Good afternoon, everybody. I'm Tim Wojs , and I cover building products here at Baird, and we're happy to have MasterBrand join us this year at our Global Industrial Conference. MasterBrand spun out of Fortune Brands a couple of years ago, and they're the largest manufacturer of residential kitchen and bath cabinets in North America. So we have CEO Dave Banyard on stage with me. We have CFO Andi Simon, and then Farand and Curtis are in the front row here, and they do IR. So I don't know, Dave, do you want to give kind of like a little bit of state of the union? I know you guys just reported earnings last week, and then we can kind of hop into Q&A.
Yeah, I mean, I think you guys probably are all paying attention to the market. The market's sort of bumping along the bottom, particularly in R&R. 2/3 of our revenue comes from repair and remodel. A third comes from new construction, which I think has been pleasantly good this year. It's not great, but it's good. And so as we talked about in our earnings call, we don't expect an immediate trajectory change because of either last Tuesday or because of any other market dynamics. But I think that in many ways feels a lot like last year this time, but the difference is you have an easing Fed as opposed to at least a holding Fed. So I think that bodes well for the future.
Not sure when that turn happens, but again, I think we're managing well through the current environment that we're in, and that's really all we can do.
OK. I guess as you think about 2025, what are some of the key factors in terms of just swing factors, right? Obviously, rates and R&R is a big one, but you also have a lot of cost initiatives. You've got synergies and those types of things. So maybe just kind of walk us through some of the big positives and negatives or unknowns, I guess.
Sure. I mean, I sort of stack up the things we can control versus the things we can't. From our perspective, continuing to drive our culture forward, which is a culture of continuous improvement and growth. Growth has got to come from the market to some extent, but I think we are focused a lot on how we can take what we have and still grow with that. But also continuing, we still have a very one of the most routine questions I get is how much longer runway do you have from a continuous improvement standpoint? We have years to go. There's plenty to do, plenty of waste in our system. I'd say what's changed a little bit moving forward here is we just acquired Supreme a couple of months ago. There's pretty meaningful cost synergies with that business, and there's also great opportunity from a revenue synergy side.
And so there's a lot we've reoriented some of those resources to make sure that we're really capturing those as expeditiously as possible. They're phased out over a several-year period, and the reason for that is that it's complicated moving, particularly in the higher end of our business. It's more complicated moving factory and equipment around, and so you want to do it in phases in a much more controlled way because those customers, I mean, all customers don't have patience when you screw things up, but in that part of the market, it's even more prescient. So I think that's a big opportunity for us in the near term. Other than that, I think what we've learned working together with the Supreme team about what we can do in the premium space, we're excited about, and we think we have a good opportunity there.
Yet to be seen exactly how to quantify that, but I think there's meaningful revenue synergies there.
Yeah. I mean, would the revenue synergies really be cross-pollinating the dealerships?
Sure. It'd start with we have product that they've never sold before, and they have product that we've never sold before with the Bath vanity we were just talking about in the premium space. For them, the lower price point products like Mantra their salesforce is already integrated. One of the first things we did was integrate the commercial teams, and they're now well-armed to go out and sell all of our products and vice versa. And so then it's just a matter of converting dealers to change their product lines or adopt a new product line if they don't have it today.
OK. I guess just if you look at your different kind of channels, how would you kind of characterize each one? I mean, it sounds like new construction's doing OK, but how would you when you look at the R&R side of the business, you've got a lot of dealers, you have a lot of different price points, you have home center stock kind of made to order. How would you kind of run through the status?
Yeah, I think the market has and this is a consumer dynamic that plays through the channel, obviously, but I think the market has somewhat bifurcated into premium buyers and value buyers. There used to be more of a spectrum. We used to call it, or we call it semi-custom. It's in between the two. What we're seeing from a buying behavior is that the premium buyers still are premium buyers, and everybody else is sort of sliding down the scale into, and that's why we've highlighted over the past year this trade-down effect where it's more of a value purchase. It doesn't mean they're getting bad product. It's just that they're aiming for a lower price point. So that sort of shifts how we do things in that part of the market. But it applies, I think, in every channel.
Home builders have done that, people that are doing repair and remodel, and I think part of that dynamic is the demographic shift. You have a larger cohort now in the Millennial population than you do in the Boomer population. Boomer, my Generation X is not as we're maybe in that premium category spending cash. You have a larger cohort coming into their first-time or second-time homeownership that's just learning how to do this, and they're borrowing money to do it, and so I think as more and more of that continues, that part of the market will be a big growth portion as we go forward. Premium never really grows at a massive clip. It also doesn't decline as fast.
OK. I mean, do you think the semi-custom market just kind of starts to move? Do you think it almost kind of hollows out over time, or do you still feel like it's a role?
I think it's a trend worth paying attention to, and I think there'll always be a market for it. But I think that you're more seeing people come in saying, hey, I want the premium, not trading up from semi-custom to premium. And then you're seeing people start with more of a value, and you work them up a bit, but probably not all the way up where they're connecting with that. The economy also drives some of this. So certainly in new construction, I think as the economy picks up and prices are absorbed by folks, you're going to see more features being added into homes, and so that's going to also push that ASP of the cabinet package up as we go. That's typically what happens as it recovers. You start seeing less pressure on the price.
If they don't have to do incentives to get buyers in the door, then they have to compete on features, and that's where those two portions of the market play, competing on features with still getting a value out of it.
Okay. So something to watch. I mean, it just seems like there's a lot of cost, I think, in the semi-custom side. So I was just kind of curious if you can kind of push them down and push them up and kind of get better margins for the whole portfolio by just kind of getting rid of some of the semi-custom options?
I think it's a factor that has a lot to do with the environment we're in. So that's why I don't say, hey, this is a definite thing. I want to wait and see how the market plays. Because the other part about it is if you start getting back to more natural species, you're by default kind of moving up into that semi-custom because it is more expensive to buy walnut cabinets as opposed to white-painted cabinets. That's always going to be the case.
Yeah. OK. So I guess how would you characterize the pricing today in the marketplace? And I think in your last call, you kind of talked about, I think pricing was down a little bit. Is that this mixed dynamic you're talking about? Is that kind of pure price?
It's a combination of the mix and the discounting that goes on in the market, which you could call normal price. If you dial back a year and a half ago, there was barely any discounting going on because the demand was there, and you couldn't really supply the full level of demand in a given week. So there was no need for discounting. This is what I'd call more of a normal environment. Cabinets are a retail product. At the end of the day, there's a consumer walking in the door to buy that, and so retailers, and when I say retailers, I'm not just talking about the home centers. I mean, a dealer is effectively a small retailer. They're going to use incentives to try to get more business, and that's a normal course for us.
I think we've just gone back to pre-COVID levels of discounting that goes on, and it's sort of been absorbed into our operating model now, and that's kind of where we are, I think.
Yeah, you're kind of going after the productivity side to kind of.
Yeah.
OK. Gotcha. I guess just with new construction, we are seeing a trend with affordability kind of moving to smaller homes. I think that impacts certain products differently. Is that a risk that you guys see, or is it still the kitchen's going to be the same size? We're still going to have a certain amount of bathrooms, but they're making the bedrooms a little smaller. That's taken out a window. That's taken out a door. That's taken out some carpet. But the number of boxes or whatever in a house is still kind of the same?
Yeah, it's more of the latter. The kitchen has become that centerpiece room for homes, and that applies both to new construction as well as existing homes. You see if somebody buys a home that they're not happy with the configuration of the kitchen, they'll knock a wall out, and they're not doing it as much right now because they're not buying existing homes as much. But even as the new construction builders have been shrinking the size of the home, that shrinkage is coming in bedrooms and in some cases eliminating the dining room and putting that in the kitchen. You have more open floor plan. So people still like their large kitchens, and I don't see that trend changing any time soon. That's a favorable trend for us, and I like it, and I think that continues for a while.
OK. Any questions from the audience? Just maybe on Dura Supreme, just maybe just kind of talk through the logic of going out and doing the acquisition, what it gets you, where you see some opportunities, where you don't see opportunities.
Yeah, absolutely. So, I mean, it starts with we have a very healthy balance sheet, and so where do we deploy that capital? We have a lot of great ideas for deploying capital on internal projects, but then another tool for deploying that is M&A. When we look at it, there are places in the market where we're under-indexed, either whether it be a region or a product. As you know, but maybe investors don't, cabinets is, despite the fact that we are North American, still a regional business. You're shipping a lot of air when you're moving cabinets to the customer. You can't really make something in Oregon and ship it to Florida. That's not cost-effective. You do have these regional biases, and you have to be present in the regions. We look at product. We look at channel coverage.
We look at regional coverage and say, where are the gaps? And our gaps are smaller than our other large competitors, but everybody has gaps. And you want to look for opportunities where there's somebody that's got that gap filled very nicely. The nice part about Supreme is they filled a number of different gaps for us that are so it was a great fit on a number of fronts. They have a product category that we didn't have that we were working on, but we found the opportunity there to buy right into it. They have a very complementary dealer network to us, not a lot of overlap, so that's all additive. Very well-run company. They know how to make money, as I like to say about it. It's always a good thing, and a great team.
And those are four really important things that we spent a lot of time looking at during diligence, and it's played out that way since we've owned them. The entire management team has stayed. They're actively engaged with us, driving a lot of the synergies that we're looking for, and also running the business and kind of cross-pollinating with our team running the business as well. So it's so far so good there. We've got a lot of work still to do, but we've done a lot of good work so far, and I think it's been a success so far.
OK. Great. Synergies, I think, were $28 million, if I'm not right. How does that kind of phase in over the next couple of years? And I guess, is that inclusive of the commercial synergies you talked about?
No, that's not inclusive of commercial. So commercial, we're driving after those today. It's unknown on timeline for that in terms of and the reason for that is you have to train the commercial team. So we've integrated the commercial teams together, but you have to train them, and the Dura catalog is very thick, so that's not a short-term task, as are some of our catalogs. So training their reps on our product line as well. Then you've got to go out and train the designers out in the field. You've got to convince them first that this is a product that they want to take on. And so that process takes several months, and so we're in the process of doing that right now.
From a cost standpoint, some of the moves are fairly large, and we've started that with the announcement that we made around Waterloo, which is we're starting to consolidate the vertically integrated component manufacturing of those two brands into one site rather than two. That's the first step. If you think about custom stuff, if you're making custom things, you're typically more vertically integrated because it's often a batch size of one. You're making something that's unique, so you have to make it yourself in many ways if you want the lead times that you're driving for. Now, I mean, we don't make door slides as an example. I'm talking about the wood parts, the wood components. Over time, the goal there is to continue to find the best of both of those sites and continue to consolidate that.
And then I think there's more that you can do with that there. But that does take time because if you think about it, any customer, like I said, is going to not be happy if you let them down on a service level. But premium in particular, if you're messing it up when you're trying to consolidate facilities, you can really lose some customers quickly. So we don't want to do that. So we're taking the appropriate amount of time. There's other things we're doing. I mean, from a supply chain standpoint, they've hit the ground running from day one, and that's just consolidating all of our spend. You get great savings from that. And just kind of working through operating processes that we do. They don't have to buy their own insurance anymore. We cover that, things like that.
So, those are the easier to get synergies, the harder ones are the factory moves.
OK, and I think Align to Grow, you were probably going to four chassis?
Correct.
In terms of sort of four ways. So is Dura going to kind of fit in one of those, or are you going to kind of create like a?
I think we've kind of, so the concept is still the same, but I think what we've learned as we've studied this more is in the premium category, that doesn't really matter as much as how you build the components that all flow. So I'd say that's probably where there's going to be commonization, if you will, and it's commonization of process, not necessarily of product. Because when you start looking at the premium category, yes, there's some things you can commonize with the chassis, and we probably will. We'll do that over time. But the manufacturing process of making all the components, we have plenty of capacity there, and we probably don't need it all, and so you kind of can do it that way, and if you have the right equipment, you can do these batch size of one, quick changeovers.
It becomes a very efficient way to have a job shop on one side and all the stuff that you can make to feed that job shop in a very consolidated, efficient factory.
OK. So it's less about, yeah.
Less about the end thing than it is about getting the assembly fed with common things. So you'll see more of that.
OK. And then I guess on the core business, where are you on that kind of chassis standardization?
Yeah, I mean, the last piece is our full access, and we're kind of in the middle innings on that, getting that straightened out. Adding a piece, Supreme does have some full access, which is the frameless cabinets. So we want to take what we learned from them and incorporate that into this as well. Not necessarily because we would do it with them, but just there's always how do you do there's just different ways to build these things, and we want to take the best of what we see out there. So that's in process right now. That's predominantly in our Canadian operation, and so they're running that through now, and I'd say we'll be done with that by next summer.
OK. I guess as you've gone through this process, what has been kind of the cumulative margin? If you could kind of pull that out, what has been the cumulative?
Yeah, I don't know that I have the full number. I mean, we've disclosed that we've generated upwards of $50 million of savings in continuous improvement for the past couple of years. That's baked into that number for sure. What's not there is how it helps us manage efficiently running our capacity in a kind of down demand environment like we're in. That's not captured in that. And when you see our margins kind of holding firm in a down environment, that's driving a lot of that, our ability to kind of scale up and down with a full network of plants rather than individually at a time.
Because you basically had individual plants, right?
All cabinets have been set up that way.
This went down to one set. There's just nothing you can do.
Unless you're, I mean, the closer you are to a stock business, so American Woodmark is a stock business. There's fewer SKUs. It's a more homogeneous product to begin with. Our stock business is very similar. Those are already somewhat set up that way, but any of the custom businesses, we're all little islands of capacity, and if you run the business that way, one's going to be down, and when they're down, they're just sucking cash out of the business. When they're way up, you're running overtime, not making as much money, so you really want to be able to balance them all at the same time if you can, and we're not perfect. I mean, all these are the concepts. We're not 100% perfect on this stuff, but we're getting better at it every time.
Yeah. OK. I guess when you think about one thing that's interesting to us that when I kind of started covering this industry back in like 2013, 2014, there were maybe eight to 10 different cabinet companies that were all kind of in this $200 million-$1 billion plus. Now there's kind of three that are all like $2 billion, $2.5 billion, $3 billion. I guess the first piece is, A, do investors kind of recognize this kind of industry consolidation, if you will, that's kind of happened under the surface?
I think they're starting to. I think everybody, every good investor is always going to say, well, how's it performed during the cycle? That's the true measure of change. And I think you're seeing varying results, in fact, through this cycle, and it's not. I wouldn't call this a recessionary cycle. Obviously, it's not. But I mean, if I were, as an investor, I'd want to say, how are you going to fare through the cycle? Because that's what really matters. But I think you've seen enough pieces of a cycle over the last four years where you have a hyperinflationary environment. That's a very challenging cycle for any business to deal with. You're seeing how different businesses in the industry perform through that. You're seeing a softer demand environment right now. You're seeing how some of those companies perform.
So you're getting some indicators of how the industry could perform in a recession. Hopefully, you can glean some things from that. I certainly do. I pay attention to those things because ultimately, that's what we're trying to do. We're not going to be recession-proof by any stretch of the imagination, but you've got to be able to handle the cycle, and your cash flow has to be able to sustain through it. And that's what we're trying to do.
Yeah, and I guess my second question to that was going to be, you had a $300 million player here, a $400 million player here, you had a $400 million player here. When demand got soft, they needed to fill their plants. They needed to put price through to keep it going.
Volume above all else, yeah.
Is that different today than it was five, six, seven years ago?
I think there's people understand, and this is where the inflation and the pricing environment occurred that helped the industry understand that if you didn't price in 2021 and 2022, you went out of business. Because the inflation happened and hit you so fast that if you weren't pricing for that, you were running out of cash. And there are a few small players that went out of business after the biggest boom in the industry in years because they ran out of cash because they didn't put price into the market. So I think even and you can see it this year. We raised price in Q3. The entire industry followed us, including the smaller players. So they may wait for us, but they understand the value that you do have to address inflation. Price is a tool that you have to do that.
And I think that people are understanding that, OK, I don't need to be bursting at the gills in my factory to make money.
Yeah. OK. I guess what are you seeing from an inflation perspective today?
Yeah, I'd say it's steady. We saw this bump that facilitated the price increase that we did. A lot of that is in some materials, but also in ocean freight. Obviously, ocean freight doesn't affect everybody directly, but the industry still does buy material from overseas, whether they buy it from an American distributor or from direct like we do. So that was an impact. I think that's settled down, but there's still just sort of what I'd call general inflation in things like particle board and lumber, and it's reasonable. It's normal inflation. It's just after the past four years, any inflation just feels like bad news, but it's normal, so we're sort of back to sort of a steady state where you're going to get a little inflation every year. You're going to get a little price every year, and I think that's a normal course for us.
OK. And have you gotten resistance to the price increase?
I think it depends on the channel and the price point. Certainly, the lower side of the market is always going to be more of a scrap from a cost perspective, but then premium, you never get it. It's very rare that you get pushback, and it's also by channel. Dealer network is quicker to get price. Home centers, we have pretty good systems within terms of price. It's always looking backwards, though, so it takes time, and then builders is always you're bidding on next communities, and so it just takes time to get through, but I think generally, people understand because they're feeling it. We're not alone.
Right. OK. When you think about your product portfolio, if you look at the dealer base today that's out there, is there an opportunity? Do you have the product portfolio to now go out and kind of be the sole provider, the sole cabinet provider? And I guess is that a real opportunity? Because there's got to be so much fragmentation in these dealers in terms of what they offer and how they've come to that. And if you can give them kind of a full product line, it seems like that could be pretty beneficial.
Yeah, I think the full product line benefits a couple of types of dealer. You have dealers that do play both in new construction. It's very custom home construction, so not even small, not even medium regional builders. I'm talking very lower 100 of the top 100 builders out there that are building 20 homes a year kind of thing. They get their cabinets from dealers because they need a play. They don't have their own showroom to show displays and so forth, so they need an outlet, and they don't have their own designers, things like that. So giving them that full breadth means they can go after and fit that builder into the right product category that they need. And then I think there are. I'll call them mini Home Depots or mini Lowe's kind of regional mega hardware stores that love to sell cabinets.
They always want to have the full breadth. Even if they only sell one premium a year, they want to have it in there, and those kind of businesses do find it's easier to deal with one player, much like the larger home centers. They try to that's their advantage, they think, so there's players like that. When you get down to the small mom-and-pop dealer, they tend to have a lane, and partly based on location or city, you go to LA, you have dealers that do nothing but very high-end kitchens. Vegas has some of those as well, and then you have the people that are going to buy cheaper cabinets are not going to go into those stores, and so you tend to have a little more specialization by dealer and by designer, so you may not get the full breadth. We always try.
But at a certain point, you go, is it worth even having a display in there for Mantra if they're selling nothing but premium stuff? I've seen it, but you're like, you've sold one kitchen in Mantra in two years. Why do you do it? Why do you bother?
Yeah. OK. I guess topical election tariffs. How is.
I can't believe that wasn't your first question.
I waited. Yeah, I waited till the 25th minute. But I guess, can you just walk us through kind of what your import exposure is in terms of components from China and Asia and how you can kind of, if you can, resource things and then just if you kind of have to bring Mexico into the fold and things, how that kind of impacts your business?
Yeah, so I'll put Mexico aside. We have our own operation in Mexico, a fairly large operation. It does bathroom vanities and some components for the rest of the business. I'm putting that aside because I don't know if that's going to be effective because this maquiladora structure has been there and that was set for a reason, so I'll put that aside for a second because that would be a different answer to what I'm about to say. For the rest of our imports, it's essentially the largest country we import from is Vietnam, and it's basically completely finished cabinet components that we bring into the United States and assemble in our Mantra product line, and then we take some components into other product lines as well.
From a cost of goods sold and material standpoint, it's about 20% of our material that comes from overseas, Vietnam being the largest. Second place is probably a combination of China and various European countries, and those are hardware, hinges, door pulls, slides, things like that, most of the metal products. Laminates come a lot from Europe. So you kind of have this basket of goods that everybody in the industry has to buy from these countries. That's the exposure. So if you had a 20% tariff, you're probably in the ballpark of a single low single-digit price increase to cover that because it's not that outsized of a portion of what we're importing. Now, there may be some other cabinet companies that are more exposed to that. The importers are 100% exposed to that.
We have a business. This Mantra product line that I've talked about is an import product. So that particular product line is going to have a bigger problem with a 20% tariff in terms of the cost. But again, it's not 100% of the cost. So there would have to be a larger scale price increase on that. But then again, all the other players that we're competing with with that product have the same exact problem. I'd say that generally speaking, compared to our peers, everybody's going to be facing the same thing. Nobody's buying drawer pulls from the middle of the U.S. They're all buying them from China, whether they buy them from a distributor or not. So everybody has the same problem. Now, Mexico, we always pay a lot of attention to Mexico. Obviously, there's always some challenges politically that you have to deal with there.
That business is about 15% of our revenue. So if we got a 20% tariff on Mexican goods, we'd have to reevaluate what we're doing. But we wouldn't make a knee-jerk decision. You have to maybe suffer a little bit for that. I think the chances of that are lower. I'm not going to say low because I don't really know. But I think that is I think China or excuse me, Mexico and Canada, I think there's a chance that that risk is a little lower just because it I don't know if it makes sense to really piss off your neighbors like that. But stranger things have happened.
Yeah, and I guess where have imports gotten to, so they used to all come from China. They maybe got to like 20%-25% of the market.
Yeah, I don't know. I'd say it's somewhere between $1.2 billion-$1.5 billion of revenue in the market. So it's 15% or something like that in that ballpark. And we're included in that number with our $200-plus million of Mantra. So it goes up and down. I mean, the import numbers are tracked, but I think there's players like us that are importing as well. So it's not all just competitors that are smaller. I'd say they're stabilized. The people that want that kind of product have it now. We're duking it out with them like we do with anything else to maintain or grow our share. Some of them are innovating a little bit. We're keeping our eye on that to see how they're doing it. But I think generally speaking, it's stabilized.
OK. And most of that, because of the tariffs on China, most of that got.
That's all. China does not. There's countervailing duties against China for that. You'd be paying an extra double, basically.
So it's really less the China piece.
It's all Vietnam, Indonesia, and those countries.