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James Hardie Industries plc (NYSE: JHX) Second Quarter 2022 Earnings Conference Call, 9:00 PM Eastern Time, November 12, 2021
Thank you for your support and welcome to the James Hardie Industries, JHX Q2 '22 financial year performance briefing. [Instructions]. There will be a speech and then a question and answer session. [Instructions]. I now want to hand over the meeting to the CEO, Dr. Jack Truong. please continue.
Jack Truong - CEO and Executive Director
Good morning, good evening, everyone. Thank you for participating in our second quarter fiscal 2022 earnings conference call. This is the tenth consecutive quarter that our company has achieved strong financial performance, with growth higher than the market, and strong returns based on the consistent execution of our global strategy.
I will start today's conference call by briefly introducing our global strategy (including sustainability). Then, our Chief Financial Officer Jason Miele will introduce our financial performance for the quarter and provide the latest information on our guidance throughout the year. After that, we will be open to questions.
Let us now turn to page 5 to get an update on our strategy. In the May 2021 Investor Day and the fourth quarter performance report, we described three key strategic initiatives that will enable us to drive the company to achieve sustained profitable growth globally. The three strategic measures are: First, expand the James Hardie brand from a first-class professional brand to a market-leading consumer brand, focusing on direct marketing to homeowners to create real demand for our products.
Second, penetrate and promote the growth of existing and new markets, such as repairs and renovations. Third, commercializing global innovations allows us to expand to other appearances and take advantage of adjacent opportunities in each of our three regions.
In addition, we will continue to build on the important foundation established in the past three years. This foundation includes continuing our path to become a world-class manufacturer of pure [Phonetic] LEAN, continuing to work closely with our customers through our advancing strategy, and continuing to integrate our supply chain with our customers to serve the market.
Let us now turn to page 6 to discuss our direct-to-family marketing progress. During our Investor Day, we shared detailed information about our 360-degree integrated marketing campaign, which directly reached out to homeowners to create real demand.
We put the host, Christine, at the center of our attention. As I shared with you at the time, the four stages of homeowner buying are awareness, consideration, purchase and amplification. We continue to build this marketing capability within James Hardie to ensure that we communicate the correct message to the homeowner throughout the purchase process. We will enhance this internal capability through key social influencers and partners in various media to create real demand for Hardie brand products.
In May, we discussed and showed you the TV campaigns that James Hardie can carry out. It is the basis of the awareness stage. So far, TV commercials have been very successful in raising our target homeowner Christine's awareness of the James Hardie brand. After homeowners understand the James Hardie brand, it is important that we provide them with the right content at the right time, because they will consider the choice of beautifying the appearance of the house.
In the past six months, we have begun to reach Christine through TV, social media, print media, and regional influencers to help guide Christine through the road to purchase. On the right side of the page, we are happy to share with you some of our key performance indicators related to the consumer market so far.
Although my journey is still very early, we have seen an increase in brand awareness, we have attracted more homeowners to visit our website, and we have achieved significant growth in LEAN [Phonetic]. Specifically, we increased the auxiliary visibility of the brand by 109%. Website traffic increased by 81%, and potential customers in our target market increased by 61%. We are very encouraged by the early momentum of the results and continue to invest heavily in this strategic plan.
As you can see on page 7, we have recently collaborated with TV and the media to continue to convey our true message to Christine. On the left, you can see James Hardie products appearing on the fixer upper, a very popular repair and transformation TV show with more than 19 million viewers per episode. Hardie brand ColorPlus Shingles has significantly modified the appearance of his home. On the right is another example of James Hardy brand products in the home improvement display. The show called "Secret Celebrity Renovation" was broadcast on July 9, 2021, and once again demonstrated James Hardie's ability to provide unlimited design possibilities.
Finally, in the lower right corner is an example of print media with a close-up advertisement on the back cover of Magnolia magazine. This is one of the most watched magazines for home decor and life lovers. Cooperate with key influencers and various forms of media to expand external influence and help homeowners understand the infinite design possibilities brought about by the trustworthy protection that James Hardie brand building solutions can provide.
Let us now turn to page 8. The second of the three core strategic initiatives penetrates and promotes profitable growth in the maintenance and renovation sector. A key component of this strategy is to promote a high-value product portfolio. On this page, you can see that this particular strategy continues to have a significant impact on driving the profitable growth of our North American business.
Starting from the left, here we show our current product portfolio in North America, covering the two key criteria of price and value. In North America, we define high-value products as our Hardie brand external products, Hardie brand external products using ColorPlus technology, and all of our Hardie brand innovations, including the recently launched Hardie textured panels. The strategic focus of our high-value product portfolio is to create awareness and higher demand for our differentiated product lines and homeowners, and to enter the transformation market with such a strong value proposition. In turn, it brings higher sales and profits to our customers and us.
On the right, you can see the clear and significant impact this strategy has had on our recent financial performance in North America. Our team continues to work with clients to develop our overall business while turning to the high-value product portfolio that homeowners want and need. The blue line on this chart represents the percentage of sales growth for each quarter of the second quarter of fiscal year 2020-through the second quarter of fiscal year 2022. The green bar represents the percentage increase in the price mix during the same period. If you pay attention to the first and second quarters of the 2022 fiscal year, you will find that our strategy to promote a high-value product portfolio has a real impact on our financial performance.
Not only did we see strong sales growth of 14% in the second quarter, but more importantly, we also saw a sustained and significant step change in the price mix of 9% [Phonetic], which resulted in net sales in North America in the second quarter. Sales increased by 23%. Please note that this growth is on top of the corresponding quarter that was strong last year. This shows that, by working closely with our customers, even in a period of high inflation like this year, we have successfully shifted to a higher-value product portfolio and promoted profitable growth. This is proven in our rate guidance, which Jason will talk about later.
Now turn to page 9. Our strategy is global. On this page, you can see the impact of our strategy of promoting a high-value product portfolio on our European business. Starting from the left, similar to the previous slide, what you see here is a map of our current product portfolio in Europe, covering the two key criteria of price and value. In Europe, we define a high-value product, namely our Fermacell brand flooring products, Hardie brand plant products, including panels and all of our Hardie brand fiber cement innovations, including the recently launched Hardie brand VL Plank.
Please note that in Europe, we have promoted the price combination of the fiber gypsum product portfolio and are also promoting a broader price combination strategy. Specifically, I mean, you can see that we use orange on the chart to represent our fiber gypsum flooring products, which represents our higher pricing profit compared to our fiber gypsum wall products. On the right, what you see here is the clear and significant impact that this strategy has had on our recent financial performance in Europe. Our team is working with our customers to promote a higher-value product portfolio, and you can see that the results have begun to gain momentum in the past two quarters as the price mix has gradually changed.
The blue line on this chart represents the percentage of sales growth for each quarter from fiscal year 2020 to the second quarter of fiscal year 2022. The green bar represents the percentage increase in the price mix during the same period. If you look at the first and second quarters of fiscal year 2022, you will find that our strategy to promote a high-value product portfolio has a real impact on our European financial performance. Not only did we see strong sales growth of 15% in the second quarter, but more importantly, we also saw a continuous and significant step change in price mix growth of 8%, which led to net sales in Europe in the second quarter An increase of 23%.
Now turn to page 10 for the latest information on innovation. In May 2021, we announced the launch of three new global innovations: First, the Hardie texture panel in North America; Second, the European Hardie brand VL Plank; Third, the Australian Hardie brand Fine Texture Cladding.
Since our launch at the beginning of this year, we have continued to maintain a good market acceptance and penetration rate for all three product platforms. We will continue to work with customers to increase the awareness and adoption rate of homeowners. The feedback from North American homeowners and our customers has been very positive.
Hardie brand texture panels provide modern design solutions suitable for any home style, homeowner's wants and needs. In addition, they provide protective features such as durability, low maintenance, and non-flammability. What you see here are four examples of Hardie brand textured panels used in four different homes in Oregon, Washington, and Florida. Regarding these other pictures, what I want to point out here is how Hardie brand texture panels stand out in a variety of home designs ranging from modern appearances to coastal and hybrid designs.
Go to page 11. In Europe, we are also very satisfied with the progress of Hardie brand VL Plank products. Installers have always given positive feedback on the time they have saved. Compared with our products, our products can save about 20% of the total installation time. On this page, you will see examples of Hardie brand VL Plank in Germany, France and Switzerland. What I want to point out here is how Hardie's brand VL Plank helps provide a modern look with a hybrid design, which is becoming more and more popular among homeowners in Western Europe.
Now go to page 12. Similar to North America, the feedback from homeowners and customers in Australia is very positive. These are four examples of Hardie's Fine Texture Cladding in the Australian market. As you can see, they help enhance the appearance of modern designs that are prominent throughout the African continent. Hardie brand Fine Texture Cladding provides homeowners with unlimited design possibilities by providing the protection, durability, low maintenance and non-flammability that homeowners need.
On the left, you can see a very simple brick house using Hardie brand fine-textured cladding as the main exterior product completely transformed into a modern modern house. We are very excited about these new innovations and how they will allow us to continue to penetrate and grow in large adjacent markets in each of our three operating regions.
Although we are excited about the early success of these three new innovations, our global innovation plan is much larger than these three product platforms. Our innovation team focuses on our innovation channels to ensure that we will have more new innovations to provide homeowners all over the world with unlimited design possibilities and excellent durability and protection. We expect to be able to roll out more innovations in the next six months, and launch them regularly thereafter.
Now turn to page 13 for a summary of global performance for the second quarter of fiscal year 2022. This is our tenth consecutive quarter to provide consistent financial performance, above-market growth and strong returns. Specifically, in the second quarter, we achieved global net sales of more than US$903 million, an increase of 23% compared to the same period last year.
Importantly, this is due to a 9% increase in the global price mix. We achieved global adjusted net income of US$155 million, an increase of 29%. We once again achieved strong financial performance in all three regions. This quarter is also for four consecutive quarters. All three operating regions have achieved double-digit extraordinary growth in net sales and EBIT.
In North America, driven by the strong penetration of our high-value product portfolio, we achieved net sales of US$635 million, an increase of 23%. Adjusted EBIT was US$182 million, an increase of 23%. The EBIT margin for the quarter continued to maintain a strong 28.7%. In Europe, we have achieved strong organic growth and strong returns for five consecutive quarters.
Net sales exceeded 104 million euros, an increase of 23%. The adjusted EBIT was 14.2 million euros and the EBIT margin was 13.6%. In the Asia-Pacific region, with strong performance in all three countries, we achieved net sales of more than 196 million Australian dollars, an increase of 15%. The adjusted EBIT was A$60.6 million, an increase of 12%, and the EBIT margin was 30.8%, which is very strong.
In the first half of the second quarter of fiscal year 2022, strong execution of a high-value product portfolio strategy in all three operating regions has been a key driver of strong financial performance. In the context of high input cost inflation, while maintaining large investments in markets, consumers and innovation.
Now turn to page 14 to discuss sustainability. Earlier this year, we released our first sustainability report. Sustainability and ESG are indeed an integral part of our strategy. It is not a separate and unique initiative, but is integrated into the way we do business in companies around the world every day. Together with James Hardie, sustainable development is about building sustainable communities. This commitment applies to the smallest communities, individual families, homeowners, the James Hardie community, the local communities where we live and operate, and the largest community, the global ecosystem in which we all live.
In our sustainability report released in July, we highlighted the progress we have made in the past year. But more importantly, as I said as our main goal for the future, I want to highlight a few key areas. First, our products are made locally. This manufacturing method has created a local community that we support in many ways. For example, 98% of our employees are employed locally to provide wages and disposable income to the local community. 83% of raw materials come within 100 miles of manufacturing facilities, and 63% of our products are transported within 500 miles of manufacturing facilities. The products we sell in the United States are made in the United States. The products we sell in Australia are made in Australia. The products we sell in the Philippines are made in the Philippines. The fibrous gypsum products we sell in Europe are locally manufactured in Germany, Spain and the Netherlands.
This strategy of local use, sales, production, and transportation is not only good from an ESG point of view, but also vital to our business strategy. Currently, it is helping our business flourish. However, this does not protect us from supply chain issues, but focusing on the local community does achieve flexibility and stability through many disruptions.
Another key component of our ESG focus is zero harm. We put safety first in our daily operations. Zero harm is the foundation of our business strategy and our company. We will continue to improve the recordable accident rate and vacation rate.
As I said before, the main goal of a zero-harm culture is to ensure the safety and well-being of our employees, customers, and communities above all business decisions we make. Although I am satisfied with the progress in our matrix, zero harm is not a destination, but an eternal journey, and we at James Hardie need to maintain a daily basis that focuses on every aspect of our global operations.
I also want to emphasize some of our commitments to the future. By 2030, the greenhouse gas intensity of Scope 1 and Scope 2 will be reduced by 40% compared with 2019, and by 2030, the intensity of landfill will be reduced by 50% compared with 2019. At James Hardie, we are proud of the growth momentum in building sustainable communities.
I now want to pass it on to our Chief Financial Officer Jason Miele to provide more detailed information about our financial performance.
Jason Miele-Chief Financial Officer
Thank you, Jack. Good morning, good evening, everyone. I will start with slide 16 and present our global results. Based on the continued execution of our global strategy, this is our tenth consecutive quarter of achieving strong financial performance, above-market growth and strong returns.
In addition, this is the fifth consecutive quarter of record-setting global performance, including quarterly records of net sales, adjusted EBIT, and adjusted net income. This marked the fourth consecutive quarter that the three regions achieved double-digit net sales growth and double-digit EBIT growth. All three regions are simultaneously implementing a global strategy.
First of all, the continued and vigorous execution of the basic measures of our strategy: lean manufacturing, push-pull and integrated supply chain operation with our customers. In fiscal year 2022, these three regions all have good momentum and are implementing updated strategic plans, marketing directly to homeowners, and commercializing global innovations. The execution of this strong global strategy resulted in a 23% increase in global net sales in the second quarter, reaching a record US$903.2 million. As our teams in all three regions successfully built momentum and promoted a high-value product portfolio, the price mix increased by more than 9%, supporting this outstanding revenue result. In addition, we achieved strong sales growth in all three regions, with global sales increasing by 14%.
Global adjusted EBIT increased by 26% to US$205.7 million, and global adjusted net income increased by 29% to US$154.9 million, both setting record highs for the quarter. To maintain this momentum, we will continue to invest heavily in our strategic initiatives, marketing, innovation and capacity expansion. By investing heavily in growth and operating in the current inflationary environment, we were able to increase our global EBITDA margin by 70 basis points to 27.2%.
We will now review each region in more detail starting from North America on page 17. In North America, the team delivered another outstanding quarter. The team achieved record-breaking net sales of $635.3 million, strong 14% sales growth, and 9% outstanding price portfolio growth. The outstanding price portfolio growth is achieved through continuous execution, driving the penetration of our customers' high-value products. By continuing to execute our basic strategy, lean manufacturing, and our supply chain integration with our customers, we are able to transform outstanding revenue results into outstanding revenue results.
Adjusted EBIT increased by 23% to a record US$182.5 million. With the gradual changes in the level of EBIT margins, the North American team continued to achieve double-digit net sales growth.
Now turn to page 18 to discuss the European results. In Europe, the team achieved strong performance for the fifth consecutive quarter and achieved double-digit net sales growth for the fourth consecutive quarter. In the second quarter, net sales increased by 23% to 104.6 million euros, and adjusted EBIT increased by 51% to 14.2 million euros. Excellent net sales growth is achieved through the team's continuous implementation of the high-value product portfolio penetration strategy. Fibre cement net sales increased by 40% during the quarter, resulting in a significant increase in the price mix of 8%. The combination of improved price mix, strong sales volume and lean improvements offset the high inflation environment that led to the second quarter, and the adjusted EBIT margin in Europe expanded by 250 basis points to 13.6%.
Let us now turn to page 19 to discuss the Asia-Pacific region. Compared to the other two regions, you will see a similar situation in the Asia-Pacific region, as all three regions continue to effectively execute the global strategy. The Asia Pacific team achieved an outstanding net sales growth of 15% in the second quarter, reaching A$196.6 million. The continued execution of the ANZ business in promoting the penetration of high-value products has resulted in a 9% increase in the price mix between Australia and New Zealand.
The strong top-line performance in the second quarter turned into a strong bottom-line performance. The execution of lean manufacturing and the focus on high-value product portfolios helped offset the high inflation environment, resulting in an adjusted EBIT increase of 12% to A$60.6 million and an adjusted EBIT margin of 30.8%.
Turning now to page 20, we will discuss operating cash flow and capital expenditures. The strong operating results discussed in the past few slides continue to translate into step changes in operating cash flow. Operating cash flow in the past 12 months has increased by 18% to US$727.6 million, and we will discuss cash flow further in the next slide.
Move to the right side of the slide and you will see our capital expenditure summary. In the second quarter, total capital expenditure was US$108.1 million. Focusing first on the short-term, our Prattville, Alabama plant continues to successfully increase production, and our Summerville South Carolina plant is restarting as planned, and is still scheduled to restart in March 2022.
Looking ahead, we are entering a transitional period of capacity expansion. In North America, we will expand our plant in Prattville, Alabama to add two sheet metal machines. We expect this expansion of Prattville to provide saleable production by the end of the 2023 calendar year.
In addition, we plan to purchase land in the United States as green space, focusing on the production of high-value products and innovation. In Europe, we will expand our fiber gypsum production capacity in Orejo, Spain, in order to achieve continued strong growth of our fiber gypsum business in Europe. We will purchase land and begin construction of greenfield fiber cement facilities to produce fiber cement locally for the European market.
Finally, in Australia, we plan to increase new fiber cement production capacity in Victoria. Similar to the United States, this greenfield capacity, we expect to focus on high-value products and innovation. Adding the right capacity at the right time allows us to continue to drive market share growth and promote organic growth.
Let us now turn to page 21 to discuss capital allocation. Our transition to the new James Hardie led to a phased change in operating cash flow. On the left, you can see that we have generated more than $2 billion in cash in the past 36 months. These funds allow us to invest in future growth through capacity expansion, reduce debt, make significant contributions to AICF, and return capital to shareholders.
On the right, you can see that our capital allocation priority remains unchanged. Today, we are pleased to announce a dividend of US$0.40 per share for the first half of the year, which is equivalent to approximately US$178 million. The record date of the dividend for the first half of the year is November 19, and the payment date is December 17.
Let us turn to page 22 to discuss the funding of the Asbestos Injury Compensation Fund. On the left side of the slide, you can see the increase in our contribution to AICF, which is directly related to the step change in operating cash flow that we discussed on slide 20. You can see that for the five years starting from the fiscal year '15 to fiscal year 2019, our average annual contribution to AICF was 119 million Australian dollars. And now, in fiscal year 2022, it has almost tripled to 328 million Australian dollars. Since the establishment of AICF, James Hardie has donated more than A$1.7 billion to AICF.
Moving to the right side of the page, you can see the impact of the increase in James Hardie's donation on AICF's cash and investment balance. In the past few years, AICF's cash and investments have increased from A$81 million on March 31, 2019 to A$253 million on October 31, 2021. We are pleased that the step change in our operating cash flow has resulted in a stronger balance sheet. AICF, especially the strong cash and investment balance.
Now let's turn to page 23 and discuss guidance. The significant momentum of our high-value product portfolio penetration in all three regions, coupled with continued market share growth and lean execution, gives us confidence to increase the adjusted net income guidance range. We raised our adjusted net income guidance to the range of US$580 million to US$600 million. The comparable figure for the previous year was US$458 million. The revised guidance range represents a year-on-year increase of 27% to 31% in adjusted net income.
Specific to our North American part, we continue to provide two points of guidance. First, in North America, we expect net sales growth for the entire fiscal year 2022 to exceed 20%. We expect the price mix to grow between 8% and 9%. As we first guided in May, we are investing heavily in our strategic growth plan and expect significant inflation in fiscal year 2022.
Finally, please turn to page 24 for some financial summaries for the half year. Globally, the James Hardie team continues to execute our strategy at a high level. Our mission is to become a high-performance global company that provides organic growth above the market and sustained strong returns.
In the first half of fiscal year 2022, global net sales will grow by 28%, and global adjusted EBIT will grow by 34%. The significant increase in net sales and EBIT was mainly due to strong execution in driving the penetration of high-value products. It is important that we continue to invest in growth. This includes investment in marketing directly to homeowners, investment in innovation, and commitment to capacity expansion in all three regions. As we continue to invest in our future growth during periods of high inflation, it is important to note that the strong execution of our strategy allows us to expand the global adjusted EBITDA margin by 80 basis points.
We continue to return capital to shareholders and today announced a first half dividend of $0.40 per share. Finally, we increased our adjusted net income guidance for this fiscal year to between US$580 million and US$600 million.
We have now concluded our prepared comments. I will hand it over to the operator and start the Q&A part of today’s meeting.
Thank you. [Instructions]. The first question comes from Peter Steyn from Macquarie. please continue.
Peter Steyn - Macquarie - Analyst
Hi, Jack and Jason. Thank you very much for your time tonight, your time. I just want to add a little more color to the blending effect. If you can from the perspective of sales contribution, let us understand the gap between new products and products, and how do you track the LTI target for FY22?
Jack Truong - CEO and Executive Director
Good morning, Peter. This is a good question. We are well tracking the LTI target you mentioned. But now, as-our approach to new innovations is actually market-driven, this is all to ensure that we put our products on the wall and in the homeowner’s home as the first priority, and this creates a typical new product To publish, you just need to ship more things to the channel, and then let it flow out slowly. So our method is more about pulling. It is to create demand with the homeowner, and create more motivation by creating demand with the homeowner, until the critical mass is reached, then you will see the real big Improve and continue to improve.
Then with respect to the first part of your question, we-as we continue to execute our high-value product portfolio, over time, the impact of the price combination will be more and more important to you to promote the growth of the price portfolio of products. Saw the difference between the first quarter and the second quarter that we just showed.
Peter Steyn - Macquarie - Analyst
Thank you Jack. So I can clarify that, in my opinion, the texture panel and VL Plank, etc. do not contribute much at this time, but as the channel starts to draw the panel or the customer, it will speed up and start to draw more clearly in due course. So what we see at this point is still the early stage, but mainly the transition from Cemplank to Hardie plank and the final stage.
Jack Truong - CEO and Executive Director
Yes. So this is really about-what you see in the price mix now is the shift from Cemplank to Prime and the shift from Cemplank and Prime to color.
Peter Steyn - Macquarie - Analyst
OK. perfect. That makes sense. Then just a question for Jason. In terms of cash flow only, excluding the tax impact of CARES, you mentioned that your operating cash flow has increased by 2% when EBIT is growing significantly faster. From the perspective of the balance sheet, no significant changes in working capital can explain this. So I am curious about what this quarter provides from a cash perspective, and try to get more color from the 2% improvement in operating cash.
Jason Miele-Chief Financial Officer
Yes, Peter, as we said, when you exclude the CARES bill, it goes up by 2%. Of course, we have shifted to a stepped change level on the basis of a rolling 12-month period. As with any quarter, there are some subtle differences in timing. However, from a cash flow perspective, we are very satisfied with where we are. We expect continuous improvement in the future.
Peter Steyn - Macquarie - Analyst
OK. perfect. I can leave this place temporarily. thanks.
Thank you. The next question comes from Simon Thackray of Jefferies. please continue.
Simon Thackeray-Jefferies-Analyst
thanks. Good morning, Jack, good morning, Jason. If you can, just a few questions. Can we talk about any type of capacity constraints, bottlenecks, supply chain constraints that we have observed in the past quarter? Despite the good profit margins, I am a bit curious given that the quarter-on-quarter growth in European sales is only 1.25%. So I just want to know if growth will be better, but for some capacity limiting factors? Contrary to the results in Europe, North America, and the Asia-Pacific region, are there any regions that currently have capacity restrictions that you could have done better, or might be restricted when we track to the end of the year?
Jack Truong - CEO and Executive Director
Yes. Hi, good morning, Simon. There are a few things just to emphasize the strategy we are pushing now, Simon, we-the way we look at how we serve the market is actually to promote more high-value product portfolios. So it's not just sales for the sake of sales. So this is a very big difference in our future strategy. This is actually to maximize the value.
The second is us-because our business model is actually about the integration of our supply chain and customers, so that we can truly understand the needs farther, so that we can produce and ship, not just production shops.
So this is really about-so we-so based on these two strategic criteria, this is how we drive our business growth based on the net sales of high-value products.
So we do have the ability to move freely in Europe, which is why you really see our European business growing very well. As we continue to become more integrated with European customers, we will have a better demand profile, which will allow us to better plan and even better serve the market.
Simon Thackeray-Jefferies-Analyst
So Jack, so I understand and thank you for your clarification. He hinted that although the net sales growth in Europe from the first quarter to the second quarter is very moderate, but you use these strategic measures to expect 1.25%, that should accelerate. Is this what you said to me?
Jack Truong - CEO and Executive Director
So what we should see is that our net sales growth is accelerating, not just for sales growth. So, if you look at the product portfolio in Europe today, then-which slide do I think it is? It can be seen from Slide 8 that the pricing of Hardie brand Panel and Plank and Backer are quite different. Therefore, this is actually about us creating more value with homeowners in Australia, New Zealand and the Philippines in Europe and North America and Europe. This is actually about understanding the needs of homeowners and providing them with suitable value products. It's not just transportation or sales in units.
Simon Thackeray-Jefferies-Analyst
OK. That makes sense. If you now describe, Jack, the percentage of your R&R to new house sales, would you say that you will continue to see R&R changes, more R&R?
Jack Truong - CEO and Executive Director
Absolutely. I think our R&R is now [undecipherable] businesses all over the world, they are very similar. It is more like 70% or more, and it is growing very fast.
Simon Thackeray-Jefferies-Analyst
OK. That's great. Then as far as COGS inflation is concerned, Jason pointed out that this is different from the May update, but as far as COGS inflation guidance is concerned, the first quarter is static. Is this COGS inflation rate increased due to higher cost assumptions? Or is it a function of better sales expectations for the business since May?
Jack Truong - CEO and Executive Director
There is a bit of both, Simon, as we talked about the last figure, pulp and shipping costs are as high. We are paying close attention to the market, but we are satisfied with the global range of US$120 million to US$150 million that we provide, which also includes our trading volume assumptions.
Simon Thackeray-Jefferies-Analyst
That's great, Jason. Then, although I already know, just an update on page 6. As far as SG&A expenditure is concerned, it has obviously increased in accordance with the guidance. Are marketing and advertising expenditures now running at a steady pace? Or will it increase from here? When we look forward to the growth that these marketing plans will bring to the business, should we consider marketing and advertising expenditures in dollars or the percentage of future sales?
Jack Truong - CEO and Executive Director
Yes, Simon. Therefore, we will continue to invest in marketing programs that drive revenue growth. Therefore, we expect more investment next year than this year. But obviously, we are monitoring to make sure we get the expected results. This is how we will continue to run it. As we learn more about this, we might consider whether we provide guidance — not the entire dollar or the percentage of sales, but all about investing to drive future growth.
Jason Miele-Chief Financial Officer
You know, Simon, the way to think about this problem is that as we invest more in the market and homeowners, this is really about our need to truly create the high-value products that homeowners really need. So, as far as our business is concerned, due to the high [technical issues] growth, and as we expand more into growth, more into the repair and transformation of market segments, you should see gross margin growth. So internally-you should expect the market investment in absolute dollar terms to rise, but it is more related to the percentage of sales.
Simon Thackeray-Jefferies-Analyst
Yes. This makes sense, Jack. Then soon began the expansion of green space in New Zealand. Is that to feed New Zealand? In this way, I learned about the green spaces of the Victorian era.
Jack Truong - CEO and Executive Director
As you know, Simon, we have a very large factory in Carroll Park on the Gold Coast and one in New South Wales. Then we see Victoria as our growth opportunity. Therefore, this is one of our fields, and it is very important for us to have a real-a large facility that serves the market for a long time. Then you may hear from my opening remarks that our ESG strategy is also that we strategically establish factories where we operate. We purchase more than 80% of the raw materials within 100 miles of the factory to be able to ship our products at least To two-thirds within 500 miles of our factory. Consistent with this strategy, this is why we are looking for VL Plank in Victoria, not to mention that it is a huge growth driver.
Simon Thackeray-Jefferies-Analyst
OK. That makes sense. Okay, thank you very much gentlemen. Cherish your time.
Thank you. The next question comes from Lisa Huynh of JPMorgan Chase. please continue.
Lisa Huynh-JPMorgan Chase-Analyst
Hi, everybody. I just have questions about the gross profit margin of North American fiber cement. I guess the input cost and Prattville's start-up cost dragged down the gross margin by 4.8%. Can you let us know how much the commissioning of Prattville will promote and when will it be completed? I also think, considering the capacity you plan to launch in the next three years, should we continue to expect this line to become a drag in the next few years?
Jack Truong - CEO and Executive Director
Yes, Lisa, when you consider the start-up cost when there are not a lot of start-up costs during the [Phonetic] period. Therefore, this is why as we continue to promote this transformation and capacity expansion, there will be a year-on-year drag. You can expect that start-up costs will always become part of our future profit and loss. Therefore, when you are [unrecognizable] during the calculation period, I will not treat it as a drag on future growth investment.
Lisa Huynh-JPMorgan Chase-Analyst
Yes. So what is the contribution this quarter?
Jason Miele-Chief Financial Officer
[Speech Overlap] Three and four were also seen in Prattville. So I think in your previous question, [unrecognizable] Prattville will continue to increase costs as we expand. Then we will not give you that gross profit margin. Although we will not specifically list startup costs, the percentage in this table will be smaller compared with the increase in freight and pulp costs.
Lisa Huynh-JPMorgan Chase-Analyst
OK. certainly. thanks. Then more specifically, on ColorPlus, considering the adoption rate, can you comment on what you saw-what you saw in the second quarter and the market share you gained from the Northeast?
Jack Truong - CEO and Executive Director
Yes. So Lisa, this is a key part of our marketing campaign for homeowners. This is actually about providing the types of products Christine wants, and what Christine wants are those families that use the products we make with ColorPlus. Therefore, our ColorPlus portfolio has indeed been growing, especially since we started activities at the beginning of this year, and we expect that this situation will continue to maintain some very healthy growth as we continue to invest in the consumer market.
Thank you. [Instructions]. The next question comes from Daniel Kang from CLSA. please continue.
Daniel Kang - CLSA - Analyst
Well, good morning, Jack. Good morning, Jason.
Jack Truong - CEO and Executive Director
Daniel Kang - CLSA - Analyst
It's just a question of price-good morning. Regarding the question of price mix, North America seems to be gaining momentum, contributing 9% in the second quarter, higher than the 7% in the previous two quarters. I realize that your guidance on price combinations only applies to 8% to 9% in FY22. Is there any reason why this momentum should not continue until FY23?
Jason Miele-Chief Financial Officer
You know, Daniel, I mean, we believe that this will continue as we execute our strategy, which is actually marketing directly to the homeowner. Then, when we sell directly to homeowners, after a lot of extensive consumer research, you know that we know exactly what consumers and homeowners want, and then we sell these, which we call the high value homeowners need The product, and the one we have. Therefore, for us, James Hardie's colorful exterior products are one of the key products that homeowners really need. Therefore, as we continue to execute, it should-we expect color products to continue to grow.
Thank you. The next question comes from Lee Power from UBS. please continue.
Lee Power - UBS - Analyst
Hi Jack. Hi Jason. Only looking at leads from direct consumers, 61%. What are the differences in conversion rates that you found when processing, such as direct-to-consumer and contractor transactions?
Jack Truong - CEO and Executive Director
No, it depends on [Phonetic] When we create demand directly with consumers, we - the message is always very consistent and very clear. Then this will generate sales leads, and then our customers, our contractors-our customers will be able to switch. So it's really about the quality of potential customers. Not only that, but also the ability to shut it down faster. Therefore, our ability to connect directly with homeowners and directly tell stories about the value of Hardie's branded products is enormous.
Thank you. The next question comes from Keith Chau of MST Marquee. please continue.
Keith Chau - MST Marquee - Analyst
Good evening, Jack and Jason. So one question is only related to North American business. Can you give us a feeling that this is after the previous question. Are there any constraints in North America that might hinder the sales of any problems caused by the hurricane activity?
Then, in keeping with this, where is the sales growth in external and internal quantities so far this quarter?
Jack Truong - CEO and Executive Director
Yes. So Keith, as I-we mentioned, we are pushing because we are now in the market directly with homeowners and we will promote high-value products that consumers or homeowners want to lead. So this is really important to us, it's about maximizing our ability to produce the right products so that we can maximize our sales growth and EBIT. So you will see more growth in high-value products. For us, this has nothing to do with external or internal, what really matters is where we can create more value.
Thank you. The next question comes from Sam Seow from Citi. please continue.
Sam Seow - Citi - Analyst
Hi Jack. Hi Jason. I think that if we think about reinvesting, I think, lean savings into the supply chain is more of a concept, and you are still proving it. At the time, logically, you only worked with a few major distributors. Looking forward to today, can you let us know how many of your existing distributors you have, would you say that you have fully integrated, or how many distributors you want to work with, I guess how many are not yet integrated? work together. I think I just want to understand the remaining avenues of a truly successful plan.
Jack Truong - CEO and Executive Director
Jason Miele-Chief Financial Officer
Yes. So it is-it is a journey. What I can say is that today we are a few miles ahead of two years ago, which is why it allows us to truly produce and serve the market better than most people because of our integration, our supply chain and our customers , Of course, as well as integrating our supply chain and our suppliers.
But it's about-this is a journey, and we have more to join. It is-we will continue to improve, but this is the way. This is the strategic path we will continue.
Thank you. The next question comes from Paul Quinn from RBC. please continue.
Paul Quinn-Royal Bank of Canada-Analyst
Yes. thank you all. good evening. It's just a question about the global pulp market, we see that they are indeed tumbling. Just want to know how many quantities you use in a year and how are these contracts? Are they priced by spot, or by contract quantity, within three or six months?
Jack Truong - CEO and Executive Director
Yes. Thanks, Paul. Pulp will become one of the most important forecasts in our business. So when the pulp turns-however, as we are talking about, the execution of our strategy allows us to expand profit margins during this period of high inflation, which is important. We have many types of contracts, some are spot contracts, and some are fixed and regular, whether it is a quarter or six months. So it is diverse.
Thank you. The next question comes from Peter Wilson of Credit Suisse. please continue.
Peter Wilson - Credit Suisse - Analyst
Thank you. In the context of your announcement of capacity expansion, there is another message about North American sales. So Jack, I think your point of view is not entirely about quantity, but about high-value quantity. But we put it aside and only focus on quantity. Should we consider the 792 million square feet of capacity in the second quarter, and should we consider it as your capacity limit until this new capacity goes live? Or is there more to get rid of the internet?
Jack Truong - CEO and Executive Director
No, it is—we actually—it should be more, for three reasons. One, lean, its execution will continue to open up more capacity of our existing assets. The second is that as we continue to integrate more customers, this allows us to have more lead times for our product requirements, so that we can run our factory network more effectively and flow products to the market. That will be more. Third, we are also expanding our Prattville Line 1 and Line 2. Then we will open and reopen our Summerville factory, which will open in March next year, and there will be about four months left in the calendar year. Therefore, these are some of the key factors that will enable us not only to continue to drive sales growth, but also to drive product portfolio growth. Of course, this will bring us income.
Thank you. The next question comes from Andrew Scott of Morgan Stanley. please continue.
Andrew Scott-Morgan Stanley-Analyst
Hi Jack. Just a question, if I can talk about the price, we are now in the price announcement on January 1. Can you tell us what you expect there? Then around this point, you have been insisting on this value pricing method this year, and the pricing of vinyl records and LP may be more like a commodity. Can you tell us if you think this has a meaningful impact on the comparison of wall hanging costs?
Jack Truong - CEO and Executive Director
Answer the first one and then...
Jason Miele-Chief Financial Officer
Yes, Andrew. So your first question about the price increase on January 1, we expect the price increase in North America to be about 5%, or about 5%.
Jack Truong - CEO and Executive Director
Yes. So Andrew, I think the key here is that we are now-I mean, this is the real driver of our direct marketing to homeowners. So it's about our Hardie brand products. The appearance and colors of Hardie brand really provide unlimited possibilities, allowing homeowners to transform their homes with different designs, which look great. But yes, they can protect their home from all factors. So this is the value. This is the decision made by the homeowner, mainly about intangible effects.
So-then, of course, the cost of the wall is important, but it is not as important as letting the homeowner make the decision that she wants to remodel the house, especially in a post-COVID environment where the home is the castle. So it is-this is where we focus. As far as the price of this board and the other board is concerned, it is not that important.
Thank you. This really ended the Q&A session. I will return the meeting to Dr. Truong.
Jack Truong - CEO and Executive Director
Well, before we end the call, I would like to take this opportunity to express my gratitude and gratitude to all James Hardie colleagues around the world. Our outstanding financial performance in the second quarter of fiscal year 2022 is a direct result of everyone in our company continuing to implement the global strategy. We work together as a global company. This outstanding second quarter performance once again shows that we are indeed a new James Hardy. This is a company that continues to leverage our global reach, global capabilities and global scale to execute together and consistently deliver strong financial performance in all three regions. As we continue with the next phase of profit growth, I am excited about the rest of the 2022 fiscal year and beyond. Thank you.
Jack Truong - CEO and Executive Director
Jason Miele-Chief Financial Officer
Peter Steyn - Macquarie - Analyst
Simon Thackeray-Jefferies-Analyst
Lisa Huynh-JPMorgan Chase-Analyst
Daniel Kang - CLSA - Analyst
Lee Power - UBS - Analyst
Keith Chau - MST Marquee - Analyst
Sam Seow - Citi - Analyst
Paul Quinn-Royal Bank of Canada-Analyst
Peter Wilson - Credit Suisse - Analyst
Andrew Scott-Morgan Stanley-Analyst
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