near-term conditions remain challenging, we are using this period to strengthen the business and position it for the next up cycle through thoughtful execution of our strategic initiatives. As we progress toward the pending combination with American Woodmark, we remain focused on maintaining continuity for customers while preparing to capture the value of the transaction.

By leveraging our complementary capabilities and realizing the expected synergies, we are confident the combined enterprise will be primed to emerge stronger and better positioned to deliver enhanced value to customers and shareholders as demand returns. Now I'd like to return the call back to Dave.

Thanks, Andi. As we close out 2025, we recognize that the operating environment remains challenging with demand softness, affordability pressures and an evolving trade landscape continuing to shape near-term outcomes. At the same time, we are encouraged by the progress we've made in advancing integration initiatives, maintaining strong customer relationships and preserving the flexibility needed to navigate uncertainty. Looking into 2026, we expect the year to be transitional for the industry as market trends persist and tariff mitigation efforts continue to work their way through our business.

Our focus is clear: execute with discipline, support our customers, manage cash and liquidity thoughtfully and continue strengthening the business so we're positioned to capitalize as conditions improve. We continue to expect a more meaningful recovery to take shape in 2027 as affordability improves and housing activity normalizes.

The MasterBrand Way continues to guide how we operate, driving consistency, accountability and execution across the organization. And it's the same approach underpinning our readiness for the proposed combination with American Woodmark. Planning continues to progress well, and we remain on track to close in early 2026, subject to remaining customary regulatory approvals. With a strong portfolio, a resilient operating model and a talented team, we believe we're well positioned to deliver long-term value for customers, associates and shareholders. Thank you to our associates for their continued dedication and to our customers, partners and shareholders for their trust and ongoing support. Now with that, I'll open the call up to Q&A.

[Operator Instructions]. First question comes from the line of McClaran Hayes with Zelman & Associates.

Yes, starting with the full year outlook for the market to be down mid-single digits. [indiscernible] Just wondering if you could maybe help us break that down by end channel, talk to what you're assuming for the builder market broadly this year versus home improvement.

Yes. I think -- thanks for the question, McClaran. The -- I think they're both about the same. The builder may be a little worse in the beginning, but then I think you're going to catch up with easier comps. I think the R&R market, which is what we consider retail is kind of down mid-single digits fairly consistently throughout the year. So it's our best guess at this point. I think part of the reason that we've gone to quarterly guidance is it's a little unclear still what the spring season is going to look like. So that's going to guide a bit of what the full year ends up being. But we wanted to at least signal that we believe the year to be down. And a lot of that in the near term is being driven by the pace of starts, which we saw declining last year.

Got it. And then on pricing, it looks like price realization sequentially decelerated about 100 basis points from 3Q to 4Q. Any way you could split out maybe how much of that was driven by the channel headwind from weaker builder sales that you spoke about? And how much was maybe tied to that step-up in promotions or competitive behavior?

Yes. I think it's a combination of several things, one of which is mix. There's more trade down occurring. So we've seen higher volumes in the low opening price point than we anticipated in the fourth quarter. And then it is a combination of the pace at which we can capture price to mitigate tariffs. I think if I was looking at price, we were effective by the end of the year of pricing for the liberation day tariffs, but then we got additional tariffs later in the year and now there's more, at least with the plywood side of things coming in this year. And we've tried to place pricing in a controlled sort of organized fashion and not constantly be changing price. We've tried to bake all these things in, but all the changes that require constant maneuvering of that over time.

So -- but generally speaking, in the fourth quarter, the bigger impact on results in general was overall volume in the business, but then tilting the business a lot more towards the opening price point trade down.

Our next question comes from the line of Garik Shmois with Loop Capital Markets.

I wanted to follow up just on the new residential construction weakness that you saw late in the quarter. I think your sales actually exceeded your prior guidance, if I remember correctly. So just kind of wondering if you could provide a little bit more detail on how sales during the quarter progressed and some more color on what you saw at the end of the quarter on the residential side.

Yes. That piece actually behaved in some ways similar to the prior year where we saw a pretty big drop off in late November, which we weren't expecting this year. In order to cover that, there was other volume that was stronger. As I just mentioned, it was an opening price point in different parts of the business. In all, we did miss what we thought we could do from a forecast standpoint internally. So we were off to that as well overall. But I think that it was primarily a mix shift that you're seeing in terms of the end result.

So we were able to get to down a couple of percentage points, but it was not through -- there were certain factories that just were very inefficient in the quarter, which results in our bottom line outcome.

Okay. On the cost side, you could go into a little bit more detail on the restructuring actions. And just to be clear, the $30 million in expected savings to be realized in '26, is that an exit rate? Or is that the dollar amount you're expecting to...

That's the dollar amount in the year. So annualized, it's a little higher than that. It's broad-based, adjusting our cost structure for the pace of demand, and it's mainly structural cost.

Okay. And then just lastly on the tariff mitigation efforts. Just given the more challenged pricing environment, can you go into a little bit more color to what gives you confidence in your ability to offset the dollar cost impacts associated with the tariffs?

Yes. I think it's -- I'm looking over a long horizon here, Garik. I think the challenge that the pricing environment presents to us is the timing of that. And so I think that as we've said many times in the past, price doesn't happen overnight for us. It takes time to work through. I think that the current pricing -- we're flagging that in the current pricing environment because it may take longer. I think we're still aiming to cover that cost throughout the year. But again, price is one of the levers. It is a fairly large lever. So I'm not going to say that it's not important. It is. I think it's really more going to affect the timing of when we're able to cover the cost of tariffs.

It also is our current plan and actions cover the cost of tariffs. So it does diminish profitability a bit because we're not covering that piece of it yet in the plans that we have. So our teams are continuing to work on operational actions. The switch from 50% back down to 25% kind of negated a few of the actions that we were considering. So it's a constantly changing plan, but the actions we've taken so far are working, and we saw that in the fourth quarter. So we're going to continue to work the problem, but it is a -- it's the kind of thing you're working daily.

And again, we're going to continue to push the teams to go further on both execution on the price we have put out to the market and additional operational actions to cover a broader part of the P&L.

And ladies and gentlemen, this does conclude today's -- this is the end of the question-and-answer session. And this also concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.

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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.

Turning to our end markets. While conditions remain challenged, they were generally consistent with our expectations. In new construction, single-family housing starts were down mid- to high single digits as affordability and buyer confidence remain constrained. Despite this backdrop, our new construction sales outperformed the broader market, reflecting the strength of our broad product portfolio and consistent service execution, underpinned by superior cycle time reliability, effective supply chain coordination and proactive design and specification support, all of which customers consistently cite as key differentiators.

Looking at the remainder of the year, we continue to expect overall new construction end market demand to be down mid-single digits on a full-year basis. However, through our strong builder relationships, reliable service performance and focused execution, we are positioned to continue to outperform the broader market.

In the repair and remodel market, serviced by our dealer and retail customers, demand remained choppy as elevated total project costs, low existing home turnover and low consumer sentiment continue to weigh on large discretionary projects. Our repair and remodel business was down mid- to high single digits year-over-year, which was aligned with the broader market and our expectations.

The impact was most evident in entry price stock cabinetry and digital retail channels where softer project demand weighed on volume. In contrast, mid-tier semi-custom products delivered stronger performance, benefiting from consumers trading down from premium offerings and placing greater emphasis on value amid the broader macro backdrop. This emphasizes the strength of our multi-tier product portfolio. We continue to expect the repair and remodel market to be down mid- to high single digits for the full-year as consumers delay larger home renovation projects amid ongoing affordability pressures.

Turning to Canada. Our third quarter performance was down mid-single digits, consistent with the market and in line with our expectations. Housing affordability remains a persistent challenge with elevated prices and limited resale inventory continuing to constrain buyer activity. We continue to expect full-year Canadian end market demand to be down mid-single digits year-over-year.

We anticipate the market more broadly to be down mid- to high single digits for the full-year 2025. As we look further ahead, we currently expect demand across both new construction and repair and remodel to remain subdued through next year with gradual improvement anticipated in late fiscal 2026 or early fiscal '27. However, we recognize that trade and market conditions could rapidly change, potentially shifting our outlook. In the meantime, our focus remains on servicing our customers, aligning production with demand and controlling costs, positioning the business for growth when the market does return.

Turning to the current trade environment. The tariff landscape has evolved meaningfully since our last call and remains a major area of focus for us. As many of you know, the Section 232 lumber tariffs took effect on October 14, and we are diligently evaluating the implications of the 25% tariff and impending 50% tariff on kitchen cabinets, bathroom vanities and related products. This said, we've been contingency planning for several months in anticipation of these potential changes. Our teams across sourcing, manufacturing and pricing are executing a coordinated mitigation strategy as we refine our assessment and work with the administration to understand certain specifics of the Section 232 lumber tariffs.

While these tariffs will introduce incremental costs, we believe MasterBrand is well positioned to navigate them effectively. As discussed last quarter, we've taken steps to enhance our sourcing flexibility and are actively engaging suppliers to minimize exposure. We are working through various manufacturing footprint and operational adjustments to mitigate the impact of tariffs and best serve our customers in growth regions. Finally, we are maintaining consistency in our surcharge methodology to provide pricing transparency for our customers as the landscape continues to evolve.

While we remain confident in our mitigation plans, we continue to monitor potential indirect impacts on consumer demand and housing affordability, which are inherently more difficult to quantify. Importantly, the MasterBrand Way, our structured data-driven operating system enables us to adapt quickly through rapid problem solving and execution across our network. That said, with Section 232 tariffs already in effect and set to double in the first quarter of 2026, we do anticipate some phasing challenges in the fourth quarter of 2025 and into full-year 2026 as we work to fully implement our mitigation initiatives. Andy will outline several key considerations to help frame the potential impact of these tariffs on our business later in the call.

Operationally, we continue to execute well despite the challenging demand environment. Our teams made significant progress in the third quarter on Supreme integration execution, our potential merger with American Woodmark is progressing as expected, and our continuous improvement and strategic deployment initiatives remain effective.

The team is executing the Supreme integration on schedule and within plan, a clear demonstration of the organizational capability and rigor embedded in the MasterBrand way. These efforts are driving the cost efficiencies we expected despite market and volume-related headwinds. Additionally, we expect revenue synergies from the Supreme integration to begin coming through as the market returns, which, as a reminder, were excluded from our disclosed synergy targets.

Building on our continued success with Supreme, we're now focusing our resources on supporting the potential combination with American Woodmark, applying the same disciplined playbook that has proven effective. We are pleased with the progress on the pending merger. Integration planning is well underway, and we're prepared to begin executing immediately following close. We continue to expect approximately $90 million in run rate cost synergies by the end of year 3 post close, driven by procurement, overhead and manufacturing network efficiencies.

Importantly, on October 30, both MasterBrand and American Woodmark shareholders independently voted to provide the necessary shareholder approvals for the proposed transaction. We are also progressing through the regulatory process and continue to expect that the transaction will close in early 2026.

Together, MasterBrand and American Woodmark would enhance the industry's most comprehensive portfolio of trusted cabinetry brands, products and services, and the combined company is expected to unlock and deliver meaningful value for our customers, associates and shareholders as well as to the end consumer, reinforcing our confidence in the long-term potential of this merger.

Finally, turning to our continuous improvement efforts and capital allocation priorities. Across our facilities, continuous improvement programs again exceeded plan, driving measurable savings that partially offset volume-related headwinds. These programs remain an essential part of our ability to manage through near-term softness while positioning us for long-term margin expansion.

Our technology investments are intentional, aligned with MasterBrand's strategic priorities and designed to build scalable, resilient systems that support long-term growth. This quarter, we advanced several cornerstone initiatives, including the deployment of the centralized order management system, which are designed to improve accuracy, efficiency and visibility across the network while simplifying core processes.

In parallel, we are executing a phased infrastructure modernization and risk mitigation program across our facilities to enhance network, server and factory system durability, ultimately ensuring greater protection and long-term support for the core operations. Additionally, the Las Vegas facility start-up was completed this quarter and marks a significant realignment of our operational footprint to better serve the Western regional market. Together, these investments are delivering measurable gains in productivity, precision and agility while positioning our organization for accelerated innovation and growth.

From a capital allocation perspective, we remain focused on operational execution and flexibility. Capital expenditures were aligned with our expectations. Additionally, our balance sheet remains healthy with sufficient liquidity to support growth initiatives, integration activities and shareholder returns.

In closing, we executed with discipline, continue to advance the Supreme integration and are planning for the proposed merger with American Woodmark and further strengthen our operations and balance sheet. While near-term challenges persist, our long-term strategy is intact and our confidence in the business remains strong. As the housing market stabilizes, we are well positioned to capitalize on recovery with greater efficiency, scale and flexibility than ever before.

With that, I'll turn the call over to Andy for a detailed review of our financial results and outlook.

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 on our mitigation strategy and full-year impact in more detail in a moment.

SG&A expenses totaled $167.5 million, up 0.7% compared to $166.3 million in the same period last year. SG&A as a percentage of net sales increased 81 basis points year-over-year to 24%, reflecting comparable levels of acquisition-related costs. This was primarily driven by continued investments in our strategic initiatives, particularly around digital technology and marketing, partially offset by lower commission and freight costs following volume decline.

Net income was $18.1 million in the third quarter compared to $29.1 million in the same period last year, and net income margin was 2.6% compared to 4.1% in the prior year as a result of lower gross profit, partially offset by lower income tax expense. Interest expense declined to $18.2 million from $20 million in the same period last year, reflecting progress as we continue to delever our balance sheet.

Income tax was $5.3 million or a 22.6% effective tax rate in the quarter, slightly better than our expectations and compared to $10.3 million or a 26.1% rate in the third quarter of 2024. The decrease in our effective tax rate was primarily driven by the mix of earnings across jurisdictions.

Adjusted EBITDA was $90.6 million, down 13.3% from $104.5 million in the prior year period. Adjusted EBITDA margin was 13%, a decline of 160 basis points year-over-year, driven by market-related volume declines and the associated leverage challenges as well as tariffs. These headwinds were partially offset by continuous improvement savings net of inflation, the flow-through of prior pricing actions and Supreme synergies.

Diluted earnings per share were $0.14 in the third quarter of 2025 based on 129.5 million diluted shares outstanding. This compares to $0.22 in the third quarter of 2024, which was based on 130.8 million diluted shares outstanding. Adjusted diluted earnings per share were $0.33 in the current quarter compared to $0.40 in the prior year period.

Turning to the balance sheet. We ended the quarter with $114.8 million of cash on hand and $461.9 million of liquidity available under our revolving credit facility. Net debt at the end of the third quarter was $839.3 million, resulting in a net debt to adjusted EBITDA leverage ratio of 2.5x, in line with our expectations given American Woodmark deal-related cash outflow. We remain well positioned to reduce our leverage ratio by year-end. However, the incremental impact of tariffs will keep us above our year-end sub 2x target.

In anticipation of the pending merger with American Woodmark, we have amended our existing credit agreement to secure commitments for a new $375 million delayed draw Term A facility, the funding of which is contingent upon the closing of the transaction. The proceeds from this facility will be used to repay and terminate American Woodmark's existing debt following the close of the transaction, further supporting the combined company's capital structure and financial flexibility. Importantly, on a pro forma basis, net debt to adjusted EBITDA leverage at close is expected to be approximately 2x, in line with our expectations and in achievement of our long-term goal.

Net cash provided by operating activities was $108.8 million for the 39 weeks ended September 28, 2025, compared to $176.9 million in the comparable period last year. Third quarter cash generation was impacted by lower net income, required bond interest payments, timing of collections and deal-related expenditures.

Capital expenditures for the 39 weeks ended September 28, 2025, were $43.8 million compared to $34.6 million in the comparable period last year. This increase reflects planned investments tied to the integration of Supreme and our ongoing footprint realignment initiatives in line with our full-year capital allocation strategy.

Free cash flow was $65 million for the 39 weeks ended September 28, 2025, compared to $142.3 million in the comparable period last year. As we look to the fourth quarter, we continue to expect free cash flow to normalize, supported by the absence of certain onetime payments related to the proposed American Woodmark merger, more typical seasonal patterns and growing benefits from our synergies realized from our Supreme integration initiatives. We remain committed to our full-year objective of generating free cash flow in excess of net income.

We did not repurchase any shares during the quarter. Our merger agreement with American Woodmark restricts activity under our preestablished Rule 10b5-1 program until the transaction closes.

Before turning to our outlook, I wanted to take a moment to address recent tariff developments and the implications for our business. Since our second quarter call in early August, several new trade actions have been announced and implemented that directly affect our industry. In mid-August, the administration reinstated and expanded Section 232 tariffs on steel and aluminum and in late September, announced new Section 232 actions targeting lumber and wood products. These new tariffs up to 25% on kitchen cabinets and vanities took effect on October 14, with additional phase increases planned for the first quarter of 2026, increasing the rate to 50% on kitchen cabinets and vanities.

Looking at our cost of goods sold, the cost components are consistent with prior disclosures. Approximately, 45% to 55% of our cost of goods sold is materials, 15% to 25% is labor and 25% to 35% is overhead, varying by product mix and plant utilization. Breaking components down by geographical source, about 70% to 80% are sourced domestically with about 15% to 20% sourced from Asia, primarily Vietnam, and only low single digits from China. The remainder comes from Canada, Mexico, Europe and South America.

Breaking down by material type, a little more than half of our components are wood and wood-related materials. About half of our wood and wood-related materials are domestically sourced. In addition, about half of our wood and wood-related product materials are hardwood. Beyond our component exposure to tariffs, we also import certain finished goods from Canada and Mexico, which historically have represented slightly more than 10% of consolidated net sales.

Prior to the Section 232 tariffs, these imports were exempt from tariffs given they were USMCA compliant. This exemption does not apply to the new 232 tariffs. Based on our current sourcing profile and product mix, we estimate that unmitigated gross tariff exposure equates to 7% to 8% of 2025 net sales with the degree of impact varying significantly by product category.

We are executing a comprehensive strategy to offset these impacts through targeted price increases, supplier renegotiations, alternative sourcing and manufacturing footprint optimization and relocations. As you've seen in our P&L, these mitigation efforts take time to fully materialize, typically between 1 and 12 months. However, we still expect to offset roughly half of the 232 tariff-related cost increase this year, and we remain on track to fully offset previously implemented tariffs on a run rate basis by year-end.

With the introduction of the new Section 232 tariffs, our expected net unmitigated exposure is $20 million to $25 million for the fourth quarter based on our current market outlook, net sales and product mix. Over time, we're confident these actions will fully mitigate the impact and preserve our long-term margin profile.

We are also closely monitoring additional trade measures under review, including potential countervailing and antidumping duties on plywood, which could further influence the trade landscape. As always, we remain focused on minimizing disruption, protecting customer value and maintaining our competitive positioning. We plan to provide a more detailed assessment of the anticipated 2026 impact when we report fourth quarter and full-year results in February.

Now turning to outlook. Our updated full-year 2025 financial outlook includes only those tariffs currently in effect, including the Section 232 lumber tariffs that went into effect on October 14, 2025. It does not reflect potential implications from proposed trade policy changes nor any potential demand impacts from tariffs on cabinets or broader housing activity as those effects remain difficult to estimate in the current environment.

Further, our outlook does not reflect any anticipated financial benefits from the proposed merger with American Woodmark nor does it include expected transaction or integration-related costs.

As Dave mentioned, we continue to expect our addressable market in 2025 to be down mid- to high single digits year-over-year with continued variability across end markets. Against that backdrop, we expect annual net sales to be approximately flat overall, including a mid-single-digit contribution from Supreme with organic net sales expected to be down mid-single digits. This updated range reflects the continued realization of pricing actions and sustained market share gains.

We are updating our full-year adjusted EBITDA guidance to a range of $315 million to $335 million, representing an adjusted EBITDA margin of 11.5% to 12%. Following, we are updating our full-year adjusted diluted earnings per share to a range of $1.01 to $1.13. The lower midpoint and narrow range reflect the timing and impact of recently enacted tariffs. These pressures are partially offset by the early benefits of our mitigation efforts, which continue to progress as planned, but take time to fully materialize.

In addition, we are reiterating our previous expectations on interest expense, effective tax rate, capital expenditures and free cash flow. To help offset these near-term bottom line pressures, we are taking targeted actions to reinforce cost discipline across the business. This includes assessing reductions in non-volume-related SG&A, reducing select strategic investments and identifying additional efficiency opportunities for 2026.

Together with our mitigation strategy, these actions are designed to protect margins, preserve liquidity and ensure MasterBrand remains resilient through this period of elevated uncertainty. We'll provide a full update on these efforts in our 2026 planning when we report fourth quarter and full-year results in February.

We remain very excited about the pending merger between MasterBrand and American Woodmark, which we believe will create a stronger, more resilient company. By leveraging our complementary capabilities and realizing the expected synergies, we are confident the combined enterprise will be well positioned to deliver enhanced value for both customers and shareholders.

Now I'd like to turn the call back to Dave.

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.

Good morning, and welcome to today's joint conference call hosted by MasterBrand, Inc. and American Woodmark Corporation to discuss proposed merger between the 2 companies. This call will also include MasterBrand's Second Quarter 2025 Earnings Conference Call, which is previously scheduled for August 6 at 4:30 Eastern Standard Time.

In addition, American Woodmark will provide commentary on Select preliminary first quarter fiscal 2026 financial results, which were announced earlier today in connection with the proposed transaction. [Operator Instructions] Please note that this conference call is being recorded.

I will now pass the call over to Henry Harrison, Senior Director of FP&A and MasterBrand. Sir, the floor is yours.

Thank you, and good morning. With me on the call today are: Dave Banyard, President and Chief Executive Officer of MasterBrand; Scott Culbreth, President and Chief Executive Officer of American Woodmark; and Andi Simon, Executive Vice President and Chief Financial Officer of MasterBrand.

MasterBrand and American Woodmark issued a joint press release earlier this morning regarding their definitive agreement to combine in an all-stock transaction. Additionally, MasterBrand issued a separate press release earlier this morning disclosing its second quarter 2025 financial results. The joint press release and investor presentation that will be used on today's call are available on the Investors section of each company's website at masterbrand.com and americanwoodmark.com. The MasterBrand earnings investor presentation is also available on the Investors section of MasterBrand's 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 joint press release issued by MasterBrand and American Woodmark earlier this morning in the section entitled Forward-Looking Statements and the press release issued by MasterBrand earlier this morning disclosing MasterBrand's second quarter 2025 financial results.

More information about risks can be found in MasterBrand's filings with the Securities and Exchange Commission, including under the heading Risk Factors and MasterBrand's full year 2024 Form 10-K and updated as necessary in its subsequent 2025 Form 10-Qs, which are or will be available once filed at sec.gov and at masterbrand.com, and in American Woodmark's filings with the Securities and Exchange Commission, including under the heading Risk Factors and its fiscal 2025 Form 10-K and updated as necessary in its subsequent fiscal 2026 Form 10-Qs, which are or will be available once at americanwoodmark.com. The forward-looking statements in this call speak only as of today, and neither MasterBrand nor American Woodmark undertakes 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 in the case of MasterBrand are in the press release issued earlier this morning disclosing MasterBrand's second quarter 2025 financial results, which is available at masterbrand.com, and in the case of American Woodmark are in the joint press release issued by Masterbrand and American Woodmark earlier this morning, which is available at masterbrand.com and americanwoodmark.com.

Our prepared remarks today will include a discussion on the transaction for MasterBrand President and CEO, Dave Banyard; American Woodmark President and CEO, Scott Culbreth; and MasterBrand Executive Vice President and CFO, Andi Simon, as well as an overview of American Woodmark's select preliminary first quarter fiscal 2026 financial results, followed by a discussion of MasterBrand's second quarter 2025 financial results from Dave Banyard and Andi Simon, along with MasterBrand's 2025 financial outlook. Finally, Dave Banyard will make some closing remarks before we host a question-and-answer session.

With that, let me turn the call over to MasterBrand President and CEO, Dave Banyard.

Thanks, Henry, and good morning, everyone. We appreciate you joining us for today's call on short notice. I'm very pleased to be here today alongside the President and CEO of American Woodmark, Scott Culbreth; and MasterBrand's CFO, Andi Simon, to discuss MasterBrand and American Woodmark's definitive agreement to combine in an all-stock merger transaction that we believe will accelerate value delivery to customers, associates and shareholders.

This all-stock transaction is a transformative step forward for both companies and brings together 2 customer-centric platforms to create the industry's most comprehensive portfolio of trusted cabinet brands and products across a broad price spectrum, delivering even better overall choice, service and value to customers and consumers.

MasterBrand and American Woodmark bring highly complementary strengths, strong and broad portfolios of world-class cabinet brands and products and streamlined low-cost manufacturing profiles. Importantly, both MasterBrand and American Woodmark are long established American companies with the vast majority of manufacturing operations based in the United States, a key differentiator we believe will enable the combined entity to compete more effectively in today's complex and evolving market environment.

Through our combined strength and resources, we are confident in our ability to unlock and deliver meaningful value with speed, agility and diligence. With the industry's most comprehensive product and brand portfolio, broader geographic reach, enhanced support and marketing capabilities and greater operational flexibility, we believe the combined company will be well positioned to drive accelerated growth and innovation while optimizing the customer and consumer experience. Further, we have strong complementary cultures, which are rooted in a shared commitment to customer focus and operational excellence. This positions us well to deliver value.

We expect to realize following close, approximately $90 million in run rate cost synergies by the end of year 3 and for the transaction to be accretive to adjusted diluted earnings per share in year 2, while generating significant cash flow. Combining the resources of both MasterBrand and American Woodmark is expected to enable increased investments in next-generation automation to drive further efficiencies, advance production innovation and provide an enhanced customer experience.

Before I turn it over to American Woodmark's President and CEO, Scott Culbreth, I'd like to give an overview of the transaction terms. Under the terms of the agreement, American Woodmark shareholders will receive 5.15 shares of MasterBrand common stock for each share of American Woodmark common stock owned at the closing of the transaction. Upon closing of the transaction, which we expect to occur in early 2026, subject to shareholder approvals and receipt of regulatory approval, MasterBrand shareholders will own approximately 63% and American Woodmark shareholders will own approximately 37% of the combined company on a fully diluted basis.

MasterBrand's Board will expand to 11 total directors with 8 directors from the current MasterBrand Board and 3 directors from the current American Woodmark Board following close. I will serve as CEO and Masterbrand Non-Executive Chairman, David Petratis, will remain as Chairman of the Board for the combined company, which will be called MasterBrand. The combined company will be headquartered in Beachwood, Ohio, and will maintain a significant presence in Winchester, Virginia.

With that, I'll turn it over to Scott.

Thanks, Dave, and good morning. Today is an exciting day for American Woodmark and one that we believe will advance our mission of creating value for people. We are pleased that American Woodmark shareholders will receive meaningful immediate value and benefit from substantial ownership in a stronger, more diversified company with significant value creation potential. Together with MasterBrand, we will unlock new opportunities to accelerate growth, innovation and value creation for our customers, our communities and our team members.

Our portfolio is aligned strategically, spanning the full spectrum of customer needs. And following close, MasterBrand will continue to offer our legacy brands that customers know and trust. Overall, through the added scale, resources and operational agility created by this merger, we expect to become a stronger company positioned to grow faster than we would on a stand-alone basis. American Woodmark has built a reputation for quality, innovation and efficiency, driven by our steadfast commitment to the customer experience, a core focus that we share with MasterBrand. I'm confident that our shared approach will ensure we continue exceeding expectations and building lasting relationships.

As referenced in our joint transaction press release, we announced today select preliminary first quarter fiscal 2026 financial results. Please refer to our guidance and the transaction release we issued this morning, accessible on our Investor Relations website.

Shortly, Dave and Andi will speak to the current market conditions. Our belief remains that our products and platforms will allow us to capitalize on tailwinds generated in the industry when mortgage interest rates decline and consumer confidence, new home construction and existing home sales increase.

Together with the proposed transaction with MasterBrand, we will enhance our ability to serve customers and deliver profitable growth and long-term value for our shareholders. We're excited about the future and what we can achieve together.

Now I'll turn it back to Dave to walk through the strategic benefits of the transaction.

Thanks, Scott. As I mentioned previously, this combination brings together 2 customer-centric platforms to create the cabinet industry's most comprehensive portfolio of trusted brands and products. Customers and consumers of both MasterBrand and American Woodmark are expected to benefit from increased access to an expanded portfolio of world-class brands, including stock, semi-custom and premium products across the full price spectrum.

Importantly, we remain committed to growing each company's legacy brands, which channel partners know and trust. For MasterBrand, the addition of American Woodmark's portfolio further enhances MasterBrand's existing portfolio and brings MasterBrand closer to customers through a diversified channel mix and expanded geographical footprint. We believe the addition of American Woodmark's semi-custom brands offers an exciting opportunity for growth and expands MasterBrand's existing offering at this price point, offering customers increased optionality.

For American Woodmark, the addition of premium, semi-custom and additional stock brands provides access to a broader and even more balanced channel mix that we believe will drive meaningful value creation and greater opportunities for a superior customer and consumer experience.

The enhanced diversity of the pro forma channel mix is anticipated to bring the combined company even closer to more customers, providing direct access to more high-growth markets and increased touch points for customer support with an enhanced service offering and offering customers greater access and flexibility to where and how they purchase.

With that, I'll now turn it over to MasterBrand Executive Vice President and Chief Financial Officer, Andi Simon, to walk through the combined company's financial profile.

Thanks, Dave, and good morning. We believe this transaction will accelerate value delivery for all shareholders and provide customers and consumers with a unique and distinctive offering. From a balance sheet perspective, we expect the combined company's pro forma net debt to adjusted EBITDA ratio at close to be below MasterBrand's stated 2x target leverage ratio. This positions the combined company to maintain exceptional flexibility to continue to invest in our customers and our business as well as deliver even greater value to shareholders.

The combined company is expected to generate significant free cash flow. And on a trailing 12-month basis, we would drive approximately $639 million in pro forma adjusted EBITDA, inclusive of anticipated run rate cost synergies of approximately $90 million by the end of year 3 following close. While the transaction consideration is comprised solely of MasterBrand stock, MasterBrand plans to arrange a revolver expansion with its current banking group to refinance American Woodmark's debt following the close of the transaction.

Now turning to expected synergies. As mentioned previously, following close, the combined company is expected to achieve run rate cost synergies of approximately $90 million by the end of year 3. These anticipated cost synergies are in addition to the savings initiatives already underway at both MasterBrand and American Woodmark and the continued expected synergies from MasterBrand's acquisition of Supreme last year. These expected synergies are primarily driven by procurement and overhead optimization, manufacturing network optimization and operational excellence through the implementation of best practices and technologies from both companies. And we are confident in our ability to realize these significant value creation opportunities.

Additionally, following close, MasterBrand will appoint Executive Vice President, Corporate Strategy and Development, Nat Leonard, as Chief Integration Officer, to lead the implementation of the integration plan [ under works ]. In this critical role, Nat will be responsible for carrying out the detailed planning and diligence completed by both companies and turning it into tangible results, aligning teams, processes and systems to realize the full value of these projected synergies and position the combined company for long-term success?

I will now hand it back to Dave to further highlight the strategic benefits of the transaction.

Thanks, Andi. In addition to our shared customer-centric cultures, I want to emphasize our shared commitment and relentless focus on innovation to elevate the customer experience and fuel sustainable growth. As Andi mentioned, the combined company is expected to generate significant cash flow to drive our capital allocation strategy. Together, we see a powerful opportunity to invest across areas of our business to create a more agile foundation that we believe will enable us to further optimize operational efficiency, advance product innovation, expand e-commerce capabilities, enhance both in-person and digital engagement and elevate the customer experience.

Further, our shared commitment to fostering mission-driven cultures that drive innovation, uplift customers, empower partners and strengthen communities creates a powerful foundation for long-term success. We believe this alignment not only differentiates the combined company, but also enhances our ability to deliver lasting value. Scott and his team have built a strong culture of deep customer relationships, operational excellence and leading with integrity in every facet of their business, and we're energized by the opportunity to bring together exceptional talent across MasterBrand and American Woodmark, and are confident in the impact we can make together.

With that, I will now turn to MasterBrand's second quarter 2025 financial results. MasterBrand's strong results for the second quarter of 2025 reflect our team's continued focus on disciplined execution, operational consistency and resilience across our business. Despite ongoing market softness and a challenging external backdrop, we remain committed to our strategic priorities and what we can control, serving our customers with excellence, managing costs effectively, preserving margins and executing on our ongoing Supreme integration strategy. This morning, I'll provide an overview of the market environment and key trends, and Andi will walk through our financial results and outlook.

During the second quarter, the broader single-family new construction market declined low single digits, driven by ongoing pressure on housing starts and completions. Despite that backdrop, we outperformed the market with our builder direct sales up 5% year-over-year. Our consistent service performance has helped us continue to gain share with both existing and new builders despite elevated interest rates and persistent macroeconomic uncertainty.

Looking ahead, we continue to expect overall new construction end market demand to be down mid-single digits for the full year 2025. However, we believe our strong position, operational discipline and trusted service model will allow us to continue delivering value in this evolving landscape.

Shifting to the repair and remodel market serviced by our dealer and retail customers. We saw continued choppiness in demand as end markets have been impacted by higher housing costs, low existing home turnover and low consumer sentiment. Our legacy repair and remodel business, excluding Supreme, declined approximately mid-single digits year-over-year, which was aligned with the broader market and our expectations. Reduced consumer confidence led to softer traffic at our retail partners with impact most pronounced in stock chemistry and across our e-commerce platforms.

Our semi-custom products demonstrated growth in the quarter as consumers trended towards the middle of the portfolio options, underscoring the value of our multi-tiered product offering. We anticipate the end market softness to continue in repair and remodel throughout the remainder of the year as consumers continue to defer large discretionary purchases in the uncertain economic environment. We continue to expect this market will be down high to mid-single digits for the full year 2025, in line with our outlook for the market more broadly.

Against that backdrop, we are executing well on the integration of Supreme with the majority of our plant consolidation initiatives in North Carolina nearing completion. We remain aligned with our synergy realization time line and expect these benefits to ramp meaningfully in the second half of 2025. The integration of Supreme remains a major unlock for our business as we navigate a challenging market environment.

While 2025 remains defined by external complexity, it's equally a year of focused execution and opportunity. We're doing what we said we would do, managing costs, advancing integration, funding innovation and delivering for our customers. With this said, we're reaffirming our full year guidance, a reflection of our confidence in the business and the momentum we're carrying into the back half.

Now with that, let me turn the call over to Andi.

Thanks, Dave. I'll begin with a review of our second quarter financial results, then provide context for our full year 2025 outlook. Second quarter net sales were $730.9 million, an 8% increase compared to $676.5 million in the same period last year. Similar to what we saw in the first quarter, our top line growth was driven primarily by the continued contribution from the Supreme acquisition, which remains on track with our expectations.

We also benefited from the flow-through of planned price improvements and share gains, particularly in the new construction market. These gains were partially offset by overall softness across the markets we serve and the corresponding volume decline. Gross profit was $239.7 million, up 3.8% compared to $231 million in the same period last year. Gross profit margin was 32.8%, down 130 basis points from last year, but improving by 220 basis points from the first quarter of this year.

This sequential improvement reflects expected seasonality, while the year-over-year decline was driven primarily by lower volumes and associated fixed cost leverage. That pressure was partially offset by contributions from Supreme, our continuous improvement efforts net of inflation and higher net ASP. Tariffs were a minor factor in the quarter, and I'll touch more on our full year mitigation strategy in a moment.

SG&A expenses totaled $159.4 million, up 8.7% compared to $146.7 million in the same period last year. This was primarily driven by the addition of Supreme's SG&A expenses. Net income was $37.3 million in the second quarter compared to $45.3 million in the same period last year. The year-over-year decline reflects the higher SG&A just mentioned as well as increased amortization and restructuring costs. These were partially offset by lower interest and tax expenses.

Interest expense declined to $18.9 million from $20.6 million in the same period last year, driven by the absence of onetime charges associated with the senior notes issued in June 2024 to fund the acquisition of Supreme. Income tax was $11.7 million or a 23.9% effective tax rate in the quarter, consistent with our expectations and compared to $14.8 million or a 24.6% rate in the second quarter of 2024. The slight decline in our effective rate was primarily driven by the mix of earnings across domestic jurisdictions.

Adjusted EBITDA was $105.4 million, relatively flat compared to $105.1 million in the same period last year. Adjusted EBITDA margin came in at 14.4%, reflecting a 110 basis point decline year-over-year, driven by the same volume-related leverage challenges I referenced earlier. However, these were offset in part by continuous improvement savings net of inflation, contributions from Supreme and pricing actions.

Diluted earnings per share were $0.29 in the second quarter of 2025 based on 129.1 million diluted shares outstanding. This compares to $0.35 in the second quarter of 2024, which was based on 130.7 million diluted shares outstanding. Adjusted diluted earnings per share were $0.40 in the current quarter compared to $0.45 in the prior year period.

Turning to the balance sheet. We ended the quarter with $120.1 million of cash on hand and $418.6 million of liquidity available under our revolving credit facility. Net debt at the end of the second quarter was $878.6 million, a $66.1 million reduction sequentially, resulting in an improved net debt to adjusted EBITDA leverage ratio of 2.5x, in line with our expectations. We remain on track to achieve a sub 2x leverage ratio by the end of the year.

Net cash provided by operating activities was $53.4 million for the 6 months ended June 29, 2025, compared to $96.1 million in the comparable period last year. Second quarter cash generation improved significantly sequentially as several nonrecurring outflows from the first quarter did not repeat. Capital expenditures for the 6 months ended June 29, 2025, were $27.9 million compared to $18.3 million in the comparable period last year. The increase reflects planned investments related to the integration of Supreme and our ongoing footprint realignment efforts. These investments are aligned with our full year capital allocation plan.

Free cash flow was $25.5 million for the 6 months ended June 29, 2025, compared to $77.8 million in the comparable period last year. This year-over-year decline was anticipated and consistent with our internal expectations. We remain committed to our full year objective of generating free cash flow in excess of net income. As we look to the back half of the year, we expect free cash flow to normalize, supported by the absence of certain onetime payments, more typical seasonal patterns and growing benefits from our integration initiatives.

We continued share repurchases in the second quarter via a pre-established 10b5-1 program. During the 13 weeks ended June 29, 2025, we repurchased approximately 576,000 shares of our common stock. The shares were repurchased at a total cost of approximately $6.7 million or an average of $11.69 per share.

Now turning to our outlook. Our full year 2025 financial outlook includes only those tariffs currently in effect and is consistent with our previous outlook. It does not reflect potential implications from proposed trade policy changes. We continue to monitor the dynamic tariff environment closely and are closely watching the potential reinstatement of Section 232 tariffs on steel, aluminum and lumber, which could take effect as early as August 15. If implemented, we anticipate these could have a significant impact on cost and the overall impact on demand remains unknown at this time. We believe it is prudent not to quantify that impact at this stage given the lack of clarity around scope, timing and duration. That said, we are continuing to prepare for a range of mitigation strategies, including targeted price increases, supplier renegotiations and longer-term shifts in sourcing and footprint.

As Dave mentioned, MasterBrand is reaffirming its expectation that our addressable market in 2025 will be down high to mid-single digits year-over-year with continued variability by end market. We continue to expect our annual net sales to decline low single digits overall, including a mid-single-digit contribution from Supreme and organic net sales are still expected to be down mid-single digits. We are reaffirming our full year adjusted EBITDA guidance of $315 million to $365 million with a corresponding margin range of 12% to 13.5%. In addition, we are reiterating our previous expectations on interest expense, effective tax rate and adjusted diluted earnings per share, consistent with what we shared on our most recent quarterly earnings call.

Given the uncertainty around tariffs and in particular, the potential impacts on demand, we believe maintaining a wider range remains prudent. Please note, this outlook does not reflect any anticipated financial benefits from the proposed merger with American Woodmark nor does it include expected transaction or integration-related costs. We are very excited about the announced merger between MasterBrand and American Woodmark. By leveraging our respective strengths and harnessing the expected synergies between our businesses, we believe the combined company will be able to drive greater value for customers and shareholders.

Now I would like to turn the call back to Dave.

Thanks, Andi. We're executing well in what continues to be a challenging environment. Our culture and associates' dedicated use of our business system, the MasterBrand Way, is proving to be effective. Our Supreme integration initiatives are progressing on schedule. And as a result, we delivered a strong second quarter. We're taking proactive steps to manage tariff and sourcing risks, and we are maintaining a balanced view of 2025, cautious in the near term, but confident in our long-term trajectory.

Additionally, I want to reiterate our excitement about partnering with Scott and the American Woodmark team. This transaction brings together 2 highly complementary businesses with strong customer-centric cultures, extending our combined geographic reach, enhancing our support and marketing capabilities and increasing our operational flexibility. We anticipate that the proposed merger between MasterBrand and American Woodmark will position the combined company to unlock and deliver meaningful value for our customers, associates and shareholders.

And with that, I'll open the call up to Q&A.

[Operator Instructions] And our first question comes from Garik Shmois from Loop Capital.

Congrats on the merger announcement. I was wondering if you could just first off, start with the timing of the transaction. Why now? And clearly, the markets are still pretty choppy. So just kind of curious as to the decision to come together at this point.

Garik, thanks. I think what we like about this transaction is it's a really compelling combination of 2 great U.S. companies with great value-generating opportunities. Lots of opportunity and value to generate for our customers with the expanded product portfolio and our operational footprint that we think bringing together makes it more efficient and delivers higher value to our customers. Plus coming together really fortifies our financial profile, which has a couple of benefits. One, it allows us to really continue to invest in our business, but also bolsters us for whatever financial or market dynamic we're seeing out there. And I think lastly, I think the transaction and the combination really expands the opportunity for our associates and team members. And we have very complementary cultures that we mentioned in our prepared remarks. And I think you put all those things together, and it makes it a good time to do this transaction. Scott, did you have anything to add?

Yes. Just to add to those comments, Dave, I think the 3 key stakeholder groups, Garik, just specifically, when I think about customers and consumers, what's this going to allow us to do, we're going to be able to better provide choice service value to that particular group. I think about shareholders and the value creation that comes from the synergies that have been framed by Andi of the $90 million in year 3. And then as Dave just mentioned, with respect to our team members and associates, growth opportunities as being part of a larger organization with more resources.

And I think I'll add one last thing, Garik, is if you look at the presentation, and I know it's a quick turn here, but I think we -- at close, we come out with a better balance sheet combined, and we're anticipating being below our stated goal of 2.0 on a leverage ratio. And so I think that prepares us well, again, like I said, for whatever market environment that we're in.

Okay. That makes sense. On the cost synergies, I was wondering if you can go into a little bit more detail within the different buckets where you see the most opportunities?

Yes. I think to start, we did a very deep dive, a joint deep dive. We also brought in a third-party independent resource to look at all of the opportunities there. So we've done a very detailed analysis. I think at this point in time, we're still -- as we presented in the presentation, it's about a little over 40% G&A and indirect costs and then a little under 60% in COGS. There's a lot to be done there. And so I think that's the level of detail we're comfortable sharing right now.

Okay. That's fair. And then last question is just on the combined entity will have meaningful exposure across the different channels. And just wondering how you're thinking about concentration or even cannibalization issues that you might experience both on the channel perspective and any thoughts to any regulatory hurdles that the merger might face?

Yes. I mean I think I'd start by saying we recognize it's a competitive environment out there. We've got to earn our place every day, and we do that individually today. I think combined, as I said earlier and Scott also focused on, we think that bringing our 2 portfolios together really offer a lot of choice and value, both to our channel partners as well as to consumers. And I think that the other piece of that, which I think is as important is that combined financial profile allows us to really invest in that customer and consumer experience. And I think you put those things together, and I think you have a compelling story for how we can continue to go out and win with our existing customer base. And so I think that's a compelling story. As it comes to the regulatory hurdles, we're very confident that we can get through that process. We have great advisers. We've analyzed this, and I think we're ready to go on that front.

Just one additional comment I'd add to that. When you do look at the pro forma data, Garik, on specifically, I would tell you that I think it's a better diversification from a channel standpoint go forward as opposed to the 2...

Our next question comes from McClaran Hayes from Zelman & Associates.

Congratulations. On the cost synergies piece, any more detail that you could share around the phasing of that $90 million over the 3-year period?

Yes. Thanks for the question, McClaran. I think the -- probably the best way to think about that is if you go back to how we phased the synergies with Supreme, it's going to follow a similar path. And that's -- there are certain things that are easier and certain things that are harder. And without going into too much detail because, again, I think it's premature to do that, it will phase in a similar fashion to what you saw from Supreme. So there'll be some early-stage things that are easier to do that we'll get after right away, things like supply chain consolidation and so forth. And then as you go further out, there are other things that take a little bit longer and require in-depth planning and thought before you make moves. And so I think that's -- I would use that as a model of how to think about it.

Okay. Yes. And I guess on Supreme, relative to that $28 million 3-year target, can you quantify where you expect to be by the end of the year on that?

Yes. I think we're on track to -- we're in year 2 here, on track for those synergies. And as we've highlighted in the past calls, and I'll give you a little more detail, our North Carolina consolidation is largely complete. We're making cabinets at run rate for all the brands that we've moved around there, which is quite an accomplishment because those are premium brands, so they're a bit more complicated than your stock product, for example. And then the other consolidation that we're working on is really, again, phased in, and we expect that to be largely complete certainly by this time next year, but probably a bit earlier than that. So you should start seeing that run rate happen in the next 12 to 18 months.

Okay. Great. And then, yes, Dave, I think you called out some prebuy activity on your last call. I guess, could you quantify that in the quarter or give us some detail on how demand is shaping up so far in the third quarter?

Yes. I think the way I'd frame it is we saw steady demand in Q2 in the single-family new construction, although as we highlighted last quarter, we see the storm clouds, if you will, on the horizon with starts and completions. That's carried a bit through July, but I think we're starting -- we're getting into that zone where the completion rate coming down starts to affect our single-family new construction portion of our business. So I think as you look at our guidance looking forward, we're expecting that, that market is going to be softer moving forward. The team has done a great job in that category, has really been out there pushing hard to try to grow in the face of that, but it's -- I think that gets challenging as the market slows a bit here. And again, I think I would characterize the new construction market. It's not a devastating decline. It's -- I think it's a normalization to adjust for consumer demand and the fact that there are a large amount of spec homes still available on the market. So that's how I'd characterize that.

On the repair and remodel side, I think it's been very similar for the past several quarters of this choppiness. It's at a reduced level, and I think you can see that in our results and in our projections. So I'd say there's no change in trajectory on R&R. It's just been down. I don't know, Scott, if you wanted to add anything on what you're seeing.

Yes, similar pattern. R&R has been kind of bouncing at the bottom is the way we frame that. It's been consistent I would say, new construction a little worse in our most recent quarter than the prior quarter as we started to see some of the impacts of the very soft spring selling season in that space.

[Operator Instructions] Our next question comes from Trevor Allinson from Wolfe Research.

You guys both have pretty notable presences in the home center channel. Do you expect on a combined basis that you're going to see any difference in your exposure there versus what the pro forma combined would be? And then a similar question on dealers versus builders. MasterBrand historically bigger presence with dealers. American Woodmark, historically bigger presence with builders. Any early reads on if there's a preference to change the combined exposure versus where the pro forma numbers would shake out to?

I think the way I'd answer it, Trevor, is what we like about this transaction is we think it actually brings more value to all of our customers in all those channels. And we intend to bring these companies together with a comprehensive portfolio and footprint to drive overall value for them. I think where there's some interesting opportunity is our expanded dealer network is much more extensive than American Woodmark's. They have some great products. And we -- much like we did with Supreme, we fully intend to introduce those products into our dealer network. There's a lot of similarity in that there's very complementary overlap. There's not a huge amount of overlap between our dealer networks. And that's been -- I know that's been a focus for Scott and his team. And he just got a much bigger sales force to go execute on that and existing relationships that we can go deliver. I'll say that we did not, in our deal modeling for either side, didn't plan on these. They're not built into our model, much like we did with Supreme. But we still see -- we do see compelling opportunity there for growth to expand the products offered to our extensive dealer network.

Just adding on to that as well, Dave. Maintaining and expanding our customer relationships is going to be a top priority as we work through this integration plan. We are already actively engaging with our customers as early as in the last hour to discuss the benefits of the companies coming together and our enhanced offerings and service capabilities. And our view, as Dave just highlighted, with an expanded portfolio, we're going to be looking at cross-selling opportunities for both companies.

Okay. That makes a lot of sense. And then second question, you talked about the combination helping you compete better in today's environment. I think you mentioned, again, an uncertain environment from a demand perspective. But I think maybe also you were alluding to an environment where bigger tariffs are potentially in place. So can you just talk about how the combined organization would be better suited to compete in that environment?

Yes. I don't know that -- I think in general, the tariff environment is something that we're both managing well. But I think as we consolidate here, we have the ability to manage that in a joint way that I think will be more effective. And I think that's how I'd look at it. Scott, do you have any...

No, I agree with those remarks, Dave.

And our next question comes from Steven Ramsey from Thompson Research.

Congrats on the deal. I wanted to start with the network optimization and the synergy benefits from there, American Woodmark, just the 2 new facilities in Hamlet and Monterrey to help the business as demand gets better. I'm curious how you think about the network as it is and putting the companies together and where the benefits could come from?

Yes. Thanks for the question. I think the way we look at it is we have complementary operational footprints. There's a lot of work to do to really dial into the details, which we're not going to go into today. But I think what you do is you look at your customer footprint, the service levels that you provide to your customers and you optimize off of that. I mean any of these kind of decisions start with the customer and how you serve them and then you work back towards the combined factory footprint and you optimize around that. I think that's the best way to think about it. And that's the work to be done once we close.

Okay. That's helpful. And similar type of question, thinking about the brands of these 2, really 3 companies, if you include Supreme, how you think about potentially pruning brands and focusing to get any marketing spend optimization, if that's baked into the synergy or how you're thinking about it?

I think there's more to come there. I don't think it's -- I think we sort of see it as additive in a lot of ways. There may be some opportunity for that. But as we started looking at this opportunity, I think we're looking more at where we both have gaps and where we can fill that in. The cabinet industry is interesting. There's a lot of different brands out there and it's not a -- it's a trade brand, not a consumer brand. And I think that the trade brands have resonance. All of the American Woodmark brands have strong resonance with their channel partners, ours do with ours. I think there's more opportunity here to bring those additional brands than, I'd say, take away at this point. And down the road, this is -- we're always looking at what's the most efficient way to serve our customers. But I think in the near term, that's how we're approaching it. Scott, did you have anything?

Exactly. We're both wanting to grow our legacy brands. That would be the punchline takeaway from that standpoint to Dave's marking down the road, you never know. But today, our focus will be to grow those legacy brands that are powerful in the marketplace today.

Okay. That's helpful. And last quick one for me. I may have missed it, but wanted to get the cost of achieving the synergies for American Woodmark. And then maybe just on a percentage basis, how it compares to the cost to achieve synergy within Supreme?

So the integration costs, they will -- they'll phase as well with some being upfront and then the ramping as we do some of the consolidations. But they will be -- from a ratio perspective, they will be -- from a dollar perspective, similar, but from a ratio perspective to the size of the company less. And that's because when you look at consolidations and some of the complexities of Supreme, they were premium businesses. So those are much more difficult to combine where this is more on the value semi-custom stock products. So it's -- I won't say it's easy, but it's less difficult than what a premium consolidation is.

And our last question comes from Tim Wojs from Baird.

Congrats on the acquisition and the deal here. Maybe just first question, just if you could talk a little bit maybe about the process of this transaction and maybe how this -- the deal has kind of come together on both sides. And then if there's any sort of kind of breakup fee or anything like that on either side would be helpful.

Yes. Thanks, Tim. Scott and I started talking about this earlier in the year, and I quickly came to the conclusion that there's a compelling value to be generated in combining 2 great U.S. companies. And we started -- and we continue the conversations from there and did a lot of detailed work on both sides, good collaboration on understanding that value and on figuring out how we would go about unlocking it.

In terms of the deal specifics, we're launching an 8-K if it hasn't already been published that's got all the deal specifics, and I'd direct you to that to look at any of it. It's a very market-based transaction merger agreement. So I'd direct you to that to take a look at the specifics.

Okay. Okay. That sounds good. And then I guess on a pro forma basis, I mean, there's been a lot of acquisition activity, I'd say, in the cabinet space over the last 5 to 8 years. Where do you think like the combined entity would be from a market share perspective once the deal closes in total?

Yes. I think I'd rather not comment on that, Tim. I think the -- we put some information in our presentation that talks about our channel coverage, the combined entity's product portfolio. And I think that's a good way for you to direct you to what this entity will look like at close.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.