James Hardie Industries plc (JHX) Q2 2021 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to James Hardie Industries' Q2 FY '21 Results Briefing Conference Call. Today's call will be hosted by Dr. Jack Truong, CEO; and Mr. Jason Miele, CFO. [Operator Instructions]. I would now like to hand the conference over to CEO, Dr. Jack Truong. Please go ahead.

Good morning, and good afternoon, everyone. Thank you for joining us on our Q2 2021 earnings call. I will begin by providing an update on the progress of how we have been executing our global strategy to deliver on our financial results consistently. Our CFO, Jason Miele, will then cover our Q2 and first half fiscal year 2021 financial results. Before I get into the contents of the presentation, I would like, first, to extend my gratitude and thanks to all James Hardie colleagues around the world. Their continued execution on global strategy, hard work, and relentless focus on health and safety have led the company to achieving its record quarter for total company in net sales, adjusted EBIT, adjusted net operating profit after tax and operating cash flow. Our success was driven by exceptional performance in delivering growth of our markets and strong returns across all 3 of our operating regions: North America, Europe and Asia Pacific. And as a total company, this marks the sixth straight quarter that we have delivered strong financial results. Our employees' commitment to continuous improvement and our strategic imperatives has been instrumental in delivering these strong results. Let's turn now to Page 5 for an update on our global strategy. Now back in August, I share with you the summary of the progress toward our vision of transforming James Hardie from being a big small company to a small, big company that can deliver consistent growth of our markets with strong returns. While significant and measurable progress having made over the past 6 quarters, the critical actions we took in year 1 form a strong foundation for James Hardie to become a high-performing small big company. First, it was important that we started by executing lean manufacturing strategy via our unique Hardie manufacturing operating system, HMAS, to transform James Hardie from being the world's largest fiber cement producer to being a world-class manufacturer. It means that as a network of plants, we would be on a continuous improvement path of becoming more predictable and with less variations in production output, quality and efficiency. Our significant progress during the past 2 years 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. Second, we shifted the focus of the commercial organization from being a pull organization to a push-pull organization. It's about being a customer-focused company. Our true customers are the dealers, retailers and distributors. They are the focal point where we create more value for them every day by creating more demand for our products with the builders, contractors and installers and with better service and would be an easier to do business with. Instilling the only customer-focused mindset throughout our company is critical to the success of our strategy. As a result, of these two foundational strategic approaches, we delivered strong fiscal year '20 results, including a 7% growth of our markets and 26% adjusted EBIT margin in North America, an increase of 17% year-over-year in total company's adjusted net operating profit after tax and a 48% year-over-year increase in total company's operating cash flow. Now with a strong foundation established in fiscal year 2020, we're now building on that momentum as a global company in fiscal year 2021. Thus far, in fiscal year 2021, our teams sell around the world have performed very well, continuing to execute and deliver consistent financial results quarter-on-quarter. We continue to strengthen the engagement and integration of our supply chain operations with our customers for mutual benefits. This has ensured that we are able to continuously service the market seamlessly through our customers, providing the markets the products they want and when they need them. However the global pandemic caused disruptions in the markets around the world, it is an opportunity for us to accelerate our engagement with our customers to add more value for them and for their customers. It enables us to improve working capital for our customers while driving more demand and share gain of our products in the marketplace. Our consistent strategy and execution enabled us to deliver record financial results for total company in Q2 fiscal year 2021, which includes strong growth above market and returns in all 3 of our regions: North America, Europe and Asia Pacific. We had significant positive momentum headed into second half of fiscal year 2021 and into fiscal year 2022. We expect to continue to execute very well our strategy and to build on our performance through the end of this year and beyond. Toward that end, as we approach fiscal year 2022 and the third year of our transformation, we will expand our focus toward developing new global growth platforms. It will allow James Hardie to continue to deliver consistent and profitable global growth well into the future. Innovation will enable us to enter adjacent markets and leverage on our core strength in fiber cement technologies and our fiber gypsum technologies of brand strength and market access. Of critical importance is our intention to launch the first innovation platform in North America, Europe and Australia at the beginning of fiscal year 2022. This innovation platform is truly global in nature, and I'm very excited about what this will deliver for our company moving forward. As we move into the second half of fiscal year 2021, it's important that we continue our progress on the strategic initiatives we have put in place to shift into a small, big company. We will continue to execute on our critical few initiatives and deliver consistent profitable growth for our total company. As I mentioned back in August, a transformation of this magnitude is not easy. Critical to this transformation and underpinning the success continue to be the integrated and globally connected management system we put in place two years ago. This management system continues to allow us to make better decisions holistically at various levels within the company. It's also enabled teams making appropriate adjustments quickly to keep our transformation on the right track. I remain very pleased with the progress we have for the past two years to transform James Hardy from a big small company to a small big company. Now let's turn to Page 6. Before we get into some details on the progress of some of our core initiatives, I want to take a step back and provide some perspective on our global financial performance over the past 10 years. This will also put our recent results into context. For clarity, the black line represents a global net sales by quarter in millions of U.S. dollars, where the green dotted line represents a global adjusted EBIT margin percentage by quarter. Starting on the left-hand side, between fiscal year 2011 and fiscal year 2018, you will notice a high degree of variability in the adjusted EBIT margin with steady albeit slower global sales growth. This volatility is indicative of a company that did not have the right globally connected and integrated processes to deliver consistent global profitability. It's also indicative of a manufacturing company that has high variability in cost per units, as it is not operating under a globally connected lean methodology and of a company that is not closely connected with its customers to understand true demand in the markets and flow the right products to the right customers and when they need them. What I'm describing is and what the chart show over that time period is of a big small company. As you move toward the right, however, you will begin to see where we started our transformational journey to become a small big company. First, in Q1 of fiscal year '19, we started to create a new James Hardie in Europe with our acquisition and integration of Fermacell. You would notice that this inflection point of global EBIT margin declined largely as a result of this acquisition, as you will see over time as we progress on the integration of global EBIT margin with rebound. Which brings me to the second inflection point in Q4 of fiscal year '19, we began a lean manufacturing transformation. Through the information of lean capabilities and processes across our network of plants, we're able to reduce variability in our manufacturing processes and improve the predictability of output and consequently, on the manufacturing cost reductions. You can see the significant improvement in our global EBIT margin shortly after we began the transformation as we translated this reduction in variability and improvement in predictability into true cost savings across our network. Which bring me now to the third significant inflection point in Q2 of fiscal year 2020, where we initiated the strategic transformation of our commercial organization from pull to push-pull. This concerted effort to shift from a focus solely on various contractors and installers to a primary focus on our customers who are maintaining connection to our various contractors and installers was instrumental in driving real value for all. As we develop more meaningful partnerships with our customers, the financial results follows, as we started to gain share, drive growth and deliver strong returns. As we continue to replicate the North American strategies into our European and APAC businesses, we start to see true consistent global growth. In fact, it is the 3 important milestones: the integration of Fermacell; the execution of lean transformation; and now shift from pull to push-pull, that led directly to James Hardie delivering record worldwide financial results in Q2 of fiscal year 2021, which is also our 6th straight quarter of delivering strong results. On the prior slide, I review the 3-year strategy that would pick James Hardie from being a big small company, to a small big company. What this chart reaffirmed is that continued focus on global lean manufacturing, increased integration of customers across the world, combined with market-led innovation would drive accelerated profitable sales growth with consistent EBIT margins moving forward. Now let's turn to Page 7. As I just mentioned, one of the critical actions we took in fiscal year 2020 was to implement lean capabilities and processes across our network of plants via our Hardie Manufacturing Operating System with the objective of becoming a world-class manufacturer. Today, I wanted to share the significant financial impact we made since the beginning of fiscal year 2020 and when our lean journey began. On the left-hand side, you can see North America strong quarterly progress to date. In fiscal year '20, we generated close to USD 28 million in cost of goods sold savings. And through the first 6 months of fiscal year '21, we generated close to $18 million in year-to-date savings, which is fiscal year '19 baseline costs. In the 18 months since inception, we delivered close to $46 million in cumulative savings due to lean. Now in addition to cost savings, consistent lean execution also unlocked an incremental 12% of our operating capacity across the North American network of plants. Moving to the right-hand side, you will see a global lean savings core utility progress, which follow in line with our North American results. APAC and Europe generated $16-plus million in cost of goods sold lean savings versus the FY '19 baseline since inception. Global lean savings now total $62 million during the past 18 months. Our lean program not only deliver a lower cost per unit outcome for our operations, it also unlocked an incremental 12% of operational capacity across our North American network of plants. While our focus on lean has returned some impressive financial results, I'm just as pleased with the impact it has had on employee engagement and retention. As an example, in North America, our manufacturing employee retention was 85% in fiscal year '20 as we cut our staff turnover rate in half. I would like to take a moment to thank all of our manufacturer employees around the globe, that all in HMOS really stand for operators as they have been critical to the success of a lean initiative. But what I have been most impressed with is their commitment to work safely through the epidemic, while maintaining safe practices and continue to drive lean initiatives with results. This continued momentum in lean manufacturing execution was instrumental in delivering savings, while unlocking incremental capacity to meet increased demand in the marketplace. Turning now to Page 8. In fiscal year 2021, one of our critical initiative is about increased end-to-end engagement and integration of our customers through supply chain. This is about a true customer partnership where all facets of supply chain working together in concert to mutual benefits. Specifically, this involves incorporation of our customers' demand signal into James Hardie supply chain operations which, in turn, enable us to provide them with the products they want, when they need them and flow them through the value chain through the sites of builders and contractors. One of this critical elements of our strategy started in earnest earlier this fiscal year, the results to date have been outstanding. On the left-hand side of this slide, you can see the quarterly breakout of the North American net sales growth in the dark green shaded bars and the inventory declines in the third quarter of fiscal year 2020, the black line. What you will notice is that over the past 9 months, North American net sales that decreased $85 million or 20% increased to $515 million in Q2 of this year - fiscal year. While at the same time, total inventory decreased $76 million or 35% to $142 million. Throughout this working capital optimization, we were able to serve the market well to our customers while helping to improve customers' working capital as well as ours. Simply put, improved integration of our customers, flow products from our network of now more efficient plants and more predictable plants through our customers to the job sites has not only helped to drive sales growth and share gain, but also help to increase efficiency across the value chain and freed up valuable working capital in the process. I'm very pleased with the strong through the supply chain engagement and integration of our customers. And I truly expect to continue developing this critical partnership through the remainder of fiscal year 2021 and beyond. Now moving on to Page 9. On the left-hand side, you can see the trend in the operating cash flow over the past 4 years, shown in half year periods. I think this slide is a good summary of the success of our strategy over the past 2 years. The strong profitable sales growth, coupled with continuous improvement in our lean manufacturing performance and the integration in our supply chain to our customers has led to a step change in our operating cash flow. For the half year and fiscal year 2021, our operating cash flow was $416.8 million, an all-time high and an increase of 66% versus the previous corresponding period. This strong operating cash flow helped increase our liquidity to USD 886 million. This also leveraged and lowered our lapse ratio to 1.32x as of September 30, 2020. The step change in our cash generation capability and our confidence in the execution of strategy, as demonstrated both in growing markets and in highly volatile markets, put us in a position today to announce a further strengthening of our balance sheet by paying down USD 400 million of debt by the end of the fiscal year and the reinstatement of ordinary dividends at the end of this fiscal year. I would now like to turn this over to our CFO, Jason Miele, to discuss additional details in our financial results. Jason?

Thank you, Jack. I'll start on Slide 11 with our global results. As Jack mentioned earlier, this is the 6th straight quarter of strong global financial returns. And pleasingly, we had strong results in all 3 regions. As we continue to execute and accelerate our strategy, we were able to deliver strong top line results in both the second quarter and the half year. And more importantly, also translates that top line growth into strong bottom line results and record operating cash flows. For the second quarter, global volume increased 8% and net sales increased 12%. This was driven by strong commercial execution across all 3 regions. As I just mentioned, we were able to turn that strong top line results in the second quarter into an even stronger bottom line outcome. Global adjusted EBIT and global adjusted net operating profit both increased 22% in the second quarter. Our ability to drive a 22% adjusted EBIT improvement with net sales up 12%, was due to strong execution against our foundational strategic priorities Jack discussed earlier: Lean manufacturing; and our continued integration with our customers. In the second quarter, we delivered strong EBIT growth in all 3 regions. In North America, adjusted EBIT increased by USD 23.9 million, a 19% increase. Europe increased adjusted EBIT by EUR 4.2 million, an 81% increase. And our Asia Pacific region increased adjusted EBIT by AUD 14.6 million, a 37% increase. For the first half, global net sales increased 4% to approximately USD 1.36 billion. For the first half, global adjusted EBIT increased 11%, driven by strong North American performance where adjusted EBIT increased USD 41.3 million. Moving to adjusted net operating profit. Our second quarter results of $120.5 million increased 22% as compared with prior year and represents a quarterly all-time high for the James Hardie Group. For the first half, adjusted net operating profit was $209.8 million, an 11% increase versus the first half of fiscal year 2020. Lastly, our operating cash flow for the first half increased 66% to $416.8 million. This outstanding cash flow generation is a true step change and in my view, is a clear indicator and measure of the success of our globally integrated strategy. This cash flow result starts with strong commercial execution and partnership with our customers to drive profitable sales growth. It continues with our planned strong execution of lean manufacturing performance. It includes the integration of our supply chain with our customers to flow inventory versus holding inventory and is finalized with better discipline around the cash conversion cycle. This record cash flow and more importantly, the sustainable nature of the cash flow has enabled us to announce today our plans to further strengthen our balance sheet and the reinstatement of dividends at the end of this fiscal year. Moving to Slide 12, we will discuss the North American business. In North America, we had another outstanding quarter. Volume increased 11%, while net sales increased by 12% in the second quarter versus the prior corresponding period. Our exteriors volume increased 11% in the second quarter, driven by our continued share gain as our team continued their focus on customer engagement. In interiors, volume increased 7% for the quarter versus the prior corresponding period as the interiors repair and remodel market rebounded in the second quarter post the initial pandemic slowdown in the first quarter. While not listed on this slide, I will point out that average net sales price increased 1% for both the quarter and the half year. Average net sales price continues to be impacted by product mix, market mix and geographic mix. It is worth noting, we have shifted our annual price increase to now take place on January 1 of each year rather than April 1. This has been announced for the market and will begin with price increase on January 1, 2021. We anticipate achieving an average net sales price increase of approximately plus 3%. Our outstanding top line results were coupled with even better adjusted EBIT growth as adjusted EBIT increased by 19% in the second quarter versus the prior corresponding period. This outstanding EBIT result was driven by continued strong execution of lean manufacturing and our continued integration with our customers. Specifically, adjusted EBIT improved in the second quarter versus the prior second quarter due to continued lean manufacturing savings, lower pulp costs and lower SG&A expenses. These improvements were partially offset by higher freight costs in the quarter. Overall, in the second quarter and the first half, the North American team delivered another set of exceptional results with continued strong growth above market and outstanding returns, including an adjusted EBIT margin of 28.9% for both the quarter and the first half. Now turning to Page 13, we'll discuss the European results. In August, we communicated that Europe was the region most affected by the COVID-19 pandemic, as net sales decreased 12% in the first quarter driven largely by current and post shutdowns in 2 of our key markets: The United Kingdom and France. I'm pleased to be discussing a very different outcome for our second quarter results here today. Our European team was able to manage through the first quarter uncertainty and drive significant improvement in the second quarter. The markets in the United Kingdom and France reopened, helping drive strong fiber cement growth in the quarter. And our team in Germany did a great job driving fiber gypsum growth in Germanic countries. In the second quarter, net sales increased 8%. By product group, fiber cement net sales increased 14% and fiber gypsum net sales increased 7% versus the prior year second quarter. Entering the second half of the year, 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 second quarter, adjusted EBIT was EUR 9.4 million, an 81% increase from the second quarter last year and adjusted EBIT margin was 11.1%. We are encouraged by our Europe team's ability to quickly return the business to top line and bottom line growth with improved EBIT margins. Let's now move to Page 14 for our Asia Pacific results. Our Asia Pacific region also had to navigate volatile and uncertain markets during the first quarter, with the first quarter results being significantly impacted by the government-imposed COVID-19 lockdowns in the Philippines and New Zealand. In the second quarter, as those countries began to ease restrictions, our financial performance recovered. The second quarter result was led by very strong results by both our Australian and New Zealand businesses, they both drove growth above market and strong returns. Our New Zealand team really delivered an outstanding result in the second quarter, driving double-digit sales growth and excellent EBIT growth. You will remember that on May 5, 2020, we announced the closure of our James Hardie Systems business as well as the closure of our Penrose, New Zealand manufacturing facility. The closure of the James Hardie Systems business is now complete, and we're in the final stages of shutting down our Penrose facility. The shift of production from New Zealand to Australia is driving a better cost per unit outcome for the ANZ region and exiting of the unprofitable James Hardie Systems business has also had a positive impact on EBIT margins for Asia Pacific. It is important to note that the Asia Pacific EBIT margin is benefiting from a country mix impact as the Philippines remained on tighter COVID restrictions during the second quarter compared to Australia and New Zealand. And thus, as a percentage of sales and a percentage of EBIT dollars, the Philippines represented a smaller portion of our Asia Pacific business in the first and second quarters of this year, fiscal year '21, compared to prior periods. This country mix EBIT margin benefit will reverse as the Philippines returns to the normal proportion of our Asia Pacific business. That said, we have a real systemic improvements in the Asia Pacific EBIT margin versus the prior periods. The shift of production from New Zealand to Australian manufacturing facilities, the exiting of the unprofitable James Hardie Systems business and lean manufacturing improvements, these are all long-term and sustainable improvements to our Asia Pacific business. In the first 6 months, adjusted EBIT and adjusted EBIT margin for Asia Pacific both benefited from lower SG&A expenses. We will invest in profitable growth in Asia Pacific beginning in the second half of fiscal year '21. Now moving to Page 15, who will briefly cover off on the other segments. Starting on the left-hand side of the slide, you'll see a significant increase in general corporate costs in fiscal year '21 second quarter and first half as compared to the prior corresponding period. These are 2 items - there are 2 items driving the increases in both the quarter and the first half: Increased stock compensation expenses; and higher legal expenses. The increase in stock compensation expense is driven by share price accretion. On the right-hand side of the slide, you can see R&D expenditures remain relatively flat year-on-year within the R&D segment. However, it is important to note the last [indiscernible] on this page, product development, R&D expenses, which are recorded in the relevant business unit segment results, are up 14% in the second quarter and 5% in the first half as we continue to invest in market-driven innovation. The global innovation team remains focused on market-driven innovation, and we anticipate continued additional investment in innovation as we prepare for the launch of the first innovation platform, as Jack discussed in his strategy update. Now turning to Page 16 for a summary of our second quarter worldwide results. In line with the outstanding segment results for the second quarter, we have discussed on the prior slides, adjusted net operating profit increased 22% versus the prior corresponding period. This was driven by strong performance across all three operating segments. The strong operating results were partially offset by higher general port costs and a higher adjusted effective tax rate. Collectively, our operating business units: North America, Asia Pacific, Europe and R&D, combined to deliver USD 41.4 million in adjusted EBIT growth versus the prior year second quarter. Second quarter adjusted EBIT of $163.1 million, an adjusted net operating profit of $120.5 million, are both record all-time quarterly highs for the James Hardie Group. Moving now to Page 17, we'll discuss the first half worldwide results. Adjusted net operating profit for the first half increased 11% to USD 209.8 million. This was driven by strong performance in North America and Asia Pacific, which delivered EBIT growth of 17% and 18% in the first half, respectively. For the first half, the strong adjusted EBIT performance was partially offset by higher general corporate costs and a higher adjusted effective tax rate. In addition, adjusted net interest expense decreased 11% due to the lower average revolving credit facility balance, which has remained at 0 for most of the year. This is a direct result of our strong cash flow generation. These strong results for the first half of the year provides strong positive momentum as we enter the second half of the fiscal year and fiscal year '22, and they position us to invest in growth. The investment in future growth will be thoughtful and strategic and will include investments in innovation, marketing and branding and capacity, to name a few. Moving on to Page 18 to discuss cash flows and capital expenditures. On the left-hand side of the slide, we'll start with cash flow. As Jack and I have both mentioned earlier in our presentation, operating cash flow increased 66% for the first half versus the prior corresponding period, driven by increased engagement with our customers, driving strong sales growth globally, continuous improvement within lean manufacturing and an integration with our customers through to our supply chain to serve the market with reduced working capital for the entirety of the value chain. Note that we have reduced inventory by $83.7 million during the first half. You have heard Jack and I mention the cash flow improvement as a step change. And I just wanted to briefly put the $416.8 million of operating cash flow into some additional context. While an improvement of 66% versus the first half of last year is significant, it is also worth noting that our best full year - full fiscal year operating cash flow result was last year in fiscal year 2020. For the full 12 months of fiscal year 2020, we generated operating cash flows of $451.2 million. So through 6 months of this fiscal year, we have already achieved 92% of last year's full fiscal year operating cash flow. And I think that helps put in perspective why we are describing this as a step change in operating cash flow performance. Now shifting to the right-hand side of the slide, where you'll see a summary of our capital expenditures. For the first half of this year, capital expenditure spend was $44.7 million, down approximately $79 million versus the prior corresponding period as we had lower capacity expansion year-over-year. It's important to note this lower capacity expansion - expenditure was made possible via our main initiative. We often talk to you about the direct cost savings, impact of lean, specifically the reduction in cost per unit. But as Jack mentioned earlier, lean execution has unlocked an incremental 12% of effective operating capacity. Moving on to future capacity expansion. Due to our strong customer integration, driving market share gains and significant volume growth in North America, we plan to commission sheet machine #1 in our Prattville, Alabama facility in the fourth quarter of this fiscal year. Further, we are now planning to commission the second sheet machine in Prattville around the middle of calendar year 2021. In Asia Pacific, we plan to commission the new sheet machine in Carol Park in the third quarter of fiscal year 2021, more specifically this month. We now expect our full year fiscal year 2021 capital expenditures to total approximately USD 120 million. Let's turn to Page 19, where I'll discuss our liquidity profile. There's been no change in our debt profile. We still have the 3 sets of notes in place, along with the revolving credit facility. As Jack mentioned earlier in the presentation, we continue to improve our liquidity position and our leverage position, driven by our strong operating cash flows. We ended the first half with $885.9 million of liquidity, an improvement of $376.1 million since March 31, 2020. We also improved leverage to 1.32x, an improvement from 1.9x at March 31, 2020. Over the 6 months, we have significantly changed our liquidity and financial flexibility and now have a very strong cash and liquidity position, which provides a nice segue to the next slide. On Page 20, we'll discuss capital management. Throughout the pandemic, we have been committed to strengthening our liquidity, our leverage and our financial flexibility. As our liquidity position continues to strengthen, we've refined our short-term capital management focus. At the start of the global COVID pandemic, we had to make some difficult decisions, including the suspension of dividends. However, those difficult decisions enabled us to drive our business strategy aggressively, knowing we have taken the necessary actions to ensure our liquidity and improve our financial flexibility. Over the first half of the fiscal year, we've generated record operating cash flows and improved our liquidity to $886 million, including $391 million of cash at September 30, 2020. Our confidence in our global business and its resiliency to various market conditions and our confidence in future cash flows has enabled us to refine our short-term capital management focus, most notably, we will reduce gross debt by $400 million by the end of fiscal year '21 and we will reinstate dividends with a full year fiscal year 2021 dividend to be announced in May 2021. Our outstanding first half performance, coupled with our pragmatic approach to cash management throughout the pandemic has afforded us the financial flexibility necessary to support the investment in our growth strategy and to strengthen our balance sheet and reinstate dividends. Finally, moving to Slide 21. Today, we are reaffirming the guidance range we announced just over 3 weeks ago on October 14. The full year fiscal year 2021 adjusted net operating profit guidance range is $380 million to $420 million. Operator, we'll now open the call for questions.

[Operator Instructions]. First question comes from Brook Campbell-Crawford from JPMorgan.

First one, Jason, actually just for you on that with America freight. It looks like the freight cost picked up quite significantly actually in the quarter. And are you able to quantify the dollar increase or the percentage increase? It just seems like a very big number to offset benefit sales for pulp and lean cost side, et cetera?

Yes, Brook, thanks for that. Specifically drilling into every metric and provide that data. But certainly, there's market data out there, as the housing market has been robust, flatbed truck demand is also high, which is driving that increase in freight pricing for us. But it was fairly significant. With the lean - continuation of our lean progress, then the lower pulp costs, we were able to still drive a higher EBIT margin outcome.

Okay. And then for Jack, just on the new global platforms. Are you able to provide any sort of further color? You mentioned adjacent markets, which sounds very interesting. Anything at this stage, you provide us on potentially what to expect from that later on or next calendar year, actually.

Yes, Brook, what we're looking at here is really about enter new adjacent categories. I mean so it means that it's not just only about the wood look or the vinyl look that we would combine our sites on. One of our core 4 strategies that we announced to the market back in February 2019 is that we would like to expand our exterior business. And the exterior business means that the market opportunity for us is really by all the - potentially all the exterior on markets. And that is what we are driving for with innovations.

Your next question comes from Peter Steyn from Macquarie.

Just maybe a quick one on Prattville. Interesting to see your intention to step your commissioning. Is that in response to a pretty tight supply environment? If you could just typify for us what your thoughts are there, the supply demand and how Prattville plays into that.

Yes. Peter, what we see is that we - as we continue to execute our global strategy, not only that the - that we are continuing to gain share in the marketplace but we also have an increased demand. And third is that with the innovation that we plan to come out in the next fiscal year. So when you add all those together, it shows that our demand going forward will really increase, and that will give us the confidence to really pull forward the Prattville, as well as know that we continue to drive lean execution. So as we continue to do that, we will continue to unlock more about existing capacity.

Your next question comes from Sophie Spartalis from Bank of America.

Just a quick one from me. Just in terms of the lean savings and production capacity you're getting, I guess, interested to hear how much more production capacity you think that there is to be unlocked across the North American network?

Yes. So Sophie, what - so right now comparing to 18 months ago, we have unlocked about 12% more capacity on what will - the total capacity in North America when we started this journey 18 months ago. And as - what lean continuous improvement is, is that we will continue to improve our execution of lean, and that means is that we will continue to unlock more. And also equally important, Sophie, is that the - by executing lean and continuing to do it better, we will reduce the variability in our production output. So - and that would drive more predictability on what we make and how much we make and where we make them. And that is one of the key factors that will allow us to be able to work with our customers, to flow products to the marketplace more fluidly.

Okay. And so just a follow-up then. We've seen over the last 12 months, a reduction in your SKUs, reduction in your, call it, offerings to try and streamline your production output. I guess, next year, we'll see the introduction of new innovative products. Can you just talk through how that marries in with your hope to be very streamlined on the manufacturing side of things?

Yes. Good question, Sophie. As part of lean approach is really about - really understand what is the true demand in the marketplace. And then based on the true demand, we want to make sure that we offer the right product portfolio. And then based on that product portfolio that the market really needs and wants, and that would drive our production plan. And so it's a - so it is now - and with lean has been a part of culture, it is a continuous process that we always evaluate. What's - what type of product and SKUs and portfolio that will continue to resonate with the market and what don't. And what don't resonate or the one that now that we have the process to be able to eliminate them sooner because - so that it makes room for the new products that we plan to launch, not only within our warehouse or our production, but also for our customers to have more resource capability to carry our innovative products.

Your next question comes from Peter Wilson from Crédit Suisse.

Just a couple on the cost base. So Slide 7, the North America lean savings. So it does appear that you're on track to me to exceed the USD 100 million target, which is a great result. But the green bars tend to suggest that the rate of improvement versus an FY '19 baseline have stalled. I'm just wondering what that means in terms of getting additional savings in FY '22 versus that '19 cost base.

Yes. Peter, I think we had this discussion in [indiscernible] once, Peter. It is really - in lean, it's really about every quarter or every month that we want to ensure that what are the savings that we were able to gain, say, last month, the last quarter. The following months, we began to make sure that we keep that gain and then improve on it. Because by keeping that gain, it is already a saving. So the way to read this, this chart is that essentially that $46 million of cumulative savings since the beginning of Q1 of FY '20, is that we have to make sure that, going forward, that we continue not only to improve but keep that gain. And that gain will - if we keep that gain going forward for the next 6 core quarters, then just to keep that gain, that's already another $46 million. So anything else on top of that will be the additional savings. It is - what lean savings is really about is to ensure that whatever the improvement that we made from what of the baseline that we started that, that is still locked in. And that is one of the key factors in driving the consistency in the gross margin or EBIT margin of a business. So the key is that sustained the gain is already very, very important and then add on top.

Got it. Okay. And if I could reprise another question, I've asked you before. Just in terms of Prattville, the margin impact you expected in the early quarters there, both gross margin and the D&A, will that come through?

Yes, Peter, thanks for that question. I think you can look back at historical results to try to model that as well. So we would have brought on Tacoma recently. Obviously not the same size facility, but still a significant amount of capital expenditure that as we brought that on, would have started having the depreciation. And obviously, selling product from that plant. And you could see in the prior year, 26% EBIT margin and in the current year, 28.9% margins. So certainly, as you bring on the new facilities, especially one sheet machine across a large facility, there'll be some incremental depreciation there. But if we're selling products in that facility, which obviously we will be, it also has a high gross margin.

The next question comes from Lisa... sorry to interrupt.

No, I just wanted to close a little bit, Peter, on that one. So just to look at the lean savings. Essentially, with $46 million saving cumulative for the first 6 quarters that will be - that we will be ahead of the plan.

The next question comes from Lisa Huynh from Citi.

Sure. I just have a question on SG&A. I guess, you've done a good job reducing SG&A during the period, which is helping the strong margin result. Some of these costs flow will naturally be added back in. But as you mentioned, you've made some structural changes to the cost base. Can you just give us a sense of what the cost savings you delivered from these initiatives were? And to what extent we should expect SG&A to step back up, particularly in Asia Pacific, where we're seeing a strong EBIT margin result?

So is this roughly between 200 and 300 basis points for both North America and Asia Pacific, primarily in Australia. And so what - structurally, what happened during the pandemic, the one when we had this cost rationalization is really to make a structure more lean. And then as we go through this pandemic, we essentially have a - just different way of driving growth in the marketplace. So it's also an opportunity for us now to really look at the critical few that will move the needle in terms of driving demand. And so going forward, what you're going to see more is - the 200 to 300 basis points of SG&A will come back to our business so that we can really drive - and the accelerated profitable growth in the mid to long term.

Okay. Sure. Got it. And I guess, just the extension of that question, then would you expect your Asia Pacific EBIT margins to continue to run ahead of your North American margins over the next 6 to 12 months in that respect?

No, no, it should be moderated lower than what you see in this quarter that we just reported. I think Jason had mentioned what you saw with a really good EBIT margin for APAC on this past quarter, really 4 factors, right? I mean first one is that the New Zealand business really had a great quarter due to the big pent-up demand, as well as more efficient cost structure of product coming from now the plant in Australia. And now - and also our more efficient plant in Australia and more volume coming in from New Zealand, that's not a lower product cost structure. And then third is really about the - this past quarter, the Philippines really didn't have a lot of growth. But now we see growth coming back in the Philippines in a very good way this quarter. So when you look at the EBIT margin, that's really the combination of EBIT dollars and net sales dollars. So you should expect that to really - not to be at the level that you see, it should be lower.

Your next question comes from Andrew Scott from Morgan Stanley.

Just first question from me, maybe for Jason. With the shifting of the timing of the price increase, can you talk to us about how you now think about the sort of the cadence or seasonality of the quarters? Usually, third quarter is the softest, presumably, you see some buying ahead of the price increase. How would you sort of expect to see that the view pan out now?

Yes. Certainly it steadies that out, the seasonality aspect a bit there, Andrew. And then I think you also have to remember this year is also a different year than any other year. But going forward, yes, Q3 is historically the lowest volume quarter. And yes, historically, you get a pull forward from a price increase. So as you look out into future years, that will help moderate that and drive some consistency throughout the four quarters.

Okay. And Jack, just a question to you, a variant on Brook's question. You spoke about sort of the global growth expansion. Just wanted to sort of inquire, does global mean anything outside of your existing footprint at the moment? Do you have further aspirations there? Or is it really - are you trying to tell us just across the platforms that you're in at the moment?

Yes. So it's really - one of the key global growth platform for us, really, it's also Europe. And I think we have discussed this annual investors tour last year is that for us to really drive the accelerated profitable growth in Europe for the 10-year ambition is really about having true in - innovations that - of fiber cement that would cater to the needs of homeowners in Western Europe specifically. So a key part of our innovation approach that we have been working on during the past 12 months is really - and that will lead to allow us to create new growth perform in North America and Asia Pacific, but also fuel the growth for Europe. And that is all about making sure that we can develop and commercialize the right products that meet the European homeowners' requirements.

Jack, if I can just jump in. I know '22, but just to clarify and be more direct, no broader Asian plans within that?

Not in the short or midterm end run. So it's really about making sure that we drive - making sure that we can drive our value creation in Europe, where we just made a very transformative acquisition.

The next question comes from Abraham Akra from Jefferies.

My first question relates to capacity utilization. It looks like plus 19% in FY '23, if that volume continues to grow by double digits year-on-year. It was a 12% incremental capacity being unlocked by Alabama coming online. What is the capacity utilization in terms that you see that will trigger a new plant or [indiscernible] plant expansion?

Yes. Abraham, we don't disclose our utilization of our plant. But I think what you can sees that our business continues to grow. I think we're doing it in the last 6 quarters here in North America. And we continue to have really, really good growth potential, at least in the near-term that we can supply the market. And then with Prattville coming online, it should drive a lot of the more capacity to first assume the market.

Sure. That's understandable. And last week...

I'm sorry, just real quick, just to add. You were also talking about deeper into the future. It's a little hard to hear you, but I think you're talking about. FY '23, FY '24. Remember, that the way we built Prattville, it can fit 4 sheet machines over the long term. So we've announced when we're going to start sheet machine one. And today, we announced when we plan to start sheet machine two. There's still brownfield capacity at that site.

Okay. Got it. And lastly, can you give some color on a trading update in terms of how you're performing in terms of volume across all regions?

Yes. So I would - right now in North America, quarter-to-date, our business is really at about upper, mid- to up teens growth. And then in Europe, this is on - so at the double-digit growth. And in Asia Pacific probably around mid- to upper single-digit growth total, as a total Asia Pacific.

Your next question comes from Paul Quinn from RBC Capital Markets.

Jack and Jason, just like other building material producers, Hardie's benefited from some of the COVID lockdowns and people fixing up their houses. Today's announcement by Pfizer on the vaccine, what do you expect the implication on your growth going forward?

Paul, I would say, I think it's for - regarding the vaccine from Pfizer, I think it's too early to tell. But we're certainly - what we see in the marketplace is that there is going to be an increased focus in remote modeling. And certainly, more and more people will be working from home, and there are going to be more opportunity for remodeling. But for us, as we look at remodeling, it's really more about residing. And there's still a lot of homes, very large percent of homes in North - in the North America that's between 30 to 40 years old. And those are prime targets for residing. So irrespective of what the vaccines kind of turn out or not, I think we still see a lot of growth opportunity for us in - particularly in North America, due to the structural nature of the housing market here when it comes to residing and remodeling.

Next question comes from Keith Chau from MST Marquee.

Just a follow-up question on your trading comments. I just want to confirm that the numbers that you've just provided to North America, up to mid-teens, Europe double digits and APAC, mid- to upper single digit, is that volume growth? And just to confirm that, that is the period to date for the third quarter, please?

Yes. So please, for quarter-to-date - yes, for quarter-to-date, for North America, that's volume growth. That's really mid-teen to upper mid-teens. For Europe, that will be revenue growth in the double digits. And then for Asia Pacific, it is volume growth, and that will be in the mid- to upper-single digits. And again, this is quarter to date. And then for Asia Pacific, that's [indiscernible] volume.

Volumes. Okay. Got it. The other one, I just want to go back to the net price increase, Jason, that you mentioned. The expectation for FY '22 is plus 3%, which I think ultimately assumes that there are some rebates flowing through as well. Just wondering if you can give us a sense on the expectation on mix going forward, whether that's going to be a tailwind or a headwind in FY '22? And as an extension of that question, whether there are commercialization of new products coming through in FY '22 that should - that may move the dial on price or volume?

Yes, Keith, as you know with the strategy, we're certainly focused on, Jack mentioned, innovation platforms. We're obviously driving color penetration and high-margin products. But certainly, in a year like this year, the mix - we achieved price everywhere we wanted to and the mix is kind of is what it is, where the south is doing very strong and single-family new construction is doing better than other segments. And so that's just - that's fine, as long as we're executing our price increase and getting price where we want. Mix is just kind of an outcome. The 3% we talked about is what we achieve - we believe what we will achieve in the financial statements next year. So that's inclusive of mix. But obviously, if there's something - shock to the market that changes it like this year, then the mix impact is - can change. But 3, 3% is our estimate today of what we believe we'll achieve.

And your final question comes from Lee Power from CLSA.

So if I take the $46 million LEAN in the U.S. If you assume you do like just a current - like what you're currently doing now so like 8.4 for the next two quarters kind of get to $63 million, which is obviously above the range that you have for '21. Do you want to just chat a little bit about is that still just coming through faster? Are you unlocking more than you thought you would unlock? And maybe how we should think about the longer-term targets.

Yes, Lee. So if you look at the - I think if you look at the - just - let's focus on North America number here. Is that - so right now, what we're seeing here, where we are now with this at the beginning of FY '20 is that with our cost structure, it's about $46 million in terms of more efficient than 6 quarters ago. So that means that - that means that to - if we continue to perform the same level as we do now, and that means - and for the next 6 quarters, that - then we will gain that $46 million additional just to keep at the same level of performance now, which is a very hard thing to do. So if we do that, if we do that, then that will be the equivalent of essentially $94 million of savings out of the $100 million that we said, beginning of fiscal year '20 when we introduced LEAN. But we expect that the continuous improvement that we will continue to improve, and that is where that additional will push us to above, at or above $100 million. But recognizing that as any month come here going forward, we have to make sure that we keep the momentum where we are now, just to lock in that game. Because if we don't perform to the level is now, then we're going to roll back. So it is a - from here going forward, every inch is, again, tougher and tougher. But that is where a lot of the work will go in, in terms of how we can lock in those gains for good, that it will be through a lot more of the process and engineering, a lot more of the manufacturing technology that we need to introduce into our manufacturing processes, to really fundamentally and "mechanically lock in" those things.

Okay. So when you say at or above $100 million, should we think of the $100 million as like a worst-case scenario, assuming that.

I mean assuming when we set out on this journey, $100 million - yes, 6 quarters ago, $100 million seem to be like a very - was a very big number. And, of course, and we worked hard and galvanized the whole company toward delivering that every day. And so as we stand right now, I mean, I remember I would say that we are ahead, I mean ahead of that path. But recognizing that every month going forward, it was tougher and tougher. Just not to keep the gain that we have or we've got to also add on top of that. So I wouldn't say $100 million a worst case. But certainly, it is now halfway through that 3-year plan, it looks a lot more tenable than it was 6 quarters ago. But certainly, we take your words as a challenge, Lee.

And there are no further questions at this time. I'll now hand back to Dr. Truong for closing remarks.

Thank you all very much for joining our call. We are in the middle of a - continuing to execute our global strategy as one global company, to continue to deliver growth above markets as a global company. And it's really great to see the progress that we have made so far. And I'd just like to take the opportunity to thank nearly 5,000 employees of James Hardie around the world who have worked very hard every day, despite the pandemic, to rebuild our business and make our business stronger as a result of it. And we're confident about the - what the future holds, despite all the uncertainties, but we're - we see the growth opportunity ahead for us, not only with the buoyancy in the housing market that we see right now, but also with the share gain that we are continuing to have and to earn as well as the excitement that we have within our company and the innovations that we plan to roll out in fiscal year 2022. Again, thank you all very much, and have a great day.