James Hardie Industries plc (JHX) Earnings Call Transcript & Summary

We have the James Hardie team here. Representing the company, we got Aaron Erter, CEO of the company; and Rachel Wilson, CFO. Well, welcome, guys. Really appreciate you joining us.

Great. Thanks, Phil. Good morning, everyone. Thanks for taking the time to be with us.

I guess, first, to kick things off, Aaron, we're all very appreciative of the decking business. The fiber cement business is probably newer for many of us. Just kind of give us a little more color in terms of the industry structure? And then just what James Hardie's all about in terms of the growth algo and your go-to-market strategy?

Yes, sure. Look, and I'm appreciative that everyone is more familiar with the decking business and that's what we need to make sure we change is get you all familiar with James Hardie and the great story that we have. Just a little bit. James Hardie has been around for about 135 years and we started in Australia, came over to the U.S. a couple of decades ago and really have built our business on fiber cement siding, and if you think about fiber cement siding, it is really we would characterize it as being resilient and beautiful product. So it holds up to the elements, it holds up to pests. It's maintenance free, it's fire resistant. So a very premium product, and we built that up as the leader in premium siding over the last couple of decades here. Our business consists of the North American business, which is the lion's share of our business, almost 80% of our business and the focus of our entire company. If we think about the other business segments, we have Europe, and we also have Australia and New Zealand. We really are on a new growth track as we think about the combination that we announced in July with AZEK. so our business now, you could say, is one of the leaders in outdoor exterior solutions and also outdoor living. Our brands are very strong. We have the James Hardie brand, which is #1 in premium siding. We have the TimberTech decking brand, which we would say is #1 with the Pro and then also our exterior products and brands, whether that be James Hardie or AZEK or Versatex, you put those together, those are #1 as well. So significant brands. And as I said before, we are on a new growth trajectory with AZEK. So what is the opportunity as we think about with AZEK. It's roughly about $23 billion with James Hardie before was about $10 billion. So we essentially have more than doubled that opportunity. How we go to market and what our focus is, it's pretty simple. And that's why bringing James Hardie and AZEK together with so natural, it's all about material conversion. And how do we convert contractors, how do we get homeowners to convert over to this resilient beautiful product. And our customer teams out there are able to sell that idea whether it be PVC decking that has a lot of the same characteristics if you think about James Hardie. It's resilient, it's beautiful, it's fire resistant. So that is not that much of a stretch for our sales team. The way we go-to-market is a little different from others out there is that we focus on the entire customer value chain. We are focused number one on our contractor partners. We think that is essential. So we provide them service. We provide them training. We have our contractor Alliance program. AZEK has the Board contractor program. And what we're providing with our contractors is support throughout the whole process. Along with the contractor, we are focused on our dealer and distributor partners, and we bring them high levels of service. We bring them training. So that is a value that they like and in addition, we're driving contractors through their locations. And then finally, we focus on the homeowner and that is through direct marketing to the homeowner. And that's why we've seen the equity and the strength in our respective brands out there. So if you -- Phil, you asked, what is our long-term growth algorithm? Just very simply, if you look at the legacy James Hardie, North America business, if you look at the legacy AZEK residential business, and you put those together, the CAGR would be essentially 11% over the last 5 years. As we look forward and just to know what AZEK has always looked at as their algorithm is to really grow 7% above the market. We at James Hardie, we look moving forward with our legacy fiber cement business, we would say we would get 2 points or we would get low double-digits market growth. We would also get 4 points of outperformance of the market. And then the remainder of that growth, we would say is between price and mix, which would be mid-single digits. So that gets us to double-digit growth. As we move forward and inclusive of the revenue synergies that we've laid out there, we believe that we can increase that growth of the 2 companies by 250 basis points. So just a little bit about our company, our focus and then the growth algorithm as we move forward.

That's really great color. Any early read from the combination from AZEK with what your customers are telling you? Your opportunity to drive conversion. I mean, obviously, the big opportunities in the Midwest and Northeast where you're underpenetrated so what are some of the early wins you're hearing and how you're converting that?

Yes. Look, just in summary, I would say the integration is going extremely well. As we thought about this and we looked at this, we don't call it an acquisition, and we were very quick to make sure we're doing that. This is the merger of 2 companies. And I think it's really important that it always starts with people and making sure you have the right people that are on the boat, and you also appreciate the similarities but also the differences that you see in culture. So just very simply, what we've instilled in the new company is the idea that the best idea wins. And I'll give you a little bit of an example there. As we started to recast as a leadership team, what our values are, one of the values that really rang true that we didn't necessarily have in our,s, it was just embedded in us, but AZEK has is it always starts and ends with the customer. So we've adopted that as our first value, and that's an example of the best idea wins. But moving along to talk a little bit about synergies, look, early days, the cost synergy targets that we've put out there, we're seeing good progress. And I would even venture to say that we're tracking a little ahead when we think about our cost synergies. From a revenue synergy standpoint, and Phil, your question was really how is this being received by our customers, I would say extremely well. Pretty much when we closed the deal, call it, a few days in as we hit the road. So I hit the road with Sean Gadd, who runs our legacy James Hardie business. I hit the road with Jon Skelly, who runs the legacy AZEK business and we went to see our largest customers. And as we went in, really, what we wanted to do is, first, understand their impressions and how they felt about this, which are general responses, excitement, but also okay. What's new. And what we wanted to make sure we're bringing to them is value. So we do anticipate some early wins with some of our large one-steppers out there. Things that we're working through the execution mode right now. I can't disclose those. It would be too early, but we feel very, very confident in some of those wins that we're going to see. And then as we think about some of the opportunities that we're seeing with some of our legacy AZEK customers is what AZEK will do in the decking industry is instituted early or a winter buy which is really getting ready for the next decking season starting now towards the end of the year. And it's not a prebuy. It's more of, okay, this is what your shelf is going to look like. Here's what we're going to market, here's going to be the new products. What we've done with this winter buy is brought the two teams together and really looked at opportunities that we could have with customers, legacy AZEK customers to bring in James Hardie products. And we're seeing an enormous amount of optimism and potential for that winter buy with those customers. Then the last piece, when we talk about synergies, and this is the one that we know will take more time. And I think we've appropriately laid that out as we looked at the phasing of the business is with our contractor partners. And so that's the idea of how do we get some of our legacy AZEK contractors. How do we get some of our legacy James Hardie contractors to adopt each other's products. So the way this is working right now because we still have 2 separate sales teams as we're handing off leads to our within AZEK and legacy James Hardie. And then we're working with the teams to execute upon those leads. And there's an incentive for our sales team to do this. So we're hearing story after story and execution after execution of a legacy James Hardie, Alliance member who does decking now deciding only to do TimberTech decking. So those are some of the success that we're seeing out there. And look, through this whole integration, what we want to make sure we're doing is being as transparent as possible and sharing with you all the wins that we're having. And certainly, the wins are going to be most credible when you see them in the results. But to answer your question, we feel very optimistic in early days.

And then, Aaron, correct me if I'm wrong, your guidance doesn't assume any of these wins or potential pickup opportunity on the winter buy side, I think is correct for this year?

Yes. From a commercial synergy standpoint, we do not have that in our guidance as assumption.

Okay. Certainly, a very dynamic environment with spring selling season being a little more underwhelming some destocking. So you guys had to lower your full year guidance pretty materially. I guess, what were some of the big surprises? And then perhaps, Rachel, how did you approach forecasting your guidance? It feels reasonably conservative. Like did you take a view at some point in time and just kind of assume the rest of the year? Just kind of help us unpack how you approached it and how much line of sight you guys perhaps have with your customers and what they're signaling.

Yes. Maybe I'll start out. And I think the first thing is you mentioned dynamic, and it certainly is a dynamic time. And I think that's a little bit of a caveat as we talk about our guidance here. One of the things I want to make clear is if we look at our legacy AZEK business, that business is stronger than ever. We're projecting low to mid-single-digit sell-through. We're going to grow our revenue. We're going to expand our margins. That business is very, very healthy. If we think about our legacy James Hardie business, which is our European business, that's going to perform as expected. As we think about our Australia and New Zealand business, we expect that to perform as expected. Really, what we're talking about is our North America legacy fiber cement business. And look, we talked about being dynamic as we did that guide in August. We saw some things as it relates to new construction, which we have a very generous exposure to and then also, we took the approach of as new construction worsens as large repair and remodel doesn't get better. We were going to take a prudent, I would say, process as a prudent look at our guide out there, Phil. And with that said, things do change, right? It's a very dynamic market, and it's our job to make sure that we're seeing things synthesizing them and giving here's what our best approach is, and we thought our guide was really prudent. With that said, also as you go out into the market, which not only when we finish our earnings calls, I've been out there in the market pounding the pavement and talking to our customers, a little bit of therapy after earnings call. But you hear pockets of optimism out there as well. So look, it's our job to make sure we give what we think that we can deliver on, and that's what we did. But Rachel, I interrupted you. Please go ahead.

No, it's good context because look, as we think about demand and forecasting demand, a key part of this is we have one of the largest sales forces in the country, right, and in this industry. And so as Aaron said, I think the right place to start is talking about going out to your customers and kind of what is that environment at the time. We do have a demand forecasting model that we use that's a key input to it. We also, of course, look at some of the macros, we look at some of the prognosticators out there, and we statistically regress and see how things are performing relative to the market. And look, this is an industry that is quite, it's cyclical. And so while we do have fairly good visibility for a quarter, as Aaron was saying, our guide actually goes through March, right? So you really have to embrace a much longer period for us as we're thinking about our guide. And as you think about constructing that guide, you really are thinking about that early August time frame and looking at the data you have at that time. And as Aaron has mentioned, it's been quite dynamic out there, I think, for a lot of us over the weekend, sharing tariffs may now be illegal, right? I mean it's a lot of dynamics that are changing. But again, as we stand back and we think about forecasting that demand, we're embracing a long period, and we're embracing the data we have as we were looking at that time.

I guess the question we get asked, and I don't think it's fair because it's a dynamic environment, destock and whatnot. On fiber cement, have you guys reached a terminal value in terms of penetration, right? So just kind of give us some nuggets why or confidence where you are in that journey, where the big opportunities are and how you can unlock that?

Yes. So we talk about our focus being material conversion. I look at it from a high level of roughly 80% of the homes out there do not have fiber cement on them, right? Now you may say, okay, well, 80% of them couldn't afford it. It couldn't qualify for it. But look, we believe there's a high amount of material conversion left from a fiber cement standpoint. I would even venture to say we may be in our infancy, if you think about those numbers. Look, there's no doubt that we've had a tremendous amount of success over the last few years. If I think about our penetration of fiber cement over the last 10 years, it's increased almost a point every single year out there. From a new construction standpoint, we would say about 24% -- 23%, 24% of the homes that are being built out there have fiber cement on them. But as I mentioned before, there's an enormous amount of homes that do not have fiber cement on them. And so our focus has been on repair and remodel in single-family new construction. And we've made significant progress when we think about single-family new construction standpoint, where I do believe, and we've talked about for years, and we've been putting resources behind it over the last couple of years, is a tremendous amount of opportunities in repair and remodel. And so that is going in converting contractors one by one. You think about the hundreds of thousands of contractors out there and it doesn't happen overnight. But I believe that is where our most significant opportunities out there. If I think about our penetration just as a business, and these are high-level numbers, so Jo will have to get you the exact ones, but thinking off the top of my head. If you look at where most of the new or older homes are that need to be resided. And first of all, why do people reside homes. Well, they reside homes either because they have to or they have a desire for one reason or another, like our best ones that we can convert from a homeowner standpoint is they want better curb appeal, right? But people are residing homes for all different reasons and the majority of older homes out there, the majority of homes are in the Northeast. And then there's a high percentage in the Midwest as well. Our business is roughly, it's under 10% in the Northeast. It's roughly about 10% in the Midwest. And that is where we believe from a repair and remodel standpoint, we still have significant runway ahead. So how do you do that? Of course, you have to have the right value proposition and you have to have the right product. And we certainly have that. We have products. People ask me a lot about affordability of fiber cement. And certainly, it is not for everyone. But we have a range of products that start with [ SimpleLine ], which is more introductory price point all the way up to ColorPlus and different versions of ColorPlus that give resilient, beautiful product out there. So the product is key, and that's one of the ways that we can -- we believe that we can help convert some of these homeowners and contractors. But then how do we accelerate this? And a big part of the opportunity that we have from the AZEK acquisition is where AZEK has been strong or those areas that I talked about the Midwest and the Northeast, where I would say from a James Hardie standpoint, we're underpenetrated. And I'll just give a little story. Last week, I said, "Hey, I want to be with some customers. And so I went with my 2 presidents and I had a regional manager, and we started out -- we flew out to Augusta, Maine. And then we went from Augusta, Maine down to Cape Cod and then we went to Long Island, then we went to the Coast of Connecticut and then we went to the Philadelphia area. And the interesting thing is I met with customers, is these were loyal independent AZEK customers that are market makers in those certain areas meaning they have the relationships with the smaller metro builders. They have the relationships with the contractors out there. And I would just say this, the business that we do with AZEK with some of those customers was 10x what we did with James Hardie. And so the first question I asked our team is why haven't we gotten after these guys more, right? Because there's certainly an opportunity as and I sat with those customers. I said, would you be willing to talk about James Hardie, have a program? How can we be successful together? Absolutely, we would. And part of it really has been our focus, right? As far as being able to do everything at one time, and I've talked about some of the areas that have been our focus, new construction, and we have been in R&R, but really over the last couple of years. But we believe AZEK can help us accelerate this with the relationships, with the contractor, with some of these smaller or some of these independent lumber yards and dealers, and that's something that we can get after right away. And we already have started the process. Long answer, sorry Phil.

That's awesome color. I guess, Aaron, when we think about this current backdrop, housing affordability, and just affordability in general for a consumer that stretch has impacted demand, right? I mean that is the environment. I think you guys have never blame the market, you're looking at ways to grow, right? So how do you accelerate growth, right, whether it's in the retail channel, whether it's potentially reducing your cost to install to kind of improve that affordability? Just kind of give us a little perspective on your approach?