MasterBrand, Inc. (MBC) Earnings Call Transcript & Summary

All right. We'll kick it off. I think some people are still finishing up lunch. I know my lunch right over anyway. For anyone who doesn't know me, James Kayler, homebuilding, building products and rental analysts and bunch of other sectors as well. We're super happy for the first time to have MasterBrand, Inc. coming at the conference. Thank you very much. We have Andi Simon, and I apologize for I don't know your title.

Vice President of Investor Relations.

So thank you guys so much for coming.

So I think maybe just to start because we're not doing it like big formal presentations this year, but MasterBrand is new to the conference, relatively new to the markets. Maybe we can just start with kind of a little bit on the background of the company, Andi and sort of where MasterBrand came from, and then we can start talking about where you guys are headed.

Well, thanks for having us, appreciate it. So MasterBrand really over the decades has been a combination of a lot of acquisitions. We did one just recently, to continue the trend, which I'm sure we'll talk about, the Supreme brand. And over time, that consolidation of various cabinet companies, especially for MasterBrand, which is now the part of [Technical Difficulty] broadest out there for an individual company. We have any type of style and design, price point that anyone may want and we have. And again, we cross basically all categories of cabinets down to stock, value semi-custom, semi-custom and premium and custom cabinetry. We basically -- oh, sure. And that broad portfolio basically allows us to service the widest variety of customers. So we service those customers through a variety of channels. We have over 6,000 customers, basically a lot of retailers, builders, large and small, which we serve direct and indirect and [about 600 to 700] individual builders across the nation. With that said, we have about 20,000 employees and about 20 manufacturing facilities in North America and a pretty large facility in Mexico. And we now, after the spin, a little bit of background there. I think the 2 companies just sort of diverging with respect to their future. Fortune [indiscernible] we spent a lot of its time, effort and resources into technology and technology in products [indiscernible] et cetera, which there's not a lot of technology [indiscernible]. So we also need the technology, but it was a little bit different focus. It was more from an operational focus, from a data focus. And as we improve the operation during those early years of [Technical Difficulty] t over, realized that it was capable of a stand-alone entity [indiscernible] separate ways. So now it's a matter of our future focusing on profitable growth, right? We spent a lot of time over the last 3 or 4 years, focused internally on operational alignment, efficiencies, getting our capacity in our footprint right, commonizing products where we could, which really benefited us from a cost perspective, supply chain. It also has really benefited us as the market changes and there's challenges with trade downs and pricing, we're able to really move customers into a product category that fits their budget needs because of some of our internal efficiency improvements. And now that we have a lot of those behind us, there's still always more to go. But a lot of that's behind us. We're really over the last 18 months now focusing on growth and growth in products that we want to be in, right? We've been very particular over the last couple of years on gaining share where we want to share and potentially let less profitable products go to someone else, let someone else use their capacity, fill less profitable products. So let's get the share we want. And now that we have that better defined, we're looking at each of those channels, retail, builders, big and small and dealers to say where do we really want to grow, which led into one of our acquisitions and other parts of our funnel where we can see certain products where we're still under-indexed in certain regions, certain technologies so that we can continue to grow at the profitability pace that we have been doing.

Excellent. That's a fantastic overview. Maybe just circling back on a few things there. Can you break down like your business a little bit more in terms of how much is repair and remodel versus new construction? And then sort of the channel breakdown, because I think it is it's somewhat different than some other building product categories given the sort of dedicated dealer channel that so many cabinets have purchased through.

Yes. So we're about 1/3 new construction and about 2/3 repair and remodel. And then from the perspective of channels, if I have it right, it's about 20% builders.

10% direct to builder.

10% direct to builder, you're right.

And the rest of that builder channel service through the -- our dealer network. So the rest of the builders are serviced through the dealer network. So to get to that 33% that Andi is talking about, you got about another 23% that goes to builders through the distribution and dealer network. The distribution and dealer network is about 55% in that range. And then the remaining portion is going to be through the retail channel.

And in terms of just the environment that we've been in, there's obviously been -- it's been kind of a crazy few years, right, coming out of COVID. There were massive shortages like lead times got really extended. I think a combination of there was a very high demand and then also there was a decent amount of disruption in terms of like on the production side. Now that we've sort of normalized, I think volumes, industry-wide volumes, you guys have given guidance, I think, for sort of a low single-digit decline, right, I think? Sort of what are the various moving parts like sort of when you break down those channels like what segments are doing better, what segments are doing worse? And then what are the -- I think there's a fair argument to be made that there's probably -- there's a lot of pent-up demand generally for a repair and remodel in the U.S. just given the aging housing stock. What are the things that you're looking at or thinking about in terms of unlocking end market demand?

Yes. So kind of -- so this year, we're basically seeing new construction is up mid-single digits year-on-year. And it was a steady growth throughout the year. I think now you're just seeing year-on-year comps kind of annualizing, but really throughout 2024, it was a nice steady growth for full year-on-year growth in mid-single digits. And then R&R basically offsetting it on the low end of mid being down low single digits. So from our perspective, our volume is relatively flat. So it's been more of a trade down and price fluctuation this year. With respect to driving demand, there's a lot of speculation out there what's going to happen, particularly in the second half. It's a matter of when the recovery happens because we know there is that pent-up demand, right? The U.S. homes they're old, let's say, 38, 39 years old, they're due for R&R. You have a new generation coming in that doesn't like the old style, right? There's been some surveys of -- it's a pretty staggering percentage of people who bought their home are unhappy with their kitchen. So there's just so many statistics out there that tell you that pent-up demand is there I think these just general economic conditions, a lot of anxiety over the election, which is still in existence, credit card debt is high again, and things are just really expensive. So people are just still hesitant on big ticket items. I did see a recent article that small ticket R&R seems to be improving just ever so slightly. But to get that big ticket moving, I think we just need some calmness in the world, quite frankly, interest rates didn't do what we thought they would or at least not yet. But really for that R&R, I think what you're seeing is just that bottoming kind of bouncing along the bottom of R&R of people who have been in their house, they're really unhappy with it or the cabinets finally broke. So they had to go replace them. And what we're really missing from historical R&R is that turnover, right, the housing turnover. So eventually, when things calm maybe interest rates have come down a little bit more. Maybe some of the election calmness has to happen, people will kind of bite again at a big ticket item. But a timing of it, for us, internally, we're not ready to give guidance, I think we're still trying to figure it out.

Yes. And I do want to sort of get into a little bit more sort of in this environment where MasterBrand strategy. Before we get there, can we just talk -- you touched on the sort of the pricing and trade down? Can you just sort of break down what's happening with the sort of absolute price like catalog pricing? And then it seems like more of the sort of price headwind is really a trade down. you could just kind of walk through that, what the impact has been like where you're seeing that in the most significant areas?

We started seeing it probably in orders midyear last year. So really, in the Q3, we started seeing it come through, and they were more -- it was heavily almost all trade down versus price. And when we refer to trade down, it can be moving from a product category to a lower product category or it could be within a product category, but just maybe doing a more standard color or doing less accessories, right? They're both kind of trade down, so to speak. So we saw that happening. We quantified it at about 3% of net sales in the third quarter, and then it went to about 5% of net sales in the fourth, and then it's kind of stabilized. We're not really seeing it get worse, not necessarily seeing it get better either, but it's hanging in there. But when you look at price, there's a couple pricing trade downs. There's a couple of dynamics. Last year it was pretty much all trade down, not necessarily price. There was a little bit of promos. Now it's a little bit more price than trade downs. Like in the third quarter, it was probably 2/3 of the effect was more price and about 1/3 was trade downs. And that price though, isn't list price, which once you change the list price, that's hard to get back. So what we've been doing in a much more disciplined way than I think we've done in previous years prior to Dave Banyard years, is we're much more disciplined that we do it via a promo or a particular discount because if it doesn't work in driving volume, we can stop it, right? So we're just not giving away price to give away price. So we're much more disciplined, particularly with a builder or a new community, if we have to give a point or to get it, we'll get it. Or we'll give the price if we need to, but it's in a much more controlled manner. So I think what you're generally seeing is most quarters is a mix of that price and trade down effect in volumes just kind of hanging in there steady.

Very good. What -- just on going or hitting on one other channel in terms of like the home center channel, how big a part of your business is that? And -- and I think the home centers are sort of notorious for coming back on pricing like always pushing for the best pricing. So what does that part of the market looks like? I think generally, sort of that is a lower price point product typically.

It varies. So it's about 20%, right? Home centers.

30-ish%.

30-ish% -- sorry. So what's interesting with home centers is they do have that reputation, right? They just come after you and with price, price, price. And what we noticed a few years ago is we wanted to change the conversation, like we wanted to be a business partner with them, driving volume, driving products and price to the consumer. But the conversation was always just price. It's just what the home centers are trained to do. And so several years ago, we worked with them pretty extensively on a quarterly process on pricing. It's partially index-based and it's a function of our bill materials. So it's become much more of a rational conversation with them, and we assess it quarterly, and they've stuck to it. And what that has allowed us to do is focus our efforts with the home centers on share that we want. So it's not -- those stock is a big part of the home centers. We also sell semi-custom and custom with them. And we have been winning some shares in some of that product line because we've been able to focus our time and conversation on what are the trends, what should the displays look like? Where our remodel is happening? Like what's the best region? What should the consumer pricing be? We've been giving you recommendations for that as well. So -- and I should mention, we've even had one of the home centers in our facility, helping us with a lean event and how they can have their back office processing when it comes to returns with cabinets. So it's become a much more productive conversation with them, and that's allowed us to focus where we want share because there is certain products in home centers that we weren't necessarily -- it wasn't the most desired share, and we're like let some of our competitors use up their capacity with some of that lower profit product and let us focus on the share we really want with the home center. So it's been quite a journey over the last couple of years, but it's been, I think, very helpful for both parties.

Very good. And I think we kind of sort of touched on this, and I think maybe your answer is time will tell, but there are, like, say, if you look at Harvard's LIRA and a few other things like people are now predicting that like we are close to the bottom of repair and remodel that they just start to turn. Is there anything that you're seeing? Is there anything that you're watching? Or do you think that some of this is just -- we've had a really bad stretch here, like demand has been very weak and like things are bouncing along realistically, the next move is like to start -- at some point, they'll like get better and just a question of when?

Yes. I think it's more of a question of when. And I think we are completely sold on the fact that there is pent-up demand. So we're sold on it. It's a matter of timing. It's there. It's just when do people feel comfortable enough again for big ticket items. So we'll start looking at -- we'll start looking at cruises, we'll start looking at car purchases. It's just that general feel of when our consumer is again getting comfortable with big ticket items. And that's when you should see it breakthrough. And then the other item you're looking at is, when does the interest rate come down low enough or just settle so people can just calm so that people can understand their budget, their month-to-month cash outflow that homes start turning again, and that will trigger additional push for R&R as well. So you kind of have both of those dynamics. So it's homes turning and it's just general comfort of big ticket items.

I guess like in terms of -- internally, I mean I think there's a lot of -- one of your big competitors, there's been a lot of change happening with like how they go to market, production. How many -- how much change has occurred at MasterBrand since the spin in terms of your manufacturing footprint, manufacturing process, automation, are those things that you're focused on? Is that a core part of the business? Or is it more, as you said, focusing on winning the business that you want to win focusing on the right products?

Yes. I think a lot of -- I mean, I know our competitors are -- 2 of our main competitors are very focused on capacity and footprint right now. To Dave's credit, he did that right away when he came in and what was that in 2019 and '20. Those footprint changes and capacity changes were done right away. So that was behind us. We had the capacity. I think we've continued and we still do today on our lean events and kind of leading through lean, the common box initiatives, the efficiency initiatives so that we can continue. We're always focused on moving that fixed cost base to variable, right? So how can we get the same capacity at a less footprint. So that journey, I would say, still continues. We're just, I think, quite a bit further along. And therefore, because of that, that gives us a lot of nimbleness. When the market goes up or down, we have the capacity to produce more. But we also have the ability to quickly shut down variable costs with less fixed costs so that our decrementals, that's why you're seeing such great decrementals when our volume does come down over the last several quarters. Because we have that nimbleness, now we can start focusing on, okay, now how do we grow? How do we win share? How do we use this breadth of product portfolio to get new customers? And quite frankly, how do we provide unique product packages to customers, particularly a builder who wants a lower price point, but yet they still want to be differentiated. They want a differentiated kitchen from their competitors to win a community, right? So how can we use our common box and our product portfolio to generally, for example, give a certain product category of price, but still also provide a hood top or refrigerator cover, which -- it seems very simple, but actually in the industry, it's quite hard because you're crossing brands. But because some of the things we've done internally, manufacturing-wise, supply chain-wise, we're able to combine some of those brands for customers to provide kind of a unique experience or a unique product for the price point they're looking for. So we've been able to change that focus to growth and share. And then we're also focusing quite a bit on technology and consumer experience. I would say under fortune, we already put in a lot of the true automation when you think of a stack of plywood coming in and being cut and the plywood piece being maximized, that type of automation has been done and already installed. Now we're looking at more advanced technologies for data processing, decision-making, vision systems, RFID for efficiency in the plant. So we're getting -- stepping into more advanced technologies. And then on top of it, we're doing some piloting with use of technology to see if we can make it easier for designers and potentially the consumer to design that kitchen and get that process faster. Right now, it takes an average American 12 to 18 months of design and pull the trigger on a kitchen. How can we make tools or develop tools to make that faster? So we've just been able to, I think, evolve our process and our strategies from that footprint internal efficiency and then using that to expand growth and probability.

Very good. Super helpful. I guess just maybe getting a little more granular in terms on the reef performance and sort of like managing the balance sheet. But -- so when I was going -- prepping the questions, in 3Q, I think gross margins were down like about 200 basis points. And I guess I just wanted to sort of decompose a little bit how much does volume deleverage? Are there other -- at this point, it feels to me like what the input cost headwind should be -- how should we think about that? And I think that's a good segue and we can talk about tariffs after that.

So when you look at that 200 basis points, almost half, like 80-ish basis points of it is really just due to year-on-year one-offs. So Q3 last year is we got almost $6 million of insurance proceeds from a tornado and medical costs that were earlier in the year. They just happened from a GAAP accounting process come through in that quarter. So that didn't repeat. So that's almost half of that difference. So the remaining about 120 basis points. Quite frankly, it was timing of inflation and price. So we've been very aggressive on price in the last couple of years really post-COVID. I would say we've been the leader in price in the industry and people follow. This has been a tougher year, obviously, with everything going on to put price. Inflation started creeping up in the summer, particularly in freight. So we went out with the pricing in August to cover it. We saw it coming. However, at that time of the year, it's pretty hard to get pricing through, particularly retail, where we have a quarterly process and then builders. They have this 9-month kind of build process. So we put the price through, but it actually doesn't come through for months later. So really, that third quarter, the remainder of that difference is we had some inflation come through primarily in wood and freight, in ocean freight, and that pricing really doesn't come through -- start coming through into the Q4 and then really the first half of 2023. It just took some time to get the price.

Year-on-year, we were flat from a volume standpoint. It was really 3% headwind related to the ASP that Andi is talking about.

Yes. Really from a Q3 perspective, it's just a little bit of time lag on price. But we see it rightsized...

So you would expect the gross margin to stabilize. So I mean I think that as a segue, I think, obviously, with the election and like already some discussion around tariff, you mentioned [indiscernible] facility in Mexico. Maybe we can just even at a higher level sort of like -- what is your exposure? I mean obviously, it's been -- it feels like China is probably relatively limited at this point unless it's hardware and stuff. But what kind of exposure do you have in Mexico and Canada, either from production and/or just input costs?

Yes. So really high level, if you look at our cost of goods sold, 50% is materials, 20% of that is imported. The majority of our imports come from Vietnam. And we do very detailed audits there. We're providing a lot of value add in Vietnam in the basically imports of our packed product. From a Mexico perspective, net sales are about 15%-ish of our sales. It primarily produces stock product for our retail business. That is set up in a maquiladora. Generally, that has been kind of exempt from tariffs in the past it has. So I'm assuming the maquiladora structure will still remain intact.

So I am not familiar, can you just explain just a little bit?

It's basically tax protection loophole, maybe is the best way to say it. Where you set up -- you have to follow certain rules on documentation, but it allows you to manufacture in Mexico, basically bring in products to Mexico, manufacture their value add and then sell into United States without a tariff.

Okay. Understood.

So that structure is in place, well audited. So I'm assuming that will be okay. So really, what we're looking at, assuming the maquiladora structures still exist under the new tariff regime. In -- when you really look at it from a high-level perspective, we think to recover, let's say, a 20% tariff, let's say, put in 20% tariffs for everything else, we would need a low single-digit price increase, which we would plan on passing on and our customers know that we would.

Yes. Okay. Very good. Yes. I guess I think we only have 4 minutes. So we -- you mentioned at the start, the company has been -- M&A has been a big part of the history and the growth you just recently completed, a not inconsequential acquisition with Supreme. Maybe you could talk first about sort of Supreme and the strategic rationale. What that brought? What was attractive about it? How the integration is going and we can talk about it?

Sure. So Supreme was top of our list on our funnel. It was a fantastic fit from many kind of strategic views. It had products that we are -- even though we have -- we would -- we're the largest manufacturer and we have the broadest product portfolio, we would still say we're under-indexed in certain regions. We're under indexed in certain products. Supreme brought us, in particular, the birch vanity. It is a -- because right now, what bathroom vanity. What we have is super custom and stock, but we don't have that in between bath vanity. We can produce it, but it actually is quite an effort to produce a product in the price book and train 6,000 dealers. So if you can get the product already established, it's super helpful. So that was a product we were going to develop any way that they had that we have, obviously, a much broader distribution network. So we're going to be able to take that product and move it through our distribution. So that was a great synergy. It also had a lot of regional advantage for us, particularly in the North. There was only about 20% overlap with our dealers. So we're able to reach a much broader customer base with them. And then thirdly, a third synergy from them is we had facilities within 200 miles of each other. And one in particular, it was only like 10 miles from each other, that both had excess capacity that we're able to merge with similar products. So there's just a lot of costs efficiencies there on top of supply chain cost, because as a smaller company, it was buying through distributors, right? So there is a markup there where we go direct. So when you look at all these synergies, Supreme was just a real easy strategic fit for us. And so far so good on the integration. There hasn't been any surprises. The supply chain savings seem to be coming through. That was one of the first things we were going after. And then the -- we've announced some of the client consolidations. Those are going well. And then that -- we mentioned that there was about $28 million of synergies in year 3. We're on track for that. And again, that does not include the sales synergies that we're seeing. And again, we'll be -- we've already well down the process of getting our dealers trained on that vanity. And then we're also a good surprise is a lot of their dealers, even though they are more custom -- semi-custom, they're very interested in our Mantra product, which is basically our copycat of the Chinese imports. It's a very easy to install product at a lower cost, and it wouldn't be a cannibalization product. It basically just allows us to Supreme dealers entry into a whole new market for them as well. So we see some synergies there, too. So it was just really a great fit. There are more Supremes out there. We do have a funnel that we keep looking at. We're very cognizant of our leverage and our goal is to always keep it below 2. We will go above that as we did with Supreme for the right deal, but we'll be very disciplined. We're not in a hurry. We definitely want to make sure we prove ourselves with the Supreme deal first.

Very good. Well, that you hit kind of my last one there in terms of the leverage on the balance sheet. So that's super helpful. We're right at time. I really appreciate you guys making the effort to come.

Thank you.

All right. Thanks, everyone.