James Hardie Industries plc Q1 FY2026 earnings call

Management Statement and Operational Highlights

• Integration of James Hardie and AZEK: The combination is complete, creating a leading provider of exterior home and outdoor living solutions. Focus on integration execution, safety, and customer service, with integration off to a positive start and progress towards synergy targets.
• Strategic Priorities: Homeowner-focused, customer and contractor driven. Emphasis on innovation in products, localized manufacturing, and customer partnerships. Examples include exclusive partnerships with large homebuilders, innovation recognition, and product solutions for contractors.
• Integration Progress: Cost synergy realization is underway, with over 50% of general and administrative cost savings target already actioned. Early commercial synergy wins with major customers, including dealer partners committing to exclusive PVC trim offerings.

Segment Performance

• North America: Net sales declined 12% in the quarter, driven by lower volumes but partially offset by a 3% year-over-year increase in average net sales price (ASP). Adjusted EBITDA was $206 million with an adjusted EBITDA margin of 32.1%, down 400 basis points year-over-year. Volumes declined double digits in exteriors, interior volumes were down double digits while multifamily returned to growth with volumes up mid-single digits.
• APAC: Net sales declined 10% in the quarter (8% in Australian dollars) 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 with an EBITDA margin of 35.4%. In Australia and New Zealand, there was a low single-digit increase in both volume and ASP.
• Europe: Net sales increased 7% (2% in euros) driven by higher ASP, partially offset by lower volumes. EBITDA margin increased 50 basis points to 16% due to higher ASP and lower freight and raw material costs.

Guidance

• FY '26 Segmental Guidance: Siding & Trim segment expects net sales of $2.675 billion to $2.85 billion with market demand expected to decline high single digits. Deck, Rail & Accessories segment expects net sales of $775 million to $800 million. Total adjusted EBITDA expected to be $1.05 billion to $1.15 billion, including ~$250 million to $265 million from the AZEK acquisition. Free cash flow expected at least $200 million in FY '26. Capital expenditures expected to be approximately $400 million in FY '26, including $75 million for AZEK over the next 3 quarters.

Risks

• Market Uncertainty: Challenges in North America repair/remodel and new construction due to homeowner affordability, uncertain macro conditions, and homebuilder demand moderation.
• Inventory Management: Defensive inventory positioning by channel partners leading to lower volume outlook for the business.
• Raw Material Inflation: Pulp was a primary driver of raw material inflation in Q1, though expected to subside but still at risk of high single-digit raw material inflation.

Question and Answer

• Q: 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...

A: Phil, thanks for the question. Let me start out by saying, look, we continue to make progress on our key strategic focus areas...

• Q: 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.

A: 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.

• Q: 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?

A: 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.