James Hardie Industries plc

Thank you for standing by and welcome to James Hardy fourth quarter fiscal year 2023 results briefing. Today's briefing is hosted by James Hardy CEO Mr Aaron Erta and CFO Mr Jason Mealy. After the briefing we will open the lines to Q&A and I remind participants to limit your questions to one plus a follow-up. After the Q&A I'll turn it back to Mr Erta for closing remarks. I would now like to hand the conference over to James Hardy's CEO, Mr. Aaron Erter. Please go ahead, sir.

Thank you, operator. Good morning and good evening to everyone. I'm Aaron Erter, CEO of James Hardy, and I would like to welcome all of you to our fourth quarter fiscal year 2023 briefing. Turning to page two, you will see our standard cautionary note on forward-looking statements. Please note that the presentation today does contain forward-looking statements and the use of non-GAAP financial information. Also, except where we explicitly state otherwise during our prepared remarks, all references to monetary amounts should be assumed to be in U.S. dollars. On page three, you will see our agenda for today. I am joined by our CFO, Jason Mele. For today's call, I will start by providing an operations and strategy update. Jason will then discuss our full year and fourth quarter fiscal year 2023 financial results, and I will return to discuss our fiscal year 2024 guidance, outlook, and provide a brief closing. We will then open it up for questions. Before we begin, I would like to take this opportunity to thank all of our employees around the world who remain focused on safely delivering the highest quality products and services to our customer partners. Our employees truly represent the very best in our industry and consistently enable our superior value proposition. I feel fortunate to work with each and every one of them. Let's start on page five with a look back at fiscal year 23. Last quarter, you heard me talk about our team's focus on controlling what we can control and managing decisively. And when I reflect on our fiscal year 23 results, that is exactly what we did. I'm really proud of what this team delivered. The true test of a team is how you perform through adversity. And I think our team has done an outstanding job. In FY23, we delivered Record net sales globally and across all of our regions. Record EBIT of $767.5 million in North America. Adjusted net income of $606 million. And operating cash flow of $608 million. I am pleased with how the teams adjusted and executed during the year to prepare the company to thrive through a difficult environment. And I believe that is reflected in the fourth quarter results. In the fourth quarter, we delivered sequential growth versus the third quarter across numerous metrics in every region and globally. Some highlights. Global adjusted net income improved 13% to $146.2 million. EBIT margins had meaningful growth versus the third quarter across all of our regions, notably North America improved 200 basis points to 29%. We took important steps forward this year to make the company stronger for years to come. We appointed a new chairperson, Ms. Ann Lloyd. We reshaped and strengthened our leadership team by adding key leaders that will help to take this company forward. We focused on SG&A for the current environment, reallocating and prioritizing resources to key areas and projects. We reset our capital allocation framework in a manner we believe aligns to a growth company, specifically with the launch and execution of our share buyback program. We strengthen our customer value proposition to continue to be homeowner focused and more customer and contractor driven. And we aligned on our go forward strategy. I believe we not only delivered differentiated results with share gain and elevated margin in a difficult environment, but we have managed decisively and effectively to position James Hardy to not only navigate this market cycle, but to accelerate our competitive advantages through the cycle and come out on the other side an even stronger company. Let's now turn to page six. I just walked you through some highlights that I believe illustrate our team's ability to navigate through any market conditions. We remain laser focused on the items on this slide. We will control what we can control and continue to manage decisively to accelerate our competitive advantages despite the continued housing market pressure. We remain focused on continued strong execution of our strategy to drive profitable share gain. We are balancing our manufacturing network to ensure not only that we better match supply to demand, but ensure we are agile and ready to react to any market changes. We have adjusted SG&A for the current environment and will continue to do so as necessary, reallocating resources to key areas and projects. And we are continuing to invest in profitable growth. We bring the solutions our customers are seeking. We are focused on being agile and adaptive to respond to significant changes in market conditions, but remain thoughtful and focused on where we can accelerate our competitive advantages. I believe our fourth quarter results are a proof point that we can indeed deliver differentiated results regardless of market conditions. And our ability to thrive regardless of the market conditions requires having the right strategy. so please turn to page 7 to review our global strategic framework. You've heard me say numerous times that we are homeowner-focused, customer and contractor-driven. This was top of mind as our team worked on our go-forward strategy. Last November, I stated I thought we had a very solid strategy, but we would be adding additional clarity and precision to the strategic framework, and that is what we have done here. All three regions are focused on the following key strategic initiatives. Number one, profitably grow and take share where we have the right to win. That is across regions, segments, products, and customers. An example is in North America where there are 40 million plus homes that are 40 years old or older that we are working to convert the James Hardy siding. Number two, bring our customers high-value differentiated solutions. We are doing this throughout all our regions and Europe is leading the way with a focus on our high-value product growth. Their high-value product penetration is expected to be the highest in the company with their commercialization of our new technologies like Hardy Architectural Panel and Therm25 Innovative Flooring Solutions. Number three, connect and influence all the participants in the customer value chain. We are doing this across all regions. Australia is doing this by marketing directly to the homeowner via multiple media platforms, co-creating next generation building design with architects and developers, and working with builders to train and implement construction efficiencies. We will accelerate our strategic initiatives by establishing competitive advantages through our strategic enablers. Our strategic enablers are customer integration, That means staying close to the participants in the value chain and optimizing service and reliability. Innovative solutions. We will continue to improve existing products and introduce new products that meet the needs of our customers. You've seen us do this throughout our history, and most recently with the Hardy Architectural Collection. And beyond just innovative products, we also want to provide innovative services and solutions, such as our Contractor Alliance programs. that provides a wide array of support and training for contractors as they start up and grow their businesses. Be the brand of choice. We are focused on being the brand of choice in the building solution space, and we are generating demand through focused and balanced marketing programs that drive awareness, consideration, and conversion across the value chain. That includes builders, dealers, and distributors, architects, contractors, and homeowners. Global capacity expansion. We are strategically aligning our capacity with demand, enabling us the flexibility to grow profitably into the future. We are focused on ensuring we have supply ahead of demand and drive growth as the market leader. Both our strategic initiatives and strategic enablers build upon our foundational imperatives. Our foundational imperatives are the bedrock of our company. and are non-negotiable as they help promote the James Hardy culture and will ensure our future success. The first is our culture of zero harm. We operate our business with our team's safety, security, and well-being as our number one priority. We will always put safety first. We believe every incident is preventable. The second is ESG. We have continued to make good progress in integrating ESG into how we operate, and we continue to make progress against the goals and targets we set out in our prior sustainability reports. We're currently in the process of setting new ESG goals and targets, which you will see in our third annual sustainability report, which will be published in July 2023. Third is the Hardy operating system. If I were going to boil this down to just a few words, the Hardy Operating System is how we get things done. This is across the entirety of our business. The Hardy Operating System builds on the success of the Hardy Manufacturing Operating System, or HMOS, which you have heard us talk a lot about over the past four years. We have had great success with our implementation of HMOS, which has been all about how we run our plants. HBOS remains unchanged and is one piece of the Hardy operating system. What we are doing now is taking those learnings and expanding the concepts to everything we do, how we run IT projects, how we run procurement, how we forecast, and more. The best companies in the world have comprehensive management systems, and I believe we are ready to take that next step. I'll speak more about the Hardy operating system in the coming quarters, and over time, I will set savings targets. The final and most important of these foundational imperatives is our people. My confidence in our future success stems directly from my belief in James Hardy's 5,000 plus employees in our leadership team. There is no question we have great people, but we need to improve upon how we invest in, develop, and retain our people. I think with the right focus, we can make our people an even bigger competitive advantage for us than they are today. I'm not going to dive deeper into our strategic framework today, but this slide will become a foundation of every quarterly result call, and I will provide more context and updates on each of these items over future quarters. What I really want you to walk away with today is we have the right strategy, We have a re-energized focus on profitable share gain. We have added our people as a critical focus, and we have expanded the success of HMOS as a comprehensive company-wide management system, the Hardy Operating System. I'm confident in our team and our strategy. Combined, they position us to execute at a high level and drive profitable share gain in all three regions. Please turn to page eight where I want to tie our strategy to our value proposition. Our strategic intent is clear, as is our expected outcome, profitable share gain. In all three regions, we have large market opportunities to drive profitable growth for the long term. Most importantly, I believe that we have the right to win in all three regions in the specific markets and segments we are targeting. The right to win has a foundation in our superior value proposition. Our products deliver a variety of exterior designs that deliver superior curb appeal for the homeowner. Our products have superior durability and are low maintenance. We are a trusted brand in the industry that delivers unrivaled business support, and we have localized manufacturing enabling us to deliver reliable, and excellent service to our customers and ensure product gets on the wall timely. It is this superior value proposition which has helped us secure the strong market position we have today, and it is these same attributes that I believe will help us continue to capitalize on our growth opportunities and drive profitable share gain into the future. I will now hand it over to Jason to go through our financial results.

Thank you, Aaron. Let's start on page 10 to discuss our global results for the fourth quarter and our full year fiscal 2023 results. Let's start with the full fiscal year. Global net sales of $3.8 billion is an all-time record for James Hardy, up 4% from the prior year. Adjusted net income of $605.5 million is our second best result of all time. We continued to generate solid operating cash flows, with FY23 cash flow was $607.6 million, and adjusted EBITDA margin of 25.2% remained strong despite the market and inflationary pressures experienced in the year. Regarding the fourth quarter, group net sales decreased 5% to $917.8 million, driven by a volume decrease of 13%, offset by global price mix growth of 8%. Adjusted net income decreased 18% to $146.2 million. Last quarter, we talked a lot about controlling what we can control as we navigate this cycle. So I wanted to also discuss our fourth quarter results sequentially versus our third quarter of fiscal year 2023 results. Volume of 1.1 billion standard feet up 3% from Q3. Net sales of $917.8 million was up 7% versus Q3. Adjusted EBIT of $187.5 million, up 13% from Q3. And finally, adjusted net income was up 13% from Q3 at $146.2 million. Globally, we are controlling what we can control and have delivered a strong fourth quarter. Let's move to page 11 to discuss the North America results. Let's start with the full year results. Our North American business set records for net sales, average net sales price, and EBIT in fiscal year 2023. Net sales increased 9% to a record $2.8 billion driven by strong price mix growth of 11%. The record $767.5 million of EBITs was achieved at a robust EBIT margin of 27.5%. Regarding the fourth quarter results compared to the prior corresponding period, North American net sales decreased 6% to $651.5 million. Volumes were down 14% as market activity weakened but was partially offset by price next growth of 8%. Despite 14% lower volumes versus the prior corresponding period, EBIT dollars in the fourth quarter were down just 8% to $188.8 million at a strong EBIT margin of 29%. Lastly, I want to discuss our fourth quarter results sequentially versus our third quarter of fiscal year 2023. We delivered 200 basis points of EBIT margin accretion in Q4 versus Q3, with average net sales price up 1% and EBIT up $14.7 million. We are controlling what we can control, delivering a lower cost per unit in Q4 versus Q3, while maintaining SG&A costs and driving profitable share gain. The North American team delivered a strong fourth quarter result by managing decisively and partnering with our customers. While we expect further weakening in the U.S. housing market, we exit Q4 in a position of strength with an EDIF margin of 29%, which will enable us to continue to invest in growth while absorbing the margin pressure associated with lower volumes. Let's move now to page 12 to discuss the Asia-Pacific results. Again, we will start with the full year results. Our Asia-Pacific business set records for net sales and average net sales price in fiscal year 2023. Net sales increased 1% to a record $787 million Australian dollars, driven by strong price mixed growth of 10%. EBIT of $208.8 million Australian dollars was achieved at an EBIT margin of 26.5%. Regarding the fourth quarter results, compared to the prior corresponding period, Asia PAC's net sales were $204.6 million Australian dollars, an increase of 2%, driven by price mix growth of 12%. Despite 10% lower volumes versus the prior corresponding period, EBIT in the fourth quarter was up 12%, at $59.1 million Australian dollars at a strong EBIT margin of 28.9%. Again, I want to discuss our fourth quarter results sequentially versus our third quarter of fiscal year 2023 as it illustrates how the team is managing decisively. Our quarterly volumes increased 16% sequentially, and net sales price was up 4%. EBIT improved by $16.8 million Australian dollars, or 40%, and EBIT margin improved 420 basis points to 28.9%. Similar to North America, our Asia Pacific team has managed decisively through the year, and we exit FY23 in a position of strength. We expect the underlying housing markets to weaken further, but are confident we will continue to control what we can control and deliver differentiated results through this cycle while accelerating our competitive advantages. Let's now turn to page 13 to discuss the European results. Starting with the full-year results, the team delivered record net sales of €431.8 million, driven by price-mix growth of 14%, while EBIT margin of 5.8% for the full year was significantly impeded by cost inflation, primarily related to energy costs. Similar to North America and APAC, our European team had a solid close to the year, with Q4 setting a quarterly record for net sales and average net sales price. Net sales were 117.8 million euros, up 2% year-over-year at a record average net sales price of 438 euros per thousand standard feet. Sequentially, the Europe team delivered significant improvement in Q4 versus Q3. Volume improved 6%, and average net sales price improved 10%, while EBIT margin improved 520 basis points to 6.7% and EBIT increased 6.4 million euros. In line with their counterparts in North America and APAC, the European team effectively controlled what they could control and enter FY24 in a position of strength. We are laser focused on driving profitable share gain in FY24. Turning now to page 14 to discuss the liquidity cash flow, capital allocation, and capital expenditures. We have maintained the standard slides on these topics in the appendix, but wanted to highlight some key points in our prepared remarks today. We continue to maintain a strong liquidity position with our leverage ratio at 0.99 times and $475.8 million of liquidity. We expect our continued robust operating cash flows will help ensure we maintain the strong liquidity position. In FY23, our operating cash flow was a robust $607.6 million. Our capital allocation framework remains unchanged. First and foremost, we invest in our organic growth. We maintain a flexible balance sheet, and when prudent, we deploy excess capital to our shareholders by the way of share buyback. Since our announcement of our share buyback program in November of 2022, we have repurchased 3.8 million shares for total consideration of 78.4 million US dollars. Finally, let's discuss capital expenditures. In FY23, total capital expenditures were 591.3 million US dollars. We had previously discussed with you a series of large capacity expansion projects across the globe. I wanted to provide a brief update on those projects. First, we have canceled our plans to build two pilot plants. We believe we have the capability to drive innovation within our existing R&D and manufacturing facilities, and we believe we have proven this over time. This will save us over $130 million in capital investment. We have continued construction of Prattville 3 and 4 in Alabama with an expected completion date for Line 3 in our fourth quarter of fiscal year 2024. We continue construction of our Massachusetts Color Plus facility, which we expect to complete in the first quarter of FY24, which we will then utilize as a reload facility, but not yet utilize the painting capacity until the market demand improves. We also continue our brownfield fiber gypsum expansion in Orejo, Spain. And we had previously announced fiber cement greenfield expansions in all three of our regions. As housing markets continue to change, we're monitoring medium-term demand closely to ensure we time these projects correctly. We're being very prudent in how we approach these greenfield projects. In relation to our US-based greenfield, last month we purchased land in Missouri. And in Europe, we plan to finalize the purchase of land for our future fiber cement site in the next few months. For both of these greenfields, we do not expect to begin any construction at either location during fiscal year 24 based on current market demand. In total, we expect to spend approximately $550 million in capital expenditures in FY24. What is most important to note here is that despite the changing market conditions, we remain committed to investing in capacity expansion that will continuously adjust such that we are not overextending our capital, but allow us to be flexible and agile to respond to demand increases coming out of this cycle. Our capacity expansion program is guided by our expectation for sustainable, long-term, profitable share gain. To close, we have robust operating cash flows, substantial liquidity, and a flexible balance sheet, which will help us navigate this market cycle. Please turn to page 15 as I pass things back over to Aaron.

Thank you, Jason. We have closed FY23 with our team executing at a high level. Let's now shift to a discussion of our fiscal year 2024 guidance and outlook before closing. Starting on page 16, we're entering fiscal year 2024 in a position of strength. We have a clarity of mission with our team to drive profitable share gain. We approach the year with confidence and a commitment. We will seize profitable share gain opportunities by bringing the right solutions to our customers. For FY24, we are targeting growth above the market, or PDG, of 400 basis points in North America and APAC. Considering all of the challenges we were faced with, I believe our fourth quarter was our best of the year, as each business unit delivered sequential EBIT margin improvement, which enabled us to continue to invest in growth through this cycle, which in turn will help us accelerate our competitive advantages and exit this cycle a stronger company and a stronger team. And of course, this is enabled by our strong team of 5,000 plus employees worldwide, which is led by an excellent group of leaders. Our team continues to manage decisively to ensure we execute on our strategy and continue to deliver differentiated results in fiscal year 24. Please turn to page 17 to discuss our guidance. Today, we are providing three points of guidance for our first quarter of fiscal year 2024. First, we expect North America volumes to be in the range of 680 and 710 million standard feet. Second, we expect North America EBIT margin to be in the range of 28% and 30%. And lastly, we expect global adjusted net income to be in the range of $145 million and $165 million. For FY24, I fully expect we will outperform the markets we participate in. With that said, I do see a challenging demand environment this year. Interest rates are still in flux, job markets are still adjusting, consumer confidence remains low, and in general, housing markets remain unsettled. This uncertainty has provided limited visibility for us to give a full year guidance number at this time. We will look to provide more clarity in August. Please turn to page 18 to discuss our market outlook. While we enter FY24 positioned to deliver differentiated results, we are also aware that all of the housing markets we participate in remain unsettled. This is supported by external data. Specifically, today I wanted to walk you through our market outlook for our largest market, North America. We shared some external data with you on our last call and have again presented updated information here, along with our view of market conditions for calendar 2023. In single-family new construction, the current range of estimates for the eight data providers we track is down 10 to down 23%. In multifamily new construction, the current range of estimates for the eight data providers we track is down 8% to down 25%. In repair and remodel, the current range of estimates for the three data providers we track is down 8% to down 15%. Our view is that all three of these markets will decrease in the top half of these external ranges. Our current view is that we will see continued weakness in both new construction and repair and remodel markets until the Federal Reserve clearly states they are done increasing interest rates. We view this as the first necessary step to enable these markets to establish a new normal and then adjust to it. Our current expectation as the underlying markets decline will lead to our North American volumes to decline sequentially each quarter through December 2023 before seeing a seasonal uplift in our fourth quarter aligned to the calendar 2024 build season. Please turn to page 19. Noting the uncertain market conditions, we thought it would be useful to also provide a sensitivity analysis in regard to North American EBIT margins. As our largest business unit, as North America volumes change, so does our global net income. Thus, we thought this page was very relevant in a period of market uncertainty. Here, we are sharing our EBIT margin expectations at a variety of quarterly volume outcomes specific to fiscal year 2024. This sensitivity analysis does assume our current range of expectations on raw material costs and freight rates and assumes we continue to invest in growth as currently planned. Obviously, if market conditions decelerated, we would focus on pulling certain levers to bring costs down as needed. So let's walk through this sensitivity analysis for FY24 quarterly volumes and EBIT margins. At 700 million standard feet of volume in a quarter, we would expect to deliver an EBIT margin of between 28 to 30%. At 650 million standard feet of volume in a quarter, we would expect to deliver an EBIT margin of between 26 to 28%. At 600 million standard feet of volume in a quarter, we would expect to deliver an EBIT margin of 25% to 27%. These volumes are simply to provide context to our EBIT margin sensitivity in North America and should not be construed as volume guidance for any quarter in fiscal year 2024. Regardless of how the market fluctuates, we will deliver strong financial results And I believe that is reflected in these EBIT margin ranges. Please turn to page 20. I think our fourth quarter results and our first quarter guidance are proof positive that our team can execute regardless of market conditions. This slide, which I introduced in February, illustrates how we intend to manage our business through this cycle and specifically in FY24. First, we plan to continue to deliver growth above market in every region in FY24. Second, we expect to achieve higher average net sales price in every region in FY24 versus FY23. Third, we expect to deliver lower cost per unit in FY24 versus FY23. Fourth, we will closely manage our global SG&A spend. Lastly, We expect to maintain full-year EBIT margins in North America and APAC above 25% and in the mid-single digits in Europe. We are managing decisively and controlling what we can control, and I think the financial results are starting to really reflect the impact our team is having by taking this approach. Globally, we have positioned ourselves to outperform the market through this cycle and enabled ourselves to continue to invest in growth while delivering strong returns. Finally, let's move to page 21. We spent a fair amount of time today talking about how we will navigate the current market, but I also shared with you our long-term strategy and how our superior value proposition will enable us to grow into the future. And I still firmly believe that these 10 core tenets listed here remain the illustration of who we are at James Hardie. a global growth company. We have updated the metrics at the bottom of this slide to include our FY23 results, and all four metrics remain extremely strong and support being a global growth company. We are homeowner focused, customer and contractor driven. With that, I would like the operator to open the lineup for questions.

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 the handset to ask your question. We ask today that you please limit your questions to 1 plus a follow-up. Your first question comes from Niraj Shah with Goldman Sachs. Please go ahead.

Good morning, guys. Hope you can hear me. My first question is just around the price contribution. How much of the 8% price mix was price, and how did the realization compare to what you'd asked for?

Yeah, Neeraj. It would be a mix of both, obviously. I think it's the fourth quarter. It would be more prices. We've had the January 1st price increase as well, and it's in line with our expectations. On the last call, we said we expect to get good price realization in the R&R markets. And obviously, we talked a lot last quarter about the competitive nature of new construction. So things are on track, and we expect to have price up year on year in FY24, as shown in the slide there and went through in the guidance and outlook section.

Great. Thanks. And then just secondly, What percentage of volumes were a sand plank in the fourth quarter and how did that increase into the period?

Yeah, Neeraj, I'm not going to get into certain percentages. I would say they were in line with our expectations of what we were projecting them to be internally. As we talked about Simplank before, you know, Simplank we're utilizing as it is a need for our customer partners, right, as they try to hit a sharper price point. So rather than us go in and lower price, we offered one of our assets that we have out there in Simplank. So it's meeting our expectations. And as you can see with our performance in EBIT margin, you know, it has not hurt us.

Yep, fair enough. Thanks, guys.

Thanks. Your next question comes from Keith Chow with MST Marquis. Please go ahead.

Good evening, gents. So first question, just to follow up, Aaron, on what you said earlier. I just wanted to be clear on this. So you're expecting a sequential decline of volumes from the December 23 quarter onwards, is that correct, before the seasonal uplift in the fourth quarter of FY24?

Keith, that's correct.

Okay, so do we interpret that as an acceleration of, I guess, a downward trend in demand as we track through FY24 and bottoming at some stage? The reason why I ask is I'm just keen to get an understanding of the shape of the demand curve you're expecting for FY24. When during FY24 are you expecting the comps to bottom out?

Yeah, as far as when we see it bottoming out, I mean... Look, our expectation is, you know, Q1, I'll just say this, is tracking along well. For us, as we look to Q2 and Q3, we see that the volume's declining. And then as we get into our Q4, Keith, we see the seasonal volume increase because of the build season. That's how we're modeling this out right now.

Okay, thanks, Aaron. I guess if we're talking about a seasonal uplift in the fourth quarter and you're seeing that seasonal uplift coming through, then we should have reached a trough at some point in time within the second and third quarter of FY24.

Yeah, Keith, I think in any downturn we've experienced historically, there's always an uplift. more clarity.

Yeah. And then just for the follow-up question, maybe on Niraj's question earlier. So let's just look at average net sales price up 1% sequentially, noting that color plus volumes were only up 2% as well. And I know we're comping off a strong period in the PCP, but it certainly seems as though mixed was negative in the period. But you know, Is that within the bounds of what you're expecting? Can we still expect ColorPlus to grow this year or at least hold volumes on an absolute basis?

Yeah, Keith, I think ColorPlus up 2% and a backdrop of total volumes down 14, a strong result and kind of leads itself to our comments last quarter that we'd expect R&R to hold up better than new construction over the cycle. And I think that's what we're seeing in our regional data and the ColorPlus data.

And Keith, I think just to add to that, when we think about Color Plus or any of our volumes, is we expect to outperform the market, right, in which we plan. So that's what we would expect with Color Plus as well.

Okay. Thank you. Excellent. Thanks.

Your next question comes from Lee Powell with UBS. Please go ahead.

Hi, Aaron. Hi, Jason. Aaron, just following on from Keith's line of questioning, so if we look at your 1Q FY24 volume guidance. I get the PCP was strong, but that 680 to 720 number implies a 16% decline year-on-year, and you're talking about full-year TAM being down 14% to 16%, and then you're expected to outperform the market. I know in your comments that you talk to continued weakness and sequential declines in the period. I'm just trying to reconcile that down 16% with this TAM down 14% to 16%. How far under your base case do you think we are actually off kind of a return to normal seasonality?

Yeah, Lee, so I think the only thing that was left out of that question would be the comment of four points of PDG that Aaron talked about on the call. So if you assume that across the market range we gave, you know, that's kind of down 10 to down 15. And so the down 16 in Q1 is in line with that when you think about Obviously, the comps in the back half of the year get a lot easier at both those quarters being right around 700 versus the first two quarters being 832 and 820. So, yeah, we'd expect to be in that range with Q1 starting at kind of the minus 16 you're facing when they point off.

Okay, thank you. And then just to follow up, I mean, you've obviously taken some shifts offline. Like, where's capacity utilization in the network now?

Yeah, Lee, we have plenty of capacity to flex if needed, so we feel good about where we're at. We don't disclose that number specifically, but we're operating, as we talked about, managing decisively and making sure we can have that network flex up or down depending on the market conditions. So we're in good shape.

Okay.

Excellent. Thank you.

Thanks. Cheers. Thanks.

Your next question comes from Peter Stein with Macquarie. Please go ahead.

Good evening, Aaron and Jason. Thanks for your time. Just wanted to dig into what you're expecting or seeing in the R&R market. You're interested in your view that there's an 11% to 15% decline in the market. in the context of what you're seeing on ColorPlus. I appreciate that there's market outperformance in your ColorPlus number, but could you just sketch the R&R market to us and what you're expecting as the year progresses?

Thanks for the question, Pete. If you look at some of the outside data providers, I think that we track around three. I mean, the range goes from negative 8 to negative 15%. Our view is negative 11 to negative 15. I think there's an interesting dynamic right now, and it just goes to the uncertainty out there, right? You know, consumer sentiment is still down, so you have people that are more reluctant to spend on a larger project, right? I think some of the forecasts out there in R&R for, you know, smaller projects are a little more bullish than what we have. I would say the long-term fundamentals are great for R&R. We keep talking about it's our number one focus. It's 65% of our business. Particularly in North America, Sean and team have initiatives to really go out and attack this market space. We keep going back to the fact that there's 40 million homes that are over 40 years old or older. So there's a huge market share opportunity for us. I think what has to happen is we get a little more certainty in the marketplace. People are going to be more comfortable with spending on a larger project. The other thing that bodes well for R&R longer term is you have probably 80 plus percent of people in North America who are tied to really low interest rates. They're not necessarily going to want to leave their homes and go out and try to find a new one. That bodes well for R&R. We are extremely confident in our long-term prospects in R&R. I think what you're seeing right now is just because of the uncertainty we're seeing out in the marketplace that we talked about on the call.

Thanks, Aaron. And then if I could ask a related follow-up. Regionally, what are you seeing in the R&R markets, if you wouldn't mind giving us some color on that?

Yeah, no, it's a great question. I would just say kind of high level, you know, the areas that are what you would expect to be, you know, more R&R focused, like the Mid-Atlantic, the Northeast, the Carolinas, the Midwest, we're seeing strength there. And tracking above what I would say, you know, the rest of the regions as it relates to R&R. And, you know, you can see that by some of our, when I look at some of our color growth And those markets in particular, we're tracking very, very well.

Perfect. Yeah, that does correlate to that color plus number. Thanks very much. I'll leave it there. Thanks, James. Thanks, Peter.

Your next question comes from Lisa Hyun with JPMorgan. Please go ahead. Hi, morning.

I mean, I had a question around fiber cement as a category more holistically. Just given where affordability stands at the moment, can you just talk about fiber cement and how that's tracking versus vinyl and the implications for, you know, how confident you are behind that four percentage points of PDG?

Lisa, I just want to make sure I got your question. How is fiber cement as a category tracking behind vinyl? Is that your question?

Yeah, it sounds like just from feedback that, you know, kind of fiber cement in general is losing share versus vinyl in the market at the moment, just given affordability concerns.

Yeah, Lisa, I think one of the things that we got to make sure, you know, that we're grounded on is they're not apples to apples, right? So, you know, someone who's going to be in the market and who can afford fiber cement may be a little different than those who can afford vinyl. And then there are some that fall in between there. You know, I would say this. We've been very successful from a market share standpoint versus vinyl. You know, if I just look at, you know, kind of a two-year look that we break down from a market share standpoint, because I think you have to look at this in two-year stacks. You know, vinyl would say that, you know, has grown over that two years a CAGR of 1%. If you would look at us, just in particular, a two-year CAGR, we've grown 11%. So, you know, I wouldn't necessarily agree with that assertion that vinyl is outdueling fiber cement. So, clearly, and we can provide these numbers to you, I think we're winning from an architecture standpoint.

Okay, sure. And then just in terms of Lane, I mean, how are you thinking about that into FY24? You know, I think when you spoke to us in September, there was a potential to kind of upsize what you've done so far.

Yeah, Lisa, great question. Look, we've talked so much about HMOS that was, you know, really instituted about four or five years ago in here, and the team's done a really solid job. year-over-year so you know we're tracking year-over-year savings what we're going to introduce into the conversation with lean as well is I mentioned on the call our Hardy operating system right so HMOS is a part of this and I said on the call basically this is our internal management system so there's going to be some metrics tied behind that whether that be procurement savings value improvement that when I come back in front of you guys here in the coming quarters We'll put some concrete targets behind that, but I feel very confident on our lien savings and our initiatives. And we have the entire enterprise rallied behind this. It's not only our manufacturing plants, but it's our new management system across all of James Hardy.

Okay, sure.

Thanks for that.

I'll leave it there. Thank you.

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

Thank you. Good morning. Good evening, I should say, I guess. Just first question for me, Aaron. I'm sorry if I missed it, but what do you think PDG was in the year just gone or the quarter just gone? And I guess implicit with that question is, what do you think R&R was? Because I know it's a hard number to pin down, but a lot of those numbers there would suggest that it's hard to see you gaining share if we look at some of the other numbers that are floating around.

Yeah. Andrew, so I am... You know, obviously being in here about nine or ten months, PDG is something I knew we used a lot in the past. So I've looked at this closely as, you know, I use the term profitable share gain. I think this falls right into that and why it falls right in line as being a major focus for us as a company. I think as we looked at FY23, our PDG gain was roughly 3.4%. you know, if we look at, you know, moving forward, I have set the target and expectation of 4% in North America and APAC. I think from a historical standpoint, it was looked at around 6%. And, you know, it was 6% because we also had a smaller base back then. Really, that 6% and the 4% equate to each other of being roughly 1% market share gain. So that is our target for this year and as we move forward, you know, roughly 1%.

Got it. Thank you. The second one, this might be for you, Jason, by all means, Aaron, jump in. Just thank you for the EBIT sensitivities. I think they were, or the volume sensitivities, they were helpful. It is a sort of a nonlinear profile. So I'm just trying to understand the levers that you might pull there. And do we expect that that can work when you just see the seasonal softness that we'll see? Obviously, you you're not going to make a decision to take a line down just for a quarter. So just interested in how that plays out just in the seasonal swings.

The question is that we might pull a line down in the quarter. I'm not sure I got that answer.

Aaron, in your prepared remarks, you mentioned that you had some levers that you would pull if you did see the volumes come down. I'm just interested in what the sort of fluctuations or the tools that you've got in the toolkit to adjust to a softer market.

Yeah, look, Andrew, we're going to manage this business for the longer term, right? So when I think about, you know, one of our largest investments, most important investments is in our plants and in our people, you know, it would take more than quarter to quarter for us to, you know, pull any type of cost out of there. Particularly right now when you look at the uncertainty of the marketplace, what we have to be prepared for is and we are in all of our regions, is to make sure that we have the capacity to respond. So, you know, if we have to invest to be sure of that over the next few quarters of this year, we're going to absolutely do that because that's going to help us take advantage of any type of potential market share gains, which is our number one focus.

Thank you.

Thanks. Thanks, Andrew.

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

Aaron, just picking up on your target of 400 basis points of PDG over the next 12 months or so, how is that split across new housing multi of which you're coming off a very low base in R&R broadly?

David, we look at it, you know, combined altogether. I don't have that split, so we look at it combined. Okay.

Thanks, guys. Good quarter. Thank you.

Thank you.

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

Thanks. Good evening, Aaron. G'day, Jason. A couple of simple ones I think, just in terms of your assumptions for the gross profit margin or the percentage margin in the guidance that you've provided and the extent to which you've already seen cost relief in say freight or I don't know if pulp's rolled over yet on your lag basis and what sort of cost relief you're expecting in the quarterly guidance that you've just provided at the gross profit line.

I'll take this and I'll let Jay jump in. Simon, thanks for the question. In our guidance range, we've assumed some inflation favorability for Q1 versus the prior year. But really in freight and energy, regarding the full year, as you're aware, we're not providing full year guidance just because of the uncertainty out there. Although we are seeing some of the favorability, you know, in freight and energy, there's other things where we're not seeing favorability, right? You know, areas like cement. So, Jason, I don't know if you want to jump in here with anything.

Yeah, I think, you know, we commonly talked about four key input costs in our variable cost assignment being pulp, freight, cement, and labor. So things remain where they are today or the trends remain the same. As Aaron said, we'd expect favorability in pulp and freight, but certainly the opposite in cement and labor. All of that is considered in our Q1 guidance. As we look to give fuller guidance, we'll provide more clarity on our assumptions around inflation.

Okay, that'll be helpful. And while we're on sort of cost-to-revenue relationships, backing out your DNA from your SG&A, Just the observation over the last several years and multiple quarters has been SG&A was tracking along and around 10.5% to 11% of revenue. It fell 250 basis points during the COVID period, probably a period where you were gifted some demand as well with disorganised competitors, et cetera, not having capacity. I just want to understand what the expectation should be for that SG&A to sales ratio given at a it did track 200 basis, 250 basis points lower during the period preceding this current downturn. Should we be expecting that to go back up, given your comments about optimization of the spend, Aaron?

Yeah, look, we're focused on SG&A as necessary. I think where we've been tracking from an SG&A standpoint is where we'll continue to track. And if you go back to our prepared remarks, we lay out some fundamentals on how we're going to run this business in FY24. So I would expect SG&A to be roughly flat to where we are. As I mentioned on the last call, we've reallocated resources and we're focusing on areas to invest. One of those areas is to really be closer to our customers. So we are doing that, but, you know, we expect to run SG&A and FY24 to pretty much be in line as how it's been tracking there, Simon.

Sure, and that's in dollar terms. Yeah?

Yeah, we're speaking in dollar terms. That's kind of how we manage the business and make sure we're investing in the right things for growth. When you get to the top of the cycle, you expect that percentage to decrease, not just continue to find ways to spend SG&A dollars. So top of the cycle, you'll see that need to go down. But we feel good about our dollar rate the last six months, and we intend to kind of stay right around there.

Very helpful. Thanks, James.

Thanks, Simon.

Your next question comes from Brooke Campbell Crawford with Baron Joey. Please go ahead.

Yeah, thanks for taking my question. Just back on slide 18, the outlook for a repair model, can you give an idea of what you're seeing at the moment? perhaps what you expect U.S. repair model for siding to be down in the first quarter FY24 and how that compares to the range you have here for the full financial year?

Yeah, Brooke, I would just say, I mean, we would say, I would say the same remarks I did on the call. You know, as far as how it's tracking right now, I mean, we're, you know, call it a month and a half

into the first quarter so you know i would say it's tracking well uh but still i wouldn't change my opinion as the you know the outlook for the rest of the year yeah okay that's fair enough and i haven't um caught the the annual report yet not sure if it's out yet but any changes in the financial metrics there for either short-term or long-term incentives for fy24 and I guess, three-year rolling period for LTIs. Any changes there on the metrics that you guys will be measuring on?

Yeah, I'd just give some highlights. You know, I would say the STI by region is more situational to what we need to do in those respective regions, right? Just, you know, kind of the Cliff Notes version, if you will. If I look at APAC and I look at APAC in North America, we're focused on profitable share gains. So we have a metric in there with PDG. We also have a metric in there as far as EBIT margin for both of those. If we look to Europe, it's all about growth, and it's about growth in our high-valued products, namely our fiber cement products and some of the innovative pouring products that we have in there. So it's about that, and it's also about our EBIT margin as well. Just from a long-term scorecard standpoint, I would say if you look at our strategy slide that we presented here, it's very tightly aligned with driving those strategies, which is what a long-term incentive should be. So that's just the highlights there, Brooke.

Yeah, Brooke, you know, that will be out tomorrow. So because the 20F is a U.S.-based document, it has to be filed there first. So that will be up around this time tomorrow morning.

Got it. Thanks so much.

Your next question comes from Harry Saunders with E&P. Please go ahead.

Oh, evening. Thanks for taking my questions. Firstly, just back on price mix expectations in 24, just wanted to be clear, are you talking about a sequential improvement across the year on the fourth quarter ASP?

We expect to have a higher average sales price in FY24 than we did in FY23.

Right. And you're not wanting to expand on versus the fourth quarter?

Well, January 1st is when we took our price increase, so the fourth quarter already has some of that built into it. So we'd expect the full year versus the full year average sales price to be up based on the detailed dynamics we talked about on the last call. where we expect to achieve our price increase in R&R, and then we talk through the competitive nature of new construction.

Thank you. And just a question on your market outlook in APAC in Europe. Are you willing to sort of give any more color around volumes in those regions?

We're not giving detailed guidance, annual guidance today, Harry, and we haven't given focused our guidance on our biggest market, North America, along with net income, which encapsulates everything. I think you heard on our prepared remarks, we do expect market weakness in Australia, but we'll be prepared to manage decisively through that, just as you've seen us do in the fourth quarter results in all three regions. All three markets are uncertain, and we're focused on controlling what we can control and delivering the type of results we did here in the fourth quarter.

Thank you.

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

Yeah, thanks very much. I appreciate the volume sensitivity slide. Just wondering if you could remind us what your cost sensitivity is to the rollover in pull prices recently. And also, I missed that when you talked about Prop Bill 3 and 4. Can you remind me when they're coming up, both of those lines?

Sorry, Paul, I heard the question about Prattville 3 and 4, so I'll answer that now, but I'm going to need you to repeat some of the other parts. We had a choppy line there. So Prattville 3, we expect to be ready about the fourth quarter of FY24, and then as that gets closer, we'll provide further updates on Sheet Machine 4, but it would lag the first one. And if you could repeat the first half of your question.

Sure, I'll give it another go.

just uh we've seen pulp markets roll over here just wondering what the timing of that uh and the sense it to be uh on the cost side to uh to nbsk pull yeah uh so time-wise it's about a three to four month lag when you consider uh how it's priced for us and then uh how it sits in inventory uh raw material inventory then ultimately finish good inventory so it's kind of lagging for us um and then we a big impact in both directions. Both freight, labor, and cement are for bigger simple costs.

Okay, that's all I have.

Thanks. Your next question comes from Shoya Vison with Bank of America. Please go ahead.

Good evening, Aaron and Jason. Thank you for taking my question. I just wanted to go back to costs again. On the raw material cost and the freight cost, could you give us a sense of In terms of perhaps numbers, how they look for you in 4Q, was like perhaps sequentially or year-in-year? And also, how do they look to the start of the year, the first quarter? Thank you.

Yeah, freight versus the start of the year would certainly be down significantly. So Q1 of FY23 would have been a high point for freight, and you can see that in the market data. somewhat stabilized and kind of across the past couple of months or a couple of quarters. So Q4, you don't expect a hugely different outcome in Q1 when it comes to freight. And then as we mentioned earlier, kind of the Paul's questions, Paul's comments and questions, we are seeing the pulp start to decrease, but we are seeing headwinds when it comes to cement. And then obviously year over year, labor on a per person basis will go up. But net-nets, you know, as Aaron talked about earlier when we talked about inflation, the trends we see today are good. We've included that in our Q1 guidance. And then as we go to give the full year guidance range and targets for net income, we'll give some context to inflation. But with uncertain markets at this point, we're sticking with the Q1 guidance.

Thank you, Justin. Thank you.

There are no further questions at this time. I'll now hand back to Mr. Erta for closing remarks. All right.

Thank you, operator. Hey, I want to thank you all for joining us today and thank all of our employees around the world. We remain laser focused on controlling what we can control and executing our strategy. And we remain homeowner focused, customer and contractor driven. Thanks, everyone.

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