Have the James Hardie team here, representing the company. We got Aaron Erter, CEO of the company, and Rachel Wilson, CFO. We really appreciate you joining us.
Great. Thanks, Phil.
Do you have a mic?
Yeah. Very good. Hey, good morning everyone. Thanks for taking the time to be with us.
I guess first to kick things off, Aaron, we're all very appreciative of the decking business. The fiber cement business is probably newer for many of us. Just kind of give us a little more color in terms of the industry structure and then just what James Hardie is all about in terms of the growth algorithm and your go-to-market strategy.
Yeah, sure. Look, I'm appreciative that everyone's more familiar with the decking business, and that's what we need to make sure we change is get you all familiar with James Hardie and the great story that we have. Hey, just a little bit. James Hardie's been around for about 135 years, and we started in Australia, came over to the U.S. a couple of decades ago, and really have built our business on fiber cement siding. If you think about fiber cement siding, it is really, we would characterize it as being a resilient and beautiful product. It holds up to the elements, it holds up to pests, it's maintenance-free, it's fire-resistant. A very premium product, and we built that up as the leader in premium siding over the last couple of decades here.
Our business consists of the North American business, which is the lion's share of our business $5 millio-$6 million, almost 80% of our business, and the focus of our entire company. If we think about the other business segments, we have Europe, and we also have Australia and New Zealand. We really are on a new growth track as we think about the combination that we announced in July with AZEK. Our business now, you could say, is one of the leaders in outdoor exterior solutions and also outdoor living. Our brands are very strong. We have the James Hardie brand, which is number one in premium siding. We have the TimberTech decking brand, which we would say is number one with the pro. Also, our exterior products and brands, whether that be James Hardie or AZEK or Versatex, you put those together, those are number one as well.
Significant brands, and as I said before, we are on a new growth trajectory with AZEK. What is the opportunity as we think about with AZEK? It's roughly about $23 billion. With James Hardie before, it was about $10 billion. We essentially have more than doubled that opportunity. How we go to market and what our focus is, it's pretty simple. That's why bringing James Hardie and AZEK together was so natural, it's all about material conversion. How do we convert contractors? How do we get homeowners to convert over to this resilient, beautiful product? Our customer teams out there are able to sell that idea, whether it be PVC decking that has a lot of the same characteristics. If you think about James Hardie, it's resilient, it's beautiful, it's fire-resistant. That is not that much of a stretch for our sales team.
The way we go to market is a little different from others out there, is that we focus on the entire customer value chain. We are focused, number one, on our contractor partners. We think that is essential. We provide them service, we provide them training. We have our contractor alliance program. AZEK has the board contractor program. What we're providing with our contractors is support throughout the whole process. Along with the contractor, we are focused on our dealer and distributor partners. We bring them high levels of service. We bring them training. That is a value that they like. In addition, we're driving contractors through their locations. Finally, we focus on the homeowner, and that is through direct marketing to the homeowner. That's why we've seen the equity and the strength in our respective brands out there. Phil, you asked what is our long-term growth algorithm.
Just very simply, if you look at the legacy James Hardie North America business, if you look at the legacy AZEK residential business, and you put those together, the CAGR would be essentially 11% over the last five years. As we look forward, and just to note, what AZEK has always looked at as their algorithm is to really grow 7% above the market. We at James Hardie, we look moving forward with our legacy fiber cement business. We would say we would get two points, or we would get low double digits market growth. We would also get four points of outperformance of the market. The remainder of that growth, we would say, is between price and mix, which would be mid-single digits. That gets us to double-digit growth.
As we move forward, and inclusive of the revenue synergies that we've laid out there, we believe that we can increase that growth of the two companies by 250 basis points. Just a little bit about our company, our focus, and then the growth algorithm as we move forward.
That's really great color. Any early read from the combination with AZEK, what your customers are telling you, your opportunity to drive conversion? I mean, obviously the big opportunities are in the Midwest and Northeast where you're underpenetrated. What are some of the early wins you're hearing and how you're converting that?
Yeah, look, just in summary, I would say the integration is going extremely well. As we thought about this and we looked at this, we don't call it an acquisition, and we were very quick to make sure we're not doing that. This is a merger of two companies. I think it's really important that it always starts with people, and making sure you have the right people that are on the boat. You also appreciate the similarities, but also the differences that you see in culture. Just very simply, what we've instilled in the new company is the idea that the best idea wins. I'll give you a little bit of an example there.
As we started to recast as a leadership team what our values are, one of the values that really rang true that we didn't necessarily have in ours, it was just embedded in us, but AZEK has, is it always starts and ends with the customer. We've adopted that as our first value, and that's an example of the best idea wins. Moving along to talk a little bit about synergies, early days, the cost synergy targets that we've put out there, we're seeing good progress. I would even venture to say that we're tracking a little ahead when we think about our cost synergies. From a revenue synergy standpoint, and Phil, your question was really how is this being received by our customers? I would say extremely well. Pretty much when we closed the deal, call it a few days in, we hit the road.
I hit the road with Sean Gadd, who runs our legacy James Hardie business. I hit the road with Jon Skelly , who runs the legacy AZEK business. We went to see our largest customers. As we went in, what we wanted to do is first understand their impressions and how they felt about this, which our general response is excitement, but also, okay, what's new? What we wanted to make sure we're bringing to them is value. We do anticipate some early wins with some of our large one-steppers out there, things that we're working through the execution mode right now. I can't disclose those. It would be too early, but we feel very, very confident in some of those wins that we're going to see.
As we think about some of the opportunities that we're seeing with some of our legacy AZEK customers, what AZEK will do in the decking industry is institute an early or winner buy, which is really getting ready for the next decking season starting now towards the end of the year. It's not a pre-buy, it's more of, okay, this is what your shelf is going to look like, here's what we're going to market, here's going to be the new products. What we've done with this winner buy is brought the two teams together and really looked at opportunities that we could have with customers, legacy AZEK customers, to bring in James Hardie products. We're seeing an enormous amount of optimism and potential for that winner buy with those customers.
The last piece when we talk about synergies, and this is the one that we know will take more time, and I think we've appropriately laid that out as we've looked at the phasing of the business, is with our contractor partners. That's the idea of how do we get some of our legacy AZEK contractors, how do we get some of our legacy James Hardie contractors to adopt each other's products. The way this is working right now, because we still have two separate sales teams, is we're handing off leads within AZEK and legacy James Hardie. We're working with the teams to execute upon those leads, and there's an incentive for our sales team to do this. We're hearing story after story and execution after execution of a legacy James Hardie alliance member who does decking, now deciding only to do TimberTech decking.
Those are some of the success that we're seeing out there. Through this whole integration, what we want to make sure we're doing is being as transparent as possible and sharing with you all the wins that we're having. Certainly, the wins are going to be most credible when you see them in the results. To answer your question, we feel very optimistic in early days.
Aaron, correct me if I'm wrong, your guidance is in so many of these wins or potential pickup opportunity on the winner buy side of things, correct, for this year?
Yeah, from a commercial synergy standpoint, we do not have that in our guidance as an assumption.
Okay. Certainly a very dynamic environment with, you know, spring selling season being a little more underwhelming and some destocking. You had to lower your guidance pretty materially. I guess what were some of the big surprises? Perhaps, Rachel, how did you approach forecasting your guidance? It feels reasonably conservative. Did you take a view at some point in time and just kind of assume the rest of the year? Help us unpack how you approached it and how much line of sight you guys perhaps have with your customers and what they're signaling.
Yeah, hey, maybe I'll start out. I think the first thing is you mentioned dynamic, and it certainly is a dynamic time. I think that's a little bit of a caveat as we talk about our guidance here. One of the things I want to make clear is if we look at our legacy AZEK business, that business is stronger than ever. You know, we're projecting low to mid-single digits sell-through. We're going to grow our revenue. We're going to expand our margins. That business is very, very healthy. If we think about our legacy James Hardie business, which is our European business, that's going to perform as expected. As we think about our Australia and New Zealand business, we expect that to perform as expected. Really what we're talking about is our North America legacy fiber cement business. We talked about being dynamic.
As we did that guide in August, we saw some things as it relates to new construction, which we have a very generous exposure to. Also, we took the approach of, as new construction worsens, as large repair and remodel doesn't get better, we were going to take a prudent, I would say, process as a prudent look at our guide out there, Phil. With that said, things do change, right? It's a very dynamic market and it's our job to make sure that we're seeing things, synthesizing them and giving, here's what our best approach is. We thought our guide was really prudent. With that said, also, as you go out into the market, which, not only when we finish our earnings calls, I've been out there in the market pounding the pavement and talking to our customers, a little bit of therapy after an earnings call.
You hear pockets of optimism out there as well. It's our job to make sure we give what we think that we can deliver on, and that's what we did. Rachel, I interrupted you. Please go ahead.
No, it's good context because look, as we think about demand and forecasting demand, a key part of this is we've one of the largest sales forces in the country, right? And in this industry. As Aaron said, I think the right place to start is talking about going out to your customers and kind of what is that environment at the time. We do have a demand forecasting model that we use. That's a key input to it. We also, of course, look at some of the macros. We look at some of the prognosticators out there. We statistically regress and see how things are performing, you know, relative to the market. This is an industry that is quite, it's cyclical. While we do have fairly good visibility for a quarter, as Aaron was saying, our guide actually goes through March. Right?
You really have to embrace a much longer period for us as we're thinking about our guide. As you think about constructing that guide, you really are thinking about that early August timeframe and looking at the data you have at that time. As Aaron's mentioned, it's been quite dynamic out there. I think for a lot of us over the weekend, hearing that terrace may now be illegal. Right? I mean, it's a lot of dynamics that are changing. Again, as we stand back and we think about forecasting that demand, we're embracing a long period and we're embracing the data we have as we were looking at that time.
I guess the question we get asked, and I don't think it's fair because it's a dynamic environment, destock and whatnot, on fiber cement, have you guys reached a terminal value in terms of penetration, right? Just kind of give us some nuggets, why, or confidence where you are in that journey, where the big opportunities are, and how you're going to unlock that.
Yeah. So, you know, we talk about our focus being material conversion. I look at it from a high level of, you know, roughly 80% of the homes out there do not have fiber cement on them. Right? Now you may say, okay, 80% of them couldn't afford it, couldn't qualify for it. Look, we believe there's a high amount of material conversion left from a fiber cement standpoint. I would even venture to say we may be in our infancy if you think about those numbers. There's no doubt that we've had a tremendous amount of success over the last few years. If I think about our penetration of fiber cement over the last 10 years, it's increased almost a point every single year out there.
From a new construction standpoint, we would say about 23%, 24% of the homes that are being built out there have fiber cement on them. As I mentioned before, there's an enormous amount of homes that do not have fiber cement on them. Our focus has been on repair and remodel and single-family new construction. We've made significant progress when we think about the single-family new construction standpoint, where I do believe, and we've talked about for years, and we've been putting resources behind it over the last couple of years, a tremendous amount of opportunity is in repair and remodel. That is going and converting contractors one by one. You think about the hundreds of thousands of contractors out there. It doesn't happen overnight, but I believe that is where our most significant opportunity is out there.
If I think about our penetration just as a business, and these are high-level numbers, so Joe will have to get you the exact ones, but, you know, thinking off the top of my head, if you look at where most of the new or older homes are that need to be resided, and first of all, why do people reside homes? They reside homes either because they have to, or they have a desire for one reason or another. Our best ones that we can convert from a homeowner standpoint is they want better curb appeal. Right? People are residing homes for all different reasons. The majority of older homes out there, the majority of homes are in the Northeast. Then there's a high percentage in the Midwest as well. Our business is roughly, you know, it's under 10% in the Northeast. It's roughly about 10% in the Midwest.
That is where we believe, from a repair and remodel standpoint, we still have significant runway ahead. How do you do that? Of course, you have to have the right value proposition, and you have to have the right product. We certainly have that. We have products, people ask me a lot about affordability of fiber cement, and certainly it is not for everyone. We have a range of products that start with same Plank, which is more introductory price point, all the way up to ColorPlus and different versions of ColorPlus that give resilient, beautiful product out there. The product is key. That is one of the ways that we can, we believe that we can help convert some of these homeowners and contractors. How do we accelerate this?
A big part of the opportunity that we have from the AZEK acquisition is where AZEK has been strong are those areas that I talked about, the Midwest and the Northeast, where I would say from a James Hardie standpoint, we're underpenetrated. I'll just give a little story. Last week, I said, "Hey, I want to be with some customers." I went with my two presidents and I had a regional manager, and we started out, we flew out to Augusta, Maine. We went from Augusta, Maine down to Cape Cod, then we went to Long Island, then we went to the coast of Connecticut, and then we went to the Philadelphia area. The interesting thing as I met with customers is these were loyal, independent AZEK customers that are market makers in those certain areas, meaning they have the relationships with the smaller metro builders.
They have the relationships with the contractors out there. I would just say this, the business that we do with AZEK, with some of those customers, was 10x what we did with James Hardie. The first question I ask our team is, why haven't we gotten after these guys more, right? There is certainly an opportunity, as I sat with those customers, I said, would you be willing to talk about James Hardie? Have a program? How can we be successful together? Absolutely, we would. Part of it really has been our focus, right? As far as being able to do everything at one time, and I've talked about some of the areas that have been our focus, new construction, and we have been in R&R, but really over the last couple of years.
We believe AZEK can help us accelerate this with the relationships with the contractor, with some of these smaller or some of these independent lumber yards and dealers. That's something that we can get after right away, and we already have started the process. Long answer. Sorry.
No, that's great. That's awesome color. I guess, Aaron, when we think about this current backdrop, housing affordability and just affordability in general for a consumer that is stretched, has impacted demand, right? I mean, that is the environment. I think you guys have never, you know, blamed the market. You're looking at ways to grow, right? How do you accelerate growth, right? Whether it's in the retail channel or potentially reducing your costs installed to kind of improve that affordability, just kind of give us a little perspective of your approach.
Yeah, look, Phil, you said we never blame the market. I think in the past we cite the market and we don't want to use the market as a crutch because our job, my job is to make sure we figure out ways to grow no matter what. That is what we are committed to as a team. There are certainly pockets, some of them that I just mentioned out there, that we certainly have the right to win. We certainly should be growing in. I think what you're getting at a little bit, Phil, is, from an affordability standpoint, certainly there is pressure out there. That's what we hear all the time, housing affordability, we need to get it in line. Our builder partners are working to do that, certainly are. James Hardie is not a product that is for everyone. It is a premium product, right?
People pay a premium for it, and we're proud of that. Is there opportunity for us to make it more accessible? Is there opportunity for us to widen our addressable market that we can get after? Certainly, we believe there is. One of the things when you think about a job, and this is roughly speaking when you're doing a siding job, the cost split out is usually the way to think of it is about a third as it relates to materials cost, about a third from a labor standpoint, and then a third roughly when we think about profit to the contractor. I get the question a lot of, if you lower your price, can you sell more? That's not necessarily the case.
The key, when you talk about getting the differential down versus, call it another substrate like vinyl, is how do you reduce the entire cost of the job? That's certainly something from an innovation standpoint, a product mix that we're laser focused on. Too early to talk about specifics, but we have tests that are going on in the Northeast and areas in the Mid-Atlantic where what we're doing is basically having a simplified product lineup, then making sure we're training the contractors in that area, and then piloting innovative install techniques. What we're seeing is that differential that we have versus another substrate, say like vinyl, being cut down in half. That opens the addressable market that we potentially have out there quite a bit. We're excited about that. We think that's a way that we can address and help some of our partners from an affordability standpoint.
Also, Phil, I just mentioned, we have product lines that can fit into what our builder and repair and remodel customers need to be more affordable out there. Those are some of the ways that we're looking at it.
In terms of penetrating into the retail channel?
Look, I mean, certainly it's a big channel. We participate in the retail channel today, as has legacy AZEK. I think as we look at early days, we have to scope out where we have the right to win, where we can bring value to those customers, and then look at the opportunity. I'd just say it's too early to talk to that. We participate today.
Okay. Certainly from an industry standpoint, it's quickly evolving, whether it's the channel where you've seen the likes of Home Depot and Lowe's kind of getting into that pro channel to excel. We've seen manufacturers like yourself get bigger as well and providing a bigger offering. How do you kind of see that market evolving, the industry evolving, and how does James Hardie position itself the next, call it, three to five years?
Really good question. We factored that in as we were thinking about the merger with AZEK. I think what you have to step back and look at is, is that going to continue? I think all of us in this room would probably say yes. We've seen evidence of that over the last two years. It's an attractive space, so yes, we believe that's going to continue. Who are the manufacturer partners and what do they look like, their structure, how are they set up to win as that continues? I think there's a few things. Number one, you have to have leading hero brands. As I started out, I talked about the James Hardie brand. It is number one with the pros. It is the number one premium siding brand with the consumers.
We take a lot of pride in that, and we're going to continue down that path, and we'll continue to invest in the brand. You have to have the brand. We have that with James Hardie. You think about TimberTech. TimberTech is the number one brand from a deck composite and PVC decking standpoint with the pro. You look at what these big retailers are, as the consolidation continues, a big part of the win is going to be ingrained with the pro. How do you get more of the pro customer? We certainly have that with James Hardie. We certainly have that with TimberTech. Bless you. From an exterior standpoint, we have leading brands in James Hardie. We have leading brands in AZEK and Versatex. You have to have strong brands. Number two, the breadth of lineup that matters again to the contractor, to the pro, is very important.
As we went through the brands, we can check off all of those as well. We bring pretty much an entire exterior solution, absent the roof and windows, with James Hardie and with TimberTech. You have to have the value proposition, which in my mind, a big part of that is service. Our sales force now, the combined sales force, is over 500 ft on the street, way bigger than anyone else. As we think about moving forward, we want to make sure that we continue to be the largest sales force because we see the value that brings to our customer partners, but also our contractors. Lastly, as consolidation happens more and more, and some of these customers get bigger, you have to have the scale. You have to be able to supply them no matter what.
You look at our manufacturing facilities around the country, we have localized supply. We think about our customer partners, we're within pretty close proximity to them. I think all of those things add up and are going to matter. I think we are really well set up to service whatever the industry looks like over the next five, 10 years and beyond.
Super. I would love to get your philosophy on how you manage pricing, right? Pretty soft demand environment, you're calling double-digit type declines for volume, but you got 3% of price, price mix. How do you think about price? How do you price your product? Do you look at spreads versus, let's say, vinyl or other hard siding? Just want to give us a little perspective of your approach on price and the pricing power through a cycle.
Yeah, look, I would characterize our pricing approach as being disciplined but thoughtful. When we think about our channels out there, we really price commensurate to value. I just talked about the value proposition that we offer out there, you know, along the value chain from a homeowner, from a dealer partner, and then to the contractor standpoint. It really amounts to pricing for value. Our approach has been roughly mid-single digits out there. I walked through our long-term growth algorithm, which consists of that. Rachel, you want to add anything else?
As you think about our position in the category, we have pretty unique attributes, with fiber cement relative to the other substrates. As Aaron talked about, we're embracing the entire value chain. Homeowner focused, customer and contractor driven is part of our strategy. I think Aaron's outlined some of the value that we try to provide to each part of that value chain. As we think about price, it is reflective of what we can bring across the value of the service. Frankly, also the fact that we have a manufacturing footprint that really spans the entire United States, and really can provide those customers a very quick service. They know they can rely on us. It's an earned right, in our value proposition.
That's great. Part of the surprise in terms of the full year guidance was the element of destocking. Once again, very dynamic environment. As you exit the year based on your guidance, where do you think inventory levels set off for you guys as well as the channel? Going forward, how do you plan on managing inventory? We've seen different iterations of Trex, AZEK approaching that a little differently. You have capacity. Just help us think through inventory more broadly.
Thanks, Phil. In Q1, we did see more of a traditional destock. As we look ahead, though, and we think about Q2 and Q3 in particular, we're really trying to embrace looking at what is the macro and what's really going to be happening in terms of how our customers will position themselves. Will they position more defensively in inventory? As we think about the pace of sell-in versus sell-through, how do we embrace that? Basically, if we are assuming that the market continues to decline, and that our customers take a more conservative position, we've tried to, again, fully embrace that in the guidance. Again, this is something that as we look ahead and we're sitting there in early August, we want to make sure, thinking through March, that we fully embrace that.
Any questions to the audience, actually? Packed house. Please.
Yeah, the question is, what's the biggest pushback customers have on adopting fiber cement? I think the biggest pushback is really our job of working with our contractor partners is clearly outlining the total cost of ownership, right? The proposition there. If you think about, and again, fiber cement is not for everyone, but it's going to pretty much, we have a 30-year warranty on it. If it's ColorPlus we have a 15-year paint warranty on it. It's engineered for climate. Whether you're in the upper Midwest or you're down south, it's engineered for that certain type of climate. It's pest resistant.
The attributes of it go on and on, but even further to that, there's been some studies where you look at realtors out there and you ask them, what's one of the number one things that you can do to your home to improve the resale value? There's all different types of things, whether it's, you know, you put these new appliances in or you do this or that. Really listed, number one is reside your home with James Hardie, right? As you go to a James Hardie home, and I'm probably many in here who might have James Hardie homes or maybe some of your second homes are James Hardie homes, it is a different look, right? It's a beautiful look, but also it lasts through time. I think that is the biggest opportunity we have.
We've been so successful in areas of the country like the South because we've been there for years and we've told the story over and over. It certainly has helped with some of the partnerships we've had with large home builders to get that story out. We have a really unique opportunity for some of those underpenetrated areas to tell that story. As we think about where we're going to put resources and how we can really accelerate this business moving forward, AZEK and the relationships are really going to help us to accelerate the story of fiber cement. I think it is just an education piece, very simply.
All right, guys, I think our time's up. Thank you, Aaron. Thank you, Rachel. Great job, guys.
All right, thank you all. Appreciate it.
Thanks.
That was awesome.