James Hardie Industries plc (NYSE:JHX) Q1 2024 Earnings Call Transcript

James Hardie Industries plc (NYSE:JHX) Q1 2024 Earnings Call Transcript August 8, 2023

Operator: Thank you for standing by. And welcome to the James Hardie First Quarter Fiscal Year 2024 Results Briefing. Today’s briefing is hosted by James Hardie CEO, Mr. Aaron Erter, and CFO, Mr. Jason Miele. After the briefing, we will open up the lines to Q&A, and I remind participants to limit your questions to one plus a follow up. After the Q&A. I’ll turn back to Mr. Erter for any closing remarks. I’d now like to hand the conference over to James Hardie CEO. Mr. Aaron Erter. Please go ahead, sir.

Aaron Erter: Thank you, operator. Good morning and good evening to everyone. And welcome to our first quarter 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 US dollars. Moving to Page 3, you will see our agenda for today. As always, I’m joined by our CFO, Jason Miele. For today’s call, I will start by providing a strategy and operations update. Jason will then discuss our financial results, and I will return to discuss our outlook guidance and provide a brief closing.

We will then open it up for questions. Before we begin, I would like to take this opportunity to thank all of our employees around the world who remain focused on safely delivering the highest quality products, solutions, and services to our customer partners. Our employees truly represent the very best in our industry, and consistently enable our superior value proposition. Let’s start on Page 5 with a brief business update. Our teams remain laser focused on partnering with our customers, managing decisively and controlling what we can control. Our first quarter results highlight how impactful that focus has been. In Q1, our adjusted net income increased 13% to $174.5 million, which was above the top end of our guidance range. This was driven by higher than expected volumes in North America, our North America volume of 748 million standard feet was a 5% beat to the top end of our volume guidance.

And we delivered that at a record 31.3% EBIT margin, which is in line with the volume sensitivity analysis we provided you in May, Jason will unpack this a bit more in the financial section. The net income result was also supported by strong results in our Asia Pac and European regions. And importantly, we generated operating cash flow of over quarter of a billion dollar. 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. With that in mind, all three regions remain focused on our three key strategic initiatives.

Number one, profitably grow and take share where we have the right to win. Number two, bring our customers high value differentiated solutions. And number three, connect and influence all the participants in the customer value chain. We accelerate our strategic initiatives by establishing competitive advantages through our strategic enablers. And both our strategic initiatives and strategic enablers build upon our foundational imperatives, I am confident in our team and our strategy. Combined, they position us to execute at a high level and drive profitable share gain in all three regions. Today, I want to spend some time discussing all three of our strategic initiatives in a bit more detail using our North American business as an example. Let us now turn to Slide 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. Internally, we break the country into eight 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.

Some examples of how we bring this to life, repair and remodel is a large opportunity for our continued growth. As we have mentioned many times, the US has an aging home inventory with over 40 million homes over 40 years old. Specifically, in the Northeast, Midwest and Carolinas we have a significant opportunity to penetrate R&R for those regions. Our ColorPlus portfolio of products is the right solution for our customer and contractor partners to profitably grow together. Shifting to new construction for a moment, we have a significant opportunity to grow profitably together with our customer partners across the entire nation. That said, currently the south represents our largest new construction opportunity. The South is a prime product market for us.

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

The right solution varies by geographic region and market segment. There will be periods of time where different geographies and different market segments grow at different rates. And those differences in underlying growth rates will naturally change our product mix. What we are focused on is ensuring we outperform in each geographic region in each market segment by leveraging our product portfolio, and superior value proposition. I’m aware that in recent years product mix was highlighted as a top priority. But today, I want to be clear, we are laser focused on profitable share gain and taking share where we have the right to win. We will no longer be going into the details of product mix such as what percentage of our mix is Cemplank, what percentage is ColorPlus, et cetera .

We drive strong margins in all geographic regions in an all market segments with all of our products, we believe we have the right value proposition and set of solutions to win in every geographic region. And in all three market segments we target in the US. I believe the EBIT margins of 29% in Q4, 31.3% in Q1 while our standpoint 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. 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 Pristine.

There are numerous types of homeowners we are focused on, and we believe we have the right to win with all of them. Our product teams are focused on connecting and influencing our value chain participants. We do this through tools and resources that enable them to easily connect with James 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. 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 helped drive awareness across the country.

Cause Marketing, this includes collaborating with community based organizations such as Habitat for Humanity, where we work together to build a better future for all. Homeowner marketing, this includes our in-store retail presence to ensure we capture the DIY homeowner and foot traffic and brand awareness retail provides. Homeowner marketing also includes our collaborations with influencers most notably our partnership with Chip and Joanna 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. As an example, we recently launched our Texas tough marketing campaign.

This campaign highlights the durability of our products, and the fact they are locally made in our two Texas facilities. Our team continues to make great strides in helping James Hardie become the brand of choice and connecting and influencing our value chain. This will further enhance our ability to drive profitable shared gain over the long term. Now let’s turn to Slide 9. We’ve returned to driving profitable share gains as a top strategic initiative. Let’s take a look at how impactful this has been for the James Hardie over the long term. The chart on the left is external data from the US Census which measures external cladding share in single family new construction. Over the past 10 years, the share of fiber cement as a primary cladding 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 a 10 year period and demonstrate proven long term profitable share game. What excites me most is that we have refined our strategy to be homeowner focused, customer and contractor driven. As we continue to accelerate the 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.

Jason Miele : Thank you, Aaron. Let’s start on Page 11 to discuss our global results for the first quarter. We have started fiscal year 2024 strong with an excellent set of results, including a beat to our adjusted net income guidance. Group net sales were $954.3 million. This result was supported by higher average net sales price in all three regions. Adjusted net income increased 13% to $174.5 million. Global adjusted EBITDA margin was a record 29.2% and operating cash flow was an outstanding $252.3 million. Globally, our teams are executing our strategy with a focus on controlling what we can control in an uncertain an unsettled market was important to start the year strong. And our team did just that delivering our best ever first quarter results for both adjusted net income and operating cash flow.

Turning into Slide 12, we will remain focused on the global result, specifically adjusted net income. We have added a new Slide to summarize the adjusted net income results versus the prior corresponding period, adjusted net income increased $20.2 million to $174.5 million, an increase of 13%. The improved result was primarily driven by strong EBIT growth in North America and APAC, which combined to contribute $29.9 million increase to adjusted net income. The largest headwind to adjusted net income was a $7.5 million increase in general corporate costs, driven primarily by the increase in stock compensation expenses. Our adjusted effective tax rate was 22.9%, which is our best estimate of the full year FY24 rate. Overall, an excellent bottom line result.

As I mentioned earlier, adjusted net income of $174.5 million is our strongest first quarter ever. Our global team is excited that we have gotten off to a strong start to the year and are focused on delivering a strong second quarter to maintain our momentum. Let’s now move to Page 13 to discuss the North America results. Starting with the top line result, North America net sales decreased 6% to $694.8 million versus the prior corresponding period. Our average net sales price was up 3%, which helped offset a decrease in volumes of 9%. Volume at 748 million standard feet exceeded our guidance. As Aaron mentioned earlier, this was the primary reason for the beat to adjusted net income guidance. Our team’s focus on profitable share gain, combined with stronger than expected market conditions led to the strong volume outcome.

As we discussed on our February 2023 results briefing, our team was taking strong action to drive share gains with the largest builders in the US. This proactive partnering with these builders early in the calendar year, to ensure we provided them the right solutions to drive their business is resulting in strong profitable share growth. We believe these actions directly impacted our first quarter volume results. In the second half of the quarter, May 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. EBIT dollars in the first quarter were up 13% to a record $217.6 million. EBIT improved $25.8 million versus the prior corresponding period, primarily due to higher price and lower freight costs. These improvements were partially offset by the decrease in volumes of 76 million standard feet. By managing decisively and partnering with our customers, the North American team delivered an excellent first quarter result with strong volumes, record EBIT and record EBIT margin. Let’s now move to Page 14 to discuss the Asia Pacific results. Similar to North America, it was a strong start to FY24 for Asia Pacific segment. Net sales improved 5% versus the prior corresponding period to a record A$209.7 million.

The net sales improvement was driven by higher average net sales price, partially offset by a volume decline of 8% which is primarily due to our New Zealand business. EBIT improved 35% to a record A$69.5 million driven by improved net sales with relatively flat cost of goods sold per unit and lower SG&A. EBIT margin improved by 750 basis points versus the prior corresponding period to a record 33.1%. Similar to North America, our Asia Pacific team has partnered with our customers and managed decisively to deliver an excellent first quarter, where we expect margins to remain strong based on the uncertain markets and increase investments in growth. We expect 33.1% margin to be the high point for the fiscal year. Please turn to Page 15 to discuss the European results.

Our European team had a solid start to the year despite an unsettled market. Starting with the top line, net sales of EUR 109.7 million was down 1%. Our higher average net sales price of EUR 478 almost entirely offset an 18% decline in volumes driven by lower housing market activity. First quarter EBIT and EBIT margin were down 5% and 50 basis points respectively, versus the prior corresponding period to EUR 10.8 million euros and 9.8% respectively. However, the EBIT and EBIT margin represents solid sequential improvement. The European team is laser focused on driving profitable share gain in FY24. Turning now to Page 16, to discuss liquidity, cash flow, capital allocation and capital expenditures. We continue to maintain a strong liquidity position with our leverage ratio of 0.85x and liquidity of $580.7 million.

We expect our continued robust operating cash flows will ensure we maintain the strong liquidity position. Iin the first quarter of FY24, our operating cash flow was $252.3 million. This outstanding cashflow result was driven by the strong financial results of all three regions and a working capital improvement of $51.8 million. Regarding our payments to the AICF in fiscal year ‘24, we will pay A$137.5 million to the AICF. This compares to our payment of A$158.8 million in fiscal year 2023. Our capital allocation framework remains unchanged. First and foremost, we invest in our organic growth. We maintain a flexible balance sheet and when prudent, we deploy excess capital to our shareholders. Since our announcement of our share buyback program in November of 2022, we have repurchased 5.8 million shares for total consideration of US $127.4 million.

This reduction in our outstanding shares has helped our diluted earnings per share grow 14% outpacing the growth and adjusted net income. Regarding capital expenditures. During the quarter, capital expenditures totaled $125.6 million. We expect to spend approximately $550 million on capital expenditures in FY24. And we remain committed to keeping supply ahead of demand. We have robust operating cash flows, substantial liquidity and a flexible balance sheet, which enable us to continue to invest in profitable growth. Finally, today, we are announcing that we are canceling our plans to build a greenfield site in Victoria, Australia. I will now hand it over to Aaron to discuss this decision further, please turn to Page 17. Aaron?

Aaron Erter: Thank you, Jason. Today, we’re announcing the cancellation of our Greenfield expansion in Victoria, Australia. Last quarter, we announced the cancellation of a 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 that’s why we have always stated brownfield capacity is always our preference when adding capacity to our network. In addition, the centralization of our capital construction and engineering teams on our one global leader Ryan Kilcullen continues to drive value. This team has identified additional brownfield opportunities at our Carole Park facility. And our continuous focus on H Moss execution continues to expand our capacity potential.

We believe that with our brownfield options, we can meet our share gain goals in Australia and New Zealand for the next 15 plus years. And that makes this decision clear. We will add brownfield capacity over a longer term horizon better utilizing our capital dollars while meeting market demand. I believe this is another excellent example of this team taking decisive action, which in this case will drive and improve return on capital while not impacting our profitable share growth in the region. Moving to Page 18. Let’s now shift to a discussion on market outlook and guidance. Before looking forward to the second quarter. I just want to reiterate something Jason said earlier. Globally, our teams are executing our strategy with a focus on controlling what we can control.

In an uncertain and unsettled market, it was important to start the year strong, and our teams did just that delivering our best ever first quarter financial results for both adjusted net income and operating cash flow. Now, please turn to Page 19. For our largest market, North America, we have again provided the Market Outlook data from several external data providers. The external ranges have changed for all three market segments. The average estimate for single family new construction improved from down 17 to down 12, multifamily new construction improved from down 16 to down 12. And repair and remodel actually worsened slightly. Now with an average estimate of down 12. You will remember that last quarter, our view of the market was in the bottom half of the ranges from the external data providers.

However, now eight months into the calendar year and with these revised ranges, we are now cautiously optimistic regarding the housing markets and are accepting the entirety of their ranges as possible outcomes for the year. Using these external ranges along with our assume market segment exposure for FY24, the implied range for a blended addressable market is down 5% to 18% with an average of down 12. Overall, we are happy with the start of the fiscal year from a market activity perspective, while acknowledging uncertainty remains and our expectation that we return to normal seasonality for the December quarter. Regardless of market conditions for the remainder of the year, I remain confident that we will be able to deliver growth above market and strong financial results.

And that confidence is rooted in what we have delivered over the last three quarters, EBIT margin of 27%, 29% and 31.3% sequentially on volumes of 701, 704 and 748 million standard feet respectively. We remain laser focused on driving profitable share gain, and are encouraged by the stronger than expected market conditions to start our fiscal year. Now, if you turn to Page 20, we have again provided the volume sensitivity analysis for FY24. This sensitivity analysis was prepared in the same manner as last quarter, which assumes our current range of expectations on raw material costs and freight rates, and assumes we continue to invest in growth as currently planned. These volumes are simply to provide context to our EBIT margin sensitivity in North America, and should not be construed as volume guidance for any quarter in fiscal year 2024.

Regardless of how markets fluctuate, we are confident we will outperform our end markets. Now please turn to Page 21. Today, we are providing three points of guidance for our second quarter of fiscal year 2024. First, we expect North America volumes to be in the range of 740 million and 770 million standard feet. Second, 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 million to $190 million. As I mentioned earlier, our team is energized and focused on driving profitable share gain, and we are positioned to deliver another strong result in our second quarter. Finally, please move to Page 23. As always, I want to close with who we are at James Hardi, a global growth company.

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

Q&A Session

Operator: [Operator Instructions] The first question today comes from Shaurya Visen from Bank of America.

Shaurya Visen: Hey, morning, Aaron and 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 volume moves, volume moved in repair and remodel versus new construction? So the overall volumes are down 9%. What was the rough mix in new construction and repair and remodel? And also, as you mentioned, second half of the quarter was stronger than the first, could you just help us quantify it broad range would be fine. Thank you.

Aaron Erter: 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. 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 and generally speaking, we were weighted more towards single-family new construction versus R&R.

Operator: Your next question comes from the Niraj Shah from Goldman Sachs.

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

Aaron Erter: Niraj, we have not, your question is, have we updated the PDG target for the year?

Niraj Shah: Yes.

Aaron Erter: No, considering we just said it , roughly three months ago we have not.

Niraj Shah: Okay, fair enough. And I guess I can, in terms of the second quarter guide, it’d be helpful to get sort of what you’re thinking in terms of input costs, cement pulp and freight in particular in that 30% to 32% range.

Aaron Erter: Yes, I’ll let Jason go into details here. Obviously, we’re seeing some favorability as it relates to freight. We’re also seeing a smaller amount of favorability in pulp, and then there’s other costs that I would say are unfavorable to us like cement. But Jason, do you want to dive in any other details?

Jason Miele : Yes, Niraj, obviously, you’re familiar with our biggest costs, freight and pulp being two of them. Freight was at an all-time high Q1 of last year. And we saw that come down throughout last year. So that favorability, we expect to persist throughout the year, but shrink each quarter when comparing versus the prior corresponding quarter. And then with pulp, we did get some favorability in q1, we actually expect that to grow throughout the year. As Aaron mentioned, there’s some headwinds, we feel some headwinds with cement and a few other input costs. But, yes, we feel good about the way that our raw materials are shaping up for the full year. And certainly had favorability in Q1, expect a similar amount in Q2, just a slightly different mix.

Operator: Your next question comes from Keith Chau from MST Marquee.

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

Aaron Erter: Yes, Keith, I think we can go into more detail next quarter, here’s what I would say is H Moss 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 H Moss continues to be an asset for us. We’ll talk more about H Moss and the Hardie operating system, just like I dove deeper into our strategy into next quarter’s call.

Keith Chau: Okay, thank you. And then maybe just one quick follow up with any specific channel movements in the period that you’d want to call out. Anything, was 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 second quarter?

Aaron Erter: Yes, Keith, I wouldn’t say anything that comes to mind. That’s an ordinary from obviously, single- family new construction has accelerated over the past quarter. And we expect that to 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.

Operator: Your next question comes from Lee Power from UBS.

Lee Power: Hi, Aaron. Hi, Jason. Aaron, just on the SG&A spent, like we’ve obviously come through this period where you’ve talked in the past about reallocating and prioritizing SG&A spend as a market slowed. You now saying you’re cautiously optimistic, like how should we think about reinvestment in SG&A? And any sort of guidance around a percentage of sales or dollar numbers that you think is appropriate would be great? Thank you.

Jason Miele : Yes, Lee, a great question. I would just say this over the past few quarters, I felt that our SG&A spent 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 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. So that’s going to be customer facing type of sales roles.

That will also be marketing related spend as well. So, as I look at our SG&A spend grew importantly, I don’t really necessarily put a percentage on it because that can be misleading, but we’re going to spend appropriately how we feel the sales dollars are coming in our outlook.

Lee Power: Okay, thanks. Appreciate it. And then just as a follow up, look, thing in the past, when we’ve talked about the relative margin, new construction, R&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 of serve for some of these larger public builders is obviously lower. Do you think that’s mean? You’ve obviously come out with the D 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 doesn’t necessarily hold with the Horton agreement?

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

Jason Miele : 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, is quite different from R&R to new construction, et cetera. So as Aaron would have talked about on the call today, we are very profitable in every segment with every product in every region. And so at the EBIT margin level, yes, there is a very good consistency in EBIT margins we are able to deliver in all of those segments.

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

Operator: Your next question comes from Daniel Kang from CLSA.

Daniel Kang: Good morning, everyone. Just a couple of questions in reference to Slide 19. Where new construction is performing better than R&R. I guess the first question. And to elaborate on this point of just I just wanted to ask you, Aaron, in terms of D R Horton, the arrangement there. Can you elaborate on how you’ve managed to win this deal? And I guess your plans to expand this arrangement with other builders? And then my follow up question is really on the slippage with R&R expectations. What do you think is driving this slippage into the full year? Thank you.

Aaron Erter: Daniel, as far as our deal with D R Horton, first 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 Madson, he says we are humble, but hungry, right. And that’s really the tact that this team has taken out there. And it’s really about bringing a value proposition to our customers. So I’m not going to disclose any details about it because we keep those confidential with our customer partners. But as far as are there opportunities to do similar deals with other builders? Of course, we do have deals with 24 out of the 25 largest builders, and the majority of the Top 200.

But you — 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 are lagging, you look at some of the outside data out there. I mean, really is we talked to contractors and we’re out in the field. I think really the biggest thing is there’s a lot of potential tailwinds from a medium and longer term standpoint, as it relates to R&R 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. So in order to go move forward with what would be considered a large R&R project, I think people are sitting on the sidelines and waiting a little bit.

That’s not going to be forever. But 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.

Operator: Your next question comes from Lisa Huynh from JPMorgan.

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

Aaron Erter: Jason, do you want to take this?

Lisa Huynh: Yes, Lisa, look, obviously, we’re only giving guidance for the second quarter for a reason, we believe the market remains unsettled. The Slide we just talked about in detail Page 19. Those are for the R&R piece that’s three outside providers, we get data from who are calling down their estimate, just 1% of the average minus 11. Now it’s minus 12. And I think it’s for all the reasons Aaron just talked about, for the homeowner doing a large R&R project waiting to see what happens when the economy et cetera. And our focus is controlling what we can control. We have the sightlines deliver a very strong second quarter, I think what’s important from 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&R, these experts are calling down 12% for the year, but we do like the fundamentals of where R&R is for the long term.

Lisa Huynh: Okay, sure. 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?

Aaron Erter: Yes, look, I think you’re comparing apples and oranges here to compare the two divisions here. I would just say this and just speaks 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&A. And relatively flat cost of goods sold per unit. But our APAC team is doing a tremendous job, capitalizing in that marketplace right now.

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

Aaron Erter: Well, as I said if it’s in the 30s, like we saw there, that we will take it that’s pretty positive.

Operator: Your next question comes from Peter Steyn from Macquarie.

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

Aaron Erter: Yes, it’s a great question, because if we look, as I mentioned before, R&R, which traditionally has been the largest share of our business, number one, we got to continue to focus on our customers. And what I mean by that is I use the term a lot, homeowner focus customer and contractor driven, R&R really needs us to do all of that, right. So we’re focusing on the homeowner with a lot of our marketing efforts. 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 one, Peter, I think the other piece because we anticipate as R&R takes off, it’s a tremendous opportunity for us.

We want to make sure we’re capitalizing on that, that’s to have the capacity that we need. So if you think about one of the most important things, we do is capital allocation. And that’s why we’re really excited about some of the projects that we have going on, all over the world, but namely, you think about North America, our largest R&R opportunity, is some of the things we’re doing around the H Moss, which was mentioned earlier, but also Prattville expansion, and also our Westfield expansion with color as well. So, Peter, great question. I think, if I have to name the top two things, those are it.

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

Aaron Erter: 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. And look, as I mentioned before, we have the best team in the business. I firmly believe that being here almost a year of being out with our teams. So I’m 100% confident that they’re getting it right with a contractor, just focusing on whatever their needs are. But again, it’s homeowner focus 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. And that’s still important, but you notice that we’re adding the contractor and the customer back in here. So yes, I do believe we’re getting it right.

Operator: Your next question comes from Simon Thackray from Jefferies.

Simon Thackray: Sorry, something wrong, can you hear me now? Hi, fellas, you got me now. Just a couple of questions. First of all, the cancellation of Australian Greenfields plan and I know you talked about H Moss finding brownfields capacity that may not have been there before. That’s great news. But just on the $400 million plus investment, how much of the business case shift was due to construction inflation and/ or other factors that may have impacted the business case for canceling the Greenfields in Victoria?

Aaron Erter: Yes, Simon, zero, that did not compute or we didn’t factor that in at all. I mean, it was clearly as s I came in, we took a look, and we’re always re-looking every single project, this is a major expenditure for us. And like I said, Ryan Kilcullen, as we centralize this, underneath him, we did an exhaustive review. And one of the things that made this possible for us to cancel, is we cancelled our pilot plant. So that made brownfield opportunity something that we could do. And by the way, we cancelled the pilot plant, because we have ability to do that in existing plants. So, look, as I said before, one of the most important things that we do is capital allocation. And this was really looking at this scrutinizing this, and just realizing that we had other options here. So, zero, factored in to escalating construction costs.

Simon Thackray: That’s really helpful. Aaron, and just as you did, what was the level of sunk cost, therefore, and including the land, which no doubt, you’ll actively market back to the market?

Jason Miele : 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 and will provide more information to the market.

Simon Thackray: That’s absolutely fine. And just a real quick one for you. Just to follow up on the operating cash flow reconciliations. So you had $31 million of inventory released, $26 million build in the PCP and your payables gave you another $27 million. So I just want to understand the drivers of that inventory, drawdown at the end of the quarter and what your expectations are in the second quarter for working capital, if I may.

Jason Miele : Yes, so we have a clear goal in our LCI to get $50 million working capital this year. So obviously in Q2 and Q1 we’re not satisfied so we continue to test drive working capital down, Simon. I mean, you have seen over the past couple of years, we did a really good job of driving inventory down. And then through this past three quarters or so as the markets became unsettled, we built some inventory. So we think we’re back in a really good spot with inventory. But we think there’s more to do around receivables and payables. And we’ll want to maintain inventories at kind of a levels they’re at June 30. And want to go this year, but we got off to a really good start

Operator: Your next question comes from Sam Seow from Citi.

Samuel Seow: Good morning, guys. Thanks for taking my question. With just looking at the results compared to the PCP, you got North American volumes down 9% of EBITDA margins, obviously 31. Just looking forward as utilization comes back, and operating leverage, is there any reason to think the margins can go higher again? Or is there something below the [inaudible] line that scales up with volumes?

Aaron Erter: Yes, I’ll let Jason tag team this 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 or actually even increase 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.

Jason Miele : Yes, Sam, I think the other thing to consider is as how housing markets grow, get to top of cycle levels, that usually includes higher freight, higher pulp, higher cement, et cetera. Certainly, we saw that last year, it was exacerbated by the war. But I think in any cycle, if you look back through our history, as you get towards the top of 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% again in the second quarter was within a really strong position through six months.

Samuel Seow: Jason, thanks. And just quickly, when I think about the rent report, I remember there being more of a cost gap feelgood, you had about 160 mil worth of I guess, lean savings and procurement savings in there to target just wondering how some of those costs out was in this result or how they are layering in over the years.

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

Operator: Your next question comes from Harry Saunders from E&P.

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

Aaron Erter: 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. I’ve just said price is going to be up year-over-year. As far as how the end markets are looking in the second half. Look, we gave our guidance for Q2, and that’s what we’re going to limit it to right now.

Harry Saunders: And if I could just sorry, just squeeze in a follow up on that point. Are you sort of moving back towards a more like a one quarter lagging in start deciding cycle times normalized to the builders.

Aaron Erter: Yes. We’re starting to see some normalization area, but you still have seen in the past six to nine months, some very interesting trends between completions and starts. So I don’t think we’re completely through that yet. But over time, we do think that’ll normalize.

Operator: Your next question comes from Brook Campbell-Crawford from Barrenjoey.

Brook Crawford: Hi, thanks for taking my question. Are you able to provide some commentary just on sort of wallet share for US builders, and maybe you can kind of group it towards a broad comment on how you’re — you share compares between the Top 25 and the Top 200. That’d be really helpful. And also, perhaps if you can give a comment on Trim penetration between sort of those two groups? Thanks.

Aaron Erter: Yes, Brooke, what I would say, and I mentioned, we have relationships, some type 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 have to check me here, I think with probably 65 plus percent of the Top 200. So we do have opportunity out there. And when I talk about our team’s being humble, but hungry, those are areas that we’re going to focus. And as far as Trim penetration, 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 the North American team is to make sure as we’re selling a Hardie house, we’re selling the Trim as well. And a lot of these deals that we’re signing with builders is we’re focused on not only the board but also the Trim as well.

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

Jason Miele : Yes, Brooke, we’re, brownfield is preferred, I would say where we’re at right now, we’re very comfortable with our greenfield approach. And the decisions that we’ve made from a US standpoint. And management analysis document we did purchase the land for a future greenfield in Missouri during the quarter. And obviously, we’re still progressing with [inaudible] three and four. So we’re comfortable with where we are in capacity, both brownfield and greenfield.

Operator: Your next question comes from Paul Quinn from RBC Capital Markets.

Paul Quinn: Yes, thanks very much. Guys, it’s a great quarter in a difficult environment. I’m just trying to understand this exclusive arrangement with D R Horton, because I suspect you’ll hiring this out for the rest of the Top 25 homebuilders, but I’m just trying to reconcile that with the comment that you had equal EBIT margins amongst R&R our new home construction. So in light of that, what’s the advantage for D R Horton to give you the exclusivity if it’s not price?

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

Jason Miele : And I think I’d add, Paul, 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 G&A you’re spending in these different areas, that’s where the range gets a lot tighter.

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

Aaron Erter: Yes, thank you, operator. And I just like to again thank all of our employees and employees around the world who remain focus 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. Thank you.

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