James Hardie Industries plc (JHX) Q1 2026 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the James Hardie First Quarter Fiscal Year '26 Results. [Operator Instructions] I would now like to hand the conference over to Joe Ahlersmeyer, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and thank you to everyone for joining today's call. Please note that during the course of prepared remarks and Q&A, management may refer to non-GAAP financial measures and make forward-looking statements. You can refer to several related cautionary and other notes on Slide 2 for more information. Forward-looking statements made during today's conference call and in the presentation materials speak only as of the date of this presentation. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on forward-looking statements. Also, unless otherwise indicated, our materials and comments refer to figures in U.S. dollars and any comparisons made are to the corresponding period in the prior fiscal year. I'm now pleased to hand the call over to our Chief Executive Officer, Mr. Aaron Erter.

Hello, everyone. In a moment, I'll discuss our most recent results and how we are thinking about the quarters ahead. But it is only fitting to open my comments with some perspective on our future now that James Hardie and AZEK are one company. The combination of these 2 businesses now completed, has created a leading provider of exterior home and outdoor living solutions. We have significantly expanded our offering and in doing so, have strengthened our customer value proposition and positioned James Hardie to capture multiple opportunities for material conversion with a total addressable market more than twice the size of legacy James Hardie. Our team is stronger as one, and we are better equipped than ever to serve our customers and create value for all our stakeholders. I am pleased with the focus shown by everyone through pre-integration planning and now into integration execution and, in particular, with an unwavering dedication to working safely each day and serving our customer partners. The integration is off to a very positive start, and I look forward to sharing more details on our actions and progress towards our synergy targets in just a few moments. The material conversion opportunity that lies ahead is substantial, and we will strategically invest where we see long-term returns to support our future growth. Please turn to Slide 5. Presently, demand in both repair and remodel and new construction in North America are challenging. Uncertainty is a common threat throughout conversations with customer and contractor partners. Homeowners are deferring large ticket remodeling projects like residing and affordability remains the key impediment to improvement in single-family new construction, where more recently, homebuilders are moderating their demand expectations and slowing starts to align their home inventory with a decelerating pace of traffic and sales. For legacy James Hardie, first quarter results were largely as we had anticipated and reflect an expected normalization of channel inventories due to moderating growth expectations by our customers as uncertainty built throughout April and early May. And although we had contemplated this dynamic within our initial outlook, incremental market softness across single-family new construction has led to more defensive inventory posturing at distributors and dealers, contributing to a lower volume outlook for our business. In May, we built into our full year guidance and assumption that end market demand could decline by approximately mid-single digits, driven by expectations for further decline in repair and remodel. Over the course of the summer, single-family new construction activity has been weaker than anticipated, and we have adjusted our expectations to account for softer demand. Furthermore, we believe it is prudent to plan for more cautious order patterns and defensive inventory positioning at our channel partners, exacerbated by the slower seasonality of new construction into the back half of the calendar year. Amidst this dynamic, we're also conservatively expecting to benefit from recent homebuilder exclusivity wins and new product launches more so in FY '27 and beyond rather than the back half of FY '26 and as previously planned. Turning to legacy AZEK results. The business delivered a strong June quarter with performance exceeding previously provided guidance. Deck, Rail & Accessories saw mid-single-digit sell-through growth driven by continued expansion in the channel and contribution from innovative new products, particularly within railing. In addition to the sustained momentum on the top line, AZEK demonstrated impressive margin performance in the quarter, all the while continuing to invest in long-term growth initiatives. As we stated, when we announced the combination, AZEK is a strong complement to James Hardie due to the long-term growth profile and the underpinnings from material conversion. TimberTech's continued growth through softer overall markets demonstrates the resilience of the demand profile for the decking category and the strong value proposition of the product offering. Together, we expect to accelerate top line performance to drive double-digit long-term growth within our North America businesses. In a few moments, Rachel will expand upon our consolidated FY '26 guidance and expectations across our new reportable segments. But first, I would like to share an update on our key strategic priorities, integration efforts and early progress towards our synergy targets. Please turn to Slide 6. We remain committed to outperforming market demand over the long term and are employing strategies to deliver on this commitment, notwithstanding near-term conditions. Our actions are centered around our value proposition to customers. Our solid execution against these strategies amplifies our expansive material conversion opportunity. We are resolute in our strategy that is grounded in being homeowner-focused, customer and contractor driven. In essence, this means that the driving force of our business is our unwavering commitment to delivering winning solutions across the customer value chain. Everything we do starts and ends with the customer. We have purposeful strategies to create demand across the value chain, winning over homeowners, contractors and customers with our value proposition and fostering loyalty to the James Hardie brand. We have unmatched resilience and beauty in our innovative and differentiated product offerings. And our localized manufacturing unrivaled by any other competitor is instrumental to the growth plans of our largest, fastest-growing customers. Our customer partnership, our innovation focus, our broad product range and scale of manufacturing and support network continually deliver material conversion wins. Our core strategies are working, and we will continue to invest strategically to profitably grow the business and bring our strategies to life as our end markets recover. We see immense material conversion opportunity ahead, fueling our growth engine and value creation flywheel. We are winning in the field by partnering with our customers and contractors and delighting homeowners. This success propels our organization forward and fuels my optimism about the future of James Hardie. We have the strongest team in the industry and the right strategy to go after our material conversion opportunity. I've said it before, and I'll say it again, nobody in the industry has a sales team like James Hardie. We have shown an ability to rapidly onboard new contractors to the alliance, our loyalty program, which we will continue to grow and enhance over the coming years. Additionally, approximately 40% of new contractors added in the prior year were introduced to the program by a customer sales representative, a clear proof point of how we have amplified our commercial efforts by leveraging our deep partnership with our customers, leading to not just hundreds, but thousands of feet on the street. This comes as a result of our focus across the entire value chain, which is driving demand creation and building brand awareness. Turning to new construction. We continue to achieve success in deepening our partnerships and supporting homebuilders growth objectives. Over the last year and a clear demonstration of the appreciation for our innovative product solutions and unrivaled business support we have announced multiyear national hard siding and trim exclusivity agreements with several large homebuilders, including Beazer Homes in July. We were also recognized as a national preferred partner by David Weekley Homes representing our 18th award in 21 years. We continue to strive for excellence and continuous innovation in terms of the products and solutions we provide to our valued customers. Beauty and resilience define our entire suite of products with beautiful aesthetics that appeal to homeowners and resilience that provides frontline defense against the elements, moisture, pests and fire to protect what matters most. During the quarter, our global innovation team led by our Chief Innovation Officer, Joe Lu was recognized for outstanding innovative culture by the National Association of Manufacturers. By committing to our values of being bold and progressive and collaborating for greatness, we are driving innovation and helping to shape the future of our industry through the introduction of new aesthetics which continue to delight homeowners and solutions increasing the productivity of contractors like statement essentials. We are also targeting material conversion wins against brick and stucco with products such as Hardie Architectural Panel, adding incremental runway on top of what has been our core focus and would-look siding. As another example of our product innovation, our ColorPlus offering helps create beautiful, distinguished homes with superior aesthetics, customization and durability. ColorPlus is strategically important across both new construction and repair and remodel. Our focused efforts and investments enabled outperformance versus prime products in the first quarter. The value proposition we can offer with ColorPlus also continues to underpin our opportunity to grow alongside large homebuilders and new construction. ColorPlus' superior aesthetics and virtually limitless range of color options provides differentiation to the exterior of homes and builder communities, increasing the appeal to the homeowner. And therefore, expediting the sales cycle and supporting the ASP for our home builder partners. In other words, we are seeing that builders who utilize James Hardie ColorPlus are selling homes faster and for more money. We continue to see significant runway for ColorPlus growth against inferior solutions within repair and remodel in the Northeast and Midwest. Two regions right for material conversion through the residing of aging homes with appreciated values that remain clad with other substrates. Our innovation strategies also apply to the installation process for our home builder and contractor partners, which again includes ColorPlus, offering time and cost savings, particularly in areas with constrained labor availability and higher painting costs. We are increasingly innovating to make James Hardie the most intuitive products to install in the marketplace. In parts of the Midwest and specifically with our statement collection, we are piloting a number of these innovative products and solutions to reduce install time and thereby labor costs, and the early results continue to be highly encouraging. We believe these initiatives will unlock a much larger range of addressable homes at more affordable price points. Turning to our global operations. This function is the key to providing the unrivaled business support that our customers demand and have come to expect from James Hardie. We are the industry leader providing the highest service levels that enable customers to run their supply chains with greater flexibility, knowing that the strength of our localized manufacturing network will respond to their needs. I recently appointed Ryan Kilcullen, to the newly established position of Chief Operations Officer. Over his 18 years of experience at James Hardie, most recently as Executive Vice President of Operations, Ryan has demonstrated beyond a doubt that he is the right leader to continue driving excellence across our expanded network of manufacturing and logistics. Currently, Ryan and his team are laser-focused on controlling the controllables and driving continuous improvement to help offset inflation and lower volume. In the quarter, we overdelivered on our global internal cost savings target, led by strong progress in procurement and R&D. We continue to see runway for continuous improvement across our manufacturing, commercial and back-office functions, contributing to both our cost synergy target and organic margin expansion goals. In both Australia and New Zealand and in Europe, we remain focused on areas in which we have the right to win and where we can continuously improve profitability. In Australia and New Zealand, our strategy is consistent and focused. We are leveraging innovation to accelerate material conversion against brick and masonry, and we are optimizing our network for future growth. In Australia, we continue to grow our strong category share across our end markets through demand creation and strategic partnerships with large homebuilders, and we expect to outperform the market which we anticipate will be flat to down in FY '26. The ANZ business is well positioned to take full advantage of a future market recovery. In Europe, the market environment remains similar to recent quarters. We are focused on our core strategy of driving double-digit sales growth in high-value products. To that point, our Therm25 fiber gypsum flooring product continues to receive accolades across the industry, including our most recent recognition, the Plus X Award, which highlighted the product's performance across categories for innovation, quality, functionality, ergonomics and sustainability. We have a solid plan to expand our margins in Europe comprised of purposeful investment to drive operating leverage alongside sales growth and cost savings from the optimization of our production footprint and freight management. Across our businesses, our teams are committed to executing on purposeful strategies that drive sustained long-term market outperformance. These plans are grounded in capturing the material conversion opportunity and driving value for our customer partners. Please turn to Slide 7. On July 1, we welcome the AZEK team into James Hardie. But before I detail our plans for a seamless integration, I'd like to take a moment to thank Jesse Singh and the rest of the AZEK team who have been instrumental in the success of AZEK and collaborated closely for an expedited close. It is imperative that we continue to build upon the strong momentum the AZEK team built by maintaining continuity with our customers and channel partners and achieving alignment across our collective North American organization as we accelerate growth by winning in the market and capturing commercial synergies as one James Hardie. Our integration road map starts with the customer, both with how we engage with them and support them. We will maintain continuity in terms of the face to our customers immediately leveraging the combined power of our unified sales force as well as our portfolio of leading brands, products and solutions. Our dealer and distributor customers have seen the growth James Hardie can drive across their businesses, and we will continue to provide the support and solutions to further collective growth as key strategic partners. Internally, working safely through 0 harm and efficiently through the Hardie operating system remain foundational imperatives. Key to our success today is also unifying our cultures and identifying best practices from both organizations to drive continuous improvement across our global operations, supporting and enabling the success of the combined organization. As I've said to our team, we aren't going to be married to the James Hardie or the AZEK way. We are going to be married to success. Moving to Slide 8. In the short time since the transaction closed, we have made meaningful progress on our cost synergy realization and are seeing business wins from customers recognizing our combined value proposition and wanting to partner with us. The initial response we have seen has well exceeded my expectations. We have tremendous confidence in our execution of a seamless integration, given the similarities of both companies' cultures, goals and operating models. Thus far, we are progressing well against our cost synergy commitments, having already actioned cost synergies accounting for more than 50% of our run rate target for general and administrative cost savings which we knew would be the quickest to realize. For FY '26, this solid run rate will drive approximately $20 million of P&L benefit primarily in the latter half of the year. We are on track to achieve our previously stated target of $125 million of cost synergies over 3 years, with room to deliver ahead of schedule. Productivity is ingrained in our culture through the Hardie Operating System, meaning we will continuously find ways to improve the overall cost structure of our business well after initial cost synergies have been captured. We are acting with thoughtful diligence to build upon our strength as a unified sales organization, which is key to harnessing our combined growth opportunity. Early feedback on our combination with AZEK from dealer customers has been very encouraging. And now that we have come together as one and are pursuing quick commercial synergy wins, our confidence in the strategic logic of the combined enterprise is greater than ever. We have already executed on several meaningful commercial synergy wins with major customers across the value chain, which serve as proof points of the rationale for bringing together our products into a comprehensive solution and provide motivation to every single team member of what is now the strongest sales organization across the building products industry. We've had important dealer partners already commit to making AZEK their exclusive PVC trim offering, not only because of their strong alignment with James Hardie, but also because of the loyalty of their contractor customers to our brand. We have already seen contractor partners commit to newly offering both TimberTech decking and James Hardie siding, their willingness to trust and work with James Hardie and TimberTech is informed by their familiarity with our leading brands and best- in-class support teams. We've already seen some wins across the country, including members of our contractor alliance committing to offer TimberTech decking and members of the Board, TimberTech's contractor program converting to James Hardie fiber cement siding. This is a testament to the trust and confidence our contractor partners have in us, and we are actively working to bring these programs and contractors together to accelerate our material conversion opportunity at the contractor level. We have also now an expanded line of total exterior solutions, which best position us to meet the needs of our homebuilder partners across the broad range of geographies and price points in which they participate. We believe that several recent wins at various levels of scale were due in large part to our homebuilder partners appreciation of our expanded offering and comprehensive solutions. Across all our existing customer partnerships, we have an on-purpose plan to communicate the enhanced value proposition we now offer. We committed to delivering more than $500 million of commercial synergies over 5 years, with benefits to begin showing in FY '27, but my message to the organization has been clear. We will achieve well over $500 million in synergies. We will do it in under 5 years, and our relentless pursuit of these wins started on day 1. The teams have clearly risen to the challenge, and through their actions in the field, have turned what once was just a thought into real-world share gains that will drive meaningfully faster growth in the years to come. Now I'll turn it over to Rachel to review our results in more detail and discuss our outlook. Rachel?

Thank you, Aaron. Please turn to Slide 9. We delivered Q1 results largely consistent with our internal plan, navigating a dynamic near-term environment, while also remaining focused on scaling the organization and investing in our business to drive long- term profitable growth. We will stay focused on the key strategies that have underpinned the strength of our long-term financial performance, including aligning our spend into the market environment, investing ahead of recovery and evolving our plans to drive outperformance. Lastly, as Aaron mentioned, our integration synergy capture efforts are well underway. In a moment, I will introduce our guidance for FY '26 inclusive of AZEK as well as provide for some modeling considerations for the combined company. But first, please turn to Slide 10 for the financial highlights of our fiscal first quarter. Total net sales were 9% below last year's strong first quarter results, mostly consistent with our internal expectations at $900 million globally. We delivered $226 million of adjusted EBITDA in the quarter with an adjusted EBITDA margin of 25.1%. Total adjusted EBITDA declined 21% against last year's record 1Q and margins decreased by 370 basis points. Adjusted net income in the quarter was $127 million, and adjusted diluted EPS was $0.29 per share. Lastly, free cash flow was $104 million up 88%, driven by continued strength in the cash generation profile of our business and moderating capital spending requirements. Turning to our North American results on Slide 11. North America net sales declined 12% in the quarter driven by lower volumes, partially offset by an increase in average net sales price, or ASP. As we anticipated, price realization improved sequentially. As ASP rose plus 3% year-over-year, ahead of the 1% increase in the fourth quarter of FY '25. Volumes declined double digits in exteriors, consistent with planning embedded in our previous guidance. As expected, many customers made efforts to return to more normal inventory levels in the first quarter. Into the second quarter, we have seen these customers take an incrementally more defensive approach to inventory levels as market growth expectations have moderated from a few months ago. The impact is most notable in the South, specifically in Florida and Georgia as well as Texas, where we have a significant presence, given our strong partnerships with scaled homebuilders. These geographies heavily tilted toward new construction have seen outsized pressure from affordability and elevated home inventories. Homebuilders are aligning production to a softer demand outlook as evidenced by seasonally-adjusted single-family starts in the South falling around 25% since February and permits in that region declining sequentially each of the last 4 months. Interior volumes declined double digits while multifamily returned to growth with volumes up mid-single digits. North America adjusted EBITDA was $206 million with an adjusted EBITDA margin of 32.1%, down 400 basis points year-over-year. Lower volumes, unfavorable cost absorption and persistent raw material inflation were the primary drivers of this decrease. Pulp was a primary driver of raw material inflation on a year-over-year basis in the first fiscal quarter, though we expect this headwind to subside through the year. For the full year, we still anticipate total raw material inflation to run high single digits, but with the risk to the favorable side of the range based on our current pricing and forecast. We continue to control the controllable with favorable ASP, cost savings and our focused clutch actions helping to partially mitigate market volume declines and raw material headwinds. Please turn to Slide 12. In our APAC and Europe segments, market conditions continue to be challenging, driven by macroeconomic uncertainty and consumer affordability concerns. Nevertheless, we strive to outperform through market cycles and believe we continue to drive outperformance in both regions during the quarter. APAC comparisons to prior year continue to be influenced by our decision to cease manufacturing and wind down commercial operations in the Philippines. Including this impact, Asia Pacific net sales declined 10% in the quarter or 8% in Australian dollars, primarily due to a 25% decrease in volumes, partially offset by a 22% rise in ASP in Australian dollars. Asia Pacific EBITDA declined 7% to $43 million and EBITDA margin increased 140 basis points to 35.4%. Speaking only to our remaining operations in Australia and New Zealand we saw a low single-digit increase in both volume and ASP leading to a mid-single-digit comparable net sales increase in local currency. EBITDA grew modestly and EBITDA margin was flat as the benefit from top line growth and of savings were offset by increased investment in sales and marketing initiatives. We remain confident in our ability to execute on our strategies and outperform our markets. In Europe, net sales increased 7% or 2% in euros, driven by higher average net sales price, partially offset by lower volumes, with Germany declining low single digits and the U.K. growing mid-single digits. EBITDA margin increased 50 basis points to 16% attributable to a higher average net sales price as well as lower freight and raw material costs. SG&A expense was higher related to increased investment in sales teams supporting growth strategies for high-value products. We continue to expect top line growth in Europe this year, outperforming against the challenging market backdrop in the region, in part due to our confidence in strong high- value product sales growth despite relatively flat performance in Q1. Our top line expectations, coupled with manufacturing facility rationalization and freight optimization efforts also positions Europe for improved margin performance in FY '26. Now please turn to Slide 13, where I will discuss guidance. Today, we are issuing guidance to incorporate the inorganic contribution from AZEK which will be split across 2 new reporting segments, representing our total North American exposure, Siding & Trim and Deck, Rail & Accessories. Starting with Siding & Trim which will be comprised of our legacy James Hardie North America Fiber Cement business and AZEK's exteriors business. For our Siding & Trim segment, we expect FY '26 net sales of $2.675 billion to $2.85 billion. We now believe market demand will decline high single digits in FY '26 as demand continues to be negatively influenced by homeowner affordability pressure and uncertain macro conditions. Encouragingly, we continue to expect our disciplined value-driven pricing approach to yield solid price realization throughout FY '26. Moving on to our Deck, Rail & Accessories segment, which consists of AZEK's legacy Deck, Rail & Accessories business. We expect net sales of $775 million to $800 million for the next 9 months. Our sales forecast assumes DR&A sell-through up low single digits as secular tailwinds in the outdoor living category and TimberTech market share gains continue to drive outperformance versus the broader R&R market. For the total company, FY '26 adjusted EBITDA is expected to be $1.05 billion to $1.15 billion, which includes an approximately $250 million to $265 million contribution from the AZEK acquisition. As it relates to our adjusted EBITDA guidance, please note the following: Corporate costs previously accounted for in the AZEK Residential segment will now be recognized in general corporate costs; our general corporate costs will no longer include unallocated R&D, which as of Q2, will be allocated to the business segments; the reclassification will be neutral to our total adjusted EBITDA; prior to cost synergy realization, general corporate costs are expected to be approximately $225 million on an annual run rate basis; lastly, we now expect free cash flow of at least $200 million in FY '26. We remain highly confident in the long-term cash generation profile of our business and are positioned for an acceleration in future years as transaction and integration costs declined, and we reduced our interest expense through debt reduction. Additionally, investment in capacity expansion projects will decline for the next few years as our recent major projects have reached completion, and we continue to improve productivity from our existing capacity footprint through HMOS and advanced manufacturing initiatives. In FY '26, we expect total capital expenditures of approximately $400 million, including $75 million of spending for AZEK over the next 3 quarters. Looking further ahead, we expect to maintain a disciplined approach to capital expenditures with our North American business, inclusive of AZEK investing 6% to 7% of sales and CapEx over the long term. In addition to the guidance provided on Slide 13, in the appendix of today's presentation, we have provided further modeling considerations for the combined company as well as a comprehensive breakdown of our current debt capital structure. Slide 18 provides additional detail to bridge from our adjusted EBITDA guidance to adjusted diluted earnings per share for FY '26, including our anticipated depreciation expense and interest expense adjusted effective tax rate and average diluted share count. Taking these modeling considerations into account our FY '26 adjusted EBITDA guidance of $1.05 billion to $1.15 billion corresponds to FY '26 adjusted diluted earnings per share of $0.75 to $0.85. Embedded within this forecast is Q2 adjusted EBITDA of approximately $275 million and adjusted diluted EPS of approximately $0.15. Turning to Slide 14 and our capital allocation priorities. As our free cash flow accelerates in the coming years, we plan to diligently allocate capital to create value for all shareholders. This includes investing to drive organic growth, reducing our balance sheet leverage in line with our deleveraging commitments and returning capital to shareholders. Lastly, while we will prioritize the flexibility of our balance sheet, we see significant merit to AZEK's existing inorganic strategies around expanding capabilities in railing and recycling through small tuck-in acquisitions. Finally, we were very pleased to successfully complete our debt financing in June, including a $1.7 billion offering of senior secured notes. The offering was multiple times oversubscribed and the notes were rated investment grade by multiple rating agencies shown in the appendix on Slide 19, gross debt stands at approximately $5.1 billion, with an annualized effective interest rate of approximately 5.7%, implying annualized interest expense of around $290 million. We are committed to rapidly reducing our net leverage and are reaffirming our commitment to reduce net leverage to at or below 2x by 2 full years post close. Maintaining a strong and flexible balance sheet is a core component of our long-term capital allocation priorities, and we remain highly confident that the profitability and cash generation profile of the combined company will drive rapid deleveraging in line with our stated commitments.

Thanks, Rachel. With the closing of the AZEK acquisition now behind us, we are working diligently to integrate and deliver on cost and commercial synergies on an accelerated time line positioning ourselves to capture the expansive material conversion opportunity ahead to deliver on our long-term value creation commitments to shareholders. I am so proud of the focus and dedication shown by our One Hardie team over the last 50 days. And I am confident that together, we are elevating James Hardie to be a clear leader in the building products industry. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from Phil Ng with Jefferies.

When I look at your legacy North American fiber cement in the quarter, volumes were down about 15%. Kind of to get to your 2Q and full year guide, appreciating you're guiding the segments a little differently. It implies like 20% declines in 2Q, probably a mid- teen decline. So appreciating a lot going on here with the single-family exposure in the South as well as destock. Can you in help us parse out like the single-family outlook versus the inventory element to it because it's far more pronounced than I think most of those was expected. So just kind of help us think through how long it's going to take to parse out the inventory fresh there's 2 pieces, right? There's a channel as well as, I guess, at the dollar level too.

Yes. Phil, thanks for the question. Let me start out by saying, look, we continue to make progress on our key strategic focus areas that involve the homeowner, customer and contractor, and we're going to be much stronger with the integration of AZEK. With the homeowner, we continue to be the #1 siding brand in the United States with the contractor with the brand of choice for contractors and siding. And with AZEK, that's going to be the case with Decking. That's going to be the case with Trim, that's going to be the case with pergolas. And we continue to add more contractors to our loyalty program each and every day. And then with our dealer partners, we're relied upon to be business consultants and hence, we are available in 25,000 points of distribution out there. Let me just -- as we answer this, I think it's important to ground and talk a little bit about Q1 and the results, and then we'll go into our guidance here. Look, our Q1 results were as expected, and they were embedded in our FY '26 guide. During the calendar year '25 March quarter, our customers ordered to really more optimistic expectations than we are here today and hence, some of the Q1 results that we're seeing. Relatively speaking, as we got into our first quarter, channel inventories were not out of line for the build season. As we progressed through the quarter, we saw our customers focus on inventory more as the outlook began to soften. The Q1 market environment was considered within our full year guidance. North America R&R multifamily performed per our expectation. And we believe we performed in line with the market, really down mid-single digits. Inventory draw down aside. Single-family new construction starts became our demand was at approximately one quarter lag. In other words, the single-family new construction starts from January through March, in fact our April through June. And thus, that was part of our May guidance. We knew that. Single-family new construction starts January through March, we're down 5% and really consistent with our underlying volume there. So with this weaker environment, we saw customers ordered less to manage inventory. And we did expect to see this in Q1, hence, what you're seeing there. Look, I think as we look forward, we talk about inventory, it's a forward-looking concept. Customer expectations for growth in calendar year '25 underpinned our May full year guidance in our Q2 through Q4 expectations. And look, that's why we updated. And I think if you go back and you listen to our Q4 call, we talked a little bit about this, right? We talked about inventory being relatively normalized, but we said we did see blips on the radar out there. We talked about uncertainty as a growing theme in Q1. We talked about challenges in single-family new construction. And look, then we talked about for the full year, our guide included volumes ramping up through the year. So I think it's really important to put that in context as we talk about Q1 and then our guidance we go forward.

Okay. As you look forward, Aaron, just given the tougher demand backdrop, it's great that you guys are accelerating cost-out actions for the deal. Are there any other things you guys could do in terms of managing costs a little more effectively demand drugs and put challenge right now. Is there a headcount to us you guys can do idle capacity because it's a pretty step margin correction here? And how -- what's the game plan to kind of improve that margin profile as we kind of look out forward.

Yes. Phil, good question. Look, I go back to what we talked about has been a discipline for us at James Hardie for years. and we're bringing that discipline with the new James Hardie with AZEK being a part of it. And that's really our Hardie Operating System. So that extends into our benchmarks, which is how we manage our manufacturing plants. Obviously, as the volumes come down, it gets more and more challenging. But we have the right focus. When volumes are high, you focus on throughput, now we're focused more on yield. Obviously, we're managing shifts as best we can. We're pedaling and clutching on certain expenditures out there with frozen headcount. And look, we're in the process of integrating 2 companies here. So we think there can potentially be opportunities there. So our team is disciplined. We are focused on this. We continue to accelerate our efforts.

And your next question comes from Keith Chau with MST.

Just back on the inventory point, please. So you mentioned we spoke about it at the last quarter, which we certainly did and that was 7.5 weeks into the quarter. So the destocking into the second half of the quarter must have been quite severe. But I just want to -- maybe if you can simplify it for us volumes were down 15% in the period. How much of that was actually attributed to inventory destocking? And then as we look into the second quarter, how much of that impact will persist into the second quarter? And your views on your competitive standing as well in the market, please?

Yes. Thanks for the question here. Let me give you a little bit of a time line when we think about inventory here. We talked -- just talked about it, but I'll reiterate it again. So Q4 FY '25 in March, we sold our customers prepared for growth. right? You think about the time, the election ended up happening in November, people were ready for growth. Look, and we talked about inventory not too high, but full well positioned for growth in the building season out there. As we got into April, we cited this on the call, a little bit of noise, a little bit of uncertainty. You get into May, we have our call, June environment softening. As we got into April, people were managing their inventory, right? So we already started to see a little bit of that destock as you talk about April through May. And then look, as we got into July, June, it was softening and then as we got into July, we really saw customers getting into defensive inventory posture. And look, this is a big part of the impetus for our lower outlook with inventory, with a dramatic change in single-family new construction. And then with that said, some of the benefits that we counted in for FY '26, whether that be new products, whether that be the benefits from some of our exclusivities with homebuilders. Those are all pushed out here. The other thing I think it's really important to remember as we look forward is our year, right, ends March 31. So as you look that the uncertainty and the visibility as you go from January of what is calendar year '26 to March that's further out than a lot of people who are reporting here. I think the other part of your question is with our competitors out there. And look, I would just ask, we have really good competitors don't have a bad thing to say about any of them. They compete well. We're all trying to go out there and utilize our value proposition. Look, I think what we have to remember is James Hardie has the leading position in most significant parts of the North American site market. This includes exclusive partnerships with top homebuilders, trusted relationships with pros in the industry, unmatched service, right? Everything we talked about as far as just our value proposition. Our position across the value chain is reflected in is what we always say, homeowner focused customer and contractor driven. We are in different parts of the country, right? And what I'm getting to here is certain areas that are -- we are really strong with large homebuilders. We think about where a lot of the new construction is going on in the South region of the United States. We're seeing weakness there. right? So that is part of, as we look for the guide for the rest of the year. So I think probably you're referring to or someone will ask about PDG. PDG is something that's really hard to quantify and look at in this type of dynamic market because not everything is moving in unison. It's all a little disparate, and it's a dynamic market out there. But look, in the areas we participate. We believe that we're holding our own. We believe that we continue to make strides with our main initiatives. And look, we go back to what is our long-term growth profile and that is our organic fiber cement business. There is a tremendous amount of runway for us out there. If we think of the material conversion opportunities, 80% of the homes out there are not clad and James Hardie, we have a tremendous opportunity. And then you have the opportunity that we have with AZEK with the expert and outdoor living, you put these 2 together, we think and what we're seeing early on from some of the synergy results is we're going to continue to be able to accelerate this. That's what we're excited about from a long-term perspective.

Sorry, just going back just seeing if you can put a framework or a number around the inventory destocking for the period of the impact going forward, please, in the second quarter? Any hangover into the second quarter?

Yes. Look, Q1 inventory aside, we believe we performed in line with market, right, which would be down mid-single digits. That's what I would say. And then Q2 and Q3, we think we continue to see some type of destock out there with our customer partners. And going back to our value proposition, as our customer partners are more cautious and making sure they're really vigilant with their inventory. We do have the supply chain with our localized manufacturing that are able to partner with them and be able to supply what they need when they need it.

Your next question comes from Ryan Merkel with William Blair.

I guess, Aaron, first off, the big issue here seems to be the single-family new construction in the South. And if we zero in on that, how did the quarter evolve for that part of your business from sort of April to today? And is it still slowing or is it sort of stabilizing at this point?

Yes. Ryan, I'll just start by saying, as I mentioned before, and just to remind you, and then I'll turn it over to Rachel, she can add some context here is we've talked and linked, right, over the last 2 years of our partnership with the large homebuilders. And we are really value that partnership. We wouldn't trade that for anything. But also, if you think about a lot of or the majority of some of the starts out there, they've really been happening in the South. So that has impacted us. As much as we talk about the outside analysts when we start this out for the year, we said, okay, single-family new construction is going to be flat to maybe down 1. I mean that's changed almost by 10 points. and it's magnified and it's accelerated in areas like the South. But Rachel, do you want to maybe hit this? .

Yes. So the first comment, as Aaron pointed out, single-file construction whether you want to look at the NAHB or burns or on a national level, they are moving their estimates from May until August or July or most recent by over 10 points. That is a very large swing in that time span as you think about from May until now. As you think about South permits as an example, is a leading indicator. If you look at April, it was 5.41, May 5.29 and June 5.17. So again, we're prudently planning that this isn't done. So as we thought about our guidance and we really thought about the 3 factors Aaron's talked about of what could weigh, we thought about the 1/3 was the difference between a mid-single-digit to a high single-digit market decline in single-family new construction, another 1/3 due to the inventory calibration and a final third really with that push out on some of the new product launches and wins that we've initially flagged for the back half of the year.

Okay. And Ryan, just the other thing, I think I mentioned it before. As we look at our new guide, I mean, what we assumed in there, right, is taking stock of the market, which we just walked through. taking stock of the cautiousness and the inventory takedown. And then some of our initiatives out there. But look, on the positive, with this exposure, do you think of longer-term I think we have enviable position, right, of leadership when we think about our partnership with these large homebuilders. They're going to win, right? And we're partnered with them. And then as I said before, as our customer partners are more cautious around things like inventory. We do have the value proposition to partner with them. And that's the localized manufacturing we talk about and be able to deliver high service levels, really short lead times, which is going to be critical as we move forward.

Got it. And then my follow-up is a question on AZEK and the EBITDA contribution. Most of us were sort of penciling in EBITDA of 3.10 to 3.15 and your guidance is a bit below that. you can just walk us through some of the assumptions there? And are you assuming a more conservative outlook for the Deck Rail & Accessories the next 2 quarters.

Yes. I would just start out by saying the 1 month that we've had AZEK's part of the company and what they were able to demonstrate continues to show the leadership and the strength of the business. But Rachel, do you want to walk through the EBITDA?

Yes, absolutely. First, our residential sell-through grew mid-single digits in the June quarter. As we think about our FY '26 outlook, the DR&A sell-through and a growth planning assumption is in the low single digits. And we're not seeing that moderation right now in the sell-through trends but our outlook does contemplate maintaining a conservative channel inventory positioning and potential negative impacts continuing in the macroeconomic uncertainty. So we'll see, it's really to your point about that macroeconomic guide.

And your next question comes from Lee Power with JPMorgan.

Aaron, can you maybe just want to talk a little bit about where you think you sit at the moment with share in the major builders, like you've obviously had a lot of announcements in terms of the top 20, you already controlled a lot of that. Where do you think you are? And maybe are those share gains being kind of matched with those builders who are outside the top 20?

Yes, Lee, good question. Like I started out and saying before is we're in an enviable position. The team has worked extremely hard I think many of you know Sean Gadd, who runs the business for us. He and his team have worked over the last couple of years to build those relationships. And look, we talk about the top 25 builders, but it really extends out to the top 200 builders out there. And we would say, as we look at some of the agreements that we've signed that we continue to take share in our partnership with them. So like I said, single-family new construction as we look at the outlook, we look at some of the partnership we have. This is part of the reason why we are resetting some of the expectations out there. But look, this is a blip on the radar. Again, from a long-term perspective and you think about the industry and who's going to win. I mean these are customer partners that we want to be linked with, and we're fortunate to be able to do that and bring them to the value proposition we have.

And then just a follow-up just on costs. Like in the past, you've chatted a lot about the cost. Like how do you think that plays out in the near term? And then maybe comment from Rachel, just how important that will be around hitting your leverage target that you've put out there post the acquisition?

Yes, Lee, good question. Look, I think we answered this a little bit when we talked about costs in some of the areas in which we can target. I think one of the things we have to remember and look, we take this very seriously as we look at where we're at, and we want to make sure we're delivering upon our commitments is where we can take cost out, we are going to do so. So that means areas like marketing. That means how do we get more efficient in our plants, how do we accelerate some of our procurement efforts. We are very confident in our ability to be able to do that. This has been a dynamic market, as you can appreciate. We also don't want to make any rash decisions that are going to impact our long-term growth. So we are keeping that in mind, and we're balancing that accordingly. Rachel please go ahead.

On the comment around the deleveraging and look, it starts and ends with having a strong margin and the right growth. And as a reminder, James Hardie has been delivering a 10% revenue CAGR, and for a long period. And over the past 5 years, we've delivered EBITDA margins in excess of 25% every single year, and that really reflects our strategic position and is unchanged in our outlook. So as we proceed forward thinking ahead to the 2x leverage position at the 2 full years post close, we do think that we are well positioned to obtain that.

And your next question comes from Timothy Wojs with Baird.

Maybe just a question on just AZEK. Is there -- to kind of go on Ryan's question, is there -- are there any definitional differences between kind of the adjusted EBITDA that you're including in your guidance? And what AZEK reported in the DR&A segment that they had publicly disclosed? Because I know there's some comparison issue -- I mean there's just time frame issues. But I mean the guidance or the EBITDA that we're including or that you're including in guidance, I mean, it is down year-over-year relative to last year. And obviously, we've seen pretty decent growth in EBITDA at AZEK. So could you just help us bridge if there's any sort of technical differences between the EBITDA contributions? And that business seems to be performing pretty well. Why would EBITDA down year-over-year?

Yes, I'll take that. There are some technical differences. First, at the James Hardie definition, we do include the cost of stock-based compensation within our EBITDA. We do not exclude it. We also have some divisional differences. So siding and trim is our former North America Fiber Cement business along with their AZEK exteriors business, whereas the DR&A is the rest of the legacy APAC business. We also have, within corporate, we've given some guidance for that for a run rate of about $225 million on a combined consolidated basis. So we do now have those definitional differences.

Yes. And Tim, we can take you through all of those.

Okay. Yes. I may just be helpful if there is something on Stockholm. I guess the allocation of EBITDA is all kind of in the bag. If there's a big stock out number, I think that would be helpful. Otherwise, we can take it offline.

Okay. Great.

And I guess just maybe to level set everybody. Can you give us what you're expecting for volumes in the North America Fiber Cement business -- legacy business in Q2 and in the back half of the year for the full year, please?

So our guide does anticipate the legacy North American fiber cement business being down low double digits. And that is up more volume-related as we are expecting positive ASP, not only in North America, but frankly, all of our regions. So we are on track for that.

And your next question comes from Keith Hughes with Truist.

Based on some of your answers to questions, here's like in the guide, you're expecting inventory reductions of somewhat similar qualities -- quantities, excuse me, the remainder of the year we saw in the quarter. I don't think I've ever seen that before. That what your largest signings reporting smacks a big share loss. Could you talk about where you think your share position is? I've never seen anything quite like this before.

Yes. So Keith, I think what -- as we look at Q2, Q3, we would say that customers are going to continue to manage their inventory down. And that speaks to the cautiousness that we're seeing out there in the marketplace. We talked a little bit about the market from an R&R standpoint, and then the dynamics from a single-family new construction standpoint as well. So yes, we would see that in Q2 and Q3, Keith.

So therefore, it looks like there's a minimum some share loss going on here. To your comment in the quarter, you performed at the market. Usually, you're above the market. What's going on with the momentum of pace of your share in the siding market?

Yes. So Keith, I think one of the things we have to remember here is the difference from a timing standpoint. When you look at our year, I think the other thing is the segments in which we compete are not apples-to-apples with some of our competitors out there. So I would not say we're losing any share. If we talk about our segments, large homebuilders out there, I just mentioned it, we keep gaining share with the -- with those 200 out there. If we think about some of the geographies in which we participate in more of the metro areas, we do not see that we're losing any share out there. So it is different from a timing. It's a different segment that we can compete in.

Okay. Let me switch to AZEK. You've owned it for a month, we're lowering the sell-through. Trex is not lowering theirs. I -- are there -- are you having some integration obvious -- not problem, but there's always a little bit of hiccups when you do integrations. Are you seeing any of that coming in as you work on these 2 businesses together?

No, Keith. Look, we're not seeing anything but progress. We don't see a slowdown with that business. I think more than anything, we're being prudent as we look at some of the challenges out there in the marketplace. We don't see a slowdown with that business. We're very, very confident in the AZEK business.

And your next question comes from Peter Steyn with Macquarie.

I may just ask you, Aaron, specifically around the commercial synergies, you've put forward a very optimistic view both in volume and -- or sorry, value and time line. And in the context of Ryan going to the COO role. I'm particularly interested in how you're thinking about the integration network-wise between AZEK and highly and how that plays into the realization of your commercial synergies in the dealer channel?

Yes. Peter, really good question. I think it's being 50 days in, probably too early to talk about how we would look at the network. What I can talk to is some of the revenue synergies. And like I mentioned before, we're really encouraged with some of the early wins, what I would call quick wins out there. Look, as we closed this a few days after, I hit the road with Jon Skelly, who's run the legacy AZEK business. and Sean Gadd, who has run the legacy Hardie business. And we've gone out and seen pretty much most of our major customers out there on both sides. So the conversations have been really encouraging. Obviously, on a public call, we're not going to talk about it. But we've had some verbal commitments from some of our large dealer partners with some early wins to be able to come over to and take some of our product. As we talk about with our contractors, what we've been doing and, again, 50 days in is looking at both of our contractor partners and our networks and our loyalty networks. And then able to really distribute leads across those networks out there. Their leads for James Hardie products coming from AZEK reps in the north and for AZEK products come from James Hardie reps in the South and West. And look, this is, I think, more so than anything, just a testament to how these 2 businesses complement each other, and how each business's individual strengths match an opportunity with each other. So we're in early days, but we're very, very encouraged from what we're seeing out there. So everyone, I think we're going to wrap it up here. Appreciate the questions and taking the time. Look, we continue to see significant opportunity ahead for James Hardie as we execute against our focused growth strategies and further accelerate growth through our combination with AZEK. I want to thank all of you for joining today's call, and please reach out to the team with any additional questions you may have. All right. Thank you, operator.

That does conclude our conference for today. Thank you for participating. You may now disconnect.