MasterBrand (MBC) Q4 2025 Earnings Call Transcript

Image source: The Motley Fool.

DATE

Tuesday, Feb. 10, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Dave Banyard
• Executive Vice President and Chief Financial Officer — Andrea H. Simon

TAKEAWAYS

• Net Sales -- $644.6 million for the quarter, a 3.5% decrease, reflecting continued market softness and a sharper-than-expected late-quarter slowdown in new construction.
• Adjusted EBITDA -- $35.1 million for the quarter with a 5.4% margin, down 580 basis points year over year due to lower volume, unfavorable mix, tariffs net of mitigation, and inflation.
• Gross Profit -- $167.5 million for the quarter, a 17.6% decrease, with a margin of 26%, down 440 basis points due to volume mix, fixed cost leverage, tariffs, and restructuring-related expenses.
• Tariff Impact -- Quarterly gross margin was negatively impacted by nearly 300 basis points from tariffs; roughly one-third was offset by mitigation actions.
• SG&A Expenses -- $186.9 million for the quarter, up from $152.3 million, primarily driven by a $17 million one-time bad debt provision tied to a single customer, personnel costs, and acquisition-related costs.
• Net Loss -- $42 million for the quarter, with a net income margin of negative 6.5%, down from positive 2.1% in the prior year.
• Adjusted Loss Per Share -- $0.02 loss per diluted share in the quarter, compared to $0.22 earnings per share in the prior year period.
• Free Cash Flow -- $53 million in the quarter, down from $69 million, reflecting lower profitability and deal-related expenses.
• Full-Year Net Sales -- $2.7 billion, up 1%, with Supreme contributing approximately 5%, and pricing actions offsetting underlying market decline.
• Full-Year Adjusted EBITDA -- $298.2 million, down 18%, with a margin of 10.9%, a decrease of 260 basis points due to lower volumes and increased costs.
• Full-Year Gross Margin -- 30.3%, a 220 basis-point decline, primarily due to lower unit volume, inflation, and tariffs.
• Net Income -- $26.7 million for the year, compared to $125.9 million in the prior year, driven by decreased gross profit and increased SG&A.
• Net Debt and Leverage -- Net debt ended at $791.2 million with a net debt to adjusted EBITDA leverage ratio of 2.7 times, due to lower trailing twelve-month EBITDA.
• Planned Cost Reductions -- $30 million in targeted annual cost reductions are planned for 2026, with full realization expected by year-end.
• Tariff Exposure 2026 -- Unmitigated gross tariff exposure projected to be 5%-6% of 2026 net sales, with expectations to offset 100% of tariff costs on a run-rate basis by year-end 2026.
• Guidance Policy Update -- The company is transitioning to quarterly guidance given limited visibility due to trade and macroeconomic uncertainty.
• Q1 2026 Guidance -- Adjusted EBITDA forecast of $23 million to $33 million, and adjusted diluted loss per share of $0.06 to $0.00, driven by volume, fixed cost absorption, and tariff mitigation timing.
• Supreme Integration -- On track to realize $28 million of annual run-rate cost synergies by year three post-close, with additional commercial opportunities anticipated upon market recovery.
• American Woodmark Transaction -- Anticipated to close in early 2026, with expected $90 million in run-rate cost synergies by year three post-close.

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

• Gross margin and profitability remain pressured by persistent tariffs, with tariff impacts of nearly 300 basis points in the quarter and an unmitigated 5%-6% gross tariff exposure anticipated for 2026.
• The CFO said, "our visibility into key performance drivers, cost inputs, and near-term demand has become more limited," highlighting uncertainty tied to trade policy shifts and the pending American Woodmark (NASDAQ:AMWD) merger.
• SG&A expenses increased sharply, driven by a $17 million one-time provision for bad debt related to a specific customer, higher personnel, and acquisition-related costs.
• The company expects continued margin pressure if "trade-down behavior persists across the portfolio or if mix shifts further unfavorably."

SUMMARY

MasterBrand (NYSE:MBC) reported continued market-driven revenue and margin contraction amid intensified trade pressures and weak demand across both new construction and repair and remodel channels. Management outlined a $30 million cost-reduction initiative for 2026, targeting operational and structural costs in response to volume declines and ongoing market uncertainties. The company detailed incremental tariff impacts, mitigation strategies, and the transition to quarterly guidance for enhanced transparency during heightened volatility. MasterBrand completed its first full year integrating Supreme and remains on track for planned synergy realization, while also progressing on its pending merger with American Woodmark (NASDAQ:AMWD). Tariff exposure is projected to remain elevated, yet the company projects full mitigation of these costs by the end of 2026 through operational and pricing actions.

• Quarterly free cash flow declined from the prior year, coinciding with lower profitability and increased deal costs.
• Interest expense decreased from the prior year as debt repayments continued.
• The effective full-year income tax rate increased sharply due to non-deductible expenses and jurisdictional valuation allowances from tariff effects.
• Segment exposure to more price-sensitive, value-oriented cabinetry increased, as customers continued to trade down, impacting sales mix and margins.
• Management underscored the timing lag for cabinet demand to reflect any sector recovery, given purchasing patterns late in the housing cycle.

INDUSTRY GLOSSARY

• Section 232 tariffs: U.S. import tariffs imposed on certain goods, including kitchen cabinets and related wood products, for national security reasons, referenced here at 25% through 2026 for MasterBrand's products.
• Tariff mitigation: Actions and initiatives taken by MasterBrand to reduce the financial impact of import tariffs, including alternative sourcing, pricing adjustments, and supply chain optimizations.
• Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, further adjusted to exclude items such as restructuring, integration, and other non-recurring charges, as defined by MasterBrand.
• Decremental margin: The rate at which EBITDA or profit declines in relation to decreases in sales, critical for evaluating cost flexibility during downturns in the context of MasterBrand's performance.

Full Conference Call Transcript

Dave Banyard, President and Chief Executive Officer of MasterBrand, and Andrea H. Simon, Executive Vice President and Chief Financial Officer. We issued a press release earlier this afternoon disclosing our fourth quarter and full year 2025 financial results. This document is available on the Investors section of our website at masterframe.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 press release we issued today. More information about risks can be found in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our full year 2024 Form 10-K and updated as necessary in our subsequent 2025 Form 10-Qs, which are available at sec.gov and at masterbrain.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 masterbrain.com. Our prepared remarks today will include a business update from Dave, followed by a discussion of our fourth quarter and full year 2025 financial results from Andrea H. Simon, along with our first quarter 2026 financial outlook. 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. Thank you, and good afternoon, everyone. We appreciate you joining us for today's call. Our fourth quarter and full year 2025 results were shaped by ongoing demand pressure and a complex trade backdrop. Despite these pressures, our teams remain focused on supporting customers, advancing our integration efforts, and maintaining financial flexibility through targeted cash management. While near-term results remain under pressure, we made meaningful progress on the priorities within our control to navigate ongoing volatility while ensuring MasterBrand remains positioned to capture meaningful upside when demand returns. In the fourth quarter, we generated net sales of $645 million, a 3.5% decrease compared to the same period last year. Our performance reflected a mid-single-digit year-on-year market decline, partially offset by the continued flow-through of previously implemented price and tariff-related pricing actions. Adjusted EBITDA for the quarter was $35 million compared to $75 million in the prior year period, and adjusted EBITDA margin was 5.4%. The variance in our results versus our implied fourth quarter outlook was primarily driven by a sharper-than-expected late-quarter slowdown in new construction, which pressured price and mix and reduced factory utilization and operating leverage. Free cash flow for the quarter was $53 million compared to $69 million in the same period last year. While cash generation declined year over year due to lower profitability and deal-related expenses, we remained focused on preserving liquidity and financial flexibility. Looking ahead, we continue to expect full-year free cash flow to exceed net income on an annual basis, reinforcing our long-standing commitment to disciplined cash conversion across cycles. Turning to our end markets, 2025 marked the third consecutive year of market contraction, with elevated interest rates, ongoing affordability concerns, and lower consumer confidence continuing to constrain activity across new construction and repair and remodel. U.S. single-family new construction declined high single digits in the quarter and mid-single digits for the full year, with the fourth-quarter slowdown sharper than expected. Builders remained under pressure, driven by tighter financing conditions, lower consumer sentiment, and greater uncertainty around input costs. However, consistent with prior quarters, MasterBrand's new construction sales again outperformed the broader market, driven by our exposure to production builders, the breadth of our portfolio, and our continued focus on service reliability and execution. We expect current headwinds in the new construction market to continue in 2026, as affordability and uncertainty around trade and pricing continue to influence buyer behavior. In repair and remodel, demand was uneven throughout the fourth quarter, reflecting a consumer that remains pressured. The U.S. Cabinet R&R market declined mid-single digits in both the quarter and the full year, with demand constrained by low existing home turnover, which historically underpins larger discretionary kitchen and bath remodel activity. Elevated interest rates, affordability concerns, and uncertainty in the job market continue to weigh on consumer confidence. Across our portfolio, we continue to observe trade-down behavior. Stock customers shifted towards our opening price point offerings, while in our premium tier, demand migrated towards semi-custom and value semi-custom options, reflecting a continued focus on value even in traditionally less price-sensitive channels. Looking into 2026, we anticipate U.S. Cabinet R&R demand will remain subdued and closely tied to financing conditions, consumer confidence, and housing turnover. We are helping offset these pressures with our broad refreshed portfolio and continued technology investments that enhance the end-to-end experience, making ordering, fulfillment, and support more seamless. Until affordability improves and housing turnover normalizes, demand is likely to remain below historical levels. But we remain confident that the long-term structural drivers of R&R are intact. In Canada, market conditions remain challenging in the fourth quarter, driven by the same affordability and turnover dynamics we saw domestically. The Canadian market declined mid-single digits in the quarter and for the full year, with new construction and R&R demand both down mid-single digits. We expect the Canadian market to remain pressured in 2026, with demand continuing to be constrained by consumer sentiment and low resale activity. As in prior periods of subdued demand, our focus remains on disciplined execution and targeted commercial actions to remain competitive and effective. Stepping back, we view 2026 as a continuation of the industry's extended period of muted demand, with end market conditions expected to remain soft and decline roughly mid-single digits across most categories as affordability pressures persist. Following multiple years of market contraction, and with tariff-related costs still continuing to flow through, expect competitive discounting to be elevated across the industry. In that environment, our ability to pass through additional pricing could be more limited. Where tariff mitigation actions require incremental pricing, those moves could further weigh on demand in select value-oriented categories, particularly stock cabinetry, adding uncertainty to near-term demand elasticity. At the same time, historically low existing home turnover is expected to continue to suppress cabinet repair and remodel activity. Looking ahead, we expect market conditions to stabilize and modestly improve in 2027, supported by historically low comps, improving affordability, easing financing conditions, and a gradual normalization in housing turnover. As a reminder, because cabinets are typically purchased later in the cycle, we expect a modest lag between a general market recovery and when the momentum is reflected in MasterBrand's results. In the meantime, we're maintaining rigorous cash discipline, pursuing targeted cost reductions, and preserving financial flexibility so we're well-positioned to capitalize on an eventual recovery as conditions improve. As part of these actions, we are implementing $30 million of planned cost reductions in 2026, which Andrea H. Simon will discuss more in detail in a few minutes. Turning to the trade environment, which remains an important and dynamic input to our planning and operations. As a reminder, in October 2025, new Section 232 tariffs on timber, lumber, kitchen cabinets, vanities, and related wood products went into effect, introducing meaningful additional duties across our materials and imports. While the scheduled 01/01/2026 tariff rate increase was deferred, the current 25% tariff on cabinets, vanities, and related products remains in place throughout 2026, with a 50% tariff rate now scheduled for 01/01/2027, absent further developments. Although timing has shifted, the trade environment remains challenging. Existing tariffs continue to pressure costs across the system and require ongoing management across sourcing, operations, and pricing. As we discussed last quarter, the impact of these measures is not limited to direct costs. It also has the potential to influence housing affordability and consumer behavior over time, effects that tend to emerge gradually rather than immediately. In response, we are continuing to a coordinated mitigation strategy across the organization. This includes enhancing sourcing flexibility and supplier engagement to reduce exposure, making targeted manufacturing footprint and operational adjustments to better align with demand and cost dynamics, adjusting product component design to lower overall tariff exposure, and maintaining consistent surcharge methodology where appropriate to provide transparency and predictability for our customers. These actions require careful sequencing and disciplined execution, and they remain a key focus for our teams. We are closely monitoring ongoing trade and macroeconomic developments and have incorporated the updated tariff timeline into our planning assumptions. We expect the benefits of our tariff mitigation and cost reduction to phase in over the course of 2026, supporting stronger profitability towards the later part of the year. Andrea H. Simon will provide additional details in her remarks. Operationally, we stayed focused on execution in the fourth quarter and throughout the year, keeping service levels strong, aligning production with demand, and continuing to build capability across the organization, even if the external environment remains pressured. Turning to Supreme, 2025 represented our first full year operating as an integrated organization. We made strong progress capturing the cost synergies we targeted, with benefits coming through across procurement, network, and logistics efficiencies, and overhead alignment. Just as importantly, we've been able to do this while maintaining critical operational continuity and customer service. As we look ahead, we remain on track to realize our target of $28 million in annual run-rate cost synergies by year three post-close, and we continue to see additional opportunity to expand the benefits of the Supreme combination over time, particularly on the commercial side as end markets recover, through broader portfolio access, cross-selling, and channel expansion. As for the pending American Woodmark transaction, we continue to advance our planning and are encouraged by our progress to date. Our teams remain focused on the integration planning and readiness work so they can move quickly following close while protecting customer service levels and maintaining continuity. We're excited about the strategic and financial opportunity the combination represents for customers and shareholders, and we anticipate closing the transaction early this year, subject to remaining customary regulatory approvals. Importantly, we continue to expect approximately $90 million in run-rate cost synergies by the end of year three post-close. Finally, turning to our continuous improvement efforts and capital allocation priorities. Our continuous improvement efforts remain a core enabler of operational excellence and long-term value creation. Our programs again outperformed plan, helping to partially offset volume pressure and tariff-related cost impacts. Importantly, continuous improvement broadened and deepened across the organization, gaining traction not only in production but also in back-office functions. Collectively, these actions are strengthening productivity, enhancing cost and performance visibility, and enabling more consistent decision-making, positioning the organization to sustain and build on these gains over time. From a capital allocation perspective, capital expenditures were in line with expectations in 2025, and we remain focused on operational execution and flexibility, consistent with the MasterBrand way. Our balance sheet and liquidity position remained healthy, providing the flexibility to support integration activities and long-term shareholder returns. In closing, while near-term market and trade challenges persist, our strategy remains intact and guided by the MasterBrand way. We have a resilient operating model, a strong portfolio, and a proven integration playbook. As industry conditions stabilize and demand recovers, we believe MasterBrand is well-positioned to emerge stronger and deliver longer-term value. With that, I'll turn the call over to Andrea H. Simon for a detailed review of our financial results and outlook. Thanks, Dave, and good afternoon, everyone. I'll start with a review of our fourth-quarter financial results followed by a brief recap of the full year. Then I'll share more details on our guidance for 2026 and provide some perspective on the full year ahead. Now turning to our fourth-quarter results. Net sales were $644.6 million, a 3.5% decrease compared to $667.7 million in the same period last year. The continued softness across our addressable market, which was down mid-single digits, was partially offset by the anticipated flow-through of prior pricing actions, including tariff mitigation price actions. Gross profit was $167.5 million, down 17.6% from $203.3 million in the same period last year. Gross profit margin was 26%, down 440 basis points year over year, primarily reflecting lower volume mix and the related unfavorable fixed cost leverage, tariffs net of supply chain mitigation, and restructuring-related expenses. These headwinds were partially offset by higher net average selling price improvement from prior pricing actions, including our tariff mitigation actions, our continuous improvement efforts, and Supreme integration synergies. Tariffs had a negative impact of nearly 300 basis points on our gross margin in the quarter, though we were able to offset approximately one-third of this impact through mitigation. SG&A expenses totaled $186.9 million compared to $152.3 million in the same period last year. This was primarily driven by a $17 million one-time provision for bad debt related to a specific customer, personnel costs, and inflation, acquisition-related costs, restructuring-related costs, and depreciation costs, and continued investments in our strategic initiatives, particularly around digital, technology, and marketing, partially offset by lower commission and freight costs following volume decline. Interest expense declined to $17.6 million from $19.3 million in the same period last year, reflecting progress as we continue to pay down our debt. Net loss was $42 million in the fourth quarter compared to net income of $14 million in the same period last year. Net income margin was negative 6.5% compared to positive 2.1% in the prior year, reflecting the items I just outlined, partially offset by lower interest expense and lower income tax expense. Adjusted EBITDA was $35.1 million compared to $74.6 million in the prior year period. Adjusted EBITDA margin was 5.4%, a decline of 580 basis points year over year due to lower volume and the related unfavorable fixed cost leverage, tariffs net of supply chain mitigation, and material freight and personnel inflation, partially offset by continuous improvement savings, the flow-through of our prior pricing actions, and Supreme integration synergies. As Dave mentioned, the variance in adjusted EBITDA relative to our implied fourth-quarter guide was primarily driven by a late-quarter slowdown in new construction. The late-quarter demand change created a more unfavorable mix and lower price realization than we had embedded in the outlook we shared in November. At these lower volume levels, mix has a greater impact on our bottom line. The shift reduced factory utilization, resulting in a mid-single-digit increase in down days versus our plan, which drove fixed cost under absorption and contributed to manufacturing inefficiencies. Given this dynamic, we expect continued margin pressure if trade-down behavior persists across the portfolio or if mix shifts further unfavorably. Diluted loss per share was $0.33 in the fourth quarter of 2025, based on 126.8 million diluted shares outstanding. This compares to earnings per share of $0.11 in 2024, which was based on 131.2 million diluted shares outstanding. Adjusted loss per share was $0.02 in the current quarter, compared to earnings per share of $0.22 in the prior year period. Moving to our full-year results, we delivered 2025 net sales of $2.7 billion, up 1% versus the prior year, driven by the contribution from Supreme and improvements in net average selling price despite a market that we estimate declined mid-single digits year over year. Supreme contributed approximately 5% to full-year net sales, consistent with our expectations, and pricing contributed to offsetting underlying market pressure. Gross profit was $827.6 million, down 5.6% compared to $877 million in the prior year. Gross profit margin declined 220 basis points year over year from 32.5% to 30.3%. The full-year margin decline was due to lower unit volume and the related unfavorable fixed cost leverage, inflation, and tariffs. This was partially offset by net average selling price improvements and the full-year inclusion of Supreme and its related synergies. Notably, tariffs had a negative impact of approximately 115 basis points on our gross margin throughout the year, and we were able to offset over half of this impact through mitigation actions. SG&A expenses were $667.8 million compared to $603.1 million in the same period last year. This increase was primarily driven by the addition of Supreme's SG&A expenses, the same one-time bad debt provision impacting the quarter, digital and technology investment, and freight inflation, partially offset by lower volume-related variable SG&A costs. Income tax was $19.6 million for the year, or a 42.3% effective tax rate, compared to $42.4 million or a 25.2% rate in 2024. The increase in effective tax rate was driven by non-deductible expenses and a jurisdiction valuation allowance driven by the tariff impact on products sourced internationally. Without these items, our effective tax rate for the year would have been approximately 23.5%. Net income was $26.7 million compared to $125.9 million in the prior year. The decrease was primarily related to lower gross profit and higher SG&A, partially offset by lower income tax expense. Adjusted EBITDA was $298.2 million in 2025, down 18% compared to $363.6 million in the prior year, and adjusted EBITDA margin declined 260 basis points to 10.9% for the full year compared to 13.5% in the prior year. These results were driven by lower volume and the related unfavorable fixed cost leverage, inflation, tariffs net of supply chain mitigation, and incremental strategic investments. This was partially offset by net average selling price improvements, including tariff-related pricing and Supreme contributions and integration synergies. Diluted earnings per share were $0.21 in 2025, down from diluted earnings per share of $0.96 in 2024, based on 129.2 million and 130.9 million diluted shares outstanding, respectively. Adjusted diluted earnings per share were $0.91 compared to $1.4 in the prior year. Despite a soft end market in 2025, we believe our long-term financial targets remain attainable, although delayed as we enter our fourth year of market decline in 2026. As discussed at our 2022 Investor Day, these targets were based on some level of annual market growth. While we continue to execute operationally, position the company for future growth, and augment our growth through acquisitions, market growth will be necessary to fully realize the benefits of these efforts and achieve our stated long-term financial targets. Turning to the balance sheet, we ended the year with $183.3 million of cash on hand and $441.9 million of liquidity available under our revolving credit facility. Net debt at the end of the fourth quarter was $791.2 million, resulting in a net debt to adjusted EBITDA leverage ratio of 2.7 times. Despite a sequential reduction in net debt, our leverage ratio increased due to a lower trailing twelve-month adjusted EBITDA. Net cash provided by operating activities was $195.7 million for full-year 2025 compared to $292 million in the full year 2024, driven by lower net income, increased restructuring-related cash outflows, and deal costs. Capital expenditures for the full year 2025 were $78.2 million compared to $80.9 million for the full year 2024, in line with our plan and driven primarily by the Supreme integration. Free cash flow was $117.5 million for the full year 2025, compared to $211.1 million for the full year 2024, reflecting lower net income. Our merger agreement with American Woodmark share repurchase activity until the transaction closes. Before turning to our outlook, I want to take a moment to address recent tariff developments and the implications for our business. Since our third-quarter call in early November, the trade backdrop has become more volatile, with actions announced, revised, implemented, and postponed in quick succession, directly impacting our industry and increasing near-term uncertainty around cost and timing. As Dave noted earlier, in late 2025, the planned Section 232 tariff rate increase on finished wood products, including kitchen cabinets and bathroom vanities, was postponed. To be clear, existing 25% Section 232 tariffs remain in place throughout 2026. In addition, Mexico announced tariffs on Chinese imports, reflecting further uncertainty in the global trade environment. Finally, countervailing and antidumping duties on hardwood and decorative plywood imports were delayed from 2025. The countervailing duties went into effect on January 12, and the antidumping duties are now anticipated to be fully implemented later this month. We are actively managing tariff impacts through targeted price adjustments, supplier renegotiations, alternative sourcing, and manufacturing optimization. As I've noted previously, these efforts take one to twelve months to fully materialize. As we prepare for the potential combination with American Woodmark, we are also intentionally sequencing certain actions and deferring select decisions to avoid implementing standalone changes that could prove disadvantageous post-close. In parallel, we are continuing to monitor potential trade measures, including the antidumping duties on plywood. Above all, we remain focused on minimizing disruption, protecting customer value, and sustaining our competitive position. Given the dynamic nature of the recent trade we just discussed, the related ongoing macroeconomic uncertainty, and actions deferred ahead of the anticipated American Woodmark merger, our visibility into key performance drivers, cost inputs, and near-term demand has become more limited. While we have a clear plan and are actively executing mitigation actions, the timing and magnitude of their impact can vary significantly as the trade environment shifts. As a result, MasterBrand is taking a measured approach to its outlook and transitioning to providing quarterly guidance until longer-term visibility improves. We believe this is the most transparent way to communicate our expectations in the current environment and provide stakeholders with decision-useful updates as we navigate these changing dynamics. Our financial outlook includes those tariffs currently in effect and the anticipated antidumping plywood duties. It does not reflect potential implications from other proposed or future trade changes. Further, our outlook does not reflect any anticipated financial benefits from the pending merger with American Woodmark, nor does it include expected transaction or integration-related costs. With those assumptions in mind, for the first quarter, our end markets are expected to be down mid to high single digits year over year. Against that backdrop, we expect first-quarter 2026 net sales to be down mid-high single digits versus the prior year. To help manage near-term pressure on profitability, we are taking action to reduce costs and align our cost structure with current demand levels. We are implementing $30 million of planned cost reductions in 2026 and anticipate we will begin to realize savings in the first quarter, with full realization expected by year-end. We believe these steps, in combination with our mitigation strategy, will help offset margin pressures, preserve liquidity, and position MasterBrand to remain resilient through this period of elevated uncertainty. Given these considerations, for the first quarter, we expect adjusted EBITDA in the range of $23 million to $33 million, representing an adjusted EBITDA margin of 3.9% to 5.3%. We expect first-quarter adjusted diluted loss per share of $0.06 to $0.00. This outlook primarily reflects the impact of lower expected volumes on fixed cost absorption, as well as the timing of our tariff mitigation and cost rationalization actions. Notably, this outlook also reflects our typical fourth-quarter to first-quarter seasonal step-down. Based on our fourth-quarter performance and expectations around the first quarter, net debt to adjusted EBITDA leverage at the close of the pending American Woodmark transaction is no longer expected to be sub-two times, reflecting the current trade environment and our decision to sequence certain mitigation and integration actions to avoid standalone changes ahead of closing. We remain focused on disciplined cash generation and deleveraging post-close and continue to expect leverage to trend down towards the end of the year as mitigation actions and synergies are realized. On the full year, as Dave mentioned, we continue to expect our addressable market in 2026 to be down mid-single digits year over year, with continued variability across end markets. For 2026, we expect decremental margins to remain elevated, driven by year-over-year volume declines, mix, and the timing of tariff mitigation. We anticipate that our decrementals will improve in the second half as our tariff mitigation and cost rationalization actions phase in further. For the full year, we also expect interest expense to be flat to down as we continue to pay down our outstanding debt. Our effective tax rate is expected to improve year over year, primarily due to the absence of certain one-time costs. Additionally, we continue to expect free cash flow for 2026 to be in excess of net income for the year. Finally, based on our current sourcing profile and product mix, the trade policies currently in effect, and the anticipated antidumping duties on plywood, we estimate that our unmitigated gross tariff exposure for the full year is approximately 5% to 6% of 2026 net sales. We anticipate tariff pressures to be partially offset by the benefits of our mitigation efforts, which will take time to fully materialize. As such, we expect more than 85% of the full-year net negative tariff impact to be reflected in 2026. Importantly, we expect to fully offset 100% of tariff dollar costs on a run-rate basis by the end of 2026 through our mitigation initiatives. We will continue to closely evaluate the impact of tariffs and remain committed to executing our comprehensive mitigation strategy, providing quarterly updates as we navigate these dynamics. In closing, while the industry has worked through a prolonged period of soft demand over the past three years and near-term conditions remain challenging, we are using this period to strengthen the business and position it for the next upcycle through thoughtful execution of our strategic initiatives. As we progress toward the pending combination with American Woodmark, we remain focused on maintaining continuity for customers while preparing to capture the value of the transaction. By leveraging our complementary capabilities and realizing the expected synergies, we are confident that the combined enterprise will be primed to emerge stronger and better positioned to deliver enhanced value to customers and shareholders as demand returns. Now I would like to return the call back to Dave. Thanks, Andrea H. Simon. As we close out 2025, we recognize the operating environment remains challenging, with demand softness, affordability pressures, and an evolving trade landscape continuing to shape near-term outcomes. At the same time, we are encouraged by the progress we've made in advancing integration initiatives, maintaining strong customer relationships, and preserving the flexibility needed to navigate uncertainty. Looking into 2026, we expect the year to be transitional for the industry, as market trends persist and tariff mitigation efforts continue to work their way through our business. Our focus is clear: execute with discipline, support our customers, manage cash and liquidity thoughtfully, and continue strengthening the business so we're positioned to capitalize as conditions improve. We continue to expect a more meaningful recovery to take shape in 2027 as affordability improves and housing activity normalizes. The MasterBrand way continues to guide how we operate, driving consistency, accountability, and execution across the organization. And it's the same approach underpinning our readiness for the proposed combination with American Woodmark. Planning continues to progress well, and we remain on track to close in early 2026, subject to remaining customary regulatory approvals.

With a strong portfolio, a resilient operating model, and a talented team, we believe we're well-positioned to deliver long-term value for customers, associates, and shareholders. Thank you to our associates for their continued dedication and to our customers, partners, and shareholders for their trust and ongoing support. And with that, I'll open the call up to Q&A. Thank you. If you'd like to register your question, please press 1. And if you are using the speakerphone, please lift your headset before entering your request. And then ladies and gentlemen, as a reminder, to request to register a question, press 1 on your telephone at this time.

Our first question comes from the line of McClaran Thomas Hayes with Zelman and Associates. Please proceed with your question. Thanks. Yes, starting with the full-year outlook for the market to be down mid-single digits. Just wondering if you could maybe help us break that down by end channel, talk to what you're assuming for the builder market broadly this year versus home improvement? Yeah. I think thanks for the question, McClaran. I think they're both about the same. The builder may be a little worse in the beginning, but then I think you're gonna catch up with easier comps.

I think the R&R market, which is what we consider retail, is kind of down mid-single digits fairly consistently throughout the year. It's our best guess at this point. I think part of the reason that we've gone to quarterly guidance is it's a little unclear still what the spring season is going to look like. So that's going to guide a bit of what the full year ends up being, but we wanted to at least signal that we believe the year to be down. And a lot of that, you know, in the near term is being driven by the pace of starts, which we saw declining last year. Got it. Thanks.

And then on pricing, it looks like price realization sequentially decelerated about 100 basis points from 3Q to 4Q. Any way you could split out maybe how much of that was driven by the channel headwind from weaker builder sales that you spoke about and how much was maybe tied to that step-up in promotions or competitive behavior? Yeah. I think it's a combination of several things, one of which is mix. There's more trade-down occurring. So we've seen higher volumes in the low, you know, opening price point than we anticipated in the fourth quarter. And then, you know, it is a combination of the pace at which we can capture price to mitigate tariffs.

I think if I was looking at price, we were effective by the end of the year of pricing for the liberation day tariffs, but then we got additional tariffs later in the year, and now there's more, at least with the plywood side of things, coming in this year. And we've tried to place pricing in a controlled sort of organized fashion and not constantly changing price. We've tried to bake all these things in, but all the changes that require, you know, constant maneuvering of that over time.

So but generally speaking, in the fourth quarter, the bigger impact on results in general was overall volume in the business, but then tilting the business a lot more towards the opening price point trade down. Awesome. Thank you. Thank you. Our next question comes from the line of Garik Simha Shmois with Loop Capital Markets. Please proceed with your question. Hi. Thanks. Thanks for all the color. I wanted to follow up on some of the residential construction weakness that you saw late in the quarter. I think your sales actually exceeded your prior guidance if I remember correctly.

So just kind of wondering if you could provide a little bit more detail on how sales during the quarter progressed and some more color on what you saw at the end of the quarter on the residential side? Yeah. That piece actually behaved in some ways similar to the prior year where we saw a pretty big drop-off in late November, which we weren't expecting this year. In order to cover that, there was other volume that was stronger, as I just mentioned. It was opening price point in different parts of the business. In all, we did miss what we thought we could do from a forecast standpoint internally, so we were off to that as well.

Overall, but I think that it was primarily a mix shift that you're seeing in terms of the end result. So we were able to get to, you know, down a couple percentage points, but it was not through, you know, there were certain factories that just were very inefficient in the quarter, which is the results in our, you know, bottom line outcome. Okay. On the cost side, you could go into a little bit more detail on the restructuring actions. And just to be clear, the $30 million in expected savings, to be realized in '26, is that an exit rate, or is that the dollar amount you're expecting to? That's the dollar amount in the year.

So, you know, in annualized, it's a little higher than that. It's broad-based, you know, adjusting our cost structure for the pace of demand. And it's mainly structural costs. Okay. And then just lastly, the tariff mitigation efforts. Just given the more challenged pricing environment, can you go into a little bit more color to what gives you confidence in your ability to offset the dollar cost impacts associated with the tariffs? I think the challenge that the pricing environment presents to us is the timing of that. And so I think that, you know, as we've said many times in the past, price doesn't happen overnight for us. It takes time to work through.

I think that the current pricing, we're flagging that in the current pricing environment because it may take longer. I think we're still aiming to cover that cost throughout the year. But again, price is one of the levers. It is a fairly large lever, so I'm not going to say that it's not important. It is. I think it's really more going to affect the timing of when we're able to cover the cost of tariffs. Also, our current plan and actions cover the cost of tariffs. So it does diminish profitability a bit because we're not covering that piece of it yet in the plans that we have. So teams are continuing to work on operational actions.

You know, the switch from 50% back down to 25% kind of negated a few of the actions that we were considering. So, you know, it's a constantly changing plan, but, you know, the actions we've taken so far are working. We saw that in the fourth quarter. We're going to continue to work the problem. But it is the kind of thing you're working daily. Again, we're going to continue to push the teams to go further on both execution on the price we have put out to the market and additional operational actions to cover a broader part of the P&L. Okay. Thanks for all that. Best of luck. Thank you.

And ladies and gentlemen, this concludes today's question and answer session. And this also concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.