James Hardie Industries plc (JHX) Q3 2021 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to James Hardie Q3 FY '21 Results Briefing. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I'd now like to hand the conference over to Mr. Jack Truong, CEO. Please go ahead.

Good morning, and good afternoon, everyone. Thank you for joining us in our third quarter fiscal year 2021 earnings call. I will begin today's call by providing an update on our global strategy. On my appointment as CEO in February 2019, I shared with you my strategic vision for James Hardie Company. Today, I want to spend some time providing an update on our progress over the past two years in the execution of that strategy. And more importantly, provide you with insight into the go-forward strategic initiatives that will enable us to continue to drive profit growth into the future. After I go through the strategy update, our CFO, Jason Miele, will then cover our third quarter and year-to-date fiscal year 2021 financial results. We'll then open the call up to questions. Before we get into the presentation, I wanted to first say how pleased I am to be able to announce today, especially dividends of US$0.70 per share, restating our return of capital even sooner than expected. We suspended dividends in March of 2020 at the onset of the global pandemic in an effort to ensure liquidity and financial flexibility. Ultimately, we were able to accelerate our strategy, integrate more closely with our customers, and drove record profits and cash flows. Based on these results of recent pay down and gross debt, and our confidence in continuing strong cash generation, we believe returning capital to our shareholders via special dividends is appropriate at this time. Now, let's turn to Page 5 for an update on our global strategy. In February of 2019, I first shared with you my vision of turning James Hardie Company from being a big-small company into a small-big company, a company that could deliver consistent profit growth, at a larger and grow in scale. As I described two years ago, this would take significant transformation across multiple facets of the company. I'm pleased to note, that we have made significant progress in the transformation of our company during the past two years. Let's start on the left hand side of the page and discuss the significant and measurable progress we have made to transform James Hardie Company and to create a scalable business to ensure and enable future global growth. First, it was critical that we become a world-class manufacturer through our execution of lean manufacturing strategy. Our network of plants is on a continuous improvement path of becoming more predictable with less variability in production, quality and efficiency. Progress in this regard has enabled us to consistently and efficiently deliver premium quality products and service to our customers, and subsequently to the market at a lower and more predictable costs. Globally, we have generated over $83 million in lean savings over the past seven quarters. Second, we transform our commercial organization to be truly customer focused. We shifted from an organization that focused solely on creating demand with home builders and contractors to partnering with our customers to enable profitable growth for them, and also for James Hardy. Instilling this true customer-focused mindset throughout our company has been critical to driving our growth above markets and taking market share across all three geographies. This connectivity to our customers and a shift to push-pull strategy has led to 7%-plus primary demand growth of PDG in our North America business over the past seven quarters. It has led to global net sales increasing 20% in a third quarter of fiscal year 2021, or just the prior corresponding quarter. The third step in our transformation was to integrate our supply chain with our customers for mutual benefits; this is to ensure that we're able to continuously service the market seamlessly to our customers, provide them with the products they want, when they need them. This integrated approach to managing the supply chain with our customers has led to a more optimal working capital for both, our customers and James Hardie. For the nine months ended on December 31, 2020, we decreased our working capital by nearly US$200 million. Underpinning of transformation and critical to our success in accelerating our strategy during global pandemic is our globally integrated management system. This management system continued to allow us to make better holistic decisions at various levels within the company. It's also enabled cross functional business teams across the company to make appropriate adjustments quickly and at the right time to keep our transformation on the right track. Ultimately, all the progress that we have made across the three transformational initiatives I just discussed, has enabled James Hardie to deliver seven straight quarters of consistent financial results with growth above market and strong returns, including two consecutive quarters with record financial results in global net sales, global adjusted EBIT, global net operating profits, and global operating cash flow. Overall, the financial results in fiscal year 2020 and fiscal year 2021 to-date have been on the right track. I'm most pleased with the true transformation that have taken place within our organization, which now positioned us and enabled us to scale and drive significant profit growth globally into the future. In addition to the continuous improvements and transformation we have undertaken over the past two years, there are three critical strategic initiatives in this next phase of profitable organic growth. One, that's global innovation; two, penetrating and driving growth in existing and new markets and segments; and three, extended James Hardie brand from a premium professional brand into a market-leading consumer brand. In the next four slides, I will talk in more detail about each of these three strategic initiatives. These three critical strategic initiatives will allow James Hardie to take advantage of the scale and connectivity generated during the first two years of our transformation, and enable us to continue to drive profitable organic growth into the future. Let's now turn to Page 6 to discuss global innovation. I'm very excited to share with you today the progress we have made in commercializing new and innovative products. We're currently in a test sales phase of our commercialization process. We're actively testing selling new products in all three of our regions. In a few minutes, I will share with you some pictures of those new products in situation of use. But first, I want to discuss the strategic direction of our Global Innovation Program. Our approach to innovation is about developing market driven innovation to drive profitable organic growth. Let's start first on the left hand side of the page. We'll focus on a true global innovation platform that includes innovative products that deliver endless possibilities of design and aesthetics for the home owners. These innovation will also provide the superior performance the market has come to expect from James Hardie products; superior performance that's based on the key properties of James Hardie unique fiber cement technology, durability, low maintenance, and non-combustibility, while also improving on labor productivity. We believe this market driven innovation will expand opportunities for growth by opening new markets and enlarging existing markets. Moving to the right hand side of the page; we have shown here some market data for reference purposes as a way to illustrate while we focus on market led innovation. The data we're showing here illustrate the materials that are utilized to clad the exterior of homes in a new construction segment in North America and Australia-New Zealand. If we focus on North America for a moment, the green area of the pie represents a portion of the market our current product portfolio can address; this green area represents vinyl wood, engineered wood and fiber cement. As you know, we really have a significant portion of the share with the blue area of this pie chart with this 49% was used to clad new homes in North America, represent materials such as stucco, stone, brick et cetera; our current portfolio does not address that portion of the new construction market. Fundamental global innovation is to ensure we can participate in more of the expanded market opportunity and we view the blue portion of the pie chart as an expansion opportunity made possible through a market driven innovation strategy. Again, these charts are only for new construction in a few markets but as we look across all countries and all segments, in which we market and sell James Hardie exterior products, there are portion of those pie charts that are also blue. Let's just say there are significant market opportunities we're not participating today because of current product portfolio did not enable us to; and this is for this reason that we are laser focused on driving market-led innovation to expand our opportunities for organic growth. Let's now turn to Page 7 to take a look at some of our current innovation progress. We're currently on-track to commercialize our first phase of innovation in May 2021, just a few months from now. Our expectation is that this will be the first of many innovations that will commercialize as we continue to introduce new products to the markets in the next few years. On this page, we have a few examples all around the world of innovations which we are in the process of test selling ahead of the full commercialization. On the top left is an example of new fiber cement interlocking plank for the European markets. We're currently test selling this product in France and the UK. To date, the market feedback has been extremely positive and we're on-track for full commercialization in May 2021. In Europe, interlocking plank makes up roughly 80% of the plank markets. Interlocking plank is a natural product portfolio extension for us in Europe that meet the European market requirements, it enabled us to provide our customers a full suite of plank products that are quicker to install while enabling homeowners to have endless possibilities of beautiful designs while getting the long-lasting beauty and trusted protection of James Hardie fiber cement. On the top right, and bottom left, you can see renderings of the two homes using panelized products that deliver stucco aesthetics. We're test selling these products in five different key markets across the United States, including New Jersey and California, as you can see here. Similar to our interlocking plank test sales in Europe, a test sale feedback from homeowners, builders and trade people have been very positive. Lastly, on the bottom right, we have a picture from a completed project in New South Wales, Australia. This product is similar to the product just discussed in United States; it is a penalized product delivering the stucco or render aesthetic. Thus sales is an important part of our commercialization process of new product innovations. In the past, James Hardie often developed new products, our product extension in a laboratory scale and then trying to manufacture and push them into the markets. This is not how true innovation will work. Over the next -- over the past few years, we have transformed our innovation process. We began with market research to understand the key unmet needs in the markets. We look at the mega trends such as labor shortage, and after careful development of prototypes, we did market tests to ensure acceptance of the concepts. And finally, we performed an extensive test sales before full commercial launch; this is to ensure a sustainable and successful innovation program for the long-term. We're very encouraged with the market feedback from the test sell process to-date, and remain on-track for the full commercialization of these new market-led innovations in May of this year, just a few months from now. Shifting down to the Page 8. The second of our three critical strategic initiative is to further penetrate and drive profitable growth in existing and new segments. On this slide, I want to discuss one such segment where we believe we have significant opportunity to grow further. Or we have a good business in North America, repair every remodel segments, we believe the opportunity for future growth remains significant. The chart on the left is the U.S Census data from 2019. We show the existence 79 million owner occupied homes in the U.S by the age, over 54% or 44 million of the 79 million owner occupied homes in the U.S are 40 years older, haven't been built before 1979. This is a huge pool opportunity from which we can generate demand for James Hardie exterior products. We can accelerate and amplify that demand by marketing directly to the homeowners that James Hardie is the trusted innovator with premium quality products that enable homeowners to realize their dream homes with endless design possibilities. Moving now to Page 9. The last of all, three critical initiatives is in driving profitable organic growth in fiscal year '22 and beyond, its extended into a consumer brand. Historically, James Hardie brand has resonated strongest with professionals and evoked a brand that is appreciated and trusted with products that are durable, low maintenance and non-combustible. We're now ready to extend James Hardie brand into a true consumer brand. When we market directly to homeowners and communicate to them the endless possibilities of aesthetic design that our products offer. By marketing directly to the homeowners we will create even more demand and emotional attachment for James Hardie brand products. James Hardie brand products provide a long lasting beauty with endless design possibilities. And James Hardie brand products deliver the trusted protection with durability, maintenance, and non-combustibility. This allows the homeowners to remodel their home into the home of their dreams. The imagery on this page represents a variety of possibilities on how to design the homes of your dreams with James Hardie branded products. By communicating directly to the homeowners and to integrate with our customers, we will increase demand and accelerate our growth in repair and resizing/remodeling [ph] segment. Turning down to Page 10. Here you see another visual representation of our desire to generate emotional attachment to the James Hardie consumer brand and remind homeowners how James Hardie can empower them to achieve the home of their dreams by unlocking the endless design possibilities and deliver protection and lasting beauty. We've planned to begin launching the first phase of marketing campaign to homeowners in the middle of calendar year 2021. Let's now turn to Page 11. As we look into fiscal year 2022 and beyond our demand profile as a growth company will expand as we commercialize global innovations, further penetrate and drive profitable growth in existing and new segments such as R&R and invest in extending into a consumer brand. Therefore, we're investing to expand our global capacity and to build new products capability. The timeline of our capacity and capability expansion over the next three years is outlined on the bottom of the page. We will number one; expand on North American nameplate capacity by 800 million standard feet. Number two; expand on nameplate capacity in Australia and New Zealand by 60 million benefits. Number three, we will provides significant increase in our color plus and HLD trim finishing capability in North America, the consistent growth plan for the next three years and going forward and to enable continuous innovation with new pilot plant innovation facilities in both our facility of R&D in the U.S and Australia. As previously disclosed, we will bring the first sheet machine in our Alabama facility online next month, March 2021. And we'll bring the second sheet machine online to the middle of calendar year 2021. In addition to those previously disclosed capacity expansions, we also made the decision to reconfigure and restart our Summerville, South Carolina facility which will start in late fiscal year 2022. We will also significantly increase our color plus and trim finishing capability in North America as we drive our accelerated growth of high value products. Lastly, we'll be adding to innovation centers, the R&D pilot facilities to enable continuous market led innovations. We have a clear strategy to drive profitable organic growth in fiscal year 2022 and beyond through global market led innovation, penetrating and driving growth in existing and new market segments and extended James Hardie brand into the consumer brand. And we will enable that growth with the strategic capacity and product capability expansion. Shifting down to Page 12. I will spend the last two slides briefly discussing the results of our strong strategic execution in the third quarter and nine months ended December 31, 2020. Starting with our third quarter results here on Page 12. We deliver second straight record quarter in global net sales and global net operating profits. We deliver growth above market with strong returns across all three of our operating regions. Specifically in the third quarter, we delivered $739 million of global net sales in a quarter. That's at 20% growth versus the prior corresponding period. And we deliver a global adjusted net operating profit of $123 million, which was an increase of 59% and an all-time record high net income. Importantly, we delivered strong financial returns in our threes region for a second consecutive quarter. In North America, we achieved net sales growth of 20% with an excellent EBIT margin of 30%. In Europe, we achieved net sales of €85 million, 12% growth over the prior corresponding period. With the second consecutive quarter of EBIT margin greater than 10%. And in Asia Pacific, we achieved net sales growth of 9% in Australian dollars, with excellent EBIT margin of 28.1% marking of seven straight three quarter of delivering growth, global growth with strong returns. These results reflect our continued ability as a global company to execute than our global strategy across all three regions. Moving on to Page 12. As you see a similar story of consistent excellent financial results for the first nine months of fiscal year 2021. I also think of this page helped to bring to light the scale of our global business today, we deliver a global net sales of $2.1 billion or 9% organic growth in the first nine months of this fiscal year versus the first nine months of the last fiscal year. We generate a global adjusted net operating profit of $333 million. That's a growth of 25% and global adjusted EBIT of $456 million, or 25% growth and operating cash flow of $678 million, which represented a 72% increase over the prior cost filing period, and all time record high. I would now like to turn this over to our CFO, Jason Miele to provide additional details in our financial results.

Thank you, Jack. Good morning, and good afternoon, everyone. I will start on Slide 15 with our global results. As Jack just discussed, this is our seventh straight quarter of generating strong global financial returns, and our second straight quarter with record results. What I'm most pleased with is that we had all three regions deliver excellent results in the third quarter. And this marks the second consecutive quarter; we've been able to achieve this. All three regions delivering excellent financial results simultaneously. Global integration of our strategy and our team and the significant execution over the past two years are now being consistently realized in the financial results. This is a litmus test of the truly integrated global company. In the third quarter global net sales were up 20% as our customer focus and customer integration efforts continue to become embedded in every country we do business in. Through continuous improvement of lean manufacturing globally, an integration of our supply chain with our customers, we were able to translate that strong top line result into an even stronger bottom line outcome. Global adjusted EBIT improved 57% and global adjusted net operating profit after tax increased 59% in the third quarter. Global adjusted net operating profit after tax in the third quarter of $123.3 million represents a another all-time record high for James Hardie in a quarter. Operating cash flow for the nine months increased 72% to $678.4 million. At the start of this call, Jack discussed the key strategic transformations we have been through over the past two years. Specifically, lean manufacturing, becoming customer focused and integrating our supply chain with our customers. These strategic transformations globally have directly led to the step change in operating cash flow, as well as a strong top line and bottom line financial results for the quarter and nine month periods. Now I'll review each region in more detail starting with North America on Page 16. In North America, we had another outstanding quarter. In the third quarter and volume increased by 17% and net sales increased by 20%. Our exteriors volume increased 19% in the third quarter, driven by continued share gain. As our team continued their focus on customer engagement and integration and then our interiors business we drove a 4% increase in volume compared to the prior corresponding quarter. Price mix improved and we anticipate continued improvement as we drive our strategic initiatives Jack discussed earlier, specifically, penetration of repairing model segment and growth through innovation. Our outstanding top line results were coupled with even better adjusted EBIT growth, which increased by 39% for the quarter to $155.6 million and that an excellent EBIT margin of 30%. The outstanding adjusted EBIT and EBIT margin results in the third quarter were driven by strong organic volume growth, continued lean manufacturing results, and lower SG&A which were partially offset by higher freight costs in both periods. Overall, in the third quarter and the nine months year to date, the North American team delivered another set of exceptional results with continued growth above market and outstanding returns. We'll now turn to Page 17 to discuss the European results. In Europe, the team delivered a second straight quarter of strong results. In the third quarter net sales increased 12% and adjusted EBIT increased 300% in Euros [ph], and adjusted EBIT margin was 10.2%. The team remains focused on driving gross margin improvements, your growth and high margin products and continued penetration in existing and new fiber cement markets. In the third quarter fiber cement net sales increased 18% and fiber gypsum net sales increased 11% versus the prior year third quarter. The strong fiber gypsum growth was underpinned with double digit net sales growth in Germany, Switzerland and Benelux and our UK team delivered excellent double digit growth in both fiber cement and fiber gypsum. We remain encouraged by the good progress of our European business and the local teams ability to drive an integrated strategy and continuous improvement, especially during the past two quarters. Let's now turn to Page 18 to discuss Asia Pacific. In the third quarter volume and net sales both increase 9% in Australian dollars compared to the prior corresponding period. This top line growth was led by continued share gains in Australia and New Zealand. The Philippines also returned to growth in the third quarter delivering double digit net sales growth in Australian dollars versus the prior corresponding period. The strong top line results in the third quarter were translated into even stronger earnings results with adjusted EBIT growth of 34% in Australian dollars at an EBIT margin of 28.1% for the third quarter. Excellent third quarter performance in our Asia Pacific region was driven by execution of our strategic objectives, including customer integration and lean manufacturing. In addition you will recall earlier this fiscal year, we announced we were consolidating our regional production for Australia and New Zealand to our two Australia based manufacturing facilities. We also closed unprofitable James Hardie systems business. These adjustments, in addition to the team's execution of our strategic objectives have helped drive the improved adjusted EBIT margin performance in Asia Pacific. Moving now to Page 19 to discuss operating cash flows and capital expenditures. Operating cash flow increased 72% for the first nine months versus the prior corresponding period, primarily driven by increased profitable sales globally, and further integration with our customers to reduce working capital for both them and us, including a reduction in inventory of $90.3 million during the nine month period. To put the $678 million of operating cash flow into some additional context, our best fully fiscal year operating cash flow results with last year in fiscal year 2020, where operating cash flow for the full 12 months was $451.2 million. So through nine months of this fiscal year, we have already exceeded last year's full year operating cash flow by 50%. Shifting to the right hand side of the slide, you'll see a summary of our capital expenditures. For the first nine months of this fiscal year, capital expenditures totaled $77 million. For the full year fiscal year 2021, we anticipate spending approximately $125 million in total capital expenditures. In Asia Pacific, we commissioned the new sheet machine in Carol Park during the third quarter, which has additional capacity to service our Australia and New Zealand markets. In North America, our Greenfield capacity expansion in Prattville, Alabama remains on track. The sheet machine number one being commissioned in March 2021 next month and sheet machine number two on track to be commissioned in the middle of calendar 2021. Early in the presentation on Slide 11, we discussed our plans for global capacity expansions and new product capabilities to support our accelerated profitable growth plan over the period of fiscal years 2022, 2023 and 2024. We expect the total capital expenditure related to the projects listed on Slide 11 along with the regular maintenance capital expenditures to approximate $250 million per year for the three year period fiscal year 2022 through fiscal year 2024. These capacity expansions and product capability expansions will further enable our global strategy to drive profitable growth. Now let's turn to Page 20 to discuss the liquidity profile. At the end of the period December 31, 2020, our debt price [ph] profile remained unchanged. And at December 31, 2020, we had liquidity of $1.1 billion, and a net leverage ratio of 0.96 both representing significant improvements from the start of the fiscal year. The execution of our global strategy has led to significantly improved cash flow and thus continuous improvement in our liquidity and leverage position. This enabled us to reduce our debt levels while maintaining strong liquidity and financial flexibility. As announced last month, on January 15, 2021, we redeemed $400 million of senior unsecured notes. This redemption included a $9.5 million call premium for total cash payment of $409.5 million. In addition to the cash payment amounts $3.6 million of unamortized financing costs associated with this set of notes will be accelerated into the fourth quarter fiscal year 2021 results. So for clarity, there will be a $13.1 million expense recorded in our fourth quarter fiscal year 2021 results associated with the note redemption. Redemption of these notes will save us approximately $20 million of interest per annum. After the redemption of the senior notes in January, our liquidity remains very robust at $675 million as of January 31, 2021. Now moving to Page 21. Our strong capital structure and cash flows have enabled us to execute on all of our capital allocation objectives. As we have discussed today, we continue to preserve a strong liquidity position and financial flexibility. We are positioned to continue to strategically invest in capacity expansion and market driven innovation to support and drive organic growth. In last month we reduced debt by $400 million in accordance with our plan and resumed returning capital to shareholders ahead of schedule. Today we are very pleased to announce a special dividend of $0.70 per share. Special dividend will have a record date of February 19, 2021 and payment date of April 30, 2021. Based on our strong strategic execution through the pandemic, our confidence in continued strong cash generation and in light of the suspension of our ordinary dividend since May 2020, we believe resuming our return of capital to shareholders via dividends is appropriate at this time. We have a solid balance sheet and liquidity position to execute on our unchanged near term and long term organic growth priorities. Lastly, before we go to the final slide, well not financially material to our results, I didn't want to briefly comment on government assistance associated with COVID pandemic. James Hardie has not received any amounts from the Australian government under the job keeper initiative, or any other COVID related assistance program. However, early in the pandemic, we did receive approximately $1.1 million New Zealand dollars from the New Zealand government under the COVID-19 wage subsidy plan. We have since return these funds in full to the New Zealand government on the back of our strong results. Finally, please turn to Page 22 to discuss guidance. As announced this morning, we are raising our full year fiscal year 2021 guidance, our new guidance for full year adjusted net operating profit, the range of between $440 million and $450 million. The comparable figure for the prior year, fiscal year 2020 was $352.8 million. The midpoint of our new guidance range represents a 26% year on year improvement in adjusted net operating profit. We'll now move on to Q&A. Operator, please provide the Q&A instructions.

[Operator Instructions] Your first question comes from Peter Steyn of Macquarie. Please go ahead.

Good afternoon, Jack and Jason, I trust you can hear me thanks very much for the opportunity and congratulations on a very strong results. Was just keen to dig into your strategic intent to enlarge your target markets. And, Jack, if you could frame up for us how you would measure your success in the achievement of your vision here. You know, obviously historic there is been a couple of guiding lights as it were, for you just interested in how one would assess where you're seeing the endpoint and what the blind path would look like towards success?

Hi, Peter. Thank you. The way that we look at our market driven innovation program is that, the reason we do a lot of market research and market tests is to ensure that we provide the right products that our customers and home owners around the world would really come to appreciate the value, so that we can tailor the products accordingly. And so that's that is really the spirit of how we approach product development and our strategic intent have really gone to new categories really understand each of the categories and then be able to have very good penetration within the new categories. And our tradition is to create a new footprint just like the way that we have done in our current fiber cement into the current wood look category. But Peter it is still early yet within our the execution of the strategy and then of course as time goes on, we would have more and more clarity on what that journey would look like and the profile of that journey.

Yes, okay. I guess as a follow up, you know, I guess what I was trying to refer to in a roundabout way was $35.19 [ph] as well as be in the North light; so that $35.19 [ph] obviously changes. And I guess, folks are going to be looking for some sort of calibration around that. But I appreciate its early days. So I guess we'll wait for further guidance on how you see that in future.

That's correct, Peter. And just a follow up to that, too, is that, the global innovation that we are driving here is not just for North America. It is also a relevant new product platform for the European markets, as well as in Australia and New Zealand.

Yes, absolutely. That's clear. Thanks, Jay. I'll leave it there.

Thank you. Your next question comes from Brook Campbell-Crawford of JPMorgan. Please go ahead.

Yes, good evening. Thanks for taking my question. First, and just around the R&R opportunity, are you able to just elaborate really on how you're going to look to gain traction with the consumer because it's a slightly different approach, really. And then to have a B2B type, marketing efforts? And that's the first part of the question. And then the second part, do you sort of a marketing budget, and for this view, and direct to consumer sort of marketing approach in FY '22?

Yes. Good morning, Brook. And so the way to think about R&R is that, we currently this 44 million homes, owner occupied homes in America, that's more than 40 years old. And also with the onset of the pandemic, the behavior has changed, and a lot more folks are staying at home more and there is really that need to make the exterior of the home look more beautiful. And as we did more market research and what we learned is that there is really a lot of a very high percentage of homeowners out there that don't really know the capability about James Hardie exterior solutions that they can work with the designer is to be able to design their own sets look a lot more beautiful. And let's take the example of in the northeast of the U.S, where we have where vinyl is a standard in that market today. And as a company we have been trying to for many years to penetrate the market. But the key value that we bring in the market is curb appeal. And that means that it's important that for us as a brand that we need to reach directly to the home owners to really show the home owners, the endless possibilities that they can design their own to make it more beautiful that they can be proud of through James Hardie solutions. And yet, they have the protection of the durability to non-stability and low maintenance that our products offer. So, it's really about driving tour, creating the demand with the home owners and then as really to get the home owner to take the decision to really reside their home. Relative to the budgets that you have asked question for fiscal year 2022, were going to look at anywhere from between $30 million to $50 million.

Okay, thanks. That's the additional marketing expense just to confirm for this new approach with R&R, $30 million to $50 million?

Right. It's not just a 100% additional it's -- we've always done marketing activities, this is a more reallocating funds as well as there will be some, a good chunk of that is incremental but not entirely.

Understood. Maybe I can squeeze them in and with you, Jason just on operating cash flow clearly very strong in the nine months, presume that will be some operating cash flow in fourth quarter. Can you just remind me what the conditions that need to be met to potentially reduce the 35% contribution to this [indiscernible], what you need to achieve? And is there any potential for that over the next 12 months given your cash flow?

Yes, Brook, it's good question. It's not anything necessary, we need to achieve; it's in the contract, the amended final funding agreements. As you know, there's a calculation that occurs at the end of each fiscal year to the term end how much we pay to the fund. And it's the lower of two numbers 35% of our cash flow, or a top up with a top up concept, which is so that the fund has at least three years' worth of payments in cash. So really, when that occurs as they build large cash balance over time. And so as we drive cash flows up and provide them 35% of cash flows, they'll continue to grow their cash balance, if our payments then exceeds the claims in that year. So that is still something that will take a few more years.

Okay, great. Thanks.

Thank you. [Operator Instructions] Your next question comes from Abraham Akra of Jefferies. Please go ahead.

Great result. Firstly, I still think product shortages across the building material space from it to creditors? If so, when do you envision your competitors supply constraints going away?

Good morning, Abraham, we can't speak through to what our competitors are doing in that space. But what we can talk about from our companies that we're working very, very closely with our customers, to be able to have a future forward demand of our product through our customers many weeks out into the future, and then couple that with the lean manufacturing strategy that we have, we're able to plan our production out in a very lean way that allow us to produce and then flow the product directly to our customer to the market. So that is really the key drivers that allow us to deliver the record result that you saw today. For us, in North America, this past quarter, our exterior volume increased 19%. And then if you look at our volume for exterior a year ago, in the third quarter, that was on -- sort of up 13%. So first is really about understand more demand products into the future, and then have a better production plan to our lean system to deliver to the markets.

Got it. I guess as a follow up, can you estimate or do you have an idea as to how much demand was pulled forward into 3Q from the price?

Abraham, everything that we produce and ship to our customer to the market is pretty much went into the wall.

Understood. Thank you.

Thank you. Your next question comes from Lisa Huynh of Citi. Please go ahead.

Hi, morning, Jack. Morning, Jason. So I had a question around interiors. So there were about 4% in the December quarter, which is a slowdown from the 7% growth in the September quarter. Can you just talk briefly to what's driving this? Or is this a slowdown indicative of what you saw in the wider market more broadly?

Yes, it is firstly, the interior businesses. It's kind of hanging around the mid-single digits is pretty much kind of where it is, until we truly innovate in this category, and then add more new products to it. So that's more and more to be seen from that perspective. But right now, given the current pandemic scenarios, having the repair done inside a home with contractors is still quite limited.

Okay, sure. Got it. Thanks. And just a quick one, if I can slide it in on raw material costs. I can't say the usual input cost slide. We're hearing is meaningful increases dying to come through in both the spot market and contract volumes, the pulp, can you just remind us what proportion of your pulp supply is secured via long term contracts and whether you've seen any impact from this today?

Lisa, pulp kind of lags, the pulp market price is kind of lags one quarter into our financials. And certainly, pulp is starting to trend up. It was fairly flat for nine months or so. And we'll expect some pulp headwinds in FY '22 versus FY '21. But currently not anything we think is too substantial.

Okay, so thanks.

Thank you. Your next question comes from Lee Power from CLSA. Please go ahead.

Hi, Jack. Hi, Jason. Just quickly on lane in North America, you're at $61 million through three quarters. That's kind of the upper end of that target. You had for FY '21. Can you give us just an idea of how we should think about that for FY '21 and also any updated thinking on the reinvestment profile for lane going forward?

Good morning. For us, that lean is really about, we will continue to improve that continuous improvement mindset. So as now that we essentially exceeded the plan that we set out, back in February 2019, we were and we have just gone on through our strategic plan, and then we will plan to update the markets on what's the next target for the next three years would be and we will kind of share that with you in May at the next earnings call.

Okay, thank you.

Thank you. Your next question comes from Paul Quinn of RBC Capital Markets. Please go ahead.

Yes, I just want to follow up on the freight and pulp headwinds, you're seeing. What we're seeing in the in the pulp markets is, some of the producers that we have coverage over are raising prices over $100 at a ton. So if you could sort of outlined what you were expecting in freight and what your sensitivity to sort of the $10 increase in pulp is?

Yes, thanks, Paul. So we will be giving a clear, FY '22 guidance in May. We certainly do expect headwinds from pulp. And we do expect in the kind of ballpark you're referring to. And then we do expect freight to remain high. Freight has been quite high this year, and certainly a headwind in FY '21 versus FY '20. That said, we do expect to maintain strong EBIT margins in FY '22. And we'll provide more clarity on that in the May result.

Excellent. Great results. Thanks guys.

Your next question comes from Keith Chau of MST Marquee. Please go ahead.

Good evening, Jack and Jason. Question for you Jack, just on new product development. Obviously innovations, not necessarily new things at Hardie's that are suddenly ramping up over the course of the coming years. Just wondering if you could first of all give us a sense of you know, how product penetration has tracked maybe using easy to expel in Australia as an example, given that was launched last year, and what that ultimately contributed to volume growth as you ramped up commercialization of their products under your watch. And then as part of their question, is there a broad rule of thumb in terms of what you're targeting for on the walk cost versus your substitute products? Whether that be in dollar terms, or in terms of time savings, obviously, the latter. So it's a bit of an issue in the market at the moment with labor. So if you can give us a sense of what benefits you're looking to, I guess proliferate into the markets to compete with alternative products that would be very useful. Thank you.

Good morning, Keith. First question with the different version of these detects that we -- really been -- really still test selling in Australia with the right support. So really the first 12 months is really the acceptance has been very high. And it's really about three, the volume was more than 3X what we had planned. And just to give you another perspective with a plan for next year for that volume will be 10X. So that's the first and second thing is for the productivity. The key part of this innovation is that for us to address the labor shortage and to improve productivity is that we also target the on the wall costs to be anywhere from 10% to 25% less than the alternatives that we're going after. And that really depends on market to market. And of course, that is from the pure economics, functional type of approach. But at the same type of innovation is really what we try to go after as well is to evoke the emotional attachments of the home owners to add to the endless possibilities of designs and aesthetic that our total experience solutions from James Hardie can deliver to the homeowners.

Thanks, Jack. I'll circle back for a follow up.

Thank you. Your next question comes from Grant Slade of Morningstar. Please go ahead.

Hi, Jack and Jason, thanks so much for taking my question. I was just wanting to confirm with you how much the repair remodels segment of the North American market grew by in the third quarter if I could.

So based on our analysis Grant, what we estimate between 7% and 8%.

7% to 8%. Okay, great. Thanks very much.

Thank you. Your next question comes from Sophie Spartalis from Bank of America. Please go ahead.

Hi, Jack and Jason. Just wanted to ask a bit more of a big broader question. Just wanted to try and understand the possibility around the margin trajectory for the U.S. And I guess this is just in context of how we balance, this input cost trajectory, as we've been talking around the pulp pricing. The new margins of these new innovative products, and then the lower unit costs are expected from the expanded capacity that you've announced today. And then just as a follow up, what does all this mean, in terms of that long term margin guidance of 20% to 25%? Does that now seem redundant, given that you're delivering sort of 30% and expect to go higher? Thank you,

Good morning Sophie, I think I counted like six questions in one question. So let me first see that I can answer the first one here. So what you should expect from us is that we will continue the drive continuous improvement through a lean manufacturing strategy. So that means not only that, we need to keep the gain that we have in lean up until now. But we will continue to drive more efficiencies. So that's the first thing. And the second is, as we do that, we then will improve lean, not only in our manufacturing processes, but also improve lean in our supply chain to our customers and to the markets. And that is the second part of savings that that we're realizing in fiscal year '21. So those are the positive sides on the operation side. And then the second part is really about for product mix. So, as we're going through to drive more marketing directly to the homeowner to create demand, for the aesthetic products, that means more color products, which have a higher price and higher margin and also better mix for us. So that will be also the second key driver for the positive side. The third one would be the innovation. And the key innovation that we bring to the marketplace is that not only that has the functional performance that superior to what's in the market right now. But we also have the aesthetics and therefore, our new innovations that asked our gate to be commercialized into the marketplace will also be higher margins than our current product base. So, those will be the accretive margin for our business going forward. And then of course that will be offset by higher freight costs and as well higher pulp costs, which is much lesser extent than a few analysts have asked here. And of course, there can be some SG&A investment that we put back into the marketplace into our business. But net, net very pleased to see our margin, particularly in North America will be higher than what it has been for many years. And we -- we will give a more definitive guidance on what margin would be in May earnings call, which will be much more on the basis for our guidance for this coming fiscal year?

Yes, that's the guidance for FY '22. And thanks for the information or clarity, Jack. It's more around that long-term guidance that I think you've provided a couple of years ago -- a year ago now, where you had that long-term margin guidance of 20% to 25%, but that seems very redundant right now.

Correct. And then, you will -- in May, when we'll share the -- during the next three year plan that would give really updated long-term guidance as well.

Okay, great. So in May you will provide FY '22 plus a three-year guidance?

That's correct.

Okay, fantastic. Thank you.

Thank you. Our final question comes from Peter Wilson of Credit Suisse. Please go ahead.

Another margin question. Just on the R&D plants that you plan on opening; will they be a significant cost or not?

Peter, the R&D facilities that we'll plan to have -- one in -- kind of U.S. and Australia will be our capital expenditure.

Okay. Will it be material increase in capital -- ongoing capital expenditure?

It is -- it's -- it is going to be a good investment, but will not be at this or the order of magnitude that you will be familiar with in our manufacturing plants CapEx.

Okay. And then, just one on guidance. If my math is correct, your full year guidance implies that Q4 will be about 10% lower at the impact level than Q3 where usually fourth quarter is actually the strongest. So I'm just hoping you might provide us some sort of commentary or bridge from Q3 to Q4.

Yes, Peter, so a couple of things. One, this Q3 did not have the normal seasonality; I'd say that -- if you're kind of going back in history with that comparison. So we had a very strong Q3. The most notable item would be the redemption of the notes. So as I went through during the slides, you're going to have a $13.1 million charge in in the fourth quarter associated with the call premium, as well as the pull-forward and acceleration of the unamortized portion of the financing costs; so that would be the most significant item. And then, obviously, as we move forward with this consumer branding, we will have -- and talent acquisition will start increasing SG&A in the fourth quarter.

Okay, thank you. And just to get a feel for where we're at in terms of this growth investment journey; so essentially, like a lot of laser [ph] analysis kind of strategy being done, if you think about -- I guess the costs that you're currently incurring versus what you might be in a couple of years, are you currently incurring a significant cost of all these kind of growth planning?

Sorry Peter, when you say growth planning can you be -- can you be more specific?

Well, I guess at a high level you're been quite upfront that there will be increased cross investment going forward. I'm wondering how much of that has come through the Q3 results versus how much is to come?

Probably, one or two has already been factored in. And so, if you're speaking specifically about virtual capacity, so our estimate is $250 million per annum for the next three years on total CapEx. If you're thinking about the marketing, [indiscernible] in Q3, but that will increase overtime, similar to what we said last quarter as we started foreshadowing, and talking to you that our SGA would begin to increase over the next six to eight quarters that includes this -- mark this growth through marketing, as well as adding talent and capability to our organization.

Okay, that's good. I leave it there. Thank you.

Thank you. Your next question comes from James Brennan-Chong of UBS. Please go ahead.

Good morning, guys. Thanks for my -- for your time. Just to clarify, when you launched these new products, these products are going to be made on the same types of sheet machines that you've already got. And I guess what I'm just wondering is that there is no shortage of demand for your existing products right now, it's surging. How do you think about balancing, you know, day D-shaped [ph] machines producing more different SKUs going forward? Just wondering how you think about potentially bumping up against any particular capacity constraints for particular lines? How do you think about just allocating -- how much a sheet machine is producing for one product versus another and switching time [ph]? Thank you.

Good question, James. So I think for new products, it's important that we use the focused factory. So it's -- and also focused line to make sure that it's more dedicated to more of a -- to producing short run type of products; so it's for -- in North America, yes. So for new products, we pretty much limit to one plant and make sure that we allow us to have the capability to do -- to run smaller runs. And then, that's also the same in our Australian plants.

Got it. So not every -- so, I think you've got 10 or 11 plants across the U.S.; so not every plant is going to producing multiple different SKUs, it is just say one or two that will produce new products. Got it, thank you.

That's correct. It will be just one, yes.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Truong for closing remarks.

Well, first of all, thank you all very much for, of course, jumping in the call. I just would like to, again, extend my gratitude and thanks to all James Hardie colleagues around the world; their continued execution of our global strategy over the past two years that helped fundamentally transform James Hardie Company, and essentially put us in a position to enable significant future global growth. We are much different company from where we were two years ago; we are focused on continuing to connect our global businesses to be with scale to an integrated management system that enable us to create more value for our customers and our market. I'm excited for what the future holds for James Hardie Company as we embark on this next phase of profitable growth driven by market-led innovation, our relentless focus on penetrating new and existing segments, and our extension of James Hardie brand into the consumer brand. Thank you. And have a good day and have a good morning.

That does conclude our conference for today. Thank you for participating. You may now disconnect.