管理層發言
Welcome to the James Hardie Fiscal Third Quarter 2026 Earnings Conference Call. I would now like to hand the call over to Chris Russell, Senior Vice President of Global Strategy, Corporate Development and Investor Relations. 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 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. 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. With that opening, I'm pleased to hand the call to Aaron for some opening remarks.
Thanks, Chris. Hello, everyone, and thanks for joining us today. Before I begin, I would like to take a moment to thank our employees around the world who work every day to safely deliver the highest quality products, solutions, and services to our customers. This team has done an incredible job navigating a period of significant change and excitement with the AZEK combination. I am truly grateful for their dedication, and I'm proud to work alongside them each and every day. With me on today's call is Ryan Lada, our new Chief Financial Officer. Many of you know Ryan from his prior role as CFO at AZEK. He brings extensive financial and operating experience and a strong understanding of the building products landscape. I'm excited to have Ryan alongside me as we lead the business forward. Also joining me today is Jon Skelly, President and General Manager, James Hardie North America Building Products Group; Jon, along with John Madson, our new Chief Sales Officer, have stepped into expanded roles recently.
Each leader brings an impressive track record of driving sustainable sales growth, and each has deep knowledge of our industry. And each one of them has already contributed meaningfully to the commercial synergies that I will speak about on today's call. I am confident in their leadership to deliver on our commitment to outperforming the market over the long term. Let's start with our results. We delivered a solid quarter, exceeding our guidance and making good progress across the business. Execution was disciplined. Commercial momentum improved, and our teams continued to advance the strategic priorities that matter most for long-term value creation. That said, we are not satisfied. We have higher expectations for ourselves, and our ambition is to deliver stronger, more consistent performance over time. That ambition is what's driving the actions we are taking across the business. On the commercial front, we are focused on reaccelerating organic growth in fiber cement and expanding margins across our portfolio through disciplined execution, innovation, and operational excellence.
The manufacturing optimization actions we implemented in mid-January were an important step in aligning our footprint and cost structure with our long-term growth and margin objectives. Finally, our combination with AZEK continues to build momentum and is already generating meaningful commercial opportunities. We are confident this combination will be a significant contributor to accelerated top-line growth in the years ahead as we bring together the best of James Hardie and AZEK to better serve our customers and create long-term value for our shareholders. Now let's look at the results for Siding & Trim in the quarter. Current market conditions remain mixed due to the category's exposure to the new construction end market and the Southern region. Organic net sales in the legacy James Hardie North America fiber cement business declined 2% in the quarter, driven by lower volumes, partly offset by higher average net sales price.
Single-family exteriors volumes were down high single digits. Multifamily was up high single digits, and interiors were down double digits in the quarter. Siding & Trim adjusted EBITDA was $269 million in the quarter with adjusted EBITDA margin of 34.1%, a nearly 500 basis point sequential improvement, largely reflecting price-mix favorability. As I mentioned in the opening, we are taking actions through the application of the Hardie operating system to improve performance and return to margin expansion in FY '27. On January 15, we made the difficult decision to close 2 of our older, less efficient plants and transfer more production volume to some of our newer advanced plants. This decision, along with actions we took to balance our footprint, will focus production on fewer manufacturing lines. These actions will create annual cost savings of $25 million beginning in the first quarter of FY '27.
Looking ahead to fiscal '27, these actions not only strengthen our cost position but also allow us to have the right capacity in the right locations to execute against our significant material conversion opportunities. From a market perspective, while new home market demand is still uncertain, we have seen stable demand trends in line with expectations we outlined in November. In repair and remodel, we have seen demand stabilize at the current low levels, and while we expect organic net sales to decline modestly in the fiscal fourth quarter, we are focused on driving organic growth in the Siding & Trim segment in FY '27 and beyond. Our overarching strategic focus is increasing our penetration in both the new home and the repair and remodel end markets, which is over $10 billion in which we have a significant material conversion runway. Going forward, we believe growth in this segment will be enabled by a few core strategies.
First, in the repair and remodel end market, we believe a significant opportunity exists for additional revenue growth in the Northeast and Midwest regions, where we believe there is a nearly $1 billion repair and remodel-focused revenue opportunity in competitive wood and wood-look siding alone. We believe the combination with AZEK positively impacts our ability to compete and win in these regions. Enabled by the combination, James Hardie now has long-standing relationships with independent lumberyards in the region, a large and talented sales force, and the best collective product portfolio to drive material conversion. And while repair and remodel remains our focus, particularly given the synergies from the AZEK acquisition, we continue to see meaningful opportunities with custom and local homebuilders. We believe this underpenetrated segment represents an incremental $750 million opportunity for continued growth in the new home construction end market.
We also see additional opportunities to drive growth through product innovation. Our R&D and product management organizations are focused on product innovation, where we see opportunity to introduce resilient and beautiful products to drive material conversion. One example of our product development is TimberHue, a new product that we will showcase at the International Builders Show that combines a natural wood look with the durability and performance of James Hardie's fiber cement. Our innovation mindset is not only in our products but also in the installation techniques of our products. We have worked closely with our contractors and installers to understand and develop installation innovation, helping to reduce the overall installed cost of our products. Through installation techniques such as score and snap and the Trim-Over method, we believe we can increase contractor efficiency by approximately 30%.
For those of you who will be in Orlando at the International Builders Show, we will have the opportunity to showcase these innovative installation methods in our booth at the show. Now let's turn to Deck, Rail & Accessories. Performance remains strong in our DR&A business with TimberTech continuing to outperform the broader market by executing against our proven growth playbook. This performance is supported by multiple levers with material conversion underpinning everything that we do. The most recent data suggests the decking market is approximately 25% converted to composite materials. As a reminder, at this point in the conversion curve, every 100 basis points of material conversion equates to approximately 400 basis points of composite decking growth. We've had sustained material conversion momentum, which gives us confidence in the long-term runway, particularly as homeowners and professionals increasingly prioritize materials that offer superior durability, fire resistance, and performance.
Wood conversion is driven by downstream-focused sales activity at the contractor level, with the continued education of contractors on the benefits of our resilient and aesthetically differentiated products relative to inferior substrates. Similar to our Siding & Trim segment, new product development represents another important growth lever, supported by our ability to design and successfully launch innovations that enhance the TimberTech portfolio for both consumers and pros. Recent new product introductions such as the TimberTech Advantage Rail and Impression privacy screen provide contractors and homeowners with advancements and functionality, aesthetics, and ease of installation. Consistent with the past, channel expansion remains a key focus as we continue to broaden TimberTech's presence across distribution and retail to further accelerate market conversion. Given the highly complementary nature of James Hardie and TimberTech's geographic footprints and customer bases, we see significant opportunities to facilitate channel expansion through our existing relationships.
An example here may be helpful. James Hardie's traditional strength has been the West and South, where we have had success penetrating the market and have strong coverage in selling locations in the region. At the moment, our fiber cement business has more than doubled the selling locations than TimberTech in the South. We believe, over time, there is a strong opportunity to place TimberTech products in the locations currently carrying James Hardie fiber cement. All of our sales and commercial initiatives are supported by a strong in-house marketing organization. By executing a consistent marketing playbook over the past 4 years, TimberTech has delivered meaningful progress across key brand health and commercial metrics, including strong gains in awareness and consideration. These results reflect increased brand visibility, broader channel presence, and effective engagement with both the homeowner and the pro.
Our focus going forward is strengthening preference and deepening relationships with contractors. With this group, we believe we have outpaced the competition to become the leader in awareness, positioning us to convert that advantage into sustained share growth over time. Taken together, these efforts give us confidence in our ability to drive 500 to 700 basis points of growth above the market, consistent with TimberTech's historical track record. We delivered on this commitment in the most recent quarter with mid-single-digit sell-through growth, outperforming the broader market that declined at a low single-digit rate. Despite continued market softness, we remain confident that our strategic growth initiatives with customers and contractors will support continued market outperformance and low to mid-single-digit sell-through growth in the fourth quarter. As I close the DR&A update, I wanted to share the progress from the seasonal early buy shelf space negotiation period with key channel partners, which wrapped up in recent weeks.
As in prior years, we were focused on reinforcing customer relationships and securing appropriate seasonal inventory positioning. We believe these discussions have further expanded our market presence, positioning us well as we move into the primary decking selling season in the spring. Turning to the integration with AZEK. We are executing with discipline and urgency across all areas of the integration with a clear focus on our people and our customers. As we move into FY '27 in just a couple of months, we have established a clear organizational structure aligned around common goals, and we have a specialized downstream customer-focused sales organization designed to deepen relationships, accelerate material conversion, and drive sustainable growth. We also continue to move quickly on cost synergy realization. We've already surpassed our FY '26 cost synergy goal, and our progress to date increases our confidence in hitting our $125 million cost synergy target.
On the commercial synergy front, customer feedback on the combined offering from the One James Hardie team has been very positive. We have seen a growing number of recent wins across the businesses that we expect to translate into meaningful revenue synergies as we move through FY '27. Just to give you an idea of some of these, a large national one-step dealer has committed to choosing AZEK as their exclusive PVC trim brand, drawn by the combination with James Hardie and the strong loyalty of contractors to our combined portfolio. Another example of our momentum is a recently secured expansion of a relationship with a scaled distributor of exterior building materials that positions James Hardie as a primary hard siding and trim brand and TimberTech as its primary composite decking brand across North America. This partner has agreed to focus national marketing on the One Hardie suite of brands and products.
Most importantly, these commitments are reinforced by coordinated go-to-market efforts, targeted hyper-local marketing support, and training to drive material conversion. We're also seeing strong momentum in cross-selling across the One Hardie portfolio. Over the past few weeks, we hosted national contractor summits for both TimberTech and James Hardie. One piece of feedback from these meetings is that contractors are increasingly looking to consolidate their portfolios under the One Hardie brands. One such example is Rick James of RPS Remodeling, a long-time James Hardie siding partner, who recently transitioned his company's decking offering from a competitive product to TimberTech. The positive momentum from these proof points gives us confidence in our ability to deliver $125 million in annualized commercial synergy run rate exiting FY '27, in line with our public commitment at the deal close. I will now turn it over to Ryan to run through the financials.
Thanks, Aaron. I will start with our third quarter consolidated results. Total net sales grew 30% to $1.24 billion, which included $275 million of acquired AZEK sales. Our organic sales increased by 1%, and adjusted EBITDA was $330 million, with a 26.6% adjusted EBITDA margin. Adjusted general corporate and unallocated R&D costs totaled $47.1 million in the quarter. As a reminder, nearly half of the P&L benefit from full year '26 cost synergies resides in corporate expense for the year. Our adjusted effective tax rate was 17.3%. We now expect our full year tax rate to be slightly lower than our prior guide at around 19%. Adjusted net interest was $68 million, and the weighted average diluted share count was approximately 583 million. We anticipate these items will remain consistent in the fourth quarter. Adjusted net income was $142 million, and adjusted diluted earnings per share was $0.24.
Year-to-date, free cash flow was $261 million, which includes the benefit of a completed land sale in Australia. However, cash flow remains negatively impacted by one-time integration costs, which will step down significantly in fiscal year 2027. Cash generation of our core businesses remains strong, and with capital spending projected at modest levels, we expect free cash flow to accelerate in the years ahead. Turning to our Siding & Trim segment. Net sales were up 10%, including $81 million from the AZEK acquisition. Siding & Trim organic net sales were down 2% as lower volumes were partially offset by a mid-single-digit increase in average sales price (ASP). Adjusted EBITDA was $269 million, with an adjusted EBITDA margin of 34.1%, down just 70 basis points year-over-year. This decline was largely due to a 100 basis point impact from reallocating $9 million of R&D costs to the segment.
Excluding this allocation, adjusted EBITDA margin would have increased year-over-year. The key drivers of the comparable change in margins were positive price, mix and ongoing Hardie operating system (HOS) savings. These were partially offset by lower volumes, unfavorable absorption, and inflation in freight and raw materials. We are employing the Hardie operating system to optimize the business cost structure through network optimization, cost synergies, and structural efficiency improvements. We expect the recently announced site closures and optimization initiatives to generate annualized cost savings of approximately $25 million beginning in the first quarter of fiscal year 2027. These cost savings will be driven by reduced fixed costs and improved utilization across the remaining manufacturing network. These cost savings are also incremental to any cost synergy savings related to the AZEK acquisition.
Together, these actions will position the business for margin recovery and stronger performance going forward. For Deck, Rail & Accessories, net sales were up 2% compared to the quarter ended December 31, 2024, prior to the AZEK acquisition by James Hardie. Sell-through was up mid-single digits, consistent with the business performance in the 2 most recent quarters. Adjusted EBITDA was $49 million, resulting in a 25.1% adjusted EBITDA margin. The Deck, Rail & Accessories margin outlook remains strong, with upside from material formulation, recycling initiatives, improved absorption across the manufacturing network, and the application of the Hardie operating system across the manufacturing base. Turning to Australia and New Zealand. Net sales were up 7% in both U.S. and Australian dollars due to a 1% growth in volume and a 6% rise in average sales price. Adjusted EBITDA was up 4% to $41 million with an adjusted EBITDA margin of 32.6%, down 90 basis points due to unfavorable production cost absorption and the R&D allocations.
And in Europe, net sales were up 13% or 3% in euros, driven by strong fiber gypsum volume and a modest decline in the average sales price. EBITDA margin was up 240 basis points to 12.7%, driven by volume leverage, lower gypsum and paper costs, and solid manufacturing efficiency. Turning to our full year outlook. We are increasing our Siding & Trim net sales guidance to a range of $2.953 billion to $2.998 billion, reflecting our outperformance in the third quarter. For Siding & Trim adjusted EBITDA, we are modestly raising our guidance range to $939 million to $962 million. At the midpoint, this implies a full year organic net sales decline of approximately 6% and an adjusted EBITDA margin of 31.9%. For Deck, Rail & Accessories, we have also increased our net sales and adjusted EBITDA guidance for the post-close period of fiscal year '26 to account for the outperformance in 3Q. We expect net sales of $787 million to $800 million, which assumes sell-through up low to mid-single digits.
This is consistent with recent quarters and above prior expectations, reflecting continued success in driving material conversion through our core strategies. Based on these demand expectations, we expect Deck, Rail & Accessories adjusted EBITDA of $219 million to $224 million. For the total company, we now expect full year '26 adjusted EBITDA of $1.232 billion to $1.263 billion. We are confident in our long-term cash generation. We expect it to accelerate as integration costs wind down and interest expense declines with debt paydown. Our capital expenditures outlook remains unchanged at approximately $400 million for full year '26, including $75 million for AZEK investments. Over the long term, we expect CapEx across our North America businesses to run 6% to 7% of combined North America sales. We continue to expect at least $200 million in free cash flow for the year. Our net debt ended the quarter at $4.3 billion.
Pro forma for the AZEK acquisition and the midpoint of our updated guidance, full year '26 net leverage stands at approximately 3x. We remain committed to reducing leverage below 2x within 2 years post-close as we grow EBITDA, generate cash and pay down debt. With that, I'll turn the call back to Aaron.
Thanks, Ryan. Looking ahead to FY '27, while we are not guiding at this time, our expectation and goal is to return to both organic revenue growth and adjusted EBITDA margin expansion. In DR&A, TimberTech has demonstrated the ability to consistently outgrow the underlying market through our well-defined and repeatable growth playbook. We expect that this will continue in FY '27. As highlighted earlier in the call, we also expect to return to organic growth in our Siding & Trim segment and fiber cement siding in particular. Our 4 key strategies for returning to growth include: number one, a focus on the $1 billion repair and remodel opportunity in the Midwest and Northeast; number two, a deeper focus on penetrating into the $750 million remaining in wood and wood-look siding and new construction; number three, a focus on new product innovation; and finally, continuing to introduce new and innovative installation techniques to drive efficiency for our contractors.
Additionally, on growth, relative to commercial synergies, we are encouraged by the early commercial wins, which give us confidence in our ability to realize our FY '27 revenue synergy target exiting the year at $125 million run rate, consistent with our public commitment at the time of the deal announcement. And on cost synergies, we have executed well in FY '26. We've already surpassed our FY '26 cost synergy goal, and our progress to date increases our confidence in hitting our $125 million cost synergy target. We will give additional details on fiscal 2027 guidance during our year-end conference call in May. To close, we are executing against our clear long-term strategy focused on material conversion from wood and other inferior materials. We are well positioned to capture that opportunity through the breadth of our combined portfolio and our downstream engagement with contractors and customers.
As we look ahead to FY '27 and beyond, we are confident in our ability to continue outperforming the market, expand margins and translate our strategy and execution into consistent long-term value creation for our shareholders. And coming up next week, we will be exhibiting at the International Builders Show, where we plan to highlight the breadth and potential of our combined product portfolio and demonstrate how our complementary offerings across siding, trim, decking, and accessories deliver differentiated solutions for our customers and reinforce the value proposition of the combined company. For those of you planning to be in attendance, we look forward to seeing you at the show. With that, operator, please open the line for questions.
分析師問答
Our first question comes from Keith Hughes with Truist.
A lot of regional variation of late in some of the siding sales. Can you give us an update on that and specifically, what you think your expectations are near term, how that could change as we get into calendar '26?
Keith, let me take it from there. As we look at the situation, it's largely in line with what we discussed in November. I'll begin with new construction. The activity is challenging across most of our regions, with Texas, the West, and the Southeast experiencing the most softness due to their scale and our exposure to these markets. As you know, permit starts are down 9% year-over-year, and year-to-date starts are down 7%. Focusing on Texas, which is important for us and the country, it represents about 26% of national closings. Builders in Texas have been managing inventory tightly. After significant volume declines in Q3, we’ve noticed early signs of normalization this year. Recent weather has caused some short-term production delays, and builders are remaining conservative, adjusting starts to match sales. In the Southeast, particularly in the Carolinas, demand is soft, with Q3 volumes down year-over-year.
Key markets like Orlando, Jacksonville, Tampa, and Atlanta have elevated inventories. However, the Carolinas and Tennessee are benefiting from strong migration trends, leading to healthier starts. In the West, starts are slow as builders in the Southwest and Mountain states are currently overbuilt. The Midwest is comparatively resilient, with cities like Minneapolis, Chicago, Ohio, and Pittsburgh seeing strong performance due to more affordable price points and good activity in higher-priced bands as well. Some easing in contractor backlog is creating momentum as the season advances. Overall, new construction is soft across many key regions with elevated inventory levels. The positive aspect is that consumer sentiment has stabilized, supported by pent-up demand, and we’re seeing modest relief in mortgage rates. Moving on to repair and remodel, that area is stabilizing; although it’s choppy, it’s not getting worse, which is encouraging.
Sentiment is improving across all regions, particularly where there’s aging housing stock. Our contractor surveys indicate optimism among contractors as well. In summary, new construction remains a challenge but is in line with our previous discussions in November. Repair and remodel is stabilizing. Before I briefly address Deck, Rail & Accessories, I want to mention our inventory levels. Exiting Q3, our inventory was seasonally appropriate, but we’ve noticed a slight uptick in dealer inventory due to weather disruptions affecting building days and production. Overall, our channel inventory remains healthy compared to last year. Regarding Deck, Rail & Accessories, I won’t elaborate much since it’s already been covered in the script, but we continue to outperform the market, with sell-through remaining broadly consistent with mid-single digits and stable trends with contractors, keeping inventories at appropriate levels. Hopefully, that answers your question, Keith.
No, that's very complete. Can you hear me now, by the way?
Yes.
Yes. Okay. Great. Just one quick follow-up on costs. Are you seeing any potential inflation coming in any of the siding inputs as we head into the new year?
Yes, this is Ryan. Keith, it's Ryan. Yes, we have a modest expectation of inflation on the fiber cement side. Nothing drastic at this point, just given where pulp and things are. The majority of it is kind of playing towards the back half of 2027 at this point.
Your next question comes from the line of Daniel Kang from CLSA.
Just wondering as we enter your final quarter and are midway through it. Currently, the end markets are still soft. Could you discuss how your recent price increases have been received by your customers and what you anticipate for the important spring selling season?
Yes, Daniel, we have implemented our price increases, which have been effective since January 1. This includes our fiber cement products, as well as our Deck, Rail & Accessories and PVC trim offerings. We have discussed these increases, and we are witnessing some positive impact from both price and mix, especially in the fiber cement segment. Our pricing strategy focuses on value, and it has been positively received by our customers.
And you also spoke about, I guess, the early wins in commercial synergies. Is this going to feature much in the FY '26 year?
Yes, Daniel, that's a good question. We expect to start seeing sales synergies reflected in the profit and loss statement as we move into fiscal year '27. Currently, we are executing many of these initiatives and are making solid progress. While we are not providing guidance for fiscal year '27, we are confident that we can achieve our target of $125 million in revenue synergies by the end of fiscal year '27.
Your next question comes from the line of Ryan Merkel of William Blair.
My first one is on the 4Q guide. Are you assuming that Siding & Trim, the volumes are going to be down in a similar range as 3Q? And then on the margins, you had a nice beat in 3Q. Why not flow that through in 4Q? Is there a reason?
Yes, I'll let Ryan go through the guide. But if we look at our Siding & Trim volume, one of the things I think that you'll remember is we are facing a comp from an inventory build that we saw in Q4 last year. But Ryan, if you want to walk through some of that.
Yes, I think the guide reflects exactly what Aaron just hit on. And then from a margin perspective, we have a step-up in marketing activity really in our fourth quarter that is the main driver of the dilution from 3Q. But yes, that's the biggest thing as we enter the season, is just increased marketing expense as we get into the year-end here.
Yes. And Ryan, to get more specific on that, these are things like contractor events. We had them on the legacy AZEK side. We had them on the legacy James Hardie side, and then also, we have an upcoming sales meeting. So some of those expenses that you see really reflect that.
Okay. Yes, that makes sense. And then my follow-up, the large distributor committing to One Hardie, that sounds pretty interesting. My question is do you have more of those in the pipeline?
Yes, Ryan, I'm going to turn it over to Jon Skelly, who runs our North American business, who has been a big architect of getting some of these commercial synergy wins. Jon, do you want to take it?
Yes. Ryan, while I can't provide too much detail at this moment, I want to connect this to what Aaron mentioned earlier regarding our confidence in achieving the exit synergy rate for fiscal '27. The customer has responded positively to the chance to consolidate with our market-leading brands, and our efforts in downstream sales and execution have supported their business growth. This is what gives us our confidence.
Your next question comes from the line of Peter Steyn from Macquarie.
I wanted to connect that conversation to working capital. Your inventory, in relation to pro forma, increased to 75 days from around 71 days in the previous period. I'm interested in knowing how the trend will develop as you implement commercial synergies and strengthen your position in similar one-step space. Do you think you can mitigate the volatility historically observed in the decking business's inventory profile? Additionally, what are your expectations for improved efficiencies regarding that investment across the business?
Ryan, do you want to handle that one?
Yes. Yes. I would say, as you think about the commercial synergies we're going after, there is a little bit of build on our internal balance sheet to be able to satisfy those as those come to fruition. So I think we hit a little bit on the prior question, but there is phasing and timing of rollout into the season. So we would expect as that normalizes, our inventory and our balance sheet would also come down. But yes, the real build is driven by that, nothing else intentionally.
And would there be network redesign benefits that flow over the medium term as well? That's probably more where I'm getting at.
Yes, nothing major contemplated in that. I think with the optimization of our footprint here that was announced last month, it's really a rebalance of the inventory through that and the corresponding freight to fulfill the customer demand.
Your next question comes from the line of Tim Wojs from Baird.
Maybe just on fiber cement and kind of the pricing contribution in the quarter, it was a pretty healthy step-up sequentially. And it sounds like it's mix-related. So I'm just curious if you could kind of flesh out the drivers of the mix improvement and if you're expecting that to kind of continue in the kind of near to intermediate term there.
Yes, Tim, I believe that price contributed approximately 4%, slightly more than that. The mix added just over 1%. As we increase our sales of ColorPlus, we'll benefit from the mix effect. Additionally, when considering new construction and certain products linked to it, we noticed a decrease in some areas. That explains part of the mix advantage you’re observing, Tim.
Okay, that's helpful. As you discuss new installation methods for R&R, are you targeting smaller, custom builders? Are there any larger investments needed, or does your go-to-market strategy change in a way that could involve significant upfront costs to speed up the process?
Yes. Tim, the biggest investment that we could make there and we have already made is going to be in our sales force, right? So I'll let Jon talk a little bit more around it. But as we move forward and we think about what our sales team is going to look like, it's going to be focused more from a downstream standpoint. So we are going to be focused on contractors out there and really converting them. We'll have a dedicated team on that. We'll also have specialists from a fiber cement, deck, rail, and accessories standpoint that aids them, and then we'll have folks that are focused on our customers, like our dealer partners there. So that investment has already been made. Certainly, training is a big part of it. But as far as any big one-time cost, I would say we made it as we think about the acquisition of AZEK. Bringing the two together is going to help us really accelerate that. But Jon, anything else you want to add there?
That's right. I mean we can leverage that existing investment, Tim. And so as you recall, historical TimberTech and AZEK were much more repair and remodel-driven, right? So it was a much larger piece of the business. And so the downstream team has the relationships within the dealer channel with custom builders and with a lot of pull-through opportunities on the R&R side. And then conversely, James Hardie has a lot of that opportunity with the new build side. So legacy AZEK relationships can be leveraged to help pull through more on the repair and remodel side of fiber cement. And then vice versa, we can work together to pull through more decking, railing, and accessories through into the vendor channel.
Your next question comes from the line of Keith Chau from MST Marquee.
The first one, just a follow-up on the 4Q guidance. I wanted to try and think about it sequentially. So revenue is expected to be broadly flat. I think, Ryan, as you said before, inflation, there is some but not too much, and sequentially, there should at least be a pulp benefit, a price increase benefit, and you should be starting to get the benefit of the capacity reduction. So yes, I understand there needs to be an investment on the marketing side, but it seems unlikely that that investment in marketing is going to be overwhelmed by some of the sequential positives. So maybe, Ryan, if you can help me understand the magnitude of marketing investment in the fourth quarter relative to the third and how much that actually steps up, just so I can get an understanding of why the margin should deteriorate quarter-on-quarter, please.
Yes. I think there's a few things, right? So from a marketing step-up, I don't think we're going to quantify the actual dollars, but it is a significant impact over Q3. I think the second thing with the announced plant closures, the impact of that really is delayed to full year '27. So we will not see any benefit of that in the quarter as we go through the wind-down activities and the delay on the balance sheet. I think the third thing, right, I mean, AZEK, from a Q3 perspective, that's AZEK's historically low production and shipment perspective. So there are some delayed costs on the balance sheet that roll off in our financial year Q4. So that's a little bit of the impact you feel on the margin perspective. So those are kind of the three things. You're not getting the savings. You have a little bit of balance sheet lag rolling off and then there is incremental marketing and sales efforts in the quarter.
Okay. My follow-up question just relates to some of those capacity reconfiguration. So I'm just trying to understand, particularly for the Fontana, California closure, where will that region be supplied now, from which part of the network? And if it's from the South, when the South eventually ramps up again, what's the plan to keep supply in the South or the West going, particularly in the California region?
Yes, Keith, I understand your question about how we will supply the West. This was a tough decision for us, but we are confident in our ability to supply the entire network. This includes anticipating growth and revenue synergies. Over the past few years, we have invested over $1 billion in modernizing our plants and expanding our facilities, which gives us confidence in our strategy. The plants we closed were limited in their production capabilities. For example, Summerville only produced plank, while Fontana produced plank, panel, and backer. We will be able to supply California from Tacoma 2 in Northern California and from Cleburne and Wax in Southern California. We've taken freight costs into account and considered the contributions we expect to see next year, which also factor in freight. So although it was a difficult choice, we believe it was the right one as we move forward.
Your next question comes from the line of Philip Ng from Jefferies.
Congratulations on a really strong quarter. The progress is quite encouraging. And Ryan, it’s great to have you back. To kick things off, I have a question for you, Aaron. I understand you’re not providing guidance for 2027 yet, but it’s promising to hear that you expect organic growth to be on the rise in that year. Do you anticipate needing assistance from the market, or are these mostly James Hardie-specific initiatives? I'm particularly interested in your Siding & Trim business, as you mentioned facing some challenges in new construction. So, what gives you confidence that this segment will start to reaccelerate? I know there’s been some discussion about new products being rolled out. Are you seeing any of that? Are you experiencing placements with dealers or success with builders? Could you provide more insight into why you believe your siding business is set to reaccelerate?
Yes, Phil, good question here. Look, when we say we believe that we're going to have organic growth, that's considering if there's no worsening of the market here than where we're at right now, right? That's the caveat I would put on this, severe worsening of the market. Number one, why we have the conviction as a team, right, this is a new James Hardie. So as we think about our sales team and the way that Jon is going to structure this team and really get after the contractor, we have a lot of confidence there. The other thing is we look at the commercial synergies that we're going to be able to generate. We look at the plans on how we grow fiber cement. We talked a little bit about the 4 key areas that we're going to really drive. All those give us conviction. The other thing is we think about this past year and what we're comping against. We have some opportunity, we believe. So all of those things together, Phil, give us a lot of confidence in being able to provide organic growth in fiber cement again.
Okay. Helpful. You guys gave us great examples of wins with dealers and distributors. I didn't hear you talk too much about big box. I believe there's a line review for decking. Any color there on an opportunity to pick up some placement there? I know AZEK made a big push on railing about a year ago. Any more color on increasing penetration, whether it's on the retail or pro channel, particularly in railing as well?
Yes. Look, I'll start out and I'll have Jon chime in here. All our customers are very important to us, and we talked about a number of the buckets that we believe are going to be opportunities for us, and we certainly see retail as being an opportunity. And we are making good progress on the James Hardie side and also from a legacy TimberTech side. Look, as someone who has called on retail and big boxes for almost 30 years now, it doesn't happen overnight. So we're looking at getting single after single with our retail partners and just building upon that. So we have a lot of confidence that's going to happen. Nothing major to announce right now. But Jon, do you want to take that?
Yes. Nothing major to announce is correct, but we continue to expand our positions there. So even without line reviews, we continue to broaden our stocking store base, continue to amplify our special order business, and continue to make retail and that channel expansion, we regularly talk about, a bigger part of our business.
Your next question comes from the line of Sam Seow from Citi.
You had a pretty solid margin improvement there sequentially in siding. I just wanted to maybe ask if you could talk about the contribution of raw materials. Was it positive sequentially in the third quarter there? And then as we think about the fourth quarter, should that raw material benefit be sequentially higher again?
Yes. Sam, good question. I'll turn it over to Ryan here in a second, but just to walk through it, I mean, if we think about the sequential improvement, it was really built from a high-level standpoint. We think about volume. We think about ASP. We think about our manufacturing costs, and we think about SG&A, right? So from a raw standpoint, Ryan, you just want to dive into that?
Yes. Yes, I would say if you think about kind of how we look at it, roughly 40% of it was contributed from price-mix about 20% came from manufacturing costs, and that was raw material costs. So we did see a step down. The first 2 quarters of the year, we did see inflation on raws on the fiber cement side. We actually saw a modest deflation year-over-year as we step into the third quarter. And then there was some cost actions just to mitigate there, and the other 40% basically came from SG&A management on the cost side. And to your question on the raw material inflation that we saw in 3Q, that will actually carry into 4Q as well.
Your next question comes from the line of Matthew Bouley from Barclays.
So the score and snap and the new install techniques, it sounds like more to be seen at the Builders Show next week. I think I heard you say that contractor efficiency is better by 30%. So in the past, you guys have talked about some of the early returns here. I'm curious if there's any update. Maybe sort of outline, as you've been undergoing the strategy, what you're doing to incentivize or motivate contractors to kind of play along here.
Yes, that’s a great question. This is all part of our strategy to succeed in the fiber cement market, particularly in the repair and remodel segment. We believe innovation plays a crucial role here, and we've dedicated years to developing new installation techniques. We're rolling these out carefully across the country, supported by our Statement Essentials Collection aimed at competing against vinyl products. We think these new installation methods, along with our readily available product, will help close the gap with vinyl, allowing our contractors to secure more jobs. We launched this collection in the eastern and midwestern regions in April 2025, and in the central midwest in January of this year. I won’t disclose the complete rollout plan to avoid giving our competitors any insights, but by Q1 of FY 2027, we expect most of the Statement Essentials Collection to be launched. Additionally, our sales force will have a dedicated team focused on contractors, which is set to launch on April 1, coinciding with the product rollout. Our local marketing and training initiatives will support these efforts. We'll keep you updated on our progress during these calls. A significant aspect will be monitoring the growth of our ColorPlus numbers, especially in these regions. That's our current status.
Your next question comes from the line of Brook Campbell-Crawford from Barrenjoey.
Yes. Just one on the outlook here for FY '27. You're talking about lots of great activity and initiatives you have going on in the U.S. at the moment, which is good to hear. Just wanted to understand, Aaron, do you think the business is capable of growing volume at that kind of 4% above market and then deliver synergies on top of it? Or do you more think of these initiatives so synergies effectively helping to deliver on the 4%? I'm just trying to understand if we should expect both or just sort of 4% above market as a total target.
Yes, Brook, good question. Look, we're not giving guidance. I think what you're referring to when we talk about 4% is that has been our PDG target, right? And obviously, this year, we are not at that rate, and there's many different reasons for that. But as we think about the inventory build, we think about some of the magnitude of new construction that we've seen in areas that we're really tied to like Texas. As we get into next year, we expect to get back on that train of 4% PDG growth. We've talked about some of the initiatives that we have to be able to do that, and that would be our base. And then our expectation is synergies are going to be on top of that. So that's our aspiration. Not giving guidance, but that's what we're aiming to do, Brook.
Your next question comes from the line of Trevor Allinson from Wolfe.
I want to follow up on your comments on some early wins regarding the revenue synergies. You've had a chance to go through the early buy period here now on the combined portfolio. Do you think you're getting some of these wins more quickly than you had originally anticipated? And then I think about the synergies between siding and trim and decking, is there one side of the business where you'd expect the commercial synergies to come through either sooner or more meaningful in fiscal '27?
Yes, Trevor, I'll take the last first, and then I'll hand it over to Jon. Look, we believe that where we see opportunity from a commercial synergy standpoint, across all our businesses, including DR&A, fiber cement, and then from an exterior trim standpoint. So we do see opportunities across the board. But Jon, do you want to take it as far as our presence?
Yes. I mean, again, I think as we highlighted in the prepared remarks, right, this is a consistent part of our growth algorithm, right, is going to early buy and expanding our shelf position and presence across all the dealer channels. Obviously, now sales guys like to have good stuff to talk about. Now they more to talk about, right? So I think we've been able to create a lot of energy and excitement at the customer with an expanded portfolio of the leading brands. And so I think that's been resonating with customers. And again, I'll connect that back to the confidence we have about delivering on our commitments around that synergy capture.
There are no further questions at this time. I'll now turn the call back to Aaron Erter, CEO, for closing remarks.
All right. Hey, thanks, everyone. Really appreciate it. I want to thank the James Hardie team. I want to thank our customers as well for their support. Look, I'd just end this by saying our integration is on schedule, and we're executing on plan. Our cost and our commercial synergies are on track. As you heard here, and we'll talk more about it, we plan to get fiber cement back in growth mode in FY '27. AZEK, legacy AZEK business is on track. We see continued growth there. And look, we set the business up for FY '27 with some of the cost actions that we've taken. If you think about what we've done with the plants, the footprint optimization, SG&A, we continue to run the business with a focus on our Hardie operating system. We look forward to ending the year strong, and we look forward to FY '27. So with that, thank you all. I appreciate the time here this evening.
This concludes today's call. Thank you all for attending. You may now disconnect.