James Hardie Industries plc (NYSE:JHX) Q3 2023 Earnings Call Transcript

James Hardie Industries plc (NYSE:JHX) Q3 2023 Earnings Call Transcript February 14, 2023

Operator: Thank you for standing by. And welcome to the James Hardie Third Quarter Fiscal Year 2023 Results Briefing. Today’s briefing is hosted by James Hardie’s CEO, Aaron Erter, and CFO, Jason Miele. I would now like to hand the conference over to James Hardie’s CEO, Mr. Aaron Erter. Please go ahead.

Aaron Erter: Thank you, operator. Good morning and good evening to everyone. I am Aaron Erter, CEO of James Hardie and I’d like to welcome all of you to our third quarter fiscal year 2023 briefing. Turning to Page 2, you will see our standard cautionary note on forward-looking statements. Please note that the presentation does contain forward-looking statements and the use of non-GAAP financial information. For today’s call our CFO, Jason Miele will start by discussing our third quarter fiscal year 2023 financial results. And I’ll follow up with him on a strategic and operational update. We will then open it up for questions. While Jason will spend his time discussing our current fiscal year results. I will spend the majority of my time looking forward and explaining how we intend to continue to derive differentiated results into the future.

Before I hand it off to Jason, 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 and services to our customer partners despite the significant headwinds we are facing in all three of our operating regions. Our employees truly represent the very best in our industry. And I feel fortunate to work with them. With that, I will hand it off to Jason to discuss our third quarter financial results. Jason?

Jason Miele: Thank you, Aaron. And let’s start on page 5 to discuss our global results for the fiscal year 2023 third quarter and year-to- date nine months. In the third quarter, group net sales decreased 4% to US $860.8 million. Global volume was down 11% due to the deceleration of the housing markets we participate around the world. However, in every region, our teams continue to deliver a strong price/mix growth, leading to group net sales down only 4%. In each region, our teams continue to drive strong product mix while executing strategic price increases, leading to price/mix growth of 10% in North America, 6% in Asia Pac and 14% in Europe. In regards to earnings, global adjusted EBIT decreased 19% to $165.4 million and global adjusted net income decreased 16% to $129.2 2 million.

Every region’s earnings continued to be negatively impacted by inflation. Nine months year-to- date results are much stronger buoyed by the stronger market in the early months of the financial year. For the first nine months, global net sales increased 8% to $2.9 billion and adjusted global net income increased 4% to $459.3 million, both our records for the first nine months of the fiscal year. As you are aware, the housing markets we participated in have decelerated during our current fiscal year and inflation continues to pressure margins. For the full year of FY23, we are estimating inflation to be between a $160 million to a $170 million headwind globally as we adapt to the changing market conditions and as Aaron will discuss further, we are making adjustments to our global workforce by balancing our manufacturing networks and reducing SG&A headcount.

In total, we reduced our headcount by approximately 6%. globally. We incurred restructuring costs of $6 million in the third quarter, and will incur approximately $2.5 million in the fourth quarter. Globally has certainly been a challenging year with significant inflation and decelerating housing markets. Nonetheless, we are confident that the full year FY23 will produce a record for net sales with strong earnings and strong margins. Let’s move to page 6 to discuss the North American results. In the third quarter, North America net sales were flat at $645.4 million. Volume growth declined by 10%, which was fully offset by strong price/mix growth of 10%. The strong price/mix in the quarter was underpinned by ColorPlus volume growth of 18% in the third quarter.

The volume decline of 10% was driven primarily by the rapidly decelerating single family new construction market, and also lower repair and remodel market activity. In the third quarter, the team delivered a robust bottom line outcome with EBIT of $174.1 million and an EBIT margin of 27%. For the nine months year-to- date, net sales increased 15% driven by strong price/mix growth of 13% and EBIT increased 8% at 27.1% EBIT margin. Let’s move now to page 7 to discuss Asia Pacific results. Asia Pac’s third quarter net sales were A$171.2 million, a decrease of 13%. The APAC business continues to drive high value product penetration, leading to price/mix growth of 6% in the quarter. The 19% decline in volumes with disappointing was primarily driven by continued market weakness in Australia and New Zealand, combined with inventory reductions from key customers in both countries.

Third quarter EBIT was A$42.3 million with a margin of 24.7% driven by the volume decrease and inflationary pressures. Turning now to page 8, let’s discuss the European results. The third quarter results in Europe remained very consistent with the first half. Volume was down 10% while the team drove strong price/mix growth of 14% leading to a net sales increase of 4% to EUR 101.2 million. Third quarter EBIT declined to EUR 1.5 million at an EBIT margin of 1.5%. The margin result was significantly lower than the first half EBIT margin 7.4%, primarily due to restructuring actions taken in the third quarter. The restructuring charges led to a 350-basis point reduction in the European margin. Turning now to page 9 to discuss capital allocation and guidance.

Starting with capital allocation, our framework we introduced in November remains unchanged. Our first focus is investing in organic growth. Second is maintaining a flexible balance sheet. And third is to deploy excess capital to shareholders via the share buyback. Late in the third quarter, we began executing on the share buyback program. And during the quarter we purchased 1.6 million shares for total consideration of US $31.2 million. We intend to continue with the share buyback program when our trading window reopens. Regarding guidance, we have adjusted our fiscal year 2023 adjusted net income guidance range to US $600 million and US $620 million. We have lowered the guidance range for four primary reasons. Number one, North American volumes in the second half will be lower than we expected three months ago.

Two, APAC volumes will also be lower than previously expected. Three, persistent inflation and four, the impact of restructuring charges in the second half. Regarding North American volumes, in November, we stated we expected our second half volumes to be down 5% to 8%. And we now expect that figure to be down 11% to 12%. This change was driven by the continued rapid deceleration of the US housing market. In regards to APAC volumes, the underlying housing market continued to decelerate faster than we anticipated, and there was significant channel destocking. Fiscal year 2023 was certainly a challenging year with full year inflation estimated to be a headwind between Us $160 million to US $170 million, and housing markets decelerating rapidly.

That said, we expect full year fiscal year €˜23 global net sales to be a record and our adjusted net income to be the second highest ever achieved by James Hardie. I will now hand it back over to Aaron.

Aaron Erter: Thank you, Jason. Jason just walked you through our fiscal year 2023 third quarter and year-to- date results. As such, I’m going to spend most of my time discussing how we intend to drive differentiated results moving forward. In addition, I will provide you with a framework on how we intend to run our business as the markets and segments we participate in soften. Whatever challenges we face, it is our job to outperform the market while providing our customers solutions. That is what we have a history of doing and what we intend on doing moving forward regardless of market conditions. With that, let’s turn to page 11. Some key takeaways as we look at fiscal year €˜23. First, significant inflation impacted our operations in all three of our regions.

Second, we experienced a rapid and unexpected deceleration in the housing markets we participate in. And third, our teams remained focused on what they can control, like bringing our customers the solutions they need, and delivering strong execution of our strategy in a challenging environment. Let me briefly talk to each of these items. First, in regards to inflation. Our current estimates are that for the full year, we will incur approximately $160 million to $170 million of inflation globally. That is not only a significant headwind to our financial results, but also a significant change from our expectations entering the year. You will remember that during our February 2022 results call, we stated our expectation for fiscal year €˜23 was global inflation to be between US $40 million to US $60 million.

We have been able to minimize this impact through pricing and productivity initiatives driven by the Hardie Manufacturing Operating System, or as we call it, HMOS. Net, let’s discuss the housing market segments we participate in, specifically our largest region, the United States. We have provided the growth expectations for calendar year 2022 for both single family new construction, and repair and remodel based upon a basket of market data. We have provided in the notes the methodology we use to arrive at these consensus figures. As we discussed and forecasted on our last call, both of these market segments decelerated rapidly throughout calendar 2022. And we’re not in line with original market expectations. You can see just how quickly the single-family new construction segment decelerated.

Back in December 2021, the consensus expectation was that single family new construction segment would grow 6% in calendar 2022. By June 2022, the consensus was calling the segment to be down 1%. And ultimately over the entire calendar year 2022 single family new construction starts decreased 11%. It was truly a tale of two halves, with single family start seeing up 1% growth in the first half of calendar 2022 and decreasing negative 22% in the second half. You can see a similar story with the repair and remodel segment. Entering the year consensus expectation was for R&R to be up 6%. But ultimately, the segment saw a decline of 1%. What this data clearly shows is that the rapid deceleration in the US housing market was unexpected by the industry.

A lot of factors drove this rapid market deceleration and they were outside of our control. But I believe the James Hardie team responded quickly and have course corrected with what is the new reality. And when I look at our fiscal year 2023 through that lens, I view it as quite strong year for our global team despite these challenging conditions. I think the team did a great job controlling what we could control and delivering solid results. Now please turn to page 12, where I will take you through those results. The entire team is disappointed. We have not achieved what we said we were going to do with the beginning of fiscal year €˜23. But as I outlined on the prior page, I believe there were a lot of things outside of our control that impacted our financial results in fiscal year €˜23.

That said, I do believe the team executed strongly in the face of those significant challenges. And when I reflect on our financial performance in fiscal year 2023, it is still a very strong set of financial results. Globally, for the full year fiscal year ’23, we expect our global net sales to be the highest ever achieved. Our global volume to be our second highest ever achieved. Our adjusted net income to be the second highest ever achieved while delivering continued enterprise-wide productivity through HMOS. Regionally for the full year, we expect every region to deliver its highest ever average net sales price and every region to deliver record net sales. Specific to our largest two regions, North America and APAC, we expect for the full year fiscal year €˜23 to deliver EBIT margin in the middle of our long-term range of 25% to 30% despite the market and inflationary headwinds I mentioned earlier.

There is a lot for us to build on as we look to the future. Our team’s ability to deliver strong results through the adversity of this year strengthens my confidence in our ability to meet the demands of the changing market, and drive differentiated results moving forward. I’m excited to take you through the adjustments we’re making to ensure we deliver on that. Let’s turn the page 13. Simply put, we are managing quickly and decisively to accelerate our competitive advantages. We’re focused on continued strong execution of our strategy, which starts with our nonnegotiable culture of zero harm, focusing on the customers and segments where we have the right to win. Delivering solutions, our customers want, strengthening our world class manufacturing and supply chain networks and marketing across the value chain and investing in our people.

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We’re focused on driving profitable volume share gain, as most of the housing markets we participate in slow. We’re effectively balancing our manufacturing network to ensure not only that we better match supply to demand, but through initiatives driven by HMOS, we do it at a lower cost per unit. And we ensure we are agile and ready to react to any market adjustments. we’re optimizing SG&A for the current environment, and reallocating resources to key areas and projects. We are continuing to invest in profitable growth. I like to quote a phrase from the great college basketball coach John Wooden that I often share with my team as we navigate through this challenging time. That is, be quick, but don’t hurry. I believe this is what you have seen and will continue to see from us.

We can be agile and adaptive to respond to significant changes in market conditions, but are also thoughtful and focused on where we can accelerate our competitive advantages. We have the right solutions that our customers are seeking. And that will allow us to deliver differentiated results. Okay, let’s now move on to discuss each of these items in more detail, starting with driving profitable share gain on page 14. As we enter this period of decelerating housing markets, it is critical we remain aggressive in that we are driving profitable volume share gain in every region and segment we do business in. We are laser focused on this and see this as a time of opportunity. I will discuss our focus in each region before diving deeper into some of the specifics regarding the North America new construction segment on the next page.

Let’s start with APAC. As we described in our Investor Day, we have a robust presence in all three of our APAC countries. We will leverage this position to drive further penetration of these markets and segments. In Australia and New Zealand, we have a strong opportunity to continue to penetrate the modern look and both new construction and repair and remodel with our innovative products. The Hardie Architectural Collection is off to a strong start in Australia, New Zealand comprising approximately 3% of our volume in fiscal year €˜23 year-to- date. As our APAC President John O’Neill described in our Investor Day, the team is focused on influencing across the entire value chain, including homeowners, builders, contractors and our customers to ensure we are driving profitable share gain in both new construction and repair and remodel.

In Europe, our new regional President, Christian Klaus and team have significant opportunity to drive profitable share gain across three key focus areas as we described in our Investor Day. The first is we’re going to seek to penetrate the underfloor heating market, leveraging our innovative Therm25 fiber gypsum product. Second, we will penetrate the plank market using our fiber cement technology, not only our existing overlap plank products but our innovative interlocking plank product VL Plank. Third, we will penetrate the large multifamily panel market, leveraging our innovative Hardie Architectural Panels. As our North American region President Sean Gadd described in our Investor Day, we plan to win in every segment in every region that we participate in, in North America.

We’re going to do that by providing the solutions that our customers need. That includes continued penetration in repair and remodel with large opportunities in both the Midwest and Northeast. We continue to drive strong growth of ColorPlus products, and repair and remodel as evidenced by our ColorPlus growth 26% year-to- date in fiscal year €˜23, after growing a strong 27% in fiscal year 2022. In addition, we’re being opportunistic with our capacity to target segments and regions that we underserved over the past couple of years. Some examples would include the multifamily segment, our interiors product line, and the mountains region. Now, let’s turn to page 15 to dive deeper in the North America new construction, and how we plan to continue to aggressively drive profitable share gain in that segment.

As we have discussed many times in North America, approximately 65% of our volume is derived from the repair and remodel segment, and 35% is derived from the new construction segment. As I mentioned earlier, thus far in fiscal year 2023, the new construction market has decelerated much more significantly than the repair and remodel segment. As I described in our second quarter call in November, the R&R segment is a less price sensitive segment for us. And thus, the achievement of our January 1 price increase is complete. The single family new construction segment is much more price sensitive. And thus, we need to make sure we are on our front foot and aggressively driving profitable share gains. It is in this segment where we must stay close to our customers to better understand their needs.

And bring them the premium products and services that enable us to grow together. We’re focused on continually driving profitable share gain in this segment. And we can do it because we have the largest and most knowledgeable sales team in the category. And we have the team deployed, focused on winning share. We’re staying close to our customers to better understand their needs and bring them the right solutions products and services. We’re also leveraging our localized supply chain to deliver the right products to the right place at the right time. We recognize that in this decelerating marketplace, our big builder customers are experiencing volume and cost pressures. And we will continue to be aggressive with tactical pricing as needed to drive profitable shared gain.

On the right-hand side of the page, I’ve listed a few of the accomplishments achieved by our team over the past several months. First, I would like to talk about our traction with the top 25 production builders in North America. As of this call, and ahead of the 2023 build season, I’m proud to say we have signed contracts with 24 of the top 25 production builders to make us their primary hard siding provider nationally for calendar year 2023. This is an increase from €˜23 of the Top 25 last year. As I mentioned earlier is a highly competitive market. And over the last few months, we have seen some intense competitive dynamics. We have and will continue to be laser focused on defending our position and aggressively pursuing new share gain opportunities.

We have been successful in doing this in the current environment. And with our value proposition, we are in an ideal position to continue to do so. When it comes to the big builder space we have strong partnerships, but have never taken them for granted. And we work hard every day to earn their business by providing them the solutions and service they need. To that end, we relaunched Cemplank in select regions for big builder partners. We believe that none of our wins and some minor losses we have gained share within the single family new construction segment and entering the calendar 2023 new construction build season and we are focused on continuing to strengthen our key relationships and partnerships in this space. In fact, across our customer base and builder base we have received four Vendor of the Year awards for calendar year 2022, and will do everything in our power to continue to serve our customers and our builders to the best of our ability.

We recognize that new construction is and will continue to be a very competitive segment. But we believe we are well positioned to address our customer needs, but the solutions that they want and need. We will remain aggressive in gaining share by providing the best services and solutions in the industry, while leveraging tactical pricing as appropriate. While focused on discussing the single family new construction segment on this slide, I assure you that the broader team remains laser focus on continuing our penetration of the repair and remodel segment as well, as evidenced by our ColorPlus growth of 26% year-to- date. In addition, the team is actively pursuing opportunities in other segments and regions that we underserved the past few years due to capacity constraints.

We have a great team focus on the multifamily new construction segment and have reopened our internal quoting desk. We expect multifamily to be an important segment this year as per housing starts data, multifamily has been more robust than single family with growth in calendar 2022 and projected to be down less than single family in calendar 2023. And we’re excited as our internal quoting desk currently has an all-time historically high number of multifamily jobs in our quoting queue. We’re also refocusing on regions we underserved such as the mountain region. And we are excited to continue to grow through our retail partners, where we sell both our exterior and interior products. When you consider the totality of our product and segment mix, we expect our net sales price to increase moving forward in North America.

A topic I will discuss a bit further in a few slides. We are laser focused on driving profitable volume shared gain, and every segment in every region, we participated. Please turn to page 16 to discuss how we are effectively balancing our manufacturing network across the globe. Our zero-harm culture is nonnegotiable, and our team remains laser focused on zero harm regardless of market conditions, or changes we make to our manufacturing networks. When markets decelerate, it is imperative we lower capacity to better match market demand. This is a given. However, we also must position ourselves to be able to quickly ramp up when markets improved. While all suppliers flex their production. We believe it is an opportunity for outperformance and we believe we can create differentiated results as follows.

First, we’re focused on delivering a lower cost per unit. After we have made these capacity adjustments. We believe we can do this by shifting production to our best performing lines while continuing to drive HMOS performance improvements. I referenced a lower cost per unit is performance based and excludes future headwinds or tailwinds from inflation. Second, we learned a lot from past downturns, and we’ll adjust our capacity in a manner that provides us the flexibility to ramp back up quickly and effectively when housing markets recover. On the last slide I spoke about gaining share through the downturn. But it’s also important we position ourselves to gain share as the housing markets returned to growth. Third, we will continue to leverage our localized supply chains to minimize landed costs, while ensuring timely delivery of our best-in-class products and solutions.

In our third quarter of fiscal year ’23, we made adjustments to our manufacturing networks in all three regions. We did this by reducing our shifts and changing shift patterns. We have not idled any lines nor shuttered any facilities. This is critical for enabling us to ramp back up quickly in the future when housing markets recover. Again, we believe we will achieve a lower unit cost based on our adjustments while providing flexibility to ramp up as we see signs of housing market recovery. Our ability to flex our manufacturing network up and down while delivering high quality and low cost products is enabled by the HMOS discipline we have embedded globally over the past four years. And this capability will enable us to drive share gain through the market downturns, while also enabling us to be in a position to drive share gain through the next cycle of market growth.

Let’s shift to page 17 to discuss the adjustments we have made to SG&A. I want to make it clear that we intend to continue to invest in profitable growth. The adjustments to SG&A were necessary but do not impede our ability to drive the outcomes we want. We reduced SG&A headcount in all three regions and a corporate. We did this to ensure SG&A headcount better align with our strategic needs. In addition to the headcount reductions, we have lowered our discretionary SG&A spend in the second half of fiscal year ’23 compared to the first half, we’re still investing significantly in strategic growth initiatives, and believe we’re in fiscal year 24 at the appropriate SG&A spend level. We will monitor it closely and apply a pedal and clutch approach to adjust as needed.

As you are aware, the largest portion of our discretionary spending within SG&A is marketing to our value chain participants. The adjustments we have made are to better balance our marketing investments across our various mediums and audiences with a focus on targeted conversions and share gain while continuing to increase brand awareness. What I’m excited about is that we continue to see great results from our marketing efforts, where we have seen an approximate 50% increase in leads year-to- date. As I noted at the beginning of this page, we will continue to strategically invest in growth initiatives, including adding the right talent and investing in marketing to all members of our value chain and adjust with a pedal and clutch approach.

We will invest in the right SG&A initiatives at the right time to drive share gain through the market downturns. Now, let’s move to page 18. As I discussed last quarter, we will not be providing guidance regarding fiscal year €˜24 until May, calendar year 2023. That said I thought it was important that I share with you how we are managing our business not only strategically, but what outcomes we expect to deliver. First, we plan to continue to deliver growth above market in every region. Second, as we move forward, we expect to achieve higher net price in every region. Third, as we make manufacturing network adjustments, we expect to do so while utilizing HMOS to deliver lower cost per unit on a performance basis. Fourth, we expect to manage our global SG&A spend in line with our current second half fiscal year €˜23 levels.

Lastly, we expect to maintain EBIT margins in North America and APAC above 25%. This is how I expect our team to run the business. And I think these targets are highly achievable. We expect to drive profitable volume share gain in all three regions while delivering strong financial returns. Finally, let’s turn to page 19 to wrap up. Before I wrap up, I do want to take this opportunity to again, thank each of our 5,000 employees from around the world for their efforts in delivering the highest quality products and services to our customer partners in what remains a challenging operating environment. I am confident and excited about the future and what we will accomplish together as a team. As I shared with you all during Investor Day, we are a global growth company.

The same compelling tenets I shared then are the same that will allow us to accelerate our competitive advantages through this market downturn and enable us to come out a stronger James Hardie. We will continue to operate with a focus on zero harm and acting as a responsible corporate citizen. We have an experienced management team that is leading quickly and decisively. We have a strong balance sheet and strong cash generation to help see us through any market downturn. We have strong share gain opportunities across a variety of segments and regions and we will be aggressive in pursuing them. We will leverage our integrated localized supply chain, strong customer partnerships, strong brand and our premium products and services to maximize these opportunities, and we intend to deliver attractive returns throughout the market downturn.

We remain homeowner focused, customer and contractor driven. With that, I would like the operator to open the lineup for questions.

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Q&A Session

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

Brook Campbell: Good morning, thanks for taking my question. Just went on guidance for FY23, and the implied fourth quarter and parts about $150 million, which is a step up from $129 million in the third quarter. Can you just step through the drivers of sequential pickup and part quarter-on-quarter from 3Q to 4Q, pls?

Jason Miele : Yes, Brook, thanks for the question. Start with price increases. Second would be the expectation that volumes are roughly in line in most regions to Q3. The expectation was better landed cost through HMOS and some inflation decreases in our input costs would be and then the lack of a restructuring charge would be the items walking from the Q3 net income, which I think is where you’re starting from.

Brook Campbell: Thanks. What’s the fourth quarter North America EBIT margin expectations?

Jason Miele : Yes, as we talked about on slide 18, our expectation is to sorry, not on slide 18, we expect to drive EBIT margin according Q4 based on higher net price and lower landed cost.

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

Keith Chau: Good morning, everyone. Thanks for taking my questions. Just one on price/mix. So I guess the commentary suggests that prices are going up. But obviously with market share gains and new sequences a chance to mix is impacted. And if you look at the price/mix number between 2Q and 3Q, there was a very slight decline quarter-on-quarter, but that might just be quarterly variability. But Aaron, can you help us understand where you think the outcome overall, we’ll be for price/mix in the context of price increases still coming through? Is there an expectation of mix to revert back to historical levels, at least to an extent, if you can help step us through that that would be much appreciated. Thank you.

Aaron Erter: Yes, thanks for the question, Keith. I think part of this is the price increase that we will realize in Q4, I’ll have Jason walk you through the steps to this. Jason, why don’t you go ahead?

Jason Miele : Yes, Keith, we’re still obviously focused on the same, winning in the same market winning in every market, every segment, there certainly be mixed impacts. Our focus is that, as Aaron described on page 18, in every region, we expect, net of all those movements, net price to increase year-on-year. So certainly as we went through the presentation, Aaron described the competitive nature of single family new construction, we’re doing really well in multifamily. We have an opportunity to better serve interiors than we did during the past couple of years. And so there’ll be quite a few different mix impacts that occur. But net of all that and our price increase, we expect to drive a higher net price year-on-year. And as we give formal guidance in May, we can unpack that a bit more. But that’s what we see moving forward.

Operator: Your next question comes from Andrew Scott with Morgan Stanley.

Andrew Scott: Thank you. Good morning. Aaron, this follows on nicely from Keith’s question. I know that you commented on the relaunch of Cemplank, obviously, that’s a pretty important strategic decision. Can you talk about the parameters you’re putting around that and how far that extends?