James Hardie Industries plc

Thank you for standing by and welcome to the James Hardie Second Quarter Fiscal Year 2023 Results Briefing. After the briefing, we will open the lines to questions. I remind participants to limit your questions to one plus a follow-up. I would now like to hand the conference over to James Brennan-Chong, Director of Investor Relations and Market Intelligence. Sir, please go ahead.

Thank you, Operator. Good morning to everyone in Sydney and hello to others from around the world. I'm James Brennan Chong, Director of Investor Relations and Market Intelligence at James Hardy, and I'd like to welcome you all to our second quarter fiscal year 2023 results call. Turning to page two, you will 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 to page three. Here you will see our agenda and speaker for today, our CEO, Aaron Erter, as well as our CFO, Jason Mealy. Today, Aaron will begin the presentation with a brief update on our strategy, as well as provide an operations update. Jason will then discuss the second quarter financial results before Aaron returns to discuss guidance and close. After this, we'll open it up to Q&A. I'll now hand it over to our CEO, Aaron Erter.

Thank you, James. Good morning and good evening to everyone. Welcome to our second quarter earnings call. Before I begin, I would like to take a moment to thank each of our 5,000 employees from around the world for their efforts in delivering the highest quality products and services to our customer partners in what remains a challenging operating environment. I've had the pleasure of meeting many of the James Hardie team over my first two months here, and the collective commitment to executing our strategy and delivering strong results all while working safely is truly inspiring. I am confident and excited about the future and what we will accomplish together as a team. With that, let's turn to page five. As I stated at our investor day in September, I believe that our strategy is solid and will enable us to deliver sustained profitable growth. Many of you on the call have seen the slide on the screen many times before, and rather than reiterate each component on this page, What I would like to do is focus on the insights I have gathered about our strategy and enhancements I see us making as we move forward. Please turn to page six, where I have briefly outlined those insights. Let's start with our foundational strategic imperatives, which are at the bottom of the diagram in green. They are zero harm, ESG, lean manufacturing, customer engagement, and supply chain integration. All of these are foundational strategic imperatives supporting our growth, and it is clear to me that they are understood within the business and are embedded within our team. These foundational initiatives will remain a core focus as they enable us to drive sustained profitable growth across the entire company. As we move forward, I have added our people. and how we develop our organizational capability as critical to our future growth. Investing resources in our organizational capability will be a key focus, and our people will be foundational to our strategy. Next, let's move to the top of the page in the blue section, which outlines the three key tenets to our strategic plan. They are market to homeowners to create demand, penetrate and drive profitable growth in existing and new segments, and commercialize global innovations by expanding into new categories. First, let me start by discussing marketing. I am really encouraged by the progress we have made in marketing to the homeowner. In Q2, we continue to see incremental reach with homeowners and strong lead growth. We are still in our early stages, but I am pleased with the execution in North America and Australia as we build our brand and continue our journey to be the brand of choice with homeowners. It's important that we execute targeted demand creation with the entirety of our supply chain, our customers, contractors, and homeowners. Our marketing strategy is developing and becoming well-rounded for our target audiences. product segments, and regions we participate. You can see this philosophy articulated at the bottom of the page. We must be homeowner-focused, customer- and contractor-driven. As I have spent time visiting all three regions, it is clear we provide superior value to our customers, contractors, and homeowners. We do this not only with great products but with value-added services. That service includes the education and inspiration we provide to homeowners through our website, the sales training we provide our customer partners, the install assistance for contractors, and the collaborative supply chain partnership we offer. As you hear me talk about strategy and our execution in the future, you will certainly hear me focus on the concept of delivering superior value to our customers, contractors, and homeowners. Lastly, I wanted to touch on two areas which I describe as long-term strategic enablers to our future success, capacity expansion and innovative products and services. They are both critical to the long-term success of our strategy. The execution of our capacity expansion program enables the continued growth of our high-value products. Today, we are excited to announce our plans to expand our ColorPlus finishing capacity by adding ColorPlus capability to our Prattville, Alabama facility. We expect this added ColorPlus capacity to be available at the end of calendar 2024. We continue to deliver strong ColorPlus growth, 31% for the half year following 27% growth in fiscal 2022. In the quarter, we commissioned our trim finishing capability in Prattville, which provides us much needed trim capacity. When I speak about innovation, you will note I mentioned products and services. We are and will continue to be focused on both. We just launched a customer visualization tool that allows a homeowner or contractor to digitally visualize a before and after look at a hardy remodeling project. This improves the design and purchase process and drives quicker conversion rates. As you have heard me state many times over the past two months, We have the right strategy. I am more confident than ever our execution will enable us to continue to drive sustained profitable growth globally. We are homeowner-focused, customer- and contractor-driven. Now let's turn to page seven. I introduced this slide at our investor day to highlight the fact that we are a growth company. Over the past 10 years, we have delivered a net sales CAGR of 11%. We have tripled our annual operating cash flow in the past 10 years. Our five-year average return on capital employed is 36%. And over the past 10 years, we have delivered an adjusted net income CAGR of 16%. These metrics highlight our ability to consistently generate attractive returns through execution of global strategy. As I reviewed our past results, One metric which I do not think we highlighted enough is our return on capital employed. Our five-year average return on capital employed of 36% indicates our ability to invest in and execute on the right growth initiatives. Let's turn to page eight to discuss ROCE further. The chart on the left summarizes our annual ROCE from fiscal year 2018 through fiscal year 2022. We delivered significant growth over the five-year period with a 51% ROCE in fiscal year 22 and an outstanding average ROCE of 36% across the five-year period. These metrics demonstrate that we have consistently invested in organic growth in an efficient and effective manner. My focus is to ensure we continue to prioritize organic growth by investing in our key initiatives, capacity expansion, innovative products and services, and targeted demand creation. Our ability to invest in organic growth efficiently and effectively will enable James Hardy to drive sustainable, profitable global growth into the future. As we look to ensure investment in organic growth is prioritized, We are adjusting our capital allocation framework. Please turn to page 9 for a summary of that adjusted framework. We believe this new capital allocation framework better matches who we are, a growth company. This framework lays out our priorities for remaining capital after funding operations, including our contribution to the AICF. Our number one and primary focus of our capital allocation is to invest in organic growth. Our five-year ROCE of 36% is proof that investing in growth should be our first use of capital. Second, we want to ensure we maintain financial flexibility through market cycles, and thus we intend to keep our leverage below two times throughout market cycles. Third, after we have invested in our organic growth, and ensure the right financial flexibility is in place, we will deploy excess capital to shareholders via share buybacks. We believe returning excess capital to shareholders via share buybacks rather than ordinary, unfranked dividends provides a growth company the optimal flexibility to ensure investment and organic growth is prioritized while maintaining financial strength and flexibility through cycles. And if we shift to page 10, today we are pleased to announce the replacement of our unfranked ordinary dividend with a share buyback program to acquire up to $200 million of issued capital between now and October 31, 2023. Now, let's move to page 11 for an operations update. First, I'm going to provide a brief update on the operational results of each region over the first half before moving on to discuss the shifting market conditions we are facing globally and in each region. Let's start in North America, where Sean Gadd and his team delivered excellent results in the first half in what remains a very challenging operating environment. Net sales grew 23%. and EBIT self growth of 15 percent at an EBIT margin of 27.1 percent. Price mix grew 14 percent, which included January and June price realization. Included in this result was continued Color Plus growth of 31 percent for the first six months of our fiscal year. The team continues to deliver on our superior value proposition to the entirety of the supply chain, enabling these outstanding results. In addition, Sean and team continue to position our organization for long-term growth by continuing to partner with our customers. Over the first half of the year, we have been recognized organizationally by a number of our trade partners, from vendor of the year with the largest private lumber distributor to a series of national builder awards, which recognize our partnership cross-functionally with sales, manufacturing, supply chain, in their construction, purchasing, and sales functions, proof points to the value our customers place in our products, services, and people, and a testament to the great work of not only our sales team, led by John Matten, but the work of our supply chain and manufacturing organizations, who ensure our customers receive the products they want when they need them, even under the most challenging of conditions. Also, during the first half, the North America team launched our partnership with Magnolia Home and Chip and Joanna Gaines. We see this partnership elevating our brand awareness with homeowners by assisting them in their remodeling journey with an inspired collection curated by Joanna Gaines herself. This collection will allow homeowners to truly transform the look of their homes. I want to thank the entire North American team for their continued operational excellence. Moving to Asia Pacific, where John Arneal and the team delivered a solid outcome of 8% growth in net sales under continued inflation, labor shortages, and supply chain disruptions in the first half of the year. As we have faced these headwinds, our EBIT margin has been under pressure, but we are partnering with our customers and executing price increases to ensure we are able to continue to provide the high level of service they expect. With that said, We expect EBIT margin growth in the second half of the fiscal year with price realization and continued higher mix products. In September, I had the pleasure of spending time with several of our key customers in Australia, and it was clear to me how much they value our products and services. We will continue to partner with our customers, contractors, and homeowners to drive growth above market in the APAC region. In Europe, our business continues to face significant headwinds from inflationary pressures and a slowing market. However, the team has done a tremendous job of navigating the environment to deliver a hard-fought 2% growth in net sales. The commercial and marketing teams have done an outstanding job in commercialization of our new product innovations we discussed at our investor day. These include VL Planck, and hardy architectural panels, which will help to drive our growth in fiber cement, and Therm25, which is an exciting solution for underfloor heating that is helping us drive fiber gypsum penetration. The early reads on these products are exceeding our expectations, and we are seeing continued adoption from the trade. Last week, we were excited to announce the appointment of our new European leader, Christian Kloss, who will join us at the start of January. I believe Christian is a great fit to lead our European business and will help us accelerate our penetration within that region. Christian has a stellar track record of leading high-performing teams, and we are excited to welcome him to James Hardie in January. Okay, let's move on to discuss the outlook for the second half. Over the past 45 days, we have seen a significant change to the outlook of housing market activity for the second half of our fiscal year in most of the geographies where we participate. In North America, single-family new construction starts have slowed significantly, and market expectations for the remainder of our fiscal year have declined sharply. The repair and remodel segment in North America is seeing moderation due to several factors, including, but not limited to, falling home prices and declining consumer confidence due to uncertain economic outlook. During our last call in the middle of August, our expectation for the second half volume was for mid-single digit growth, which we then reaffirmed at our investor day in early September. However, based on the significant decline in the market expectations over the past 45 days, which we have reviewed with our customer partners, we now expect second half volume growth to be between negative 5 and negative 8 percent to the prior year, which is a significant reduction to our August-September projections. We do expect regions with more exposure to repair and remodel to remain more buoyant than regions more exposed to new construction. And in our projections for the second half of the year, we see volume growth in our regions that are more R&R focused but see significant volume decreases in those regions skewed toward new construction. In Australia, labor shortages and unfavorable weather conditions have constrained housing market activity despite strong contracted backlogs. In addition, we have had our customers ask to lower inventory levels as we enter this period of market uncertainty. These conditions resulted in our APAC volume declining by 4% in Q2. For the second half of our fiscal year, we expect volume growth will be in the range of minus 4% to flat versus the same period last year. In Europe, we expect the second half to be very similar to the first half, as that region contends with a tense macroeconomic situation. We do believe we will continue to deliver relatively strong price mix growth, resulting in net sales in the second half to be slightly down versus the same period last year. It is certainly a unique time, with housing markets changing quickly due to a variety of factors. That said, despite the reduction in our expectations for housing market activity, we are confident that we will continue to deliver growth above the market. Before I hand it over to Jason, I wanted to discuss further the change in our outlook for second half North American volumes. The primary reason for the reduction in our outlook for second half volumes is new construction. On September 20th and October 19th, the census data was released for new construction for August and September activity. A few notable items in that data. First, single family starts were down 17% versus the same two-month period last year. Second, for the first time this year, completions are now outpacing starts. Over the two-month period, completions were 11% higher than starts, which reduces the new construction backlog. In addition to the census data, we learned through big builder quarterly announcements that their cancellation rates have increased substantially, which also reduces new construction backlogs. And lastly, over the past few weeks, as we dug into the backlog deeper, we discovered that builder practices had changed in some regions, whereby our product was being installed earlier in the process than it historically has been over the past 30 years. Specifically, In regions where roofing materials and windows were a constraint, our product was going up ahead of those items. And thus, some of the outstanding completions in the industry already have our product installed, again, reducing our addressable backlog. In addition, we have seen two additional Fed rate hikes on September 21st and November 2nd, which we believe will continue to drive starts downward and keep cancellations high. All in all, we are now expecting our addressable new construction activity to be down 30 plus percent in our second half, which is the primary basis for a reduced volume outlook. While we are significantly reducing our expectations for the second half volumes, to put that in context, we still expect our second half of fiscal year 23 to be one of the largest halves in the history of our company. And from a net sales dollar perspective, we expect it to be the second largest half-year net sales in our history. Over the past few years, we have significantly step-changed our top-line results by driving volume growth and price-mix growth, which puts us in a position to deliver, again, the second largest half-year net sales dollar results in our history, despite the market slowdown. This adjusted outlook for the second half still puts us in a position to deliver EBIT growth year over year and an EBIT margin in the top end of our 25 to 30% range while continuing to make the right investments in our long-term growth. We will continue to focus on what we can control and position ourselves appropriately for fiscal year 2024. With that said, I would like to hand it off to our CFO, Jason Mealy, who will share details about our second quarter financial results.

Thank you, Aaron. Let's now shift to page 13 to discuss our fiscal year 2023 second quarter results. In challenging macro conditions, the global team has continued to deliver growth above market with strong returns. In the second quarter, group net sales increased 10%, to just under 1 billion U.S. dollars. Group net sales was highlighted by strong price mix growth in every region, with price mix growth of 14 percent in North America, 11 percent in Asia-Pac, and 12 percent in Europe. The unfavorable change in foreign exchange rates between the second quarter of FY23 and the second quarter of last year had an unfavorable impact on net sales in U.S. dollars of 30.9 million U.S. dollars. Global adjusted EBIT increased 6% to 218.5 million U.S. dollars, driven by the global net sales growth of 10%, partially offset by inflationary pressures in all regions. The unfavorable change in foreign exchange rates between the second quarter of FY23 and the second quarter of last year had an unfavorable impact on adjusted EBIT in U.S. dollars of $3.2 million. Global adjusted net income increased 13%, to $175.8 million in the second quarter, we have seen substantial growth in adjusted net income over the past few years. From the second quarter of fiscal year 2020 through to this result, we have now seen our second quarter adjusted net income grow 22%, 29%, and now 13% over the past three years. During the quarter, the European team sold surplus land from an old unused site as part of their work to find a suitable site for our future greenfield fiber cement plant. The sale of land generated a gain to net income, net of tax, of $8.9 million. For the half year, net sales increased 14% to just under $2 billion, and adjusted net income increased 14% to $330.1 million. Operating cash flow for the first half of the year was lower year over year, at $264.6 million. The lower operating cash flow was driven by an unfavorable change in working capital in the current year versus a favorable change in working capital in the prior year, primarily related to the timing of payments within accounts payable and prepaids, and also included an increase in inventory during the half year. Let's move to page 14 to discuss the North American results. In the second quarter, the North American team delivered robust net sales growth of 18% to $750.6 million, driven by volume growth of 4% and excellent price mix growth of 14%. The strong price mix in the quarter was underpinned by ColorPlus volume growth of 31% in the second quarter. Volume growth of 4% was below our expectations of mid- to high-single-digit growth in the quarter, due to our customers partnering with us to lower their inventory levels, as well as the impact of Hurricane Ian in Florida, which required us to close two of our plants for multiple days at the end of the quarter. In the second quarter, the team delivered a strong bottom-line outcome, with EBIT increasing 17% to $212.8 million at an EBIT margin of 28.4%. As we foreshadowed in August, we are pleased to report a 250 basis point sequential increase in EBIT margin for the second quarter to 28.4% from 25.9% in our first quarter. As discussed in August, this improved EBIT margin was driven primarily by the execution of our June 2022 price increase while we maintained SG&A spend relatively flat to Q1. Persistent inflation kept cost of goods sold per unit relatively flat to Q1, and comparing Q2 versus Q1, while we saw freight improve, pulp, natural gas, and other input costs increased into Q2, almost entirely offsetting the favorable change in freight. Over the past three years, we have seen substantial growth in North American net sales and EBIT. From the second quarter of fiscal year 2020 through to this result, We have seen our second quarter North America net sales grow 12%, 23%, and now 18% over the past three years, and have seen our EBIT grow 19%, 23%, and now 17%. We continue to drive growth on top of growth in our North American segment. Let's now move to page 15 to discuss the Asia-Pacific results. The Asia-Pacific team delivered second quarter net sales growth of 7%, to $211.1 million Australian dollars. Importantly, the APAC business continued to drive high-value product penetration with price mix growth of 11% in the quarter. The 4% decline in volumes was primarily driven by the constrained housing market in Australia, as well as customers in Australia and New Zealand adjusting inventory levels lower. Despite strong contracted backlogs, unfavorable weather conditions and labor shortages are slowing market growth in Australia. Second quarter EBIT declined 7% to $56.1 million Australian dollars with a margin of 26.6%. EBIT margins were adversely impacted by lower volumes as well as higher freight and pulp costs, which more than offset continued execution of lean manufacturing and growth in high-value innovations. Similar to our discussion of our North American business last quarter, In our Asia-packed business in Q2, continued inflationary pressures have constrained margins, and as we execute price increases in all three countries in September and October, we expect margin accretion in the back half of the year. Over the past three years, we have seen substantial top-line growth in Australian dollars. From the second quarter of fiscal year 2020 through to this result, we have seen our second quarter Asia-Pacific net sales grow 4%, 15%, and now 7% over the past three years. Turning now to page 16, let's discuss the European results. During the second quarter, net sales decreased 2% to 102 million euros, driven by a 14% decline in volumes, which was a result of the slowdown in the European housing market. However, the team's continued execution of the high-value products penetration strategy resulted in strong price mix growth of 12%. Second quarter EBIT declined to 4.4 million euros at an EBIT margin of 4.3%. Margins were adversely impacted by higher prices for natural gas, freight, gypsum, and paper compared to the prior corresponding period. In addition, SG&A investment increased 10% primarily in marketing and talent capability. For the half year, Europe net sales increased 2% to 212.8 million euros. As stated at the investor day, our European team remains focused on ensuring effective execution of our long-term strategy to become a €1 billion net sales business with 20-plus percent EBIT margins. We remain confident in the strategy and the European business. I will now hand it back over to Aaron.

Thank you, Jason. Let's turn to page 18 for an update on guidance. As I discussed early in the operational update, over the past 45 days, we have seen a significant change to the outlook of housing market activity in the second half of our fiscal year. This has been a consistent sentiment across most industry participants. I discussed earlier our expectations for volume in each of our regions for the second half of our fiscal year. These expectations have reduced significantly in the past 45 days and are the basis for the change in our guidance range. We are navigating this market uncertainty with a focus on controlling what we can control. This includes costs, price realization, HMOS productivity initiatives, and outperforming our competitors in the underlying markets we participate in with our outstanding value proposition. Due to the decline in volume expectations, we are adjusting our full year fiscal year 2023 adjusted net income to between 650 million US dollars and $710 million, which represents a 10% increase at the midpoint relative to fiscal year 2022. More specifically, for North America, our largest region, we expect fiscal year 2023 net sales growth of 13% versus fiscal year 2022 at an EBIT margin between 28% and 30%. As I mentioned earlier, while we have reduced our expectations for the second half in North America due to the changing market conditions, we still expect to deliver the second largest half year in net sales in James Hardie's history. As we look to the back half of the year, we expect to continue to face challenges, but we are confident in our ability to outperform our competitors in the markets we participate. If you could turn to page 19, Before we open for Q&A, I'd like to take this opportunity to state how proud I am to be a part of the James Hardy team. This group has managed through COVID, global supply chain disruptions, rapid inflation, and an extended period with the leadership vacuum. Through all of that, this team has delivered strong results. I am invigorated by the can-do attitude that exists here. People are the heart of what we do. And over the past several weeks, I have witnessed firsthand how strong, capable, and dedicated the James Hardy employees are. The future is bright for James Hardy. When I reflect on why James Hardy for our investors, I go back to what I shared with you all at our Investor Day and who we are, a global growth company. As we look to the future, I'm confident we are well positioned to successfully navigate any market uncertainty and emerge out of any such period stronger than when we entered it. With that, I would like the operator to open the line up for questions.

Thank you. If you do wish to ask a question, please press star then 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star and then 2. And if you are on a speakerphone, please pick up your handset before asking your question. Just a reminder to please limit questions to 1 plus a follow-up. Thank you. Your first question comes from Keith Chow at MST Marquee. Please go ahead.

Hi, Aaron, Jason, and team. Thanks for taking my question. Thanks for the context, Aaron, on the change of guidance for the year. I just want to go back to the comment made at the last quarterly result where revenue growth expectations was laid out as possible to get 22% plus growth, and I know things have changed rapidly. um since then with where mortgage rates are sitting um but i guess part of the reason for that guidance change at the last quarter was because of this visibility that parties has improved with customers over the last couple of years which seems to have unraveled a bit uh over the last few months i'm just wondering if you can help us understand based on your discussions with customers if things change that dramatically for those customers such that You know, what was this apparent backlog of work in the system, and that all now disappeared. And secondly, is there an element of destocking going into the end of the year from not only new construction, but also the dealer distributed channel that's impacting volumes? Thank you.

Hey, Keith. Thanks for the question. You're right at our investor day. very close, we can always be better. I think what's changed, and if we would talk to, you know, say our dealer network, I think they were surprised at the rate of decline as we were out there.

You know, one of the things I mentioned is we probably looked at our backlogs, you know, in a way that we hadn't seen before. We found our products, you know, continued to flow to the wall, but there was really a change in the building structure. and for our customers out there. With the big builders, you know, as you can see some of the data out there, you know, cancellations have really increased, you know, and the completions have outpaced starts. So I would say, you know, we were surprised and our customers were surprised. It's a rapidly changing market out there. You know, and if we talk about, you know, destocking, if you will, I feel like, you know, if we would ask our customers, we're at the right levels right now. You know, they signaled to us in the quarter their desire to lower stocking levels late within the quarter. You know, if you look through COVID, we adjusted downward on stocking levels with our key customers from historic levels as we improved how we connected our supply chains. You know, and as most have now, again, lowered inventory levels to adjust for really what's the changing market out there. So we don't think there's any significant room for lower stocking levels

Thanks, Aaron. And then my follow-up is just with respect to the new construction estimate for the second half. So down 30% of the new construction seems quite aggressive, given at least there's still remaining or even some backlog that is still remaining. Can you give us a sense of where you see R&R in the second half? and ultimately what your market share gain assumption is, and whether your volume deterioration accelerates into the fourth quarter. Thank you.

Yeah, so we expect R&R to remain more robust than new construction. And as we said before, we're going to continue to try to outperform the marketplace. If you look for, you know, Color Plus, you can see, you know, some of the progress we've made there of 31% year over year. So we continue to grow R&R and particularly, you know, some of the focus areas like Color Plus. But like every segment and every region, you know, we would expect the growth rate to slow. You know, if I just have to put numbers on it, if I would look at R&R volume in the second half, I'd probably call it flattish.

Thanks, Aaron. And then market share or market share growth?

Yeah, Keith, as far as market share growth, I would just say that we're looking to outperform the markets that we participate in.

Okay, that's great. Thanks very much, Aaron. I'll circle back.

All right. Thanks, Keith.

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

Thanks very much. Good evening Aaron, good evening Jason. Keith sort of covered off I think on the first part about visibility into R&R but I'm interested maybe just to extend the question a little bit on the visibility part. You get visibility into new construction quite clearly with your contracts with the large home builders. The R&R channel is a little less reliable I think. What are your contractors actually telling you on the ground today as to

to the order flow?

Yeah, and I think I got the question as far as what are contractors telling us about the order flow?

Yeah, in our particular area.

Yeah, you know, from an R&R standpoint, as I said, R&R is more robust, but we are seeing the rate of orders come down. You know, and as I mentioned, and per our guidance, You know, obviously new construction is a big piece of it, but we expect R&R to slow down. You know, and then also we're seeing different – if I look at North America, it depends by region of the country, right? Those regions of the country that are more focused on new construction, we're seeing that decline more. And then those that are more robust as far as R&R, like we talked about the Midwest, the Northeast, they're doing better for us and we expect them to do better than us because they're exposed more to R&R versus new construction.

Okay, that's helpful. And then just in terms of the narrowing of the North American EBIT margins this year, they were 28 to 32, they're 28 to 30 for reasons which are very easy to identify. You'd mentioned the margin target before 25 to 30. Just any view of the medium to long-term North American EBIT margin now, which has been set at 25 to 30. Is there an expectation that could be lowered?

Hey, yeah, Simon, this is Jason. I'll start with the current year. Last quarter, we would have talked about the 28 to 32 requiring us to hit the top line estimates. And obviously, with us calling down the back half of the year from volume perspective, that's why that's lowered. Yep, I understand that. Yep. As we move forward, we believe we'll still be able to operate in the long-term range. Obviously, we're tracking market conditions going into calendar 24 and beyond.

Okay, so long-term 25 to 30 we can stick with. Is that right? Yeah, if you look at the back half of this year, we're obviously calling something between 28 to 32. for the back half, which is a much lower volume outcome than previously assumed. Alright, thank you. Thank you.

Your next question comes from Lisa Huynh at JP Morgan. Please go ahead.

Hi, morning. So thanks for the colour around the order backlog being reduced. Can you just confirm that customers are still on allocation and when within the guidance you expect that to roll off?

Anyway, so we're actually in full supply for the most part with a couple of exceptions, the most notable being our trim product in the south. But we expect to be in full supply shortly in the next couple months. So it's an opportunity for us to really drive and beat the market.

Okay, sure. Then within that, ColorPlus. growth still remains quite strong. I guess, can you talk about where you're seeing the slowdown the most across the product range then? Is it largely Simplank or, you know, how should we be thinking about that?

Yeah, as far as ColorPlus, you know, we are seeing exceptional growth. We mentioned, you know, up 31%. And we expect, as I said before, that, you know, to remain robust, you know, and a lot better than So the regions we sell Color Plus are more highly indexed R&R and new construction. If we think about some of the products that we would see a slowdown, they would be focused on new construction. In those regions I mentioned, some of the regions that are more highly concentrated new construction would be areas like Texas, for instance.

Hello? Yeah, we're still here, Lisa. Oh, sure.

Yeah, can I just tack on to that? So when throughout FY22 did color plus growth take off? I just wanted to know when we should start cycling some of the strong growth we saw in the prior year baseline.

We had strong growth throughout last fiscal year, Lisa. I think we closed the year, full year 27% growth, which was steady throughout the year, started picking up. and then obviously the first two quarters of this year both at 31%.

Okay, sure, thanks.

I'll leave it there.

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

Hi, Aaron. Hi, Jason. Just on the visibility piece, I guess I'm a little bit confused as to Was it you were wrong on the visibility that you thought was there or did that kind of backlog get cancelled on you given what's happened with house prices and things like that, particularly in R&R? And then just to be clear, Aaron, can you actually tell us what you think backlog visibility is in weeks under these kind of new operating conditions that you've got?

Yeah, you know, good question, Lee. So... Look, you know, as we dove into the backlogs, as I mentioned, we found that, you know, the backlogs were less than we thought for their products. And that really involved a fundamental change in building practices as we think about North America where you had products that were going up, you know, like our products were in a different order than they usually did. You know, if you looked at things that were supply constrained like windows and roofs, they were putting our products on them. And then they were putting these up after the fact. So that really reduced the addressable backlog for us. So just in full transparency, this is probably the piece we should have identified sooner. But you're really talking about a change to a well-rooted practice that has existed since we really started doing business here in the US for over 30 years. So all of those factors decreased our estimate of the addressable backlog. You know, and then as we look forward, you know, we just think about all the economic indicators that we see, and hence, you know, the addressable backlog being lowered. We think about some of the two additional Fed rate hikes, you know, on September 21st and November 2nd, where we think that's going to continue to drive starts down from the current levels, and it's going to continue to put pressures on cancellation. So, you know, hence the reduced guidance here. And, you know, as far as where do we see addressable or the backlogs now, I'd just say, you know, it's a much shorter window than what we've seen in the past.

Are you willing to put a week or month number on that?

No, Lee, I'm not.

That's all right. And then just on lean, can you give us an idea of what's been achieved and the confidence that you still get that benefit as this probably softer volume environment comes through?

Yeah, Lee, it's a great question. I mean, I've been here roughly two months, and I've really been impressed with our team's focus on lean and productivity. This is something that's part of our scorecard and part of our DNA as a team. So we've really shifted from looking at dollars as a total team you know, to look at net hours and our yield. And those are going to be really important for us to continue to focus on as we move forward. And, you know, I'm stating the obvious in that lean execution has never been more important, you know, in what is a high inflationary environment and what becomes a more challenging environment for us, you know, as we think from a manufacturing standpoint.

Okay. Thank you. Thanks, Lee.

Thank you. Your next question comes from Peter Stein at Macquarie Group.

Please go ahead. Good evening. Good evening, Aaron and Jason. Thanks very much. I appreciate your time. Aaron, could you talk through your cost intentions or cost management intentions under the circumstance, what you're going to be doing around market development expense and the like? And then also perhaps just some of the CapEx intentions in the context of where things are headed?

Yeah, absolutely. Peter, good to hear from you. Look, we're going to continue to focus on what we need to control. You know, as I came in here, what I was impressed with, the team already had a certain look at scenarios, right? You know, and we probably have accelerated some of those scenarios sooner than when we look at the difficult market conditions. So, you know, we're going to continue to make sure we're focusing on the right growth initiatives, but as the markets slow down, we're going to ensure that we're optimizing our SG&A. If we look at our capital expense, we have slowed in some areas that we don't deem critical right now, but we are moving forward with some key projects that are important to us, right? talked about Prattville expansion, which we're going to continue to invest in. So, you know, Peter, needless to say, we're going to continue to invest in the key growth initiatives, but we're also going to respond to the slowing market conditions where we deem necessary.

Gotcha. Just two very quick follow-ups. So from an SG&A perspective, everything that you're doing around consumer marketing essentially is probably not going to change much, I assume. And then Crystal City, the announcement that you put out a few weeks ago, that you're presumably just doing front-end engineering and some design work before actually breaking ground there.

Yeah, so in regards to marketing, we're going to continue to focus on marketing because, you know, we are, you know, initial results are very good for us, right? We talked about the growth we're seeing with Color Plus and R&R, you know, the Midwest and the Northeast will be, you know, a continued focus with our marketing efforts. I would say with marketing, we're learning more and we're getting more efficient, right? So we can really dial in that spin as it relates to marketing and And as I said before, as it relates to capacity expansion, Prattville is our main focus right now, and we're ramping that up. But we do have some other things that we're more slow playing, and if we need to shift in higher gear, we will do so.

Gotcha. Thanks, Aaron. Appreciate that.

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

Thank you. Aaron, just a question for you. I know there's a lot of moving parts and things are moving quickly, but North America, 4% volume growth. And I know we could probably debate whether it starts or completions are more relevant, but completions are up 8% in the period. How confident are you that you actually did grow share during the period?

Yeah, you know, it's a great question, Andrew. We are confident that we're outperforming the market in which we're participating in, you know, particularly as we look at, you know, our R&R growth, and you see some of the numbers as it relates to ColorPlus. But we are confident we're outperforming the market in which we participate in.

Okay, we might give it a longer time to get a bigger bit of data sample there. Second question. When we were in New York, I think it was Anne mentioned that one of the reasons you were appointed was the need to add a level of corporate infrastructure to get Hardee's to probably what is warranted for a company of this size and scale. Just interested in your observations now. You've been there a little bit longer and maybe what we should expect coming forward on that cost line.

Andrew, are you speaking of additional costs as it relates to, you know, we think of corporate?

Correct. Corporate infrastructure, et cetera.

Yeah. You know, it's a great question. I think the big thing that I'm looking at here is, you know, how do we prioritize? And are there ways that we can, you know, shift costs, right, from a prioritization standpoint? One of the things that I just did recently is I had our lead ESG person come right into me, report directly into me. Also, our chief information officer come right into me. So, you know, I wouldn't say that we're going to see a lot of additional costs initially. I think we're just going to reprioritize and, you know, have a better focus on what really helps to accelerate our strategies.

Thank you. I'll jump off. Thanks. Thank you. Your next question comes from Sam Seow at Citi. Please go ahead.

Well, thanks, guys. Appreciate the time. Obviously not the best volume outlook, but looking forward, I think the 28% to 30% margin time is fairly positive, actually. So just want to understand you're thinking about what's offsetting that reversal of fixed cost leverage? And I mean, is it continued growth and mix or costs coming off? But yeah, keen to understand the factors there, whether they're sustainable through FY24.

Yeah, Sam, thanks for the question. So I guess I'll start by saying you'll see in Q2 we delivered on what we said we would from a margin perspective last quarter in August when we spoke. So we said we would deliver that through the price increase primarily. And that's what's happened. So we delivered 250 basis points of accretion, Q2 versus Q1. Certainly, to your point, in the back half of the year, the volume number will be lower. But as Aaron mentioned on the call, it will still be our second highest half of revenue ever. So you still do have a robust top line that helps us deliver still a strong margin in the top end of that long-term range. So I think it's the continued price increase

price accretion, as well as mix, and then cost control, as Aaron mentioned earlier. Got it.

And I guess a couple of years ago, you did upgrade your margin targets. But when I look back at those targets, you actually put a cap on them for three years, it looks like. So I just want to understand why you put that cap and was it necessary? And I guess, Aaron, perfect timing as a new CEO, what are your thoughts about extending those old targets up?

Yeah, Sam, I think at the time we could see out three years. We felt that was the appropriate change. I mean, it was a big change. We were changing at 500 basis points from a long-term range of 20% to 25% to 25% to 30%. At the time, we felt signaling a three-year period, which is kind of the period of time we do our planning for, made sense.

But certainly now that Aaron's on board, we'll revisit that and make sure we provide clarity. Thanks, Michael. I appreciate it.

Thank you. Your next question comes from Daniel Kang at CLSA.

Please go ahead. Good morning, everyone.

Just in terms of, Aaron, you mentioned about Prattville's expansion. There's also further new capacity coming through in the industry. How do you see this being digested in the current slowing markets?

The further capacity being introduced? Yes.

Yeah, look, I mean, obviously, as you have a market slowdown and you have more capacity, you're going to have, you know, if you have equal product, you're going to have, you know, a lot of fight over, you know, new business, right? I think what we look at is focusing on what we can control. And so what we can control is the value proposition that we offer to our customers. I mentioned a lot of our focus or what we talk about here internally is really to be homeowner-focused, customer and contractor-driven. That really means along that supply chain with the homeowner, with the customer and the contractor, we have to provide an outstanding product, which we do, and an outstanding service. So if you're asking are we going to go out and fight on price, the answer is going to be no.

We're going to continue to provide that value proposition that customers all along that supply chain are going to be willing to pay for. Thanks, Aaron.

And I guess you put a chart in terms of mix of volume for North America in the past. Has that chart necessarily changed given the slowdown in the market?

No, it won't change.

Got it. And just one quick follow-up, if I can. You expanded the consumer marketing campaign to three new regions in Minneapolis, Chicago, and Washington. Can you talk us through how that launch has been received?

Yeah, look, it's early days. You know, we're focused on awareness, preference, and leads. So those are all things that we're still trying to quantify. I won't share, you know, exact numbers here on this call, but needless to say, we're pleased with what we're seeing.

That's why we are going to continue to invest in, you know, the homeowner-focused marketing campaign. Good to hear. Thanks, Aaron. Thank you.

Thank you. Your next question comes from Anderson Chow at Jarden Group Australia.

Please go ahead. Good evening, Aaron and Jason. Thanks for taking my questions. I just have two questions if I could. I mean, the rapid market slowdown also caught me by surprise, I guess. You mainly talk about new starts slowing down, but isn't the R&R market also slowing is rapidly decelerating. I mean, if I look at Leroy Index, it's barely positive. And new home sales, I mean, existing home sales is still declining. So how do you think we're placed for a potential shrinking of the R&R market, probably going to 2024 as well when new starts is already weak?

Yeah, look, Anderson, we like the fundamentals of the R&R market.

We certainly see it moderating. As Aaron mentioned earlier, the contractors we partner with are certainly seeing their calls slow. But with the conditions of new construction, we do like the fundamentals of the R&R market, and we believe it will remain buoyant. So we think going forward, our focus is right, as we've over the past 10, 12 years shifted to be a much more heavily focused R&R a lot more of our volume goes into R&R, so we think that plays well for us moving forward. Certainly, consumer confidence is low.

We do see R&R moderating, but we think it'll be strong going forward.

Okay, and just related to that, we basically kept the CapEx steady, 1.6 to 1.8 billion U.S., but I'm just trying to understand sort of the logic behind that because we are seeing a rapidly changing market to the downside in volume and industry is still increasing capacity. We are increasing capacity. I mean, what would be roughly a break-even production utilization rate for new plants? And if North America is only going to operate at about 50% or 60% production utilization rate, what would that do to our EBIT margin or EBIT, if you could discuss that?

Yeah, Anderson, I guess I'd first start with the headline number you mentioned. That will get stretched out over a longer period of time, barring a drastic change in market conditions. The majority of the projects we've been highlighting on that map slide, we've shown you a lot, we still think are the right projects. We don't believe we're anywhere near terminal share in North America, and we'll need to add that capacity over time. How you time that, obviously, we'll adjust. So right now, we really like the Prattville 3 and 4 project. We want to add more color to Prattville, as we announced today. We have the Asia Pacific plants going in in Victoria. So those projects will continue to move forward with construction that are long lead times. Some of the more greenfield sites, we may buy the land and then wait. So we have a lot of flexibility. You've seen us do it in the past. We added Prattville 1 and 2 several years ago and then paused before we started those lines up, and we were still able to deliver very strong EBIT margins through that period.

So we'll monitor the markets and we'll flex as we need to.

Okay. Thank you. I'll leave you with that. Thank you.

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

Thanks. Good evening. Good morning. This might be a question best directed to Sean Gaddy if he's on the line. But just to follow up, the assertion that you're outperforming competitors in North America, Just had one of your major competitors print almost 10% volume growth and forecast further volume growth in the next quarter. And specifically I guess they refer to, or they're confident they're gaining market share in the new construction segment. And then I'd also say that your 30%, your expectation of 30% down in the second half in that segment is probably worse than, it's the worst I've heard. it would appear that you are losing market share in that new construction segment. So my question is, do you agree with that? How would you respond? And is it time to bring back that same blank brand?

Yeah, a great question. And Sean's out selling. So we have him out selling today. So let's talk a little bit, you know, before we talk about other companies' results, let's talk about ours just to remind you. You know, our first half, you know, in North America, we posted 23% increase in revenue. That was on top of 25% first half revenue growth last year. So if you think about the comps, we have some really tough comps that we're going against. So, you know, we continue to grow the business here. You know, one of the things I would say also is we have been consistent on having supply to our customers, and so part of the reason is the supply that we've been able to give to our customers out there. As far as Simplank, you know, Simplank's a fighter brand, and we've described it as such in the past. And, you know, one thing you need to remember is in the past we lost some discipline, and we're allowing this product to move within the market to end users, segments where it shouldn't have been. And it was ultimately over 20% of our mix. We corrected that, and we're going to make sure we stay disciplined I will say as we look forward, you know, and we look at some of the changing market conditions, if it's the right move to use it to defend a position, we will do that. So, you know, as we think forward, you know, with Simplank, we would only offer that to some of our large builders. You know, so that's our stance on Simplank. But we like our strategy. We think we have a strong value proposition. You know, as I mentioned before, the products and services them at the right segments.

Okay thank you and to you Jase, just to follow up on Sam's question around the second half margin North America, I'm not really understanding where the margin growth is coming from because you've just reported 27.1% even margin for the first half, 28.4% for the second quarter and then the midpoint of your guidance would imply 31% in the second half. So I'm just wondering what's causing that. Is there some lagged price or other?

Yeah, Peter. As we talked about in August, we were showing you a chart that would have shown additional price. So the June 22, 2022 price increase, we wouldn't fully realize that in Q2, and we'd get some more of that in Q3. And then we have the annual price increase on January 1. So you got those two items. across the two quarters. We do expect, we have seen, as I talked about on the call, we've seen freight improve into Q2, and we see that improving into Q3 as well. In Q2, as I discussed earlier, we saw that offset with other increases, pulp, natural gas. We do expect some of that to moderate, so we do expect to see total COGS improvement per unit.

on top of the price increases, helping to offset the lower volumes. Okay, thank you. I'll leave it there.

Thank you. Your next question comes from Brooke Campbell Crawford at barronjoy.com. Please go ahead.

Yeah, thanks for taking my question. Just following up on the last points around price, can you confirm what your price increase is? announcement is in North America for January 23. And if you're able to sort of comment on sort of gross price increase and expectations around rebates coming through, I guess that probably has to happen in the new construction channel. So any color around that will be great. Thank you.

Yeah, Brooke, for North America for January, we're targeting a 5% price increase.

And that is a net price increase after rebates?

Yeah, that would be net. Sorry.

Okay, brilliant. Thanks. And a couple of other questions I've asked around the idea of ramping up capacity into a slowing market. I mean, I guess just to follow up on that, I mean, are you thinking about even if you ramp up Alabama 3 and 4, which I guess is already underway, are you considering mothballing other plants? Like I guess what? the business did back at the early days of COVID taking down Somerville? Because otherwise, I guess you'll have the fixed cost recovery issue to sort of work through.

Yeah, you know, as we look at our plant network, you know, one of the things is having, you know, multiple plants around the country. We have the ability to flex where we think the volume is going to be.

And so we will make sure that we're doing that as we continue to monitor the market conditions. Okay, thanks. Sure. Thank you.

Your next question comes from Paul Quinn at RBC Capital Markets. Please go ahead.

Yeah, thanks very much. And morning, guys. So just checking on your North American sales guidance for the plus 13% for fiscal year 23. My rough and dirty map has your second half sales down 12% over the first half. Is that correct?

Sorry, Paul. I'm not sure I'm tracking with you. We'd expect sales to be up in the back half of the year. Okay.

I've just done, on your fiscal year, 22 sales, 2.551 billion. Sorry, Millie. I've just taken 13% of that and taken off the first half, and I got you back down in the second half. Is that right?

So you're asking is the second half net sales lower than the first half? Is that the question?

Yes. Yes. And then how does that shake out on volume and price?

Sorry, I missed that last part of that question. We're having a tough time hearing you all.

Sorry about that. If you're down in the second half, how does that shake out on volume and price?

Yeah, so as we referenced earlier, we expect to be our second largest revenue half ever.

And you're correct in saying the highest ever would be the first half of this fiscal year. And then, yeah, we'd expect the volume in the second half to be lower than the first half as well.

The average price would be higher.

Okay, and I'm also really confused with the guidance going forward because LP just reported last week, and they're guiding a 30% revenue increase in the calendar Q4, you know, not the second half of their year. But just what is – are you seeing them showing up, you know, more competition between you and LP on the siting product?

Yeah, Paul, I would say we have a lot of good competitors here. out there um you know what i would say is we have not lost a customer um you know and we'll continue to utilize our value proposition uh that we have and as i said before we're very confident we're going to outperform the markets we're in okay i'm confused with the result because your your first half of the year your volume's up eight percent lps was up ten percent they've had customers on allocation two years in a row now so

I'm just trying to understand why you're losing a growth when you're not as constrained as LP.

Yeah, Paul, I think, you know, as we talked about on the call, we're flowing product to the wall consistently and we're not constrained the past several quarters.

And so I think part of what we believe is that as the downturn was coming, we're feeling it faster as our backlog, sorry, our backlog, the new construction backlog

our profitability on the wall. Okay, that helps. Thanks, guys. Best of luck.

Thanks.

Thank you. Your next question comes from Sharia Vison at Bank of America. Please go ahead.

Hey, morning. Aaron Vison. Thanks for taking my question. I had a quick one on your input, because perhaps a follow-up from what Peter and Andrew asked, right? So last quarter you called out called out on the cost inflation, right? A few line items that you thought were pretty high. I just wanted to get a sense that for this quarter, were there any such items? And also, what are you seeing on the cost side, if you have any visibility? Thank you.

Yeah, thanks for the question. I think you're referring to the slide last quarter where we kind of called out freight, pulp, and cement. So we would still, versus second quarter of last year, all would be up double digits. So we still saw significant cost inflation Q2 of FY23 versus Q2 of FY22. As I mentioned on the call, we did see favorability. So I think sequentially from Q1 into Q2, we've seen freight come down modestly about 10%, but we saw that offset by pulp. and natural gas ticking up into Q2 from Q1. So net-nets, our total COGS per units essentially remain flat, Q2 versus Q1, and then obviously a lot of inflation Q2 versus prior Q2.

Can you just give a sense from what you're seeing, is there an expectation that the input costs continue to trend down as we head into the year end, or what are you seeing there?

Yeah, we're seeing freight continue to tick downward from our Q2 levels into October, November, which is a positive for us. That's good. We're seeing moderation in pulp, but cautious

But those two big ones, like I said, we're seeing moderation and pull, and freight continue to tick down, which is a positive. Great. Thank you.

Thank you. That concludes our question and answer session. I would like to hand back now for some closing remarks.

Just want to thank everyone for being on the call. You know, just in closing, our focus remains on being a growth company. As I said before, we're going to continue to focus on what we can control, which is working safely, grow above the market by leveraging our value proposition. We're going to continue to invest in our key strategic growth initiatives.

So with that, thank you, everyone.

Ladies and gentlemen, that concludes our conference for today. Thank you all for participating. You may now disconnect your lines.