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Edited Transcript of JHX.AX earnings conference call or presentation 8-Feb-21 10:00pm GMT

·49 min read

Q3 2021 James Hardie Industries PLC Earnings Call DUBLIN Feb 9, 2021 (Thomson StreetEvents) -- Edited Transcript of James Hardie Industries PLC earnings conference call or presentation Monday, February 8, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jack G. Truong James Hardie Industries plc - CEO & Director * Jason Miele James Hardie Industries plc - Senior VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Abraham Akra Jefferies LLC, Research Division - Equity Associate * Brook Campbell-Crawford JPMorgan Chase & Co, Research Division - Analyst * Grant Slade Morningstar Inc., Research Division - Analyst * James Brennan-Chong UBS Investment Bank, Research Division - Associate Director and Mining Associate Analyst * Keith Chau MST Marquee - Building Materials & Packaging Analyst * Lee Power CLSA Limited, Research Division - Research Analyst * Lisa Huynh Citigroup Inc., Research Division - Research Analyst * Paul C. Quinn RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst * Peter Wilson Crédit Suisse AG, Research Division - Associate * Peter Steyn Macquarie Research - Analyst * Sophie Spartalis BofA Securities, Research Division - VP and Senior Resources Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the James Hardie Q3 FY '21 Results Briefing. (Operator Instructions) I'd now like to hand the conference over to Mr. Jack Truong, CEO. Please go ahead. -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [2] -------------------------------------------------------------------------------- Good morning, and good afternoon, everyone. Thank you for joining us in our third quarter fiscal Year 2021 earnings call. I will begin today's call by providing an update on our global strategy. On my appointment as CEO in February 2019, I shared with you my strategic vision for Good morning, and good afternoon, everyone. Thank you for joining us in our third quarter fiscal Year 2021 earnings call. I will begin today's call by providing an update on our global strategy. And more importantly, provide you with insight into the go-forward strategic initiatives that will enable us to continue to drive profitable growth into the future. After I go through the strategy update, our CFO, Jason Miele, will then cover our third quarter and year-to-date fiscal year 2021 financial results. We will then open the call up to questions. Before I get into the presentation, I wanted to first say how pleased I am to be able to announce today a special dividend of USD 0.70 per share, restating our return of capital even sooner than expected. We suspended dividends in March of 2020, at the onset of the global pandemic in an effort to ensure liquidity and financial flexibility. Ultimately, we were able to accelerate our strategy, integrate more closely with our customers and drove record profits and cash flows. Based on these results, a recent pay down of gross debt and our confidence in continued strong cash generation, we believe returning capital to our shareholders via special dividend is appropriate at this time. Now let's turn to Page 5 for an update on our global strategy. In February of 2019, I first shared with you my vision of turning James Hardie Company from being a big small company into a small big company. A company that could deliver consistent profitable growth at a larger and growing scale. As I described 2 years ago, this would take significant transformation across multiple facets of the company. I'm pleased to note that we have made significant progress in the transformation of our company during the past 2 years. Let's start on the left-hand side of the page and discuss the significant and measurable progress we have made to transform James Hardie Company and to create a scalable business to ensure and enable future global growth. First, it was critical that we become a world-class manufacturer through our execution of lean manufacturing strategy. Our network of plants is on a continuous improvement path of becoming more predictable with less variability in production, quality and efficiency. Progress in this regard has enabled us to consistently and efficiently deliver premium quality products and service to our customers and subsequently to the market at a lower and more predictable cost. Globally, we have generated over $83 million in LEAN savings over the past 7 quarters. Second, we transformed our commercial organization to be truly customer-focused. We shifted from an organization that focused solely on creating demand with homebuilders and contractors to partnering with our customers to enable profitable growth for them and also for James Hardie. In, this true customer-focused mindset throughout our company has been critical to driving our growth above markets and taking market share across all 3 geographies. This connectivity to our customers and the shift to a push-pull strategy had led to a 7-plus percent primary demand growth, or PDG, in our North America business over the past 7 quarters. It has led to global net sales increasing 20% in the third quarter of fiscal year 2021 versus the prior corresponding quarter. The third step in our transformation was to integrate our supply chain with our customers for mutual benefits. This is to ensure that we're able to continuously service the market seamlessly to our customers, provide them with the products they want, when they need them. This integrated approach to managing the supply chain with our customers have led to a more optimal working capital for both our customers and James Hardie. For the 9 months ended on December 31, 2020, we decreased our working capital by nearly USD 200 million. Underpinning of transformation and critical to our success in accelerating our strategy during a global pandemic is our globally integrated management system. This management system continued to allow us to make better holistic decisions at various levels within the company. This also enabled cross-functional business teams across the company to make appropriate adjustments quickly and at the right time to keep our transformation on the right track. Ultimately, all the progress that we have made across the 3 transformational initiatives I just discussed has enabled James Hardie to deliver 7 straight quarters of consistent financial results with growth above market and strong returns, including 2 consecutive quarters with record financial results in global net sales, global adjusted EBIT, global net operating profits and global operating cash flow. All of the financial results in fiscal year 2020 and fiscal year 2021 to date have been on the right track. I'm most pleased with the true transformation that have taken place within our organization, which now position us and enable us to scale and drive significant profit growth globally into the future. In addition to the continuous improvements of transformation we have undertaken over the past 2 years, there are 3 critical strategic initiatives in this next phase of profitable organic growth: one, that's global innovation; two, penetrating and driving growth in existing and new markets and segments; and three, extended James Hardie brand from a premier professional brand into a market-leading consumer brand. In the next 4 slides, I will talk in more detail about each of these 3 strategic initiatives. These 3 critical strategic initiative will allow James Hardie to take advantage of the scale and connectivity generated during the first 2 years of our transformation and enable us to continue to drive profitable organic growth into the future. Let's now turn to Page 6 to discuss global innovation. I'm very excited to share with you today the progress we have made in commercializing new and innovative products. We're currently in the test sales phase of our commercialization process. We are actively test selling new products in all 3 of our regions. In a few minutes, I will share with you some pictures of those new products in situation of use. But first, I want to discuss the strategic direction of our global innovation program. Our approach to innovation is about developing market-driven innovation to drive profitable organic growth. Let's start first on the left-hand side of the page. We're focused on a true global innovation platform that includes innovative products that deliver endless possibilities of design and aesthetics for the homeowners. These innovation will also provide the superior performance the market has come to expect from James Hardie products. Superior performance that's based on the key properties of James Hardie unique fiber cement technology, durability, low maintenance and noncombustibility while also improving on labor productivity. We believe this market-driven innovation will expand opportunities for growth by opening new markets and in large and existing markets. Moving to the right-hand side of the page, we have shown here some market data for reference purposes as a way to illustrate why we're focused on market-led innovation. The data we're showing here illustrate the materials that are utilized to clad the exterior of homes in the new construction segment in North America and Australia and New Zealand. If we focus on North America for a moment, the green area of the pie represent a portion of the market our current product portfolio can address. This green area represents vinyl, wood, engineered wood and fiber cement. As you know, we really have a significant portion of the share with the blue area of this pie chart, which is 49% was used to clad new homes in North America represent materials such as stucco, stone brick, ec cetera. Our current product portfolio does not address that portion of the new construction market. Fundamental of global innovation is to ensure we can participate in more of the expanded market opportunity, and we view the blue portion of the pie chart as an expansion opportunity made possible through a market-driven innovation strategy. Again, these charts are only for new construction in a few markets. But as we look across all countries and all segments in which we market and sell James Hardie exterior products, there are a portion of those pie chart that also blue. That's to say there are significant market opportunities we do not participate in today because our current product portfolio did not enable us to. It's for this reason that we are laser-focused on driving market-led innovation to expand our opportunities for organic growth. Let's now turn to Page 7 to take a look at some of our current innovation progress. We're currently on track to commercialize our first phase of innovation in May 2021, just a few months from now. Our expectation is that this will be the first of many innovations that will commercialize as we continue to introduce new products to the markets in the next few years. On this page, we have a few examples from around the world of the innovations, which we are in the process of test selling ahead of the full commercialization. On the top left is an example of new fiber cement interlocking plank for the European markets. We currently test selling on this product in France and the U.K. To date, the market feedback has been extremely positive, and we're on track for full commercialization in May 2021. In Europe, interlocking plank makes up roughly 80% of the plant markets. Interlocking plank is a natural product portfolio extension for us in Europe that meet the European market requirements. It enabled us to provide our customers a full suite of plant products that are quicker to install while enabling homeowners to have endless possibilities of beautiful designs while getting the long-lasting beauty at trusted protection of James Hardie fiber cement. On the top right and bottom left, you can see renderings the 2 homes using panelized products that deliver stucco aesthetics. With test selling these products in 5 different key markets across the United States, including New Jersey and California, as you can see here. Similar to our interlocking plank test sales in Europe, the test sell feedback from homeowners, beers and trade people have been very positive. Lastly, on the bottom right, we have a picture from a completed project in New South Wales, Australia. This product is similar to the product just discussed in the United States. It is a penalized product delivering the stucco or Rando aesthetic. Test sales is an important part of our commercialization process of new product innovations. In the past, James Hardie often developed new products or product extension in a laboratory scale and then trying to manufacture and push them into the market. This is not how true innovation will work. Over the next -- over the past few years, we have transformed our innovation process. We began with market research to understand the key unmet needs in the markets. We look at the megatrends, such as labor shortage. And after careful development of prototypes, we did market tests to ensure acceptance of the concepts. And finally, we performed an extensive test sales before full commercial launch. This is to ensure a sustainable and successful innovation program for the long term. We're very encouraged with the market feedback from the test sale process to date and remain on track for the full commercialization of these new market-led innovations in May of this year, just a few months from now. Shifting now to Page 8. The second of our 3 critical strategic initiative is to further penetrate and drive profitable growth in existing and new segments. On this slide, I want to discuss 1 such segment where we believe we have significant opportunity to grow further. While we have a good business in North America repair and remodel segments, we believe the opportunity for future growth remains significant. The chart on the left is the U.S. census data from 2019. We show the existing 79 million owner-occupied homes in the U.S. by the age. Over 54% or 44 million of the 79 million owner-occupied homes in the U.S. of 40 years or older, having been built before 1979. This is a huge pool opportunity from which we can generate demand for James Hardie exterior products. We can accelerate and amplify that demand by marketing directly to the homeowners, that James Hardie is a trusted innovator with premium quality products that enable homeowners to realize the dream homes with endless design possibilities. Moving now to Page 9. The last of our 3 critical initiatives is in driving profitable organic growth in fiscal year '22 and beyond is extended into a consumer brand. Historically, the James Hardie brand has resonated strongest with professionals and evoked a brand that is appreciated and trusted with products that are durable, low maintenance and noncombustible. We're now ready to extend James Hardie brand into a true consumer brand where we market directly to homeowners and communicate to them the endless possibility of aesthetic design that our products offer. By marketing directly to the homeowners, we will create even more demand and emotional attachment for James Hardie brand products. James Hardie brand product provide a long last and beauty with endless design possibilities. And James Hardie brand products deliver the trusted protection with durability, maintenance and noncombustibility. This allows the homeowners to remodel their home into the home of their dreams. The inventory on this page represents a variety of possibilities on how to design the homes of our dreams (inaudible) James Hardie branded products. By communicating directly to the homeowners and continue to integrate with our customers, we will increase demand and accelerate our growth in the repair and remodeling segments. Turning now to Page 10. Here, you see another visual representation of our desire to generate emotional attachment to the James Hardie consumer brand. And remind homeowners of James Hardie can empower them to achieve the home of their dreams by unlocking the endless design possibilities and deliver protection and lasting beauty. We plan to begin launching the first phase of our marketing campaign to homeowners in the middle of calendar year 2021. Let's now turn to Page 11. As we look into fiscal year 2022 and beyond, our demand profile as a growth company will expand as we commercialize global innovations further penetrate and drive profitable growth in the existing and new segments such as R&R and invest in extended into a consumer brand. Therefore, we're investing to expand our global capacity and to build new products capability. The time line of our capacity and capability expansion over the next 3 years is outlined on the bottom of the page. We will, number one, expand our North American nameplate capacity by 800 million standard feet. Number two, expand our nameplate capacity in Australia and New Zealand by 60 million standard feet. Number three, we will provide a significant increase in our color plus and HLD trim finishing capability in North America, consistent with our growth plan for the next 3 years and going forward. And to enable continuous innovation with new pilot plant innovation facilities in both our facility of R&D in the U.S. and Australia. As previously disclosed, we will bring the first sheet machine in our Prattville, Alabama facility online next month, March 2021, and we'll bring the second sheet machine online toward the middle of calendar year 2021. In addition to those previously disclosed capacity expansions, we also made the decision to reconfigure and restart our Sumavel, South Carolina facility which is startup in late fiscal year 2022. We will also significantly increase our colo Plus and trim finishing capability in North America as we drive our accelerated growth of high-value products. Lastly, we'll be adding 2 innovation centers for the R&D pilot facilities to enable continuous market-led innovations. We have a clear strategy to drive profitable organic growth in fiscal year 2022 and beyond through global market-led innovation, penetrating and driving growth in the existing and new market segments and extended James Hardie brand into the consumer brand, and we will enable that growth with the strategic capacity and product capability expansion. Shifting now to Page 12. I will spend the last 2 slides briefly discussing the results of our strong strategic execution in the third quarter and 9 months ended December 31, 2020. Starting with our third quarter results here on Page 12. We delivered a second straight record quarter in global net sales and global net operating profits. We delivered growth above market with strong returns across all 3 of our operating regions. Specifically, in the third quarter, we delivered USD 739 million of global net sales in the quarter. That's a 20% growth versus the prior corresponding period. And we delivered global adjusted net operating profit of USD 123 million, which was an increase of 59% and an all-time record high net income. Importantly, we delivered strong financial returns in all 3 regions for the second consecutive quarter. In North America, we achieved net sales growth of 20% with an excellent EBIT margin of 30%. In Europe, we achieved net sales of EUR 85 million, 12% growth over the prior corresponding period with a second consecutive quarter of EBIT margin greater than 10%. And in Asia Pacific, we achieved net sales growth of 9% in Australian dollar with excellent EBIT margin of 28.1%, marking our seventh straight quarter of delivering growth -- global growth with strong returns. These results reflect our continued ability as a global company to execute on our global strategy across all 3 regions. Moving on to Page 12. As you see a similar story of consistent excellent financial results for the first 9 months of fiscal year 2021. I also think of this page help to bring to life the scale of our global business today. We delivered global net sales of USD 2.1 billion or 9% organic growth in the first 9 months of this fiscal year versus the first 9 months of the last fiscal year. We generated global adjusted net operating profit of USD 333 million. That's a growth of 25%. And global adjusted EBIT of USD 456 million or 25% growth. And operating cash flow of USD 678 million, which represents a 72% increase over the prior corresponding period and an all-time record high. I would now like to turn this over to our CFO, Jason Miele, to provide additional details on our financial results. -------------------------------------------------------------------------------- Jason Miele, James Hardie Industries plc - Senior VP & CFO [3] -------------------------------------------------------------------------------- Thank you, Jack. Good morning, and good afternoon, everyone. I'll start on Slide 15 with our global results. As Jack just discussed, this is our seventh straight quarter of generating strong global financial returns and our second straight quarter with record results. What I'm most pleased with is that we had all 3 regions delivered excellent results in the third quarter, and this marks the second consecutive quarter we've been able to achieve this. All 3 regions delivering excellent financial results simultaneously. The global integration of our strategy and our team and the significant execution over the past 2 years are now being consistently realized in the financial results. This is a litmus test of a truly integrated global company. In the third quarter, global net sales were up 20% as our customer focus and customer integration efforts continue to become embedded in every country we do business in. Through continuous improvement of lean manufacturing globally and integration of our supply chain with our customers, we were able to translate that strong top line results into an even stronger bottom line outcome. Global adjusted EBIT improved 57% and global adjusted net operating profit after tax increased 59% in the third quarter. Global adjusted net operating profit after tax in the third quarter of USD 123.3 million represents another all-time record high for James Hardie in a quarter. Operating cash flow for the 9 months increased 72% to USD 678.4 million. At the start of this call, Jack discussed the key strategic transformations we have been through over the past 2 years. Specifically lean manufacturing, becoming customer-focused and integrating our supply chain with our customers. These strategic transformations globally have directly led to the step change in operating cash flow as well as the strong top line and bottom line financial results for the quarter and 9 month periods. Now I'll review each region in more detail, starting with North America on Page 16. In North America, we had another outstanding quarter. In the third quarter, volume increased by 17% and net sales increased by 20%. Our exteriors volume increased 19% in the third quarter driven by continued share gain as our team continued their focus on customer engagement and integration. And in our interiors business, we drove a 4% increase in volume compared to the prior corresponding quarter. Price/mix improved, and we anticipate a continued improvement as we drive our strategic initiatives Jack discussed earlier, specifically penetration of the repair and remodel segment and growth through innovation. Our outstanding top line results were coupled with even better adjusted EBIT growth, which increased by 39% for the quarter to USD 155.6 million and at an excellent EBIT margin of 30%. The outstanding adjusted EBIT and EBIT margin results in the third quarter were driven by strong organic volume growth, continued lean manufacturing results and lower SG&A which were partially offset by higher freight costs in both periods. Overall, in the third quarter and the 9 months year-to-date, the North American team delivered another set of exceptional results with continued growth above market and outstanding returns. We'll now turn to Page 17 to discuss the European results. In Europe, the team delivered a second straight quarter of strong results. In the third quarter, net sales increased 12% and adjusted EBIT increased 300% in euros, and adjusted EBIT margin was 10.2%. The team remains focused on driving gross margin improvements through growth in high-margin products and continued penetration in existing and new fiber cement markets. In the third quarter, fiber cement sales increased 18% and fiber gypsum net sales increased 11% versus the prior year third quarter. The strong fiber gypsum growth was underpinned with double-digit net sales growth in Germany, Switzerland and Benelux. And our U.K. team delivered excellent double-digit growth in both fiber cement and fiber gypsum. We remain encouraged by the good progress of our European business and the local team's ability to drive an integrated strategy, and continuous improvement, especially during the past 2 quarters. Let's now turn to Page 18 to discuss Asia Pacific. In the third quarter, volume and net sales both increased 9% in Australian dollars compared to the prior corresponding period. This top line growth was led by continued share gains in Australia and New Zealand. The Philippines also returned to growth in the third quarter, delivering double-digit net sales growth in Australian dollars versus the prior corresponding period. The strong top line results in the third quarter were translated into even stronger earnings results with adjusted EBIT growth of 34% in Australian dollars at an EBIT margin of 28.1% for the third quarter. The excellent third quarter performance in our Asia Pacific region was driven by execution of our strategic objectives, including customer integration and lean manufacturing. In addition, you will recall earlier this fiscal year, we announced we were consolidating our regional production for Australia and New Zealand to our 2 Australia-based manufacturing facilities. We also closed the unprofitable James Hardie Systems business. These adjustments, in addition to the team's execution of our strategic objectives have helped drive the improved adjusted EBIT margin performance in Asia Pacific. Moving now to Page 19 to discuss operating cash flows and capital expenditures. Operating cash flow increased 72% for the first 9 months versus the prior corresponding period, primarily driven by increased profitable sales globally and further integration with our customers to reduce working capital for both them and us, including a reduction in inventory of USD 90.3 million during the 9-month period. To put the USD 678 million of operating cash flow into some additional context, our best full fiscal year operating cash flow results of last year in fiscal year 2020 where operating cash flow for the full 12 months was $451.2 million. So through 9 months of this fiscal year, we have already exceeded last year's full year operating cash flow by 50%. Shifting to the right-hand side of the slide, you'll see a summary of our capital expenditures. For the first 9 months of this fiscal year, capital expenditures totaled USD 77 million. For the full year fiscal year 2021, we anticipate spending approximately $125 million in total capital expenditures. In Asia Pacific, we commissioned the new sheet machine in Carole Park during the third quarter which adds additional capacity to service our Australia and New Zealand markets. In North America, our greenfield capacity expansion in Prattville, Alabama remains on track, sheet machine number one being commissioned in March 2021 next month, and sheet machine number two, on track to be commissioned in the middle of calendar 2021. Early in the presentation, on Slide 11, we discussed our plans for global capacity expansions and new product capabilities to support our accelerated profitable growth plan over the period of fiscal years 2022, 2023 and 2024. We expect the total capital expenditure related to the projects listed on Slide 11 along with the regular maintenance capital expenditures to approximate USD 250 million per year for the 3-year period of fiscal year 2022 through fiscal year 2024. These capacity expansions and product capability expansions will further enable our global strategy to drive profitable growth. Now let's turn to Page 20 to discuss the liquidity profile. At the end of the period, December 31, 2020, our debt profile remains unchanged. And at December 31, 2020, we had liquidity of USD 1.1 billion a net leverage ratio of 0.96, both representing significant improvements from the start of the fiscal year. The execution of our global strategy has led to significantly improved cash flow and thus, continuous improvement in our liquidity and leverage position. This enabled us to reduce our debt levels while maintaining strong liquidity and financial flexibility. As announced last month, on January 15, 2021, we redeemed USD 400 million of senior unsecured notes. This redemption included a USD 9.5 million call premium for a total cash payment of USD 409.5 million. In addition to the cash payment, an amount of USD 3.6 million of unamortized financing costs associated with these -- this set of notes will be accelerated into the fourth quarter fiscal year 2021 results. So for clarity, there will be a USD 13.1 million expense recorded in our fourth quarter fiscal year 2021 results associated with the note redemption. Redemption of these notes will save us approximately USD 20 million of interest per annum. After the redemption of the senior notes in January, our liquidity remains very robust at USD 675 million as of January 31, 2021. Now moving to Page 21. Our strong capital structure and cash flows have enabled us to execute on all of our capital allocation objectives, as we have discussed today. We continue to preserve a strong liquidity position and financial flexibility, we are positioned to continue to strategically invest in capacity expansion and market-driven innovation to support and drive organic growth. And last month, we reduced debt by USD 400 million in accordance with our plan. And we have resumed returning capital to shareholders ahead of schedule. Today, we are very pleased to announce a special dividend of USD 0.70 per share. Special dividend will have a record date of February 19, 2021, and a payment date of April 30, 2021. Based on our strong strategic execution through the pandemic, our confidence in continued strong cash generation and in light of the suspension of our ordinary dividend since May 2020, we believe resuming our return of capital to shareholders via dividends is appropriate at this time. We have a solid balance sheet and liquidity position to execute on our unchanged, near-term and long-term organic growth priorities. Lastly, before we go to the final slide, while not financially material to our results, I didn't want to briefly comment on government assistance associated with COVID pandemic. James Hardie has not received any amounts from the Australian government under the JobKeeper Initiative or any other COVID-related assistance program. However, early in the pandemic, we did receive approximately NZD 1.1 million from the New Zealand government under the COVID-19 wage subsidy plan. We have since returned these funds in full to the New Zealand government on the back of our strong results. Finally, please turn to Page 22 to discuss guidance. As announced this morning, we are raising our full year fiscal year 2021 guidance. Our new guidance for full year adjusted net operating profit is a range of between USD 440 million and USD 450 million. The comparable figure for the prior year fiscal year 2020 was USD 352.8 million. The midpoint of our new guidance range represents a 26% year-on-year improvement in adjusted net operating profit. We will now move on to Q&A. Operator, please provide the Q&A instructions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Peter Steyn of Macquarie. -------------------------------------------------------------------------------- Peter Steyn, Macquarie Research - Analyst [2] -------------------------------------------------------------------------------- And congratulations on a very strong result. I was just keen to dig into your strategic intent to enlarge your target markets. And Jack, if you could frame up for us how you would measure your success in the achievement of your vision here. Obviously, historically, there's been a couple of guiding lights as it were for you. Just interested in how one would assess where you're seeing the endpoint and what the glide path would look like towards success? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [3] -------------------------------------------------------------------------------- Peter, thank you. We -- the way that we look at our market-driven innovation program is that we -- the reason we do a lot of market research and market tests is to ensure that we provide the right products that our customers and the homeowners around the world would really come to appreciate the value so that we can really tailor the products accordingly. And so that is really the spirit of how we approach the product developments. And our intent -- strategic intent of really going to new categories, really understand each of the categories and then be able to have very good penetration within the new categories. And our tradition intent is to create a new footprint, just like the way that we have done in our current fiber cement into the current wood look category. But Peter, it's still early yet within our -- the execution of the strategy. And then, of course, as time goes on, we would have more and more clarity on what that journey would look like and the profile of that journey. -------------------------------------------------------------------------------- Peter Steyn, Macquarie Research - Analyst [4] -------------------------------------------------------------------------------- Yes. Okay. I guess as a follow-up, I guess what I was trying to refer to in a round about way was 35/90 has always been the north light. So that 35/90 now obviously changes. And I guess, folks are going to be looking for some sort of calibration around that. But I appreciate it's early days. So I guess, we'll wait for further guidance and how you see that in the future. -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [5] -------------------------------------------------------------------------------- That's correct, Peter. And just a follow-up to that, too, is that the innovation, the global innovation that we are driving here is not just for North America. It is also a relevant new product platform for the European bits as well as in Australia and New Zealand. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Your next question comes from Brook Campbell-Crawford of JPMorgan. -------------------------------------------------------------------------------- Brook Campbell-Crawford, JPMorgan Chase & Co, Research Division - Analyst [7] -------------------------------------------------------------------------------- First one, just around this R&R opportunity. Are you able to just elaborate really on how you're going to look to gain traction with the consumer because it's a slightly different approach, really and then sort of a B2B-type marketing effort? And that's the first part of the question. And then the second part, do you have sort of a marketing budget for this new direct-to-consumer sort of marketing approach in FY '22? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [8] -------------------------------------------------------------------------------- Yes. Brook, so the way to think about R&R, is that just -- currently, there's 44 million homes -- owned and occupied homes in America. That's more than 4 years -- 40 years old. And also with the onset of pandemic, the behavior have changed and a lot more folks that are staying at home more and and there is really that need to make the exterior of the home look more beautiful. And as we did more market research, what we learned is that the there's really a lot of -- a very high percentage of homeowners out there that don't really know the capability about James Hardie exterior solutions that they can work with their designers to be able to design their homes that look a lot more beautiful. And so let's take the example of -- in the northeast of the U.S. where we have -- where vinyl is a standard in that market today. And we haven't, as a company, we have been trying for many years to penetrate the market. But the key value that we bring in the market is a curb appeal. And that means that it's important that for us, as a brand that we need to reach directly to the homeowners to really show the homeowners the endless possibilities that they can design their home to make it more beautiful that they can be proud of through James Hardie solutions. And yet they have the protection of the durability, the noncombustibility and low maintenance that our products offer. So it's really about driving tour, creating the demand for the homeowners and then as really to get the homeowner to take the decision to really reside their home. So relative to to the budget that you have asked question for fiscal year 2022. We will look at it anywhere from between USD 30 million to USD 50 million. -------------------------------------------------------------------------------- Brook Campbell-Crawford, JPMorgan Chase & Co, Research Division - Analyst [9] -------------------------------------------------------------------------------- Okay. That's the additional marketing spend. Just to confirm for this new approach with R&R, USD 30 million to USD 50 million? -------------------------------------------------------------------------------- Jason Miele, James Hardie Industries plc - Senior VP & CFO [10] -------------------------------------------------------------------------------- Correct. Yes, Brook, it's not necessarily 100% additional. It's -- we've always done marketing activities. This is a more reallocating funds as well as there will be some -- a good chunk of that is incremental, but not entirely. -------------------------------------------------------------------------------- Brook Campbell-Crawford, JPMorgan Chase & Co, Research Division - Analyst [11] -------------------------------------------------------------------------------- Understood. Maybe I could squeeze on in with you, Jason, just on operating cash flow, clearly very strong in the 9 months. Presume it will be some operating cash flow in the fourth quarter. Can you just remind me what the conditions that need to be met to potentially reduce the 35% contribution, the asbestos fund, what you need to achieve? And is there any potential for that over the next 12 months given your cash flow? -------------------------------------------------------------------------------- Jason Miele, James Hardie Industries plc - Senior VP & CFO [12] -------------------------------------------------------------------------------- Yes. Brook, it's a good question. It's not anything necessarily. We need to achieve. It's in the contract, the amended final funding agreements. As you know, there's a calculation that occurs at the end of each fiscal year to determine how much we pay to the fund. And it's the lower of 2 numbers, 35% of our cash flow or a top -- was a top-up concept, which is -- so that the fund has at least 3 years' worth of payments in cash. So really when that occurs is as they build a large cash balance over time. And so as we drive cash flows up and provide them 35% of cash flows, they'll continue to grow their cash balance if our payment to then exceeds the claims in that year. So that is still something that will take a few more years. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Abraham Akra of Jefferies. -------------------------------------------------------------------------------- Abraham Akra, Jefferies LLC, Research Division - Equity Associate [14] -------------------------------------------------------------------------------- Great results. Firstly, are you still seeing product shortages across the building material space from your competitors? If so, when do you envision your competitive supply constraints going away? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [15] -------------------------------------------------------------------------------- Abraham, we can't speak to what our competitors are do in that space. But what we can talk about from our company is that we're working very, very closely with our customers to be able to have a future forward demand of our product through our customers many weeks out into the future. And then couple that with the lean manufacturing strategy that we have. We're able to plan our production out in a very lean way that allow us to produce and then flow the product directly to our customer to the markets. So that is really the key drivers that allow us to deliver the record result that you saw today. We -- for us, in North America this past quarter, our exterior volume increased 19%. And then if you look at our volume for exterior a year ago in the third quarter, that was on -- so up 13%. So for us, it's really about -- really understand more of demand of our products into the future, and then to have a better production plan throughout in system to deliver to the market. -------------------------------------------------------------------------------- Abraham Akra, Jefferies LLC, Research Division - Equity Associate [16] -------------------------------------------------------------------------------- Got it. And I guess as a follow-up, can you estimate or do you have an idea as to how much demand was pulled forward into 3Q from the price rise? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [17] -------------------------------------------------------------------------------- Yes. We know -- Abraham, everything that we produce and ship to our customer to the market is pretty much went into the wall. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Our next question comes from Lisa Huynh of Citi. -------------------------------------------------------------------------------- Lisa Huynh, Citigroup Inc., Research Division - Research Analyst [19] -------------------------------------------------------------------------------- So I had a question around interiors, so they were up 4% in the December quarter, which is a slowdown from the 7% growth in the September quarter. Can you just talk briefly to what's driving this? Or is this a slowdown indicative of what you saw in the wider R&R market more broadly? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [20] -------------------------------------------------------------------------------- Yes. It is, for us, the interior business, this is -- it's kind of hanging around the mid-single digits is pretty much kind of where it is until we truly innovate in this category and then add more new products to it. So that's more and more to be seen from that perspective. But right now, given the current pandemic scenarios having the repair done inside a home with contractors is still quite limited. -------------------------------------------------------------------------------- Lisa Huynh, Citigroup Inc., Research Division - Research Analyst [21] -------------------------------------------------------------------------------- Okay. Sure. Got it. And just a quick one, if I can slide it in, on raw material costs. I can't see the usual input cost slide. We're hearing of meaningful increases starting to come through in both the spot market and contract volumes for pulp. Can you just remind us what proportion of your pulp supplies secured via long-term contracts and whether you've seen any impact from this today? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [22] -------------------------------------------------------------------------------- Yes. Lisa, pulp kind of lags -- the pulp market price is kind of lags 1 quarter into our financials. And certainly, pulp is starting to trend up, it was fairly flat for 9 months or so, and we'll expect some pulp headwind in FY '22 versus FY '21. But currently, not anything we think is too substantial. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Your next question comes from Lee Power of CLSA. -------------------------------------------------------------------------------- Lee Power, CLSA Limited, Research Division - Research Analyst [24] -------------------------------------------------------------------------------- Just quickly on lean in North America, you're at $61 million through 3 quarters. That's kind of the upper end of that target you had for FY '21. Can you give us just an idea of how we should think about that for the remainder of FY '21? And also, any updated thinking on the reinvestment profile for lean going forward? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [25] -------------------------------------------------------------------------------- Yes. The -- for us, lean, is really about -- we will continue to improve that continues improvement mindset. So as now that we essentially exceeded the plan that we set out back in February of 2019. We are -- we have just gone through our strategic plan, and we'll plan to update the market on the -- what the next really the target for the next 3 years would be, and we'll plan to share that with you in May at the next earnings call. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Our next question comes from Paul Quinn of RBC Capital Markets. -------------------------------------------------------------------------------- Paul C. Quinn, RBC Capital Markets, Research Division - Director of Paper and Forest Products & Paper and Forest Products Analyst [27] -------------------------------------------------------------------------------- Yes. I just wanted to follow-up on the freight and pulp headwinds you're seeing. What we're seeing in the pulp market is some of the producers that we have coverage of or raising prices over $100 a ton. So if you could sort of outline what you're expecting in freight and and what your sensitivity is to sort of a $10 increase in pulp is? -------------------------------------------------------------------------------- Jason Miele, James Hardie Industries plc - Senior VP & CFO [28] -------------------------------------------------------------------------------- Yes. Thanks, Paul. So we'll be giving a clear FY '22 guidance in May. We certainly do expect headwinds from pulp, and we do expect in the kind of ballpark you're referring to. And then we do expect freight to remain high. Freight has been quite high this year and certainly a headwind in FY '21 versus FY '20. That said, we do expect to maintain strong EBIT margins in FY '22, and we'll provide more clarity on that in the May result. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Your next question comes from Keith Chau of MST Macquarie (sic) [MST Marquee]. -------------------------------------------------------------------------------- Keith Chau, MST Marquee - Building Materials & Packaging Analyst [30] -------------------------------------------------------------------------------- A question for you, Jack. Just on your product development. Obviously, innovation is not necessarily new things Hardie, but certainly ramping up over the course of the coming years. Just wondering if you could, first of all, give us a sense of how product penetration has tracked maybe using EasyTex panel in Australia. As an example, given that was launched last year and what that ultimately contributed to volume growth as you ramped up commercialization of that product under your watch. And then as part of that question, is there a broad rule of thumb in terms of what you're targeting for on the walk cost versus your substitute products? Whether that be in dollar terms or in terms of time savings, obviously, the latter seems bit of an issue in the market at the moment with labor. So if you can give us a sense of what benefits you're looking to I guess, proliferate into the market to compete with alternative products, that would be very useful. -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [31] -------------------------------------------------------------------------------- Keith, first question would be really a different version of these attacks that we commercially -- well, it's been really do test selling in Australia with really the right support. So really the first 12 months is really -- the acceptance has been very high. And it really about 3 -- the volume was more than 3x what we had planned. And just to give you a little perspective, is that the plan for next year for that volume will be 10x. So that's the first thing. Second thing is for the productivity, the key part of this innovation is that for us to address the labor shortage and to improve productivity is that we also target the on the wall cost to be anywhere from 10% to 25% less than the alternatives that, that we're going after, and that really depends on market to market. And then, of course, that is 1 from the pure economics, functional type of approach. But at the same time, this innovation is really what we're trying to go out to as well is to evoke the emotional attachments of the homeowners to do the endless possibilities of design and aesthetic our total experience solutions from James Hardie can deliver to the homeowners. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Your next question comes from Grant Slade of Morningstar. -------------------------------------------------------------------------------- Grant Slade, Morningstar Inc., Research Division - Analyst [33] -------------------------------------------------------------------------------- Look, I was just wondering to confirm with you how much the repair/remodel segment of the North American market grew by in the third quarter, if I could? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [34] -------------------------------------------------------------------------------- Yes. So our -- based on our analysis, Grant, we estimate between 7% and 8%. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Your next question comes from Sophie Spartalis of Bank of America. -------------------------------------------------------------------------------- Sophie Spartalis, BofA Securities, Research Division - VP and Senior Resources Analyst [36] -------------------------------------------------------------------------------- Jack and Jason, just wanted to ask a bit more of a big broader question. Just wanted to try and understand the possibility around the margin trajectory for the U.S., and I guess this is just in context of how we balance this input cost trajectory, we've been talking around the pulp pricing, the margins of these new innovative products and then the lower unit cost unexpected from the expanded capacity that you've announced today? And then just as a follow-up, what does all this mean in terms of that long-term margin guidance of 20% to 25%, does that now seem redundant given that you're delivering sort of 30% and expect to go higher? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [37] -------------------------------------------------------------------------------- Sophie. I think I counted like 6 questions in 1 question, so a big one. Let me first see that I can answer the first one here. I think the -- so we -- what you should expect from us is that we will continue to drive continuous improvement through our lean manufacturing strategy. So that I mean, not only that we need to keep the gain that we have in lean up until now, but we will continue to drive more efficiency. So that's the first thing. And the second is that as we do that, we then will improve lean, not only in our manufacturing processes, but also improve lean it our supply chain, to our customers and to the market. And that is the second part of savings that we'll realize in the fiscal year '21. So those are the positive side from the operational side. And then the second part is really about for product mix. So as we are going through to drive more of marketing directly to the homeowner to create demand for really the aesthetic products. That means there's more color products, which have a higher price and higher-margin and also a better mix for us. So that will be also the second key driver for the positive side. The third one would be the innovation. All the key innovation that we bring to in the marketplace is that not only that has the functional performance that's superior to what's in the market right now, but we also will have the aesthetics. And therefore, our new innovations that has to be commercialized into the marketplace will also be a higher-margin than our current product base. So those will be the accretive margin for our business going forward. And then, of course, that will offset -- be offset by higher freight and cost and as well higher pulp costs, which is much lesser extent than a few analysts have asked here. And then, of course, there's going to be some SG&A investment that we put back into the marketplace, into our business. But net-net, what you should see is our margin, particularly in North America, will be higher than what it has been for many years. And we will give a more definitive guidance on what the margin would be come May earnings call, which must form the basis for our guidance for this coming fiscal year. -------------------------------------------------------------------------------- Sophie Spartalis, BofA Securities, Research Division - VP and Senior Resources Analyst [38] -------------------------------------------------------------------------------- Yes. That's with the guidance for FY '22. It's more around that long-term guidance that I think you provided a couple of years ago, a year ago now, where you had that long-term margin guidance of 20% to 25%, but that seems very redundant right now. -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [39] -------------------------------------------------------------------------------- Correct. And then you will -- in May, where we'll share the really the next 3-year plan that will give a really updated long-term guidance as well. -------------------------------------------------------------------------------- Sophie Spartalis, BofA Securities, Research Division - VP and Senior Resources Analyst [40] -------------------------------------------------------------------------------- Okay. Great. So in May, you'll provide FY '22 plus a 3-year guidance? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [41] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Our final question comes from Peter Wilson of Crédit Suisse. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [43] -------------------------------------------------------------------------------- Another margin question. Just on the R&D plants that you plan on opening, will there be a significant cost or not? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [44] -------------------------------------------------------------------------------- Peter, the R&D facilities that we'll plan to have in 1 in the kind of U.S. and Australia will be our capital expenditure. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [45] -------------------------------------------------------------------------------- Okay. Will it be a material increase in capital -- ongoing capital expenditure? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [46] -------------------------------------------------------------------------------- It is going to be a good investment, but will not be at this -- at the order of magnitude that you will be familiar with in our manufacturing plants' CapEx. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [47] -------------------------------------------------------------------------------- Okay. And then just one guidance. If my math is correct, your full year guidance implies that Q4 will be about 10% lower than the impact level in Q3, where usually fourth quarter is actually the strongest. So I'm just hoping you might provide us some sort of commentary or bridge from Q3 to Q4. -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [48] -------------------------------------------------------------------------------- Yes. Peter, so a couple of things. One, this Q3 did not have the normal seasonality. I'd say of you're kind of going back in history with that comparison. So we had a very strong Q3. The most notable item would be the redemption of the notes. So as I went through during the slides, you're going to have a $13.1 million charge in the fourth quarter associated with the call premium as well as the pull forward and acceleration of the unamortized portion of the financing costs. So that would be the most significant item. And then obviously, as we move forward with this consumer branding, we'll have -- and talent acquisition we'll start increasing SG&A in the fourth quarter. -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [49] -------------------------------------------------------------------------------- Okay. And just to get a feel for where we're at in terms of this growth investment journey. So there seems to be like a lot of lease analysis kind of strategy being done. If you think about, I guess, the costs that you're currently incurring versus what you might be in a couple of years. Are you currently incurring a significant cost of all this kind of growth planning? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [50] -------------------------------------------------------------------------------- Sorry. Peter, when you say growth planning, can you be more specific? -------------------------------------------------------------------------------- Peter Wilson, Crédit Suisse AG, Research Division - Associate [51] -------------------------------------------------------------------------------- Well, I guess, at a high level, you've been quite upfront that there will be increased growth investment going forward. I'm wondering how much of that has come through the Q3 results versus how much is to come? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [52] -------------------------------------------------------------------------------- (inaudible) 1 and 2 has already been factored in into the -- yes. So if you're speaking specifically about growth through capacity, so our estimate is $250 million per annum for the next 3 years on total CapEx. If you're thinking about the marketing there was some in Q3, but that will increase over time, similar to what we said last quarter as we started foreshadowing and talking to you that our SG&A would begin to increase over the next 6 to 8 quarters. That includes this growth through marketing as well as adding talent and capability to our organization. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Our next question comes from James Brennan-Chong of UBS. -------------------------------------------------------------------------------- James Brennan-Chong, UBS Investment Bank, Research Division - Associate Director and Mining Associate Analyst [54] -------------------------------------------------------------------------------- Just to clarify, when you launch these new products, these products are going to be made on the same types of sheet machines that you've already got. And I guess what I'm just wondering is that there's no shortage of demand for your existing products right now, it's surging. How do you think about balancing the sheet machines producing more different SKUs going forward? Just wondering how you think about potentially bumping up against any particular capacity constraints for particular lines. How do you think about just allocating how much a sheet machine is producing for one product versus another and switching times, I guess? -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [55] -------------------------------------------------------------------------------- Yes. Good question, James. So I think for new products, it's important that we use a focus factory. So it's -- and also a focused line to make sure that it's more dedicated to more of a -- to produce in shorter run type of products. So it's for -- in North America, yes. So for new products, we pretty much limit to one plant to make sure that we allow us to have the capability to run smaller runs. And then that's also the same in our Australian plant. -------------------------------------------------------------------------------- James Brennan-Chong, UBS Investment Bank, Research Division - Associate Director and Mining Associate Analyst [56] -------------------------------------------------------------------------------- Got it. So not every -- so I think you've got 10 or 11 plants across the U.S. So not every plant is going to producing multiple different SKUs. It is just, say, 1 or 2 that will be new products. -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [57] -------------------------------------------------------------------------------- That's correct, yes. -------------------------------------------------------------------------------- Operator [58] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back to Mr. Truong for closing remarks. -------------------------------------------------------------------------------- Jack G. Truong, James Hardie Industries plc - CEO & Director [59] -------------------------------------------------------------------------------- Well, first of all, thank you all very much for jumping in the call. I just would like to again extend my gratitude and thanks to all James Hardie colleagues around the world. The continued execution of our global strategy over the past 2 years have helped fundamentally transform James Hardie Company and essentially put us in a position to enable significant future global growth. We are a much different company from where we were 2 years ago. We're focused on continuing to connect our global businesses to be able to scale to an integrated management system that enable us to create more value from customers in the market. I'm excited for what the future hold for James Hardie Company as we embark on this next phase of profitable growth driven by market-led innovation, a relented focus on penetrating new and existing segments and our extension of James Hardie brand into the consumer brand. Thank you. And have a good day, and have a good morning. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.