James Hardie Industries : Transcript FY 2024

James Hardie Q4 FY24 Results

21 May 2024

Start of Transcript

Operator: Thank you for standing by and welcome to the James Hardie Q4 FY24 Results call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr Aaron Erter, CEO. Please go ahead.

Aaron Erter: Thank you, operator. Good morning and good evening to everyone and welcome to our fourth quarter and total 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 US dollars. Moving to page 3, you will see our agenda for today. Joining me is our CFO, Rachel Wilson. 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. We will then open it up for questions.

Before I share an update on our strategy and operations, I would like to take this opportunity to thank all of our team members around the world who remain focused on safely delivering the highest quality products, solutions, and services to our customer partners. Our James Hardie team truly represent the very best in our industry and consistently enable our superior value proposition.

Let's start on page 5 with a brief business update. Our team's focus remains simple, working safely, partnering with our customers, investing in long-term growth, and driving profitable share gain. Our fourth quarter results continue to highlight how impactful that focus has been and is reflected in our full year results. For the full year, we achieved record global net sales of just under $4 billion, up 4% versus the prior corresponding period, with record global adjusted net income of $708 million, up 17% 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. For the full year, North American volume was just over 3 billion standard feet, and we delivered that with a record 31.9% EBIT margin.

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The adjusted net income result was also supported by solid year over year financial results in our Asia-Pacific region. In the EU, business performance improved year over year, and we are seeing momentum in growing our high-value products. For the 12 months, we generated record operating cash flow of $914 million, up 50% year over year. We have continued to accelerate our investment in long-term growth, supporting our marketing tentpoles, driving awareness and conversion in targeted regions to aid in sustaining profitable share gain.

We have done this in the face of a challenging and what has been uncertain markets around the globe. Rachel will share additional details regarding the quarterly results 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 continue to emphasise, 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. (1) Profitably grow and take share where we have the right to win. (2) Bring our customers high value differentiated solutions. (3) Connect and influence all the participants in the customer value chain.

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 three regions. We accelerate our strategic initiatives by establishing competitive advantages through our strategic enablers without compromising on our foundational imperatives.

Over the last few quarters, we have shared pieces of our value proposition that go beyond the product. This has included our marketing tent poles, which help drive demand, our unrivalled business support, and our localised manufacturing, which improves our customer experience.

Over the next two slides, I will show you how far James Hardie has come and pull together all the pieces to demonstrate clearly how we are driving long-term value creation. Let us now turn to slide 7. In FY24, our North American business continued to profitably take share. Our FY24 volumes grew by 1% year over year against a market where in FY24, major remodelling contracted by 11%, and single-family new construction in calendar year 23 contracted by 6%.

Our strong above-market growth in FY24 was driven by: (1) our partnerships with the large builders who took considerable share during the year, and (2) our continued focus on

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driving material conversion in the repair and remodel space. Over the last two-plus decades, James Hardie has built considerable awareness and goodwill with contractors and builders across the country with our superior siding solution.

Since the year 2000, we have sold over 45 billion standard feet of product. This includes siding, Trim, soffit, as well as interior products. Within the same timeframe in siding alone, we have sold over 28 billion standard feet of product. Conceptually, this is equivalent to fully cladding over 11 million homes. While this is an admirable achievement, there is more to be gained.

Since joining James Hardie just under two years ago, you have heard me talk about how we are homeowner-focused, customer- and contractor-driven. This focus is what will help to drive ongoing profitable share gain and further material conversion, resulting in more homes being clad with James Hardie products over the years to come.

Turning to slide 8 to discuss this in more detail. At James Hardie, we are investing in long- term value creation. Over the last 10 years, James Hardie has taken consistent market share. The US Census reports fibre cement share a primary cladding of new homes at 23% in 2022, up from 16% in 2012, equivalent to just under 1% of share gain per year. To sustain and build on this growth, we continue to invest in demand creation.

This investment occurs across the entire value chain and is aligned with our homeowner- focused, customer and contractor-driven mindset. We accomplish this by leveraging our marketing tentpoles, which include TV and sports sponsorships, influencer partnerships, in- store marketing at our retail partners, as well as targeted marketing with our contractors.

Demand creation ultimately drives increased awareness for James Hardie products and creates long-term demand across the value chain. Next, we have our innovative solutions. We have high-quality and differentiated product solutions that meet the needs of our customer partners and homeowners. In the Northeast and Midwest, which are R&R dominant, we have significant opportunity to penetrate with our ColorPlus portfolio of products.

These products are engineered for extreme climate and offer superior durability. Siding with James Hardie products delivers lasting beauty for the homeowner with minimal maintenance. In new construction, which dominates the Southern parts of the US, we have opportunity for growth while defending existing share through our Prime and Cemplank products.

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As I previously mentioned, we remain the predominant hard siding of choice for 24 of the top 25 large builders. We remain committed to these large builders as we expand our focus to grow with the rest of the top 200. Currently, we provide approximately 80% of the hard siding needs for the top 200 builders, and we are committed to further growing our share.

Across both R&R and new construction, our products continue to offer superior design and curb appeal. Our in-market presence for over 25 years has also made us a trusted brand. Both of these play a part in driving ongoing long-term value creation. Next, we have our unrivalled support. James Hardie products have a superior value proposition. That is visible from the street. For our customers and partners who use our products, the unrivalled support and localised manufacturing we provide directly benefits them each and every day.

These benefits include customer integration that ensures the right products are delivered to the right place and at the right time. Interactive in-person events such as our Dream Builder Program, which provides product education and training support. Finally, our Contractor Alliance Program, which is about supporting our contractors with lead generation and co-branding, all in support of helping grow their businesses to drive long- term material conversion to James Hardie products.

As an example, for every contractor's completed home that utilises this co-branding or localised marketing, they can expect to generate, on average, an incremental 12 leads and an additional two more jobs sold. As I mentioned, James Hardie is on more than 11 million homes in the US. Every home that is clad with James Hardie is a lasting mark on the residential streetscape. The long-lasting beauty of James Hardie products helps to further drive awareness of our product and channel future material conversion in neighbourhoods across America.

As we continue to invest in demand creation, offer the right products and solutions for our customer partners, and provide unrivalled business support, this will drive a virtuous cycle of material conversion, profitable share gain, and long-term value creation, resulting in more homes being clad in James Hardie products. Now, I would like to hand it over to Rachel to share more details about our fourth quarter results. Rachel?

Rachel Wilson: Thank you, Aaron. Let's start on page 10 to discuss our global results for the fourth quarter. Our team has delivered a strong set of results in the fourth quarter compared to last year, with consistent and focused execution through fiscal year 2024. For

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the quarter, Group net sales were up 9% to just over $1 billion. Adjusted net income increased 19% to $174.2 million.

The global adjusted EBITDA margin was 27.9%, up 250 basis points, and operating cash flow for FY24 was a record $914.2 million, up 50%. Our team is focused on executing on our strategy, and these consistent results demonstrate the value of focused execution.

Now, turning to slide 11, I'll detail our adjusted net income waterfall for the fourth quarter. As mentioned, adjusted net income increased 19% or $28 million year over year to $174.2 million, and was in line with guidance provided in February. The increase was primarily driven by strong EBIT growth in North America, which contributed $35.9 million to the increase in adjusted net income.

The increase was also supported by growth in EU, which contributed $3.6 million to the increase in adjusted net income. During the quarter, and as part of our ongoing marketing investments to drive long-term growth, global SG&A, including corporate, increased 24% to $164.2 million. This equates to 16.3% of revenues, up from 14.5% last year.

Sequentially, global SG&A was up 5% compared to the third quarter of fiscal year 2024. The increase in investment, primarily in our marketing tentpoles, reflects our continued focus on growing brand awareness and driving profitable share gains. In Q4 year over year, we saw our homeowner leads up 22% nationally, and our high opportunity R&R markets, or epicentre markets, up over two times.

General corporate SG&A expenses decreased modestly year over year. Higher employee cost, stock compensation expenses, and professional fees offset prior year New Zealand weather tightness expenses, general corporate SG&A expenses were flat sequentially. Our FY25 full year estimated adjusted tax rate range is 23.5% to 24.5%. This compares to the FY24 full-year tax rate of 23%. We are proud of our global teams for the way they've executed in a challenging market, and we will remain focused on consistent execution to similarly deliver in fiscal 2025.

Let's now move to page 12 to discuss the North American results. Beginning with the top line result, for the quarter, North America net sales of $735.2 million was up 13% versus the prior corresponding period, and our average net sales price was up 4%. Volume of

766.3 million standard feet increased 9% year over year, and was in line with our guidance

range.

During the quarter, overall housing and markets remained mixed. Industry experts have highlighted that major project R&R continues to be under pressure, estimating the

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segment decline 11% year over year in Q4, while single-family new construction was up double digits in the December quarter. As a reminder, we use a one-quarter lag methodology as applied to single-family new construction starts to better align the data to the timing of our reported sales.

Similar to the third quarter, our strategic initiative to partner with big builders helped drive strong volume growth in the south-central region in areas such as Texas, which is new construction dominant. In addition, we continue to see strong growth in the West. These regions outperformed our total North American volume growth. Our key R&R markets in the north were down single digits year over year. This compares favourably to major project R&R, which was down low double digits. Importantly, our exterior cladding volume was up low double digits.

Additionally, we have continued to succeed in growing our presence in the multifamily sector, which accounts for approximately 15% of our new construction exposure, up from 10%. Now turning to margins.

The North American EBIT margin improved by 270 basis points versus a prior corresponding period to 31.7%, and similar to volume, was in line with our guidance range. EBIT dollars in the fourth quarter were up 23% to $233 million versus the prior corresponding period. EBIT benefited from a higher average net sales price as well as lower input costs. Compared to last year, pulp prices and HOS savings, including plant improvements, more than offset the year over year increase in cement and freight costs.

Sequentially, we saw cement costs increase low double digits in line with expectations in February. Additionally, we incurred approximately $3 million of startup ramp-up costs related to Prattville Sheet Machine 3 and our ColorPlus finishing capacity project in Westfield. During the quarter, SG&A increased 46% year over year off a low base in the prior year.

Our SG&A investment remains focused on our marketing tentpoles to drive long-term demand creation. As a percentage of sales, SG&A increased two percentage points. Despite housing market volatility, we are encouraged by our relative share performance. By partnering with our customers, the North American team delivered a strong fourth quarter. Let's now turn to page 13 to discuss the Asia-Pacific results.

Similar to North America, it was a robust fourth quarter for our Asia-Pacific segment. Net sales improved 5% versus the prior corresponding period to AU$215.2 million. The net sales improvement was driven by a 9% increase in our average net sales price, partially

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offset by a 4% decrease in volumes. During the December quarter, Australian housing activity weakened, with dwelling approvals falling 10% year over year. In calendar year '23, dwelling approvals were down 14% versus calendar year '22.

During our Q4, the best-performing region was New Zealand. EBIT declined 1% to

AU$58.6 million. The result was driven by higher cash costs that was impacted by mix and partially offset by a higher average net sales price. SG&A increased 43% year over year as we continue to invest in long-term demand creation. As a percentage of sales, SG&A increased 3 percentage points. The APAC EBIT margin declined by 170 basis points versus the prior corresponding period to 27.2%.

The Australian housing market remains challenged as the industry digests housing market affordability issues and a double-digit decline in building approvals. Despite this backdrop, our teams delivered 5% net sales growth by driving profitable share gain. Our Asia-Pacific team has continued to partner with our customers to deliver a robust fiscal year. We will now turn to page 14 to discuss the European results.

Our European team had a solid fourth quarter as the team continues to execute well in a challenging market environment. The European market has declined double digits. As an example, German building permits were down 29% year over year in three months to January 2024. European net sales were flat at €118 million euros, primarily related to a 5% increase in ASP due to our strategic price increases and growth in high-value products.

We continue to see our product mix shift towards our higher value fibre cement offerings. We are working closely with our customers to provide products that are geared to both multifamily and single-family homes. During the quarter, our fibre gypsum volumes were down low double digits, while high-value products were up mid-single digits. We are pleased to see that high-value products are becoming a larger part of our overall mix.

On a combined basis, overall European volumes declined 9%, which, while significant, represent a lower decline than the overall European market. Similar to our other geographies, SG&A increased 14% year over year. As a percentage of sales, SG&A increased three percentage points. In the EU, these investments included creating dedicated sales teams to commercialise our panel portfolio across Europe and driving market initiatives.

EBIT improved year over year to €12.1 million, driven by a higher average net sales price. In addition, reduced volumes were partially offset by lower raw material costs, including paper and energy. EBIT margin improved by 360 basis points versus the prior

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corresponding period to 10.3%. We expect to deliver mid-to-highsingle-digit EBIT margins near-term, and the focus for the EU team is execution on growing high-value products. This strategic emphasis will support the longer-term margin expansion opportunity.

Finally, on 1 April, we've adjusted our transfer pricing on the intercompany sale of product from the US to Europe. This impact will be reflected in the EU segment in FY25, with the offsetting value fully accruing to North America, with thus no impact on a consolidated basis.

Turning to page 15 to discuss cash flow, liquidity, capital allocation, and capital expenditures.

Our robust operating cash flows reflect our strong margins, which stem from the superior value proposition that we offer our customers, builders, and contractors. In FY24, our operating cash flow was $914.2 million. This record cash flow result was driven by strong financial results in all three regions and a working capital improvement of $31.1 million. We continue to maintain a strong liquidity position with a Q4 net leverage ratio of 0.67 times and liquidity of $958.2 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 and deploying excess capital to our shareholders. During Q4, we repurchased 1.9 million shares for $75 million at an average per share price of US$39.42. For FY24, we repurchased 8.7 million shares for $271.4 million at an average price of US$31.42. As we look to Q1 FY25, we plan to continue to repurchase shares under our US$250 million buyback program.

Over the last 12 months, our superior cash flow has allowed us to fund the buyback while maintaining balance sheet flexibility. Regarding capital expenditures, our FY24 spend totalled $449.3 million with an additional $75 million in CapEx incurred but not yet paid. In FY25, we are continuing to invest to prepare for future demand and we are expecting CapEx of between $500 million to $550 million.

Key investments include early works for brown and green field capacity additions in North America, improvement initiatives globally to unlock existing capacity, as well as investment in the Hardie Operating System initiative. I'll discuss our long-term growth and capacity in more detail in a few slides. We have robust operating cash flows, substantial liquidity, and a flexible balance sheet which enables us to invest in profitable growth.

Turning now to page 16 to discuss our progress on HOS initiatives.

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The Hardie Operating System, or HOS, is about improving how we get work done at James Hardie. This requires continued investments in critical Company-wide initiatives that will support consistent delivery of operational savings year over year. In FY25, we will be making investments to accelerate strategic opportunities and enable future cost savings. These investments are reflected within our guidance. This is an important step in our Company's growth as these investments will enhance our foundation for efficient scaling.

This time last year, we set out a series of cumulative saving targets over the period FY24 to FY26 versus the base level from FY23. We've made significant progress on these targets over the year. In our first full year, we have realised US$31 million in global HMOS savings against the three-year target of $100 million. This was driven by less unplanned machine downtime and improved rolled throughput yield, which is a defect-free measure, ultimately helping reduce product reject costs.

Across procurement and R&D value improvements, we have realised US$52 million in savings against the three-year target of US$60 million. This was achieved by improved management of indirect spend, R&D value improvements, and supply chain optimisation. We now expect to surpass our initial goal.

Finally, we've realised $31.1 million improvement in working capital. We expect progress to continue, particularly given the Q4 seasonality of accounts receivable. Our global teams have made significant progress on our targets. These savings are helping to fuel our growth by supporting the financial means to continue to invest in profitable share gain.

Turning now to page 17 to discuss the outlook for long-term capacity.

As Aaron mentioned at the beginning of the call, we are focused on driving long-term value creation. To support future demand, we have capacity additions at various stages of development to meet our expectations for profitable share gain. Starting with North America and Prattville, we are on track for commissioning Sheet Machine 3 in Q1. The combinations of Sheet Machine 3 and Sheet Machine 4 will add 600 million standard feet and bring total nameplate capacity at Prattville to 1.2 billion standard feet.

The expansion of the Prattville site enables us to better serve the growing demands for both new construction and R&R from a key central location in the US. At Westfield, we are on track to commence production at our dedicated ColorPlus facility in Q1. This site will allow us to better serve the R&R markets in the Northeast, which is a key focus area for us.

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Finally, in FY24, we purchased land in Missouri for a greenfield future site. The Crystal City site plays a key role in our long-term planning to meet our expectations for continued material conversion and profitable share gain. In Europe, our Orejo brownfield site in Spain is set to add 252 million standard feet to take nameplate capacity up to 527 million standard feet. This site will improve our overall manufacturing cost position.

Similar to North America, in FY24, we purchased land in Europe as part of our long-term capacity planning process. We remain excited about the opportunities ahead for our high- value product offerings.

At James Hardie, we've grown our market share consistently over the last decade as illustrated on slide 7 and slide 8. To meet expected demand, we fund capacity and keep development at various stages to flexibly meet profitable share gain. This includes optimising existing capacity with HOS, including HMOS improvements, as well as balancing Brownfield and Greenfield capacity development. I'll now turn it back over to Aaron.

Aaron Erter: Thank you, Rachel. We have delivered record results in FY24 in a difficult operating environment. In addition, we have continued to outperform our end markets. These results are proof points that we are accelerating and taking share, all while we have increased our investment in long-term demand creation.

Let's now move to page 19 to discuss our market outlook and guidance.

For our largest market, North America, we are again providing the calendar year 2024 market outlook data from several external data providers. The average estimate for single- family new construction is for growth of 7%. Multifamily new construction is forecasted to contract 21%. In repair and remodel, our largest end market is estimated to decline 4%.

Using these external ranges, along with our assumed market segment exposures, the implied range for our blended addressable market is down 6% to up 3%, implying an average 2% decline. This compares to the flat outlook that was forecasted in February. It won't come as a surprise to you to see that these third-party forecasts for R&R have weakened throughout the quarter, led by a deferral in interest rate cut expectations.

That said, since joining James Hardie, I have seen us execute our strategy at a high level and increase our investment in long-term demand creation. Our business and team remain in a strong position to capitalise on the expected return to growth in the R&R segments over the years ahead. We remain laser-focused on driving profitable share gain and are demonstrating this with market outperformance.

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