James Hardie Industries plc

Thank you for standing by and welcome to the James Hardy Q4FY22 results call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Harold Wiens, Interim Chief Executive Officer. Please go ahead.

Hello everyone and welcome to our fourth quarter and full year fiscal year 2022 earnings column. I'm Harold Wiens, Interim CEO of James Hardy. On page two, you'll see our standard cautionary note on forward-looking statements. Please note that this presentation does contain forward-looking statements and also the use of non-GAAP financial information. Let's move on to page three, where you will see our agenda and speakers for today. I'm proud to be joined by our CFO, Jason Mealy, and our North America President, Sean Gabb. Today, we'll start the presentation with a brief update on the significant transformation James Hardy has undertaken. Jason will then discuss the fourth quarter and full year financial results, And then Sean will provide an update on our North American strategic focus and how he and his team plan to deliver a strong fiscal year 2023. Finally, Jason will return to conclude with a discussion on guidance. Let's turn to page five. Our strategy remains unchanged, and we expect it to continue to drive profitable growth globally. It is embedded across all three regions and all 5,000 of our team members. Underlying our strategy is our commitment to zero harm and ESG. Our strategy starts with focus and strong execution around our three foundational initiatives, which are lean manufacturing, customer engagement and partnership, and of course, supply chain integration. Over the last three years, it is these three foundational strategic initiatives that drove our transformation. With these initiatives now fully embedded in our company, we're focused on continuing to drive profitable growth globally through the following three strategic initiatives. First, marketing directly to the homeowner to create demand. second, penetrating and driving profitable growth in existing and new segments, and third, commercializing global innovations by expanding into new categories. Over the next few pages, we will highlight just how different of a company James Hardy is today compared to just a few years ago. This change was driven by our strategic transformation and we enter fiscal year 2023 as a global company that has consistently delivered growth above market and strong returns. Let's turn to page six. Four years ago, we were a regional business with $2 billion of revenue, delivering 66 cents of earnings per share. In contrast, We are now probably a $3.6 billion revenue global business, delivering $1.39 of earnings per share. We have also increased our operating cash flow from $309 million to $757 million during this period, and that enables us to continue to invest in growth. Our shift to a truly global business of scale began with our acquisition in Europe and was then accelerated through the successful implementation and execution of our global strategy. Our execution of HMOS, which means Hardy Manufacturing Operating System, helped to ensure consistent production within our network of plants, and it is the cornerstone that enabled us to increase our long-term margin ranges in May 2021. We also engaged with our customers and partnered together to deliver increased value for them and us as we drove growth above market and had a higher value product mix. And lastly, we integrated our supply chain to ensure that we could provide the right products at the right time for our customers and then in turn their customers. Every employee, team and division that contributed to our incredible transformation and growth during this period and I want to thank them all for their contributions to our success. I will now ask Sean and Jason to discuss this transformation for each of our regions.

Thanks Harold. Let's turn to page seven. In North America, we became a significantly larger and more profitable business over the past three years. We're now a $2.5 billion revenue division with adjusted EBITs close to three-quarters of a billion U.S. dollars. We have step-changed our adjusted EBIT margin, increasing it by 600 basis points during this period. It is interesting to note that the net sales and EBIT results of just the North American business in fiscal year 22 represents a larger and more profitable company and the entire consolidated James Hardy Global Company of fiscal year 19. As we increased our scale during this time, we did so in a manner that drove leverage whilst we continued to invest in future growth, primarily in people, capability, and marketing. Over a three-year period, we delivered a 15% CAGR on net sales, while delivering a 24% CAGR on adjusted events. Later in the presentation, I will discuss our approach deliver another fantastic result in fiscal year 23. Jason will now take you through APAC in Europe.

Thanks, Sean. Let's turn to page eight. Our Asia-Pacific team has also delivered a remarkable step change in performance over the past three years and a significant change in the scale of the business. A 58% increase in adjusted EBIT on 16% volume growth is excellent leverage across this three-year period. More importantly, the business continues to grow and scale, and at now over 200 million Australian dollars of the EBIT, it represents a substantial business that can significantly impact the group results. Similar to North America, the adjusted EBIT margin expansion is significant at 570 basis points, and the team has delivered at the top end of the new long-term target range two years in a row. Turning to page nine, let's discuss Europe. In February of 2019, shortly after the acquisition of Firmacell, we laid out long-term targets for our new European business, as well as short-term guidance to measure our success against. Our long-term targets remain unchanged. In our 10th year of operations in Europe, post-acquisition, we expect to be a €1 billion net sales business with an EBIT margin over 20%. And over these past three years, the European team has delivered against the short-term targets we laid out in February of 2019. The first target we set at that time was a net sales CAGR of 8% to 12% during the three-year period ending with fiscal year 2022. We delivered a 10% net sales CAGR right in the middle of the range. The second metric we committed to was exiting fiscal year 2022 with a 14% EBIT margin. You'll see on this chart we delivered 12.9% EBIT margin in fiscal year 2022, which is below the original target of 14%. However, if you remove the impacts of hyperinflation in fiscal year 22, the team would have delivered in full year EBIT margin 220 basis points higher than the 12.9%, which is well above the initial target of 14% we set out in February of 2019. The European team has integrated tremendously well into James Hardy, and they have a clear strategy to continue to drive growth and margin expansion into the future. Let's turn to page 10, which is the last slide in this section. As you have heard Harold, Sean, and I discuss, we believe as we enter fiscal year 23, we have a global company that is enabled for continued growth. Through the acquisition of Europe in April 2018 and the execution of our strategy to transform our business these past three fiscal years, we have step-changed our financial profile and believe we have the right go-forward strategy to continue to deliver growth above market with strong returns. I want to spend a few minutes discussing the middle section of this slide. As you can see here, the financial strength of the global organization has changed significantly during this three-year period, and it is a key factor in enabling our future strategic plans, which are articulated on the right of the slide. First, we have delivered a step change in our P&L performance and scale. Global net sales has increased to 3.6 billion U.S. dollars in fiscal year 22. Adjusted net income more than doubled in the past three years to 621 million U.S. dollars. We also raised our long-term EBIT margin ranges in all three regions in May of 2021. And in fiscal year 2022, we delivered at the top end of those ranges. Second, we have also delivered a step change in our operating cash flows, growing from $304 million in fiscal year 19 to $757 million in fiscal year 22. And over the past two-year period combined, our operating cash flow has exceeded $1.5 billion. Third, we have significantly improved our balance sheet over this period. our leverage has decreased from 2.4 times on March 31, 2019 to 0.8 times as of March 31, 2022. And we decreased our net debt from $1.3 billion at March 31, 2019 to $752 million as of March 31, 2022. And fourth, the AICF also now has a much improved balance sheet. As of March 31, 2019, the AICF had cash and investments of $81 million, and as of March 31, 2022, they have $350 million in cash and investments. And as we discussed last quarter, the top-up calculation will apply in July of 2022, and we currently estimate that payment will be 19% of operating cash flow, a significant change from the historic 35% rate. Our global team has created an incredible platform upon which to enable our future growth, and we believe we have the right strategy to continue to deliver growth above market and strong returns as we move into fiscal year 2023 and beyond. We have spent a decent amount of time discussing our three-year transformation. Let's now shift to page 12 to discuss our fiscal year 2022 results. In the fourth quarter, the global team continued to deliver growth above market and strong returns with all three regions delivering double-digit net sales growth. The global team's execution resulted in global net sales increased 20% to $968.2 million for the quarter. For the full fiscal year 2022, net sales increased 24% to over $3.6 billion U.S., Global adjusted EBIT increased 30% to $225.3 million for the quarter and $815.6 million for the full year, both representing a 30% increase over the prior corresponding period. Global adjusted net income increased 42% to $177.5 million for the quarter and was up 36% to $620.5 0.7 million for the 12 months. All of our businesses performed extremely well in fiscal year 2022. And this operational performance would have delivered an adjusted net income result toward the top of our adjusted net income guidance range of 620 and 630 million US dollars. However, higher general corporate costs in the fourth quarter resulted in adjusted net income of 620.7 million US dollars. Full-year operating cash flow was strong at $757.2 million, and adjusting for the one-off U.S. CARES Act tax refund in fiscal year 21, operating cash flow was up 5% versus the prior year. Let's move to page 13 to discuss the North America results. In the fourth quarter, the North America team delivered net sales growth of 25% to $694 million U.S., the team delivered strong volume growth of 13% and exceptional price mix growth of 12%. The price mix growth was delivered through continued execution and driving high-value product penetration in close partnership with our customers. In addition, with continued execution of our foundational initiatives, we were able to convert the top-line results into a strong bottom-line outcome, with adjusted EBIT increasing 35% to $206.1 million U.S., at a margin of 29.7%. For the full year, net sales increased 25% to just over $2.5 billion on volume growth of 15% and price mix growth of 10%. A key contributor to price mix growth as well as margin performance was delivery of a 27% increase in ColorPlus volumes in fiscal year 2022 versus fiscal year 2021. Adjusted EBIT was $741.2 million for the 12 months, with an impressive adjusted EBIT margin of 29.1%. The team delivered a 20 basis point improvement in adjusted EBIT margins for the full year. This was achieved through continued lean manufacturing improvements, combined with driving a high-value product mix, helping to offset cost inflation and significant investment in future growth through marketing, innovation, and talent capability. Let's move now to page 14 to discuss Asia Pacific. The Asia Pacific team delivered fourth quarter net sales growth of 23% to $200.5 million. The APAC business continues its step-change execution in driving high-value product penetration with price mix growth of 11% in the quarter with volume growth of 12%. In the fourth quarter, execution on lean manufacturing and a focus on high-value product mix helped to offset the inflationary environment, leading to strong adjusted EBIT growth of 21% at an adjusted EBIT margin of 26.3%. It was a strong fiscal year for the Asia-Pacific business, with full-year net sales increasing 22% to $777.7 million, and adjusted EBIT improved 23% to $217.4 million, at an outstanding margin of 28%. Turning now to page 15, let's discuss the European results. In Europe, during the fourth quarter, net sales increased 10% to €115 million and adjusted EBIT increased 3% to €16.1 million. Quarterly net sales growth was delivered through the team's continued execution of the high-value product penetration strategy as well as a January 1st, 2022 price increase, which led to price mix growth of 14%. Fourth quarter volumes decreased 4% as we strategically shifted away from low margin partnerships. There was some minor reduction in demand in the period, and we were comping a prior year fourth quarter, which included some of our initial new innovation VL plank stocking positions. Encouragingly, fourth quarter adjusted EBIT margin returned to expected levels, at 14%, as we had indicated they would when we spoke three months ago. Fiber cement net sales increased 18% in the quarter, while fiber gypsum increased 9%. Full-year net sales increased 20% to 420.5 million euros, with an impressive 39% increase in fiber cement net sales and a 17% increase in fiber gypsum net sales. Adjusted EBIT improved 51% to €54.2 million at a margin of 12.9%. We are particularly pleased that European EBIT margins have improved in line with our expectations set three years ago. Excluding the impacts of hyperinflation, the full-year EBIT margin would have been 220 basis points higher in fiscal year 2022, exceeding our original target of 14% set back in February of 2019. As you know, natural gas is a key input cost for the manufacturing of fiber gypsum, and with prices remaining high, the European team has taken another price increase, effective on April 1st, 2022. Now that we are able to travel more freely again, I had the pleasure to be in our European business over the past few weeks, along with Harold and Ryan Coccolin. I want to thank the team there for the excellent job they've done in integrating into James Hardy, hitting all of the targets we set together over these first four years, and positioning the business to deliver on our initial 10-year plan of becoming a 1 billion euro business with over 20% EBIT margins. We are extremely encouraged by the success to date and the strategy the team has in place to deliver on our long-term targets. I will now turn it over to Sean Gant.

Thanks, Jace. We're going to now shift our attention to the how, meaning how we will continue to deliver growth above the market and strong returns in fiscal year 23 in North America. Let's turn to page 17. Looking back at fiscal year 22, our outstanding performance in the North American business was driven by our continued strong execution of the strategy across all components of our business. We delivered net sales greater than 2.5 billion U.S. dollars, an increase of 25% over last year, and 741 million U.S. dollars of EBIT, an increase of 26% over last year. We expect similar outstanding performance in FY23. Specifically in North America, we expect net sales growth between 18% and 22%, while maintaining strong EBIT margins of between 30% and 33%. The significant net sales growth in FY23 and corresponding strong EBIT margin will be a direct result of continuing to drive high-value product mix in the region. Specifically, as you see in this chart on the right, in fiscal year 23, it will be driven by continued penetration for high-value ColorPlus products in the repair and remodel segment as we drive more demand by reaching our consumer more efficiently and effectively. We continue to remain focused on innovation as it will be critical in our future growth in FY24 and beyond. But at 1% of our product mix in fiscal year 23, it will not be the key to delivering differentiated results this year. Before we dive deeper into how we will deliver fiscal year 23, I want to announce that we did take a second price increase for this year. and will become effective on June 20th, 2022. With the timing of the second price increase and how it will come into the market, we expect the full year impact of both the January 1st price increase and June 20th price increase to improve our average net sales price by approximately 7% for the full year. Our views on mix have not changed since the last time we spoke in February. Thus, we expect the price mix growth for fiscal year 23 to be between 9% and 12%. We expect the second price increase to help improve our overall top-line results while offsetting cost pressures, enabling us to deliver the EBIT margin range of 30% to 33% for the full year. Moving to page 18 to discuss at a high level the strategic initiatives that will drive our continued growth in fiscal year 23. First, we start with the capacity expansion. As you know, we have Prattville sheet machines 1 and 2 continuing to ramp up, and we now have Somerville back online and ramping up. So we feel very comfortable that we'll be able to continue to main supply to meet demand. Ryan Kukala's team continues to ensure that we are expanding our global capacity in line with market demand. And Ryan will join us for Q&A if you have any capacity-related questions. Second, HMOS. Our plant network team continues to do an amazing job of continuous improvement. I think a lot of you have met Dave Kessner over the years, who leads North America Manufacturing. Here's a really talented group of plant managers who will all continue to develop strong teams inside our plants. The team plans to deliver improvements in net hours and roll throughput yield. As you know, that is our cornerstone to enabling continued EBIT margin expansion. Next, FI 23 will be driven by engaging and partnering with our customers. Earlier in the presentation, we talked a lot about financial changes over the past three years. But in my view, the most significant increase is in our relationship with our customers. and the strong partnerships we have created. We have now aligned goals with our key customers in how much we plan to grow. We have an industry-leading sales team and customer relationships team led by two industry veterans in John Madsen and Johnny Koch. Our strategic partnerships continue to grow stronger and will be critical in enabling us to drive growth in fiscal year 23. Lastly, we'll continue to market directly to the homeowner to drive demand of high-value products. In fiscal year 23, will have a heavy focus on driving ColorPlus growth in the repair and model segment. It's important for you to note that when we create this demand, we are driving it back through our customers, thus helping them grow faster as we grow faster. Let's turn to page 19, where I want to share some of our marketing results from FY22 and our marketing plans for FY23. The 360-degree marketing campaign that we began in earnest last spring has so far delivered significant positive results in our three targeted northeast metro regions. At an overall level, this program generates over 1.4 million new web sessions, an increase of 505%. More than 33,000 marketing leads, an increase of 209%. Over 6,000 sales leads, more than double over the prior corresponding period. More importantly, the market program is delivering increased demand and sales. In the three regions where we implemented the marketing campaign, we saw our volume growth outpace the comparable color plus regions where we did not execute the campaign by 11%. To be clear, we are seeing substantial color growth in all markets. However, in the markets where we have been running the campaign, color is growing 11% faster than those markets. We're very encouraged by these results as well only in the first year of the campaign. Simply put, the combination of our marketing programs driving more leads along with our efforts to partner with our customers has led to more volume growth for our customers and for James Hardy in our targeted regions. As a result of the success we're seeing in the marketing program, we're expanding to three additional R&R ColorPlus markets in FY23. We believe our campaign, along with our continued focus on customer partnership, will help drive the top-line demand for high-value product mix and will enable us to deliver a net sales growth guidance of 18% to 22%. Before I hand back over to Jason to discuss global guidance, I wanted to just briefly discuss how I see the year progressing for the North American business. We feel really good about our full-year target for net sales and EBIT margin, but I do want to flag that quarters will not be identical. The first quarter will be the most significant outlier from the rest of the year. Without the benefit of the second price increase and with higher costs due to inflationary pressures, The continued investment in growth initiatives, including some people actions taken to drive retention, we expect Q1 EBIT margins to be the low point of the year and below our full year range. From there, we expect EBIT margins to improve sequentially each quarter as our second price increase begins to take effect on June 20th and ramps into those results until full realization at the start of Q3. We then have our standard annual price increase on January 1st, 2023. Again, we are confident in the full year targets of Net Sales growth of 18% to 22% and EBIT margin of 30% to 33%. We are a growth business and we are investing in initiatives that will continue to drive our growth in FY23 and beyond. The team and I are excited about the progress we have made in FY22, but even more excited about the opportunities ahead of us in fiscal year 23 as we continue to partner with our customers to drive growth above market and strong returns. I would now like to pass it to Jason, who will summarize our global guidance.

Thanks, Gad. Let's move to page 20 for an update on fiscal year 2023 guidance. Today, management reaffirms full year fiscal year 2023 adjusted net income guidance of between $740 million and $820 million. The midpoint of this guidance represents an outstanding 26% increase relative to FY22. Further, as Sean just mentioned, in North America, we are providing guidance for net sales growth of between 18 and 22% for the full year, fiscal year 23, while delivering an excellent adjusted EBIT margin of between 30 to 33%. At the beginning of this call, we discussed our significant transformation and our financial strength as we enter fiscal year 23. We described a step change in our P&L performance, a stronger balance sheet, a stronger AICF balance sheet, and operating at a substantially larger and global scale. We believe this financial strength, our foundational strategic imperatives, and the right go-forward strategy have us poised to continue to deliver growth above market and strong returns. I'll hand it back over to Harold for some closing remarks. Thanks, Jason.

A few last comments. I want to thank all 5,000 of our employees who helped to deliver another fantastic year. It is with your hard work and dedication that we are able to deliver value to our shareholders. I've had a long career, and I'll tell you this is the best team I've ever been associated with, and I appreciate everything you do for ARTIE. Lastly, I wanted to provide a brief update on the CEO search. I'm pleased to report that we have met some excellent candidates and I believe we're on track to have a permanent CEO in place in line with our initial expectations which were set in January. At that time, we thought it would take place in about six to nine months. That looks to be realistic. The board looks forward to providing you with further information when the time is right. We have now concluded our prepared remarks. Operator, please commence the Q&A portion of today's meeting.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up your handset to ask your question. A reminder to please limit your questions to one per person with one follow-up question. Your first question comes from Peter Stein with Macquarie. Please go ahead.

Good morning, Jason. Sean Harold, good evening. Thanks very much. I just wanted to drill down on the ColorPlus numbers and particularly the contribution made that you highlighted, Sean, on page 19. Am I correct in thinking that that 11% uplift in sales performance in those three metros would not have made a particularly big contribution to the 27% overall. So, you know, ColorPlus seems to be doing exceptionally well across markets. I just wanted to get a little bit more of an understanding of what you're seeing from a demand perspective, from a competitive perspective, and what's resulting in that strong performance.

Thanks, Peter. I will say that generally, color's running pretty well across North America, but particularly, obviously, in the markets where paint costs and where we go up against vinyl, so Midwest, Northeast, You're right in that those three regions are relatively large, but we've still got lots of headroom in all the markets in terms of color. The 27% increase in color was kind of what we were planning for, so we do like where it's going. The order file will tell us that we're expecting that to continue. Our target for this year would be another 25% increase in color. And we do expect, as we expand our marketing campaign, for that to continue to drive further growth. Obviously, we know it takes a fair amount of time for our consumer to, once she engages, to actually complete the project. But we feel good about what's happening in those markets, good enough that we want to expand, and we'll start to see more benefit in the year relative to the work we did last year. So hopefully that answers your question.

Thanks, Sean. Could I sneak a follow up just on the data? Have you seen any change in your in the conversion rates. Presumably, they're going up generally because you're executing quite well around your marketing. But I'm just curious whether there's been any drop-off in some of the data in the context of what we're seeing in the market at the moment around rates and so on.

Yeah, no, we have not seen any of that yet, and nor do we plan to. I think the backlog's relatively large in repair and remodel. Certainly when you speak to our contractors and our customers, their backlogs are more than double what they traditionally are. And they will tell you that they're not getting cancellations. And interest rates for a restart aren't really that big an impact. At least we don't believe it is. And so obviously people seem to have a fair amount of cash and we haven't seen that drop off. In fact, we think we will continue to see the growth.

Thanks, Sean. Appreciate it.

Thank you. Your next question comes from Keith Chaw with MST Marquis. Please go ahead.

Good morning and evening, gentlemen. Sean, you seem fairly, I guess, positive at least about the near-term outlook and your comment around the backlog for remodelers being double in some case what they usually are. Can you give us a sense of how you're tracking in the first quarter, at least from a top-line perspective? you just mentioned, you know, the margin progression through the year, but can you give us a sense of, you know, volume versus price, what you expect that mix to be within your revenue growth assumptions for FY23 and how you've been tracking in the quarter to date on both volume and price?

Yeah, sure. Sure. I will tell you, as of like yesterday, Keith, basically our order file is about 10% up so far. So that's very encouraging. And in terms of, you know, our net sales, you know, we think the volume, obviously, we're indicating price is going to be, net price will be about plus 7%, and then we're getting into our net sales of 18 to 22. So, you know, volume will be double digits. Growth year over year is what we predict.

Just to clarify real quick, so we indicated on the call, Keith, price mix growth of plus 9 to plus 12 for the full year. We're on track for that in the first quarter. And then the 10%, Sean mentioned, were up 10% volume year-to-date in the order file.

Can I ask a follow-up on the other regions being APAC and Europe? Obviously, Europe's in a bit of an unfortunate situation at the moment. Volumes were down in the period. What your expectations are for Europe and also for APAC going forward, particularly given the APAC margins looked a bit softer in the period. Any color around that would be very useful. Thank you.

Yeah, thanks, Keith. I think you saw, you know, margins impacted in the fourth quarter by inflationary pressures in all the businesses. So obviously pricing actions as we move forward will help. APAC, we're expecting a strong result for the full year. We're not giving guidance for every region, but the business is operating very strongly. Similar to the U.S., we see, you know, backlogs for construction and repair and remodel, so we see strengths there. EU, as you flagged, unfortunate circumstances. Q1, we expect probably a flattish volume, maybe down slightly as the conflict continues. And we are comping again, similar to the fourth quarter, some initial build of inventory positions with the VL product. That happened last Q4 and last Q1. But we will continue to drive a very strong price mix in that region. and we'll expect strong net revenue growth throughout the year and strong EBIT growth in Europe as well for the full year.

Thanks very much, James.

Cheers.

Thank you. Your next question comes from Andrew Scott with Morgan Stanley. Please go ahead.

Thank you. Sean, this is probably a question for you. Great job on Mix so far. I'm just interested in your thoughts view on what sort of the cadence and the runway looks from here if I'm right reading it correctly it sounds like you're not expecting the the mix benefit to to be as strong in the 23 year and I just sort of as I think forward you've you've done a great job uh converting sand plank to hardy plank but there's only so much runway there and maybe the color conversion is a bit harder so can you talk about how much runway you think you've got on mix and does it get harder from here

Yeah, no problem, Andrew. So, yeah, certainly the same blank timing, you know, we start to lap that in the Q1, so that comes off. And so that's obviously going to slow the rate down. But because of the pricing of color today, if we hit our penetration, which we believe we will for this year, you know, we're going to end up with the price mix component between 9% and 12%. So we still feel like it's got, the colour can drag it up. We've also got products like Trim, Aspire, those products all obviously are accretive, and so we're driving those. And to be honest, colour's growing faster than the rest of the business, so we do feel good about still having a fairly decent runway for this year with regards to price mix.

Okay, thanks. And then just on that stem plank to hardy plank conversion, how confident are you that you can keep that if we do get into an affordability-focused market, particularly with the big builders. I would have thought there's going to be some people knocking on your door asking to trade back down.

Yeah, so I've said this before. I like Semblanc. It is a fighter brand. It certainly got out of hand, and so we've reset the brand. It's now down to five SKUs, so we like where it's at. It's truly a fighter brand. I don't envisage us having to open it up to any builders, but if we feel like there's a competitive threat, I'm not afraid to use it and utilize it. But I don't, at this point, envisage this going to happen this year.

Yeah, I'll just add, Andrew, we're at a point now where 65% of our business is repair and remodel. And as Sean mentioned, we intend color to grow faster than the rest of the business this year, which means we're continuing to grow faster in repair and remodel. And Simplank's not a product for repair and remodel. So while Sean's not afraid to use a fighter brand, it's not as big of an impact as it may have been 10, 15 years ago.

I completely agree. Thank you, gents.

Thank you.

Thank you. Your next question comes from Simon Thackeray with Jefferies. Please go ahead.

Thanks very much. Good morning, good evening, guys. Very helpful, Sean. Just in terms of your price mix for North America, 9 to 12, and your colour plus expectations for another 25% year on year. So just looking against the net sales growth of 18 to 22, am I right in assuming that colour plus is a pretty significant part, obviously, of that 9 to 12 price mix? And then to your comment earlier about first quarter margins being below the range for the year, given you had sequential improvement in margin in North America. What is the actual expectation for margin in Q1, 23?

Yeah, okay. So I'll start with the first part of the question, Simon. So yeah, the majority of our price mix is going to come through a drive towards colour. So that's correct. Hence the investment in repair and remodel. and the investment in the consumer. So we'll continue to drive that, and we believe that will go quite strong, and that will be what's pulling up our price mix for sure. And we get, obviously, the benefit of lapping sand planks. We have one more quarter of that, and then at that point, it's all about color.

OK, and then just in terms of the margin? As far as 9 to 12 points of price mix, seven of that is embedded with the price. which was taken across all products, not just Color Plus. And then we're not going to give specific guidance margins by quarter, but we'd expect it to be in the high 20s.

Okay, thanks, Jason, but it's obviously a step down from fourth quarter, which is understandable to get to those numbers. And then just a real quick follow-up question.

Primarily driven, you know, as you know, by inflation quarter over quarter, freight, pulp, you know, pretty much across everything. And then we'll sequentially see it go up through the year and for the full year deliver in the 30 to 33% range.

Okay, no, that's helpful. And Jase, while you're there, just the quick follow-up question was, with the consumer marketing campaign, we talked a couple of years ago about a level of investment. Can you give us a guide on the level of investment that has gone into digital marketing and marketing generally and what the guide for 23 is? Yeah, so...

We would have talked about it before, kind of a 60, $65 million number last year. It probably ended up about 50 to 60. Now, some of that was just shifting dollars from things we had done in the past. And then we'll go up from there this year as we're extending the program into three more regions. But we're comfortable with that. It might be about a 20% increase from where we were this year. But as Sean showed on page 19, we're seeing the results we want to see. And so we're going to continue to invest in growth. And that's part of Q1 as well, Simon. I mean, we're a growth company. We are investing in growth through quarter one and throughout the year to drive the future growth we expect. Excellent. Thank you, gentlemen. Cheers. Thanks, Simon.

Thank you. Your next question comes from Peter Wilson with Credit Suisse. Please go ahead.

Thank you. Because I first get a comment on the state of the Europe business, the team size, morale, the cost base. And I ask it because FY22 SG&A went down 400 bps as a percentage of sales on top of a 600 bps decrease the year before. So I'm just wondering effectively kind of how much you've stripped that back and how sustainable it is.

Yeah, morale's high. Like I said, me and Ryan and Harold were out there Two weeks ago, teams in good shape. Yeah, I think SG&A has a percentage of sales going down. As we entered COVID, we definitely held the line on SG&A spend, but it wasn't a massive reduction. It's them driving the top line that's delivering that. So I think if you go back to February 2019, you know, we said a big part of the acquisition is we're acquiring the right team. You know, they had representation in all the key countries we wanted to be in. They had a strong team based out of Germany. That's still the case, and it's driving that top line result that's given us the leverage across the SG&A base. That said, we will invest in SG&A in that business fairly significantly this year, just like the other two businesses, talent, marketing, et cetera. So the team's good, high morale, and they have the right strategy to move forward. But you'll continue to see, I mean, if we deliver on our targets towards the billion as a percentage of revenue, I wouldn't be expecting SGA to increase.

Okay, good. And one for Sean, if I could, on North America. The second price increase, can I ask whether that was a difficult decision? Because as I understand it, it is a fairly large departure from your typical commercial approach, which is just your annual price increases and not to do cost plus pricing. So just wondering kind of how you thought about the decision and whether you think there might be some future repercussions from changing your commercial approach there.

Yeah, so certainly, we thought about it quite hard. Obviously, you said that we typically price once a year, and they're usually normally reasonable price increases. You know, I guess the way I describe it is this price increase, I ended up talking to all of my key customers. We're talking about how they were going to see and get through the inflation And we talked about what's the best way they can deal with it. And we gave options, and they were the ones that actually recommended to us to take the price increase. So one of the benefits of having strong partnerships with our customers, we're able to have good conversations like this. And so when you ask me about repercussions, I don't see them being any. They would have informed me that price increase is right, and so we talked about the size of the price increase. We landed on that as well. So we did that in conjunction with our partners.

Okay. Why would a customer want a price increase?

Because, well, one, it makes them more money, and they've got the same inflationary cost, and certainly freight. Freight for them is just a bigger component than for us, so it helps them deal with the inflation that they see.

Yeah, I think one thing to remember, Peter, our customers are selling product into the market, and we're creating demand for them. So when Sean was talking about our marketing campaign, if you think about some of the regions, say the Northeast, we're spending money marketing to pull revenue back into our customers, and they're taking a margin on what we sell to them. So it's a win-win.

Okay, got it. Thanks.

Thank you. Your next question comes from Lisa Huynh with JP Morgan. Please go ahead. Oh, hey morning team.

I guess I had a question on transport anecdotally, which has been a bit more disrupted over the quarter, I guess. Can you talk about whether you've had any issues on the whole with the freight and just given how that's compared to the pier set as well, and whether from an execution standpoint, the customers are happy?

Yeah, from the North American perspective, you know, we are definitely working harder to lock up the trucks and the rail cars that we need. But we haven't seen any disruption. We're paying more for it, but we haven't seen any disruption. We continue to get feedback from our customers that our flow to them is one of the better ones in the industry. So we haven't seen any disruptions, but we are working harder at it.

Okay, and I guess as a follow-up, you know, just given how fuel surcharges and the cost of freight has risen over the quarter, is it safe to say that freight's a larger bucket of costs now than, say, you know, items in the past like pulp?

Freight and pulp would be the top two. And labor. Okay, sure, thanks. The three of them are growing in proportion to what proportion they would have been five years ago.

I guess, would you say freight's larger than pulp now? I guess was what I was asking.

They're pretty close, Lisa. We're not going to give specific numbers for our input costs, but the three of those items are by far the largest three components of our copy.

Sure, thanks.

Thank you. Your next question comes from Daniel Kang with CLSA. Please go ahead.

Morning, everyone. Sean, I just wanted to confirm the second price hike. So I understand the first one was a 5% price hike. Can you talk us through the second price hike, the actual level, and any potential lags or risks? I guess you talked about the risks before, but any potential lags that may come through from the effectiveness of the price hike?

Yeah, so the price increase was essentially a 4% price increase. It goes into effect, like I said, on June 20th. Now, it will lag because, obviously, we've got orders on our order file that have sort of backdated. So it's going to come in. You'll start to see full effect of that by the beginning of Q3. So it will lag over time, and it will net out somewhere around 2%.

the year okay great and just follow up if I may on the I guess the architectural range recently launched and well received by the market do you expect much contribution in the FY 23 year and I guess the follow-up to that is when do you expect a more meaningful contribution from from that range yeah right now from FY 23 I see that pretty much as us continuing to learn and do some test sales we are we are

going to be expanding where it's available throughout the year, and we're going to continue to do, like I said, our test sales and get our pricing right and our value proposition dialed in. To be honest, when you think about the future, I think we're starting to see something meaningful towards the back end, second half probably of FY24 and then into FY25. Thank you, Gus. Thank you.

Your next question comes from Sam Sow with Citi. Please go ahead.

Thanks. Evening, Jason, Sean. Just on guidance, backing out the price implies, I guess, growth above the market towards the high end of your old targets. I guess, is that fair? And just on that PDG part, is there factors to consider if the market index is a bit softer or are you comfortable that's relatively locked in?

Yeah, I guess I haven't thought about PDG for a while, but I'll tell you that we are taking share, and we believe we'll continue to do that. So we like that. And you said your second part was if the market softens. Again, repair and remodel looks pretty robust for us, so we don't see us necessarily giving up share, and we've got some capacity coming on that will enable us to obviously continue to grow at the rate we like. From my perspective, I'm feeling pretty confident that we'll continue to see what you term as PDG, but PDG in that range for sure.

So, Izzy, and I guess just on marketing directly to the homeowner, could you perhaps talk about that lag between the website visits and the 11% colour plus volume growth? Because it's kind of hard to understand those two periods you've disclosed there. And following up to that, just what regions you're planning next? you know, timing inside?

Yeah, so, I mean, the lag, in reality, there is a significant lag. Like I said, it's sort of 12% to 18%. Now, that's on average. So you can imagine there's consumers right at the bottom of the funnel about to make a decision, and we're intercepting them, and they are changing their decision. So it isn't like a straight formula for us, but we are seeing the increase, and the increase isn't sort of a one-month, big spike, it's been over a period of time, so we feel good about that and we do believe we're impacting the decision maker at the right time. Now there's some people obviously who are still in deliberation, some consumers in deliberation that we will continue to influence through our marketing campaign, so that's kind of how I think about it. We are trying to compress the path to purchase, but that is... a fairly long journey to get it down, but we feel good that we are continuing to learn. We are definitely tracing consumers from the point they get to our website all the way through, so we're getting some good data there, but nothing that I want to disclose yet. And then from an expansion perspective, we're going to be expanding into D.C., Baltimore. We're going to expand into Chicago, and we're going to expand into Minneapolis. And it'll be... sort of starting in Q2.

And so if you take those 12 to 18 months that you're talking about, then those 1.4 million website visits to March 22 really shouldn't flow through till this year. And the 11% really was old, old marketing.

I wouldn't say that for sure because when I look at the, again, when you think about 12 months, that's an average. So there are some consumers that do go through this funnel in about two months and some that go through in 18, 24 months. So I don't think that's accurate. I think it's a fair mix. I don't believe a marketing was doing that great before we started this campaign and this campaign is really strong. Now, I will also tell you that together with our customer. So we work pretty feverishly in those markets to make sure that when Christine, our consumer, is saying yes, she wants to go with Hardy, that we've got contractors ready to actually say yes to her and then obviously get it back to our customers. And so that link is what's driving, in my mind, a lot of the incremental growth. Just put it in perspective, we've signed up in those three regions about 400 contractors, new contractors who hadn't done Hardy before into the system.

Great. Thanks for that. Appreciate it. No worries.

Thank you. Your next question comes from Lee Power with UBS. Please go ahead.

Hi, James. You're obviously continuing at the benefit of lean. I mean, you have a $340 million savings target out there globally for lean. Can you just give us an idea of how we're tracking against that target?

Yeah, we saved over $215 million globally, so it continues to deliver savings. More importantly, also delivers capacity. And then as Sean mentioned on the call, the cornerstone of what allowed us to raise our margin ranges back in May of 2021 and gives us confidence in providing margin range guidance. You know, the way lean has added stability and consistency into our plants has been huge for us, and we're on track with the savings. Yeah, we're on track with the savings. It's over $215 million.

Yeah, thanks. And then, Sean, you just obviously talked about the visibility in the pipeline before R&R robust. Can you just give us an idea of how long the backlog is that your customers are talking about and maybe how much visibility you have into the channel now?

Yeah, so from an R&R perspective, you know, contractors are talking about sort of 8- to 12-week backlogs, where they're typically 4-6. So that's sort of the... that they've seen. Um... And obviously, as we continue to work with our customers, our dealers and our distributors, we've started to see some visibility from them. Still relatively strong visibility, which is good for us. So we know it kind of gives, as Jason said, it makes us feel fairly confident with our numbers. It also enables us to get our factories set up to make the right length of runs to be able to deliver the right products in the right time. The visibility for us is one of the reasons why lean is starting to pay off the way it does.

Okay, thank you.

No problem.

Thank you. Your next question comes from Brooke Campbell Crawford with Barron Joey. Please go ahead.

Yeah, thanks for taking my question. Just on slide 17, the stacked bar chart, looks like the gray bar there, the low value products for FY23 is a couple of percentage points lower than that same chart you provided in 3Q. So clearly doing well on sort of moving your customers up to price points, but just keen to understand really what's changed over the last couple of months because it looks like it's a couple of percentage point change if this chart is to scale.

Yeah, so obviously from a Semblanc perspective, I think you guys are around all the moves you've made there. Inside of the Grape Bar is also a backer. And we're pushing way more interiors into retail. So we're obviously trying to build a retail channel that's stronger than it is today. And part of our strategic relationship with them was to ensure interiors even though we look to probably reduce the amount of backer we make, that retailers see growth. And so we've been pushing more of our backer through retail than through the professional channel.

Yeah, okay, thanks. And a follow-up of sorts, COGS inflation, previously you were expecting it to be $40 million to $60 million. I think it was. Step up in FY23. Just can't understand how you're expecting that. Maybe a question for Jason. What are you expecting that COGS inflation to be now in FY23? I presume much higher, but any sort of range you can give relative to the $40 to $60 million at the last update would be great.

Definitely shifted significantly since February, Brooke, and globally our estimates, we're now thinking $90 to $130, so a significant change from where we were a couple months ago.

Okay, thanks for that.

Thank you. Your next question comes from David Pace with Green Cape Capital. Please go ahead.

Good morning, guys. Just with respect to fiber cement penetration in Europe, how far along the European fiber cement penetration story are you? And I guess in that context, how confident are you of ongoing annualized growth in fiber cement despite Ukraine in the European region?

Yeah, thanks for that question, David. Fiber cement growth is on track, but as we discussed from the get-go in February 2019, it was bringing new products to the market. The team has done a really nice job with the VL plank product, which is a plank that's not overlapping. It's flat on the wall, and we're seeing good growth with that this year, and we'll continue to grow that market. But more broadly, Europe is not just a plank market. So that'll be a good business for us, the Planks, but we're looking into different innovations and bringing products to the market. The team has a very strong plan there. Me and Ryan and Harold were there to go through that with them. We are excited about the opportunity. I'm not gonna discuss it in detail on this call for commercial sensitivity purposes, but they have a very large opportunity that they're attacking. We think it'll be successful and it'll take us that next step towards what will become a 500 million euro fiber cement business alongside what we believe will become a 500 million fiber gypsum business in our goal to get to 1 billion euros within the first 10 years.

Okay, wonderful. And just while I've got you, the business is obviously flush with cash and your gearing is low. Can you just talk us through what your capital allocation principles are and give us some heart that you're not going to be throwing it up against marginal strategies just because you're flush?

Yeah, David, great question. No change. So organic growth comes first. You know, we have a $1.6 billion to $1.8 billion four-year plan to grow capacity that is underway, and we're going to continue down that path. Obviously, we can make adjustments if the market changes, but we believe we'll continue down that path with that investment. That comes first. returning to shareholders is after that, and any other opportunities would be last on the list. That's always how we've managed this business. We're an organic growth company. We have some great opportunities in front of us, and that's what we're focused on.

Thanks, Ko. That's a great result.

Thanks, David.

Thank you. Your next question comes from Anderson Chow with Jodden Australia. Please go ahead.

Good morning and good evening. Thanks for taking my question. Just on page 19 of the presentation, I just want to understand or link up the numbers a little bit more. In your mind, how do you measure the success of the sales conversion from the marketing leads? I mean, is the 6,000 from 33,000 sort of kind of the optimal level or is there kind of a delay, as you mentioned before, that we could see probably a higher conversion rate?

Yeah, so the way I think about it would be, listen, $6,000 for me is not necessarily the number I care about or the $33,000. What I care about is sort of the quality of our conversion. So this is something that our consumer will do once or twice in their lifetime. So it's not a well thought out process or it's not well laid out. she definitely gets stuck along the way. So what we're working on as a team is understanding where the bottlenecks are and trying to find and develop tools to get her along the path. So we're making pretty good progress there. And the way we measure that is we actually contact the consumer and ask her exactly what she's looking for and we deliver what she needs when she needs it. And when we see that subset improving, which we are, Those are the things we're looking to now scale up and send out into the marketplace. I care way more about our quality and ability to hold our hand all the way through the process than I do about the actual number. That said, the numbers speak for themselves as far as I can tell. We are seeing more people come to our website. We are seeing people asking for more samples. We are seeing people asking for more brochures. We're certainly seeing the sales volumes go up as well. In the end, we feel very confident that compared to the control group, this is working.

I just want to real quick clarify, because we've got a couple questions on the 11% now, and maybe it wasn't clear in the footnotes or when Sean talked about it earlier, but the places we're doing the marketing, we are 11 points higher than the places we are not. So when we say ColorPlus is up 27, the three regions we're doing the marketing, it's in the 30s. and the places we are not doing the marketing. We're still growing color in the 20s, but we're getting 11 points differential in the locations we're doing the marketing. So when you say, how do we measure it? We are seeing increased sales for us and our customers, and that's the ultimate measurement. We're still early days learning exactly what the exact figures should be for marketing leads and sales leads and the conversion rates, et cetera. But we see success, and therefore we're going to continue to invest.

Got it. And just want to quickly clarify this two times expansion. I mean, given the sort of marketing dollars kind of cumulative, is there any kind of sales and marketing expense growth that you could speak to in 2023 or 2024 to achieve that two times expansion?

Yes, so a couple of things. One is we're way more efficient and effective second year round in three epicenters. So we don't need to spend as much dollars as we did last year in those regions. And then obviously we start new regions. We've learned a lot in the last 12 months. So there's some stuff that we won't repeat. So we'll be more effective as we continue to go down the path. But overall, we are investing more dollars. from a marketing perspective this year versus last?

Yeah, probably about a 20% uptick. But a lot of the core work is done centrally. So we can go into double the amount of places without a huge increase in cost.

Thank you. If I may, just a last question on Asia Pacific. Given we tend to invest ahead of growth and this significant expansion new capacity in Victoria. I wonder if you could talk about your long-term growth expectation in Australia and New Zealand on a sort of three to five-year time horizon. What are you targeting?

Yeah, we don't. We'd expect double-digit growth in revenue, which would be a mix of price, a mix as well as volume. Similar to the U.S., we see good underlying market dynamics with new construction and repair and remodel in both locations, and therefore we're continuing to invest in that greenfield site in Victoria. We'll be doing a groundbreaking this week, so we're excited, and we're going to invest in that volume to support the future growth of this region. Thank you. Thank you.

Thank you. Your next question comes from Paul Quinn with RBC. Please go ahead.

Yeah, thanks very much. Morning, guys. Just a question sitting back here taking a look at this new marketing program. With the doubling of the three additional key metros, what percentage of North America will you have? put this marketing program to, i.e., are we in the early evenings of doing this right across North America? And then when are you moving to other regions, you know, Asia Pacific and Europe?

I'll talk about North America. From our perspective, we invest in where we believe we've got the biggest opportunity for growth. So that's typically for us, the Northeast, Midwest. And so we will be expanding. I see us going sort of more than what we've got now, for sure. That said, the last time we spoke, I would have talked about a Magnolia agreement that we've got. That's still tracking based on what we want to get done, and that will have more of a national reach. And then as we get a Heidi Architectural Collection, that will be combined with some marketing programs as well. So I think our marketing will continue to move It will continue to be at the consumer level. It will continue to move across the country. What we're driving might be different. So in the markets where architectural collections, a piece of it, we'll be talking about that. But obviously, right now, the focus for this year will be color.

Yeah, I'll cover up on the more global aspects of that, Paul. I think it aligns with what Sean said. I mean, the marketing campaigns will be tied to our strategy. So the strategic places we think there's opportunity is typically where the marketing would occur. And so for this past year, it was a focus on Color Plus in the Northeast. And we learned a lot from that. And we're applying that not only within the US, but also globally. And so in our Asia-Pac region, we have started similar marketing campaigns for the folks who live in that region. They would have seen our ads on the Aussie Open a few months back and running similar game plans in Australia currently. And then the European team is also looking at marketing campaigns to drive growth. So we've learned a lot the past 12 months. And now how we apply that, we need to continue to do that by region and by strategic initiative.

Jason, I would just add to that that the conversations with Europe and APAC happen every week to two weeks. So the learning knowledge transfer is very quick.

Okay, that's helpful. And just you call that higher corporate costs in Q4, just if you could give us some details around what that was related to and then whether that's a one-time or non-repeat.

Yeah, it's non-repeatable, Paul. There's a slide in the appendix that we didn't speak to, but it lists out the items there, one being legal reserves that we feel were fully accrued for and one-time in nature. So, yeah, one-time.

Got it. Got the slide. Thanks, guys. Cheers. Cheers.

Thank you. Your next question comes from Simon Zachary with Jefferies. Please go ahead.

Oh, sorry. Sean, just a quick follow-up. I'm fascinated by that slide 19 that we were just on before. Just with the changes that Apple made with IDFA, ID for Advertising, and now Google are going to be implementing as well, did that change? create any impact on consumer marketing in terms of being able to track customers through that period for those that opted out, which was about 62% of mobile customers? Or are most people doing this at home on their browsers at home?

Yeah, it depends. And it would have had a small impact for us, because it depends where the states are at, Simon. So if they're doing design work on their home, that's generally on a laptop. That's not necessarily on their phone. But certainly looking for brochures, looking for samples, that I'm guessing is mobile. So it'd be a bit of a mix for us, but we haven't seen it. And in terms of it hasn't been enough to impact us. And in terms of our learning, we've got a subset of that. So we try to get hold of about 500 customers a month that we can actually go and help them get through it just because that's the subset we're learning from. So it hasn't impacted what we've had to do to any extent yet. That's cool.

Thanks, Sean.

No worries. Thanks, Simon.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Wiens for closing remarks.

Well, first of all, let me thank each of you that took the time to visit with us today to learn more about our business. As you can see, it's going well. Also, I'd be remiss if I didn't reach out and thank every single one of our 5,000 employees. They're the people that are driving this. They're doing it willingly and with real focus. So thank you, team. And thanks to everybody for coming on the call.

That does conclude our conference for today. Thank you for participating. You may now disconnect.