MasterBrand, Inc.

Welcome back to Masterbrand's second quarter 2024 earnings conference call. We appreciate your patience this afternoon following a brief severe weather delay due to a tornado warning in the Cleveland area. We will begin the conference call with the company's prepared remarks. During the company's prepared remarks, all participants will be in a listen-only mode. Following management's closing remarks, callers are invited to participate in a question and answer session. Please note this conference call is being recorded. I would now like to turn the conference over to Farhan Folik, Vice President, Investor Relations, Treasury, and Corporate Communications. Please go ahead.

Thank you. 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, and Andy Simon, Executive Vice President and Chief Financial Officer. We issued a press release earlier this afternoon disclosing our second quarter 2024 financial results. If you do not have this document, it is available on the investor section of our website at masterbrand.com. I'd like to remind you that this call will include forward-looking statements and either our prepared remarks or the associated question and answer session. Each forward-looking statement contained in this call is based on current expectations and market outlook. and is subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. Additional information regarding its factors appears in the section entitled Forward Looking Statements in the press release we issued today. More information about risk can be found in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our full year 2023 Form 10-K and updated as necessary in our subsequent 2024 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 second quarter 2024 financial results, along with our 2024 financial outlook from Andy. 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.

Thanks, Darren. Good afternoon, everyone. We appreciate you joining us here today for our second quarter 2024 earnings conference call. We've had a productive several months since we last spoke. We delivered another solid quarter of financial performance, and our associates continue to make meaningful strides across all of our strategic initiatives. We announced our acquisition of Supreme Cabinetry Brands, our first transaction as a standalone public company, which we will share more details on shortly. Lastly, in concert with the transaction, we restructured our debt. A busy period for the team, but I'm proud of what we accomplished and our prospects for the remainder of the year as we continue to navigate choppy end market demand. Now let me provide a little more detail on each of these areas. Net sales in the second quarter of 2024 were $677 million, a 3% decline over the same period last year. This low single-digit decline was in line with our expectations as year-over-year volume growth was offset by the continued impact of lower ASB due to anticipated trade downs and normal promotional activity. We saw healthy performance from our customers in the new construction market driving our year-over-year volume growth. With continued growth in both large and medium builders and small builders turning positive in the second quarter, we believe our strategic initiative work, specifically around Align to Grow, has allowed us to capitalize on this and to perform at or above the underlying market conditions. As I mentioned on prior calls, our Align to Grow initiative enables us to focus on the right parts of the market, the right customers with the right products at optimal service levels. We benefited from this last year as we launched new products and channel-specific offerings, specifically targeting production builders. And our net sales continue to benefit from these efforts in the second quarter of 2024. Moving to operations, MasterBrand continued to perform well. We delivered adjusted EBITDA of $105 million in the second quarter and a related margin of 15.5%, 20 basis points higher than the same period last year. Our margin expansion was again driven by cost savings from our strategic initiatives and continuous improvement efforts, which more than offset the negative impact of lower average selling price, personnel inflation, and strategic investments. Our TIC-enabled initiative, particularly our work on quality processes, played an increasing role in expanding our adjusted EBITDA margin. Better data fidelity has continued to drive improvements in our quality processes. which improved both internal productivity as well as customer satisfaction. In several cases, we've heard from customers that our performance on both quality and delivery is industry-leading. We know we have more opportunity for improvement, and our digital tools, paired with the master brand way, give us a roadmap to improve the customer experience. In addition to year-over-year personnel inflation in the second quarter, we've seen inflation increase sequentially in other areas of our cost of goods. While it did not have a material impact on the second quarter, we do anticipate certain costs to increase for the remainder of the year. Because of this, we chose to implement price increases in the second quarter across all our brands in the dealer and builder direct channels. Andy will provide more details on the timing of the anticipated benefit to our net sales and what this could mean for the phasing of our adjusted EBITDA margins in the second half of 2024. From a cash generation standpoint, We delivered another strong quarter of free cash flow at $66 million as the team continued to make improvements around working capital management. While this is lower than the same period last year, it's important to remember that 2023 benefited from the release of a 2022 strategic inventory bill meant to ensure service and delivery to various supply chain constraints. As you can see, a very solid quarter of financial and operational performance from our associates. Now let's shift here to our acquisition of Supreme Cabinetry Brands. For those of you still unfamiliar with the transaction, I'll briefly touch on the key points. On May 21st, we entered into an agreement to acquire Supreme Cabinetry Brands for $520 million and subsequently closed on the transaction after the quarter end. Supreme is a highly regarded manufacturer of premium cabinetry, offering a robust portfolio of on-trend products with a focus on premium kitchen and premium bath cabinetry. Since the founding in 1954, they've built an impressive track record of product innovation across their premium brands, including Dura Supreme and Birch, while also achieving significant growth and profitability. Over this same time period, they've developed an exceptional dealer network, which they service through their three manufacturing campuses in Howard Lake, Minnesota, Waterloo, Iowa, and Statesville, North Carolina. What is so compelling about this acquisition is the strategic fit and near-perfect alignment with our growth priorities and our channel and product strategy. Supreme enhances MasterBrand's portfolio with complementary products in the premium kitchen categories. Birch also adds a well-recognized premium bath brand, which gives us great growth opportunities in the subtractive portion of the market. Supreme and MasterBrand have complementary dealer networks with very little overlap. resulting in channel distribution capable of reaching more customers and end consumers than ever before. Lastly, the combination of the two companies' operations present compelling and identifiable cost synergies. Inclusive of the $28 million of anticipated annual run rate cost synergies in year three following the acquisition, our purchase price multiple of adjusted EBITDA is approximately 5.9 times. While it has only been about one month since the close, we're off to a great start and are confident in this transaction. I'd specifically like to thank Tony Segalski and his entire executive team who are staying with the organization for their support and partnership. He and his team, along with all Supreme Associates, have really hit the ground running and are leaning into this integration while continuing to manage their business with excellence. As I sit in meetings with them and the Legacy Master Brand Associates, it's great to see the new team come together and embrace our shared purpose of building great experiences together. Andy will provide you with more details on the near-term financial benefits of the Supreme acquisition when she discusses our updated 2024 outlook. With the acquisition of Supreme, Master Brand is now utilizing all the pillars of our capital allocation strategy. Reinvest in the business, maintain a healthy balance sheet, disciplined M&A, and return value to shareholders. When it comes to the balance sheet, we took the opportunity this quarter to act on favorable market conditions and enhance our capital structure. For those of you that might recall, we went to the capital markets in late 2022 to finance our dividend to Fortune Brands. The timing wasn't optimal given the general uncertainty around the economy and the housing market. Now with our positive track record as a standalone company and improved debt market conditions, We chose to pay off our remaining term loan balance with the proceeds from our privately offered senior notes and replace our existing revolver with an expanded credit facility. Following our favorable ratings with all three credit agencies, we were able to successfully increase the size of our credit facilities, extend the maturity, and lower the cost of capital. Overall, great work by the team getting this completed before the acquisition closed. Before I hand the call over to Andy to discuss our outlook, I'd like to provide a brief update on end market demand and our expectations for the remainder of the year. Market demand in the second quarter was largely in line with our expectations, with some slight puts and takes between our customers servicing the new construction market and our customers servicing the repair and remodel market. That being said, as we progress through the quarter, we've seen some signals that temper our expectations for the remainder of the year. For those customers focused on the U.S. single-family new construction market, We saw demand increase year-over-year low teens in the second quarter. We service all sizes of builders in the U.S., and as mentioned, we were pleased to see all portions of the market grow year-over-year, with large production builders performing the best. Large production builders, both public and private, continue to benefit from their scale and the ability to offer incentives, such as rate buy-downs, which provides them an advantage over not only other builders, but existing home purchases as well. Looking to the back half of the year, we expect to see continued growth in the new construction market, but more moderate rates year over year and slower sequentially. While public builder comments remain optimistic, slower new housing starts and high inventory of spec homes points to a potentially more muted outlook for single family new construction. These muted expectations are also due to normal seasonality and more challenging year over year comparables in the second half of the year. We remain positioned to perform at or above the market going forward due to our prior line-to-grow work for builders. In total, we believe this market will still grow mid-single digits year-over-year for 2024. Moving to the repair and model market, serviced by our dealer and retail customers, demand was on the softer side of expectations, albeit within our range. Lower foot traffic and extended decision times continue to be a headwind for our customers, as end consumers remain hesitant about committing to large purchases. The market had been flat sequentially as we entered the second quarter. However, we saw increasing choppiness in our orders as the quarter progressed. Feedback from our channel servicing the repair of the model market suggests this choppiness will continue in the second half of 2024. Add to this, recent economic data suggests that consumer spending faces headwinds, which we believe could continue to slow R&R spending on large ticket items. With these factors in mind, we anticipate R&R demand to now be at the lower end of mid-single-digit declines for the full year of 2024. In Canada, both the new construction and repair and remodel markets remain slow year-over-year, as expected. While there continues to be commentary related to steps the Canadian government has taken to improve housing affordability, the new housing market remains weak. We expect to see soft end-market demand continue, in line with our previous outlook. Despite this weak demand backdrop, we remain pleased with our overall performance in the market as our team in Canada continues to strengthen builder direct relationships across the country. Based on these factors and current macroeconomic conditions, we expect these recent softer end market trends for the remainder of the year. While it appears the capital markets are factoring in rate reductions by the Fed later this year, it's important to remember that our outlook was more predicated on rate stability than on rate reductions. To the extent that rate reductions by the Fed either improve consumer sentiment, triggering more R&R activity, or improve existing housing turnover or new home affordability, we could see some slight improvement in demand. We would not expect this demand to translate into higher net sales in the second half of 2024. With these factors in mind, we now expect end market demand to trend towards the lower end of our expected range of down low single digits year over year in 2024. Now I'll turn the call over to Andy.