James Hardie adjusts FY26 outlook, anticipating mid-single-digit decline in demand as integration with AZEK progresses and customer caution persists.

OPERATOR - (00:01:00)

Thank you for standing by and welcome to the James Hardie Industries first quarter fiscal year 26 results. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Joe Ahlersmeier, 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 and 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 material 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 US dollars and any comparisons made are to the corresponding period in the prior fiscal year.

UNKNOWN - (00:02:12)

I'm now pleased to hand over the call.

Aaron Erter - Chief Executive Officer - (00:02:14)

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 two 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 thread 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 home builders 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 an 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 are also conservatively expecting to benefit from recent homebuilder exclusivity wins and new product launches More so in FY27 and beyond rather than the back half of FY26 as previously planned. Turning to legacy AZAC results, the business delivered a strong June quarter with performance exceeding previously provided guidance. Deck rail and 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, AZAC 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 FY26 guidance and 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 scaled 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 home builders growth objectives. Over the last year. In a clear demonstration of the appreciation for our innovative product solutions and unrivaled business support, we have announced multi year national Hard siding and trim exclusivity agreements with several large home builders 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 Liu 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 Wood look siding as another example of our product innovation. Our Color plus offering helps create beautiful, distinguished homes with superior aesthetics, customization and durability. Color plus is strategically important across both new construction and in repair and remodel. Our focused efforts and investments enabled outperformance versus prime products in the first quarter. The value proposition we can offer with Color plus also continues to underpin our opportunity to grow alongside large home builders and new construction. Color Plus 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 color + are selling homes faster and for more money. We continue to see significant Runway for Color plus growth against inferior solutions within repair and remodel in the Northeast and Midwest, two regions ripe 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 Color plus 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 Industries, most recently as Executive Vice President of Operations, Ryan has demonstrated beyond a doubt that he is the right leader and 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 Haas savings target led by strong progress in procurement and R and 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 home builders and we expect to outperform the market which we anticipate will be flat to down in FY26. 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 therm 25 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 welcomed the AZAC team and the 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 AZAC team who have been instrumental in the success of AZAC and collaborated closely for an expedited close. It is imperative that we continue to build upon the strong momentum the AZAC 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 roadmap 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 zero harm and efficiently through the hardy 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 FY26. This solid run rate will drive approximately 20 million of P and 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 three 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 AZAC 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 AZAC 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 Timber Tech 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 are 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 five years with benefits to begin showing in FY27. But my message to the organization has been clear. We will achieve well over $500 million in synergies. We will do it in under five years and our relentless pursuit of these wins started on day one. 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 - (00:24:25)

Rachel thank you Erin 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 to the market environment, investing ahead of recovery and evolving our plans to drive outperformance. Lastly, as Aaron mentioned, our integration and synergy capture efforts are well underway. In a moment I will introduce our guidance for FY26 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 result, 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 American 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 FY25. 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 Home Builders. 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 four months. Interior volumes declined double digits while multifamily returned to growth with volumes up mid single digits. North America adjusted EBITDA was $206 million and 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 a risk to the favorable side of the range based on our current pricing and forecast. We continue to control the controllable with favorable ASP Haas savings and our focused clutch actions helping to partially mitigate market volume declines and raw material headwinds. Please turn to Slide 12 in our APEC 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 HOF 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 UK 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 a 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 FY26. 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 two new reporting segments representing our total North American exposure, Siding and Trim and deck rail and accessories. Starting with Siding and Trim which will be comprised of our legacy James Hardie North America Fiber Cement business and AZEKS exteriors business. For our Siding and trim segment we expect FY26 net sales of 2.675 to 2.85 billion. We now believe market demand will decline high single digits in FY26 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 FY26. Moving on to our deck rail and accessories segment which consists of ASEC's Legacy Deck Rail and accessories business, we expect net sales of 775 to $800 million for the next nine months. Our sales forecast assumes DRNA sell through up low single digits as secular tailwinds in the outdoor living category and timber tech market share gains continue to drive outperformance versus the broader R and R market. For the total company FY26 adjusted EBITDA is expected to be $1.05 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 and 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 FY26. 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 integration costs decline and we reduce 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 HMOF and advanced manufacturing initiatives. In FY26, we expect total capital expenditures of approximately $400 million, including $75 million of spending for AVIC over the next three quarters. Looking further ahead, we expect to maintain a disciplined approach to capital expenditures with our North American business inclusive of ASEC investing 6% to 7% of sales in 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 FY26, including our anticipated depreciation expense, net interest expense, adjusted effective tax rate and average diluted share count. Taking these modeling considerations into account, our FY26 adjusted EBITDA guidance of $1.05 billion to $1.15 billion corresponds to FY26 adjusted diluted earnings per share of 75 to 85 cents. Embedded within this forecast is Q2 adjusted EBITDA of approximately 275 million and adjusted diluted EPS of approximately 15 cents. Turning to Slide 14 in 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 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 2 times 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.

Aaron Erter - Chief Executive Officer - (00:35:58)

Thanks Rachel. With the closing of the AZAC acquisition now behind us, we are working diligently to integrate and deliver on cost and commercial synergies with on an accelerated timeline, 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 hardy 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. Thank you. If you wish to ask a question, please press Star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press Star2. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Phil Ng with Jefferies. Please go ahead. Hey guys, you know 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 your.

Phil Ng - Equity Analyst at Jefferies - (00:37:20)

Guiding the segments a little differently and 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. You can always 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. Us would have expected. So just kind of help us think through how long it's going to take. To parse out the inventory. Free shading, there's two pieces right? There's, there's a channel as well as.

Aaron Erter - Chief Executive Officer - (00:37:48)

I guess at the builder level too. Yeah. Hey 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. You know, with the homeowner. We continue to be the number one 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, you know, 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 FY26 guide. During the calendar year, the 25th of 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 and R multifamily performed per our expectation and we believe we performed in line with the market really down mid single digits. Inventory drawdown aside, single family new construction starts became our demand with an approximately 1/4 lakh. In other words, the single family new construction starts from January through March impact 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, what you're seeing there. Look, I think you know, as we look forward or we talk about inventory, it's a forward looking concept. Customer expectations for growth in calendar year 25 underpinned our May FY20 or May full year guidance and 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 guide as we move forward. Okay, as you look forward, Aaron, given.

Phil Ng - Equity Analyst at Jefferies - (00:41:21)

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 because demand is obviously pretty challenging right now. Is there headcount stuff you guys can do idle capacity because it's a pretty steep margin correction there. And how.

Aaron Erter - Chief Executive Officer - (00:41:43)

What's the game plan to kind of improve that margin profile as we can look out for it? Yeah, 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 AZAC being a part of it. And that's really our Hardie operating system. So that extends into our hmos, which is how we manage our manufacturing plants. You know, obviously as the volumes come down, it gets more and more challenging. But we have the right focus. You know, when volumes are high, you focus on throughput. You know, 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. We've frozen headcount. And look, we're in the process, process of integrating two companies here. So we think, you know, there can potentially be opportunities there. So our team is disciplined. We are focused on this. You know, we continue to accelerate our efforts. Okay.

Phil Ng - Equity Analyst at Jefferies - (00:42:50)

Appreciate the color, Aaron. Thank you. Thanks, Phil.

OPERATOR - (00:42:57)

And your next question comes from Keith Chow with mst. Please go ahead.

Keith Chow - Equity Analyst at MST - (00:43:06)

Just back on the inventory point, please. So, you know, you mentioned we spoke about it at the last quarter, which we certainly did, and that was seven. And a half weeks into the quarter.

Aaron Erter - Chief Executive Officer - (00:43:18)

So, you know, the destocking into the second half of the quarter must have been quite severe. 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. Thank you. Yeah, hey, Keith, thanks for the question here. Let me give you a little bit of timeline when we think about inventory here. We just talked about it, but I'll reiterate it again. So Q4FY25 in March, you know, we, we saw our customers prepared for growth, right? You think about the time, you know, the election had happened in November, you know, people were ready for growth. Look, and we talked about inventory not too high, but, you know, full well positioned for growth in the building season out there. You know, as we got into April, you know, we cited this on the call, you know, a little bit of Noise, a little bit of uncertainty. You know, you get into May, we have our call, you know, June environment software. And, you know, as we got into April, you know, 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, you know, 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 impetuous for our lower outlook, you know, with inventory, with the dramatic change in single family new construction. And then with that said, you know, some of the benefits that we counted in for FY26, whether that be new products, whether that be the benefits from, you know, some of our exclusivities with home builders, those are all pushed out. 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, you know, a lot of people who are reporting here. I think the other part of your question is, you know, with our competitors out there. And look, I would just say this, we have really good competitors, you know, don't have a bad thing to say about any of them. They compete well. We're all trying to go out there and, you know, utilize our value proposition. Okay. I think what we have to remember is James Hardie Industries has the leading position in most significant parts of the North American side. This includes exclusive partnerships with top home builders, trusted relationships with pros in the industry, unmatched service. Right. Everything we talked about as far as just, you know, our value proposition, our position across the value chain is reflected in as what we always say, homeowner focused, customer and contractor driven. We are, you know, in different parts of the country. Right. You know, and what I'm getting to here is certain areas that we are really strong with large home builders, we think about, you know, where a lot of new construction is going on in the south region of the United States. We're seeing weakness there. Right. So that is part of, you know, 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's a tremendous amount of Runway for us out there. If we think of the material conversion opportunities, you know, 80% of the homes out there are not clad in James Harding. We have a tremendous opportunity. And then you add the opportunity that we have with AZAC with the exteriors and outdoor living. You put these two 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 Aaron, just coming 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? Yeah, 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. 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. That's great. Thank you, Aaron. Thanks, Keith.

OPERATOR - (00:49:17)

And your next question comes from Ryan Merkel with William Blair. Please go ahead.

Ryan Merkel - Equity Analyst at William Blair - (00:49:23)

Hey everyone and thanks for the question. 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? Yeah. Hey Ryan, I'll just start by saying, you know, 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 two years of our partnership with the large home builders and we really value that partnership. We wouldn't trade that for anything. But also if you think about a lot of or the majority of, you know, some of the starts out there, they're really been happening in the South. So that has impacted us as much as, you know, we talk about the outside analysts, you know, when we start this out for the year, we said, okay, single family new construction is going to be flat to maybe down one. I mean, that's changed almost by 10 points and it's magnified and it's accelerated in areas like the South. But Rach, you want to maybe hit this?

Rachel - (00:50:38)

Yeah. So first comment, as Aaron pointed out, single family new construction, whether you want to look at the NAHV or Burns or on a national level, they are moving their estimates from May to 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, as a leading indicator, if you look April, it was 541, May 529 and June 517. So again, we're prudently planning that this isn't done. So as we thought about our guidance, and we really thought about the three factors Erin's talked about of what could go away, we thought about the third was the difference between a mid single digit to a high single digit market decline in single family new construction, another third 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'd initially flagged for the back half of the year.

Ryan Merkel - Equity Analyst at William Blair - (00:51:37)

Got it. Yeah. Really helpful color.

Aaron Erter - Chief Executive Officer - (00:51:41)

Okay. And Ryan, just the other thing I think I mentioned before, you know, as we look at our new guide, I mean, what we assumed in there, right, is taking, you know, stock of the market, which we just walked through, taking stock of, you know, the cautiousness and the inventory take down and then some of our initiatives out there. But look, you know, on the positive, you know, with this exposure, you think of longer term, I think we have an enviable position, Right. Of leadership. When we think about our partnership with these large home builders, they're going to win. Right. And we're partnered with them. And then as I said before, as you know, 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. Thanks for that. And then my follow up is a question on AZEC and the EBITDA contribution. Most of us were sort of penciling in EBITDA of 310 to 315 and your guidance is a bit below that. You can just walk us through some of the assumptions there. And are you assuming more conservative outlook for the deck rail and accessories the next two quarters? Yeah, I would just start out by saying, you know, the one month that we've had AZEK as part of the company and what they were able to demonstrate continues to show the leadership and the strength of the business. But Rachel, you want to walk through the ebitda?

Rachel - (00:53:20)

Yeah, absolutely. First, our residential sell through grew mid single digits in the June quarter. As we think about our FY26 outlook, the DRNA sell through and a growth planning assumption is in the low single digits and we're not seeing that in moderation right now in the sell through trend. But our outlook does contemplate maintaining a conservative channel, inventory positioning and potential negative impacts continuing in the macro economic uncertainty. So we'll see. It's really to your point about that macroeconomic guide.

Ryan Merkel - Equity Analyst at William Blair - (00:53:54)

All right, thanks. I'll pass it on. Thanks, Ryan.

OPERATOR - (00:54:01)

And your next question comes from Lee Power with JP Morgan. Please go ahead.

Lee Power - Equity Analyst at JP Morgan - (00:54:07)

Hi, Aaron. Hi, Rachel. Aaron, do 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?

Aaron Erter - Chief Executive Officer - (00:54:32)

Yeah, Lee, good question. Like I started out in saying before is we're in an enviable position. The team has worked extremely hard. I think many of you know Sean Gad, who, you know, runs the business for us, he and his team have worked over the last couple 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 you know, 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, you know, single family, new construction. As we look at the outlook, we look at some of the partnership we have, you know, this, 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 when 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 you know, we're fortunate to be able to do that and bring them to the value proposition we have. Thanks. And then just to follow up just on cost.

Lee Power - Equity Analyst at JP Morgan - (00:55:43)

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

Aaron Erter - Chief Executive Officer - (00:56:00)

Yeah, Lee, good question. Look, I think we answered this a little bit when we talked about HAAS and 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, you know, 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 plans, 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 - (00:56:56)

Rachel, go ahead, pick up 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 Hardy has been delivering a 10% revenue CAGR for a long period. And over the past five years we've delivered EBITDA margins in excess of 25% in every single year. That really reflects our strategic position and is unchanged in our outlook. So as we proceed forward, thinking ahead to the two time leverage position at the two full years post close, we do think that we are well positioned to obtain that.

Lee Power - Equity Analyst at JP Morgan - (00:57:32)

Excellent, thank you. Thanks, Lee.

OPERATOR - (00:57:38)

And your next question comes from Timothy Woj with Baird. Please go ahead.

Timothy Woj - Equity Analyst at Baird - (00:57:45)

Yeah, hi, good afternoon everybody. Maybe just a question on just azec. Is there, you know, to kind of go on Ryan's question. Are there any definitional differences between kind. Of the adjusted EBITDA that you're including in your guidance and what AZEC reported in the DRNA segment that they had publicly disclosed? Because, you know, 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. It'S down year over year relative to last year. And obviously, you know, we've seen pretty decent growth in EBITDA at Asia. So could you just help us bridge if there's any sort of technical Differences. Between the EBITDA contributions and you know. That that business seems to be performing pretty well. Why would EBITDA be down year over year?

Rachel - (00:58:38)

Yeah, 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 American fiber cement business along with their ASIC exteriors business, whereas DRNA is the rest of the legacy ASEC 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 though have those definitional differences.

Aaron Erter - Chief Executive Officer - (00:59:20)

Yeah. And Tim, we can take you through all those. Okay.

Timothy Woj - Equity Analyst at Baird - (00:59:25)

Yeah, it may just be helpful if. There is something on stocks. I guess the allocation of EBITDA is. All kind of in the bag. If there's a big stock cot number.

Rachel - (00:59:33)

I think that would be helpful. Otherwise we can take it offline. Okay, great. And I guess just maybe to level set everybody, could you give us what you're expecting for volumes in the North American fiber cement business? You know, the 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 downloads double digits and that is more volume related as we are expecting positive ASP not only in North America, but frankly in all of our regions. So we are on track for that.

Timothy Woj - Equity Analyst at Baird - (01:00:16)

Okay. Okay. Appreciate it. Thank you.

OPERATOR - (01:00:24)

And your next question comes from Keith Hughes with Truist. Please go ahead.

Keith Hughes - (01:00:30)

Thank you. Based on some of your answers to questions, it appears like in the guide you're expecting inventory reductions of somewhat similar quantities. Excuse me. The remainder of the year we saw in the quarter. I don't think I've ever seen that before. That and what your largest dining bears reporting smacks, it's a big share loss. Could you talk about where you think your share position is? I've never seen anything quite like this before. Yeah. So Keith, I think what, you know, as we look at Q2, Q3, we would say that, you know, 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. You know, we talked a little bit about, you know, the market from an R and R standpoint and then the dynamics from a single family new construction standpoint as well. So yeah, we would see that in Q2 and Q3, Keith. So therefore it looks like there's at a minimum some share loss going on here or 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? Yeah. So Keith, I think one of the things we have to remember here is the difference from a timing standpoint. You know, when you look at our year, I think the other thing is the segments in which we compete, you know, are not apples to apples with, you know, some of our competitors out there. So I would not say we're losing any share. If we talk about our segments, you know, large, you know, home builders out there. I just mentioned it. We keep gaining share with the, with those top 200 out there. If we think about some of the geographies in which we participate in, you know, 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 segments that we can compete in. Okay, let me switch to azec. You've owned it for a month. We're lowering the sales. The sell through Trex is not lowering theirs. Are you having some integration? Obvious, not problems, 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 two 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 AZAC business. Okay, thank you. Thanks, Keith.

OPERATOR - (01:03:34)

And your next question comes from Peter Stein with Macquarie. Please go ahead.

Peter Stein - Equity Analyst at Macquarie - (01:03:41)

Good afternoon, Aaron and Rachel. Thanks for your time. 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 timeline. And in the context of Ryan Kiltelen going to the COO role, I'm particularly interested in how you're thinking about the integration network wise, between ASIC and Heidi and how that plays into the realization of your commercial synergies in the dealer channel. Yeah. Hey, Peter, really good question. I think it's being 50 days in, probably too early to talk about, you know, 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 close this, a few days after, I hit the road with John Skelly, who's run the legacy AZ business, and Sean Gad, who's run the legacy Hardy 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 and take some of our product as we talk about with our contractors. You know, 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 been able to really distribute leads across those networks out there. There are leads for James Hardie products coming from AZAC reps in the north and for AZAC products come from James Hardy reps in the south and west. And look, this is, I think, more so than anything, just a testament to how these two 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 azac. 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.

OPERATOR - (01:06:35)

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