Earnings Call Transcript - MBC Q2 2025

Operator, Operator

Good morning, and welcome to today's joint conference call hosted by MasterBrand, Inc. and American Woodmark Corporation to discuss the proposed merger between the two companies. This call will also include MasterBrand's Second Quarter 2025 Earnings Conference Call, which was 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. Please note that this conference call is being recorded. I will now pass the call over to Henry Harrison, Senior Director of FP&A at MasterBrand. Sir, the floor is yours.

Henry Harrison, Senior Director of FP&A

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 and in the section entitled Forward-Looking Statements in 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 in 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.

R. David Banyard, President and CEO of MasterBrand

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 two 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 approximately $90 million in run-rate cost synergies by the end of year 3 following the close, 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 the 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.

Michael Scott Culbreth, President and CEO of American Woodmark

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 the 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.

R. David Banyard, President and CEO of MasterBrand

Thanks, Scott. As I mentioned previously, this combination brings together two 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 that 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 touchpoints for customer support with an enhanced service offering, 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.

Andrea H. Simon, Executive Vice President and CFO of MasterBrand

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 the 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 currently in 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.

R. David Banyard, President and CEO of MasterBrand

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 timeline 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.

Andrea H. Simon, Executive Vice President and CFO of MasterBrand

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 one-time 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 six 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 six 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 six 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 one-time 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 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.

R. David Banyard, President and CEO of MasterBrand

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 two 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, Operator

Our first question comes from Garik Shmois from Loop Capital.

Garik Simha Shmois, Analyst

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.

R. David Banyard, President and CEO of MasterBrand

Garik, thanks. I think what we like about this transaction is it's a really compelling combination of two 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?

Michael Scott Culbreth, President and CEO of American Woodmark

Yes. Just to add to those comments, Dave, I think the three 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, and 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.

R. David Banyard, President and CEO of MasterBrand

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 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.

Garik Simha Shmois, Analyst

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?

R. David Banyard, President and CEO of MasterBrand

Yes. To begin, we conducted a comprehensive analysis, including collaboration with an independent third-party resource to explore all available opportunities. Our detailed assessment indicates that currently, approximately 40% of our costs are related to G&A and indirect expenses, while the remaining 60% falls under COGS. There is significant work ahead, and this is the extent of the detail we can share at this time.

Garik Simha Shmois, Analyst

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 on any regulatory hurdles that the merger might face?

R. David Banyard, President and CEO of MasterBrand

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 two portfolios together really offers 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.

Michael Scott Culbreth, President and CEO of American Woodmark

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

Operator, Operator

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

McClaran Thomas Hayes, Analyst

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?

R. David Banyard, President and CEO of MasterBrand

Thank you for your question, McClaran. I believe the best approach to understanding this is to consider how we phased the synergies with Supreme, as it will follow a similar trajectory. There are aspects that will be easier and others that will be more challenging. Without going into too much detail, as it may be premature, the implementation will resemble what you observed with Supreme. Initially, there will be some straightforward actions we can take right away, such as consolidating the supply chain. As we move further along, some initiatives will take longer and will require careful planning and consideration before proceeding. I suggest using that as a framework for understanding the process.

McClaran Thomas Hayes, Analyst

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?

R. David Banyard, President and CEO of MasterBrand

Yes, I believe we are on track in our second year for the anticipated synergies. Our consolidation efforts in North Carolina are mostly finished, and we are producing cabinets at a steady rate for all the brands we’ve relocated there. This is a significant achievement as these are premium brands, making them more complex than standard products. Additionally, we are progressing with another phased consolidation, which we expect to complete by this time next year, but likely even a bit sooner. Therefore, you should begin to see that steady output occurring within the next 12 to 18 months.

McClaran Thomas Hayes, Analyst

Okay. Great. And then, yes, Dave, I think you called out some pre-buy 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?

R. David Banyard, President and CEO of MasterBrand

Yes. I would frame it by saying we observed consistent demand in the second quarter for single-family new construction. However, as we noted last quarter, there are signs of concern on the horizon regarding starts and completions. This trend continued into July, and we are entering a phase where declining completion rates are beginning to impact our single-family new construction segment. Looking ahead, we anticipate that this market will soften. The team has performed admirably in this area, working diligently to foster growth despite these challenges, but navigating this situation becomes more difficult as the market cools down. I would describe the new construction market as not experiencing a significant downturn, but rather a normalization to align with consumer demand and the large inventory of speculative homes available. Regarding the repair and remodel sector, we've experienced a similar situation of volatility over the past several quarters, and it's operating at a lower level, evident in our results and forecasts. The trajectory for repair and remodel remains unchanged; it has simply decreased. I don't know, Scott, if you wanted to add anything about what you are observing.

Michael Scott Culbreth, President and CEO of American Woodmark

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 is 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, Operator

Our next question comes from Trevor Allinson from Wolfe Research.

Trevor Scott Allinson, Analyst

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 has a bigger presence with dealers. American Woodmark, historically, has a 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?

R. David Banyard, President and CEO of MasterBrand

I believe that what stands out about this transaction is that it enhances the value for all our customers across various channels. We aim to merge these companies into a comprehensive portfolio and footprint that will provide overall value. An interesting opportunity lies in our larger dealer network, which is more extensive than that of American Woodmark. They offer excellent products, and similar to our approach with Supreme, we plan to introduce those products into our dealer network. There is significant complementarity between our offerings, and there isn't much overlap in our dealer networks. This has been a key focus for Scott and his team, who now have a much larger sales force to execute this strategy along with existing relationships we can leverage. I should note that these factors were not included in our initial deal modeling for either organization, similar to our work with Supreme, but we still recognize compelling growth opportunities to enhance the product range available to our widespread dealer network.

Michael Scott Culbreth, President and CEO of American Woodmark

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.

Trevor Scott Allinson, Analyst

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?

R. David Banyard, President and CEO of MasterBrand

Yes. In general, we are managing the tariff environment well. However, as we consolidate, we have the opportunity to manage this more effectively together. That's how I see it. Scott, do you have any...

Michael Scott Culbreth, President and CEO of American Woodmark

No, I agree with those remarks, Dave.

Operator, Operator

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

Steven Ramsey, Analyst

Congrats on the deal. I wanted to start with the network optimization and the synergy benefits from there, American Woodmark, just the two 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?

R. David Banyard, President and CEO of MasterBrand

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 kinds 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.

Steven Ramsey, Analyst

Okay. That's helpful. And similar type of question, thinking about the brands of these two, really three 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?

R. David Banyard, President and CEO of MasterBrand

I believe there's still more potential there. We view it as something that can add value in various ways. There might be opportunities as we explore this venture, particularly where we identify gaps that we can address. The cabinet industry is quite diverse, with many brands, and it's primarily focused on trade rather than consumer. Trade brands tend to have strong connection with their partners, and all the American Woodmark brands resonate well with their channel partners, just as ours do. I see more potential in adding these brands rather than subtracting them at this stage. Moving forward, we are always evaluating the most efficient ways to serve our customers, but for now, that is our approach. Scott, do you have anything to add?

Michael Scott Culbreth, President and CEO of American Woodmark

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.

Operator, Operator

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?

Andrea H. Simon, Executive Vice President and CFO of MasterBrand

So the integration costs will come in phases, with some being upfront and then increasing as we execute consolidations. From a dollar perspective, they will be similar, but on a ratio basis relative to the size of the company, they will be lower. This is due to the nature of the consolidations and the complexities involved with Supreme, which comprised premium businesses. These are much harder to merge, whereas this situation involves more value semi-custom stock products. It is not necessarily easy, but it is less challenging than a premium consolidation.

Operator, Operator

And our last question comes from Tim Wojs from Baird.

Timothy Wojs, Analyst

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

R. David Banyard, President and CEO of MasterBrand

Yes. Thanks, Tim. Scott and I began discussing this earlier this year, and I quickly realized that there is significant value in merging two strong U.S. companies. We initiated and have continued our discussions from there, conducting extensive work on both sides, collaborating effectively to understand that value and devise a plan for unlocking it. Regarding the specifics of the deal, we are issuing an 8-K if it hasn't already been released, which contains all the details, and I encourage you to refer to that for further information. This is a very market-driven transaction merger agreement, so please check that for specific details.

Timothy Wojs, Analyst

Okay. Okay. That sounds good. And then I guess on a pro forma basis, 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 the combined entity would be from a market share perspective once the deal closes in total?

R. David Banyard, President and CEO of MasterBrand

Yes. I think I'd rather not comment on that, Tim. I think 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.

Operator, Operator

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.