James Hardie Industries plc (NYSE:JHX ) Q4 2022 Earnings Conference Call May 16, 2022 6:30 PM ET

Harold Wiens – Interim Chief Executive Officer

Sean Gadd – North America President

Jason Miele – Chief Financial Officer

Thank you for standing by and welcome to the James Hardie Q4 FY 2022 Results Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to Mr. Harold Wiens, Interim Chief Executive Officer. Please go ahead.

Hello, everyone, and welcome to our fourth quarter and full year fiscal year 2022 earnings call. I'm Harold Wiens, Interim CEO of James Hardie. On Page 2, you'll see our standard cautionary note on forward-looking statements. Please note that this presentation does contain forward-looking statements and also the use of non-GAAP financial information.

Let's move on to Page 3, where you will see our agenda and speakers for today. I'm proud to be joined by our CFO, Jason Miele; and our North America President, Sean Gadd. Today, we'll start the presentation with a brief update on the significant transformation James Hardie has undertaken. Jason will then discuss the fourth quarter and full year financial results. And then Sean will provide an update on our North American strategic focus and how he and his team plan to deliver a strong fiscal year 2023. Finally, Jason will return to conclude with the discussion on guidance.

Let's turn to Page 5. Our strategy remains unchanged and we expect it to continue to drive profitable growth globally. It is embedded across all three regions and all 5,000 of our team members. Underlying our strategy is our commitment to Zero Harm and ESG. Our strategy starts with focus and strong execution around our three foundational initiatives, which are LEAN manufacturing, customer engagement and partnership and of course supply chain integration. Over the last three years, it is these three foundational strategic initiatives that drove our transformation. With these initiatives now fully embedded in our company, we're now focused on continuing to drive profitable growth globally through the following three strategic initiatives.

First, marketing directly to the homeowner to create demand, second penetrating and driving profitable growth in existing and new segments; and third, commercializing global innovations by expanding into new categories. Over the next few pages, we will highlight just how different of the company James Hardie is today compared to just a few years ago. This change was driven by our strategic transformation and we enter fiscal year 2023 as a global company that has consistently delivered growth above market and strong returns.

Let's turn to Page 6. Four years ago, we were a regional business with $2 billion of revenue delivering $0.66 of earnings per share. In contrast, we are now proudly a $3.6 billion revenue global business delivering $1.39 of earnings per share. We have also increased our operating cash flow from $309 million to $757 million during this period and that enables us to continue to invest in growth. Our shift to a truly global business of scale began with our acquisition in Europe and was then accelerated through the successful implementation and execution of our global strategy. Our execution of HMOS, which means Hardie Manufacturing Operating System helped to ensure consistent production within our network of plants. And it is the cornerstone that enabled us to increase our long-term margin ranges in May 2021.

We also engaged with our customers and partnered together to deliver increased value for them and us as we drove growth above markets and had a higher value product mix. And lastly, we integrated our supply chain to ensure that we could provide the right products at the right time for our customers and then in turn their customers. Every employee team and division that contributed to our incredible transformation and growth during this period, and I want to thank them all for their contributions to our success.

I will now ask Sean and Jason to discuss this transformation for each of our regions.

Let's turn to Page 7. In North America, we became a significantly larger and more profitable business over the past three years. We're now $2.5 billion revenue division with adjusted EBIT goes to US$0.75 billion. We have step-changed our adjusted EBIT margin, increasing it by 600 basis points during this period. It is interesting to note that the net sales and EBIT results of just the North American business in fiscal year 2022 represents a larger and more profitable company in the entire consolidated James Hardie global company of fiscal year 2019. As we increased our scale during this time, we did so in a manner that drove the leverage as we continue to invest future growth, primarily in people, capability and marketing. Over the three year period, we delivered a 15% CAGR of net sales while delivering a 24% CAGR on adjusted EBIT.

Later in the presentation, I will discuss our approach to deliver another fantastic result in fiscal year 2023. Jason will now take you through APAC and Europe.

Let's turn to Page 8. Our Asia Pacific team has also delivered a remarkable step-change in performance over the past three years and a significant change in the scale of the business, a 58% increase in adjusted EBIT and 16% volume growth is excellent leverage across this three-year period. More importantly, the business continues to grow and scale. And is now over A$200 million of the EBIT, it represents a substantial business that can significantly impact the group results. Similar to North America, the adjusted EBIT margin expansion is significant at 570 basis points and the team has delivered at the top end of the new long-term target range two years in a row.

Turning to Page 9, let's discuss Europe. In February of 2019, shortly after the acquisition of Fermacell, we laid out long-term targets for our new European business, as well as short-term guidance to measure our success against. Our long-term targets remain unchanged in our 10th year of operations in Europe. Post-acquisition, we expect to be a €1 billion net sales business with an EBIT margin over 20%.

And over these past three years, the European team has delivered against the short term targets we laid out in February of 2019. The first target we set at that time was a net sales CAGR of 8% to 12% during the three-year period ending with fiscal year 2022. We delivered a 10% net sales CAGR right in the middle of the range.

The second metric we committed to was exiting fiscal year 2022 with a 14% EBIT margin. You'll see, on this chart, we delivered 12.9% EBIT margin in fiscal year 2022, which is below the original target of 2014. However, if you remove the impacts of hyperinflation in fiscal year 2022, the team would have delivered in full year, EBIT margin 220 basis points higher than the 12.9%, which is well above the initial target of 14% we set out in February of 2019.

The European team has integrated tremendously well into James Hardie, and they have a clear strategy to continue to drive growth and margin expansion into the future.

Let's turn to Page 10, which is the last slide in this section. As you have heard, Harold Sean and I discuss, we believe as we enter fiscal year 2023, we are a global company that is enabled for continued growth. Through the acquisition of Europe in April, 2018 and the execution of our strategy to transform our business these past three fiscal years, we have step-changed our financial profile and believe we have the right go-forward strategy to continue to deliver growth above market with strong returns.

I want to spend a few minutes discussing the middle section of this slide. As you can see here, the financial strength of the global organization has changed significantly during this three-year period. It is a key factor in enabling our future strategic plans, which are articulated on the right of the slide.

First, we have delivered a step-change in our P&L performance and scale. Global net sales has increased to US$3.6 billion in fiscal year 2022. Adjusted net income more than doubled in the past three years to US$621 million. We also raised our long-term EBIT margin ranges in all three regions in May of 2021. And in fiscal year 2022, we delivered at the top end of those ranges.

Second, we have also delivered a step-change in our operating cash flows growing from US$304 million in fiscal year 2019, to US$757 million in fiscal year 2022. And over the past two-year period combined, our operating cash flow has exceeded US$1.5 billion.

Third we have significantly improved our balance sheet over this period. Our leverage has decreased from 2.4 times on March 31, 2019 to 0.8 times as of March 31, 2022. And we decreased our net debt from US$1.3 billion at March 31, 2019 to US$752 million as of March 31, 2022.

And fourth, the AICF also now has a much improved balance sheet. As of March 31, 2019 the AICF had cash in investments of A$81 million. And as of March 31, 2022, they have A$350 million in cash and investments.

And as we discussed last quarter, the top up calculation will apply in July of 2022 and we currently estimate that payment will be 19% of operating cash flow, a significant change from the historic 35% rate.

Our global team has created an incredible platform upon which to enable our future growth. And we believe we have the right strategy to continue to deliver growth above market and strong returns as we move into fiscal year 2023 and beyond.

We have spent a decent amount of time discussing our three-year transformation. Let's now shift to Page 12 to discuss our fiscal year 2022 results. In the fourth quarter, the global team continued to deliver growth above market and strong returns, with all three regions delivering double digit net sales growth. The global teams’ execution resulted in global net sales increase 20% to US$968.2 million for the quarter. For the full fiscal year 2022 net sales increased 24% to over US$3.6 billion. Global adjusted EBIT increased 30% to US$225.3 million for the quarter and US$815.6 million for the full year, both representing a 30% increase over the prior corresponding period.

Global adjusted net income increased 42% to US$177.5 million for the quarter and was up 36% to US$620.7 million for the 12 months. All of our businesses performed extremely well in fiscal year 2022. And this operational performance would have delivered an adjusted net income result towards the top of our adjusted net income guidance range of US$620 million and US$630 million.

However, higher general corporate costs in the fourth quarter resulted in adjusted net income of US$620.7 million.

Full year operating cash flow was strong at US$757.2 million. And adjusting for the one-off U.S. CARES Act tax refund in fiscal year 2021, operating cash flow was up 5% versus the prior year.

Let’s move to Page 13 to discuss the North America results. In the fourth quarter, the North America team delivered net sales growth of 25% to US$694 million. The team delivered strong volume growth of 13% and exceptional price mix growth of 12%. The price mix growth was delivered through continued execution and driving high value product penetration and close partnership with our customers.

In addition with continued execution of our foundational initiatives, we were able to convert the top line result into a strong bottom line outcome with adjusted EBIT increasing 35% to US$206.1 million at a margin of 29.7%. For the full year net sales increased 25% to just over US$2.5 billion on volume growth of 15% and price mix growth of 10%. A key contributor to price mix growth as well as margin performance was delivery of a 27% increase in ColorPlus volumes in fiscal year 2022 versus fiscal year 2021.

Adjusted EITT was US$741.2 million for the 12 months with an impressive adjusted EBIT margin of 29.1%. The team delivered a 20 basis point improvement in adjusted EBIT margins for the full year. This was achieved through continued lean manufacturing improvements combined with driving a high value product mix, helping to offset cost inflation and significant investment in future growth through marketing, innovation and talent capability.

Let’s move now to Page 14 to discuss Asia Pacific. The Asia Pacific team delivered fourth quarter net sales growth of 23% to A$200.5 million. The APAC business continues its step change execution in driving high value product penetration with price mix growth of 11% in the quarter with volume growth of 12%. In the fourth quarter, execution on LEAN manufacturing and a focus on high value product mix, help to offset the inflationary environment leading to strong adjusted EBIT growth of 21% at an adjusted EBIT margin of 26.3%.

It was a strong fiscal year for the Asia-Pacific business with full year net sales increasing 22% to A$777.7 million and adjusted EBIT improved 23% to A$217.4 million at an outstanding margin of 28%.

Turning now to Page 15, let's discuss the European results. In Europe, during the fourth quarter, net sales increased 10% to €115 million and adjusted EBIT increased 3% to €16.1 million. Quarterly net sales growth was delivered through the team's continued execution of the high value product penetration strategy as well as a January 1, 2022 price increase, which led to price mix growth of 14%. Fourth quarter volume decreased 4% as we strategically shifted away from low margin partnerships. There was some minor reduction in demand in the period. And we were comping a prior year fourth quarter, which included some of our initial new innovation VL Plank stocking positions.

Encouragingly, fourth quarter adjusted EBIT margin returned to expected levels at 14% as we had indicated they would when we spoke three months ago. Fiber Cement net sales increased 18% in the quarter while Fiber Gypsum increased 9%. Full year net sales increased 20% to €420.5 million with an impressive 39% increase in Fiber Cement net sales and a 17% increase in Fiber Gypsum net sales. Adjusted EBIT improved 51% to €54.2 million at a margin of 12.9%.

We are particularly pleased that European EBIT margins have improved in line with our expectations set three years ago, excluding the impacts of hyperinflation the full year EBIT margin would have been 220 basis point higher in fiscal year 2022, exceeding our original target of 14% set back in February of 2019. As you know, natural gas is a key input cost for the manufacturing of Fiber Gypsum and with prices remaining high; the European team has taken another price increase effective on April 1, 2022.

Now that we are able to travel more freely again, had the pleasure to be in our European business over the past few weeks, along with Harold and Ryan Kilcullen. I want to thank the team there for the excellent job they've done in integrating into James Hardie, hitting all of the targets we set together over these first four years and positioning the business to deliver on our initial 10-year plan of becoming a €1 billion business with over 20% EBIT margins. We are extremely encouraged by the success to-date and the strategy the team has in place to deliver on our long-term targets.

I will now turn it over to Sean Gadd.

We're going to now shift our attention to the how meaning, how we will continue to deliver growth above the market as strong returns of fiscal year 2023 in North America. Let's turn to Page 17. Looking back at fiscal year 2022, our outstanding performance in the North American business was driven by a continued strong execution of the strategy across all components of our business. We delivered net sales greater than US$2.5 billion, an increase of 25% over last year and US$741 million of EBIT, an increase of 26% over last year.

We expect similar outstanding performance in FY2023, specifically in North America; we expect net sales growth of between 18% and 22% are maintaining strong EBIT margins of between 30% and 33%. The significant sales growth in FY2023 and corresponding strong EBIT margin will be a direct result of continuing to drive high value product mix in the region.

Specifically, as you see in the chart on the right in fiscal year 2023, it'll be driven by a continued penetration of high value ColorPlus products in the repair and remodel segment. As we drive more demand by reaching our consumer more efficiently and effectively. We continue to remain focused on innovation as it will be critical in our future growth in FY2024 and beyond. But a 1% of our product mix in fiscal year 2023, it will not be the key to delivering differentiated results this year.

Before we dive into how we will deliver fiscal year 2023, I want to announce that we did take a second price increase for this year that will become effective on June 20, 2022. With the timing of the second price increase and how we come into the market, we expect the full year impact of both the January 1 price increase and June 20 price increase to improve our average net sales price by approximately 7% for the full year.

Our user mix have not changed since the last time we spoke in February, thus, we expect the price mix growth for fiscal year 2023 to be between 9% and 12%. We expect the second price increase to help improve our overall top line result while offsetting cost pressures, enabling us to deliver the EBIT margin range of 30% to 33% for the full year.

Moving to Page 18 to discuss at high level of the strategic initiatives that will drive our continued growth in fiscal year 2023. First, it’s start with the capacity expansion. As you know, we have Prattville sheet machines one and two continuing to ramp up and we now have Summerville back on-line and ramping up. So we feel very comfortable that we'll be able to continue main supply to meet demand.

Ryan Kilcullen and his team continues to ensure that we are expanding our global capacity in line with market demand. And Ryan will join us for Q&A, if you have any capacity related questions. Second, HMOS, our plant network team continues to do an amazing job of continuous improvement.

I think a lot of you have met Dave Kessner over the years, who leads North America manufacturing. Here's a really talented group of plant managers who are all continue to develop strong teams inside our plants. The team plans to deliver improvements in net hours and roll throughput yield. As you know, that is our cornerstone to enabling continued EBIT margin expansion.

Next, FY2023 will be driven by engaging and partnering with our customers, early in the presentation, we talked a lot about financial changes over the past three years. But in my view, the most significant increase is in our relationship with our customers and the strong partnerships we have created. We have now aligned goals with our key customers in how much we plan to grow. And we have an industry-leading sales team and customer relationship team led by two industry veterans in John Matheson and Johnny Cope.

Our strategic partnerships continue to grow stronger and will be critical in enabling us to drive growth in fiscal year 2023. Lastly, we’ll continue to market directly to the homeowner to drive demand of high value products. In fiscal year 2023, we’ll have a heavy focus on driving ColorPlus growth in the repair and remodel segment. It’s important for you to note that when we create this demand, we are driving it back through our customers, thus helping them grow faster as we grow faster.

Let’s turn to Page 19, where I want to share some of our marketing results from FY2022 and our marketing plans for FY2023. The 360 degree marketing campaign that we began in this last spring has so far delivered significant positive results in our three targeted Northeast Metro regions. And overall level this program generates over 1.4 million new web sessions, an increase of 505% more than 33,000 marketing leads an increase of 209%. Over 6,000 sales leads more than double over the prior corresponding period.

More importantly, the market program is delivering increase demand in sale. In the three regions where we implemented the marketing campaign, we saw our volume growth outpaced the comparable ColorPlus regions, where we did not execute the campaign by 11%. To be clear, we are seeing substantial color growth in all markets however the markets where we have been running the campaign color is growing 11% faster than those markets.

We’re very encouraged by these results as well only in the first year of the campaign. Simply put, the combination of our marketing programs driving more leads along with our efforts to partner with our customers has led to more volume growth for our customers and for James Hardie in our targeted regions. As a result of the success we’re seeing in the marketing program, we’re expanding to three additional R&R ColorPlus markets in FY2023. We believe our campaign along with our continued focus on customer partnership will help drive the top line demand for high value product mix that will enable us to deliver our net sales growth guidance of 18% to 22%.

Before I hand back over to Jason to discuss global guidance, I wanted to just briefly discuss how I see the year progressing for the North American business. We’re really good about our full year target for net sales and EBIT margin, but I do want to flag that quarters will not be identical. The first quarter will be the most significant outlier from the rest of the year, without the benefit of the second price increase and with higher costs due to inflationary pressures to continued investment in growth initiatives including some people actions taken to drive retention, we expect Q1 EBIT margins to be the low point of the year and below our full year range.

From there, we expect EBIT margins to improve sequentially each quarter as our second price increase begin to take effect on June 20 and right into those result until full realization at the start of Q3, we then have our standard annual price increase on January 1, 2023. Again, we are confident in the full year target of net sales growth of 18% to 22% and EBIT margin of 30% to 33%. We are a growth business and we are investing in initiatives that will continue to drive our growth in FY2023 and beyond.

The team and I are excited about the progress we have made in FY2022, but even more excited about the opportunity ahead of us in fiscal year 2023 as we continue to partner with our customers to drive growth above market and strong returns.

I would now like to pass to Jason who will summarize our global guidance.

Let’s move to Page 20 for an update on fiscal year 2023 guidance. Today management reaffirms full year fiscal year 2023 adjusted net income guidance of between US$740 million and US$820 million. The midpoint of this guidance represents an outstanding 26% increase relative to FY2022. Further, as Sean just mentioned in North America, we are providing guidance for net sales growth of between 18% and 22% for the full year fiscal year 2023, while delivering an excellent adjusted EBIT margin of between 30% to 33%.

At the beginning of this call, we discussed our significant transformation and our financial strength as we enter fiscal year 2023. We described a step change in our P&L performance, a stronger balance sheet, a stronger AICF balance sheet and operating at a substantially larger and global scale. We believe this financial strength, our foundational strategic imperatives and the right go forward strategy have us poised to continue to deliver growth above market and strong returns.

I'll hand it back over to Harold for some closing remarks

A few last comments. First, I want to thank all 5,000 of our employees who help to deliver another fantastic year. It is with your hard work and dedications that we are able to deliver value to our shareholders. I've had a long career. And I'll tell you, this is the best team I've ever been associated with, and I appreciate everything you do for Hardie.

Lastly, I wanted to provide a brief update on the CEO search. I'm pleased to report that we have met some excellent candidates, and I believe we're on track to have a permanent CEO in place in line with our initial expectations, which were set in January. At that time, we thought it would take place in about six to nine months. That looks to be realistic. The board looks forward to providing you with further information when the time is right.

We have now concluded our prepared remarks. Operator, please commence the Q&A portion of today's meeting.

Thank you. [Operator Instructions] Your first question comes from Peter Steyn with Macquarie. Please go ahead.

Good morning, Jason, Sean and Harold. Good evening. Thanks very much. Just wanted to drill down on the color plus numbers and particularly the contribution made that you highlighted Sean on Page 19. Am I correcting thinking that 11% uplifting sales performance in those three metros would not have made a particularly big contribution to the 27% overall? So color plus seems to be doing exceptionally well across markets. Just wanted to get a little bit more of an understanding of what you're seeing from a demand perspective, from a competitive perspective. And what's resulting in that that strong performance.

Thanks Peter. I will say that generally colors are running pretty well across North America, but particularly obviously in the markets where paint costs and where we go up against vinyls, so Midwest, Northeast. You're right in that, those three – I mean, those three regions are relatively large, but are still – we've still got lots of headroom in all the markets in terms of color. The 27% increase in color was kind of what we were planning for. So we do like where it's going. The auto file will tell us that it's going, we expecting that to continue a target for this year will be another 25% increase in color.

And we do expect as we expand our marketing campaign for that to just to continue to drive further growth. Obviously we know it takes fair amount of time for our consumer to once we engages to actually complete the project. But we feel good about what's happening in those markets. Good enough that we want to expand and we'll start to see more benefit in the year relative to the work we did last year. So hopefully that answers your question.

Yes. Thanks, Sean. Could I sneak a follow-up just on the data? Have you seen any change in your – in the conversion rates, presumably they're going up generally, because you're executing quite well around your marketing. But I'm just curious whether there's been any drop off in some of the data, in the context of what we're seeing in the market at the moment around rates and so on.

Yes. We have not seen any of that yet. And nor do we plan to – I think the backlog's relatively large and repair and remodel. Certainly, when we speak to our contractors and our customers, their backlogs are more than double what they traditionally are. So – and they will tell you that they're not getting cancellations and interest rates for reside aren't really that big an impact, at least we don't believe it is. And so obviously people have seem to have a fair amount of cash and we haven't seen that drop off, in fact, we think that we will continue to see the growth.

Thank you. Your next question comes from Keith Chau with MST Marquee. Please go ahead.

Good morning, and evening, gentlemen. Sean, you seem fairly, I guess, positive at least about the near-term outlook and your comment around the backlog for remodelers being double in some case what they usually are. Can you give us a sense of how you're tracking in the first quarter, at least from a top line perspective? I know you just mentioned the margin progression through the year. But can you give us a sense of volume versus price, what you expect that mix to be within your revenue growth assumptions for FY2023 and how you've been tracking in the quarter to date on both volume and price?

Yes, sure, sure. I will tell you as of like yesterday Keith, basically I would've filed about 10% up so far. So that's very encouraging. And in terms of our net sales, we think the volume, obviously, we have indicating price is going to be net price will be about plus 7% and then we're getting into our net sales of 18% to 22%. So our volume will be double digits growth year-over-year is what we predict.

Just to clarify real quick, so we indicated on the call, Keith, price mix growth of plus 9% to plus 12% for the full year. We're on track for that in the first quarter. And then the 10% Sean mentioned was – were up 10% volume year-to-date in the order file.

Can I ask a follow-up on the other regions being APAC and Europe, obviously, Europe's in a bit of an unfortunate situation at the moment? Volumes were down in the period, what your expectations are for Europe and also for APAC going forward; particularly given the APAC margins looked a bit softer in the period. Any color around that would be very useful. Thank you.

Yes. Thanks, Keith. I think you saw margins impacted in the fourth quarter by inflationary pressures in all the businesses. So obviously pricing actions as we move forward will help. APAC we’re expecting a strong result for the full year. We’re not giving guidance for every region. But the business is operating very strongly. Similar to the U.S., we see backlogs for construction and repair and remodel. So we see strong – we see strengths there. EU as you flagged, unfortunate circumstances Q1 we expect probably a flattish volume maybe down slightly as the conflict continues. And we are comping again similar to the fourth quarter some initial build of inventory positions with the VL product that happened last Q4 and last Q1. But we will continue to drive a very strong price mix in that region. And we’ll expect strong net revenue growth throughout the year and strong EBIT growth in Europe as well for the full year.

Thank you. Your next question comes from Andrew Scott with Morgan Stanley. Please go ahead.

Thank you. Sean, this is pretty a question for you. Great job on mix so far. Just interested in your view on what sort of the cadence and the runway looks from here. If I’m right, reading it correctly, it sounds like you’re not expecting the mixed benefit to be as strong in the 2023. And just sort of as I think forward you’ve done a great job converting Cemplank to HardiePlank, but there’s only so much runway there and maybe the Color conversion is a bit harder. So can you talk about how much runway you think you’ve got on mix and does it get harder from here?

Yes, no problem, Andrew. So yes, certainly the Cemplank timing that we start to lap that in the Q1, so that comes off. And so that’s going to – it’s obviously going to slow the rate down, but because of the pricing of Color today if we hit our penetration, which we believe we will for this year, we’re going to end up with the price mix component between 9% and 12%. So we still feel like it’s got – the Color can drag it up. We’ve also got products like Trim, Fascia those products all obviously are accretive. And so we’re driving those. And to be honest, Color is growing faster than the rest of the business. So we do feel good about still having the fair decent runway for this year with still regard to price mix.

Okay, thanks. And then just on that Cemplank to HardiePlank conversion, how confident are you that you can keep that if we do get into a affordability focused market, particularly with the big builders? I would’ve thought there’s going to be some people knocking on your door asking to trade back down.

Yes. So I’ve said this before. I know I like Cemplank, it is a fighter brand. It certainly got out of hand. And so we’ve reset the brand. It’s now down to five SKUs. So we like where it’s at and it’s truly a fighter brand. I don’t envisage us having to open it up to any builders. But if we have – if we feel like there’s a competitive threat, I’m not afraid to use it and utilize it, but I don’t at this point envisage this going to happen this year.

Yes. I’d just add Andrew. We’re at a point now where 65% of our business is repair and remodel. And as Sean mentioned, we intend Color to grow faster than the rest of business this year, which means we’re continuing to grow faster in repair and remodel. And Cemplank is not a product for a repair and remodel. So while Sean’s not afraid to use a fighter brand it’s not as big of impact as it may have been 10, 15 years ago.

No, I completely agree. Thank you gens.

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

Thanks very much. Good morning. Good evening guys. Very helpful, Sean, just in terms of price mix for North America 9% to 12%, when your ColorPlus expectations for another 25% year-on-year, so just looking against the net sales growth of 18% to 22%. Am I right in assuming that ColorPlus is a pretty significant part obviously of that 9% to 12% price mix? And then to your comment earlier about first quarter margins being below the range for the year, given you had sequential improvement in margin in North America, what is the actual expectation for margin in Q1 2023?

Yes. Okay. So I’ll start with the first part of the question, Simon. So the majority of our price mix is going to come through our drive towards Color. So that’s correct. Hence the investment in repair and remodel and the investment in the consumer, so we’ll continue to drive that and we think we believe that will go quite strong and that will be what’s pulling up our price mix for sure. And we get obviously the benefit of lapping Cemplank. So we have one more quarter of that. And then at that point, it’s all about Color.

Okay. And just in margin.

Yes. As far as 9 points to 12 points of price mix, 7% of that is embedded with the price increase, which is taken across all products not just ColorPlus and then we’re not going to give specific guidance margins by quarter. But we’d expect it to be in the high 20s.

Okay. Thanks Jason. But it obviously a step down from fourth quarter, which is understandable to get to those numbers, and then just a real quick follow up...

Primarily driven, as you know by inflation quarter-over-quarter freight, pulp, pretty much across everything and then we’ll sequentially see it go up through the year and for the full year deliver in the 30% to 33% range.

Okay. No, that’s helpful. And Jason, while you’re there, just the quick follow up question was with the consumer marketing campaign; we talked a couple of years ago about a level of investment. Can you give us a guide on the level of investment that that has gone into the digital marketing and marketing generally, and what the guide for 2023 is?

Yes. So we would’ve talked about it before kind of a $60 million, $65 million number last year. It would probably ended up about $50 million to $60 million. Now some of that was just shifting dollars from things we had done in the past. And then we’ll go up from there this year, as we’re extending the program into three more regions. But we’re comfortable with that. It might be about a 20% increase from where we were this year. But as Sean showed on Page 19, we’re seeing the results we want to see. And so we’re going to continue to invest in growth, and that’s part of Q1 as well, Simon. I mean we are a growth company. We are investing in growth through quarter one, and throughout the year to drive the future growth we expect.

Thank you. Your next question comes from Peter Wilson with Credit Suisse. Please go ahead.

Thank you. I first get a comment on the state of the Europe business. The team size and morale [ph], the cost base. And I also, because FY 2022 SG&A went down 400 bps a percentage of sales on top of a 600 bps decrease the year before. So, I’m just wondering effect kind of how much you’ve stripped that back and how sustainable it is?

Yes, morale’s high. Like I said, Me and Ryan were, and Harold were out there two weeks ago, teams in good shape. Yes, I think SG&A is a percentage of sales going down as we entered COVID we definitely held the line on SG&A spend, but it wasn’t a massive reduction. It’s them driving the top line. That’s delivering that. So, I think if you go back to February, 2019, we said a big part of the acquisition is we’re acquiring the right team. They had representation in all the key countries we wanted to be in. They had a strong team based out of Germany, and that’s still the case and it’s driving that top line result. That’s given us the leverage across the SG&A base.

That said, we will invest in SG&A in that business fairly significantly this year. So just like the other two businesses, talent, marketing, et cetera. So the team’s good, high morale and they have the right strategy to move forward. But you’ll continue to see, I mean, if we deliver on our targets towards the billion as a percentage of revenue, I wouldn’t be expecting an SG&A to increase.

Okay, good. And for Sean, if I put on North America, just that second price increase, can I ask whether that was a difficult decision? Because as I understand it, it is a fairly large departure from commercial approach, which is just through annual price increases and not to do cost plus pricing. So just wondering kind of how you thought about the decision and whether you think there might be some future repercussions from changing a commercial approach there?

Yes. So you certainly, we thought about it quite hard. Obviously you said, we typically price once a year and usually normally lose reasonable price increases. I guess the way, the way I describe it is this price increased, I ended up talking to all of our key customers. We’re talking about how they were going to see and get through the inflation. And we talked about what’s the best way they can deal with it. And we gave options and they were the ones that actually recommended to us to take the price increase.

So, one of the benefits of having strong partnerships with our customers, we were able to have good conversations like this. And so when you asked me about repercussions, I don’t see the them being any they would’ve informed me that price increase is right. And so we talked about the size of the price increase. We landed on that as well. So, we did that in conjunction with our partners.

Okay. I mean, why would a customer want a price increase?

Because, well, one, it makes them more money and they’ve got the same inflationary prior costs and certainly freight, freight for them is just as a bigger component than for us. So they – it helps them deal with the inflation that they see.

Yes. I think one thing to remember Peter, our customers are selling product into the market and we’re creating demand for them. So, when Sean was talking about our marketing campaign, you think about some of the regions say the Northeast, we are pulling, we’re spending money marketing to pull revenue back into our customers and they’re taking a margin on what we sell to them. So it’s win-win.

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

Oh, Hey morning team. I guess, I had a question on transport anecdotally, which has been a bit more disrupted over the quarter, I guess, can you talk about whether you’ve had any issues on the whole with the freight and just given how that’s compared to the peer set as well. And whether from an execution standpoint the customers are happy?

Yes. From North America perspective, we are definitely working harder to lock up the trucks and the rail cars that we need. But we haven’t seen any disruption. We’re paying more for it, but we haven’t seen any disruption. We continue to get feedback from our customers that our flow to them is one of the better ones in the industry. So, we haven’t seen any disruptions, but we are working harder at it.

Okay. And I guess as a follow up, just given how fuel surcharges and the cost of freight has risen over the quarter, is it safe to say that freight’s a larger bucket of costs now than say, items in the past like pulp?

Freight and pulp would be the top two, and labor.

They’re all the three of them are growing in proportion to what the – what proportion they would’ve been five years ago.

I guess, would you say freight’s large than pulp now? I guess was what I was asking.

They’d be, they’re pretty close, Lisa, we’re not going to give specific numbers for our input costs, but the three of those items are by far the large largest three components of our confidence.

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

Morning everyone. Just, Sean just wanted to confirm the second price hike. So I understand the first one was a 5% price hike. Can you talk us through the second price hike, the actual level and any potential lags or risks, I guess you talked about the risks before, but any potential lags that may come through from the effectiveness of the price hike?

Yeah, so the price increase was essentially a 4% price increase. It gets goes into effect like I said on June 20th now it will lag because obviously we've got orders on our – that have got sort of backdated. So it's going to come in, we'll see, you'll start to see full effect of that by the beginning of Q3. So it will lag over time and it'll net out somewhere around 2% for the year.

Okay, great. And just follow up if I may, on the, I guess the architectural range recently launched and well received by the market. Do you expect much contribution in the FY 2023 year? And I guess the follow up to that is when do you expect a more meaningful contribution from that range?

Yeah. Right now from FY 2023, I see that pretty much is us continuing to learn and do some test sales. We are going to be expanding where it's available throughout the year and we're going to be continuing to do our test sales. Our test sales and learn and get our pricing right and our value proposition dialled in. To be honest, when you think about the future, I think we're starting to see something meaningful towards the back end second half probably of FY 2024 and then into FY 2025.

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

Thanks evening Jason and Sean. Just on guidance, backing out the price implies, I guess, gross, the growth above the market towards the high end of your old targets, I guess, is that fair? And just on that PDG part is there factors to consider if the market index is a bit softer or you comfortable that's relatively locked in?

Yeah, I guess I haven't talked about PDG for a while, but I'll tell you that we are taking share and we believe we'll continue to do that. So we like that. And you said your second part was, if the markets softens again repair and remodel looks pretty robust for us. So we don't see us necessarily giving up share, and we've got some capacity coming on that enable us to obviously continue to grow the rate we like.

So from our perspective, I'm feeling pretty confident that we'll continue to see what you cook term as PDG, but PDG in that range, for sure.

And I guess just on marketing directly to the homeowner, could you perhaps talk about that lag between the website visits and the 11% ColorPlus plus volume growth? Because it's kind of hard to understand those two periods you've disclosed there? And following up to that, just what regions you're planning next, you know timing and size?

Yeah. I mean the lag in reality, there is a significant lag, like I said, it's sort of 12% to 18% now that's on average. So you can imagine there's consumers right at the bottom of the funnel about to make a decision and we are intercepting them and they are changing their decision. So it isn't like a straight formula for us but we are seeing the increase and increase, isn't sort of one month big spike. It's been over a period of time. So we feel good about that.

And we do believe we're impacting the decision maker at the right time. Now there's some people obviously who are still in deliberation, some consumers in deliberation that we will be continue to influence through our marketing campaign. So that's kind of how I think about it. We are trying to compress the path to purchase but that is a fairly long journey to get it down. But we feel good with that. We are continuing to learn.

We are definitely tracing consumers from the top point, they get to our website all the way through so we are getting some good data there but nothing that I want to disclose yet. And then from a expansion perspective we're going to be expanding into the DC Baltimore. We're expanding into Chicago and we're expanding to Minneapolis. And it'll be sort of starting in Q2.

And so if you take those 12 to 18 months that you're talking about, then those 1.4 million website visits to March 2022 really shouldn't flow through till this year. And the 11% really was old marketing?

I wouldn't say that for sure, because when I look at the, again, when you think about just say 12 months, that's an average. So there are some consumers that do go through this funnel in about two months and some that go through in 18, 24 months. So I don't think that's accurate. I think it's a fair mix. I don't believe marketing was doing that great before we started this campaign and this campaign is really strong.

Now we'll also tell you that together with our customer. So we work pretty feverously in those markets to make sure that when Christine's, our consumer is saying, yes, she wants to go with Hardie that we got contractors ready to actually say yes to her and then obviously get it back to our customers. And so that link is what’s driving a lot of the – in my mind, a lot of the incremental growth. And just put it in perspective, we’ve signed up in those three regions about 400 contractors, new contractors that hadn’t done Hardie before into the system.

Great. Thanks for that. Appreciate it.

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

Hi team. You’re obviously continuing at the benefit of LEAN. I mean, you had a 340 million savings target out there globally for LEAN. Can you just give us an idea of how we’re tracking against that target?

Yes, we’ve saved over 215 million globally, Lee, so it continues to deliver savings. More importantly also delivers capacity. And then as the Sean mentioned on the call, the cornerstone of what allowed us to raise our margin ranges back in May of 2021 and gives us confidence in providing margin range guidance the way LEAN has added stability and consistency into our plants has been huge for us. And we’re on track with the savings. Yes, we’re on track with the savings, it’s over 215 million.

Okay. Thanks. And then Sean, you just obviously talked about the visibility in the pipeline before or not robust? Can you just give us an idea of how long the backlog is that your customers are talking about? It may be how much visibility you have into the channel now?

Yes. So from an R&R perspective, contractors are talking about sort of eight to 12 week backlogs with a typically four to six. So that’s sort of the – that they see. And from – obviously as we continue to work with our customers, our dealers and our distributors, we start to see some visibility from them still relatively strong visibility, which is good for us. So we know it kind of gives as Jason said, it feels – makes us feel fairly confident with our numbers. It also enables us to get our factory set up to make the right length of runs, to be able to deliver the right products in the right time. So the visibility for us is one of the reasons why LEAN is starting to pay off the way it does.

Thank you. Your next question comes from Brook Campbell-Crawford with Barrenjoey. Please go ahead.

Yes, thanks for taking my question. Just on Slide 17, the stack bar chart looks like the gray bar there, the low value products for FY 2023 is a couple of percentage points lower than that same chart you provided in 3Q. So clearly doing well on sort of moving your customers up to price points, but just keen to understand really what’s changed over the last couple of months, because it, yes, looks like it’s a couple percentage point change if this chart is to scale?

Yes, so obviously from a sampling perspective, I think you guys are around all the moves you’ve made there. Inside of the gray bar is also backup. And we’re selling – we are pushing way more interiors into retail. So we obviously are trying to build a retail channel that’s stronger than it is today. And part of our strategic relationship with them was to ensure even though we look to probably reduce the amount of back we make that retailers see growth. And so we’ve been pushing more of our retail, more of a back into retail than through the professional channel.

Yes. Okay. Thanks. And a follow-up of sorts and COGS inflation, previously you’re expecting it to be 40 million to 60 million. I think it was step up in FY 2023, just keen to understand how you’re expecting that. Maybe a question for Jason, what are you expecting that COGS inflation to be now and FY 2023, I presume much higher, but any sort of range you give relative to the 40 million to 60 million at the last update it would be great [ph].

Yes, definitely shifted significantly since February, Brook and globally, our estimates are – we’re now thinking 90 to 130. So significant change from where we were a couple months ago.

Thank you. Your next question comes from David Pace with Greencape Capital. Please go ahead.

Good morning, guys. Just with respect to fiber cement penetration in Europe, how far along the European fiber cement penetration story are you? And I guess in that context, how confident I have ongoing annualized growth in fiber cement despite Ukraine in the European region?

Yes, thanks for that question, David. The fiber cement growth is on track but as we discussed from the get-go in February, 2019. It was going to – bring new products to the market. The team has done a really nice job with the VL plank product which is a plank that's not overlapping. It’s flat on the wall. And we’re seeing good growth with that this year. And we’ll continue to grow that market, but more broadly Europe is not just a plank market.

So that'll be a good business for us, the planks, but we're looking into different innovations and bringing products to the market. The team has a very strong plan there. Me and Ryan and Harold were there to go through that with them. We are excited about the opportunity. I'm not going to discuss it in detail on this call for commercial sensitivity purposes, but they have a very large opportunity that they're attacking. We think it'll be successful and it'll take us that next step towards what will become a €500 million fiber cement business alongside what we believe will become a €500 million fiber gypsum business in our goal to get to €1 billion within the first 10 years.

Okay, wonderful. And just while I've got you, business is obviously flush with cash and your gearing is low. Can you just talk us through what your capital allocation principles are and give us some heart that you're not going to be throwing it up against marginal strategies just because you flush?

Yes, David, great question. No change. So organic growth comes first. We have a U$1.6 billion to US$1.8 billion four-year plan to grow capacity that is underway. And we're going to continue down that path. Obviously we can make adjustments if the market changes, but we don't – we believe we'll continue down that path with that investment that comes first, returning to shareholders is after that and any other opportunities would be last on the list. That's always how we've managed this business. We're an organic growth company. We have some great opportunities in front of us and that's what we're focused on.

Thanks Guys, that's great result.

Thank you. Your next question comes from Anderson Chow with Jarden, Australia. Please go ahead.

Yes. Good morning and good evening. Thanks for taking my question. Just on Page 19 of the presentation, I just wanted to understand or link up the numbers a little bit more, from in your mind. I mean, how do you measure the success of the sales conversion from the marketing leads? I mean, is there 6,000 from 33,000 sort of, kind of the optimal level? Or is there kind of a delay, as you mentioned before that we could see probably a higher conversion rate?

Yes. So the way I think about it would be listen, 6,000 for me is not, not necessarily the number I care about or the 33,000. What I care about is sort of the quality of our conversion. So this is something that our consumer will do once or twice in their lifetime. So it's not – it's not a well thought out process or it's not well laid out. So she definitely gets stuck along the way. So what I'm – what we are working on as a team is understanding where the bottlenecks are and trying to find and develop tools to get her along the path. So we're making pretty good progress there. And so – and way, I measure that, we measure that is we actually contact the consumer and ask her exactly what she's looking for when she – and we deliver what she needs when she needed.

And when we see that subset improving, which we are that's the – those are the things we are looking to now scale up and send out into the marketplace. So I care way more about our quality and ability to hold her hand all the way through the process than I do about the actual number, but that said the numbers to speak for themselves as far as I can tell. I mean, we are seeing more people come to our website. We are seeing people asking for more samples. We are seeing people asking for more brochures, and we're certainly seeing the sales volumes go up as well. So in the end we feel very confident that that compared to the control group, this is working.

Yes. I just want to – real quick clarify because we've got a couple of questions on the 11% now, maybe it wasn't clear in the footnote or when Sean talked about it earlier. But the places we're doing the marketing, we are 11 points higher than the places we are not. So when we say ColorPlus is up 27, the three regions we're doing the marketing it's in the 30s. And the places we are not doing the marketing; we're still growing color in the 20s but we're getting 11 points differential in the locations, we're doing the marketing. So when you say, how do we measure it? We are seeing increased sales for us and our customers and that's the ultimate measurement. We're still early days learning exactly what the exact figures should be for marketing leads and sales leads and the conversion rate, et cetera, but we see success and therefore we're going to continue to invest.

Got it. Got it. And just wanted to quickly clarify this two times expansion I mean, given the sort of marketing dollars kind of cumulative is there any kind of sales and marketing expense growth that you could speak to in 2023 or 2024 to achieve that three times the expect?

Yes. So a couple of things, one is we are way more efficient and effective second year round in three epicenters. So we don't need to spend as much as much as much dollars as we did last year in those regions. And then obviously we start new regions. We've learned a lot in the last 12 months. So there's some stuff that we won't repeat. So we will be more effective as we continue to go down the path. But overall we are investing more dollars from a marketing perspective this year versus last.

Yes. Probably about a 20% uptick, but a lot of the core work done centrally. So it's not we can go into double the amount of places without a huge increase in cost.

Thank you. If I may just a last question on Asia Pacific, I mean, given our – we tend to invest ahead of growth and this significant new capacity in Victoria. I wonder if you could talk about your long-term growth expectation in Australia, New Zealand on a sort of three to five year time horizon, what do – what are you targeting.

Yes, we don't we'd expect double digit growth in revenue which would be a mix of price, price mix as well as volume similar to the U.S. We see good underlying market dynamics with new construction and repair and remodel in both locations. And therefore we're continuing to invest in that Greenfield site in Victoria. We'll be doing a groundbreaking this week. So we're excited and, we're going to invest in that volume to support, the future growth of this region.

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

Yes, thanks very much, morning guys. Just questioning sitting back here, taking a look at this new marketing program with the doubling of the three additional key metros. What percentage of North America will you put this marketing program to? I.e. are we in the early earnings of doing this right across North America? And then when are you moving to other regions Asia Pacific and Europe?

I'll talk about North America, from our perspective we invest in where we believe we've got the biggest opportunity for growth. So that's typically for us Northeast, Midwest and so we will be expanding. I see us going sort of more than what we've got now, for sure. That said, the last time we spoke, I would've talked about a Magnolia agreement that we've got, that's still tracking based on what we want to get done, and that will have more of a national reach. And then as we get a highly architectural collection, that will be combined with some marketing programs as well.

So I think our marketing will, will continue to move. It will continue to be at the consumer level. It will continue to move across the country what we're driving might be different. So in the markets where architectural collections a piece of it, we'll be talking about that. But obviously right now, the focus for this year would be color

Yes. And I'll cover up on the more global aspects of that Paul; I think it aligns with what Sean said. I mean, the marketing campaigns will be tied to our strategy. So the strategic places, we think there's opportunity is typically where the marketing would occur. And so for this past year, it was a focus on color plus in the Northeast. And we learned a lot from that and we're applying that not only within the U.S., but also globally. And so in our AsiaPac region, we have started similar marketing campaigns for the folks, who live in that region. They would've seen our ads on the Aussie Open a few months back and, running similar game plans in Australia currently. And then the European team is also looking at marketing campaigns to drive growth. So we've learned a lot the past 12 months and now how we apply that we need to continue to do that by region and by strategic initiative,

I would, I've just add to that, that the conversations with Europe and APAC happen every week to two weeks. So the learning knowledge transfer is very quick.

Okay. That's helpful. And just you call that higher corporate cost and Q4 just if you could give us some details around what that was related to, and then whether that's a one time or non-repeat?

Yes. It's non repeatable. Paul it's in the there's a slide in the appendix that we didn't speak to, but it lists out the items there one being legal reserves that we feel are, we’re fully accrued for and one time in nature. So yes, one time.

Got it. Got the slide. Thanks guys. Cheers.

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

Sorry, Sean. Just a quick follow up, one I'm fascinated by that Slide 19 that we were just on before. Just with the changes that Apple made with IDFA, ID for advertising, and now Google are going to be implementing as well. Did that create any impact on consumer marketing in terms of being able to track customers through that period for those that, that, that opted out, which was about sort of 62% of mobile customers or are most people doing this at home on their browsers at home, looking for, yes.

Yes. It depends so, and we would've had a small impact for us, but because it depends where the, what stays there at Simon. So if they're doing design work on their home, that's generally on a laptop. That's not necessarily on their phone, but certainly looking for brochures, looking for samples that, that I'm guessing is mobile. So a bit of a mix for us, but we, we haven't seen it. And in terms of it hasn't been enough to, to impact us and in terms of our learning, we, we've got a subset of that. So, we try to get hold of about 500 customers a month that we can actually go and help them get through it just because that's the subset we're learning from. So it does it hasn't impacted what we've had to do to any extent yet.

No, that's cool. Thanks Sean.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Wiens for closing remarks.

Well, first of all, let me thank each of you that took the time to visit with us today to learn more about our business. As you can see, it's going well also I'd be remiss, if I didn't reach out and thank every single one of our 5,000 employees, there are the people that are driving this, they're doing it willingly and with real focus. So thank you team and thanks to everybody for coming on the call.

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