James Hardie Industries plc

Thank you for standing by and welcome to the James Hardy second quarter fiscal year 2024 results briefing. Today's briefing is hosted by James Hardy's CEO, Mr. Aaron Erta, and CFO, Mrs. Rachel Wilson. After the briefing, we will open the lines to Q&A and I will 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, CEO. Mr. Aaron Erda, please go ahead, sir.

Thank you, operator. Good morning and good evening to everyone and welcome to our second 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 remarks, 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. Before we begin, I would like to take a moment to introduce you to our new Chief Financial Officer, Rachel Wilson. Rachel brings an impressive track record of over 25 years of experience, including extensive involvement in corporate finance, capital markets, leadership and development of high-performing teams, along with a demonstrated focus on driving profitable growth. We are thrilled to have Rachel join our team, and I am looking forward to partnering with her as we continue to harness James Hardy's momentum. Over the last year, We have continued to add talent, invest in the development of our team, and align our structure to support our strategy. In my first year, we have consciously built our talent in select areas, such as HR, marketing, and technology, while also supporting our existing team. Rachel will now share with you in her own words why she chose to join the James Hardy team.

Thanks, Aaron. I'm grateful for the warm welcome and onboarding support that I have received. First off, I want to tell you how excited and honored I am to be joining James Hardy as CFO. In choosing to be here, I've quite literally voted with my feet. And why is that? In simple terms, I believe James Hardy is an exceptional growth business with a significant strategic moat that is supported by a team and values that I'm eager to be a part of. My experience as a public company CFO and former Wall Street investment banker brings unique financial skills and leadership experience to the James Hardy executive team. Under Aaron's leadership, I believe we can further drive sustainable, profitable growth and development of our people. I'm in my 12th week here, and I've spent much of my time thus far meeting the team, engaging with them as functional groups, as well as individually, and learning about our business. I can certainly attest to the fact that the momentum here is palpable. Finally, I'm very much looking forward to getting to know the investment and analyst community and continue to take you on our journey of being homeowner-focused, customer- and contractor-driven. I'm energized to be on this team, and I believe in our right to win. With that, I'll turn it back over to Aaron before I discuss our second quarter results. Aaron?

Thank you, Rachel. I speak for all of us here at James Hardy when I say how excited we are to have you join our team. and I know that you will bring strong capability and leadership, which will positively impact everyone across James Hardy. For today's call, I will start by providing a strategy and operations update. Rachel will then discuss our financial results, and I will return to discuss our outlook, guidance, and provide a brief closing. After that, we will then open it up for your questions. Before I share an update on our strategy and operations, 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 now 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 second quarter results continue to highlight how impactful that focus has been. For the second quarter, we achieved global net sales of just under $1 billion, flat versus the prior corresponding period, with a record quarterly global adjusted net income of $178.9 million, up 2% versus the prior corresponding period. Both our global net sales and adjusted net income results were again supported by volumes in North America that have outperformed the market. Our second quarter North American volume of 773 million standard feet was at the top end of our guidance range, and we delivered that with a record 31.7 EBIT margins. The adjusted net income result was also supported by strong financial results in our Asia Pacific and European regions. For the first half of the year, we generated record operating cash flow of $459.1 million, up 74% year over year. Finally, as we discussed last quarter, we have been accelerating our investment in SG&A. supporting our marketing tentpoles, driving awareness and conversion in targeted regions to aid in sustaining profitable share gain. Rachel will share additional details in the financial section. While uncertainty continues to affect our end markets, our focus remains on partnering with our customers and controlling what we can control to outperform in the markets we participate in. Now, please turn to page six in our global strategic framework. As I shared last quarter, 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-valued, 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 without compromising on our foundational imperatives. I remain confident in our team and our strategy. Combined, they position us to execute at a high level and and drive possible share gain in all three regions. Last quarter, I shared additional details about our three strategic initiatives. Today, I want to spend some time discussing two of our four foundational imperatives, zero harm and the Hardy operating system. Let us now turn to slide seven to discuss our first foundational imperative, zero harm. At James Hardy, our focus on zero harm is a non-negotiable element of our global culture and is underpinned by a conviction that every incident is preventable. We operate with our team's safety, security, and well-being as our number one priority. This also includes ensuring our products are safe and that safety is adhered to when we work with our partners, customers, and within the communities we participate. While Zero Harm is managed centrally at the global level, it relies on participation from every employee because safety is everyone's responsibility. We take a bottom-up approach to involve our employees in safety and empower them with the skills they need to avoid accidents and injuries. As seen here in October, we launched our inaugural Global Zero Harm Month at James Hardie. All of our teams across all of our manufacturing sites and offices globally dedicated a day to discuss and exclusively focus on safety. These zero-harm days are an annual event and show that our business will never put profit before safety. I would also like to highlight our progress on DART, or days away restricted or transferred when compared to the industry average. At a global level, our year-to-date DART was .57. High-performing companies do safety well. Why? Because it requires complex situational awareness and unrelenting focus and vigilance. While we are improving, there are no shortcuts to zero harm, and there remains more to be done as we continue to operate with a belief that all incidents are preventable. Thank you to each and every James Hardy team member for your continued focus on embedding zero harm in everything you do. Now, let's turn to slide eight to discuss another foundational imperative, the Hardy Operating System. The Hardy Operating System, or HOSS, is our enterprise management system which has been developed to drive focus across all areas of our business. This system provides clarity of priorities, efficient resource allocation, and execution standards for approved initiatives. This focus and discipline ensures all efforts generate expected outcomes back to the business on time. The HOSS works in conjunction with our existing manufacturing system called HMOS. Simply put, HOSS is how work gets done. While HOSS covers more than what we have listed here, today I want to touch on three critical initiatives. Number one, driving manufacturing efficiency through lean manufacturing principles with HMOS. delivering procurement and R&D savings, and improvements in working capital. As it relates to these three components, Haas helps us to offset cost increases outside of our control, providing us with the flexibility to strategically invest in our homeowners, customers, and contractors, including the builders, where and when appropriate, while maintaining our focus on profitable share gains. Over the next three years, we expect to generate $100 million of cumulative global savings through HMOS. This is achieved by driving ongoing lean efficiency throughout our global network of plants, including rolled throughput yield, net available hours, and a focus on delivering against our ESG targets. Across our facilities, you can see HMOS in action as we move towards standardized HMOS visual cues such as pyramid trackers and color-coded escalation billboards. This consistency underpins the rigorous lean process that is embedded in the HMOS and that we are rolling out across all of our facilities globally. Additionally, over the next three years, we plan on delivering $60 million of savings through procurement and R&D-led initiatives. From a procurement perspective, this is about leveraging the size of our global business to purchase more efficiently and implementing best practices to drive unit costs down. From an R&D perspective, it is about value improvements, including ESG initiatives that expand our competitive advantage. It is not about cutting R&D investments. Together, our lean manufacturing and procurement and R&D savings will lead to an expected cumulative $160 million of savings from FY24 through FY26. Lastly, in terms of working capital, over the next three years, we plan on delivering a cumulative improvement of $100 million by continuing to demonstrate discipline and rigor with how we manage all aspects of our working capital globally. These goals were first announced publicly in May 2023 in our remuneration report, and I am very pleased with the progress we have made to date on these three key HOSS initiatives, and I look forward to continuing to update you in the quarters ahead. Now, I would like to hand it over to Rachel to share more details about our second quarter results. Rachel.

Thank you, Aaron. Let's start on page 10 to discuss our global results for the second quarter. Against the challenging backdrop, our team has delivered strong-set results in the second quarter compared to last year, with consistent and focused execution through the halfway point of our fiscal year. For the quarter, group net sales were flat year-over-year at just under $1 billion. Adjusted net income increased 2% to $178.9 million. The global adjusted EBITDA margin was 28.6%. and operating cash flow for the first six months was a record $459.1 million, up 74% year-over-year. The team is executing on our strategy, and these record results demonstrate the power of controlling the controllable. Now, turning to slide 11, I'll detail our net income waterfall for the second quarter. As mentioned, adjusted net income increased 2%, or $3.1 million year-over-year, to $178.9 million, and was in line with guidance provided in August The year-over-year increase was primarily driven by strong EBIT growth in North America and APAC, which combined contributed a $21.3 million increase to adjusted net income. During the quarter, global SG&A spend, which includes corporate, increased 23% year-over-year to $152.8 million. This equates to 15.3% of revenues, up from 12.5% last year. The increase in investment, primarily in our marketing temples, reflects our focus on growing brand awareness and driving profitable share gains. Some of our key initiatives include increased marketing through advertising, sponsorship, and trade marketing to drive consideration and conversion across the value chain. This not only includes our It's Possible themed TV ad campaign, but also investing in programs designed to support our contractors and HOS initiatives. Adjusted general corporate costs increased primarily due to an allowance for a legal fee insurance receivable, higher stock-based compensation expense, and increased employee costs. In addition, our Q2 adjusted effective tax rate was 23.9%, which was higher than our estimate in Q1 FY24 of 22.9%. This increase reflects a change in expected geographic mix. Our current estimate for the full-year FY24 tax rate is 23.4%. While this slide focuses on adjusted net income, I did want to take this opportunity to clarify that during the quarter, we recorded a U.S. $20 million charge related to the previously announced cancellation of the Truganina Greenfield site. The non-cash write-down was recorded as an asset impairment and the impact excluded from our adjusted net income. At this time, we are actively exploring sale options for this site. Overall adjusted net income of $178.9 million was in line with guidance. We are proud of our global teams for the way they have executed in a challenging market. We will remain focused on consistent execution to similarly deliver in the third quarter. Let's now move to page 12 to discuss North American results. Beginning with the top line results, North American net sales of $734.4 million was down 2% versus the prior corresponding period. Our average net sale price was up 2%, which helped to offset a 5% decrease in volume. Volume of 773 million standard feet was just above the top end of our guidance range. During the quarter, overall housing end markets were challenging, with major project R&R down mid-teens and single-family new construction down 14% in the June quarter. As a reminder, we use a one-quarter lag methodology that applies to single-family new construction macro data to better align the data to the timing of our reported sales. Our volume decline of 5% year-over-year, in contrast to the double-digit overall housing market decline, highlights the success we are having in converting share against other competitive materials. This reflects James Hardy's continued material conversion advantage in building products. Similar to the first quarter, we continue to see volumes in South Central regions, which is new construction dominant, outperform our total North American volumes. This has been supported by our partnering with the larger leading builders who have also been taking care during this time. In the September quarter, single-family new construction turned positive, growing 7% year over year, albeit off a depressed base, and new construction has continued to outperform R&R. We remain focused on serving both the new construction and R&R segments and continue to invest in the larger R&R market. During the quarter, Our mission is to target contractors resulted in record membership to our Contractor Alliance program, with total membership at an all-time high of just over 6,000 contractor members. The contractor remains a key relationship in driving conversion to James Hardy products and completes the concept of being homeowner-focused and customer- and contractor-driven. Now turning to margins. The North America EBIT margin improved by 330 basis points versus the prior corresponding period to a record 31.7% and was towards the top end of our guidance range. EBIT dollars in the second quarter were up 9% to a record $232.7 million and improved $20 million versus the prior corresponding period. EBIT benefited from a higher average net sales price as well as lower input costs, specifically in freight and pulse. These benefits more than offset the impact of lower volumes. During the quarter, we continued to invest, with SG&A dollars increasing 18% year over year. As a percentage of sales, SG&A expenses increased 1.8 percentage points. This increase was focused on our marketing temples and was highlighted as a strategic investment initiative by Aaron in our last quarterly call. We are gaining awareness from these investments, and since August, our request for quotes or RFQs have increased by 20%, and we have achieved this result more cost-efficiently. It is early, however, to measure the ultimate return from these investments. Post the quarter end, we have communicated our annual North American price increase for calendar year 24. On average, prices have gone up mid-single digits. As outlined earlier this year, we continue to expect reported net average selling price to be positive for the fiscal year. Despite housing market volume declines, we are encouraged by our relative share performance. By managing decisively and partnering with our customers, the North American team delivered a strong second quarter result with record EBIT and EBIT margins. Let's now turn to page 13 to discuss the Asia-Pacific results. Similar to North America, it was a strong second quarter for our Asia-Pacific segments against a challenging backdrop. Net sales improved 7% versus the prior corresponding period, to a record $225.1 million. The net sales improvement was driven by a higher average net sales price of 15%, which was partially offset by a volume decline of 9%. All three countries in the APAC segment experienced a decline in volume, with Australia performing the strongest. EBIT improved 21% to $67.9 million. The result was driven by a higher average net sales price which more than offset an increase in cost of goods sold. We continue to invest in marketing, such as with the Block media campaign built around this popular TV series. We have a focus in APAC on brand-building media and showcasing before and after home transformations made possible with James Hardy products. The APAC event margin improved by 360 basis points versus the prior corresponding period to 30.2%. Similar to North America, our Asia-Pacific team has partnered with our customers and managed decisively to deliver a strong second quarter. We'll now turn to page 14 to discuss the European results. Our European team had a solid second quarter as the team capitalized on a dislocated market environment. Net sales increased 5%, primarily related to a 20% increase in ASP, and a €3.3 million favorable true-up related to customer rebate estimates. The growth in ASP resulted from our strategic price increases and growth in high-value products. We continue to work closely with our customers and respond with products that are geared to both multifamily and single-family homes. Importantly, we are seeing our product mix continue to shift towards our higher-value fiber cement offerings. Our fiber dips in volume were down mid-teens during the quarter, whereas we experienced double-digit growth in our high-value products. While our high-value products are growing off a small base, they are becoming a larger part of the overall mix, namely the plank and panel opportunity. On a combined basis, however, volumes declined 15%, which, while significant, represents a lower decline than the overall European market. Our innovative architectural panel provides an example of our growing high-value products. This fiber cement product offers superior fire safety, sophisticated design developed in collaboration with leading European architects, and a 15-year warranty, which together represent highly valued attributes in the market. Our architectural panel is an innovative and cost-effective solution to help meet the European multifamily housing balance. Our focus on high-value products helps support even growth of €7.1 million, driven by a higher average net sales price, which more than offset a higher cost of goods sold per unit that was impacted by higher labor and energy costs. Similar to North America, SG&A investments increased to drive new product selling support and growth initiatives. The EBIT margin improved by 640 basis points versus the prior corresponding period to 10.7%. This margin is inclusive of the Euro 3.3 million favorable true-ups related to customer rebate estimates. Strategically, the European teams remain focused on driving growth through high-value products in FY24 and beyond. the strategic emphasis similarly supports the long-term margin expansion opportunity. Turning now to page 15 to discuss cash flow, liquidity, capital allocation, and capital expenditures. Our robust operating cash flows reflect our strong margins, which are a hallmark of James Hardy. In the first half of FY24, our operating cash flows was $459.1 million. This cash flow result was driven by strong financial results in all three regions, and a working capital improvement of $82.7 million. These improvements were both supported by the execution of the Hardy operating system. We continue to maintain a strong liquidity position with a Q2 leverage ratio of 0.79 times and liquidity of $608 million. We are stewards of investor capital. Our capital allocation framework is first and foremost to invest in organic growth. We do this while maintaining a flexible balance sheet while deploying excess capital to our shareholders. Through Q2, we have paid down 90 million of Revolver, completed our U.S. 200 million buyback program, and today announced a new U.S. 250 million buyback program, which we expect to complete over the next 12 months. These actions reflect our strong cash flow and balanced approach to capital deployment. Regarding capital expenditures, For the first six months, capital expenditures totaled $232.6 million. We continue to expect to spend approximately $550 million on capital expenditures in FY24, and we remain committed to keeping capacity supply ahead of demand. Subsequent to the quarter end and through October, the company paid down the entire $140 million balance on our revolving credit facility. We also entered into a new five-year U.S. $300 million term loan agreement maturing October 2028. As of 31 October 2023, our liquidity was US $1 billion versus US $608 million at 30 September 2023, with a net leverage of approximately 0.7 times versus 0.79 times at the quarter end. We have robust operating cash flows, substantial liquidity, and a flexible balance sheet, which enables us to invest in profitable growth. I'll now turn it back over to Aaron.

Thank you, Rachel. We have delivered a strong first half and a record quarterly result for adjusted income. In addition, we have outperformed our end markets in challenging conditions. These results are proof points that we are accelerating through the cycle and taking share. Now, let's move to page 17 to discuss our market outlook and guidance. For our largest market, North America, We have again provided the market outlook data from several external data providers. The external ranges continue to change. The average estimate for single-family new construction improved from down 12 to down 9. Multi-family new construction weakened from down 12 to down 15, and repair and remodel improved incrementally to down 11. Using these external ranges, along with our assumed market segment exposures for FY24, the implied range for our blended addressable market is down 7 to 14, with an average of down 11. Overall, while these calendar year 2023 North American in-market forecasts have improved incrementally, there remains considerable uncertainty in the market today due to poor mortgage affordability, interest rate volatility, and unsettled market dynamics. Regardless of market conditions, we remain confident that we will be able to deliver growth above market and strong financial results. We remain laser focused on driving profitable share gain and are demonstrating this with our market outperformance. If you turn to page 18, 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 19. Today, we are providing three points of guidance for our third quarter of fiscal year 2024. First, we expect North America volumes to be in the range of 730 and 760 million standard feet. Second, we expect North American EBIT margin to be in the range of 30 to 32%. And lastly, we expect global adjusted net income to be in a range of $165 million to $185 million. As I mentioned earlier, our team is energized and focused on driving profitable share gain, and we are positioned to deliver another strong financial result in our third quarter. Finally, please move to page 20. 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 to deliver a strong second quarter and build on the momentum from our first quarter. We are homeowner focused, customer and contractor driven. Before I hand it over to the operator, I would like to mention that we will be hosting our next Investor Day in late June 2024 in North America. At this event, We look forward to showing you our value proposition in the field, and we'll be sharing more details in the coming months. With that, I would like the operator to open the lineup for questions.

Thank you. If you wish to ask a question, press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on speakerphone, please pick up the handset to ask your question. Your first question comes from Lee Power from UBS. Please go ahead.

Good morning, Erin Rachel. The midpoint of volume guidance that you've given for the third quarter, it's up 6% year-on-year. I take your end market data, that's really helpful, but just thinking about your mix and share growth, is there something going on in the third quarter that doesn't mean we should be assuming positive year-on-year performance polls through the fourth quarter as well?

Hey, Lee. This is Aaron. We're going to launch Rachel right into this to answer the first question. Rachel?

Hi, Lee. Nice to meet you. Yeah, so when we look kind of where we are, the first thing I talk about is where is Q3 relative to Q2? And as you know, for us, Q3 is typically a bit of a seasonality of a bit lower of about 5%. So when you look at our guidance, to your point, the midpoint of our guidance does reflect that seasonality. But apart from that, it's really fairly similar in terms of how we were guiding and, frankly, how we delivered for Q2. And again, we're very pleased with our performance relative to the market overall as you knew it is, and it does reflect our focus on PBG.

And, yeah, sorry, maybe to clarify, that's useful, but in terms of When I'm thinking about the 3Q guidance and the fact that that's up year and year, should we take that as just kind of reconciling that with the market data? Does that positive year and year performance, do you think that holds through the fourth quarter? Should we be thinking that the volumes are bottom and that we're now out on a year and year basis, regardless of seasonality that we're seeing into the third quarter?

Yeah. Hey, Lee, I'll take this. Right now, we're seeing a pretty normal order pattern. I would say, as evidenced by our guidance and up 6%, we feel very strongly about our third quarter. But as we always say, we're just going to get one quarter of guidance, and that's what we're doing here.

Excellent. Thank you for that. And then... The lean savings, just as a follow-up, the $100 million, can you maybe talk a little bit about the profile of that? I mean, it sounds like you're getting great traction. You did, what, 40% gross margins again for the quarter, which is great. How do we think about the weighting of that through that period? It seems like you've got some great early wins on it.

Yeah, Lee, look, I think you're referring to Haas. which there's a few components of that for us. Obviously, HMOS, which is our Hardy Manufacturing Operating System, we have a terrific team across our entire manufacturing organization. We think about every single region, but I'll just pick North America, for instance. North America's run by a terrific leader in Sean Gadd. Brian Kilcullen is our leader of HOS and HMOS throughout the organization. And then Don Ashworth, who runs manufacturing. What this team is really looking at is we're looking at our yield, but we're also looking at our net hours when we look at that HMOS metric. The other thing that is new that we haven't talked about before is we have our ESG initiatives in here that we think are gonna generate substantial savings for us when we think about waste, those types of things. So that really makes up the $100 million We're off to a very strong start there. The other components of HOSS would be when we think about R&D and procurement. I think you've heard me mention many times that we had a change in our structure as it relates to procurement. Procurement was more regional. We've set it up centralized under Ryan Kilcullen, a gentleman by the name of Rob O'Brien runs this for us. He's doing a terrific job, and we're really being able to leverage James Hardie as a whole and we're seeing savings across all different areas, but also being able to work with our suppliers when we think about payment terms and things like that. So we're off to a strong start as it relates to Haas.

Excellent. Thank you. I'll leave it there. Thanks, Aaron, and welcome, Rachel. Thanks, Lee.

Thank you. Your next question comes from Shariah Visson from Bank of America. Please go ahead.

Morning, Aaron. Morning, Rachel. Thanks a lot for taking my question, and congrats on a very good quarter. One question on your SG&A, perhaps for you, Rachel. Looking at page 8 of your financial statement, and the SG&A cost came in at $40.5 billion. It was $28 million for the same period last year. And I know you mentioned certain one-offs related to provision of receivables. So if you could just give us a sense of if you take that number out, what was the SG&A on an underlying basis? And also, more importantly, how should we think about that number in 3Q and 4Q? Thank you.

Thank you. I'm happy to take that. So we talked about three components that are general corporate costs that comprise that $40 million. One is an insurance receivable unwind as it relates to an expected recovery of legal fees. Again, this is an insurance receivable online. That probably is your largest component in the delta. The other two pieces that we should talk about are higher stock-based compensation. That not only reflects our share costs and increase in our share price, but also a larger group of employees, which is also reflected in the third component, which is our increased employee costs. And those are the three elements I pointed to.

Rishi, could you give us the numbers, if you have them?

I do think the only one that I should give a little bit more color on is the unwind and the insurance receivable because it is a one-time, and that is in your kind of low single-digit millions.

Great. Thanks. If I can just squeeze in one very quickly to you, Aaron. Just looking at, you know, page 18 of your presentation, the guidance, I just note that, you know, I appreciate those are just ranges and sensitivities, but Looks to me that, you know, the ranges have gone up. You know, you put in an 815 million number. Is it fair to say that it sort of shows an increase in confidence or I'm reading too much into it?

Yeah, Shariah, it's good observation. I think, number one, we're trying to simplify this. Number two, we do have confidence in what we laid out. You know, as I mentioned before, as we start into our Q3 phase, We're seeing a very strong order pattern, so we have confidence in what we're displaying here.

Okay. Thanks. I'll jump back in. Thank you.

Thank you. Your next question comes from Lisa Huynh from JPM. Please go ahead.

Hi. Morning, Rachel. Morning, Aaron. I just had a question about the price rise. I mean, can you share any feedback that you've had with your customers so far, just given, you know, you put through another price rise and commodity prices do seem lower?

Yeah, Lisa, so let me just remind you, I think I've gone through this, of what our strategy is in relation to pricing, right? You know, we look at a value-based approach when we think about pricing. It's not purely... commodities go up X or go down X and that we're going to take price one way or another. So it's more value-based. Also, I just want to remind everyone, we're not a commodity. We think we bring the highest value proposition to our customers, and it costs money. It costs resources. You think of everything that we're bringing to our customer partners, and they're paying for it. The other thing, and you can look across the different regions, right? You know, strong price in North America, relatively speaking, when you think about the market dynamics. I can say the same for APAC, and I can say the same for Europe as well. So we really study and take into account market dynamics as well, so as that we're going to be able to go out there and take price and still be able to defend and gain share. That's how we look at this, Lisa.

Sure, that's a great color. Can I also ask just around the volume trends you're seeing at the moment? You said orders have been quite strong. I guess in the slide deck you called out South Central and Northwest as being the best performing regions. Can you give us any color on the Northeast and some of the other regions, what you're kind of seeing there that aren't performing as well?

Yeah, and when I say not performing as well, it's all relative. Again, talking specifically about North America, again, we have a terrific team. So they really are bringing solutions to our customer partners. And if you think about the difficult environment, whether you're an R&R, whether you're a new construction, you need a partner that can bring you value. And that's what we're bringing out there to our customers in each one of those segments out there. But look, we were down 5%. If you look at our volumes, we would say R&R in general was down mid-teens, is what some of the external advisors have been telling us, if you look at some of the studies out there. And then new construction down 14. So even with that, you can see our strong performance. Now, region by region, you did mention Texas, and that is relatively strong because it's been buffered by new construction. That's where a lot of the new construction is going on there. And then if I look at an area like the Pacific Northwest, that is us having the right proposition that we didn't have before and going out and taking share from a competitor, plain and simple.

All right, that's great, Carlo. I'll leave it there. Thanks. Thanks.

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

Yeah, thanks. Good morning. Welcome, Rachel, as well. Just a quickie, I'll go straight to you, Rachel, just on some basic math. The company free cash flow generation looks, again, pretty formidable, and looking out on an annual run rate, maybe $400 million of free cash flow after the CapEx. You've announced a $250 million buyback, so I'm sort of confused why you need a $300 million term loan when you've got the free cash flow generation You've paid out the 140 revolver. I get that. Why do you need to turn out five years worth of debt for 300 when you're generating that kind of cash flow? Just out of interest?

Yeah, I mean, yeah, I'm echoing. I'm echoing.

Maybe you want to mute your line there? Okay, try it again.

All right. So the first thing you rightly note, we paid down 140 million of revolver with the term loans. As it tells you, our term loan is at SOFR plus 2%. So this is very attractive money for a locked-in five-year. And we are a growth company. So as you think about being a growth company, having quote-unquote cash on the shelf for that very accessible cash is very appropriate for where we are in being a growth company. And we can support that organic growth. And as you can see, we also can do an AND. In this case, we just announced a new $250 million share purchase program. on the heels of completing the $200 million share purchase program. And look, the $200 million is equivalent of just under 2% of our shares outstanding. So again, I think we're taking a balanced approach as we think about our capital allocation and return capital structures.

No, I get that. But the HOSS system that you're talking to, Aaron, delivers you another $160 million pre-tax improvement. plus working capital is another 100 you're talking about. I mean, you've got cash coming out your ears on this thing. I'm just trying to really understand, is there something else that I should be thinking about? I know you're saying you're a growth company. I mean, is that acquisition? Is that capital allocation over and above the existing capex envelope? Is it capacity coming on faster? We should be thinking about trying to really understand the logic of that, given the strength of the numbers you're putting out there and the way you've structured that finance facility.

Yeah, I'm going to start back with, you know, the first comment is, why are we generating so much cash? We have great margins, right? And our great margins are a hallmark of James Hardy, but we're in a cyclical business. So, you know, the combination of being in a cyclical business means what is that insurance policy and what does it cost you? And if so, for plus 2%, and again, I've paid down my revolver, so I'm not being kind of lazy with the cap structure, you know, it does feel appropriate to support the growth ahead.

All right, Simon, anything else?

No, no, that's all good. Thanks, Aaron. Thanks, Rachel.

Thanks, Simon.

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

Hey, Peter. Morning, Aaron. Morning, Rachel, and pleased to meet you. Aaron, just a quick question on SG&A. So you're clearly picking that up fairly materially at what, hopefully, is the low end of the cycle. Could you talk to us a little bit about some of the benefits that you're seeing there, what you're specifically investing in? Also picking up that comment in the strategy about connecting and influencing all participants in the value chain. where it is that you're investing and what the impacts have been, because clearly that is coming through in bucket loads from a volume perspective.

Yeah, Peter, great question. And I think you've really seen this ramp up of SG&A over the last couple of quarters. And as we look to Q3, we expect it to be similar to what we're seeing here now, or what you just saw in Q2. Look, it supports our strategy. I've said this over and over, customer-focused. When I think about our strategy, homeowner-focused, customer and contractor-driven. More recently, I think you've heard James Hardy talk just about the homeowner. The focus has been really on media, namely Magnolia Home. We think that we need to do more than that when we think about the value chain. As recently, we've been investing in media, but it's been targeted. at media where we think it goes across our entire value chain. So that is homeowners, that's customers and contractors. And really I brought this term into play of our marketing tent poles out there. And it's really a few key areas that we think about from a marketing perspective that we're going to invest in. So if you think about the builder and contractor, we think about the brand days events. We think about our contractor alliance program. Also, we're getting more prescriptive as it relates to regional marketing, and that can include sponsoring local sports teams. So it really covers the gamut of that homeowner-focused, customer and contractor-driven. You know, one of the things that I look at is the share gains that James Hardy's been able to achieve over the last 10 years, and I think we shared that. It was some census data. And we achieved 8% share growth over the last 10 years out there from 15 to 23%. And this was really centered around new construction. What I'm really excited about, if you look over those last 10 years, we didn't do much of this at all, right? So if we think moving forward and you look at this investment, we expect this to accelerate our share gains. And look, it's only been two quarters, and I think you have to judge us on an annual basis, but we are taking share, and we sit here with a year going by. I think it'll be a worthwhile investment. So early days, but that's why we're doing it, Peter.

Thanks, Aaron. That's useful, Kala. And then just turning to new construction, obviously an area of significant focus for you this year is Could you comment on what you've experienced in terms of the entire proposition being pulled through? So beyond just the plank, what you've seen in trim and other products that have contributed to the overall profitability of the portfolio in the context of new construction?

Yeah, look, in new construction, I would just say this. We're bringing the solutions that our customers need and value, right? So new construction, as we partner with our large builder customers, it's very, very competitive out there. I think we've talked about it before. Part of the reason they're doing so well is there's not existing homes out there for people to buy. So they have land and they're building on them. And one of the things that they have the advantage of doing because they have such A strong balance sheet is they're buying down rates. Usually the magic number is sub-five from an interest rate standpoint out there. And they're getting traction there. And this is really the large builders out there. So as you can imagine, very, very cost-conscious. And we're bringing them the solutions they need for those different levels of buyers. One of the ones that we've talked about many times is Simplank. And we introduced that early into the year. And I think there was a lot of fears of, you know, are we going to let this product get out of control? Because I know that happened before. We're managing it appropriately. And I think it's evidence when you see the type of margins that the North American team's been able to generate. One of the things you asked about was trim. That's an on-purpose strategy and focus for us from a North American perspective. standpoint is really to increase our trim attachment rate. We are doing that. I think probably it's best to let a whole year to go by before we would talk to that, Peter. But when we look at every single one of our product segments, we're bringing the right solutions to our customers. That's what we're focused on.

Perfect. Thanks, Aaron. I'm going to be cheeky and just sneak one quick one on cash flow for Rachel. Sorry, $82.7 million worth of working capital unwind. We haven't seen that in the second quarter typically. Rachel, how much of that is structural versus sort of a seasonal, some other effect that's playing through there? So I guess how much HRS are we seeing in that number?

Well, Peter, you're absolutely right to point out there's two factors, right? You can't ignore that there is some seasonality, but then what part is structural? And when you dig into the working capital, I know you guys have just gotten the numbers, you're going to see the two key drivers are an inventory and it's also an account payable. And what does that reflect? So on the inventory, we're doing a lot more with customer integration. So with the customer integration, we're specifically getting a tighter look on their inventory with our top customers, largely driven with North America. From that inventory look, we are getting that close inventory look. Not only is that a demand signal for us, but it is also a great way for us to efficiently manage their inventory and our inventory. So that is a number that is clearly part of the hawk. As we look at the accounts payable, that also is a reflection of the procurement groups that Aaron had discussed. So really, when you say things like, it's our phone bill. I mean, it's something so basic as some of that. We're having a global procurement focus is letting us access some of that opportunity.

Fantastic. Thank you. And I'll definitely leave it there.

Thanks, Peter.

Thank you. Your next question comes from Harry Saunders from AMPay. Please go ahead.

Morning, Aaron. Morning, Rachel. Thanks for taking my questions. Firstly, just one on primary demand growth. I think you alluded to sort of 4% previously. Just wondering any idea how this is tracking? You know, it seems it's well ahead of that sort of 4% in the quarter given the end market growth that you talked about.

Yeah, very... We set this back in March, right, the end of March when we kicked off our fiscal year at 4%. And if you remember the year prior, I think we came in North America roughly 3%. So 4% was a goal that was not a layup for our team out there. I would say right now how we're tracking is we're very pleased with our performance relative to PDG. If I look at PDG, I think we need to evaluate it annually versus one or two quarters. And, you know, I think what's really encouraging for us is we continue to take share with our superior product out there. I mentioned before, I think, to Peter of just the opportunity from a material conversion that we do have in front of us. Over the last 10 years, we've taken substantial share without doing a lot as it relates to demand creation. We're putting more behind demand creation, so we expect to see our PDG growth just accelerate.

Right. So on that, when you say accelerate, so FY25, you could expect a higher PDG than that 4%.

Now, Harry, you know better than to try to get me to talk about FY25. We're just going to give here Q3 guidance. Thank you.

My other question relates to the seasonal uptick you typically see in the fourth quarter. Is there anything to sort of change the view, I guess, that you usually would see a seasonal volume increase?

Yeah, and Harry, I think probably you might be referring to our people buying ahead as it relates to price increases. We're seeing normal order patterns right now, so we're not seeing anything different.

Right, and sorry, but in the March quarter, you typically will get a volume increase over the December quarter, right? You look at historical trends, just wondering... if there's anything to change to that usual seasonality view?

Yeah, I think we expect the seasonality is there with us as part of the Q3 guidance, and so there's nothing unusual in what we have seen so far.

Great. Thanks, guys. Sorry, I might just sneak one more in on the HOSS cumulative savings. So just to be clear, that's a cumulative number. So can you give an idea of the run rate broadly that you might be sort of factoring in by the time you get to FY26? Go ahead, Rachel.

I'll start by saying these targets were set as of our fiscal year end, right? And they're through FY26. So it's a bit premature to be talking about where we are, particularly on a quarterly basis. But I think when Aaron talked about what are some of those key drivers we're looking at, he took you through in HMOS what we're tracking with R&D and procurement, and also what I was talking about with the customer integration, particularly working cap with some of the initiatives. So that's coming together to be that. But again, I'll remind you, we just set that baseline, and it is through FY26. Great. Thanks.

Thanks, Eric.

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

Thanks for taking my question. It was a follow-up actually on the HOSS savings. Are you able to just clarify or provide some colour on what the uses of those savings are going to be? Are you looking to move it around and invest elsewhere or are you more keen to let it drop through to earnings or maybe it's a mix of both? So any sort of examples or further color on the use of those savings would be great, thanks.

Yeah, look, the way that we look at Haas Savings, Brooke, is really it's going to help offset non-controllable costs, right? You know, another benefit of Haas is it's going to help us add incremental capacity and it's going to allow us to continue to invest in the things to grow our business. You know, I talked about the marketing tent poles, things like that. It's going to help us invest in people. So the list goes on and on, but that's how I look at the Haas savings. It's not a one-for-one transfer over to the P&L.

That's great. Thanks. And then would you mind providing some comments on the R&R market? I know you've talked to mid-teens, the client, and the quarter, but any sort of green shoots there? You've always sort of flag there, Aaron, that there are some good structural drivers that should support that market at some point. So you're hearing any green shoots at all, as well as if you're able to comment about how it's trended through this year, just so we can think about when the comps start to get easier, I guess, in calendar year 24. Thanks.

Sure, Brooke. Look, we remain bullish on R&R from a mid- to long-term standpoint. There's many reasons why, which I'll go into. But look, just more short-term As we talk to our contractors, they feel the same way, but they're cautious right now. And they're cautious because homeowners are cautious for many different reasons. Interest rates continue to climb in North America. That's one piece. But there's just still uncertainty out there in the marketplace. But as I've said many times before, we're in a really good spot as it relates to R&R. You think about the material conversion opportunity for us. There's so many homes out there that are older that need resited, right? And that's one of the reasons why we're investing now, because it is a long sales cycle for us. Also, you know, people have more wealth in their homes than they've ever had. So as they come off the sidelines, we want to be there. You know, Rachel uses the term, which I like a lot, We think about the R&R market, you know, like a beach ball underwater.

That's Zonda. I've got to credit her. That is an external macro.

I wish I came up with that. She cited that, but I still like it. And that's what we see out there is this, you know, R&R market has all the elements to really take off. And if you look at some of the projections, it's for the back half of next year. We also think about our investments. I mentioned, you know, in our marketing projects, but it's also having people in the field. And then it's our capacity as well. You know, if we think about Prattville 3, that's going to come online at the end of February of next calendar year. So we'll have the capacity. We'll have the demand creation in store. All the elements check off. We're really, really excited about our prospects.

That's positive. Thanks. Thanks.

Thank you. Your next question comes from Rowan Gallagher from Jarden Group. Please go ahead.

Hi, Aaron. Can you hear me? Yeah, I got you, Rowan.

Hi, Aaron. Hey, Rachel. Good morning, everybody. First of all, congratulations. Continuing to fire the market, so it's a credit to you and the team. Just in relation to costs, I noticed that the last 12 months you've had massive tailwinds associated with pulp and freight in particular. I'm conscious of the geopolitical risks, diesel prices, et cetera. Can you just comment on where you see those four key cost of goods sold drivers and what you're assuming implicit in your guidance going forward where you can, please?

Yeah. So we've been talking about four key cog drivers for us. We talk about freight. We talk about cement. We talk about labor. and pulse. So those are the four that we've been tracking, and as we've discussed, those are nearly kind of 50% of our COGS. So you're right to point to those. As you pointed out, freight and pulse have been tailwinds for us this year. We've also cited that we expect cement, particularly at the very end of the year, is going to be a headwind for us. So we've had puts and takes on our costs overall, but those are really the four of the two to keep monitoring.

And just freight in particular, are we seeing that starting to back up now?

For us, freight has been, for the year, your right favorite, but on a quarter-to-quarter sequential basis, pulse has been the area that's really been still supportive.

Okay, thank you. And a follow-up question, Rachel, if I may, and apologies. It was a previous question, and I missed the call, but on the term line that you've refinanced, Can you confirm whether that's, number one, fully drawn and the rate that you signed off on? Thank you.

Yeah, so it's not a refi. So the term loan A, it's roughly a SOFR plus 2%. It's $300 million. It's a five-year. And we used $140 million of those proceeds to repay our revolver. Okay, so the other piece is we also announced the $250 million new share repurchase program. So as you look across the cap structure, we are taking a balanced approach here to how we are thinking about funding and supporting our growth.

Okay. And final question, if I may, Aaron. You've commented in your published remarks about mid-single price increases, ASP being announced, etc. Obviously, the mix effect with your customer base will vary as well as product mix rebates, etc., At what point would you envisage or could you envisage ASP in North America flatlining or even declining given the uncertain markets that we're facing currently?

Yeah, Rowan, just very simply, we don't see that average price declining for us. We believe for the foreseeable future it's going to be positive. Awesome. Thank you very much. Thanks.

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

Morning, all. Thanks for taking my question. Just wanted to ask on third quarter margin, I guess it's normally declined sequentially on lower volumes, but you're talking on keeping that flat. I just wondered if you could walk us through the moving pieces and in relation to margin seasonality going forward with the cost out, is there a way to balance your reinvestment in SG&A I guess, seasonally to keep that more stable through the year?

Yeah, look, I'll start and then, you know, Rachel can jump in here. As far as margins, first of all, you know, we've had a healthy margin through this, you know, entire year and moving forward. I think we're forecasting that as well. We're going to continue to invest in the business where we need to invest, which we talked about some of the demand creation issues mainly some of the marketing tentpoles. And what's also helping our margins is the benefits we're getting from the outstanding work our team is doing around HMOS, right? Also working with our suppliers, you know, to continue to offset inflation with some of the HOS savings. So if you think about our margins and, you know, how healthy they are, those are some of the areas that are really aiding us, but we're still able to be able to invest in demand creation.

What I like with Aaron's focus on us, given the market right now, he's kind of telling us control the controllables. So that is kind of our execution mantra as we go through. And controlling the controllables means we've given some of that margin guidance. It's in also relation to a very specific input cost environment as well. So I think we have to also keep in mind there's things we can do and then also the environment. So that is one of the reasons we're being quite cautious right now and keeping our focus very much on our execution and giving you guidance as we look ahead to the one quarter.

Got it, but just following on from that, is there an opportunity with HMOS to keep the margins more stable? Will the margin profile more stable through the year?

Yeah, so it's a great question. And I think you're probably looking at past years, correct, if you look at the margin profile. Look, I think there's opportunities with our HOSS system to keep our margins stable and really just continue to execute our existing strategy. So, yes, I think there is.

Okay, great. And then just quickly, last year, we saw cancellation rates pick up because of rising rates. Is there any thoughts around something similar happening this year or any reasons things might be different as you look at your customer backlogs?

Yeah, Sam, look, you know, based upon where we're at now and, you know, I'm reflecting back on when I started, you know, roughly a year ago and, you know, the tumultuous market that we faced, we have confidence in what we're seeing right now, hence the guidance we're putting forward. I think what's different then last year is the strength of new construction that we're seeing out there. So we come into Q3 very, very confident of where we're at right now.

Got it. And then any thoughts on cancellation rates?

We have not seen much in the way from a cancellation rate standpoint.

Look, I think our guidance for Q3 underscores that confidence, and that is a difference as well.

Okay, cool. Congrats on the result, guys. Appreciate it.

Thank you. Your next question comes from Paul Quinn from RBC Capital Markets. Please go ahead. Hey, Paul.

Hey, thanks very much, afternoon, Aaron and Rachel. Just wanted maybe some color just on the North American volume, that 5% reduction. Was there a meaningful split between what you saw, the reduction in repair and remodel and new home construction?

Yeah, look, I think it's still good directionally. We always have said that 65% is R&R, 35% is new construction. I think directionally that still stands. But I did mention some of the areas of the country that are outperforming, and one of them being Texas, and that really correlates to new construction. But then conversely, Pacific Northwest, is more of us going out and taking share from a competitor because we have the right value proposition. But just in summary, I would say more of the new construction-focused markets are doing better than what would be our R&R markets.

Okay, thanks for that. And then that contractor alliance that you've got, that 6,000 members, sounds like a big number. No idea how big that market is. If you could size that total market?

Size the total market for R&R? I'm not sure I understand, Paul.

I thought you guided that your contractor alliance membership was a total of 6,000 members. What is that? In percentage of contractors you've got or total North America, what is that? How big is that market?

Yeah, I think we would have to have the denominator of how many contractors are out there, which we don't. All I would say is we see sequential improvement here. So if we looked last year at this time, I think we had roughly 4,000 members, and we've moved that with an on-purpose plan to 6,000 at all different levels.

Wow. That's quite a gain and very helpful. Thanks very much. That's all I had. Best of luck.

Thanks, Paul. Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Your next question comes from Keith Chu from MST. Sorry, MST Marquis. Please go ahead.

Morning, Erin and Rachel. Thanks for staying on the line for me. The first one, just to cover off on channel risk, I mean, one of the other building partners, companies out there, I think overnight was saying that the channel was actually getting pretty thin on inventory. So I just want to try and understand whether that's the case for fiber cement, whether there's any risk there. And As an extension to that point, Aaron, you've been in the business for a year now. Have you noticed anything change significantly for the sales team? Obviously, you've got these initiatives in place to drive demand creation, but anything internally or how that sales team is being run that's changed that you've picked up over the last year that's made a big difference?

Yeah, Keith, good to hear from you. Hey, I think, number one, we don't see any, you know, as far as inventories in the channel, it's normalized. to us. We don't see any noticeable difference of it being stuffed or thin, so that's number one. Number two, as it relates to the sales team, and look, we have great sales leaders across all of our regions, very, very good and aligned with our customers. Here's the difference I think that we've seen. Number one, our customer integration keeps getting better and better. That's not only our relationships with our customers, but also the data in which they're giving us, which is helping us as it relates to helping them to have the right inventory and where they need it. Just to give you a stat, we've taken our largest customers, we had about 30% of them that gave us data. Now we're closer to 70% this year. So that's number one. The other thing I think that's different is we're getting more specialized from a sales standpoint. When I talk about investments, we're making investments to get specialized in certain areas. So for instance, when we think about single family new constructions, it's putting people on that's focused on some of those large builders, but also moving it past the top 25 to the top 200 as well. So I think those are two of the noticeable changes that we've made within the last year that we're seeing benefits from, Keith.

That's great. Thanks very much for the fulsome answer. And then just coming back to a point that was made on share gains in the Pacific Northwest. Can you give us a bit more detail on whether that's in hard siding or whether that's against vinyl or other substrates, whether that's trim or plank? Any color on that would be very useful. Thank you.

Yeah, I'd just say very simply it's in the hard siding and it would be in the fiber cement area.

That's excellent. Thanks very much. All right.

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

Yeah, thank you, operator. Hey, just again, thank you to everyone. Appreciate the time. I want to again thank all of the team at James Hardy for making an excellent Q2. Appreciate everything you do. That's it. Thank you.

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