Q1 2025 MasterBrand Inc Earnings Call and Business Update
Welcome to MasterBrand's first quarter 2025 Arnie's conference call. During the company's prepared remarks, all participants will be in a listen-only mode. Following management's closing remarks, calls are invited to participant in a question and answer session. Please note that this conference call is being recorded.
First quarter net sales were $663 million or.
Three 5% increase compared to $638 $1 million in the same period last year.
Our topline performance was primarily the result of the positive contribution from our Supreme acquisition, which continues to perform in line with our expectations.
And the flow through of our anticipated net ASP improvements and share gains, particularly in the new construction market, partially offset by overall weakness in the markets, we serve and the related volume decline.
Gross profit was $202 $2 million in the first quarter down one 2% compared to $204 $7 million in the same period last year.
Gross profit margin decreased 150 basis points year over year from 32, 1% to 36%.
This year over year margin decline was due to lower volumes and the related impact on fixed cost leverage partially offset by positive contribution from Supreme continuous improvement net of inflation and higher net asps.
Tariffs had a minor impact in the quarter.
I will discuss our expectations for their full year impact along with our recovery and mitigation plans on a review of our full year outlook.
Selling general and administrative expenses were $154 million up 11, 8% compared to $137 $8 million in the same period last year.
Virtually all of the increase in SG&A was driven by Supreme related items. Specifically. The addition of Supreme to SG&A expenses acquisition related costs, including some incremental depreciation with the remainder being driven by increased spending on our digital and technology initiatives.
These increases were partially offset by volume related reductions in commissions distribution and freight costs.
Net income was $13 $3 million in the first quarter compared to $37 $5 million in the same period last year.
The year over year decline was primarily driven by higher SG&A expenses due to the addition of Supreme as I, just discussed as well as higher interest expense related to the funding of the Supreme acquisition restructuring costs and the amortization of intangible assets, partially offset by lower income tax expense.
Interest expense was $19 $4 million in the first quarter compared to $14 $1 million in the same period last year. This.
This increase in interest expense related to debt necessary to fund the Supreme acquisition.
Income tax was $4 million or 23, 1% effective tax rate in the quarter compared to $11 $5 million or at 23, 5% rate in the first quarter of 2024.
Diluted earnings per share were 10 cents in the first quarter of 2025 based on $130 7 million diluted shares outstanding have decreased from diluted earnings per share of <unk> 29 in the first quarter of last year based on $130 5 million diluted shares outstanding.
Adjusted diluted earnings per share of our 18th and the first quarter compared to 31 in the prior year period.
Adjusted EBITDA was $67 1 million compared to $79 $4 million in the same period last year.
Adjusted EBITDA margin declined 220 basis points to 10, 2% compared to 12, 4% in the comparable period of the prior year, primarily due to the impact of lower volume and fixed cost leverage which more than offset the benefit of our anticipated net ASP improvements savings from our continuous improvement.
Efforts net of inflation and contribution from Supreme.
Turning to the balance sheet, we ended the quarter with $113 $5 million of cash on hand, and $358 $6 million of liquidity available on our revolver.
Net debt at quarter end was $944 $7 million, resulting in a net debt to adjusted EBITDA leverage ratio of two seven times up as anticipated from two four times last quarter.
Including Supreme for a full 12 months, our net debt to adjusted EBITDA leverage ratio was two four times up from $2 two last quarter.
Despite this anticipated increase we continue to see a path to our stated leverage goal of below two times by the end of the year.
Net cash used in operating activities was $31 $4 million for the three months ended March 32025, compared to net cash provided by operating activities of $18 $7 million in the comparable period last year.
As Dave mentioned this decline was in line with our expectations.
We expect our second quarter cash flow to improve as those large first quarter outflows will not repeat.
Capital expenditures for the three months ended March 32025 were $9 $8 million compared to $7 million in the prior year. This elevated number reflects our full year 2025, Capex budget, which includes Supreme integration and footprint realignment spending and we believe will help align our.
Factory network for the current demand environment.
Free cash flow was negative $41 2 million for the three months ended March 32025, compared to positive free cash flow of $11 $7 million in the comparable period last year.
The decrease was in line with our expectations and we are maintaining our goal of free cash flow in excess of net income for 2025.
We expect our free cash flow to return to a more typical pattern in subsequent periods as certain one time payments will not repeat normal seasonal trends will resume and our integration efforts take hold.
Our board of directors authorized an additional share repurchase program under which we may repurchase up to $50 million of our common stock over a 36 month period expiring on March 13th 2028.
This repurchase program replaces the 2023 share repurchase authorization that expired on April 23 2025.
During the 13 weeks ended March 30 of 2025, we repurchased approximately 839000 shares of our common stock.
The shares were repurchased at a total cost of approximately $11 $4 million or an average of $13 60 per share.
Now, let's turn to our outlook.
As we stated in the press release, we issued today, our 2025 financial outlook only reflects the impact of those tariffs any effect as of today. It does not reflect any other potential tariff impacts on our cost or an end market demand.
We believe the dynamic nature of the tariffs specifically the uncertainty of implementation potential timing and duration of any new or changes in tariffs.
That's the usefulness of estimating this information.
As Dave mentioned.
We expect our overall market demand to be down high to mid single digits year over year in 2025 with performance varying by end market. Accordingly, we now anticipate a low single digit percentage decline in our annual net sales year over year.
Let me provide some additional color on the drivers of our net sales in relation to the market.
We continue to anticipate that Supreme will add mid single digits to our net sales in 2025 as we work towards the July 10th anniversary of the acquisition.
We continue to assume very modest commercial synergies related to Supreme as we continue to onboard a train dealers and prepare our factory footprint for related growth.
We now expect a mid single digit decrease in our organic net sales year over year.
With more visibility into a slow and uneven spring selling season, particularly with increased weakness in builder activity retail point of sale trends, specifically in our stock product and continued softness in our dealer channel. We believe it was appropriate to lower our full year expectations to reflect the negative impact of <unk>.
Economic uncertainty on our end market demand, especially on big ticket items.
As we discussed last quarter, we continue to expect new products and channel specific packages and share gains across our channels to allow us to outperform the market in our legacy business.
With respect to seasonality based on the first quarter and what we have seen in the second quarter. So far.
We expect 2025 net sales to exhibit normal seasonal demand pattern.
That said in addition to being weaker this years spring selling season began later than last year, which benefited from a stronger new construction market in the first half of the year.
This challenging comparable will continue to impact our year over year decremental performance in the second quarter of 2025.
Additional market dynamics are expected to challenge margins as choppy demand limits, our ability to operate plants at peak efficiency.
In response, we are implementing a series of targeted actions and efforts to preserve profitability.
Our footprint optimization initiatives announced in 2024 are progressing however.
The associated cost savings will take some time to fully materialize.
Our workforce is being realigned to better match staffing levels with current operational needs. Despite these efforts, we anticipate headwinds to fixed cost leverage in the second quarter with margin performance improving in the second half of 2025.
As I mentioned earlier tariffs had a minor impact in the first quarter looking.
Looking forward existing tariffs are impacting our product categories in different magnitudes and.
In aggregate and on a full year annualized basis, the potential exposure from tariffs will be low single digits as a percentage of net sales.
We are aiming to mitigate some of the impact through a multi pronged strategy of price increases renegotiating terms with existing suppliers sourcing from new suppliers in regions not affected or less impacted by tariffs and exploring further manufacturing footprint adjustments to optimize costs.
Even as we are executing these remediation plans, we are seeing alternative suppliers take advantage of the pricing umbrella created by tariffs and follow with similar price increases.
We believe our counter measures will materially offset the impact of tariffs, but we anticipate it will take some time for the benefits to show in our in our financial performance.
We are continuing a disciplined approach to SG&A spending while remaining committed to investing in the business. We believe this healthy tension between managing costs and investing for growth is appropriate given the current market conditions for.
Proactively managing costs not only allows us to mitigate margin pressure, but also gives us the financial flexibility needed to invest in targeted areas with the goal of capturing market share and growth when demand recovers.
Despite current headwinds we remain confident in our strategic priorities.
Our continuous improvement initiatives are tracking in line with our previously stated expectations. Despite volume declines and Supreme synergies are also progressing as planned.
We will continue to ramp throughout the year and we are on track to achieve the previously disclosed amounts.
With this in mind, we now expect adjusted EBITDA in the range of $315 million to $365 million with adjusted EBITDA margins of roughly 12 to 13, 5% for 2025.
We believe the widened range as deemed prudent due to the unknown impact of tariffs on demand <unk>.
While tariffs have introduced more uncertainty into our outlook and negatively impacted demand. We believe it is important to continue to share our view of the markets. We are operating in and our anticipated financial performance.
Interest expense still is expected to be approximately $68 million to $73 million and we continue to anticipate an effective tax rate of around 25% as such for 2025, we expect our adjusted diluting diluted earnings per share to be in the range of one dollar at <unk> to $1 32.
We now expect 2025 capital expenditures to be in the range of $75 million to $85 million down $10 million from our previously stated range.
As I stated last quarter after excluding $27 million related to the Supreme integration and footprint realignment. This investment is just under one times depreciation which is within our stated long term goals.
With 2025 shaping up to be another year of softer anticipated demand.
Speaker Change: This outlook is focused on our goals of actively balancing near term financial performance is stability in a dynamic environment, while continuing to maintain capacity invest in growth to create long term value for our shareholders now I would like to turn the call back to Dave.
Dave: Thanks, Andy.
Dave: As you can see we're currently operating in a more dynamic environment.
Speaker Change: While we cannot control tariffs or their impact on end market demand, we can control, how we react to them.
Through the disciplined use of our business system. The Master brand way, we are confident in our strategy to navigate through these uncertain times as we have in the past.
Speaker Change: We believe staying focused on our customers and delivering superior products and services should allow us to outperform the market throughout the cycle and deliver superior financial performance for our investors now.
Speaker Change: Now with that I will open the call up to Q&A.
Speaker Change: Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Moderator: Our first question comes from Garik <unk> with loop capital markets. Please proceed with your question.
Garik: Oh, hi, thanks, Thanks for all the detail I was hoping you could speak a little bit to how you're thinking about pricing recognizing you implemented a price increase previously and it sounds like you might need additional actions to counteract tariffs.
Moderator: Are you seeing any impact.
Moderator: Impact on the demand side related to pricing.
Moderator: And if you can maybe help us understand.
Moderator: If there is additional pricing that's needed at this point to offset higher costs.
Moderator: Yeah, Derik sure the I think that let me first surface, saying, yes, there is.
Moderator: Additional price, but it's related to the tariff impact we're using a surcharge methodology for that.
Moderator: <unk>.
Moderator: Kind of put out there that.
Moderator: If it's <unk>.
Speaker Change: Tariffs change or come off we'll adjust that surcharges as appropriate along with that in terms of.
Speaker Change: The mechanics of it it's very similar to what we've talked about in the past certain parts of the market.
Speaker Change: Can go quicker and.
Speaker Change: In general we've.
Speaker Change: Had some empathy for our customers in that sense and so all of them have gotten a little bit of a window. Most of April while we were waiting to figure out what the kind of final are sort of semi finals tariff numbers, where they are we changing so much basically throughout the month that we we just listened a lot <unk>.
Speaker Change: And waited but.
Speaker Change: Moving forward, it's all a matter of timing in certain projects and certain customers have to be negotiated and we are in that process right now so.
Speaker Change: I think that's that's the kind of stage, we're in we're going to have to see how demand develops from it.
Speaker Change: It is a bit strange we talked a lot about the choppiness of demand we have seen some demand coming in over the past months through this tariff discussion is really high.
Speaker Change: Highlighted in the prepared remarks.
Speaker Change: We don't see that as a signal of future demand, we see that more as a potential that people are pre buying you have seen that another large ticket items.
Speaker Change: Around <unk> around the country. So.
Speaker Change: Theres been some buying with that.
Speaker Change: It's hard to tell when that's going to start downturn, we've sort of <unk>.
Speaker Change: <unk> forecasted that out as sort of the tail end of Q2 and into Q3 and four that were going to start seeing some impact on demand overall in the market and thats not some of Thats based off of things like starts that came down in March but some of it is also just.
Speaker Change: An estimate of where we think the market's going in the second half.
Speaker Change: Okay. Thanks, and just wanted to follow up on that point with respect to.
Speaker Change: Maybe <unk> and I think you mentioned that Youre expecting.
Speaker Change: Normal seasonality, if I heard that correct is that mainly a function of.
Speaker Change: Some of the pre buying that Youre seeing right now.
Speaker Change: Any other ways that you can maybe help us think through the.
Speaker Change: The demand cadence.
Speaker Change: The best you can just give me your visibility right now.
Speaker Change: Yes, I think.
Speaker Change: Within a quarter. It's you can see what backlogs are doing and so I think we're pretty comfortable with that we're seeing that seasonality here in Q2 again theres no real crystal ball on what will happen in the second half across particularly in R&R I think.
Speaker Change: You can listen to builders talk about what they're planning for the year, but.
Speaker Change: We have to kind of pick.
Speaker Change: Pick a spot and say this is what we think it's going to be an aim for that in terms of capacity in head count and all the costs associated inventory all of that kind of stuff and so we've kind of put a line down and said this is where we think things are going to go in the second half.
Speaker Change: The one thing I'll say on this in the second quarter as we are eating the tariffs right now.
Speaker Change: Along with the fact that we have not completely adjusted the factory footprint.
<unk>.
Speaker Change: Some of that is taking some time and we'll start seeing the benefits of that.
Speaker Change: Q3, and Q4 so.
Speaker Change: It'll be a little better than the Decrementals, we had in Q1, but.
Speaker Change: But probably not up to our standard in Q2, either so we're going to just take some time to adjust our operating footprint and frankly, we do have scenarios planned for.
Speaker Change: Worse or better, but you have to kind of pick a point and deal with it and that's what we've done here.
Speaker Change: Yes no.
Speaker Change: Last question is just on the.
Speaker Change: Last point on that.
Footprint optimization and trying to have on your cost to where the demand is just wondering if you could maybe expand on how youre thinking about.
Speaker Change: Some of the cost savings measures.
Speaker Change: <unk> seen the near term uncertainty with the potential for <unk>.
Speaker Change: When demand does end up recovery.
Speaker Change: Yes, I think we've always built our factory network to be as flexible as you can in this kind of manufacturing, which is certainly not the most flexible but.
Speaker Change: We really understand how to run a production line from a tack time perspective, and how many people you need in the first movie always make is as you change the tax time, and so youre building slower it doesn't fix the fixed cost portion of it but it's certainly adjust the variable cost appropriately.
Speaker Change: Obviously, the more choppy demand is the harder that is to do so.
Speaker Change: Tend to chase it a little bit here, and there and thats kind of what Youre seeing here in the last couple of quarters. I think we have a good rhythm now where we understand at least where we are today and then the plans. We've put in place really are designed to deal with some of the fixed costs that you can't adjust on a daily basis.
Speaker Change: And if we have to adjust further we have those plans ready to go we just hard to.
Speaker Change: We're not going to do that just yet.
Speaker Change: We'll be able to the moves that we're making right right now don't sacrifice future growth I think that should conditions get worse, then we have to make those decisions around would we sacrifice future.
<unk> future growth.
Speaker Change: To maintain performance and moves have to see how that flushes out right. Now I think we're we're more focused on how do we keep the demand that we have going at the current pace and Theres a lot of effort around that so it's not we're not just throwing up our hands.
Speaker Change: Flooding the market dictate we're trying to make our own way in this in this difficult market, but.
Speaker Change: We're just going to have to wait and see as the year progresses.
Yeah understood alright, thanks for all the help and other Florida.
Gary: Thanks, Gary.
Speaker Change: Our next our next question comes from Adam Baumgarten with Zelman and Associates. Please proceed with your question.
Adam Baumgarten: Hey, everyone. Thanks for taking my question I guess, maybe just thinking about <unk> I know you talked about sales kind of following the seasonal patterns. If we think about margins. There is usually a pretty decent step up quarter over quarter in margins, but you did call out some headwinds and some timing related factors, maybe some help on how you think the margin progression.
Adam Baumgarten: We'll be into Q, I think it sounds a bit better in the second half as some of these initiatives go through but maybe some help on <unk> would be great.
Adam Baumgarten: Yeah sure I think we should see improvement from Q1 for sure. It's maybe not going to be again as I highlighted I don't think our decrementals are in the zone of where we are happy in Q2 in a couple of different factors for that one is just the mix of where the volume is coming in.
Adam Baumgarten: So theres certain factories that are running fairly and efficiently right now.
Adam Baumgarten: We're adjusting that but again you can't unless you close a factory youre not youre not.
Adam Baumgarten: Eliminating the fixed cost portion of that so.
Adam Baumgarten: I've talked in the past about how we have a very good model for adjusting our flow and level loading our factories, but you do reach a point, where the fixed costs becomes over bearing.
Adam Baumgarten: The moves that we're making in terms of the realignment will solve a lot of that in the second half, but theyre not going to be done in the second quarter in.
Adam Baumgarten: In addition, as I highlighted just a few minutes ago, we are.
Adam Baumgarten: Sure.
Adam Baumgarten: Getting the tariff costs and we don't have the price in the market yet. So that's another headwind for Q2 and you take those two combined things in that that puts a bit of weight on the.
Adam Baumgarten: On the P&L from a year over year perspective. So sales are we think we are.
Adam Baumgarten: It will be better than Q1, EBITDA will be better than Q1, but again the.
Adam Baumgarten: Decrementals year over year will not be up to our stuff up to our standard and do you have any additional things to sell and I think that's two.
Adam Baumgarten: Two points.
Adam Baumgarten: Okay, Great and then just on the guidance fairly wide range on EBITDA fully understanding it's a pretty dynamic environment out there I guess, we think about what gets you to the lower high end is it simply kind of the range of sales that you guys put out of those declines or is it on the organic side or is it <unk>.
Adam Baumgarten: <unk> to offset tariffs and pushed through price and maybe it's all of it but maybe you could just help us kind of how we get to the top end or low end.
Adam Baumgarten: Yes, I think the range is really dictated by market demand.
Adam Baumgarten: Obviously within that it's how well we do it at gaining share in <unk>.
Adam Baumgarten: Starting our own course, but I think it gives us a broader range of where we think the market will go because again like I just said.
Adam Baumgarten: You have to pick a point and this is where we're going to operate and aim for and then adjust as you get closer and learn more and right now it's still premature to really have a good feel for the impact that tariffs may have on demand.
Adam Baumgarten: I think its more I don't think the tariffs are having.
Adam Baumgarten: Massive amount of impact particular to our business I think it's just the consumer in general is getting impacted by it and we haven't seen that.
Adam Baumgarten: Show up yet in the market. So it's hard to tell how the consumer's going to behave other than consumers not very happy right now and that doesn't bode well.
Speaker Change: Okay got it thanks best of luck.
Speaker Change: Thanks, Adam.
Speaker Change: Our final question is from Tom Mahoney with Cleveland Research. Please proceed with your question.
Hello, Good afternoon.
Speaker Change: Wanted to go back to the.
Speaker Change: The tariff question and just as you take a step back can you say.
Speaker Change: In a world that has kind of more tariffs in the future than it has had in the past if you think about master brands comparative position relative to others in the category and what are some of the ways that.
Speaker Change: You guys think about yourselves as favorably positioned or.
Speaker Change: In the past.
Speaker Change: The benefits that you could see in a world that has more tariffs as you think about the path to rebuilding margin.
Speaker Change: Versus the pressures that you're seeing right now.
Speaker Change: Yes, it's a good question I think the 80% of our production is in the United States, So compared to other industries, we're better insulated from tariffs because we are really.
Speaker Change: We're a north American.
Speaker Change: Company, but we're predominantly our revenue comes from the United States So from that perspective.
Speaker Change: Where we are.
Speaker Change: Insulated a bit more than other industries from tariffs and I think also there are there's obviously been a model of companies importing 100% of their product into the United States.
Speaker Change: And I think that.
Speaker Change: I think in the current tariff construct it's not really impacting them that much but I think if that change that could potentially impact that now. We've also explained we have some of that supply chain as well.
Speaker Change: We have the capacity in the United States to build those products. Its just theyre going to be a little more expensive I mean, the reason you go to.
Speaker Change: Low cost countries as for affordable housing products and keep the costs down by doing that so I think in general Youll see inflation from tariffs and it's the same reason why everybody's moved certain production offshore is because it helps bring the costs down.
Speaker Change: Over time, though I think that.
Speaker Change: People will adjust their thinking and it may mute demand in aggregate, but I think that.
Speaker Change: We have a good footprint in the United States and I think we can.
Speaker Change: Absorb a lot of that volume, if we need to as things change over time, so a little too soon to tell how it flushes out I don't think in the current.
Speaker Change: Script of tariffs it has a material impact, but I think if that changes over time that it could so we'll just have to wait and see.
Speaker Change: Okay.
Speaker Change: That's helpful perspective.
Speaker Change: Thinking more about 25, and how things move through.
Speaker Change: The first I wanted to talk about with Asps.
Theres carryover price from the second half of last year, but.
Speaker Change: Looking at ASP in the third quarter and the fourth quarter I believe it was negative and so.
It seems like perhaps the mix of the business as a piece of why that was able to swing positive in the first quarter. I guess is there any way to parse that out as.
As you look at the numbers and then how do you think about Asps trending.
At least on the carryover is what you can see for now.
Speaker Change: Yes through the boundaries of year.
Speaker Change: It's sort of indicative of.
Speaker Change: The process of getting price in our business. It takes a couple of quarters. So what youre seeing is probably normal I will say there is definitely some mix.
Speaker Change: We highlighted that the higher end is held up better that's been consistent for a long time here, so thats not necessarily a deviation from the past, but it's.
Speaker Change: What was odd this time was there was definitely.
Speaker Change: Much more softness in the in stock product in home centers.
Speaker Change: And then we expected it would be that we normally see normally that's a product line, that's fairly robust and downtime. So it's sort of signals that the.
Speaker Change: The low end lower end.
Speaker Change: Of the market is under some pressure from from just general.
Speaker Change: Economics, and so I think that makes it a little harder.
Speaker Change: Our goal here this year like I said earlier is to make our own way through whatever happens and we're really emphasizing with our investments things like new product launch.
Speaker Change: How we can get closer to the consumer and bring them into our world If theyre going to buy cabinets. So we just got to go find the people that are willing to buy cabinets in.
And bring them to us so that they are getting great product from us.
Speaker Change: That makes sense and the last one on inventory.
Speaker Change: You guys have talked about doing some pre buy in these areas in the past is that how you would characterize the growth in inventory at least on a year over year basis for <unk> and how do you see that progressing through the year.
Speaker Change: Yes, a little bit and a little bit of.
Speaker Change: Unfortunately, it was a slow <unk>.
Speaker Change: You end up having too much safety stock so it's a little bit of both we did not do a massive.
Speaker Change: Pre buy of anything and it was kind of hard to put your fingers on what was.
Speaker Change: What was going on with the tariffs it changed so rapidly that we we have but.
Speaker Change: Because of the combination of buying a little bit more when we could but also just carrying more inventory because we didn't use it as fast so but thats I think we've demonstrated in the past that we have a good handle on how to adjust that so as we look forward from a cash flow standpoint, those metrics will come down to adjust to the current operating environment.
Speaker Change: Understood. Thank you.
Yeah.
Speaker Change: Thank you.
Speaker Change: We have reached the end of the question and answer session I would now like to turn the call back over to Varun Pollock for closing comments.
Speaker Change: Thank you operator, and thank you everyone for joining US we appreciate your interest and support and look forward to speaking with you in the future. This concludes our call for today.
Speaker Change: This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.