James Hardie Industries plc

Thank you for standing by. Welcome to the James Hardy third quarter fiscal year 2024 results briefing. Today's briefing is hosted by James Hardy CEO, Mr. Aaron Erder and CFO, Mrs. Rachel Wilson. After the briefing, we will open the lines to Q&A and then remind participants to limit your questions to one plus a follow-up. After the Q&A, I'll turn it back to Mr. Erder for closing remarks. I would now like to hand the conference over to James Hardy, CEO, Mr. Aaron Erder. Please go ahead, sir.

Thank you, operator. Good morning and good evening to everyone, and welcome to our third 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. Joining me is our CFO, Rachel Wilson. 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. We will then open it up for 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 on page five with a brief business update. Our team's focus remains simple. working safely, partnering with our customers, investing in long-term growth, and driving profitable share gain. Our third quarter results continue to highlight how impactful that focus has been. For the third quarter, we achieved global net sales of $978.3 million, up 14% versus the prior corresponding period, with a record quarterly global adjusted net income of $179.9 million, up 39% 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 third quarter North American volume of 766.5 million standard feet exceeded the top end of our guidance range, and we delivered that with a record 32.7% EBIT margin. The adjusted net income result was also supported by strong year-over-year financial results in our Asia Pacific region. In the EU, business performance improved year-over-year, and we are seeing momentum in growing our high-value products. For the first nine months of the year, we generated record operating cash flow of $749.5 million, up 73% year-over-year. Similar to last quarter, we have continued to accelerate our investment and long-term growth, supporting our marketing tentpoles, driving awareness and conversion in targeted regions to aid in sustaining profitable share gains. 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. Now, please turn to page six in our global strategic framework. As I continue to emphasize, 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. I remain 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. We accelerate our strategic initiatives by establishing competitive advantages through our strategic enablers without compromising on our foundational imperatives. Today, I will discuss two specific components of our value proposition. Unrivaled support and localized manufacturing. Let us now turn to slide seven to discuss those components in greater detail. At James Hardie, we offer superior products and services to all participants in our value chain. Beyond the high performance of our product offerings, our unrivaled support and localized manufacturing are both key components of the superior value proposition that we offer our customers, builders, and contractors. Unrivaled support is about enhancing the experience for our value chain participants before and after the purchase of our products. Using our North America business, which is led by Sean Gadd, as an example, some of the ways we support value chain participants include, number one, our customer integration programs. This program enables our customers, in this case our distribution partners, to assess demand, manage stock and inventory positions, and ensure that they have the right products at the right place and at the right time. This program also helps our customers and our manufacturing teams plan more efficiently to ensure high levels of service while optimizing the use of working capital. Number two, dream builder events. Some of you will remember this as brand days from our investor day in 2022. At our dream builder events, we bring together key customers and contractors with our sales teams to learn more about how to market and sell James Hardy products. These interactive in-person events cover everything from initial home design decisions to the installation of James Hardy products, providing insights and engagement from the beginning to the end of the process. In effect, we are driving the number of contractors pitching James Hardy products in the home. We have doubled the amount of such events held in FY24 versus FY23. Number three, our Contractor Alliance Program, or CAP for short, is a membership program for our R&R contractors. The program offers tiered and tailored support and services to meet the varied needs of our contractors, regardless of size. Support includes the sharing of leads or referrals generated through the James Hardy website portal. Supplying our customers with high-quality leads is a key differentiator for James Hardy. High-quality leads benefit both new contractors just starting out with James Hardie and long-term contractors alike. Contractors value these leads as they are real currency for the success of their businesses. Program members also have access to local sales support, technical training on using our products, and installation support. All of these help our contractors improve the quality and efficiency of installing our products and ultimately assist in lowering the on-the-wall costs for their customers, increasing the overall value they provide homeowners. And finally, program members have access to co-branded marketing materials like job site marketing kits and curated social media packages, which ensure our collective messaging is aligned and impactful. These materials boost the contractor's local presence in the community with the intention of increasing awareness for the contractor as well as driving James Hardy's presence in their neighborhood. As an example, for every contractor's completed home that utilizes this localized marketing, they can expect to generate, on average, an incremental 12 leads and an additional two more jobs sold. Our unrivaled support is part of our homeowner-focused, customer and contractor-driven mindset. We are investing in our customers and contractors to help grow their businesses, which will help drive ongoing material conversion towards James Hardie fiber cement. Localized manufacturing is another part of our superior value proposition for customers, builders, and contractors. We are physically close to our customers, We operate 10 manufacturing sites across the U.S., enabling a local presence to support our customers' changing needs and differentiating us from our competition. In FY23, approximately 70% of our products were delivered within 500 miles of one of our plants. This enables us to provide our customers and partners with reliable and responsive customer support services. limiting exposure to the risks inherent in extended supply chains. Our plants are conveniently located near key sources of raw materials. In FY23, approximately 80% of our raw materials were sourced within 150 miles of our plants. This close proximity provides our plants with efficient sourcing, which helps to minimize freight costs and the carbon footprint of our supply chains. Finally, we invest in and support the communities within which we operate. In FY23, we contributed $1.85 billion in incremental growth and economic activity through capital expenditure at our plants, investing in our employees and local ecosystems and across our supplier base. The benefits of our localized manufacturing are long-lasting. And through our capital allocation framework, we remain focused on investing and enhancing our localized offering. In short, our unrivaled support and localized manufacturing benefit all of our value chain participants, our customers, our builders, and our contractors. These benefits are part of the superior value proposition that differentiates James Hardie over other building materials providers and supports our growth aspirations by providing our partners with benefits that extend beyond the product. Now, I would like to hand it over to Rachel to share more details about our third quarter results. Rachel?

Thank you, Aaron. Let's start on page nine to discuss our global results for the third quarter. Our team has delivered a strong set of results in the third quarter compared to last year. with consistent and focused execution for the first nine months of our fiscal year. For the quarter, grouping of sales were up 14% year-over-year to $978.3 million. Adjusted net income increased 39% to $179.9 million. The global adjusted EBITDA margin was 28.7%, up 440 basis points, and operating cash flow for the nine months was a record $749.5 million, of 73% year-over-year. Our team is focused on executing on our strategy, and these consistent results demonstrate the value of focused execution. Now, turning to slide 10, I'll detail our adjusted net income waterfall for the third quarter. As mentioned, adjusted net income increased 39% or $50.7 million year-over-year to $179.9 million and was in line with guidance provided in November. The year-over-year increase was primarily driven by strong EBIT growth in North America, which contributed $52.4 million to the increase in adjusted net income. The year-over-year increase was also supported by growth in APAC and EU. Combined, these two regions contributed $12 million to the increase in adjusted net income. During the quarter, and as part of our ongoing marketing investment to drive long-term growth, global SG&A investment, which includes corporate, increased 36% year-over-year to $156.3 million. This equates to 16% of revenue, up from 13.4% last year. Sequentially, global STNA was up 2% compared to the second quarter of fiscal year 2024. The increase in investment, primarily in our marketing tentpole, reflects our continued focus on growing brand awareness and driving profitable share gains. In the last quarter, we've seen our gain party aided brand awareness inside an increase Some of our key initiatives include increased marketing through advertising, sponsorships, and trade marketing to drive consideration and conversion across the value chain. General corporate SG&A expenses increased primarily due to higher stock compensation expense, mainly a higher share price, as well as higher employee costs, and was partially offset by lower New Zealand weather tightness expense. Our FY24 full-year estimated adjusted tax rate is now updated to 22.8%. This compares to the FY23 full-year tax rate of 20.1% and is higher than FY24, reflecting our geographic mix. We are proud of our global teams for the way they've executed in a challenging market. We remain focused on consistent execution to similarly deliver in the fourth quarter. Let's now move to page 11 to discuss the North American results. Beginning with the top-line results, North American net sales of $727 million, with up 13% versus the prior corresponding period, and our average net sales price was up 3%. Volume of 766.5 million standard feet exceeded the top end of our guidance range. During the quarter, overall housing and markets improved as mortgage rates eased. However, major projects R&R remained down high single digits while single family new construction was up 7% in the September quarter. As a reminder, we use a one-quarter lag methodology as applied to single-family new construction macro data to better align the data to the timing of our reported sales. Our quarterly volume increase of 9% year-over-year is against a mixed-end market. Q3 volumes exceeded guidance and historical trends in part due to customers fully buying the amounts permissible prior to the January 1st price increase. When thinking about seasonality, it's noteworthy that in October 2020, we moved our annual price increase to calendar year-end versus our fiscal year-end, based on customer feedback to better align this to their fiscal year end. Given this movement, and disregarding 2021 to 2022 due to supply allocations, we now expect a more even North American volume distribution between Q3 and Q4. The 9% Q3 volume increase and expected 9% Q4 volume increase at the guidance midpoint highlights the success we are having. We are converting share against other competitive materials, This reflects James Hardy's superior value proposition, as outlined by Aaron in his opening remarks, and our material conversion advantage in building products. Similar to the second quarter, our strategic initiative to partner with big builders helped drive continued volume growth in the South Central region, which is new construction dominant. This region outperformed our total North American volume. In addition, our volumes in the Northwest have continued to remain strong as our execution focus has enabled us to take share. We are committed to serving both the new construction and R&R segments and continue to invest in the larger R&R market. Now turning to margins. The North American EVEN margin improved by 570 basis points versus the prior corresponding period to a record 32.7%, and similar to volume, we're just above the top end of our guidance range. EVA dollars in the third quarter were up 37% to a record $237.8 million versus the prior corresponding period. EBIT benefit is from a higher average net sales price, as well as lower input costs, specifically pulse and freight. Looking to Q4, and as noted last quarter, we expect cement to remain a key headwind for our North American margins, given timing of our supply contracts and strong demand for cement globally. We additionally anticipate higher pull prices, as well as an increase in our startup ramp-up costs for Prattville Line 3. For the full year calendar 2024, Some of our key input costs, as just mentioned, cement and pulp, are expected to markedly increase. During the quarter, SG&A investment increased 40% year-over-year off of a low base in the prior year. This investment is focused on a marketing temple to drive long-term demand creation. As a percentage of sales, SG&A investment increased two percentage points. Despite housing market volatility, we are encouraged by our relative share performance. By partnering with our customers, the North American team delivered a strong third quarter result with record EBIT and EBIT margins. Let's now turn to page 12 to discuss the Asia-Pacific results. Similar to North America, it was a strong third quarter for our Asia-Pacific segment. Net sales improved 21% versus the prior corresponding period to $206.3 million. The net sales improvement was driven by a 14% increase in our average net sales price and supported by a 6% increase in volume. Volume growth was driven by recovery in New Zealand, as well as APAC-focused strategies that have resulted in new customer acquisitions and successful co-creation with builders. EBIT improved 34% to $56.7 million. The result was driven by a higher average net sales price, which more than offset an increase in cost of goods sold per unit. Despite both pulse and trade costs being lower in the quarter versus last year, cost increased modestly due to a higher price mix of sales. SG&A investment increased 22% year-over-year as we continue to invest in long-term demand creation. As a percentage of sales, SG&A investment was largely unchanged year-over-year. The APAC EBIT margin improved by 280 basis points versus the prior corresponding period to 27.5%. Given our Q3 is seasonally weaker, this was a strong margin outcome relative to prior Q3 performances. Our Asia-Pacific team has continued to partner with our customers to deliver a strong third quarter. The Australian housing market remains challenged as the industry digests housing market affordability issues and a double-digit decline in building approvals. Despite this backdrop, our teams are focused on driving profitable share gains. We will now turn to page 13 to discuss the European results. Our European team had a solid third quarter as the team continues to execute well in a challenging market environment. The European market has declined double digits. As an example, German building permits were down 15% year-over-year in the three months to November. European net sales increased 8% to €109.3 million. The increase was primarily related to an 18% increase in ASP, as well as a €4.2 million favorable show-up related to customer rebate estimates. The growth in ASP was due to our strategic price increases and growth in high-value products. We continue to see our product mix shift towards our higher-value fiber cement offerings. We are working closely with our customers to provide products that are geared to both multifamily and single-family homes. During the quarter, our fiber gypsum volumes were down low double digits, whereas we experienced double-digit growth in our high-value products. We see strong opportunities ahead for our high-value products, and recently were recognized by the German Design Council with an award in the category of Excellent Product Design, Building, and Elements. Let's recognize our latest innovation, the Hardy Architectural Panel Collection. The Architectural Panel Collection has been developed in conjunction with European architects to specifically meet the design preferences of our European customers. While our high-value products are growing off of a small base, they're becoming a larger part of the overall mix, namely with panel opportunities. On a combined basis, overall volumes declined 10%, which, while significant, represents a lower decline than the overall European market. EBIT improved year-over-year to 7.1 million euros, driven by a higher average net sales price, which more than offset a higher cost of goods sold due to lower volumes and increased costs of gypsum and energy. Similar to other geographies, STNA investments increased 30% year-over-year. As a percentage of sales, STNA investment increased 3.5 percentage points. In the EU, these investments included creating dedicated sales teams to commercialize our panel portfolio across Europe and driving market initiatives. such as a series of events for architects in major European cities like Paris and London, as well as further advertising activities on major social media platforms to generate more leads. EBIT margin improved by 500 basis points versus the prior corresponding period to 6.5%. We remain confident in delivering mid to high single-digit EBIT margins near term, and the focus for the EU team is execution on growing high-value products. This strategic emphasis will support the longer-term margin expansion opportunities. Turn now to page 14 to discuss cash flow, liquidity, capital allocation, and capital expenditures. Our robust operating cash flows reflect our strong margins, which stem from the superior value proposition that we offer our customers, builders, and contractors. In the nine months of FY24, our operating cash flow was $749.5 million. This record cash flow result was driven by strong financial results in all three regions, and a working capital improvement of $121 million. We continue to maintain a strong liquidity position with a Q3 net leverage ratio of 0.65 times and liquidity of over $1 billion. We are stewards of investor capital. Our capital allocation framework is the first and foremost to invest in organic growth. We do this while maintaining a flexible balance sheet and deploying excess capital to our shareholders. During Q3, we were purchased 2.4 million shares for $75 million at an average per share price of US $32.11. For the nine-month period, we repurchased 6.7 million shares for $196.3 million at an average price of $29.14. As we look to Q4, we plan to continue to repurchase shares under our US $250 million buyback program. Regarding capital expenditures, for the first nine months, capital expenditures totaled $328.2 million. We expect to spend approximately $515 million on capital expenditures in FY24, and we remain committed to keeping capacity ahead of supply. In Q4, we expect to complete prep bill sheet machine number three. In over a 12-month period, we expect to incur startup ramp-up costs of approximately $10 million. Looking into calendar year 24, we are continuing to invest to prepare for future demand, and we are expecting CapEx to increase year over year. Key investments include early works for brown and greenfield capacity additions in North America, and proven initiatives globally to unlock existing capacity, as well as investments in the hardy operating system initiatives. 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 nine months and another record quarterly result for adjusted net income. In addition, we have outperformed our end markets and volatile conditions. These results are proof points that we are accelerating through this cycle and taking share, all while we have increased our investment and long-term demand creation. Let's now move to page 16 to discuss our market outlook and guidance. For our largest market, North America, we are providing the calendar year 2024 market outlook data from several external data providers. The average estimate for single-family new construction is for growth of 5%. Multi-family new construction is forecasted to contract 21%. And repair and remodel, our largest end market, is estimated to decline 2%. Using these external ranges along with our assumed market segment exposures, the implied range for a blended addressable market is down 4% to up 6%, with an average of flat. It won't come as a surprise to you to see these third-party forecasts for our end markets have improved over the last quarter and is supported by declining interest rate expectations. Over the last 18 months, I've seen us execute on our strategy and increase our investment and long-term demand creation. Our business and team are now in a stronger position to capitalize on the expected return to growth in our end markets over the years ahead. We remain laser focused on driving profitable share gain and are demonstrating this with our market outperformance. If you turn to page 17, 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 for raw material costs and freight rates, while continuing 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 beyond fiscal year 2024. Regardless of how markets fluctuate, we remain focused on outperforming our end markets. Now, please turn to page 18. Today, we are providing three points of guidance for our fourth quarter of fiscal year 2024. First, we expect North America volumes to be in the range of $750 and $780 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 $165 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 fourth quarter. Finally, please move to page 19. We at James Hardy are a global growth company. Over the past several quarters, I have spoken to a few of these defining attributes. Last quarter, I spoke to the Hardy operating system and zero harm. In the first quarter, I highlighted James Hardy as the brand of choice, noting our premium products and our multi-segment focus. Today, I spoke about our premium service, which includes unrivaled support as well as localized supply chains. You have also heard Rachel talk about our strong financial position underpinned by our disciplined execution translating into sustained margin performance and superior cash generation. We remain focused on consistently delivering while continuing to invest in growth. This is evidenced by our investments in SG&A and CapEx as we remain focused on profitable share gain and our material conversion opportunity. In enhancing our growth efforts, I would be remiss to not mention a few of our foundational supports. Our experience management team, Over the last 18 months or so, you have seen our executive leadership team expand with key areas elevated and new talent and skills added. Combined, this provides James Hardy with the stewardship that allows for focus and simultaneous execution across multiple key areas. This includes establishing the Hardy operating system targets, our continued investment in our people, ESG disclosure and commitments, centralized procurement and R&D focus, as well as targeted investment and demand creation. All of these efforts combine to drive our ongoing material conversion and profitable share gain. Attractive returns. Over the last nine months, our focus on forecast accuracy and consistent execution has enabled our business to deliver on our commitments. While there are many financial return metrics I can point to, the North American EBIT growth over the last nine months of 19% year-over-year in what has been challenging conditions with an EBIT margin of 31.9% provides one such data point. I am proud of our team's ongoing ability to navigate market conditions and execute consistently. delivering a strong third quarter result and demonstrating operational momentum as we head into the fourth quarter. We are homeowner-focused, customer and contractor-driven. Before I open it up to Q&A, I would like to highlight our upcoming 2024 Investor Day in late June. We are hosting a two-day event in North America, showcasing our value proposition in the field with some of our customers and partners. We look forward to showing you firsthand our value proposition and how we are driving profitable share gain. If you haven't already, please use this link to register your interest. The save the date registry will close at the end of February. With that, I would like the operator to open the lineup for questions.

Thank you. If you wish to ask a question, please press star then one on your telephone. and wait for your name to be announced. If you wish to cancel your request, please press star, then two. If you are on speakerphone, please pick up your handset to ask your question. The first question comes from Keith Hsiao with MSD Marquis. Please go ahead.

Hi, Erin. Hi, Rachel. First question on fourth quarter volume guidance, and I appreciate the comments you've provided us already, Rachel, on that one. But usually the fourth quarter is typically roughly 4% higher than the third quarter, even with the timing of price increases. So historically, prior to the price increase timing change, when price increases were 1st of April, the seasonality 3Q to 4Q was around 11%. Now that it's changed to 1st of January as of 2021, the seasonal variation is now typically up 4% Q&Q. So notwithstanding that, You know, the comments you've given on pull forward, Rachel, just wondering if you can give us a sense of what magnitude the pull forward was this year, whether there were limitations or the same limitations on customers as there has been in prior years or whether there were any other issues impacting the volumes between third quarter and fourth quarter. Thank you.

Yeah. Hey, Keith, I'll start with this and then Rachel can jump in. Hey, just as we said before, I mean, let's start with Q3. You know, lest anyone should forget, we had a very strong Q3 result in North America with volumes up 9% year-over-year, which exceeded the top end of the guidance. And our guidance for North America Q4 at the midpoint implies another 9% year-over-year growth. You know, if you think about this, this strong expected growth is really against a mixed backdrop. for us, where we have R&R still down year over year, while new construction is recovering. The pattern of our Q3 to Q4 seasonality really needs to incorporate the impact of the change in timing of our North American price increase in calendar year 21, which would be our fiscal year 22, from March to January. This, as well as the mixed backdrop, is reflected in the volume guidance range. We are performing strongly in our driving profitable share game. This is reflected in our PDG performance over the last nine months and in our results, which set forth new financial records for us. I think the other thing to note is, you know, importantly, we're partnering with our customers and investing in long-term demand creation. The other thing, when you think about the backdrop we were in over those time periods, is, you know, we were in periods of allocation. as it relates to what customers could purchase. You know, if we think about where we're at right now, we're able to supply what our customers need, and that's what we did and, you know, part of what we saw in our Q3 results.

Okay, that makes sense. And my follow-up question is just related to the margin guidance. So let's just say the midpoint of guidance, your volumes are flat quarter on quarter. but your margin guidance is 30% to 32%, which is below the outcome on the same volume outcome as in the third quarter. So given you've got price increases going up, costs going into the fourth quarter are probably flat to down. It surprised me that your margin guidance is only 30% to 32%. So just any clarity on that would be useful. And I appreciate your comments, Rachel, that you're expecting costs to go up in FY25.

Hey, Keith, I'll hand it over to Rachel, but one of the things you said is costs were going down, so that's not necessarily the case. So, Rachel, you want to give some color there?

Yeah, so one of the things I highlighted last quarter and emphasized again this quarter is that we are expecting particularly cement costs in Q4 to go up for us. That has to do with the timing of some of our contracts, which we've talked about range, from range of kind of 12 to 18 months, depending on the contract, but we've marked Q4 for you. The other thing to point out is, this is a reminder, North American EBIT margin last year was 29%. And as we think about this year and move down from the margins all the way down to net income, the other point we should bring up is that the tax rate is expected to go up 120 basis points between Q3 and Q4. That alone is worth about a $3 million drag to net income. So those are really the key factors between those raw material costs and the tax rate.

Okay, thank you. Thanks, Rachel.

Yep.

Thanks, Keith.

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

Good evening, Erin and Rachel. Thanks very much for your time. I just want to focus a little bit on your R&R positioning. Aaron, interesting comment about brand awareness benefits, but clearly a lot of SG&A going in doubled your number of dream days or dream builder events. Could you give us a sense of qualitatively what is making you excited about your positioning? How convinced are you that you can get the return on this investment?

Yeah, sure, Pete. Look, I think for everyone on the call, just remember, R&R is our largest opportunity as a company. If you think about the opportunity in North America, we get really excited when we talk about the 40 million homes that are 40 years old or older, right? So we have this pin pointed down to zip codes as far as what our opportunity is out there. Now, You know, what is the good news is even though R&R has been down, we're seeing the outlook become more optimistic out there from an R&R perspective. But we still are seeing, you know, high single-digit, a depressed market out there. But, you know, for R&R to improve, right, we really state a few things. Home prices need to go up, which we're starting to see more and more of that. We're starting to see consumer sentiment, or we want to, So we're seeing that more positive with inflation falling. And then contractor sentiment, it's improving gradually as we talk to our contractors out there. And then the other piece is really big box transactions. We're still not seeing year-over-year growth. But, look, we know this is going to come back. The question is when. You know, a lot of outside experts would say this would be in the back half of next year for us. Very good position. I talk so much about our long-term growth. Well, it's investing in our brand, which Rachel talked about, some of the brand awareness numbers. And by the way, seven points when we think over a couple quarters is very, very strong results. So it shows that we're really spending our marketing efficiently. But also, it's having people on the ground. and focused on our R&R business. So this can be everyone from training, our contractors out there, and then really bring them into the James Hardy fold. We talk a lot about our contractor alliance program. I mentioned the success we're having in that. So you put all these together, Pete, it's really exciting as this starts to get some tailwind behind it. And we are very optimistic as we think into the back half of the year, that we're going to be able to take advantage of that.

Right. A quick follow-up. So as much as you mentioned that the market is down high single digits, in Q3, you outperformed your expectations from a volume point of view. Could you give us a sense of whether that was R&R driven or was that new construction driven, just so that we understand some of the exit rates coming into Q3? this calendar year?

Yeah, Pete, good question here. So look, I think when, you know, it's the same story that we had last quarter, we're really seeing, you know, new construction really, you know, help us as we think about it. You know, it's been very strong for us. I'll just give you some data points here. If you look at the south, right, you know, we would call a new construction market. We benchmark, you know, the north being more of an R&R market for us. We're still down, you know, call it mid-single digits there. So new construction really is carrying the day for us right now.

Thanks very much, Aaron. Appreciate that.

Thanks, Pete. The next question comes from Simon Thackeray with Jefferies. Please go ahead. Please go ahead.

Thanks. Hi, Aaron. Hi, Rachel. Thanks for taking the questions. Aaron, given your experience in the big box channel, I just wanted to explore with you your views on Depot in particular, but I presume those will follow in trying to capture more of the contractor market and that contractor pro market. How do you see that playing out between your existing channel partnerships and whether Depot provides an incremental opportunity for Hardy or is it a a potential threat to some of your traditional channel partners?

Yeah, look, Simon, it's a really good question. I would say this. You know, the Home Depot and Lowe's are excellent partners of ours. And, you know, a couple things. Number one, there's a lot of R&R foot traffic that goes through there. So as we think about the exposure through homeowners, that's a plus for us. I hear a lot of noise in the background. And then the other thing, if we think about the pro market, I would say that Depot and Lowe's are uniquely equipped to service certain segments of our contractor base. You know, some of the smaller contractors, home builders out there. So, you know, we're working with them, and our business continues to grow with them, and we see them as very important partners as we move forward.

Thanks, Haren. And then, Rachel, maybe one for you. At the half we talked to or laid out the cost at working capital improvement targets for between 24 and 26, $100 million for HMO, $60 in procurement and R&D, and $100 in working capital. I just noted in this third quarter there's no specific update on that, but could you give us a view on how that has started and which is moving faster or slower and what kind of benefits we're seeing in the programs?

I'm happy to. Capital improvement is $121.2 million, so obviously very nice progress on that. But what's interesting in this quarter in particular is that improvement has been driven while you're seeing our inventory levels actually going up. So, you know, that shows some of the strength of how we are getting there. But, you know, again, as I cautioned before and I'll caution again, that is a long-term target and this can go up and down. particularly as we start to continue to keep building inventory. But again, it's very good control here as we think about our working capital turnover ratios.

Just on HMOS and procurement and R&D?

Yes. So when you think about working capital, it's Sorry, there's a lot of background noise. It's a little hard. But driving the working capital, yes, you are investing in inventory, but as we look at our accounts receivables, we look at our accounts payable, there's nice discipline in what's been happening there. So overall, the progress in that does reflect having that central procurement group, having that HOSS discipline throughout the organization, and really kind of moving to an emphasis on this and more controls around that. You know, again, some of this should retract as we build inventory, but overall, strong performance.

And, Simon, I would just say, as we get through our year end, you know, we'll report on what our HOSS savings and our progress there. But needless to say, to Rachel's point, we're making really good progress there.

That's excellent. Thank you both. Appreciate that.

The next question comes from Matthew McKellar with RBC Capital Markets. Please go ahead.

Hi, thanks for taking my question. You talked about third-party projections for R&R and how that market's a bit soft right now, but from what you're seeing in your own business, are there any differences in your outlook for R&R by region of North America that you'd call it?

Yeah, Matthew, it's a very good question. You know, I would say for us, the largest opportunity would be you know, in the Northeast and the Midwest. And I think that, you know, as we think about those projections, they would be right in line with that.

Okay, thanks for that. And one more from me. Are you content with continuing to allocate capital to the share buyback at roughly the current run rates, or are you priority shifting at all with the strength in the share price here?

Hey, Matthew, it's Rachel. This is one where we feel very strongly that with our current performance, with our margins, with our revenue growth, with what we've been able to return on capital employed, you know, we look at some of the multiples of some of our North American peers and say there's growth, okay, and that, you know, we have been performing to that point. So, again, we have a $250 million program. We've executed $75 million of it, and we will, as we said, first prioritize investing in organic growth And then, of course, with excess capital, we want to make sure we are good stewards of capital, and we'll be returning to shareholders.

Great. Thanks. That's all from me. I'll turn it back.

Thanks.

The next question comes from Sharia Vissen with Bank of America. Please go ahead.

Hi, Aaron. Hi, Rachel. Thanks for taking my questions. Aaron, congrats on a very solid quarter. I just wanted to get some sense for FY24, calendar year 24, right? And I appreciate you won't give us explicit guidance, but if I just look at your presentation where you say that it's expected that your end market will be flat for calendar year 24. Now, if you look at for this year, right, calendar year 23, your volumes will largely be flat, whereas the market is down anywhere between 5% to 6%. I'm just curious to get your thoughts on whether you think you'll be able to continue with those market share gains in the next year and then have a follow-up solution. Thanks.

Yeah. Hey, thank you for the compliment there, Sharia. You know, if we look to, you know, next year, of course, we're not going to give any type of guidance as we move forward. And we are focused on profitable share gains. You know, if you look at PDG, I think you have to have a full year look, right? And we're always hungry for more. But as you think about, you know, moving forward, it gets tougher and tougher, you know, to get after that type of PDG growth that we're seeing this year. We still expect, you know, and I'm not going to give any projections to take profitable share gain, but, you know, it gets tougher and tougher year over year.

That's quite helpful. And then just a follow-up, and I think Pete asked that question. So for your first nine months, right, your North America volumes are down 2%. Could you just give us a sense of the breakdown between repair and remodel and new construction within that? I'm guessing repair and remodel is quite weak, but could you just share some rough numbers with us?

Yeah, Shari, we don't necessarily do that as far as the breakout. We just directionally would say, you know, 65-35 R&R to new construction. Now, I will put the caveat on that. You know, this year, you know, it may have shifted a little more directionally towards new construction.

Sorry, and I was just trying to get the growth numbers. So, look, what I'm saying is like 2% up on volumes, right? What's the growth within that for R&R and new construction?

Yeah, we don't give that type of breakout.

Thanks. Just one quick one for Rachel. Rachel, just your comments on the input costs, right? I know that you point that for the third quarter, pulp and freight were soft. Could you just share some numbers with us for those four key cost items for the third quarter? On a year-to-year basis, is that easier for you?

Yeah, I've talked about for input costs for COGS, roughly 50% of our COGS are cement, freight, pulp, and labor. Of those, particularly for this year, pulp and freight have been tailwinds for us. As we look to next year, we have been citing that cement we expect to be increasing, and most forecasts are expecting pulp to also become a headwind for next year.

Great. Thank you, Lisha. Thank you.

Thank you.

The next question comes from Lisa Wind with JP Morgan. Please go ahead.

Hi. Morning, Erin. Morning, Rachel. Hey, I just had a question around 4Q volume guidance. You know, I appreciate the colour around the lack of seasonality given the price rises. Just can you talk about feedback that you've had from your customers to date and the extent that this guidance could potentially be just conservative given we've seen rates come off over January, there's been a strong pickup from the US home builders and just any colour from the R&R space?

Yeah, Lisa, a good question. And I think you're asking us a little bit to speculate here, you know, because we do feel very comfortable with the guidance that, you know, we gave. I would just say this, you know, all the reasons, as I mentioned before, for R&R to improve have to be in place, right? You know, and a big part of that is interest rates. So that's going to really give some tailwind, which we don't expect to be more towards the back half of the year. I would say this, you know, in conversations with our home builder partners, they're optimistic. This is the larger home builders, but we're starting to see some optimism from, you know, some of the smaller home builders called the top 200 out there. So there is still demand out there for homes. And as I said before, you know, what they're able to do is buy down rates and they have land. So they're building. So I, in the new construction area. And if you think about that, and this is why it starts to get really exciting, and hence why we keep investing in long-term growth initiatives, you get an interest rate cut, and then you start to see repair and remodel accelerate as well. Now, I'm not talking about Q4 necessarily, but as we look to our next year.

That's helpful. Thanks, Aaron. And just around the comment about COGS rising in FY25, I mean, is there anything around the purchasing of pulp, Rachel, that would suggest you would see a different kind of headwind than the RISI prices that we all kind of look at?

No, I mean, you look at the pulp index, and that's probably a good indication for how we would be experiencing it.

Okay, great. That's helpful.

Thanks for that. I'll leave it up. The next question comes from Daniel Kang with CLSA.

Please go ahead.

Good morning, Aaron, Rachel. I just had a question on multifamily families. So the outlook from the industry forecasters on slide 16 looks very wide, minus 45% to plus 3%. Just wondering if you can comment on what you're seeing in your own business and perhaps comment on the strategic progress with looking to penetrate this market segment.

Yeah, Daniel, I would just say this, and I'll let Rachel jump in with some of the data here. You know, if we think about multifamily, this is an area when we had, you know, supply problems that we would put the foot on the gas and take it off again, right? And, you know, as we were ramping up this year, we did have some allocation as it relates to multifamily. We're normalized now on allocation. Also, this is a business that we believe in. We have a full-up and dedicated team around multifamily as well. And, you know, as we think about that allocation, it's really a bid-based type of business, so we didn't necessarily see that we were hurting any of our customers out there. So, again, a focus for us as we move forward. but I also think there's going to be some headwinds as it relates to multifamily's look to the future. Rachel, you want to provide some data?

As a reminder, you know, as we think about our split, as Aaron talked about, 35% new construction, but only 10% of that is within that is multifamily. So it is a smaller piece for us. As Aaron said, though, one that is a bid-based model, and so one that we feel that we are ready to take advantage of as markets keep turning.

Thanks for the color. Just my follow-up, just in regards to Prattville 3 and just CapEx Outlook. How are you planning to ramp up Prattville 3? And I guess, can you give some color in terms of CapEx into FY25, 26?

Yeah, Daniel, really good question. How we're trying to ramp it up is very carefully and prescriptively. I think we have a very, very experienced team and our best people on Prattville. So, you know, if we look at Prattville, it's going to be critical to our success next year and into the future. So, you know, like I said, we have our best people on Prattville. If you think about the capacity that that's going to give us, if we look at sheet machine number three, it's going to give us roughly 300 million standard feet additional capacity. And you heard me talk about, you know, as we think forward, right, and what gets you really excited is the prospect of R&R take off again. We're going to need all of that. And that's going to help us as we move forward. In regards to, you know, FY25 CapEx, Rachel can take you through that.

Yeah, the first thing is we've got brownfield capacity in all three regions, and we have greenfield capacity both in the United States as well as in Europe. So we have a lot of options in front of us. We've talked about our need to complete PrEP bill number four in the next year, continuing expansion in our Arrejo facility in Spain, and then that we will be further investing in the U.S. So those are some of the primary areas that you can expect to see us employ CapEx in 25. Thank you, Beth.

The next question comes from Lee Power with UBS. Please go ahead.

Hi, Aaron. Hi, Rachel. Obviously, really strong gross margins. You're obviously taking the opportunity to invest in marketing and then some of those comments around high-quality leads. It seems your comments on the call are quite conservative around that flowing through to a higher PDG number. Is there something that you think is a sweet spot in terms of marketing spend and PDG? And are you willing to talk to what that is?

Yeah. So, you know, if we talk about leads, right, really, really important. But usually, you know, if we think about the timeline of converting leads into sales, it's a rather long lead time. You know, it's roughly 18 months lead. So as we think forward, you know, there's some time that we're going to, you know, see sales from that. You know, as far as PDG, you know, we're not going to give any forward look on that right now. But as I said before, you know, the higher PDG you achieve, the tougher it gets year over year. And then it's also dependent on the market you're going to enter in as well. So, you know, we'll leave it at that.

Okay. Thanks. And then just to follow up, like, If you look at capacity utilisation, I think it was 89% in the US, it was 89% in FY23. Can you give us an idea of kind of where you're sitting now and then just the economics around sending volumes further afield than that 500 miles if you need to, given you've got obviously Prattville ramping up kind of in the near term and just the ability to kind of send that further afield if you need to into other markets?

Yeah, Lee, so as far as capacity utilization, we don't give that number. I would just say this. If we think forward, you know, over the next three years, we have the capacity we need to handle our growth projections. And with that said, we're constantly evaluating new capacity ads that we need to make. So we're doing that right now. On top of that, You know, Rachel talked a little bit about HOSS and our HMOS. That's going to help us just get more efficient, right, to be able to add capacity in our existing model as well. So I would just say this. We have the capacity we need to satisfy growth expectations. And, you know, Lee, I think your other piece was – go ahead, Lee.

No, sorry. I was just going to – I think you're getting to it, just the economics about sending – things further afield than kind of that 500 miles we obviously send most of the product.

Yeah, Rachel, why don't you take that one?

Yeah, I mean, the first thing is having 10 manufacturing facilities across the U.S. creates a very nice strategic moat, right? So not only is this an advantage in terms of how we serve our customers, how responsive we can be, but also, by the way, it supports our ESG initiative. As we think about, you know, is that far enough? Can we be the flexibility to serve from another facility, you know, Ultimately, we do. The good news, though, is that given our footprint and given the reach, it's not one facility, it's 10, right, across the U.S., we do have a really good way to reach our ad market.

Excellent. Thank you. Appreciate it, Nicola.

Thanks, Louise. Thank you.

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

Yeah, thanks for taking my question. Do you mind providing some color or some commentary just around your growth capex and your expected return on that capital? Bearing in mind, I think your group return on capital employed is 40% over the last three years. I think you noted that in the presentation. So how should we think about this significant amount of growth capex going into the business? Is 40% the number we should think about or is it a different range, I guess, noting the New plans, I presume, will be pretty efficient and low cost relative to your average. Thanks.

Thank you, Brooke. You know, the first comment is what drives a strong return on capital employee? By the way, it starts with also having strong margins, right, and discipline in your capex spend. So at the heart of, you know, how we've been doing on some of our return on capital is the strong margins, and that is another reason why it's very important for us to continue to invest in growth and keep our capacity ahead of demand. So that is something we are committed to. In terms of, you know, what is that right number, we are trying to very efficiently build that is correct, but there's also really those investments through costs as we think about how do we manufacture more efficiently, and that is also a piece of how we gain productivity. So we'll be working on both of those aspects to try to maintain that performance.

Okay, that's great. And then just for the fourth quarter FY24, you had the January price increase. Do you mind just providing some commentary on what we should expect for ASP in North America in the fourth quarter versus the third quarter? Should we simply just use a sort of a mid-single-digit step up there in price, or any reasons why that might not be such a great idea when it comes to forecasting the fourth quarter ASP in North America? Thanks.

Yeah, Brooke, I would say this. I mean, obviously, North America, we announced price increase in October of the calendar year 23, which was implemented in January 1st. And then the other regions, there's different timings for that. But what we've always stated is our average sales price would be positive. So I think that's the right type of directional information that I would provide right now. Yeah.

Okay, thanks. Thanks, Bro.

The next question comes from Sam Ciel with Citi. Please go ahead.

Good morning, guys. Thanks for taking my question. Just a question on the margins, the 32.7%. It looks like a record to me, and it's not lost on me that it's winter and probably you had a lower mix of high-value product than when you last reported a couple of years ago. So going forward, just thinking, how should we think about the margin upside in a more normalised SG&A spend environment? I mean, it looks like SG&A was up 40% there in North America, and if I back out the extra $21 million to $22 million, it looks like margins could have been 35% plus. But yeah, just any color around the upside there.

Yeah. Hey, Sam, thanks for the questions. You said it right. I mean, margins at 32.7 in North America was outstanding. The team did a really great job. I think you mentioned the SG&A. I mean, really, Q2 to Q3, sequentially, it was flat from SG&A standpoint. Moving forward, I would just say this. As we look at North America, for the near term, I think we're at our peak from a margin standpoint. The reason I say this is we're going to continually invest in long-term growth initiatives. The other thing, and Rachel mentioned this, is the headwinds that we're going to face as it relates to input costs. Now, we're going to be able to... cancel some of those as it relates to some of our HOSS savings, but we are going to see more headwinds as it relates to raw materials out there. So long-term, we believe we will get to accretive margins, but more short-term, near-term, this is going to be the high point for us.

Got it. And then just as a quick follow-up, I mean, keen to understand, obviously, anything quantitative you can provide just so we One, we can measure the SG&As being utilized efficiently. And two, I mean, in terms of the SG&A, it was elevated in Australia and Europe where I guess margins weren't at target. So any thoughts there? And then I guess to your point on input costs, do you expect SG&As going forward to be correlated to gross margins?

Yeah, so... SG&A, the way I look at this, and I think you're looking at a percentage to sales, I look at this as what's needed to support our growth initiatives. So if you think about what we're after, it's profitable share gain for us, long-term profitable share gain. And we've invested in people. We invested in marketing. I think the question is, how do you know it's working, right? And I would just use this year to date. as a proof point, you know, it is working for us. You know, I talked about leads being more longer term, so we'll have to wait there. But if I think about the people investment we've made, our investment in our customers, it's working for us. And we'll continue to invest where we think we need to to really push that profitable share gain.

Okay, appreciate the color. And then can I squeeze one more? And then you just talked about the profitable share gain. Could you maybe perhaps talk about where, I mean, the PDG looked quite strong there. Can you maybe talk about where that's coming from? You know, new R&R, you know, large versus small home builder? Thanks.

Yeah, Sam, and we'll let you squeeze one more in here. But as far as our share grade, we talked about this before. You know, this is coming from new construction. And who's benefiting in new construction? Who's really driving that? That's the large builders. out there. We've gone through a lot of color around those top 25 builders and the great relationships we have with them, but that's really who's driving that right now.

Got it. Appreciate the call. Thanks. Got some results. Sure. Thank you.

The next question comes from Rowan Gallagher with Jarden Group. Please go ahead.

Aaron, Rachel, James, good evening. Good morning, everyone. Most questions have been answered, but PIC1, Rachel, CAPEX guidance has been reduced from 550 to 515. Is that any... Can you sort of unpack that one, please, in terms of any reduced projects or more efficiency...

Yeah, we are on time with our biggest project here, which is the Prattville Line 3. So I think we feel quite good about how we're landing for FY24. We also have that Color Plus Line, and it's also in tune to trial phase. So we feel good that it's not necessarily that we're not accomplishing our projects. It's more that we are able to trim that budget and land with a slightly reduced guy here. So, you know.

It's more efficient. Fantastic. Thank you. Aaron, conscious of the balance sheet, just in terms of where you're at at the moment, could you just cover philosophically at a high level, conscious of inorganic growth opportunities is not your priority, what you'd be looking for in terms of principles for M&A?

And, you know, Rowan, it's a good question. What we talked about before, you know, as far as when we think about capital allocation, it's organic growth first. And I think we've demonstrated that, you know, that is still our focus area. I would just say this from an M&A perspective. You know, this has not been something in recent years James Hardy has talked about. We are looking at it, right? There's nothing in the works around M&A, but I think we would be remiss if we didn't look at it. And it really needs to do a couple things, right? It needs to help accelerate our current strategy. Then, you know, it has to enhance the value proposition that we can bring to our customers.

Excellent. Thank you. Thanks, Ron.

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

Good evening, Erin, Rachel. Thanks for taking my questions. Firstly, just wondering if you could give any idea of what your PDG actually was approximately for the first nine months of the year. And I appreciate you said that was driven by new construction, but was any of that from the R&R end market? Thanks.

Yeah, Ari, I think we answered that before, you know, as far as, look, PDG is best to give, you know, look at from a four-year standpoint. But we're tracking really well from a PDG standpoint.

Great, thank you. And just related to that on PDG, for FY25, you know, I appreciate your sort of LTIP targets, you know, of 4% PDG, could you just confirm whether that's an average over the three years, or are you still aiming for that 4% each year?

Yeah, Harry, that's an average over the three years. One of the things that I think that everyone has to remember, when we set those targets back in, call it March of last year, is the environment we were in. You think about a recession, you know, climbing interest rates, very, very difficult environment, a lot of uncertainty, which, you know, even though the environment and the outlook has gotten better, there's still a lot of uncertainty as we move forward. But those are the average over three years, Harry.

Got it. Thank you. And just wondering as well on R&R, you know, the weakness in calendar 2014, Could you just talk through what you see as the main drivers behind that market being off a couple of percent on average across your different forecasts? And perhaps how does that look in the first half next year versus the second half? Thanks.

Yeah, look, I think that as we talk about R&R, the entire market really last year underestimated the impact that interest rates, higher interest rates, would have on R&R. You had a lot of resites being deferred, consumers lacking confidence, the list goes on and on. As I mentioned before, we really look at three or four things for the conditions for R&R to improve. One, our home prices rising. Number two, consumer sentiment, contractor sentiment, and then really those big box transactions. So, you know, three out of the four But we still need to see more of that, I think, for, you know, the R&R business to improve. And I think that's why, you know, the projection is more of the back half of the year, Harry.

Great. Got it. Thank you. Thanks.

There are no further questions at this time. I'll now hand it back to Mr. Erder for closing remarks. Please go ahead.

All right. Hey, thank you, everyone, and thank you, Operator. Just again, I want to thank our team across the world for making James Hardy a homeowner-focused, customer- and contractor-driven company. I appreciate everything you do, and thank you.

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