James Hardie Industries plc ($JHX)

Welcome to the James Hardie Fiscal Fourth Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Chris Russell, Senior Vice President of Global Strategy and Corporate Development. Please go ahead.

Thank you, operator, and thank you to everyone for joining today's call. I am joined today by Aaron Erter, Chief Executive Officer of James Hardie; Ryan Lada, Chief Financial Officer of James Hardie; and Jon Skelly, President and General Manager of James Hardie, North America Building Products. Before we begin the call, please note that during prepared remarks and Q&A, we 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 of our earnings presentation for more information. Forward-looking statements made during today's conference call and in the earnings 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. In addition, non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of non-GAAP measures discussed today can be found in our earnings presentation, which is posted on our website. 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. Organic net sales comparisons exclude the impact of the AZEK acquisition as well as the impact of exiting our Philippines business in Q2 fiscal year '25. With that opening, I'm pleased to hand the call to Aaron.

Thanks, Chris. I'd like to take a moment to thank Chris for his contributions during this transition period in Investor Relations and to welcome Bill Seymour, our new Vice President of Investor Relations. Bill brings extensive IR experience to the role and a strong track record in the field. In my remarks today, I will briefly review the highlights for Q4 and fiscal 2026, discuss our strategy and end with our outlook. We delivered a solid fiscal fourth quarter and full year despite a challenging construction market. The result of staying focused on what we can control, execution, cost and serving our customers. For the fourth quarter, we delivered net sales of $1.4 billion, and adjusted EBITDA of $381 million ahead of expectations with adjusted EBITDA margin of 27.1%. Demand held up across our core categories despite weather-related softness early in the quarter in the United States. And our teams executed well, protecting price, managing costs and supporting demand as conditions improved. For the full fiscal year, we delivered net sales of $4.8 billion and adjusted EBITDA of $1.3 billion with adjusted EBITDA margin of 26.2%, reflecting the resilience of our portfolio and the actions we took across the business. Free cash flow for the year was $314 million, reflecting tightly managed operations in the year and despite significant onetime integration and acquisition-related costs. While organic net sales declined in our fiber cement business during the year, we are confident in the underlying demand drivers and expect this business to grow in fiscal 2027. This confidence is reinforced by our great products, leading brands and best-in-class sales force, which together position us to outperform the market and capture long-term growth opportunities. As I look back on fiscal 2026, we delivered against a number of objectives. A key differentiator for us is the Hardie Operating System. Through HOS, we've taken out and offset significant inflationary costs by improving procurement, driving productivity in our plants, and applying operational discipline. Even with lower volumes, we were able to maintain best-in-class margins and keep the business performing at a high level. As we continue to bring the companies together we are applying the Hardie Operating System to the AZEK manufacturing network. We are encouraged by the early progress in the AZEK plans and believe that HOS will drive productivity and savings over the long term. We utilized a HOS framework to make the difficult decision to close 2 of our legacy fiber cement plants in January 2026. As we move forward, we will continue to leverage HOS as a critical tool to drive productivity, manage costs and support both margin expansion and reinvestment in growth. Another milestone in the integration we recently completed was combining our sales forces. We believe we have the largest, most downstream focused sales team in our space. One sales force, one company and a portfolio of leading Pro brands, James Hardie, TimberTech, AZEK and more. We are seeing commercial synergy momentum build as a result of the combination with early wins validating the strength of our integrated go-to-market approach. These wins are both numerous and broad-based. You can see 2 examples in our earnings presentation. One example is our expanded relationship with Lansing Building Products. Lansing has been a long-time and valued partner of James Hardie, and through this expansion, we are consolidating multiple PVC trim brands to AZEK across their footprint. This simplifies the offering for the channel, increases attachment of AZEK trim on our fiber cement siding jobs and strengthens our ability to deliver a more complete exterior solution. Another example is our recently announced expansion with CBUSA. This exclusive agreement adds TimberTech to an existing relationship between James Hardie and CBUSA, expanding our share of wallet, while positioning us as a single source provider of exterior products for custom builders. These are just 2 examples. The breadth of opportunities and early traction reinforces our confidence and hitting $125 million in run rate commercial revenue synergies exiting fiscal 2027. On cost synergies, we're ahead of schedule without sacrificing service or execution. Integration continues and our conviction in this combination grows. Next, I'd like to discuss our go-to-market strategy in our largest market, North America, starting with the size of the prize. Our $23 billion exterior total addressable market remains heavily underpenetrated by more resilient materials. Wood and vinyl still dominate siding, decking, railing and outdoor structures despite real limits on durability and maintenance, a $17 billion plus conversion opportunity. The James Hardie AZEK combination positions us to capture it, build a leading exterior platform with the best brands and win in both R&R and new construction. To capture it, we're executing against 5 pillars that drive our growth and margin expansion. First, material conversion. We're replacing wood and vinyl with materials that are more resilient, need less maintenance and resist fire. We're seeing this play out in real time. Contractors who trust our brands are switching competitive decking to TimberTech and long-time Hardie siding contractors are adding composite decking to their service offerings. There are approximately 60 million decks in the United States, and the vast majority are wood, representing a long runway as the installed base weathers and the elements. These 2-way wins are exactly what we expected from the combination. With our brands, products and contractor relationships, we are positioned to continue to deliver above-market growth. Second, channel expansion. In scaling what each business does best across the combined footprint. In the South, approximately 2,500 locations stock Hardie, but not TimberTech yet. A clear runway for our outdoor portfolio into accounts where we have established relationships. In the north, the inverse, approximately 700 strong TimberTech and AZEK locations where Hardie isn't yet stocked, disciplined approach, real growth opportunities. The third pillar is innovation. The product and R&D teams from both companies are now combined, focused on solutions that accelerate exterior conversion. Innovation has been a key element of AZEK's 500 to 700 basis points above market growth per year. We're applying that same playbook to fiber cement to expand our market and drive new product growth over time. Fourth, brand preference. James Hardie, AZEK and TimberTech are among the most recognized brands in our categories, and we're extending that lead through targeted marketing, contractor education and innovation, most of it in-house. The impact is clear in our DR&A business, brand search volume has increased at a 40% CAGR over the past 3 years, while customer sample orders, a leading indicator of future demand have grown at nearly 15% annually over the same period. This marketing strength also carries through to our loyal TimberTech pros where our data suggests that the consumer demand we are generating has established TimberTech as the leader in brand awareness among contractors. This positions us for sustained share gains over time. As we move forward, we have combined the marketing teams and are applying the AZEK in-house marketing approach to the fiber cement side of the business. As we scale this competency, we expect to drive increased awareness, consideration and brand preference. Fifth, simplifying the consumer journey. We're making it easier for homeowners to choose and purchase our products. A key part of this has been a full replatforming of our website, designed to improve how homeowners research, compare and ultimately select products for their homes. Just as important, it better connects homeowners to our contractor network helping turn interest into action. Underpinning it all is the Hardie operating system, continuous improvement in safety, quality, service and cost. Together, this is a clear path to sustainable growth, margin resilience and long-term value. Now let me talk a little bit about our fiber cement growth plan. Beyond these 5 pillars, our fiber cement growth plan is central to the strategy. We have clear plans to reaccelerate siding and trim and as noted, we expect fiber cement to return to organic volume growth in fiscal 2027. Step one, a deliberate focus on the Northeast and Midwest, where we're underpenetrated and where R&R wood and wood-look siding alone is an approximately $1 billion conversion opportunity. AZEK gives us immediate relevance, established channels, strong relationships and complementary products. In these markets, we are actively pursuing the opportunity across multiple fronts, including expanded dealer engagement, targeted training programs and scaled contractor conversion initiatives. Central to this effort is the continued rollout of expanded statement and statement essentials which ensure James Hardie has the right offering for each contractor in our value chain. We launched this program with a Midwest pilot in April 2025, and the results to date provide clear evidence that the strategy is working. We are seeing consistent acceleration in shift to revenue across each quarter, with growth culminating in double-digit percentage gains. This reflects improved execution in the market and early success in converting demand into realized revenue, and we are scaling this approach to other regions throughout our footprint. We're hitting these markets on multiple fronts. Hardie ProLab, a series of mobile training units supports contractor adoption with hands-on training on ease, speed and economics of fiber cement install. Based on Midwest pilot success, we've expanded the program across approximately 50 dealer locations and the broader Midwest and Northeast with strong early traction. Our approach focuses on 3 opportunities: one, converting vinyl siding. Two, winning against all wood siding types; and three, expanding our presence in premium products. First, vinyl, we're accelerating penetration in the Northeast, Midwest, Carolinas and Canada, backed by new products, expanded ColorPlus rollout and more contractor engagement and training. Second, winning against wood. We are rolling out easier and faster to install products, targeted downstream sales and marketing and expanded channel access, including the legacy AZEK dealer network. Fire resilience is becoming an increasingly critical factor in this dynamic. As building codes evolve, insurance requirements tighten and the homeowners place greater emphasis on durability and risk mitigation, fiber cement's noncombustible properties are emerging as a more meaningful differentiator versus wood and other combustible materials. While this is most pronounced in the higher-risk regions, we are also seeing broader awareness and adoption across markets, reinforcing the structural advantage of our portfolio and supporting continued material conversion. Third, premium products, TimberHue and enhancements to Artisan and other premium lines target custom builders and high-end remodelers, leveraging our independent channel strength where design and durability drive the decision. Together, these priorities position us to accelerate conversion, take share and drive durable volume growth in fiber cement siding. Let me talk to you a little bit about our external environment and outlook. Ryan will cover our outlook in more detail, but let me quickly frame how we see the external environment and touch on our approach to fiscal 2027. The market has shifted substantially in the last few months. At the start of the year, we plan for broadly flat market demand in fiscal 2027. Since then, key variables have changed, 30-year mortgage rates below 6% late February, moved meaningfully higher after the Middle East escalation. Builder confidence and consumer sentiment have softened. Across our dealers and contractors, nearly half cite economic uncertainty as their biggest challenge. While the broader market remains somewhat challenging, I want to be clear, we are optimistic about our path forward. We are seeing solid momentum in the business and are intensely focused on execution. We expect to deliver market outperformance, a return to growth in fiber cement, adjusted EBITDA expansion, and we expect to significantly grow our free cash flow which will drive meaningful deleveraging. Now over to Ryan, who will take us through the financials.

Thanks, Aaron. I will walk through our results and then get into our planning assumptions. Q4 total net sales grew 45% to $1.4 billion, including $445 million of acquired AZEK revenue. Organic net sales declined 1% in the quarter. For the full year, total net sales grew 25% to $4.8 billion with organic net sales down 2%. The organic decline in fiber cement reflects the market environment Aaron has described. Q4 adjusted EBITDA was $381 million, margin was 27.1%. For the full year, adjusted EBITDA was $1.27 billion, margin was 26.2%. A few items to highlight. Adjusted corporate and unallocated R&D was $45.5 million in Q4. For modeling purposes, keep in mind that approximately 40% of our full year 2026 cost synergy benefits are in that line. Our adjusted effective tax rate was 23.4% for the quarter, and 20.2% for the full year, slightly above our prior 20% guide. Adjusted net interest was $65 million. Weighted average diluted shares were approximately 585 million we expect both to remain consistent in fiscal 2027. Q4 adjusted net income was $173 million and adjusted diluted EPS was $0.30. Free cash flow for fiscal '26 was $314 million, including the benefit of a completed Australia land sale in Q3. Integration costs continue to weigh on cash. but those stepped down meaningfully in fiscal 2027. Combined with higher EBITDA from synergy realization and disciplined CapEx, free cash flow will improve significantly and deleveraging remains a clear priority. In Siding & Trim, we delivered against our objectives despite unfavorable weather. In Q4, net sales were $767 million, up 7% with adjusted EBITDA of $253 million at a 33% margin. Cold, storms and above-average precipitation, most pronounced in February and early March limited job site activity and delayed project starts in both new construction and R&R. We estimate the weather impact to our fiber cement sales was approximately $20 million in the quarter. Activity rebounded later in the quarter as conditions improved. Our manufacturing footprint optimization and expense management is already delivering with initial P&L benefits in Q4 an example of actively managing the business for stronger profitability. For the full year, Siding & Trim delivered net sales of $2.96 billion, up 3% and adjusted EBITDA of $951 million at a 32.1% margin. In Deck, Rail & Accessories, Q4 net sales were $345 million, up 5%. Adjusted EBITDA was $97.5 million, margin was 28.2%. Sell-through grew low single digits. January was solid, February and early March were disrupted by weather and activity recovered through the end of the month. We grew DR&A again this quarter, lapping strong Q4 growth in the prior year, delivering against the down market. Over the past few years, we've meaningfully expanded our shelf position with continued gains this year across both Pro and retail channels. During Q4, we shipped to support those new shelf wins and saw pockets of sell-through delayed by weather. Working with our channel partners, we are taking a slightly more conservative inventory position in Q1 to set up a strong back half of the year. Q1 sales and margins will be softer as a result. Underlying demand is intact. We expect positive sell-through in both Q1 and for the full year. Full year on 3 quarters of contribution, net sales were $795.2 million. Adjusted EBITDA was $224.8 million. Margin was 28.3%. We outperformed a market that declined low to mid-single digits by more than 700 basis points. In Australia and New Zealand, our fiber cement business remains highly profitable across new construction and R&R. Q4 net sales were $140 million, up 18%, mainly driven by FX and with adjusted EBITDA of $50 million at 35.8% margin. Softer volumes in certain markets were partially offset by pricing realization and disciplined cost management. with long-term tailwinds from durability requirements and consumer preference for low maintenance materials. For the full year, ANZ delivered net sales of $521 million, which is flat and adjusted EBITDA of $178 million at 34.1% margin. We remain focused on innovation, mix and contractor engagement to extend our leadership in the region. In Europe, Q4 net sales were $152 million, up 13%, mainly driven by FX. Adjusted EBITDA was $23 million. Margin was 14.9%. Fiber gypsum demand was strong, and we improved profitability through expense management and increased manufacturing efficiency. For the full year, Europe delivered net sales of $557 million, up 13%, adjusted EBITDA was $82 million at a margin of 14.8%. Turning to our fiscal 2027 outlook. The environment is more challenging than we expected entering the year. Mortgage rates are higher, builder confidence and consumer sentiment have softened, and economic uncertainty remains a top concern across our dealer and contractor base. New construction will remain under pressure. R&R activity is compressed. Our base case assumes the addressable market declined approximately 3% in fiscal 2027. With that said, our guidance contemplates a range of outcomes on both the macro and the cost side. We are not assuming conditions improve. We are planning on what we can execute. On cost, the Middle East conflict has driven real inflation across raw materials, freight and energy. We expect approximately $80 million to $100 million of cost pressure in fiscal 2027, roughly 2/3 in North America. Pricing actions announced in late April directly offset this pressure. Separately, the $25 million in annualized savings for Fontana and Summerville, cost discipline across sourcing, productivity, formulation and deal cost synergies where we are ahead of schedule reflects structural improvement work already underway independent of the macro environment. One technical note on commercial synergies. As we convert customers, some wins involve buyback of their inventory in the channel. This is mechanical, transitory and not fully modeled into our guidance. We will quantify it where material. Our objectives are clear: organic volume growth in Siding & Trim and Deck, Rail & Accessories, margin expansion and a significant step-up in free cash flow as integration cost step down. Capital expenditures are expected to be approximately 6% to 7% of net sales. These primarily include maintenance, safety and targeted growth investments. On Page 17 of the presentation, we have outlined our planning assumptions for fiscal 2027. At a high level, our fiscal 2027 planning assumptions are for net sales of $5.25 billion to $5.41 billion, which equates to 0% to 3% growth on a pro forma basis. On an organic basis, it's a sales growth of 1% to 4%. For adjusted EBITDA, we are planning for a range of $1.45 billion to $1.5 billion or 4.1% to 7.7% growth on a pro forma basis. On free cash flow, this is where the combination of the business shows up. We expect to exceed $500 million in fiscal 2027, up from $314 million in fiscal year 2026. Higher profitability integration and acquisition costs rolling off and disciplined capital spending, all driving in the same direction. Turning to Q1. For the first quarter of fiscal 2027, we expect net sales of $1.32 billion to $1.35 billion or growth of flat to 3% on a pro forma basis. On an organic basis, this translates to sales growth of 4.3% to 7.5%. Adjusted EBITDA is expected to be between $354 million and $375 million or 0.5% to 6.5% growth on a pro forma basis. In Siding & Trim, we expect net sales of $758 million to $781 million. Channel inventory is normalized. We expect continued execution in new construction and early traction in the Midwest and Northeast fiber cement expansion. In Deck, Rail & Accessories, we expect net sales of $291 million to $300 million. As flagged in results, Q1 reflects the channel inventory normalization dynamic. Across both Siding & Trim and Deck, Rail & Accessories, pricing actions, plant cost savings and cost synergies are all driving in the same direction on margins. And with that, I'll turn the call back to Aaron.

Thanks, Ryan. Before we open it up to questions, let me leave you with a few thoughts. Fiscal 2026 was a solid performance in a challenging market. A testament to the discipline and focus of our team and our commitment to control what we can control. And it sets us up well for what's ahead. Looking ahead to fiscal 2027, we expect fiber cement to return to growth. We expect to outperform the market across our portfolio. The early returns and execution from the AZEK acquisitions are encouraging, resulting in $125 million in run rate of commercial revenue synergies exiting this fiscal year and ahead of schedule progress on cost synergies. We expect adjusted EBITDA to expand. And finally, we expect significant free cash flow improvement in fiscal 2027, which will drive deleveraging and give us continued flexibility to invest behind our brands, innovation and go-to-market capabilities. We look forward to telling you more about all of this at our Investor Day which we will host in New York City this September. Members of our leadership team will provide an in-depth update on our strategy, growth priorities and long-term financial outlook and a formal invitation to register for the in-person or virtual attendance will follow in the coming weeks. Before we go to questions, I want to thank our team. None of this happens without them. They've done an excellent job navigating change, while servicing our customers at a high level and delivering solid results. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Philip Ng with Jefferies. Please go ahead.

Thanks for all the great color I guess a question for you, Aaron. Still pretty challenging backdrop. Help us kind of think through the key drivers that you have that gives you confidence you could deliver positive organic growth in your Siding & Trim business. it would be helpful to kind of tease out the big buckets, whether it's pricing, some of these commercial synergies, how that kind of ramps up? And any other Hardie-specific initiatives?

Yes. Thanks for the question, Phil. Look, quite simply, when we think about the priorities in our business, our #1 priority as a company is getting our fiber cement business back to growth. Look, we've had a strong history of growth in this category over the last decade, but we haven't been happy with our growth in the last couple of years. We can talk about the markets being tough, but quite simply, those are excuses, and we won't have any excuses anymore. There's enough available share for us to go out and get when we think about the value proposition we have, the team we have. So we're going to go out and get it. Let me tell you a little bit how I think we're going to be able to do this. We talked a little bit about it on the call, Phil. But look, we have a tremendous opportunity in our R&R business. We think that we can really take advantage of, call it, over $1 billion type of opportunity in the Northeast and the Midwest that have been really underpenetrated for us. We're going to be able to do this by making the product easier to install with our Trim-Over method. We're going to be able to reduce costs to our contractors, to our homeowners who take on these jobs with contractors by the labor savings that we're going to be able to provide. And that's going to help contractors go out there and do more jobs. And we're going to make the product more accessible. We're having more and more of our dealer partners bring in our statement essentials product. And I guess the question is, all right, what's the proof point? How do we know this is working? We piloted this in the Midwest for about a year now. and we're seeing really strong growth. In fact, over the last year, we saw low double-digit growth in the Midwest. So we're extremely excited about this. We're going to roll this out to other areas, right now. We're rolling it out to the north to the mid-Atlantic to the Carolinas to the south. So this is the #1 priority for our team. And as you know, we have a combined sales force. As we think about their objectives, this is #1 for them to be able to grow this fiber cement business. The other opportunity we believe we have that has been untapped for us and not fully focused on is really getting after these regional homebuilders. We believe this is about a $750 million opportunity out there. We have the product to be able to do it. We have the team. We have the value proposition. And I think a proof point of this, when we think about synergies out there is the agreement we just signed with CBUSA to help us really get after a lot of those regional homebuilders, not just with fiber cement, but with our whole selection of products out there. And then if we think about this, Phil, just with -- from a fiber cement standpoint, we do believe there's competitive share to go out there and get. We have a competitor that's vacating the space. Add to that, the synergies that we believe we're going to be able to give with the combined sales team. And then we look at our inventory levels, which are in a good space right now. And we look at our Q1, we have pretty favorable comps. You add all that together, Phil, and it gives us a lot of confidence for us to be able to get this business back to growth in this year FY '27.

Well, that sounds exciting, Aaron, if anything, it almost feels a little conservative in terms of how you frame the guidance for this year. So looking forward to that defaulting this year. I guess a question for Ryan. Your full year guidance for EBITDA margin is calling for, I think, roughly 140 basis points of expansion. And you're calling out, call it, $80 million to $100 million of inflation. So a tough environment from that standpoint. Just give us the levers you have at your disposal to offset some of this. You talked about HOS and perhaps some pricing. But just kind of help us think through how that kind of ramps up and the ability to drive that margin expansion this year.

Yes. So if you think about this back last year, right? I mean we had a lot of cost synergies that we took action on that materialized here in fiscal year Additionally, we took $25 million of plant actions at the end of the year in Q4 that would really start impacting us. So those are nice regardless of what the market has. And then second, we do -- are seeing about $80 million to $100 million of cost inflation due to the current conflict. We are working through HOS savings as well as other procurement initiatives to go after that as well as we have opportunity to price against that selectively with our -- partnering with our customers. So I think the back of that as well as a little bit of growth and getting utilization in our factories. Those should set us up really nice for 2027 from an EBITDA perspective.

Your next question comes from Lee Power with JPMorgan.

The decking and railing piece. So you obviously talked to an inventory impact in the first quarter. Other than inventory, as we look to this FY '27 number, how important are the price increases that you've announced to hitting that guidance and kind of what's the feedback that you're getting from your customers, given there's obviously a couple of your peers that are probably not going as hard on price at the moment?

Lee, good to hear from you. I'll start out here and then I'll turn it over to Ryan and then Jon to add any color. I think the first thing to note is our DR&A business is healthy. And we expect we're going to continue the trajectory traditionally that AZEK has had in the '27. And we're going to grow the business, and we're going to improve the pricing and the mix of the business. Look, the last couple of years, we've really meaningfully expanded our shelf position with gains this year in the pro channel and also the retail channels. So as we think about our stack and our growth algorithm, the biggest part of this is for us to have a contractor and customer conversion, which we'll continue to do that. And look, from a pricing standpoint, we're taking price to offset inflation, and also to hold our margins here. But guys, do you want to chime in here, Ryan?

Yes. I think those are the major drivers there, right? So our historicals, we've been targeting to help ease the market by 5 to 7 points and we've consistently done that. I'd say there's not a lot of change to the algorithm for this year. As we exit the full year, we had a modest inventory build due to the weather after a successful early buy. So that normalizes past Q1, and then we're back to kind of growth from a that perspective. So I think those are the key things. I don't know, John, anything else you'd add.

Yes. I think that's well said. I'd just add that we have history of taking selective price actions business and still drive that 500 to 700 basis points above market growth.

Okay. Excellent. And then just a follow-up, if I can. Just going on from Phil's question around kind of bridging that top line. So market volumes sold, I think, going to be down 3%. You've got a couple of points of growth at the top line. So there's a decent a decent gap there. You've obviously kind of outlined a bunch of initiatives that sound really exciting on getting back to that 500 to 700 points of growth. When we think about '27, is it real -- is it going to be that growth above market that does the most of that heavy lifting? Or is it a pricing perspective? Just trying to think about how we go from down 3% to the low single-digit growth?

Lee, I think that the short answer is we're guiding to a number we believe that's appropriate, given the uncertainty that we see out in the marketplace right now. and also 1 that we believe that can handle continued potential challenges.

Your next question comes from Ryan Merkel with William Blair.

Wanted to ask on Slide 8. It's new disclosure. I think it's a case study of the Midwest. And I guess my question is, do you expect to see this kind of growth when you roll it out to the other regions and then what could it mean for fiber cement growth if it has a success that you think it might?

Ryan, really good question. I'll start out, and I'll hand it over to Jon to talk about a little more. Look, as we think about our fiber cement growth, as I mentioned before, we have not been pleased with it. This has been an on-purpose effort that we've had in the works over the last couple of years. How do we get after repair and remodel, how do we close that gap right, versus inferior materials like vinyl from a pricing standpoint? And we get after what we think is the largest opportunity in the marketplace. We talked always about these 40 million -- are these homes that are 40 years or older, 40 million homes. So we believe that we have the right formula now. It is the early days, right? When we were citing this case study here, we've been doing this for about a year. The results are very promising. So we're taking the template of that, and we're rolling it out region by region where there's this opportunity. So we talked about the Midwest, mid-Atlantic, we think we can do this in other areas of the country. So Ryan, as we get into our Investor Day in September, they can talk about from a longer-term perspective, what that means. Our focus right now, as I mentioned in the beginning, is getting this business back to growth and getting it back to volume growth, and that's our target, and we believe this is going to help us be able to do that even in what is a challenging market. Jon, do you have anything else you want to throw in there?

Yes, sure. I mean I think the only thing I'd add is it's really -- it's good execution and it's providing additional education and awareness in the marketplace, right? So there's a strong value proposition for the product. But in certain markets, there wasn't the right value proposition in terms of installation and pricing. So we've solved that problem, right? So that gives us the opportunity, Ryan, to get after that $1 billion R&R opportunity that Aaron highlighted by making sure we've narrowed the gap between competitive secure materials, and we allow both the homeowner and the contract or benefit from a better value proposition from a pricing perspective.

All right. That's great. Great to see. And then my next question is just on the first quarter DR&A. The EBITDA is a little light. Can you just talk about what's the impact of the production cut in 1Q to EBITDA? And then when do you think the channel will be destocked for decking?

Yes. I'll turn it over to Ryan here. Look, when we talk about elevated inventory levels, this is less than $20 million. So just full disclosure here. But Ryan can talk a little bit about the impact from reducing the production.

Yes, right. I would say basically half the decline year-over-year is probably limited to the production there. So we did pull a little bit of volume out. Some of it was related to that inventory destock that we were mentioning. And then some of it was we've been producing a little bit ahead for some of the synergies, and now we're kind of normalizing that production. So our goal was to get that all behind us as we exited Q4 into Q1. The rest is really just the volume of that $20 million that we would be in. So if you go to those 2, that really normalize EBITDA year-over-year.

Your next question comes from Sam Seow with Citi.

Ryan. Just a quick question on the guide and really how you're modeling costs over the full year. When we think about the margin assumption you've got there, are you using kind of like spot for things like freight, et cetera? Or how are you thinking about the assumption you're building into the margin?

Yes. Sam, good to hear from you, and I'll start out. Look, what we're thinking about when we look at inflation in FY '27 we're thinking about a $80 million to $100 million type of cost headwind. And certainly, the Middle East conflict has driven real input cost inflation across certain raw materials, in particular, freight and production inputs. So the majority of this, call it, about 70% is in North America. But that's how we're looking at it. As far as how we offset it, certainly, we're looking at this from a hard operating system standpoint. The team has done a really fabulous job even with slowed volumes of operating very efficiently. And we've certainly taken out costs last year that is going to help us this year. And then we're working with our customer partners where we need to from a pricing standpoint. But -- that's kind of how we're looking at this. But Ryan, do you want to add anything to this?

Yes. I mean I think the other way to look at it, too, from a phasing perspective, right, it's pretty equal right now. We're not assuming recovery. So what we're seeing for oil prices now in terms of freight and input. We're modeling that through the year. As that could get worse, that could get better. We're monitoring it daily, and we would continue to work to offset that.

Got it. That's really helpful. And then a quick question on cash. You obviously did [ $300-odd million ] this year. If we had an additional AZEK quarter reversal of the integration costs we kind of get above $600 million or well above your guide before even kind of considering organic growth or declining CapEx. Can we just kind of talk about if there's another moving piece there or if the guidance is just conservative on cash as well?

Yes. So we were starting with the building blocks that we knew, right? So obviously, the big one being integration and deal costs stepping down materially year-over-year. The second part is you're picking up the highest quarter of AZEK, and then we were really working on an assumption of we didn't need to market to help stabilize that. We did have a land sale that won't repeat year-over-year. So that's part of the step down. So -- although CapEx is coming down, we won't get the benefit from the Australia land sale. So that's kind of offsetting some of that. But yes, generally, we were setting $500 million of the floor. We think we absolutely do that.

Your next question comes from Keith Hughes with Truist.

Questions on Siding & Trim in the guidance and the organic numbers you talk, can you give us a feel at least directionally how much price and volume are going to play a role in that number? For the guide.

It's Ryan. Yes. So when you think about combined market down 3%, right? I mean we think new home construction is going to be down a little bit more than that. When you think about that growth there, I'd say about half of its price and then the half is initiatives at this point. We could do a little bit better on pricing, but the reality of it is it's about 50-50 in our current guidance.

So you think volume will be up for that segment in the year you hit the guide?

Yes. So I would look at it as the price is kind of offsetting the market decline of 3% and then that other 0 to 3% would be the volume and initiatives that we're driving.

Okay. So okay. One other question. It does look as you work through the numbers, like a pretty big margin ramp coming in Deck, Rail & Accessories. I know the first quarter is going to be hit with the production slowdowns. Can you just talk about our production rates and what you anticipate to see for the rest of the year in that segment.

Yes. I think we're pretty consistent with where we were in the last couple of years, just under 70% utilization across the decking network. I would say that probably stays pretty consistent throughout the year. It is a little bit lower in Q1. So if you normalize for the Q1 blip, it's back to more I'd say, kind of run rate, what we've seen for DR&A. So I think absent of Q1, the run rate kind of holds the track record and kind of trend that we ran.

Your next question comes from Peter Steyn with Macquarie.

Ryan, Aaron, Chris and Jon, may I just ask you, after the sales organization integration in mid-March, if you could just sort of dig in a little deeper for us, Aaron, can you give us a sense of where the team is at? What the balance is like between the 2 businesses and how comfortable you are that the team is set up to be able to switch and shift between the businesses and drive the outcomes that you're needing both on siding and the DR&A.

Yes. Peter, that's a really good question. And as we think about keys to our success, that certainly is. Just to note, as we sit here in Chicago, we're having our sales organization have their sales meeting, right now. So if we think about this, as we sign the deal, we're getting to almost a year of finalizing it and we've integrated the 2 teams starting on April 1. We're still in our infancy here. With that said, we're seeing a lot of success. When we talk about synergies, which certainly is a proof point for us from a commercial standpoint, we are seeing very good progress, and we're confident in our run rate exiting FY '27 a $125 million run rate. But look, I think best we got Jon sitting right here who runs this group, and he can give some more color to you.

Happy to do that, Aaron. So, again, I think, ultimately, the #1 litmus test is the customer, and that's where you've seen a really positive response, right? So the synergy opportunities are headed in the direction that we expected. And to clarify in terms of roles and responsibilities, largely, if somebody was a tenured fiber cement seller or someone was a 10-year Deck, Rail & Accessories seller that maintains its flow. So we haven't built a general sales force what we've done is leverage the strength of the team and we still have that specialist bottle out on the street, but that's being coordinated as a team and then we have a channel manager that's considered that person a quarterback at the customer level. So the customer has 1 point of contact and then is able to leverage the best-in-class knowledge required, whether it's a fiber cement conversion opportunity or Deck, Rail & Accessories opportunities. So the customer's feedback has been really positive. The data and the sales growth coming from that has been exceeded by expectations. And then Ryan just quoted, that's a big driver of the initiative growth that we expect next year is going to be driven by that combined sales team.

Awesome. Could I just indulge 1 quick follow-up. You tried a number of years ago, you entered a range of exclusive deeper relationships, particularly with the large builders or some of those have probably played out in some of the sales performance over the last years just from a mix and location point of view. But what I'm curious about is as a lot of those contracts probably are starting to extend now towards some form of renewal? How are you thinking about those how we positioned do you feel for extension of those relationships?

Yes. Peter, you were a little choppy. I think I got the gist of it. It's just our -- the contract renewals for some of the large homebuilders. Look, reminds -- that remains a key focus and a very important part of our business, and we will defend that rigorously, and we have. And we believe not only is there opportunity to continue to defend that business, but to deepen those relationships and expand those relationships with offering a full suite of products that now we have at our disposal, whether that be AZEK trim or TimberTech type of decking. So our focus is to defend that business but also to expand it. And as we think about opportunities from a revenue synergy standpoint, certainly, this is a key 1 for us.

Your next question comes from Tim Wojs with Baird.

Everybody, maybe just starting with price mix in the Siding & Trim business. I think it was the second consecutive quarter where that's been up mid-single digits. And so I'm just curious if you -- if there's any -- anything in there that we should think about in terms of pure price versus mix? Because Ryan, it did sound like maybe that number could step down a little bit as you think about fiscal 2027. So could you just kind of talk about what price mix kind of landed in the fourth quarter and kind of the sustainability of that in 2027, especially against higher inflation.

Yes. I think as we talked about before on the fiber cement side, we'd expect it to be a little north of 3% in terms of price realization and then DR&A would be closer to that 2%. We did end Q4 in a little bit better position. So I think price was net about 4.8%. We did see a little bit higher realization on price and then that was offset by some negative mix based on the regional demand scale. We expect that to normalize closer to that 3%, 3.5% as we enter full year 2017 here. And then DR&A consistent, we would expect that 2% to 3%, depending on the annual price increase as well as we're working to offset inflation.

Okay. Okay. Great. That's helpful. And then just, is there a way just to kind of give us a little bit more precision on what the realized cost synergies that are kind of embedded in the guidance are?

Yes. So I think as we exited full year '26, we're approximately at an $80 million run rate versus our original target of about $42 million exiting the year. So I would say you expect like a $35 million to $40 million incremental of cost synergies to be realized during full year '27, driven by manufacturing optimization, procurement organization efficiency and just continuing to integrate on the AZEK platform. Cost savings and things outside of that and the $25 million we cleared for the plant closures would be outside of that. But that's generally where the cost synergies would be.

Your next question comes from Keith Chau with MST Marquee.

Aaron, Ryan. The first one, maybe just for simply. So -- we're all trying to get a gauge of what's in the FY '27 guide. I just want to focus on market share. So important to give a bit of context for Siding & Trim last year. I think there was a $75 million destocking impact at the revenue level for Siding & Trim. So if you take that into consideration, it's -- I'm just trying to back out what your market share assumptions is for FY '27. So maybe if you can just give us that 1 number, that would be useful.

Yes. Keith, if you're talking about PDG, I mean, look, what we're looking at is how do we have positive PDG as we go into FY '27. Certainly, a lot of challenges in FY '27. Our focus is to outperform the market. And we believe with the commercial synergies, the R&R expansion we talked about, you mentioned that some of the comps that we have that we're going to be able to do that, and bring this business back to volume growth. So if you're looking for a PDG number, our focus is to be able to have positive PDG as we contemplate our guide, and we look to the year. One thing I think everyone knows this, but as we look at our guide, we're not only guiding through this year. We're lapping the calendar, and we have to guide through March 31. So that -- the visibility is limited, but we are confident in our ability to be able to grow and be able to have positive market share gains.

Can I just ask a follow-up for Ryan. So Ryan, I think you mentioned before that this history of AZEK raising prices being able to recover costs and also taking market share at the same time. Presumably, you're talking about that post-COVID period where price increases were fairly and I guess the difference this time around is your competitors in decking haven't announced a price increase, whereas back in that period, everyone was raising prices and for some competing products, it was multiple price increases. So -- just keen to understand how you're proposing to manage the competitive dynamic given AZEK and raising prices and at this juncture.

Yes, again, I would say we have history regardless of market conditions to be able to take strategic price and so there's a long track record with our ability to do so. So again, I think we have proven history of strategic pricing plus share gains, nothing's changed. What we have seen historically is typically the competition has followed. If they choose not to, again, we still believe we have the best value proposition in terms of product, downstream sales and marketing engine. And so we have proven capability to take share regardless of what the competition does from a pricing standpoint.

Your next question comes from Trevor Allinson with Wolfe Research.

Another question on the synergies. You reiterated your run rate target about $125 million by year-end on the commercial synergies. How should we think about the contribution of these in 2027? And then on the cost side, do you see upside to your eventual cost synergies number, given you've made such good progress? Or are you just seeing those come through earlier and you think you kind of land in the same spot as you'd originally targeted on the cost side?

Yes. Trevor, I'll take the revenue synergy piece. Look, we haven't explicitly mentioned what these are and how they're going to be phased in. What I would say is we have clear line of sight to be able to exit the year at $125 million in revenue synergies. We gave a couple of the headlines out there. There's many headlines that we could give on some of these. The real magic is going to come, and Jon talked a little bit about the sales teams being together, is when we really get after in which we are our, our contractors are -- thousands of contractors that we can cross-sell to. So that's a big opportunity for us as we move forward. Yes, we're giving headlines, but we feel confident we do have line of sight to that $125 million revenue synergies. Do you want to take the cost?

Yes. And ever on the cost side, right, the primary goal is to get to the $125 million faster. We're not necessarily raising that target. The goal is just to achieve that quicker, and we're on a really good run rate to be able to do that.

Okay. Good. Makes sense. And then maybe more of a clarifying question here on some of the pricing commentary 2027, I think I heard you say you're expecting about 3% pricing in siding, which for you guys is a pretty normalized price increase, but you also have the inflationary pressures that you're speaking to see maybe to require some additional pricing. So can you confirm on siding and trim is the 3% expectation for realization in 2027, correct? And then if so, can you kind of help reconcile why given some of these inflationary pressures that might not be a little bit higher in 2027?

Yes. Trevor, if we think about this, I mean, we go out usually with a mid-single-digit type of price increase and it usually matched to like 3% to 3.5%. Here's what I would say. If we have to go out and take pricing because of inflation, certainly, we're going to be able to -- we'll do that. And on the Siding & Trim side of the business, we've been very selective in working with our customer base on certain products, in certain areas where we can go take pricing and that's what we've done. Certainly, there's other areas that we try to make up that inflation and hold our margins. We talked a lot about the Hardie Operating System. So we have a number of levers at our disposal, which we'll utilize if we need them.

Your final question comes from Daniel Sykes with Jarden.

I just have 2. The first one was just on the exteriors business within Siding & Trim on AZEK. It looks like revenue dropped kind of -- I'm getting in the double digits year-on-year that was more than actually the organic fibers cement business. Just in the context with earlier questions around the go-to market combined sales force. Just wondered if you could help us flesh out, I guess, a differential in performance between those 2 businesses, whether there's any kind of volume and pricing mix you can give us on that 7% drop on the exteriors business?

Yes, do you want to talk to that? I'll talk to moving forward here.

Yes. Yes, I think just given kind of where we ended Q4, you're talking about the results or the guidance result?

Result and then that we move forward.

Yes. Yes. I think we have a lot of the commercial synergies that early on are related to the exterior product. A lot of those will materialize as we get into the season here. So I think that's really what you saw in Q4, nothing really from a fundamental demand perspective, just given timing of where the market is.

Yes. As we move forward, and you heard from some of the headlines, we believe, and we talked about this when we signed the deal, we see some low-lying fruit within being able to bring to many of our traditional fiber cement customers. That's what you're seeing with Lansing is us doing that, and we'll do that with a number of other customers. So the business is healthy. The business is going to grow for us. So nothing else really. I guess we have no worries about this business. We're confident of our path forward.

Okay. Great. And then just another clarifying question. Just on the timing impacts of starts. I think historically, you kind of talked to a 1 quarter lag between sales volume and what we see on the start side, I note in the prepared remarks kind of talking to, I think it was a $20 million headwind from weather in February and March. So it seems like the kind of timing is contracted. I was just wondering if you could help me understand a little bit more whether there's any kind of procedural changes, whether that shortened that time frame and if we should expect that going forward.

Yes. I don't think there's anything different. When we talk about the -- you mentioned the $20 million from weather impact. That was because we had customers that were shut down. There were job sites where people could not work. That's -- there's really nothing else to read into that. So as far as the -- would there be any difference from the lag between starts and realized volume, we should get back on a normalized level.

We have reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.