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…

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…

[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.