James Hardie Industries plc 2027 Q1 Earnings Call

We're ahead of our expectations, led primarily by better than expected organic growth in our fiber cement business. Performance that came against an economic and housing macro backdrop that remains uncertain. Our team stayed focused on what we can control, strong execution and serving our customers at a high level. We entered the year with a clear set of priorities, return fiber cement to growth, outperform the market across our portfolio, expand Adjusted EBITDA, achieve cost and revenue synergies, and drive a step-up in free cash flow to support deleveraging. One quarter in, we're pleased with our progress against each of these priorities. Let me get into the highlights of the quarter. Net sales for the quarter were above the high end of our original guidance range, with pro forma growth of 12%, strong outperformance versus the market. Adjusted EBITDA was also above the high end of our guidance range.

As you saw in our results today, starting in Q1, we are excluding share-based compensation expense and Adjusted EBITDA and other non-GAAP financial measures. We believe excluding stock-based comp provides a clearer view of our underlying performance and makes us more comparable to our peers. We have also heard from a number of our investors that they would like to see this change, and we appreciate that input. We will continue to break out SBC as a separate line item in our reconciliation tables so investors can clearly see the impact of this change. Back to the results. Our outperformance in the quarter was broad-based, but it was led by our fiber cement business, where organic growth of 20% came in ahead of our expectations. Three things primarily drove the beat.

First, strong execution against our growth initiatives, including ColorPlus, Statement Essentials, and Trim-Over, where we're seeing continued proof points on material conversion, particularly in the Northeast and Midwest. Second, strength in two parts of the market where we are particularly strong that have held up better than the rest, the higher end of the market, including repair and remodel and multi-family new construction. Third, we lapped the inventory destock from a year ago. Our strong execution and progress in fiber cement are encouraging as we head into the balance of the year, even as the market environment remains uncertain. In Deck, Rail & Accessories, underlying demand remained healthy, with nearly double-digit sell-through that re-accelerated through the quarter, driven by strong consumer demand and incremental shelf space across the platform.

We're encouraged by the continued strength in TimberTech, driven by wood deck conversions, mix shift to more premium products, and commercial synergy momentum. The Australia, New Zealand, and Europe businesses performed well, both growing revenue double digits and outperforming in a challenging macro environment. We made progress on debt paydown in the quarter, redeeming $400 million of unsecured notes ahead of their 2028 maturity. This keeps us well on track toward our net leverage target of approximately 2.4 times at the end of this fiscal year, and less than 2 times by fiscal Q2 2028. Turning to the integration. Commercial synergy momentum continues to build. We're seeing broad-based wins across our combined sales force, strengthening our conviction in the fiscal 2027 $125 million run rate commercial revenue synergy target. Last quarter, we highlighted two examples, Lansing Building Products and CBUSA.

As you saw earlier this week, we announced an expanded nationwide partnership with Boise Cascade, one of the largest U.S. wholesale distributors of building materials. This agreement makes Boise a national distribution partner across our entire portfolio, from Hardie Siding and Trim to AZEK Exteriors, and for the first time, TimberTech Decking and Railing. In addition to the expanded partnership with Boise, we have expanded our partnership with six major regional distributors, Capital, Dixie, Lumbermen's, Parksite, Woodgrain, and Wolf. Now carrying the full line of the Hardie portfolio. They will now become fiber cement partners in addition to their existing decking partnerships, extending our reach into the repair and remodel market. These expanded partnerships are a validation of our strategy and the culmination of months of planning to bring together James Hardie's industry-leading exterior building products with the best-in-class national distributor and best-in-class regional distributors.

These expanded partnerships also mark a significant step forward toward achieving our revenue synergy target. On cost synergies, we remain ahead of schedule, while under budget for cost to achieve, without sacrificing service or execution. Our combined sales force gathered for a company-wide sales meeting in Chicago in late May, bringing our legacy Hardie and AZEK teams together under one roof for the first time. One company, one sales force, one culture, with a shared playbook. At 500 strong, we believe we have the largest and best sales force in the industry, and the early results reflect that. We also continued extending the Hardie Operating System across the AZEK manufacturing network, resulting in improved productivity, tighter procurement discipline, and better cost visibility across the combined plant footprint. These examples are the best of both companies coming together in practice.

As a reminder, our $23 billion exterior total addressable market in North America remains heavily under-penetrated by more resilient materials, yielding a $17 billion plus conversion opportunity. We are executing against five pillars to capture it, and I will touch briefly on each. First, material conversion. We continue to see contractors switch competitive decking to TimberTech, and longtime Hardie Siding contractors add composite and PVC decking to their offering. There are approximately 60 million decks in the U.S., and the vast majority are wood. These two-way wins remain a meaningful contributor to above-market growth. Second, channel expansion. We continue to scale Hardie into TimberTech and AZEK strong accounts in the north, and TimberTech into Hardie strong accounts in the south, adding new stocking locations across the combined footprint this quarter. Third, innovation and new product development.

Our combined product and R&D teams remain focused on solutions that accelerate material conversion, applying the AZEK innovation playbook to fiber cement with products like TimberHue, which offers authentic wood grain finishes in eight colors. Fourth, brand preference. Brand search volume and customer sample orders, a leading indicator of future demand, both continue to grow at a healthy clip in the quarter, reinforcing our position as one of the most recognized brands in our categories and supporting sustained share gains over time. Fifth, simplifying the consumer journey. Our replatform website continues to improve how homeowners research, compare, and connect with our contractor network. Together, these five pillars remain the core of how we win in North America, and we are pleased with our progress across each of these this quarter. Let me give you an update on our fiber cement growth plan.

As discussed last quarter, our focus remains on the Northeast and Midwest, where repair and remodel wood and wood look siding alone represents an approximately $1 billion conversion opportunity, and where AZEK gives us immediate channel relevance, an established footprint, strong relationships, and complementary products. The expanded Statement and Statement Essentials rollout is gaining traction, continuing with double-digit growth in the Midwest East pilot, and is now live in an additional 5 regions. Building on that momentum, we opened 2 new expanded Statement partner stocking locations on the East Coast, improving service and availability of the full collection across our pilot markets, with ColorPlus mix continuing to grow. At the same time, we've expanded our Hardie Pro Lab, our mobile contractor training units, to drive Statement Essentials adoption across the broader Midwest and Northeast footprint, and we're seeing that training translate into sell-through.

Our 3 conversion priorities remain unchanged: converting vinyl siding, winning against wood, and expanding our presence in premium products. On vinyl, we are accelerating penetration in the Northeast, Midwest, and the Carolinas, backed by expanded ColorPlus rollout and contractor training. On wood, fire resilience, especially in the West, continues to be an increasingly important part of the conversation as building codes evolve, insurance requirements tighten, and homeowners place greater emphasis on durability and risk mitigation. Finally, TimberHue and our enhanced Artisan lineup, our premium, higher priced, higher margin lines, are gaining traction with custom builders and high-end remodelers. Let me close my remarks with a quick word on the external environment before I hand it to Ryan. The housing macro backdrop remains uncertain and broadly similar to what we discussed last quarter. Mortgage rates remain elevated, and builder confidence and consumer sentiment remain cautious.

Housing starts have converged down toward permits over the quarter, as I touched on earlier, we are seeing a divergence by price band with the middle to upper tiers, where we participate more significantly, holding up better than the rest of the market. In our outlook, we are not assuming housing industry conditions improve from here. We are focused on what we can control and our own execution, and we remain committed to our fiscal 2027 priorities: market outperformance, a return to growth in fiber cement, attainment of cost and revenue synergies, Adjusted EBITDA expansion, and significant growth in free cash flow and further deleveraging. Let me turn it over to Ryan, who will walk you through our financial results and outlook in more detail.

Thanks, Aaron. Total net sales for the first quarter were $1.47 billion, growing 64% on a reported basis and 12% on a pro forma basis above the high end of our original guidance range. As Aaron mentioned, starting this quarter, we're excluding share-based compensation expense from Adjusted EBITDA and our other non-GAAP measures. We'll continue to break share-based compensation out as a separate line in our reconciliation tables so investors can see the impact clearly in both current and prior periods. Adjusted EBITDA was $422 million, with margins of 28.6% above the high end of our original guide, with and without the share-based compensation exclusion, reflecting volume leverage and the benefit of our cost actions. A few modeling notes. Adjusted corporate and unallocated R&D was $32.3 million in the quarter. Keep in mind, a portion of our cost synergy benefits continue to run through that line.

Our adjusted effective tax rate was 21.7%, in line with expectations. Weighted average diluted shares were approximately 584 million in the quarter, and we expect share count to remain broadly consistent throughout the year. Adjusted net interest was $64.8 million in Q1, and we expect it to normalize around $60 million per quarter for the remainder of the fiscal year. Adjusted EPS was $0.36, up 13%, with growth diluted by the increase in shares from the AZEK consideration. As we discussed last quarter, we continue to convert customers as part of our commercial synergy program, and some of those wins involve buying back existing channel inventory. These are investments tied to specific conversion wins, not a reflection of underlying demand, and we'd expect to see these investments continue as we close out more of our commercial synergy pipeline.

On costs, we continue to expect approximately $80 million-$100 million of cost pressure in fiscal 2027, primarily raw materials, freight, and energy, with roughly two-thirds of that impact in North America. The pricing actions we announced in late April are directly offsetting this pressure, and we're pleased with the execution and realization to date. Our raw material cost assumptions have improved modestly, but we're seeing offsetting pressure in freight, where elevated spot rates and network dynamics are running above our original planning assumptions. We are actively working on contracting a higher percentage of our freight lanes to help reduce this pressure. Oil prices have moved below our planning assumptions, but refined products like diesel have not seen the same relief. We are holding our assumption of $80 million-$100 million of cost pressure in fiscal 2027, and we're continuing to watch this closely given the volatility.