James Hardie Industries plc

Thank you for standing by, and welcome to the James Hardy First Quarter Fiscal Year 2024 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 up 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 back to Mr. Erta for any closing remarks. I'd now like to hand the conference over to James Hardy, CEO. Mr. Aranurta, please go ahead, sir.

Thank you, operator. Good morning and good evening to everyone, and welcome to our first quarter fiscal year 2024 results 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 marks, all references to monetary amounts should be assumed to be in U.S. dollars. Moving to page three, you will see our agenda for today. As always, I'm joined by our CFO, Jason Mealy. For today's call, I will start by providing a strategy and operations update. Jason will then discuss our financial results and I will return to discuss our outlook, guidance, 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, solutions, and services to our customer partners. Our employees truly represent the very best in our industry. and consistently enable our superior value proposition. Let's start on page five with a brief business update. Our teams remain laser focused on partnering with our customers, managing decisively, and controlling what we can control. Our first quarter results highlight how impactful that focus has been. In Q1, our adjusted net income increased 13% to $174.5 million, which was above the top end of our guidance range. This was driven by higher than expected volumes in North America. Our North America volume of 748 million standard feet was a 5% beat to the top end of our volume guidance, and we delivered that at a record 31.3% EBIT margin, which is in line with the volume sensitivity analysis we provided you in May. Jason will unpack this a bit more in the financial section. The net income result was also supported by strong results in our Asia-Pac and European regions. And importantly, we generated operating cash flow of over a quarter of a billion dollars. While markets remain uncertain, our focus remains on partnering with our customers and controlling what we can control to deliver differentiated results. Now, please turn to page six in our global strategic framework. At the heart of our global strategy, we are homeowner-focused, customer and contractor-driven. With that in mind, all three regions remain focused on our three key strategic initiatives. Number one, profitably grow and take share where we have the right to win. Number two, bring our customers high-value, differentiated solutions. And number three, connect and influence all the participants in the customer value chain. We accelerate our strategic initiatives by establishing competitive advantages through our strategic enablers. And both our strategic initiatives and strategic enablers build upon our foundational imperatives. I am 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. Today, I want to spend some time discussing all three of our strategic initiatives in a bit more detail, using our North American business as an example. Let us now turn to slide seven to discuss these initiatives, profitably grow and take share where we have the right to win, and bring our customers high-value differentiated solutions. When we look at the United States geographically, we believe we have the right to win across the entire country. Internally, we break the country into eight geographic regions, which we discuss in detail in our September 2022 Investor Day. From a market segment perspective, we have chosen to focus on repair and remodel, single-family new construction, and multi-family new construction. We believe that our value proposition provides us the right to win in all of these market segments, and we endeavor to drive profitable share gain in all three market segments, each and every day. We do this through bringing our customers high-valued, differentiated solutions. Our teams ensure we are leveraging the entirety of our superior value proposition to provide our customer partners the right solutions for their geographic region and market segments. Some examples of how we bring this to life. Repair and remodel is a large opportunity for our continued growth. As we have mentioned many times, the US has an aging home inventory with over 40 million homes over 40 years old. Specifically, in the Northeast, Midwest, and Carolinas, we have a significant opportunity to penetrate R&R for those regions. Our ColorPlus portfolio of products is the right solution for our customer and contractor partners to profitably grow together. Shifting to new construction for a moment, we have a significant opportunity to grow profitably together with our customer partners across the entire nation. That said, currently the South represents our largest new construction opportunity. The South is a prime product market for us, and as we discussed at length in February, We partnered closely with our customers, including the big builders, to provide them with Simplank, which we believe was the right product solution to help them compete and accelerate growth. Speaking of partnering with new construction and strong customer partnerships, you would have seen last week that we announced an exclusive national relationship with D.R. Horton, the largest home builder in the United States. This agreement makes us D.R. Horton's exclusive hard-siding provider nationally. This three-plus year agreement is a testament to our focus on the customer and providing them the right products at the right time to drive growth together. It is our team's responsibility to ensure we offer the right solutions to our customer, builder, and contractor partners to enable profitable growth. The right solution varies by geographic region and market segment. There will be periods of time where different geographies and different market segments grow at different rates. And those differences in underlying growth rates will naturally change our product mix. What we are focused on is ensuring we outperform in each geographic region and each market segment by leveraging our product portfolio and superior value proposition. I'm aware that in recent years, product mix was highlighted as a top priority. But today, I want to be clear. We are laser focused on profitable share gains. and taking share where we have the right to win. We will no longer be going into the details of product mix, such as what percentage of our mix is Simplank, what percentage is ColorPlus, et cetera. We drive strong margins in all geographic regions and in all market segments with all of our products. We believe we have the right value proposition and set of solutions to win in every geographic region and in all three market segments we target in the U.S. I believe the EBIT margins of 29% in Q4, 31.3% in Q1, while our SEM point mix was increasing, is proof positive to that point. Let's now turn to slide 8 to discuss how we connect and influence all the participants in the value chain and how we are focused on solidifying James Hardy as the brand of choice in building products. In recent years, we have used the audience category we call Christine to describe the target homeowner for James Hardy. However, based on detailed studies we have performed, we know our opportunity goes well beyond Christine. There are numerous types of homeowners we are focused on, and we believe we have the right to win with all of them. Our product teams are focused on connecting and influencing our value chain participants. We do this through tools and resources that enable them to easily connect with James Hardy. We also do this through marketing to all value chain participants to effectively ensure they know our superior value proposition. When we do all these things collectively, we become the brand of choice. We have numerous marketing tools that enable our value chain to be successful. I like to refer to these as tent poles, which you can see at the bottom of the slide. Starting with sponsorships such as the Magnolia Network and HGTV Dream Home that help drive awareness across the country. Cause marketing. This includes collaborating with community-based organizations such as Habitat for Humanity, where we work together to build a better future for all. Homeowner marketing. This includes our in-store retail presence to ensure we capture the DIY homeowner and foot traffic and brand awareness retail provides. Homeowner marketing also includes our collaborations with influencers, most notably our partnership with Chip and Joanna Games. Trade marketing. We have specific marketing directed at and supporting our trade professionals, the contractors and installers. Lastly, marketing. local marketing. We have specific campaigns targeted to specific regions to address the needs and thoughts of the value chain participants in that local area. As an example, we recently launched our Texas Tough marketing campaign. This campaign highlights the durability of our products and the fact they are locally made in our two Texas facilities. Our team continues to make great strides in helping James Hardy become the brand of choice and in connecting and influencing our value chain. This will further enhance our ability to drive profitable share gain over the long term. Now, let's turn to slide nine. We've returned to driving profitable share gain as a top strategic initiative. Let's take a look at how impactful this has been to James Hardy over the long term. The chart on the left is external data from the US Census, which measures external cladding share in single-family new construction. Over the past 10 years, the share of fiber cement as a primary cladding in new construction has increased 7%, reaching 23% share of the market in 2022. This demonstrates our ability to consistently drive share gain. On the right is our North American adjusted EBIT dollars over the past 10 years. What this data shows is that over those 10 years, our adjusted EBIT dollars have grown at an outstanding CAGR of 13%. And our adjusted EBIT margin for this 10-year period was 26%. These results are outstanding across the 10-year period and demonstrate proven long-term profitable share gain. What excites me most is that we have refined our strategy to be homeowner-focused, customer- and contractor-driven. As we continue to accelerate this strategy, I believe this will only bolster the long-term profitable growth metrics you see here. With that, I'll now turn it over to Jason to discuss our financial results.

Thank you, Aaron. Let's start on page 11 to discuss our global results for the first quarter. We have started fiscal year 2024 strong with an excellent set of results, including a beat to our adjusted net income guidance. Group net sales were $954.3 million. This result was supported by higher average net sales price in all three regions. Adjusted net income increased 13% to $174.5 million. Global adjusted EBITDA margin was a record 29.2%. And operating cash flow was an outstanding $252.3 million. Globally, our teams are executing our strategy with a focus on controlling what we can control. In an uncertain and unsettled market, it was important to start the year strong, and our teams did just that, delivering our best-ever first quarter results for both adjusted net income and operating cash flow. Turning to slide 12, we will remain focused on the global result, specifically adjusted net income. We have added a new slide to summarize the adjusted net income result versus the prior corresponding period. Adjusted net income increased $20.2 million to $174.5 million, an increase of 13%. The improved result was primarily driven by strong EBIT growth in North America and APAC, which combined to contribute $29.9 million increase to adjusted net income. The largest headwind to adjusted net income was a $7.5 million increase in general corporate costs, driven primarily by the increase in stock compensation expenses. Our adjusted effective tax rate was 22.9%, which is our best estimate of the full year FY24 rate. Overall, an excellent bottom line result. As I mentioned earlier, adjusted net income of $174.5 million is our strongest first quarter ever. Our global team is excited that we have gotten off to a strong start to the year and are focused on delivering a strong second quarter to maintain our momentum. Let's now move to Phase 13 to discuss the North America results. Starting with the top-line results, North American net sales decreased 6% to $694.8 million versus the prior corresponding period. Our average net sales price was up 3%, which helped offset a decrease in volumes of 9%. Volume at 748 million standard feet exceeded our guidance. As Aaron mentioned earlier, this was the primary reason for the beat to adjusted net income guidance. Our team's focus on profitable share gain combined with stronger than expected market conditions led to the strong volume outcome. As we discussed on our February 2023 results briefing, our team was taking strong action to drive share gain with the largest builders in the U.S. This proactive partnering with these builders early in the calendar year to ensure we provided them the right solutions to drive their business is resulting in strong profitable share growth. We believe these actions directly impacted our first quarter volume results. In the second half of the quarter, May 15th through June 30th, our order rate surged higher, exceeding the daily order rate experienced in the first half of the quarter. This surge in order rate exceeded our expectations that underpinned our volume guidance. EBIT margin improved by 540 basis points versus the prior corresponding period to a record 31.3%. This margin was in line with the volume sensitivity analysis we provided in May. EBIT dollars in the first quarter were up 13% to a record $217.6 million. EBIT improved $25.8 million versus the prior corresponding period, primarily due to higher price and lower freight costs. These improvements were partially offset by the decrease in volumes of 76 million standard feet. By managing decisively and partnering with our customers, the North American team delivered an excellent first quarter result with strong volumes, record EBIT, and record EBIT margin. Let's now move to page 14 to discuss the Asia-Pacific results. Similar to North America, it was a strong start to FY24 for our Asia-Pacific segment. Net sales improved 5% versus the prior corresponding period to a record $209.7 million. The net sales improvement was driven by higher average net sales price, partially offset by a volume decline of 8%, which is primarily due to our New Zealand business. EBIT improved 35%. to a record 69.5 million Australian dollars driven by improved net sales with relatively flat cost of goods sold per unit and lower SG&A. EBIT margin improved by 750 basis points versus the prior corresponding period to a record 33.1%. Similar to North America, our Asia Pacific team has partnered with our customers and managed decisively to deliver an excellent first quarter. While we expect margins to remain strong based on the uncertain markets and increased investments and growth, we expect 33.1% margin to be the high point for the fiscal year. Please turn to page 15 to discuss the European results. Our European team had a solid start to the year despite an unsettled market. Starting with the top line, net sales of 109.7 million euros was down 1%. A higher average net sales price of 478 euros almost entirely offset an 18% decline in volumes driven by lower housing market activity. First quarter EBIT and EBIT margin were down 5% and 50 basis points respectively versus the prior corresponding period to 10.8 million euros and 9.8% respectively. However, the EBIT and EBIT margin represent solid sequential improvements The European team is laser-focused on driving profitable share gain in FY24. Turning now to page 16 to discuss liquidity, cash flow, capital allocation, and capital expenditures. We continue to maintain a strong liquidity position with our leverage ratio of 0.85 times and liquidity of $580.7 million. We expect our continued robust operating cash flows will ensure we maintain the strong liquidity position. In the first quarter of FY24, our operating cash flow was $252.3 million. This outstanding cash flow result was driven by the strong financial results of all three regions and a working capital improvement of $51.8 million. Regarding our payments to the AICF, In fiscal year 24, we will pay 137.5 million Australian dollars to the AICF. This compares to our payment of 158.8 million Australian dollars in fiscal year 2023. 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. Since our announcement of our share buyback program in November of 2022, we have repurchased 5.8 million shares for total consideration of 127.4 million U.S. dollars. This reduction in our outstanding shares has helped our diluted earnings per share grow 14%, outpacing the growth in adjusted net income. Regarding capital expenditures, during the quarter, capital expenditures totaled $125.6 million. We expect to spend approximately $550 million on capital expenditures in FY24, and we remain committed to keeping supply ahead of demand. We have robust operating cash flows, substantial liquidity, and a flexible balance sheet, which enable us to continue to invest in profitable growth. Finally, today we are announcing that we are canceling our plans to build a greenfield site in Victoria, Australia. I will now hand it over to Aaron to discuss this decision further. Please turn to page 17.

Aaron? Thank you, Jason. Today, we are announcing the cancellation of our greenfield expansion in Victoria, Australia. Last quarter, we announced the cancellation of the pilot plant within our Rose Hill facility in Sydney. That is important to this greenfield decision because that now enables the possibility to add brownfield capacity at Rose Hill. And as we have always stated, brownfield capacity is always our preference when adding capacity to our network. In addition, the centralization of our capital, construction, and engineering teams under one global leader, Brian Kilcullen, continues to drive value. This team has identified additional brownfield opportunities at our Carroll Park facility and our continuous focus on HMOS execution continues to expand our capacity potential. We believe that with our brownfield options, we can meet our share gain goals in Australia and New Zealand for the next 15 plus years. And that makes this decision clear. We will add brownfield capacity over a longer term horizon, better utilizing our capital dollars while meeting market demand. I believe this is another excellent example of this team taking decisive action, which in this case will drive an improved return on capital while not impacting our profitable share growth in the region. Moving to page 18, let's now shift to a discussion on market outlook and guidance. Before looking forward to the second quarter, I just want to reiterate something Jason said earlier. Globally, our teams are executing our strategy with a focus on controlling what we can control. In an uncertain and unsettled market, it was important to start the year strong, and our teams did just that, delivering our best-ever first quarter financial results for both adjusted net income and operating cash flow. Now, please turn to page 19. For our largest market, North America, we have again provided the market outlook data from several external data providers. The external ranges have changed for all three market segments. The average estimate for single-family new construction improved from down 17% to down 12. Multifamily new construction improved from down 16 to down 12. And repair and remodel actually worsened slightly, now with an average estimate of down 12. You will remember that last quarter, our view of the market was in the bottom half of the ranges from the external data providers. However, now eight months into the calendar year and with these revised ranges, we are now cautiously optimistic regarding the housing markets. and are accepting the entirety of their ranges as possible outcomes for the year. Using these external ranges along with our assumed market segment exposure for FY24, the implied range for our blended addressable market is down 5% to 18%, with an average of down 12%. Overall, we are happy with the start of the fiscal year from a market activity perspective, while acknowledging uncertainty remains and our expectation that we return to normal seasonality for the December quarter. Regardless of market conditions for the remainder of the year, I remain confident that we will be able to deliver growth above market and strong financial results, and that confidence is rooted in what we have delivered over the last three quarters. EBIT margin of 27%, 29%, and 31.3%. Sequentially, on volumes of 701, 704, and 748 million standard feet, respectively. We remain laser focused on driving profitable share gain and are encouraged by the stronger than expected market conditions to start our fiscal year. Now, if you turn to page 20, we have again provided the volume sensitivity analysis for FY24. This sensitivity analysis was prepared in the same manner as last quarter, which assumes our current range of expectations on raw material costs and freight rates and assumes we continue to invest in growth as currently planned. 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 markets fluctuate, we are confident we will outperform our end markets. Now, please turn to page 21. Today, we are providing three points of guidance for our second quarter of fiscal year 2024. First, we expect North America volumes to be in the range of $740 and $770 million standard fee. Second, we expect North America EBIT margins to be in the range of 30% to 32%. And lastly, we expect global adjusted net income to be in the range of $170 million to $190 million. As I mentioned earlier, our team is energized and focused on driving profitable share gain, and we are positioned to deliver another strong result in our second quarter. Finally, please move to page 23. As always, I want to close with who we are at James Hardy, a global growth company. I am proud of our team's ability to navigate these uncertain markets and to be able to deliver such a strong first quarter. 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'd like to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you'd like to cancel your request, please press star 2. If you are on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Sharia Veason from Bank of America. Please go ahead.

Hey, morning, Aaron, Jason. Thank you for taking my question and congrats on a very good quarter. So for the North America business, could you give us a sense of how the volumes moved in repair and remodel versus new construction? So the overall volumes were down 9%. What was the rough mix in new construction and repair and remodel And also, as you mentioned, second half of the quarter was stronger than the first. Could you just help us quantify it? Broad range would be fine. Thank you.

Sharia, thank you for the question. What I would say, and we're not going to specifically break out the segments there, I would say just generally we saw more volume weighted to single-family new construction. Also, the volume is reflected there by what's going on in the United States from, you know, single family new construction builds, right? So, you know, the areas of Texas and Florida, we saw more volumes there. As far as how we saw it moving at the latter end of the quarters, I would say it was focused on just what I said, single family new construction. So, hope that answers your question, but as far as breaking it out between the three segments, we're not going to do that. I would just say in Generally speaking, we were weighted more towards single-family new construction versus R&R.

Thanks, Aaron. That's very helpful. I'll jump back into the queue later. Thank you.

Okay. Thank you.

Thank you. Your next question comes from Niraj Shah from Goldman Sachs. Please go ahead.

Hi, guys. Good morning. I guess, firstly, and apologies if I've missed it, but have you updated the PDG target of four points for the year?

Neeraj, we have not. Your question is, have we updated the PDG target for the year? Yes. No, considering we just said it, you know, roughly three months ago. We have not.

Okay. Fair enough. And I guess, secondly, in terms of the second quarter guide, it'd be helpful to get sort of What you're thinking in terms of input costs, cement, pulp and freight in particular in that 30 to 32% range?

Yeah, I'll let Jason go into details here. You know, obviously we're seeing some favorability as it relates to freight. We're also seeing a smaller amount of favorability in pulp. And then there's other costs that I would say are unfavorable to us like cement. But Jason, you want to dive into any of the details?

Yeah, Neeraj, obviously you're familiar with our biggest costs, freight and pulp being two of them. Freight was at an all-time high Q1 of last year, and we saw that come down throughout last year. So that favorability we expect to persist throughout the year, but to shrink each quarter when comparing versus the prior corresponding quarter. And then with pulp, we did get some favorability in Q1. We actually expect that to grow throughout the year. As Aaron mentioned, there's some headwinds. We'll feel some headwinds with cement and a few other input costs, but yeah, we feel good about the way our raw materials are shaping up for the full year and certainly had favorability in Q1. Expect a similar amount in Q2, just a slightly different mix.

Great. Thank you. Sure.

Thank you. Your next question comes from Keith Chow from MST Marquee. Please go ahead.

Hi, gents. Hi, Aaron and Jason. First one, I just want to talk about, you mentioned the plant network and plant configuration and some benefits there under Ryan's team. Can you give us a sense of how much more capacity HMOS is expected to unlock in the network, please? I know in recent years there have been some benefits delivered from that program, but it seems like there's more. So if you can give us a sense of how much more there is to come out of the global network, and if you can split it by region, that would be most useful. Thank you.

Yeah, Keith, I think we can go into more detail next quarter. Here's what I would say. HMOS continues to unlock capacity benefits, and I am very comfortable where we're at from a capacity standpoint. obviously from last quarter as we look into Q2 and beyond. So HMOS continues to be an asset for us. We'll talk more about HMOS and the Hardy operating system just like I dove deeper into our strategy into next quarter's call.

Okay, thank you. And then maybe just one quick follow-up. Were there any specific channel movements in the period that you've that you'd want to call out um anything you know was there any restocking of the channel given how significantly the new construction market turned around and you know how much of a focus that has been in the second quarter yeah you know keith i wouldn't say anything that comes to mind um that's unordinary um you know i from obviously single family new construction has uh

accelerated over the past quarter, and we expect it to continue to accelerate. That's part of our Q2 guidance. So, if anything, you know, it's been able to work with our customer partners and big builders, making sure they have what they need.

Okay, that's great. Thanks, Ed. Thanks, Jason. Thank you.

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

Hi, Aaron. Hi, Jason. Aaron, just on the SG&A spend, like we've obviously come through this period where you've talked in the past about reallocating and prioritising SG&A spend as the market slowed. You're now... saying you're cautiously optimistic. Like, how should we think about reinvestment in SG&A and any sort of guidance around, I don't know, percentage of sales or dollar numbers that you think is appropriate would be great. Thank you.

Yeah, Lee, a great question. I would just say this. You know, over the past few quarters, I've felt that our SG&A spend has been appropriate. You know, I like to use the term pedal and clutch based upon uncertain markets. As we get more and more confidence that we do have now, we're going to continue to invest. I mean, we've been investing in the right things. I would say we're just going to probably proliferate that more. And I'll start with we always want to invest in our people. So that's training, career development, things like that. And then it's our customers. So we're going to continue to invest in areas that are going to help service our customers and really enhance our value propositions. So that's going to be customer-facing type of sales roles. That will also be marketing-related spend as well. So as I look at our SG&A spend moving forward, I don't really necessarily put a percentage on it because that can be misleading. But we're going to spend appropriately how we feel the sales dollars are coming in and our outlook.

Okay. Thanks. Appreciate it. And then just as a follow-up, I think in the past – when we've talked about the relative margin, new construction, R&R, and particularly some of these larger public builders, there's been kind of the comment that the margin is not that dissimilar because the cost to serve for some of these larger public builders is obviously lower. Do you think that's, I mean, you've obviously come out with the DR Horton announcement Do you think that reasoning still holds, or is there something going on with tactical pricing and needing to fend off some of your larger competitors that means that that doesn't necessarily hold with the Horton agreement?

I want to get Jason into the mix here. So, Jason, do you want to take this one?

Yeah, Lee, if I understood your question correctly, it was about EBIT margins. Certainly, we have variation by segment at the gross profits. from R&R to new construction, et cetera. So as Aaron would have talked about on the call today, we are very profitable in every segment with every product in every region. And so at the EBIT margin level, yes, there is a very good consistency in the EBIT margins we're able to deliver in all those segments.

And, Lee, I would just add, sorry, I would just add, you know, if you think about the focus on single-family new constructions, And the large builders, I think our margins we just registered really tell the story, right? And if you look at our guidance, it's going to tell the story as well. And that's what I was trying to say in my beginning is, you know, wherever we focus, it's profitable for us. So, you know, I think it's, again, look at the results. It's highlighting that.

Excellent. Thank you. Appreciate the call-off. Thanks.

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

Good morning, everyone. Just a couple of questions in reference to slide 19, where new construction is performing better than R&R. I guess the first question, and to elaborate on Lee's point, I just wanted to ask you Aaron in terms of DR Horton's the arrangement there can you elaborate on how you've managed to win this deal and I guess your plans to expand this arrangement with other builders and then my follow up question is really on the slippage with R&R expectations what do you think is driving this slippage into the full year thank you Aaron

Daniel, as far as our deal with DR, first and foremost, we're really proud to partner with them. And, you know, the way we've been able to get that done, first of all, we have the best sales team in the industry. And I like to use the quote that my head of sales, John Mattson, uses, we're humble but hungry, right? And that's really the tact that this team has taken out there. And it's really about bringing a value proposition to our customers. So I'm not going to disclose anything. You know, any details about it because, you know, we keep those confidential with our customer partners. But as far as are there opportunities to do similar deals with other builders, of course. You know, we do have deals with 24 out of the 25, you know, largest builders and a majority of the top 200. But I didn't say we have 100%, right? So we do have opportunity out there, and we'll continue to, you know, chase that opportunity. As far as why repair and remodel is lagging, you look at some of the outside data out there. Really, as we talk to contractors and we're out in the field, I think really the biggest thing is there's a lot of potential tailwinds from a medium and longer-term standpoint as it relates to R&R. People are staying in their homes. They have more equity in their homes than they ever have. If they want to move, it's hard to find a house And the mortgage rates are so high. I think what it really comes down to right now is, you know, people are, there's still uncertainty out there. So in order to go move forward with what would be considered a large R&R project, I think people are sitting on the sidelines and waiting a little bit. That's not going to be forever. But, you know, I think if I have to just relay some of the feedback I've had out there in the field and from talking

Thanks, Aaron. Thank you, Daniel.

Thank you. Your next question comes from Lisa Huynh from J.P. Morgan. Please go ahead.

Hi, morning, guys. I guess my question, just following up on R&R and the weakness you're seeing there, can you just be a bit more specific about what you're seeing in markets, wherever the trend is diverging? And just given, you know, we can kind of see in line of sight to a recovery, when do you expect to start to see things turning into 24?

Jay, you want to take this one? Yeah, Lisa, look, obviously we're only giving guidance for the second quarter for a reason. We believe the market remains unsettled. You know, the slide we just talked about in detail, page 19, those are 11 now it's minus 12 and I think it's for all the reasons Aaron just talked about for the homeowner doing a large R&R project waiting to see what happens with the economy etc and our focus is controlling what we can control we have the sight lines to deliver a very strong second quarter I think what's important in our perspective when we think about the repair and remodel market and the new construction market we think they both are strong for the long term and And obviously there's just a period here of uncertainty in the market and R&R, you know, these experts are calling down 12% for the year, but we do like the fundamentals of where R&R is for the long term.

Okay, sure. And I guess, can you talk about the EBIT margin differential between North America and APAC? Just, you know, what's kind of driving APAC ahead of the North American divisions?

Yeah, look, I think you're comparing apples and oranges here to compare the two divisions here. I would just say this, you know, and to speak to some of the strength with APAC here, you know, they've been very successful in partnering with our customers to make sure we're able to service at a high level. That means they've been able to take price out there. I would say, you know, they also have lower SG&A. And, you know, relatively flat cost of goods sold per unit. But, you know, our APAC team is doing a tremendous job, you know, capitalizing in that marketplace right now.

Okay, sure. Because I guess historically the APAC EBIT margins, you know, have been structurally below North America because, you know, all those obvious reasons like scale and manufacturing capacity. So I was just surprised to see it come ahead this quarter.

No, if it's in the 30s like we saw there, we'll take it. That's pretty positive.

Okay, sure. I'll leave it there.

Thank you. Our next question comes from Peter Stein from Macquarie. Please go ahead.

Hi, Aaron and Jason. Thanks, and good evening. Just a broader question, Aaron. What are the two or three things that you absolutely believe you have to get ready and right for a recovery, particularly in R&R activity? Obviously right now you've done new construction deals. How's that going to affect your flexibility is one of the questions that I have as a follow up. But what are those things that absolutely have to be in place to maximize the opportunity for you over the next three, four years?

Yeah, it's a great question because if we look, as I mentioned before, R&R, which traditionally has been the largest share of our business, number one, we've got to continue to focus on our customers. And what I mean by that is I use the term a lot, homeowner-focused, customer- and contractor-driven. R&R really needs us to do all of that, right? So we're focusing on the homeowner with a lot of our marketing efforts, You know, we're focusing on our customers and helping them have what they need, whether that be training, you know, the list goes on and on. And, you know, from our contractor partners, you know, helping them with their business and being able to go out and market James Harding. So that's number one, Peter. I think the other piece, because we anticipate, you know, as R&R takes off, you know, it's a tremendous opportunity for us. We want to make sure we're capitalizing on that. That's to have the capacity. that we need. So if you think about one of the most important things we do, it's capital allocation. And that's why, you know, we're really excited about some of the projects that we have going on, you know, all over the world. But namely, you think about North America, our largest R&R opportunity is some of the things we're doing around HMOS, which was mentioned earlier, but also Prattville expansion and also our Westfield expansion with color as well. So Peter, great question. I think if I have to name the top two things, those are it.

Thanks, Aaron. Are you comfortable getting the contractor piece right?

Look, I've been working with contractors for almost 30 years. Can you ever get it 100% right? You focus on what you can control. I think all the things that we need to control with the contractor, we're getting right. And look, as I mentioned before, we have the best team in the business. I firmly believe that being here almost a year and being out with our teams. So I'm 100% confident that they're getting it right with the contractor. You know, just focusing on whatever their needs are. But again, it's homeowner focused, customer and contractor driven. You know, I think that's maybe a little different For us, that you've heard from before, is we said homeowner over and over. And that's still important, but you notice that we're adding the contractor and the customer back in here. So, yes, I do believe we're getting it right.

Thanks, Aaron. Appreciate it. I'll leave it there.

Thanks, Peter.

Thank you. Your next question comes from Saman Thakrai from Jefferies. Please go ahead.

Please go ahead. Oh sorry, something wrong with my phone. Can you hear me now? Sorry about that fellas.

There you go, got me now. Just a couple of questions. First of all, the cancellation of the Australian greenfields plant. I know you've talked about HMOS finding brownfields capacity that may not have been there before and that's great news. But just of the $400 million plus investment how much of the business case shift was due to construction inflation and or other factors that may have impacted the business case for cancelling the greenfields in Victoria?

Yeah, Simon, zero. You know, that did not compute or we didn't factor that in at all. I mean, it was clearly, you know, as I came in, We took a look, and we're always relooking every single project. This is a major expenditure for us. And like I said, Ryan Kilcone, as we centralized this underneath him, we did an exhaustive review. And one of the things that made this possible for us to cancel is we canceled our pilot plant. So that made brownfield opportunity something that we could do. And by the way, we canceled the pilot plants because we have you know, ability to do that in existing plans. So, look, as I said before, one of the most important things that we do is capital allocation. And this was really looking at this, scrutinizing this, you know, and just realizing that, you know, we had other options here. So, zero factored into, you know, escalating construction costs.

That's really helpful, Aaron. And just what was the level of sunk cost there for? And including the land, which no doubt will actively market back to the market?

Yes, Simon, we think we'll end up with a good economic outcome as we decide how we want to unwind this. At the time we move forward with potentially going down that path, we'll provide more information to the market. No, that's fine, Josh.

That's absolutely fine. And then just a real quick one for you, just to follow up on the operating cash flow reconciliation. So you had $31 million of inventory released versus the $25 million billed in the PCP, and your payables gave you another $27 million. So I just want to understand the drivers of that inventory drawdown at the end of the quarter and what your expectations are in the second quarter for working capital, if I may.

Yeah, so we have a clear goal in our LCI to... get $50 million of working capital this year. So obviously, we would keep that in Q1, but we're not satisfied. So we're going to continue to try to drive working capital down, Simon. I mean, you would have seen over the past couple of years, we did a really good job of driving inventory down. And then through this past three quarters or so, as the markets became unsettled, we built some inventory. So we think we're back in a really good spot with inventory. But we think there's more to do around receivables and payables. and we'll want to maintain inventories at kind of the levels they're at at June 30th.

Okay, that's it.

Some more to go this year, but we got off to a really good start.

Yeah, no, well done. Congratulations.

Great result. Thank you, Simon. Thanks, Simon.

Thank you. Your next question comes from Sam Seow from Citi. Please go ahead.

Good morning, guys. Thanks for taking my questions. We're just looking at the result compared to the PCP. You've got North American volumes down 9%, but EBIT margins obviously 31%. Just looking forward as utilization comes back and operating leverage, is there any reason to think that margins could go higher again, or is there something below the GP line that scales up with volumes?

Yeah, I'll let Jason tag team this with me. As far as margins going higher, You know, our thought is that it's a very competitive marketplace out there, and we're going to continue or actually even increase our investment out there. So, you know, the guidance we gave, you know, I believe that's probably our high point as we look for the year. Sam, but I'll let Jason dive in here with me on this.

Yeah, Sam, I think the other thing to consider is as housing markets grow, get to top of cycles, et cetera. Certainly, if you saw that last year, it was exacerbated by the war. But I think in any cycle, if you look back through our history, as you get towards the top of a cycle, input costs increase as well. So I think we're comfortable with where we're at. It's a great quarter. And guidance of 30% to 32% against, again, in the second quarter was within a really strong position through six months.

Sophie, thanks for that. And just quickly, when I think about the REM report, I remember there being more of a cost-out feel to it. You had about 160 mil worth of, I guess, lien savings and procurement savings in there to target. Just wondering how some of those costs out was in this result or how they layer in over the years.

Yeah, so you're referring to the Hardy operating system savings we highlighted in the LTI report. So there's a couple components of procurement and R&D. We're off to a good start, Sam, but something we plan to bring to the forefront of the presentation. So Aaron kicks off each call with an update on strategy. We plan to provide an update on that in the second quarter. We just got it started. We like the progress we're making on both initiatives with R&D and procurement savings. It had an impact on Q1. but we believe it will have a bigger impact as the quarters roll on here in FY24. Awesome.

Thanks for the comment. Great result.

Thanks, Sam.

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

Hi, guys. Just firstly, wondering if you could outline how price mix is sort of expected to play out over the remainder of the year, particularly sort of sequential movements in North America. And then the follow-up, can you talk through how the end markets are sort of looking specifically in the second half, 24 versus that minus 12 given for the full year?

Yeah, Harry, you know, we're not going to go through the detail on price mix as we talked before. You know, in previous calls, I really outlined how we're going to run the business. And very simply, you know, price is going to be up over the previous year. And that's how this year looks as well. That's how we intend to run the business. So we're not going to dive into details of price mix. I would just say price is going to be up year over year. As far as how the end markets are looking in the second half, look, we gave our guidance for Q2, and that's what we're going to limit it to right now.

And if I could just, sorry, just squeeze in a follow-up on that point. Are you sort of moving back towards more like a one-quarter lag and start deciding cycle times normalize as a builder?

Yeah, we're starting to see some normalization, Harry, but you still have seen in the past six to nine months some very interesting trends between completions and starts. So I don't think we're completely through that yet. But over time, we do think that will normalize.

Thanks, guys. Thanks, Eric.

Thank you. Once again, if you'd like to ask a question, please press star 1 on your telephone and wait for your name to be announced. Your next question comes from Brooke Campbell Crawford from Barron Joey. Please go ahead.

Yeah, thanks for taking my question. Are you able to provide some commentary just on sort of wallet share for U.S. builders? And maybe you can kind of group it towards a broad comment on how your share compares between the top 25 and the top 200. That would be really helpful. And also perhaps if you can give a comment on trim penetration between sort of those two groups. Thanks.

Yeah, you know, Brooke, what I would say, and I mentioned, you know, we have relationships, you know, some type of exclusivity with 24 of the top 25 builders. As far as wallet share there, you know, it would depend, but I would say just in generality, it's north of 85%. And then if we look at the top 200, you know, we have relationships, and Jason, you'll have to check me here, I think with probably... you know, 65 plus percent of the top 200. So we do have opportunity out there. And when I talk about our teams being humble but hungry, those are areas that we're going to focus. And as far as trim penetration, and we can get back to you, I don't have an exact percentage here, but that's been an on-focus, you know, initiative for us as a team, as a North American team, is to make sure as we're selling trim a hardy house, we're selling the trim as well. And a lot of these deals that we're signing with builders is we're focused on not only the board, but also the trim as well.

Thanks for that. And just one follow-up with respect to sort of brownfield over greenfield. You made it quite clear that the plans here in Australia, but I might have missed the comments, but is there a similar approach to the capacity in the U.S. where we'll perhaps see opportunities for brownfield lines being added to existing plants over the next sort of five years or so rather than greenfield?

Yeah, Brooke, brownfield is preferred. I would say where we're at right now, we're very comfortable with our greenfield approach and the decisions that we've made from a U.S. standpoint. And, Brooke, I just had you say something. management analysis document, we did purchase the land for a future greenfield in Missouri during the quarter.

And obviously, we're still progressing with Prattville 3 and 4.

So we're comfortable with where we are with capacity, both brownfield and greenfield. Thanks, Jason. Thanks, bro. Cheers. Thank you.

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

Yeah, thanks very much. Yeah, it's just a great quarter in a difficult environment. I'm just trying to understand this exclusive arrangement with DR Horton because I suspect you'll pattern this out for the rest of the top of the 25 home builders. And I'm just trying to reconcile that with the comment that you had equal EBIT margins amongst R&R and new home construction. So in light of that, what's the advantage for DR Horton to give you the exclusivity if it's not price?

So, Paul, what I would say and what I've learned over years and years of experience is I don't speak for our customers. I'm not going to speak for them. So you would probably have to ask DR Horton there. What I would say is what we're focused on is bringing great value proposition to our customers, and that's what we're doing with DR Horton.

And the only thing I'd add, Paul, is what I had commented earlier. There'd be a large disparity at the gross margin level, but when you get down to the EBIT margin and you consider how much SG&A you're spending in these different areas, that's where the range gets a lot tighter.

All right. Fair enough. Best of luck. Thanks, Paul. Thank you.

As there are no further questions at this time, I'll now hand the call back over to Mr. Erda for any closing remarks.

Thank you, Operator. I'd just like to again thank all of our employees around the world who remain focused on safely delivering the highest quality products, solutions, and services to our customer partners. Our employees truly represent the very best in our industry and consistently enable our superior value proposition. Appreciate the time from everyone today.

Thank you.

That does conclude our conference for today. Thank you for participating.

You may now disconnect.