Earnings Call Transcript - JHX Q1 2026

Operator, Operator

Thank you for being here, and welcome to the James Hardie First Quarter Fiscal Year '26 Results. I would now like to turn the conference over to Joe Ahlersmeyer, Vice President of Investor Relations. Please proceed.

Joe Ahlersmeyer, Vice President of Investor Relations

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.

Aaron M. Erter, CEO

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 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 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'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 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-driven, and contractor-oriented. 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, as 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 over-delivered 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 welcomed 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 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 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 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 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 five 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 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 was once 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 Wilson, CFO

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 first quarter 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 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 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. The Asia Pacific 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 cost 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. 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 & 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 nine 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 repair and remodel 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 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 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 three 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 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 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 in 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. 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 two 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 M. Erter, CEO

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 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 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, Operator

Your first question comes from Phil Ng with Jefferies.

Philip H. Ng, Analyst

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 help us parse out 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 two pieces, right? There's a channel as well as, I guess, at the dollar level too.

Aaron M. Erter, CEO

Yes, Phil, thank you for the question. To begin with, I want to emphasize that we are making steady progress in our main strategic areas involving homeowners, customers, and contractors, and we anticipate that the integration of AZEK will strengthen us further. We remain the top siding brand in the United States for homeowners, and for contractors, we are the preferred choice in siding and soon will be in decking, trim, and pergolas with AZEK. We're also continuously adding more contractors to our loyalty program every day. Moreover, we work closely with our dealer partners, providing them with business consultancy, and we are present in 25,000 distribution points. As we discuss this, it's crucial to reflect on our Q1 results, which were in line with expectations and incorporated into our FY '26 guidance. During the March quarter of calendar year '25, our customers placed orders based on more optimistic expectations than we currently have, which impacted some of the Q1 results. In terms of inventory for the building season, channel inventories were generally appropriate. However, as the quarter progressed, customers began to focus more on managing inventory as market outlook softened. The R&R multifamily sector in North America met our expectations, with performance aligning with the market, showing a downtrend of mid-single digits. Inventory reduction contributed to this, as single-family new construction starts lagged in demand by about a quarter. Specifically, the new construction starts from January to March reflected in our demand from April to June, which was part of our guidance in May. We noted that single-family new starts in that period were down 5%, consistent with our underlying volume trends. Given this tougher environment, customers reduced orders to manage their inventories, which we anticipated for Q1. Looking ahead, we see inventory management as a forward-thinking approach. Customer expectations for growth in calendar year '25 were reflected in our May full-year guidance and our expectations for Q2 through Q4. This is why we updated our outlook. If you revisit our Q4 call, we highlighted that while inventory levels were generally normalized, we observed some irregularities. We mentioned growing uncertainty in Q1 and challenges in single-family new construction as significant themes. Our guidance for the year included expectations for volume increases throughout the year, so it's essential to place Q1 results in the context of our overall guidance moving forward.

Philip H. Ng, Analyst

As you look ahead, Aaron, considering the challenging demand environment, it's encouraging that you are implementing cost-reduction measures for the deal. Are there additional strategies you could adopt to manage costs more effectively given the current demand challenges? Can you address headcount or idle capacity since there is a significant margin adjustment occurring? What is the plan to enhance the margin outlook as we look forward?

Aaron M. Erter, CEO

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 two 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.

Operator, Operator

And your next question comes from Keith Chau with MST.

Keith Chau, Analyst

Regarding the inventory point, you mentioned that we discussed it last quarter, which was 7.5 weeks in. The destocking in the second half of that quarter must have been significant. Can you clarify how much of the 15% volume decrease during that period was due to inventory destocking? Also, as we approach the second quarter, how much of that impact is expected to carry over? Additionally, I would like to hear your thoughts on your competitive position in the market.

Aaron M. Erter, CEO

Thank you for the question. I'll provide an overview of our inventory timeline. In March of Q4 FY '25, we prepared our customers for growth following the election in November when many were ready to advance. Our inventory was not overly high but was well-positioned for the building season. In April, we noted some noise and uncertainty, and by May, we saw a softening environment. During this period, customers began managing their inventory, and we noticed some destocking occurring. As we moved into July, we observed a shift towards a more defensive inventory approach among customers, which contributed to our lower outlook due to changes in single-family new construction. Looking ahead to FY '26, some anticipated benefits, such as new products and exclusive partnerships with homebuilders, have been pushed back. It's also important to note that our fiscal year ends on March 31. This means the uncertainty extends from January into March, affecting visibility for many. Regarding our competitors, we have strong industry peers, and I respect their competitiveness. James Hardie maintains a leading position in significant areas of the North American site market, backed by exclusive partnerships, trusted relationships, and excellent service. Our value proposition focuses on being homeowner-focused and contractor-oriented. In certain regions, particularly where large homebuilders operate, like the South, we're observing some weaknesses, which we need to consider for our year-end guidance. When discussing the PDG, it’s a challenge to quantify in this dynamic market, as there isn’t a uniform movement across the board. However, we are confident in our performance and ongoing efforts in our key initiatives. For our long-term growth, our organic fiber cement business has substantial potential, given that 80% of homes remain unclad in James Hardie products. Additionally, our partnership with AZEK in outdoor living offers promising synergy opportunities, which we're excited about for our future growth.

Keith Chau, Analyst

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?

Aaron M. Erter, CEO

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 is able to partner with them and be able to supply what they need when they need it.

Operator, Operator

Your next question comes from Ryan Merkel with William Blair.

Ryan James Merkel, Analyst

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?

Aaron M. Erter, CEO

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 two 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 one. 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?

Rachel Wilson, CFO

Yes. So the first comment, as Aaron pointed out, single-family 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, as 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 three factors Aaron's talked about of what could weigh, we thought about the one-third was the difference between a mid-single-digit to a high single-digit market decline in single-family new construction, another one-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've initially flagged for the back half of the year.

Aaron M. Erter, CEO

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 side, 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.

Ryan James Merkel, Analyst

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 310 to 315 and your guidance is a bit below that. can you just walk us through some of the assumptions there? And are you assuming a more conservative outlook for the Deck Rail & Accessories the next two quarters?

Aaron M. Erter, CEO

Yes. I would just start out by saying the one 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?

Rachel Wilson, CFO

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.

Operator, Operator

And your next question comes from Lee Power with JPMorgan.

Lee Power, Analyst

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 matched with those builders who are outside the top 20?

Aaron M. Erter, CEO

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.

Lee Power, Analyst

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?

Aaron M. Erter, CEO

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.

Rachel Wilson, CFO

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.

Operator, Operator

And your next question comes from Timothy Wojs with Baird.

Timothy Ronald Wojs, Analyst

I have a question regarding AZEK. Are there any definitional differences between the adjusted EBITDA that you include in your guidance and what AZEK reported in the DR&A segment that they disclosed publicly? I understand there may be comparison issues related to the timeframe. However, the EBITDA in your guidance is down year-over-year compared to last year, while AZEK has experienced solid growth in EBITDA. Could you clarify if there are any technical differences between the EBITDA contributions? Given that AZEK's business seems to be performing well, why is the EBITDA down year-over-year?

Rachel Wilson, CFO

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.

Aaron M. Erter, CEO

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

Timothy Ronald Wojs, Analyst

Okay. Yes, it 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.

Aaron M. Erter, CEO

Okay. Great.

Timothy Ronald Wojs, Analyst

Can you provide your expectations for volumes in the North America Fiber Cement business, specifically the legacy segment, for the second quarter and the latter half of the year?

Rachel Wilson, CFO

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.

Operator, Operator

And your next question comes from Keith Hughes with Truist.

Keith Brian Hughes, Analyst

Based on some of your answers to questions, you're expecting inventory reductions of similar quantities for the remainder of the year as we saw in the quarter. I've never seen that before. The largest signings reporting indicates a significant share loss. Could you discuss where you believe your share position is? I've never encountered anything quite like this before.

Aaron M. Erter, CEO

Yes. As we approach Q2 and Q3, we believe that customers will continue to reduce their inventory levels. This reflects the caution we are observing in the marketplace. We have also discussed the market dynamics from both the repair and remodel perspective, as well as in single-family new construction. Therefore, we anticipate seeing this trend in Q2 and Q3.

Keith Brian Hughes, Analyst

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?

Aaron M. Erter, CEO

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 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.

Keith Brian Hughes, Analyst

Okay. Let me switch to AZEK. You've owned it for a month, and we're lowering the sell-through. Trex is not lowering theirs. Are you experiencing some integration challenges as you work on these two businesses together?

Aaron M. Erter, CEO

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.

Operator, Operator

And your next question comes from Peter Steyn with Macquarie.

Peter Steyn, Analyst

I would like to ask you, Aaron, specifically about the commercial synergies. You have presented a very positive outlook regarding both volume and value as well as the timeline. With Ryan moving into the COO role, I am especially curious about your thoughts on the integration between AZEK and the other business, and how that will affect the realization of your commercial synergies in the dealer channel.

Aaron M. Erter, CEO

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 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 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.

Operator, Operator

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