James Hardie Industries Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2023

There are 13 speakers on the call.

Operator

You for standing by, and welcome to the James Hardie First Quarter Fiscal Year 20 24 Results Briefing. Today's briefing is hosted by James Hardie's CEO, Mr. Aaron Erter and CFO, Mr. Jason Mealy. After the briefing, we will open up the lines to Q and A, and I remind participants to limit your questions to 1 plus a follow-up.

Operator

After the Q and A, I'll turn back to Mr. Urda for any closing remarks. I'd now like to hand the conference over to James Hardie's CEO, Mr. Aaron Urda. Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning and good evening to everyone, Welcome to our Q1 fiscal year 2024 results briefing. Turning to Page 2, 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.

Speaker 1

S. Dollars. Moving to page 3, you will see our agenda for today. As always, I'm joined by our CFO, Jason Mealy. For today's call, I will start by providing And operations update.

Speaker 1

Jason will then discuss our financial results and I will return to discuss our outlook, guidance and provide a brief closing. We will then open it up for questions. Before we begin, I would like to take this opportunity to thank all of our employees around the world We 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 5 with a brief business update.

Speaker 1

Our teams remain laser focused On partnering with our customers, managing decisively and controlling what we can control. Our Q1 results highlight how impactful That focus has been. In Q1, our adjusted net income increased 13% to $174,500,000 which was above the top end of our guidance range. This was driven by higher than expected volumes in North America. Our North America volume of 748,000,000 standard feet was a 5% beat to the top end of our volume guidance, And we delivered that at a record 31.3 percent EBIT margin, which is in line with the volume sensitivity analysis we provided you in May.

Speaker 1

Jason will unpack this a bit more in the financial section. The net income result was also supported by Strong results in our Asia Pac and European regions. And importantly, we generated operating cash flow of over a $250,000,000 While markets remain uncertain, our focus remains on partnering with our customers And controlling what we can control to deliver differentiated results. Now please turn to Page 6 And our global strategic framework. At the heart of our global strategy, we are homeowner focused, Customer and contractor driven.

Speaker 1

With that in mind, all three regions remain focused on our 3 key strategic initiatives. Number 1, profitably grow and take share where we have the right to win. Number 2, bring our customers high value Differentiated solutions and number 3, connect and influence all the participants in the customer value chain. We accelerate our strategic initiatives by establishing competitive advantages through our strategic enablers. And both our strategic initiatives And strategic enablers build upon our foundational imperatives.

Speaker 1

I am confident in our team and our strategy. Combined, they position us to execute at a high level and drive profitable share gain in all three regions. Today, I want to spend some time discussing all three of our strategic initiatives in a bit more detail using our North American business as an example. Let us now turn to Slide 7 to discuss these initiatives, profitably grow and take share where we have the right to win and bring our customers high value differentiated solutions. When we look at the United States geographically, We believe we have the right to win across the entire country.

Speaker 1

Internally, we break the country into 8 geographic regions, which we discussed in detail in our September 2022 Investor Day. From a market segment perspective, We have chosen to focus on repair and remodel, single family new construction and multifamily new construction. We believe that our value proposition provides us the right to win in all of these market segments, and we endeavor to drive profitable share gain in all three market segments each and every day. We do this through bringing our customers high value differentiated solutions. Our teams ensure we are leveraging the entirety of our superior value proposition to provide our customer partners The right solutions for their geographic region and market segment.

Speaker 1

Some examples of how we bring this to life. Repair and remodel is a large opportunity for our continued growth. As we have mentioned many times, the U. S. Has an aging home inventory with over 40,000,000 homes over 40 years old.

Speaker 1

Specifically, in the Northeast, Midwest and Carolinas, we have a significant opportunity penetrate R and R for those regions. Our ColorPlus portfolio of products is the right solution for our customer and contractor partners to profitably grow together. Shifting to new construction for a moment, we have a significant opportunity to grow profitably together with our customer partners across the entire nation. That said, currently the South represents our largest new construction opportunity. The South is a prime product market for us.

Speaker 1

And as we discussed at length in February, we partnered closely with our customers, including the big builders provide them with Symplank, which we believe was the right product solution to help them compete and accelerate growth. Speaking of partnering with new construction and strong customer partnerships, you would have seen last week that we announced an exclusive national relationship with Doctor Horton, The largest homebuilder in the United States. This agreement makes us Doctor Horton's exclusive hard siding provider nationally. This 3 plus year agreement is a testament to our focus on the customer and providing them the right products at the right time to drive growth together. It is our team's responsibility to ensure we offer the right solutions to our customer, builder and contractor partners to enable profitable growth.

Speaker 1

The right solution varies by geographic region and market segment. There will be periods of time where different geographies And different market segments grow at different rates. And those differences in underlying growth rates will naturally change our product mix. What we are focused on is ensuring we outperform in each geographic region and each market segment by leveraging our product portfolio and superior value proposition. I'm aware that in recent years product mix was highlighted as Top priority, but today I want to be clear, we are laser focused on profitable share gain And taking share where we have the right to win.

Speaker 1

We will no longer be going into the details of product mix such as what percentage of our mix is SimPlank, what percentage is ColorPlus, etcetera. We drive strong margins In all geographic regions and in all market segments with all of our products, we believe we have the right value proposition and set of solutions in every geographic region and in all three market segments we target in the U. S. I believe that EBIT margins of 29% in Q4, or 31.3 percent in Q1, while our Semplank mix was increasing is proof positive to that point. Let's now turn to Slide 8 to discuss how we connect and influence all the participants in the value chain And how we are focused on solidifying James Hardie as the brand of choice and building products.

Speaker 1

In recent years, we have used the audience category we call pristine to describe the target homeowner for James Hardie. However, based on detailed studies we have performed, we know our opportunity goes well beyond Christine. There are numerous types of homeowners we are focused on and we believe we have the right to win with all of them.

Speaker 2

Our

Speaker 1

product teams are focused on Connecting and influencing our value chain participants. We do this through tools and resources that enable them to easily connect with James Hardie. We also do this through marketing to all value chain participants to effectively ensure they know our superior value proposition. When we do all these things collectively, we become the brand of choice. We have numerous marketing tools that enable our value chain to be successful.

Speaker 1

I like to refer to these as tent poles, which you can see at the bottom of the slide. Starting with sponsorships Such as the Magnolia Network and HGTV Dream Home that help drive awareness across the country. Cause marketing, This includes collaborating with community based organizations such as Habitat for Humanity, where we work together to build a better future for all. Homeowner marketing. This includes our in store retail presence to ensure we capture the DIY homeowner and foot traffic And brand awareness retail provides.

Speaker 1

Homeowner marketing also includes our collaborations with influencers, most notably our partnership With Chip and Joanna Gaines. Trade marketing. We have specific marketing directed at and supporting our trade professionals, the contractors And installers. Lastly, local marketing. We have specific campaigns targeted to specific regions to address the needs and thoughts of the value chain participants in that local area.

Speaker 1

As an example, we recently launched our Texas Tough marketing campaign. This campaign highlights the durability of our products and the fact they are locally made in our 2 Texas facilities. Our team continues to make great strides in helping James Hardie become the brand of choice and in connecting and influencing our value chain. This will further enhance our ability to drive profitable share gain over the long term. Now let's turn to Slide 9.

Speaker 1

We have returned to driving profitable share gains as a top strategic initiative. Let's take a look at how impactful This has been the James Hardie over the long term. The chart on the left is external data from the U. S. Census, which measures External cladding share in single family new construction.

Speaker 1

Over the past 10 years, the share of fiber cement As a primary cladding and new construction has increased 7%, reaching 23% share of the market in 2022. This demonstrates our ability to consistently drive share gain. On the right is our North American adjusted EBIT dollars over the past 10 years. What this data shows is that over those 10 years, our adjusted EBIT dollars have grown at an outstanding CAGR of 13% And our adjusted EBIT margin for this 10 year period was 26%. These results are outstanding across the 10 year period and demonstrate Proven long term profitable share gain.

Speaker 1

What excites me most is that we have refined our strategy to be homeowner focused, Customer and contractor driven. As we continue to accelerate this strategy, I believe this will only bolster the long term profitable growth metrics you see here. With that, I'll now turn it over to Jason to discuss our financial results.

Speaker 3

Thank you, Aaron. Let's start on Page 11 to discuss our global results for the Q1. We have started fiscal year 2024 strong with an excellent set of results, including a beat to our adjusted net income guidance. Group net sales were $954,300,000 This result was supported by higher average net sales price in all three regions. Adjusted net income increased 13% to $174,500,000 Global adjusted EBITDA margin was a record 29.2 percent And operating cash flow was an outstanding $252,300,000 Globally, our teams are executing our strategy with a focus Controlling what we can control in an uncertain and unsettled market was important to start the year strong and our teams did just that delivering our best ever Q1 results for both adjusted net income and operating cash flow.

Speaker 3

Turning to Slide 12, we will remain focused the global results, specifically adjusted net income. We have added a new slide to summarize the adjusted net income results versus the prior corresponding period. Adjusted net income increased $20,200,000 to 174,500,000 13%. The improved result was primarily driven by strong EBIT growth in North America and APAC, which combined to contribute $29,900,000 increase to adjusted net income. The largest headwind to adjusted net income Our adjusted effective tax rate was 22.9%, which is our best estimate of the full year FY 2020 4 rate.

Speaker 3

Overall, an excellent bottom line results. As I mentioned earlier, adjusted net income $174,500,000 is our strongest Q1 ever. Our global team is excited that we have gotten off to a strong start to the year and are focused on delivering a strong second quarter to maintain our momentum. Let's now move to Page 13 to discuss the North America results. Starting with the top line results.

Speaker 3

North American net sales decreased 6% to $694,800,000 versus the prior corresponding period. Our average net sales price was up 3%, which helped offset a decrease in volumes of 9%. Volume at 748,000,000 standard feet exceeded our guidance. As Aaron mentioned earlier, This was the primary reason for the beat to adjusted net income guidance. Our team's focus on profitable share gain combined with stronger than expected market conditions led to the strong volume outcome.

Speaker 3

As we discussed on our February 2023 results briefing, our team was taking strong action to drive share gain with the largest builders in the U. S. This proactive partnering with these builders early in the calendar year to ensure we provided them In the second half of the quarter, May 15 through June 30, our order rate surged higher Exceeding the daily order rate experienced in the first half of the quarter, this surge in order rate exceeded our expectations that underpinned our volume guidance. EBIT margin improved by 540 basis points versus the prior corresponding period to a record 31.3%. This margin was in line with the volume sensitivity analysis we provided in May.

Speaker 3

EBIT dollars in the Q1 were up 13% to a record $217,600,000 EBIT improved $25,800,000 versus the prior corresponding period, primarily due to higher price and lower freight costs. These improvements were partially offset by the decrease in volumes of 76,000,000 standard feet. By managing decisively and partnering with our customers, The North American team delivered an excellent Q1 result with strong volumes, record EBIT and record EBIT Let's now move to Page 14 to discuss the Asia Pacific results. Similar to North America, It was a strong start to FY 2024 for our Asia Pacific segment. Net sales improved 5% versus the prior corresponding period to a record AUD209.7 million.

Speaker 3

The net sales improvement was driven by higher average net sales price, partially offset by a volume decline of 8%, which is primarily due to our New Zealand business. EBIT improved 35% to a record AUD69.5 million driven by improved net sales with relatively flat cost of goods sold per unit and lower SG and A. EBIT margin improved by 7.50 basis points versus the prior corresponding period to a record 33.1 percent. Similar to North America, our Asia Pacific team has partnered with our customers and managed decisively to deliver an excellent Q1. While we expect margins to remain strong based on the uncertain markets and increased investments in growth, we expect 33.1% margin to be the high point for the fiscal year.

Speaker 3

Please turn to Page 15 to discuss The European results. Our European team had a solid start to the year despite an unsettled market. Starting with the top line, net sales of €109,700,000 was down 1%. A higher average net sales price of €478 almost entirely offset an 18% decline in volumes driven by lower housing market activity. 1st quarter EBIT And EBIT margin were down 5% 50 basis points respectively versus the prior corresponding period to €10,800,000 9.8 percent respectively.

Speaker 3

However, the EBIT and EBIT margin represents solid sequential improvement. The European team is laser focused on driving profitable share gain in FY 2024. Turning now to Page 16 to discuss liquidity, Cash flow, capital allocation and capital expenditures. We continue to maintain a strong liquidity position with our leverage ratio of 0.8 5 times and liquidity of $580,700,000 We expect our continued robust Operating cash flows will ensure we maintain the strong liquidity position. In the Q1 of FY 2024, our operating cash flow was $252,300,000 This outstanding cash flow result was driven by the strong financial results of all three regions and a working capital improvement of $51,800,000 Regarding our payments to the AICF, In fiscal year 2024, we will pay AUD137.5 million to the AICF.

Speaker 3

This compares to our payment of AUD158.8 million in fiscal year 2023. Our capital allocation framework remains Unchanged. 1st and foremost, we invest in our organic growth. We maintain a flexible balance sheet And when prudent, we deploy excess capital to our shareholders. Since our announcement of our share buyback program in November of 2022, we have repurchased 5,800,000 shares for total consideration of $127,400,000 This reduction in our outstanding shares has helped our diluted earnings per share grow 14%, outpacing the growth in adjusted net income.

Speaker 3

Regarding capital expenditures, during the quarter, capital expenditures totaled $125,600,000 We expect to spend approximately $550,000,000 on capital expenditures in FY 2024 and we remain committed to keeping supply ahead of demand. We have robust operating cash flows, substantial liquidity and a flexible balance sheet, which enable us Continue to invest in profitable growth. Finally, today we are announcing that we are canceling our plans to build a greenfield site in Victoria, Australia. I will now hand it over to Aaron to discuss this decision further. Please turn to Page 17.

Speaker 3

Aaron?

Speaker 1

Thank you, Jason. Today, we are announcing the cancellation of our Greenfield expansion in Victoria, Australia. Last quarter, we announced the cancellation of the pilot plant within our Rosehill facility in Sydney. That is important to this greenfield decision because that now enables the possibility to add brownfield capacity at Rosehill. And as we have always stated, Brownfield capacity is always our preference when adding capacity to our network.

Speaker 1

In addition, the centralization of our capital, Construction and engineering teams under one global leader, Brian Kilcullen continues to drive value. This team has identified additional brownfield at our Carole Park facility and our continuous focus on HMAS execution continues to expand our capacity potential. We believe that with our brownfield options, we can meet our share gain goals in Australia and New Zealand for the next 15 plus years. And that makes this decision clear. We will add brownfield capacity over a longer term horizon, better utilizing Capital dollars while meeting market demand.

Speaker 1

I believe this is another excellent example of this team taking decisive action, which in this case will drive an improved return on capital while not impacting our profitable share growth in the region. Moving to Page 18. Let's now shift to a discussion on market outlook and guidance. Before looking forward to the Q2, I just want to reiterate something Jason said earlier. Globally, our teams are executing our strategy with Focus on controlling what we can control.

Speaker 1

In an uncertain and unsettled market, it was important to start the year strong And our teams did just that delivering our best ever Q1 financial results for both adjusted net income and operating cash flow. Now please turn to Page 19. For our largest market, North America, we have again provided the market outlook External ranges have changed for all three market segments. The average estimate for Single family new construction improved from down 17 to down 12. Multifamily new construction improved from down 16 to down 12.

Speaker 1

And repair and remodel actually worsened slightly now with an average estimate of down 12%. You will remember that last quarter, Our view of the market was in the bottom half of the ranges from the external data providers. However, now 8 months into the calendar year and with these revised ranges, We are now cautiously optimistic regarding the housing markets and are accepting the entirety of the ranges as possible outcomes for the year. Using these external ranges along with our assumed market segment exposure for FY 2024, the implied range for our blended addressable market is down 5% to 18% with an average of down 12%. Overall, we are happy with the start of the fiscal year from a market activity perspective, While acknowledging uncertainty remains and our expectation that we return to normal seasonality for the December quarter.

Speaker 1

Regardless of market conditions for the remainder of the year, I remain confident that we will be able to deliver growth above market and strong financial results. And that confidence is rooted in what we have delivered over the last three quarters. EBIT margin of 27%, 29% and 31.3 percent sequentially on volumes of 701,704 And 748,000,000 standard feet respectively. We remain laser focused on driving profitable share gain and are encouraged by the stronger than expected market conditions to start our fiscal year. Now if you turn to Page 20, We have again provided the volume sensitivity analysis for FY 2024.

Speaker 1

This sensitivity analysis was prepared in the same manner as last quarter, which assumes our current range of expectations on raw material costs and freight rates and assumes we continue to invest in growth as currently planned. These volumes are simply to provide context to our EBIT margin sensitivity in North America And should not be construed as volume guidance for any quarter in fiscal year 2024. Regardless of how markets fluctuate, We are confident we will outperform our end markets. Now please turn to Page 21. Today, we are providing 3 points of guidance for our Q2 of fiscal year 2024.

Speaker 1

First, we expect North America volumes to be in the range of 7.40 and 770,000,000 standard feet. 2nd, we expect North America EBIT margin to be in the range of 30% to 32%. And lastly, we expect global adjusted net income to be in the range of $170,000,000 to $190,000,000 As I mentioned earlier, our team is energized and focused on driving profitable share gain And we are positioned to deliver another strong result in our Q2. Finally, please move Page 23. As always, I want to close with who we are at James Hardie, a global growth company.

Speaker 1

I am proud of our team's ability to navigate these uncertain markets and to be able to deliver such a strong Q1. We are homeowner focused, customer and contractor driven. With that, I would like the operator to open the line up for questions.

Operator

Thank Your first question today comes from Shari Avisan from Bank of America. Please go ahead.

Speaker 4

Hey, morning, Aaron, Jason. Thanks for taking my question and congrats on a very good quarter. So for the North America business, could you give us a sense of How the volumes moved in repair and remodel versus new construction? So the overall volumes were down 9%. What was the rough mix in new construction and repair and remodel?

Speaker 4

And also, as you mentioned, second half of the quarter was stronger than the first. Could you just help us quantify it? Broad range would be fine. Thank you.

Speaker 1

Sharia, thank you for the question. What I would say, we're not going to specifically break out the segments there. I would say just generally, we saw More volume weighted to single family new construction. Also the volume is reflected there by what's going on in the United States From single family new construction builds, right? So the areas of Texas and Florida, we saw more volumes there.

Speaker 1

As far as how we saw it moving at the latter end of the quarters, I would say it was focused on Just what I said, single family new construction. So hope that answers your question. But as far as breaking it out Between the three segments, we're not going to do that. I would just say generally speaking, we were weighted more towards Single family new construction versus R and R.

Speaker 4

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

Speaker 1

Okay. Thank you.

Operator

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

Speaker 5

Hi, guys. Good morning. I guess, firstly, and apologies if I've missed it, but have you Updated the PDG target of 4 points for the year?

Speaker 1

Neeraj, we have not your question is have we updated the PDG The target for the year? Yes. No, considering we just said it, roughly 3 months ago, we have not.

Speaker 5

Okay, fair enough. And I guess secondly, in terms of the Q2 guide, it'd be helpful to get sort of What you're thinking in terms of input costs, cement, pulp and freight in particular in that 30% to 32% range?

Speaker 1

Yes. I'll let Jason go into details here. Obviously, we're seeing some favorability as it relates Freight, we're also seeing a smaller amount of favorability in pulp and then there's other costs that I would say are unfavorable To us like cement.

Speaker 3

But Jason, you want to dive in any other details? Yes, Niraj, obviously, you're familiar with our biggest costs, Freight and pulp being 2 of them. Freight was at an all time high Q1 of last year, and we saw that come down throughout last So that favorability we expect to persist throughout the year, but to shrink each quarter When comparing versus prior corresponding quarter. And then with pulp, we did get some favorability in Q1. We actually expect that to grow throughout the year.

Speaker 3

As Aaron mentioned, there's some headwinds. We'll feel some headwinds with cement and a few other input costs. But yes, we feel good about the way Our raw materials are shaping up for the full year and certainly had favorability in Q1 and expect a similar amount in Q2, just a slightly different mix.

Speaker 5

Great. Thank

Speaker 2

you. Sure.

Operator

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

Speaker 6

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

Speaker 6

Thank you.

Speaker 1

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

Speaker 6

Okay. Thank you. And then maybe just one quick follow-up. Were there any specific channel movements in the period that you'd want to call out? Anything Was there any restocking of the channel given how significantly the new construction market turned around and how much of a focus that has been in the Q2?

Speaker 1

Yes. Keith, I wouldn't say anything that comes to mind that's unordinary. From obviously single family new construction has accelerated over the past quarter and we expect it Continue to accelerate. That's part of our Q2 guidance. So if anything, it's been able to work with our customer partners and big builders, Making sure they have what they need.

Speaker 6

Okay. That's great. Thanks, Aaron. Thanks, Jason.

Speaker 1

Sure.

Operator

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

Speaker 2

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

Speaker 1

Yes, Lee, a great question. I would just say this, over the past few quarters, I felt that our SG and A spend has been appropriate. I like to use the term pedal and clutch based upon uncertain markets. As we get more and more confidence That we do have now, we're going to continue to invest. I mean, we've been investing in the right things.

Speaker 1

I would say we're just going to probably proliferate that more. And I'll start with, we always want to invest in our people. So that's training, career development, things like that. And then it's our customers. So we're going to continue to invest in areas that are going to help service our customers and really enhance our value proposition.

Speaker 1

So that's going to be customer facing type of sales roles that will also be marketing related spend as well. So As I look at our SG and A spend moving forward, Lee, I don't really necessarily put a percentage on it because that can be misleading, but we're going to And appropriately, how we feel the sales dollars are coming in, in our outlook.

Speaker 2

Okay. Thanks. Appreciate it. And then just as a follow-up, like I think in the past when we've talked about the relative margin new construction R and R and particularly some of the larger public builders, There's been kind of the comment that the margin is not that dissimilar because the cost to serve for some of these larger public builders is obviously lower. Do you think that's I mean, you've also come out with the D.

Speaker 2

R. Horton announcement. Do you think that reasoning still holds? Or is there something going on with tactical pricing and needing to fend off some of your larger competitors that means that that doesn't necessarily hold with the Horton agreement?

Speaker 1

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

Speaker 3

Yes. Lee, if I understood your question correctly, it was about EBIT margins. Certainly, we have variation by segment at the gross profit margin level. But your point, which we've definitely said prior about the cost to serve It's quite different from R and R to new construction, etcetera. So as Aaron would have talked about on the call today, we are very profitable in Every segment with every product in every region.

Speaker 3

And so at the EBIT margin level, yes, there is a very good So Cincy and EBIT margins we're able to deliver in all of

Speaker 1

those segments. Yes. And Lee, I would just add Yes. Sorry, I would just add, if you think about the focus on single family new construction and the large builders, I think our margins we just registered Really tell the story, right? And if you look at our guidance, it's going to tell the story as well that and that's what I was trying to say in my beginning is, Wherever we focus, it's profitable for us.

Speaker 1

So I think it's if you again look at the results, It's highlighting that.

Speaker 2

Excellent. Thank you. Appreciate the color. Thanks.

Speaker 1

Thanks, Clayton.

Operator

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

Speaker 7

Good morning, everyone. Just

Speaker 8

a couple of

Speaker 7

questions in reference to Slide 19, where new constructions I guess the first question and to elaborate on Lee's I just wanted to ask you, Aaron, in terms of D. R. Horton's, the arrangement there, Can you elaborate on how you've managed to win this deal? And I guess your plans to expand this arrangement with other builders? And then my follow-up question is really on the slippage with R and R expectations.

Speaker 7

What do you think is driving this slippage

Speaker 9

into the full year? Thank you.

Speaker 1

Yes. Daniel, as far as our deal with Doctor Horton, 1st and foremost, we're really proud to partner with them. And the way we've been able to get that done, first of all, we have the best sales team in the industry. And I like to use the quote that my Head of Sales, John Mattson uses, we're humble but hungry, Right. And that's really the tact that this team has taken out there.

Speaker 1

And it's really about bringing a value proposition to our customers. So I'm not going to disclose any details about it because we keep those confidential with our customer partners. But as far as other opportunities to do similar deals with other builders, of course, we do have deals with 24 out of the 25 Largest builders and a majority of the top 200, but I didn't say we have 100%, right? So we do have opportunity out there And we'll continue to chase that opportunity. As far as why repair and remodel is lagging, you look at some of the outside Data out there.

Speaker 1

I mean, really as we talk to contractors and we're out in the field, I think really the biggest thing is there's a lot of Potential tailwinds from a medium and longer term standpoint as it relates to R and R, right. People are staying in their homes. They have more equity in their homes than they ever have. If they want to move, it's hard to find a house and the mortgage rates are so high. I think what it really comes down to right now is people are there's still uncertainty out there.

Speaker 1

So in order to go move forward with what would be A large R and R project. I think people are sitting on the sidelines and waiting a little bit. That's not going to be forever. But I think if I have to just relay some of the feedback I've had out there in the field and from talking To contractors and our customers, that's really what's going on. Thanks, Aaron.

Speaker 3

Thank you, Daniel.

Operator

Thank you. Your next question comes from Lisa Quinn from JPMorgan. Please go ahead.

Speaker 10

Hi, good morning guys. I guess my question just following up on R and R and the weakness you're seeing there. Can you just Be a bit more specific about what you're seeing in markets where the trend is diverging. And just given we can kind of see in line of sight to a When do you expect to start to see things turning into 2024?

Speaker 1

Jay, you want to take this one?

Speaker 3

Yes, Lisa, look, obviously, we're only giving guidance for the Q2 for a reason. We believe the market remains unsettled. The slide we just talked about in detail, Page 19, those are for the R and R piece, that's 3 outside providers we get data from who are Calling down their estimate, it's just 1%. It was average minus 11%, now it's minus 12%. And I think it's for all the reasons Aaron just talked about that

Speaker 1

For the homeowner,

Speaker 3

doing a large R and R project, waiting to see what happens with the economy, etcetera. And our focus is controlling what we can control. We have the sidelines to deliver a very strong Q2. I think what's important in Our perspective, when we think about the repair and remodel market and the new construction market, we think they both are strong for the long term. And obviously, there's just a period here of uncertainty in the market and R and R, these experts are calling down 12% for the year, But we do like the fundamentals of where R and R is for the long

Speaker 2

term. Okay, sure.

Speaker 10

And I guess, can you talk about the EBIT margin differential between North America and APAC? Just what's kind of driving APAC ahead of The North American division?

Speaker 1

Yes. Look, I think you're comparing apples and oranges here to compare the two Divisions here. I would just say this, and to speak to some of the strength with APAC here, they've been very successful in partnering with our customers to make sure we're able to service at a high level. That means they've been able to take price out there. I would say they also have lower SG G and A and relatively flat cost of goods sold per unit.

Speaker 1

But our APAC team is doing a tremendous job Capitalizing in that marketplace right now.

Speaker 10

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

Speaker 1

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

Speaker 10

sure. I'll leave it there.

Operator

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

Speaker 9

Hi, Aaron and Jason, thanks and good evening. Just a broader question, Aaron. What are the 2 or 3 things that you absolutely believe you have to get ready and right for a recovery, particularly in R and R activity? Obviously, right now you've done new construction deals. How is that going to affect your flexibility It's one of the questions that I have as a follow-up, but what are those things absolutely have to be in place to maximize the opportunity for you over the next 3, 4 years?

Speaker 1

Yes. It's a great question because if we look, as I mentioned before, R and R, which Traditionally, it's been the largest share of our business. Number 1, we got to continue to focus on our customers. And what I mean by that is I use the term a lot, homeowner focused customer and contractor driven. R and R really needs us to do all of that, Right.

Speaker 1

So we're focusing on the homeowner with a lot of our marketing efforts. We're focusing on our customers and helping them have what they need, whether that be Training, the list goes on and on. And from our contractor partners, helping them with their business and being able to go out and market James Hardie. So that's number 1, Peter. I think the other piece because we anticipate as R and R takes off, It's a tremendous opportunity for us.

Speaker 1

We want to make sure we're capitalizing on that. That's to have the capacity that we need. So if you think about one of the most important things we do, it's capital allocation. And that's why we're really excited about some of Projects that we have going on, all over the world, but namely you think about North America, our largest R and R opportunity Some of the things we're doing around HMAS, which was mentioned earlier, but also Prattville expansion and also our Westfield Thanks, Anshan, with color as well. So Peter, great question.

Speaker 1

I think if I have to name the top two things, those are it.

Speaker 9

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

Speaker 1

Yes. Look, I've been working with contractors for almost 30 years. So Can you ever get it 100% right? You focus on what you can control. So I think all the things that we need to control With the contractor, we're getting right.

Speaker 1

And look, as I mentioned before, we have the best team in the business. I firmly believe that being here almost You're being out with our teams. So I'm 100% confident that they're getting it right with the contractor. Just focusing on whatever their needs are, but again, it's homeowner focused customer and contractor driven. I think that's maybe a little different for us that you've heard from before, as we said homeowner over and over.

Speaker 1

And that's still important, but you notice that we're adding the contractor and the customer back in the year. So yes, I do believe we're getting it right.

Speaker 9

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

Speaker 1

Thanks, Peter.

Operator

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

Speaker 2

Sorry, something wrong with

Speaker 8

my phone. Can you hear me now? Sorry about that, fellas. You got me now. Just a couple of questions.

Speaker 8

First of all, the cancellation of the Australian greenfields plant. And I know you talked about HMOS Finding Brownfield's capacity that may not have been there before, and that's great news. But just of the $400,000,000 Plus investment, how much of the business case shift was due to construction inflation and or other factors that may have impacted the business case for canceling the greenfields in Victoria?

Speaker 1

Yes, Simon, 0. That did not compute or we didn't factor that in at all. I mean, it was clearly as I came in, we took a look and we're always relooking at every single project. This is a major expenditure for us. And like I said, Ryan Kilcullen, as we centralized this underneath him, we did an exhaustive review.

Speaker 1

And one of the things that made this possible for us to cancel is we canceled our pilot plan. So that made brownfield opportunity something we could do. And by the way, we canceled the pilot plans because we have ability to do that in existing plans. So look, as I said before, one of the most important things that we do is capital allocation. And this was really looking at the scrutinizing this and just Realizing that we had other options here.

Speaker 1

So 0 factored into escalating construction costs.

Speaker 8

That's really helpful, Aaron. And just what was the level of sunk cost therefore, including the land, which no doubt you'll actively Market back to the market?

Speaker 3

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

Speaker 8

fine. And then just a real quick one for you, just to follow-up on the operating Cash flow reconciliation. So you had $31,000,000 of inventory released, plus the $26,000,000 build in the PCP and Your payables gave you another $27,000,000 So I just want to understand the drivers of that inventory drawdown in at the end of the quarter and what your expectations are In the Q2 for working capital, if I may.

Speaker 3

Yes. So we have a clear goal in our Yes. We had $50,000,000 working capital this year. So obviously, we would achieve that in Q1, but we're not satisfied. So we're going to continue to try to drive Working capital down, Simon.

Speaker 3

I mean, you would have seen over the past couple of years, we did a really good job of driving inventory down and then through this At 3 quarters or so as the markets became unsettled, we've built some inventory. So we think we're back in a really good spot with inventory, But we think there's more to do around receivables and payables and we'll want to maintain inventories at kind of We're almost there at June 30.

Speaker 11

Okay. That's

Speaker 3

Some more to go this year, but we've gone off to a really good start.

Speaker 8

Yes. Well done. Congratulations. Great result.

Speaker 1

Thank you, Simon. Thanks, Simon.

Operator

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

Speaker 11

Good morning, guys. Thanks for taking my questions. Just looking at the results compared to the PCP, you got North American volumes down 9% but EBIT margin, obviously, 31%. Just looking forward as utilization comes back And operating leverage, is there any reason to think that margins could go higher again? Or is there something below the GP line that scales up with volumes?

Speaker 1

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

Speaker 3

Yes, Sam, I think the other thing to consider is as housing markets grow, To top of cycle levels that usually includes higher freight, higher pulp, higher cement, etcetera. Certainly, we saw that Last year, it was exacerbated by the war. But I think in any cycle, if you look back to our history, As you get towards the top of the cycle, input costs increase as well. So I think we're comfortable with where we're at. It's a great quarter and guidance of 30% to 32% against again in the Q2 while this within a really strong position through 6 months.

Speaker 11

Sophie, thanks for that. And just quickly, when I think about the REM report, I remember there being more of a cost out Feel to it, you had about $160,000,000 worth of, I guess, lien savings and procurement savings in there as a target. Just wondering How some of those costs out within this result or how they layer in over the year?

Speaker 3

Yes. So you're referring to the Hardie operating system savings we highlighted in the LTI, Which so there's a couple of components of procurement and R and D. We're off to a good start, Sam, but it's something we plan to bring to the forefront of the So Aaron kicks off each call with an update on strategy. We plan to provide an update on that in the Q2 and we just got it started. We like the progress we're making on both initiatives with R and D and procurement savings.

Speaker 3

It had an impact on Q1, But we believe it will have a bigger impact as the quarters roll on here in FY 2024.

Speaker 11

Awesome. Thanks for the time. Great results.

Speaker 1

Thanks, Sam.

Operator

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

Speaker 11

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

Speaker 1

Yes. Harry, we're not going to go through the detail on price mix as we talked before. In previous calls, I really outlined how we're going to run the business. And very simply, price is going to be up over the previous year and that's How this year looks as well, that's how we intend to run the business. So we're not going to dive into details of price mix.

Speaker 1

I would just say price It's going to be up year over year. As far as how the end markets are looking in the second half, look, we gave our guidance For Q2 and that's the that's what we're going to limit it to right now.

Speaker 11

And if I could just sorry, just squeeze in a follow-up on that point. Are you sort of moving back towards More like a 1 quarter lag in starts deciding cycle times normalize to the builders?

Speaker 3

Yes, we're starting to see some normalization, Harry, but you still have seen in the past 6 to 9 months, some very interesting trends between completions So I don't think we're completely through that yet, but over time, we do think that will normalize.

Speaker 1

Thanks guys. Thanks, Larry.

Operator

Thank Your next question comes from Brook Campbell Crawford from Barren Joey. Please go ahead.

Speaker 2

Yes. Thanks for taking

Speaker 12

my question. Are you able to provide some commentary just on sort of wallet Share for U. S. Builders and maybe you can kind of group it towards a broad comment on how Your share compares between the top 25 and the top 200, that would be really helpful. And also perhaps if you can Give a comment on TRIM penetration between sort of those two groups?

Speaker 12

Thanks.

Speaker 1

Yes. Brooke, What I would say and I mentioned, we have relationships, some type of exclusivity with 24 of the top 25 builders. As far as wallet share there, it would depend, but I would say just in generality, it's north of 85 And then if we look at the top 200, we have relationships and Jason, you'll have to check I think with probably 65 plus percent of the top 200. So we do have opportunity out there. And when I talk about our teams Being humble but hungry, those are areas that we're going to focus.

Speaker 1

And as far as trim penetration, And we can get back to you. I don't have an exact percentage here, but that's been an on focus initiative for us As a team, as a North American team is to make sure as we're selling a hardy house, we're selling the trim as well. And a lot of these deals that we're signing with builders as we're focused on not only the Board, but also the TRIM as well.

Speaker 12

Thanks for that. And just one follow-up with respect to sort of brownfield over greenfield. You made it quite clear that The plans here in Australia, but I might have missed the comments, but is there a similar approach to the capacity in the U. S. Where we'll Perhaps the opportunities for brownfield lines been added to existing plants and over call it the next sort of 5 years or so rather than Rather than greenfield?

Speaker 1

Yes. Brooke, brownfield is preferred. I would say where we're at right now, we are very

Speaker 3

And Brook, as I said, you'd see in management analysis document, we did Purchased the land for future greenfield in Missouri during the quarter. And obviously, we're still progressing with Prattville 34. So we're comfortable with where we are in capacity both for Amfield and Greenfield.

Speaker 2

Thanks Jason.

Speaker 1

Thanks, Brook. Cheers.

Operator

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

Speaker 3

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

Speaker 1

So Paul, what I would say What I've learned over years years of experience is I don't speak for our customers. I'm not going to speak for them. So I would just You would probably have to ask D. R. Horton there.

Speaker 1

What I would say is what we're focused on is bringing Great value proposition to our customers and that's what we're doing with Doctor Horton.

Speaker 3

And the only thing I'd add Paul is what I had commented earlier, there The large disparity at the gross margin level, but when you get down to the EBIT margin and you consider how much SG and A you're spending in these different areas, That's where the range gets a lot tighter. All right. Fair enough. Best of luck.

Speaker 1

Thanks, Paul.

Operator

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

Speaker 1

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

Speaker 1

Thank you.

Operator

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

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Earnings Conference Call
James Hardie Industries Q1 2024
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