James Hardie Industries plc (NYSE:JHX) Q2 2024 Earnings Call Transcript

James Hardie Industries plc (NYSE:JHX) Q2 2024 Earnings Call Transcript November 8, 2023

Operator: Thank you for standing by, and welcome to the James Hardie Second Quarter Fiscal Year 2024 Results Briefing. Today's briefing is hosted by James Hardie CEO, Mr. Aaron Erter and CFO, Mrs. Rachel Wilson. After the briefing, we will open the lines to Q&A. And I will remind participants to limit your questions to 1 plus a follow-up. After the Q&A, I'll turn it back to Mr. Erter for closing remarks. I would now like to hand the conference over to James Hardie CEO, Mr. Aaron Erter. Please go ahead, sir.

Aaron Erter : Thank you, operator. Good morning and good evening to everyone, and welcome to our second quarter fiscal year 2024 results briefing. Turning to Page 2, you will see our standard cautionary note on forward-looking statements. Please note that the presentation today does contain forward-looking statements and the use of non-GAAP financial information. Also, except where we explicitly state otherwise during our prepared remarks, all references to monetary amounts should be assumed to be in U.S. dollars. Moving to Page 3, you will see our agenda for today. Before we begin, I would like to take a moment to introduce you to our new Chief Financial Officer, Rachel Wilson. Rachel brings an impressive track record of over 25 years of experience, including extensive involvement in corporate finance, capital markets, leadership and development of high-performing teams, along with a demonstrated focus on driving profitable growth.

A pile of cement on the top of the wheelbarrow in construction site.

We are thrilled to have Rachel join our team, and I am looking forward to partnering with her as we continue to harness James Hardie's momentum. Over the last year, we have continued to add talent, invest in the development of our team and align our structure to support our strategy. In my first year, we have consciously built our talent and select areas such as HR, marketing and technology while also supporting our existing team. Rachel will now share with you in her own words, why she chose to join the James Hardie team.

Rachel Wilson: Thanks, Aaron. I'm grateful for the warm welcome and onboarding support that I have received. First off, I want to tell you how excited and honored I am to be joining James Hardie as CFO. In choosing to be here, I've quite literally voted with my feet. And why is that? In simple terms, I believe James Hardie is an exceptional growth business with a significant strategic moat that is supported by its team and values that I'm eager to be a part of. My experience as a public company CFO and former Wall Street Investment Banker brings unique financial skills and leadership experience to James Hardie executive team. Under Aaron's leadership, I believe we can further drive sustainable, profitable growth and development of our people.

I'm in my 12th week here, and I've spent much of my time thus far meeting the team, engaging with them as functional groups as well as individually and learning about our business. I can certainly attest to the fact that the momentum here is possible. Finally, I'm very much looking forward to getting to know the investment and analyst community and continue to take you on our journey of being homeowner focused customer and contractor driven. I'm energized to be on this team and I believe in our right to win. With that, I'll turn it back over to Aaron before I discuss our second quarter results. Aaron?

Aaron Erter : Thank you, Rachel. I speak for all of us here at James Hardie, when I say how excited we are to have you join our team. And I know that you will bring strong capability and leadership, which will positively impact everyone across James Hardie. For today's call, I will start by providing a strategy and operations update. Rachel will then discuss our financial results, and I will return to discuss our outlook, guidance and provide a brief closing. After that, we will then open it up for your questions. Before I share an update on our strategy and operations, I would like to take this opportunity to thank all of our employees around the world who remain focused on safely delivering the highest quality products, solutions and services to our customer partners.

Our employees truly represent the very best in our industry and consistently enable our superior value proposition. Let's start now on Page 5 with a brief business update. Our teams remain laser-focused on partnering with our customers, managing decisively and controlling what we can control. Our second quarter results continue to highlight how impactful that focus has been. For the second quarter, we achieved global net sales of just under $1 billion, flat versus the prior corresponding period, with a record quarterly global adjusted net income of $178.9 million, up 2% versus the prior corresponding period. Both our global net sales and adjusted net income results were again supported by volumes in North America that have outperformed the market.

Our second quarter North American volume of 773 million standard feet was at the top end of our guidance range, and we delivered that with a record 31.7% EBIT margin. The adjusted net income result was also supported by strong financial results in our Asia-Pacific and European regions. For the first half of the year, we generated record operating cash flow of $459.1 million, up 74% year-over-year. Finally, as we discussed last quarter, we have been accelerating our investment in SG&A, supporting our marketing tent-poles, driving awareness and conversion in targeted regions to aid in sustaining profitable share gain. Rachel will share additional details in the financial section. While uncertainty continues to affect our end markets, our focus remains on partnering with our customers and controlling what we can control to outperform in the markets we participate.

Now please turn to Page 6 in our global strategic framework. As I shared last quarter, at the heart of our global strategy, we are homeowner focused, customer and contractor driven. With that in mind, all three regions remain focused on our three key strategic initiatives. Number one, profitably grow and take share where we have the right to win. Number two, bring our customers high-value differentiated solutions; and number three, connect and influence all the participants in the customer value chain. We accelerated our strategic initiatives by establishing competitive advantages through our strategic enablers without compromising on our foundational imperatives. I remain confident in our team and our strategy. Combined, they position us to execute at a high level and drive profitable share gain in all 3 regions.

Last quarter, I shared additional details about our 3 strategic initiatives. Today, I want to spend some time discussing 2 of our 4 foundational imperatives, Zero Harm and the Hardie Operating System. Let us now turn to Slide 7 to discuss our first foundational imperative Zero Harm. At James Hardie, our focus on Zero Harm is a non-negotiable element of our global culture and is underpinned by a conviction that every incident is preventable. We operate with our team's safety, security and well-being as our #1 priority. This also includes ensuring our products are safe and that safety is adhered to when we work with our partners, customers and within the communities we participate. While Zero Harm is managed centrally at the global level, it relies on participation from every employee because safety is everyone's responsibility.

We take a bottom-up approach to involve our employees and safety and empower them with the skills they need to avoid accidents and injuries. As seen here in October, we launched our inaugural Global Zero Harm month at James Hardie. All of our teams across all of our manufacturing sites and offices globally dedicated a day to discuss and exclusively focus on safety. These Zero Harm days are an annual event and show that our business will never put profit before safety. I would also like to highlight our progress on DART or Days Away Restricted or Transferred when compared to the industry average. At a global level, our year-to-date DART was 0.57. High-performing companies do safety well. Why? Because it requires complex situational awareness and unrelenting focus and vigilance.

While we are improving, there are no shortcuts to Zero Harm and there remains more to be done as we continue to operate with a belief that all incidents are preventable. Thank you to each and every James Hardie team member for your continued focus on embedding Zero Harm in everything you do. Now let's turn to Slide 8 to discuss another foundational imperative, the Hardie Operating System. The Hardie Operating System or HOS, is our enterprise management system, which has been developed to drive focus across all areas of our business. This system provides clarity of priorities, efficient resource allocation and execution standards for approved initiatives. This focus and discipline ensures all efforts to generate expected outcomes back to the business on time.

The HOS works in conjunction with our existing manufacturing system called HMOS, HOS: How Work Gets Done. While HOS covers more than what we have listed here, today, I want to touch on 3 critical initiatives: number one, driving manufacturing efficiency through lean manufacturing principles with HMOS, delivering procurement and R&D savings and improvements in working capital. As it relates to these 3 components, HOS helps us to offset cost increases outside of our control. providing us with the flexibility to strategically invest in our homeowners, customers and contractors, including the builders, where and when appropriate, while maintaining our focus on profitable share gain. Over the next 3 years, we expect to generate $100 million of cumulative global savings through HMOS.

This is achieved by driving ongoing lean efficiency throughout our global network of plants, including rolled throughput yield, net available hours and a focus on delivering against our ESG targets. Across our facilities, you can see HMOS in action as we move towards standardized HMOS individual cues, such as pyramid trackers and color-coated escalation billboards. This consistency underpins the rigorous lean process that is embedded in the HMOS and that we are rolling out across all of our facilities globally. Additionally, over the next 3 years, we plan on delivering $60 million of savings through procurement and R&D-led initiatives. From a procurement perspective, this is about leveraging the size of our global business to purchase more efficiently and implementing best practices to drive unit costs down.

From an R&D perspective, it is about value improvements, including ESG initiatives that expand our competitive advantage. It is not about cutting R&D investment. Together, our lean manufacturing and procurement and R&D savings will lead to an expected cumulative $160 million of savings from FY '24 through FY '26. Lastly, in terms of working capital, over the next 3 years, we plan on delivering a cumulative improvement of $100 million by continuing to demonstrate discipline and rigor with how we manage all aspects of our working capital globally. These goals were first announced publicly in May 2023 in our remuneration report, and I am very pleased with the progress we have made to-date on these 3 key HOS initiatives, and I look forward to continuing to update you in the quarters ahead.

Now I would like to hand it over to Rachel to share more details about our second quarter results. Rachel?

Rachel Wilson : Thank you, Aaron. Let's start on Page 10 to discuss our global results for the second quarter. Against the challenging backdrop, our team has delivered strong set results in the second quarter compared to last year, with consistent and focused execution through the halfway point of our fiscal year. For the quarter, group net sales were flat year-over-year at just under $1 billion. Adjusted net income increased 2% to $178.9 million. The global adjusted EBITDA margin was 28.6%, and operating cash flow for the first 6 months was a record $459.1 million, up 74% year-over-year. The team is executing on our strategy, and these record results demonstrate the power of controlling the controllables. Now turning to Slide 11, I'll detail our net income waterfall for the second quarter.

As mentioned, adjusted net income increased 2% or $3.1 million year-over-year to $178.9 million and was in line with guidance provided in August. The year-over-year increase was primarily driven by strong EBIT growth in North America and APAC, which combined contributed $21.3 million increase to adjusted net income. During the quarter, global SG&A spend, which includes corporate, increased 23% year-over-year to $152.8 million. This equates to 15.3% of revenues, up from 12.5% last year. The increase in investment primarily in our marketing tent-poles reflects our focus on growing brand awareness and driving profitable share gains. Some of our key initiatives include increased marketing through advertising, sponsorship and trade marketing to drive consideration and conversion across the value chain.

This not only includes our if possible, being TV ad campaign, but also investing in programs designed to support our contractors and HOS initiatives. Adjusted general corporate costs increased primarily due to an allowance for a legal fee insurance receivables, higher stock-based compensation expense and increased employee costs. In addition, our Q2 adjusted effective tax rate was 23.9%, which was higher than our estimate in Q1 FY '24 of 22.9%. This increase reflects the change in expected geographic mix. Our current estimate for the full year FY '24 tax rate is 23.4%. While this slide focuses on adjusted net income, I did want to take this opportunity to clarify that during the quarter, we recorded a $20 million charge related to the previously announced cancellation of the Truganina greenfield site.

The non-cash write-down was recorded as an asset impairment and the impact excluded from our adjusted net income. At this time, we are actively exploring sale options for the site. Overall adjusted net income of $178.9 million was in line with guidance. We are proud of our global teams for the way they've executed in a challenging market, and we remain focused on consistent execution to similarly deliver in the third quarter. Let's now move to Page 12 to discuss North American results. Beginning with the top line results. North American net sales of $734.4 million was down 2% versus the prior corresponding period. Our average net sales price was up 2%, which helped to offset a 5% decrease in volumes. Volume of 773 million standard feet was just above the top end of our guidance range.

During the quarter, overall housing end markets were challenging with major project R&R down mid-teens and single-family new construction down 14% in the June quarter. As a reminder, we use a 1-quarter lag methodology that applies to single-family new construction macro data to better align the data to the timing of our reported sales. Our volume decline of 5% year-over-year in contrast with double-digit overall housing market decline highlights the success we are having in converting share against other competitive materials. This reflects James Hardie's continued material conversion advantage in building products. Similar to the first quarter, we continue to see volumes in South Central regions, which is new construction dominant, outperform our total North American volume.

This has been supported by our partnering with the larger leading builders who have also been taking share during this time. In the September quarter, single-family new construction term positive, growing 7% year-over-year, albeit off a depressed base and new construction has continued to outperform R&R. We remain focused on serving both the new construction and R&R segments and continue to invest in the larger R&R market. During the quarter, our initiatives to target contractors resulted in record membership to our contractor alliance program with total membership at an all-time high of just over 6,000 contractor members. The contract remains a key relationship in driving conversion to James Hardie's products and completes the concept of being homeowner focused and customer and contractor driven.

Now turning to margins. The North America EBIT margin improved by 330 basis points versus the prior corresponding period to a record 31.7% and was towards the top end of our guidance range. EBIT dollars in the second quarter were up 9% to a record $232.7 million and improved $20 million versus the prior corresponding period. EBIT benefited from a higher average net sales price as well as lower input costs, specifically in freight and pulp. These benefits more than offset the impact of lower volumes. During the quarter, we continued to invest with SG&A dollars increasing 18% year-over-year. As a percentage of sales, SG&A expenses increased 1.8 percentage points. This increase was focused on our marketing tent-poles and was highlighted by the strategic investment initiative by Aaron in our last quarterly call.

We are gaining awareness from these investments. And since August, our request for close of RFQs have increased by 20% and we've kept this result more cost efficiently. It is early, however, to measure the ultimate return from these investments. Post the quarter-end, we have communicated our annual North American price increase for calendar year '24. On average, prices have gone up mid-single digits. As outlined earlier this year, we continue to expect reported net average selling price to be positive for the fiscal year. Despite housing market volume declines, we are encouraged by our relative share performance by managing decisively and partnering with our customers, the North American team delivered a strong second quarter result with record EBIT and EBIT margin.

Let's now turn to Page 13 to discuss the Asia-Pacific results. Similar to North America, it was a strong second quarter for Asia-Pacific segment against a challenging backdrop. Net sales improved 7% versus the prior corresponding period to a record AUD 225.1 million. The net sales improvement was driven by a higher average net sales price, up 15%, which was partially offset by a volume decline of 9%. All 3 countries in the APAC segment experienced a decline in volumes with Australia performing the strongest. EBIT improved 21% to AUD 67.9 million. The result was driven by a higher average net sales price, which more than offset an increase in cost of goods sold. We continue to invest in marketing, such as with the block media campaign built around this popular TV series.

We have a focus in APAC on brand-building media and showcasing before and after home transformation made possible with James Hardie products. The APAC EBIT margin improved by 360 basis points versus the prior corresponding period to 30.2%. Similar to North America, our Asia-Pacific team has partnered with our customers and managed decisively to deliver a strong second quarter. We'll now turn to Page 14 to discuss the European results. Our European team had a solid second quarter as the team capitalized on a dislocated market environment. Net sales increased 5%, primarily related to a 20% increase in ASP and a EUR 3.3 million favorable true-up related to customer rebate estimates. The growth in ASP resulted from our strategic price increases and growth in high-value products.

We continue to work closely with our customers and respond with products that are geared to both multifamily and single-family homes. Importantly, we are seeing our product mix continue to shift towards our higher-value fiber cement offering. Our fiber gypsum volumes were down mid-teens during the quarter, whereas we experienced double-digit growth in our high-value products. While our high-value products are growing off a small base, they are becoming a larger part of the overall mix, namely the plank and panel opportunity. On a combined basis, however, volumes declined 15%, which while significant, represents a lower decline in the overall European market. Our innovative architectural panel provides an example of our growing high-value products.

This fiber cement product offers superior power safety, sophisticated design developed in collaboration with leading European architects and a 15-year warranty, which together represent highly valued attributes in the market. Architectural panel is an innovative and cost-effective solution to help the European multifamily housing balance. Our focus on high-value products helped support EBIT growth of EUR 7.1 million, driven by a higher average net sales price, which more than offset a higher cost of goods sold per unit that was impacted by higher labor and energy costs. Similar to North America, SG&A investments increased to drive new product selling support and growth initiatives. The EBIT margin improved by 640 basis points versus the prior corresponding period to 10.7%.

This margin is inclusive of the EUR 3.3 million favorable true-up related to customer rebate estimates. Strategically, the European teams remain focused on driving growth through high-value products in FY '24 and beyond. This strategic emphasis similarly supports the long-term margin expansion opportunity. Turning now to Page 15 to discuss cash flow, liquidity, capital allocation and capital expenditures. Our robust operating cash flows reflect our strong margins, which are a hallmark of James Hardie. In the first half of FY '24, our operating cash flow was $459.1 million. This cash flow result was driven by strong financial results in all 3 regions and a working capital improvement of $82.7 million. These improvements were both supported by the execution of the Hardie Operating System.

We continue to maintain a strong liquidity position with a Q2 leverage ratio of 0.79 times and liquidity of $608 million. We are stewards of investor capital. Our capital allocation framework is first and foremost to invest in organic growth. We do this while maintaining a flexible balance sheet while deploying excess capital to our shareholders. Through Q2, we have paid down $90 million of revolver, completed our $200 million buyback program and today announced a new $250 million buyback program, which we expect to complete over the next 12 months. These actions reflect our strong cash flow and balanced approach to capital deployment. Regarding capital expenditures, for the first six months, capital expenditures totaled $232.6 million. We continue to expect to spend approximately $550 million on capital expenditures in FY '24, and we remain committed to keeping capacity supply ahead of demand.

Subsequent to the quarter-end and through October, the company paid down the entire $140 million balance on our revolving credit facility. We also entered into a new 5-year $300 million term loan agreement maturing October 2028. As of 31 October 2023, our liquidity was $1 billion versus $608 million at 30 September 2023, with a net leverage of approximately 0.7 times versus 0.79 times at the quarter-end. We have robust operating cash flows, substantial liquidity and a flexible balance sheet, which enables us to invest in profitable growth. I'll now turn it back over to Aaron.

Aaron Erter: Thank you, Rachel. We have delivered a strong first half and a record quarterly result for adjusted income. In addition, we have outperformed our end markets in challenging conditions. These results are proof points that we are accelerating through the cycle and taking share. Now let's move to Page 17 to discuss our market outlook and guidance. For our largest market, North America, we have again provided the market outlook data from several external data providers. The external ranges continue to change. The average estimate for single-family new construction improved from down 12% to down 9%. Multifamily new construction weakened from down 12% to down 15%, and repair and remodel improved incrementally to down 11%.

Using these external ranges along with our assumed market segment exposures for FY '24, the implied range for our blended addressable market is down 7% to 14%, with an average of down 11%. Overall, while these calendar year 2023 North American end market forecasts have improved incrementally, there remains considerable uncertainty in the market today due to poor mortgage affordability, interest rate volatility and unsettled market dynamics. Regardless of market conditions, we remain confident that we will be able to deliver growth above market and strong financial results. We remain laser-focused on driving profitable share gain and are demonstrating this with our market outperformance. If you turn to Page 18, we have again provided the volume sensitivity analysis for FY '24.

This sensitivity analysis was prepared in the same manner as last quarter, which assumes our current range of expectations on raw material costs and freight rates and assumes we continue to invest in growth as currently planned. These volumes are simply to provide context to our EBIT margin sensitivity in North America and should not be construed as volume guidance for any quarter in fiscal year 2024. Regardless of how markets fluctuate, we are confident we will outperform our end markets. Now please turn to Page 19. Today, we are providing 3 points of guidance for our third quarter of fiscal year 2024. First, we expect North America volumes to be in the range of $730 million and $760 million standard feet Second, we expect North American EBIT margin to be in the range of 30% to 32%.

And lastly, we expect global adjusted net income to be in a range of $165 million to $185 million. As I mentioned earlier, our team is energized and focused on driving profitable share gain, and we are positioned to deliver another strong financial result in our third quarter. Finally, please move to Page 20. As always, I want to close with who we are at James Hardie, a global growth company. I am proud of our team's ability to navigate these uncertain markets to deliver a strong second quarter and build on the momentum from our first quarter. We are homeowner focused customer and contractor driven. Before I hand it over to the operator, I would like to mention that we will be hosting our next Investor Day in late June 2024 in North America.

At this event, we look forward to showing you our value proposition in the field, and we'll be sharing more details in the coming months. With that, I would like the operator to open the line up for questions.

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