James Hardie Industries plc (JHX) Q2 2022 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the James Hardie Industries JHX Q2 FY '22 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Dr. Jack Truong, Chief Executive Officer. Please go ahead.

Good morning, and good evening, everyone. Thank you for joining us on our second quarter fiscal year 2022 earnings call. This is now the tenth consecutive quarter of our company delivering on strong financial results with growth of our market and strong returns based on the consistent execution of our global strategy. I will begin today's call by providing a brief update on our global strategy, which includes sustainability; then our CFO, Jason Miele, will cover our financial results for the quarter and also provide an update on our full year guidance. After that, we'll open up for questions. Let's turn now to Page 5 for an update on our strategy. In our Investor Day and in our Q4 results presentations, both in May 2021, we described our 3 critical strategic initiatives that will enable us to drive consistent profitable growth globally by our company. Those 3 strategic initiatives are: number one, expand the James Hardie brand a premier professional brand into a market-leading consumer brand that focuses on marketing directly to the homeowners to create true demand of our products. Number two, penetrate and drive growth in existing and new markets such as repair and remodel. And number three, commercialize global innovations that allow us to expand and to other exterior looks and to take advantage of adjacent opportunities in each of our 3 regions. In addition, we will continue to execute and build on a significant foundation we have built over the past 3 years. This foundation includes continue our path of becoming a world-class manufacturer of LEAN, continue to partner closely with our customers with our push-forward strategy and continue to integrate our supply chain with our customers to serve the market. Let's now turn to Page 6 to discuss the progress of our marketing directly to homes. During our Investor Day, we shared details about our 360-degree integrated-marketing campaign that reaches homeowners directly to create true demand. We have put the homeowner Custine at the center of our attention. As I share with you then, the 4 phases of homeowners purchase our awareness, consideration, purchase and amplification. We continue to build on this marketing capability within James Hardie to ensure that we reach a homeowner with the right messages throughout the path to purchase. We will augment this internal capability with key social influencers and partners across a variety of media to create real demand for Hardie brand products. In May, we discussed and show you the TV campaign is possible with James Hardie. It is the foundation of the awareness phase. To date, the TV commercial has been very successful in raising awareness of James Hardie brand with our target homeowners the Custine. After the homeowner is aware of James Hardy brand, it is important that we reach them with the right content at the right time as they consider the option to beautify the experience of their home. Over the past 6 months, we have begun to reach Custine to television, social media, print media and regional influences to help guide Custine through a path to purchase. On the right-hand side of the page, we're pleased to share with you some of our key performance metrics related to our consumer market and thus far. While we're still very early in our journey, we have seen brand awareness increase. We have driven more homeowners to our website. We have generated significant growth in leads year-on-year. Specifically, we have increased our aided awareness of our brand by 109%, increased website traffic by 81% and increased leads in our target markets by 61%. We're very encouraged with the early momentum in the results and continue to invest significantly in this strategic initiative. As you can see on Page 7, we have recently partnered with television and media to continue to reach Custine with our message with authenticity. On the left, you can see James Hardie products feature on fixer upper, a very popular repair remodel TV show with over 19 million viewers per episode. It is a remarkable transformation of the experience at home with Hardie brand ColorPlus Shingles. On the right is another example of James Hardie brand products being featured in home renovation shows. This show secret celebrity renovation, aired on the 9th of July 2021, and again showcased James Hardie's ability to deliver endless design possibilities. Lastly, at the bottom right is an example of print media with a feature ad on the back cover of Mongolia magazine. This is one of the most followed magazines for devotees of home decorations and living. Working with key influencers and various forms of media, extend our reach and help to educate homeowners about the endless design possibilities with trusted production the James Hardie brand BerinSolutions can deliver. Let's now turn to Page 8. The second of 3 core strategic initiative is to penetrate and drive profitable growth in the repair and remodel segment. A key component of this strategy is driving the high-value product mix. On this page, you see the clear impact of this particular strategy continue to have on driving profitable growth in our North American business. Starting on the left-hand side, what we have here is a plot to our current product portfolio in North America across 2 key criteria: price and value. In North America, we defined a high-value products as our Hardie brand exterior products, Hardie brand exterior products with ColorPlus technology and all of our Hardie brand innovation, including the recently launched Hardie Textured Panels. The focus of our strategy in driving the high-value product mix is to create awareness and higher demand for our differentiated line of products and homeowners in the remodeling segments where our value proposition is so strong. In turn, it generates increased sales and margins for our customers and for us. On the right-hand side, you see the clear and significant impact this strategy has had on our recent financial results in North America. Our teams continue to partner with our customers to grow our overall business, while shifting to high-value product mix that homeowners want and need. The blue line on this chart represents percent volume growth for each quarter from fiscal year 2020 Q2 through Q2 of fiscal year 2022. The green bars represent the percentage price mix growth across the same time period. If you focus on Q1 and Q2 of fiscal year 2022, you will observe a real impact that our strategy of driving high-value product mix has had on our financial results. Notably, we see strong volume growth of 14% in Q2, but more importantly, we want to sell a continued and significant step change in price mix growth of 9% resulted in 23% net sales growth in Q2 in North America. Note that this growth was on top of a strong corresponding quarter in previous year. What this indicate is that by partnering closely with our customers who have been successful in shifting to a higher value product mix and driving profitable growth even in a highly inflational period as this year. This is evidenced in our raised guidance, which Jason will speak to later. Turning now to Page 9. Our strategy is global. And on this page, you see an impact of strategy of driving the high-value product mix is having on our European business. Starting on the left-hand side and similar to the prior slide, what you see here is a plot of our current product portfolio in Europe across 2 key criteria, price and value. In Europe, we defined a high-value products at our -- brand Florin products, Hardie brand Plank products, including panel and all of our Hardie brand Fiber Cement Innovations, including this recently launched Hardie brand, VL Plank. Note, that within Europe, we are driving price mix within our fiber gypsum product portfolio while also driving the broader price mix strategy. Specifically, what I mean by that is that you can see we have indicated our fiber gypsum flooring product in orange on a chart would represent higher price and margin for us compared to our fiber gypsum wall products. On the right-hand side, what you see here is a clear and significant impact this strategy has had on our recent financial results in Europe. Our teams are partnering with our customers to drive a higher value product mix, and you can see the results are starting to build momentum with a step change in price mix in the last 2 quarters. The blue line on this chart represents percent volume growth for each quarter from fiscal year 2020 to Q2 of fiscal year 2022. The green bar represents percent price mix growth across the same time period. If you look at Q1 and Q2 of fiscal year 2022, you observed the real impact of our strategy of driving how value product mix have had in our European financial results. Not only did we see a strong volume growth of 15% in quarter 2, but more importantly, we want to sell a continued and significant step change in price mix growth of 8%, which resulted in a 23% net sales growth in Q2 in Europe. Turning now to Page 10 for an update on innovation. In May 2021, we announced the launch of 3 new global innovations. One, the Hardie Textured Panels in North America; two, the Hardie brand VL Plank in Europe; three, Hardie brand Fine Textured Cladding in Australia. We continue to have very good traction with market acceptance and penetration of all 3 product platforms since the launch early this year, We continue to partner with our customers to drive awareness and adoption with the homeowners. Feedback from homeowners and our customers in North America has been overwhelmingly positive. Hardie brand Textured Panels deliver contemporary design solutions that fit any home style that homeowners want and need. In addition, they offer protection properties as durability, low maintenance and noncombustibility. What you see here are 4 examples of Hardie brand Textured Panels on 4 different homes in Oregon, Washington and Florida. What I would like to point out here about these other pictures is how Hardie brand Textured Panels are prominent in a variety of home designs from contemporary look to costal to mix design. Moving on to Page 11. In Europe, we are also very pleased with the progress of our Hardie brand VL Plank products. Installers have been consistent and their positive feedback about the time savings, the Hardie brand VL Plank offer compared to competitive solutions, with our product saving approximately 20% of total installation time. On this page, you see an example of Haride brand VL Plank in Germany, France and Switzerland. What I would like to point out here is how Hardie brand VL Plank helped to provide a mixed design modern look, which is becoming more popular with homeowners across Western Europe. Turning now to Page 12. Similarly to North America, feedback from homeowners and customers in Australia is very positive. These are 4 examples of Hardy brand Fine Texture Cladding in the Australian markets, which, as you can see, help to augment the modern design and look that is prominent throughout the continent. Hardie brand Fine Texture Cladding offer endless design possibilities for homeowners or delivering on protections that homeowner need, durability, low maintenance and noncombustibility. On the left, you can see the complete transformation of a very plain standard rig home into a modern contemporary home, utilizing Hardie brand Fine Texture Cladding as the primary exterior plates. We remain very excited about these new innovations and how they will allow us to continue to penetrate and grow in large adjacent markets in each of our 3 operating regions. While we're excited about the early success of these 3 new innovations, our global innovation program is much bigger than 3 product platforms. Our innovation team is focused on our innovation pipeline to ensure we will have additional new innovations to provide the endless design possibilities with superior durability and protection for homeowners around the world. And we anticipate being able to launch additional innovations within the next 6 months and regularly thereafter. Turning now to Page 13 for a summary of global results for the second quarter of fiscal year 2022. This is now the 10th consecutive quarter that we delivered consistent financial results, growth of our market and strong returns. Specifically, in the second quarter, we delivered global net sales of over USD 903 million, which is 23% growth versus the prior corresponding period. Importantly, this was underpinned global price/mix of 9% growth. And we delivered global adjusted net income of USD 155 million, which is an increase of 29%. We again delivered strong financial results in all 3 regions. This quarter also marks 4 consecutive quarters to all 3 operating regions, delivered exceptional double-digit growth in both net sales and EBIT. In North America, driven by strong momentum of high-value product mix penetration, we delivered net sales of USD 635 million, 23% growth. Adjusted EBIT of USD 182 million, an increase of 23% and continued strong EBIT margin of 28.7% for the quarter. In Europe, we delivered 5 straight quarters of strong organic growth and strong returns. Net sales of more than EUR 104 million to 23% growth, adjusted EBIT of EUR 14.2 million and good EBIT margin of 13.6%. In Asia Pacific, with strong performance in all 3 countries, we achieved net sales of more than AUD 196 billion, that's a 15% growth. Adjusted EBIT of AUD 6.6 million, a 12% growth and a very strong EBIT margin of 30.8%. In the first half of second quarter of fiscal year 2022, the strong execution of a high-value product mix strategy and all 3 operating regions has been the key driver in delivering strong financial results, all maintaining a significant investment in marketing to the consumers and innovation against the backdrop of high input cost inflation. Turning now to Page 14 to discuss sustainability. Earlier this year, we delivered our first sustainability report. Sustainability and ESG are really an integral part of our strategy, is not a separate and distinctive initiative, but rather is woven into how we operate our business to help company every day around the world. For James Hardie, sustainability is about building sustainable communities. This commitment is to the smallest of communities, the individual household, the homeowner, the James Hardie community, the local communities in which we live and operate and the largest of our communities, the global ecosystem always live in. In our sustainability report that we will publish in July, we highlighted our progress over the past year, but more importantly, set of key goals for the future. I would like 2 highlight a few key areas. Number one, our products are made locally. This approach to manufacturing create local communities in which we support in numerous ways. For example, 98% of our employees are hired locally, providing wages and expandable income into the local communities. 83% of raw material sourced within 100 miles of manufacturing facilities. 63% of products have shipped within 500 miles of our manufacturing facilities. The product we sell in the United States are made in America. The product we sell in Australia are Australian made. The product we sell in the Philippines are made in the Philippines and the fiber gypsum product we sell in Europe, I mean locally in Germany, Spain and the Netherlands. This strategy of employing selling, producing and shipping locally is not only good from an ESG standpoint, but also critical to our business strategy. Currently, is helping our business drive. It does not, however, make us immune to supply chain issues, but having a local community focus does enable flexibility and stability through many disruptions. Another critical component of our ESG focus is zero harm. We incorporate safety first into how we operate every day. Zero Harm is the foundation business strategy at our company. And we continue to make improvements in our recordable interim rate and our days away rate. As I have stated previously, the primary objective of zero-harm culture is to ensure the safety and well-being of our employees, customers and community above all business decisions we make. While I'm pleased with the progress in our metrics, zero harm is not a destination, but rather is a perpetual journey that we at James Hardie need to remain focused on a daily basis and throughout every facet of our global operations. I would also like to highlight a few of our commitments for the future. A 40% reduction in Scope 1 and Scope 2 greenhouse gas intensity by 2030 compared to 2019. And a 50% reduction in landfill intensity by 2030 compared to 2019. At James Hardie, we're proud of our growing momentum in building sustainable communities. I would now like to turn over to our CFO, Jason Miele, to provide additional details on our financial results.

Thank you, Jack. Good morning, and good evening, everyone. I will start on Slide 16 with our global results. This is now the tenth consecutive quarter we have delivered strong financial results with above-market growth and strong returns based on the consistent execution of our global strategy. Also, this is the fifth straight quarter with record global results, including quarterly records for net sales, adjusted EBIT and adjusted net income. And this now marks the fourth straight quarter, all 3 regions delivered double-digit net sales growth and double-digit EBIT growth. All 3 regions are executing on our global strategy, simultaneously. First and foremost, the continued strong execution of the foundational initiatives of our strategy: lean manufacturing, push pull and operating an integrated supply chain with our customers. And in fiscal year 2022, all 3 regions have good momentum on executing the newer strategic initiatives, marketing directly to the homeowner and commercializing global innovations. This strong strategic execution globally has led to global net sales increasing 23% to a record USD 903.2 million in the second quarter. This excellent top line result was underpinned by price/mix growth of plus 9% as our teams in all 3 regions successfully built momentum in driving a high-value product mix. In addition, we delivered strong volume growth in all 3 regions with global volumes increasing 14%. Global adjusted EBIT increased 26% to USD 205.7 million and global adjusted net income increased 29% to USD 154.9 million, both represent all-time record highs for our quarter. To maintain this momentum, we continue to invest significantly in our strategic initiatives, marketing, innovation and capacity expansion with significant investment in growth and while operating in the current deflationary environment, we were able to expand our global EBITDA margin by 70 basis points to 27.2%. We will now review each region in more detail, starting with North America on Page 17. In North America, the team delivered another outstanding quarter. The team delivered record net sales of USD 635.3 million through strong volume growth of plus 14%, an exceptional price mix growth of plus 9%. The exceptional price/mix growth was delivered through continued execution in driving high-value product penetration with our customers. Through continued execution of our foundational strategies, main manufacturing and integration of our supply chain with our customers, we're able to translate the outstanding top line results into an excellent bottom line outcome. Adjusted EBIT increased 23% to a record USD 182.5 million. The North American team continues to deliver consistent double-digit net sales growth and a step change EBIT margin level. Turning now to Page 18 to discuss the Europe resultsIn Europe, the team delivered a fifth straight quarter of strong results and a 4 straight quarter of double-digit net sales growth. In the second quarter, net sales increased 23% to EUR 104.6 million and adjusted EBIT increased 51% to EUR 14.2 million. The exceptional net sales growth was delivered through the team's continued execution of a high-value product mix penetration strategy. Fiber cement net sales increased 40% in the quarter, which contributed to an outstanding 8% growth in price/mix. A combination of improved price mix, strong volumes as well as lean improvements more than offset the high inflationary environment and resulted in second quarter Europe adjusted EBIT margin, expanding by 250 basis points to 13.6%. Let's move now to Page 19 to discuss Asia Pacific. You'll see a similar story in Asia Pacific compared to the other 2 regions as all 3 regions continue to execute the global strategy effectively. The Asia Pacific team delivered outstanding net sales growth of plus 15% to AUD 196.6 million in the second quarter. The ANZ business delivered continued execution in driving high-value product penetration, resulting in price mix growth of plus 9% in Australia and New Zealand. The strong top line results in the second quarter were translated into robust bottom-line results, execution on lean manufacturing and focus on high-value product mix helped to offset the high inflationary environment, leading to adjusted EBIT growth of 12% to AUD 60.6 million at an adjusted EBIT margin of 30.8%. Moving now to Page 20, we'll discuss operating cash flows and capital expenditures. These strong operational results discussed in the past few slides continue to translate to a step change in operating cash flow. Operating cash flow for the trailing 12 months was up 18% to USD 727.6 million, and we will discuss cash flow further on the next slide. Shifting to the right-hand side of the slide, I'll give you a summary of our capital expenditures. In the second quarter, capital expenditures totaled USD 108.1 million. Focusing first on the shorter term. Production at our Prattville, Alabama facility continues to ramp up successfully and our restart of our Summerville, South Carolina facility is on track and still plan to restart in March 2022. Looking further ahead, we are now embarking on a transformational period of capacity expansion. In North America, we will expand our Prattville, Alabama facility to include 2 more shot machines. We expect this expansion at Prattville to provide saleable production in late calendar year 2023. In addition, we plan to purchase land in the United States for a greenfield site that will focus on the production of high-value products and innovation. In Europe, we will expand our fiber gypsum capacity in Orejo, Spain to enable continued strong growth of our fiber gypsum business in Europe, and we will purchase land and begin construction of a greenfield fiber cement facility to locally produce fiber cement for the European market. And lastly, in Australia, we plan to add greenfield fiber cement capacity in Victoria. Similar to the United States, this greenfield capacity we expect to focus on high-value products and innovation. Adding the right capacity at the right time positions us to continue to drive market share gains and drive organic growth. Now let's move to Page 21 to discuss capital allocation. Our transformation to a new James Hardie has resulted in a step change in operating cash flow. On the left, you can see we have generated more than USD 2 billion of cash over the past 36 months. These funds have allowed us to invest in future growth through capacity expansion, reduce our debt contribute significantly to the ICI and return capital to shareholders. On the right, you can see that our capital allocation priorities remain unchanged. And today, we are pleased to announce a first half dividend of USD 0.40 per share, which equates to approximately USD 178 million. The first half dividend will have a record date of November 19, and payment date of December 17. Let's move to Page 22 to discuss the funding of the asbestos injury compensation funds. On the left-hand side of the slide, you can see the growth in our contributions to the AICF which is directly linked to our step change in operating cash flow we discussed on Slide 20. We You can see in the 5 years from fiscal year '15 to fiscal year 2019, our average annual contribution to the AICF was AUD 119 million. And now in fiscal year 2022 that has almost tripled to AUD 328 million. The inception of the AICF, James Hardie has now contributed over AUD 1.7 billion to AICG. Moving to the right-hand side of the page, you can see the impact of the increase in James Hardie contribution it had on AICF's cash and investment accounts. Over the past few years, AICF cash and investments has more than tripled from AUD 81 million on March 31, 2019, to AUD 253 million on October 31, 2021. We are pleased that our step change in operating cash flow has led to a stronger balance sheet for AICF, specifically for robust cash and investment balance. Now let's turn to Page 23 to discuss guidance. Our significant momentum in high-value product mix penetration in all 3 regions, combined with continued market share gains and lean execution gives us confidence in raising the adjusted net income guidance range. We raised our adjusted net income guidance to a range of USD 580 million USD 600 million. The comparable figure for the prior year was USD 458 million. The revised guidance range represents a 27% to 31% year-on-year improvement in adjusted net income. Specific to our North America segment, we continue to provide 2 points of guidance, first, North America, we expect net sales growth greater than 20% for the full fiscal year 2022. We expect price/mix growth of between plus 8% and plus 9%. As we first guided in May, we are investing significantly in our strategic growth initiatives and expect to experience significant inflation in fiscal year '22. Finally, please turn to Page 24 for some financial highlights for the half year. Globally, the James Hardie team continues to execute our strategy at a high level. Our mission is to be a high-performing global company that delivers organic growth above market with strong returns consistently. In the first half of fiscal year '22, global net sales increased 28% and global adjusted EBIT increased 34%. This significant growth in net sales and EBIT was primarily driven by the strong execution in driving high-value product penetration. Importantly, we continue to invest in growth. This includes significant investment in marketing directly to the homeowner, investment in innovation and commitment to significant capacity expansion in all 3 regions. As we continue to invest in our future growth during a highly inflationary period, it's important to note that the strong execution of our strategy enabled us to expand our global adjusted EBITDA margin by 80 basis points. We continue to return capital to our shareholders with an announcement today of the USD 0.40 per share first half dividend. And lastly, we raised our adjusted net income guidance for the current fiscal year to a range of USD 580 million and USD 600 million. We have now concluded our prepared remarks. I will hand it over to the operator to commence the Q&A portion of today's meeting.

[Operator Instructions] The first question comes from Peter Steyn from Macquarie.

Just wanted to get a little more color on the mix effects and if you could give us a little bit of a sense of how the new products are faring from a product -- from a sales contribution point of view and how you're tracking against your LTI targets for FY '22?

Yes, Peter. It's a good question. We're tracking well to the LTI targets that you mentioned. But right now, as the -- our approach to the new innovations is really about market driven, and that is all about making sure that we get our products on the wall and in the home of the homeowners as the #1 priority, and that created a pull-through as supposed to a typical new products launch or just shift a lot more to the channel and then just let it trickle out. So our approach is more about the pull, it's about to create the demand with the homeowners and really build more momentum with the demand creation with the homeowners and until that gets to a critical mass, and that's when you see really a big lift and a continue lift. And then relative to your first part of your question, is that we -- as we continue to execute our high-value product mix that as time goes on, the effect of price mix will be driven more and more through to the increase in high value products that drive that price mix growth that you saw the difference between Q1 versus Q2 that we just showed. A – Jason Miele : So can I just clarify then in my mind, the interpretation there is that there’s not a heck of a lot of contribution coming from Textured Panel and VL Plank among others at this point, but it will accelerate in due course as the channel starts drawing that the customer starts drawing that more definitively. So what we’re seeing at this point is still the very early stages of that, but largely the shift from the same plant to hardie plank in the tail end of that playing out. SP02 Yes. So it’s really about the – what you see in the price mix right now is really driven more from our shift from Cemplank to prime and also the shift from Cemplank and prime to color.

Okay. Perfect. That makes sense. And then just a question for Jason. Just on cash flows, excluding the tax effect of CARES, you mentioned that your operating cash flow was up 2% in the context of EBIT, obviously growing quite substantially faster. Looking at the balance sheet, there’s no appreciable movements in working capital that would account for that. So I was just curious what this quarter delivered from a cash effective and trying to get a little bit more color on that 2% improvement in op cash. A –Jason Miele : Yes. Peter, as we’ve laid out, when you exclude the CARES Act, it is up 2%. And we’ve certainly shifted to a step change level on a rolling 12-month basis. As with any quarter, there’s some minor timing differences, but we’re very happy with where we’re at from a cash flow perspective. We expect continued improvement going forward.

The next question comes from Simon Thackray from Jefferies.

I was just kind of -- few questions, if I may. Can we just talk about the observation of any sort of capacity constraints, bottlenecks, supply chain constraints in the quarter just gone. I'm sort of particularly curious in light of the sequential growth in European sales, which was only 1.25%, notwithstanding the good margin performance. So I just want to understand if growth could have been better, but for some capacity constraint factors? And in contrast to Europe, North America and APAC results, beg the question whether there are any regions where capacity constraints now exist where you could have done better or you might be constrained as we track through to the end of the year?

Yes. Simon. Just a couple of things just to highlight the strategy of what we are driving tour right now, Simon, is that we -- the way we look at how we show the market is really a combination of driving more volume of high-value products. So it's not just about selling volume for selling volume. So that's a very big distinction of our strategy going forward. It's really about maximizing how you -- and then 2 is that we -- since our business model is really about integration of our supply chain with our customers so that we can really have the visibility of the demand a lot further out so that we can produce to ship produce to store. So it's really about -- so we -- so based on those 2 strategic criteria, that's how we we've been driving our business growth based on net sales of the high-value products. So we do have the free flow capacity for Europe, and this is why you see a very good growth for our European business. And as we continue to be more integrated with our customers in Europe, we'll have a much better demand profiles that will allow us to plan out a lot better even to serve the market better.

So Jack, just so I understand that lift, is that suggesting that whilst the net sales growth sequentially, first quarter to second quarter in Europe was pretty modest 1.25% that you would expect under the -- using those strategic initiatives that, that should accelerate. Is that what you're saying to me?

And so what we should see is that the acceleration of our growth in net sales as opposed to just for the sake of volume growth. So if you look at the product portfolio in Europe today and I think on slide was a Slide 8, something that you see that there in there is a big difference in in the pricing of the [indiscernible] Hardie brand Panel versus blank and versus backer. So it's really about us creating more value with the homeowners in Europe as well as in North America and Europe in Australia and New Zealand and the Philippines is of understanding the needs of the homeowners and we provide the right value product for them as opposed to shipping in upsell in units.

Okay. That makes sense. And if you characterize now, Jack, your percentage of sales coming from R&R versus new housing, would you say that we're continuing to see a shift towards R&R, more R&R?

Absolutely. I think right now, our R&R is semi business around the world, they're quite similar. It's more like 70-plus percent and it's that growing pretty fast.

Okay. That's great. And then just in terms of the COGS inflation, Jason, noting it's a change from the May update, but it's, but it's static on the first quarter in terms of the COGS inflation guidance. Is this COGS inflation increase because of higher cost assumptions? Or is it a function of the better volume expectations for the business since May?

A little bit of both, Simon. As we talked about last number, pulp remains elevated as does freight. We're watching markets closely, but we're comfortable with the range we've provided of USD 120 million to USD 150 million globally, and that would include our volume assumptions as well.

That's great, Jason. And then while I've got it, just on the update on Page 6. Just in terms of the SG&A spend, which obviously stepped up as per guidance, is the marketing and advertising spend now at a steady run rate? Or will it increase from here? And as we look forward with the growth that those marketing initiatives are delivering to the business, should we be thinking about the spend for marketing and advertising in dollar terms or in terms of percentage of sales going forward?

Yes, Simon. So we'll continue to invest in marketing initiatives that drive top line growth. So we will expect to be investing more next year than we did this year. But obviously, we're monitoring to ensure we're getting the outcomes we expect. And that's how we'll continue to run it going forward. As we get deeper into that, we'll then potentially think about do we provide guidance of should we be thinking of that in whole dollars or a percentage of sales, but it's all about investing to drive future growth.

Simon, the way to think about this is that as we invest more in the marketing to the homeowners as worry for us to very create the demand of our high-value products that really the homeowners need. So in terms of our business when you should expect to see gross margin expansion because of the growth of high and as we expand more into growth more into repair and remodel in segment. So then within -- you should expect that the absolute dollar term market investment will go up, but we'll be more to correlate than to the percent of sales.

Yes. That makes sense, Jack. And then just quickly on the New Zealand greenfields expansion. Is that designed to feed New Zealand? Just so I understand the Victorian greenfields. A – Jack Truong: As you know, Simon, we have a very big plant in Carole Park in the Gold Coast. And one in New South Wales. And then we see that the Victoria so a growth opportunity for us. That’s an area that we therefore, it’s important for us to have a really – a big facility to serve that market for the long term. And then you probably heard from my opening remarks that’s our ESG strategy as well is that we strategically build plants around where we operate in such a way that we sourced more than 80% of our raw material within 100 miles of our plant to be able to ship our products to at least 2/3 of it to within 500 miles of our plant. So consistent with that strategy, and this is why we are looking to the VL Plank in Victoria and not to mention that it is a big growth incentive.

The next question comes from Lisa [indiscernible] from JPMorgan.

I just had a question on the gross margin as well in terms of North America Fiber Cement. I guess there was a 4.8 percentage point gross margin drag from input costs and also the start-up cost from Prattville. Can you just give us an idea of how much will be driven by the commissioning at Prattville and when that will be done exactly? And I also, I guess, in the context of the capacity you’re planning to bring online over the next 3 years, should we continue to expect that line to be a drag in the future years as well? A – Jack Truong: Yes, Lisa, when you think about start-up costs for a competent period with not a lot of start-up costs in the prior period. So that’s why it’s a drag year-on-year as we continue forward with this transformational capacity expansion, you can expect start-up costs to be consistently part of our P&L going forward. So when you’re comping period versus period, I wouldn’t view it as a drag on investment into the future growth.

Yes. And so what was the contribution from that for the quarter? A – Jason Miele : Seen 3 and 4 in Brazil as well. So I think earlier in your question was one with [indiscernible] rate will continue to have ramp-up costs as we expand. And then we don’t – we give you that gross margin walk. We don’t break out start-up costs specifically, but it would be smaller percentage in that table compared to freight and pulp cost increases.

Okay. Sure. And then just on ColorPlus more specifically, given the uptake, can you just comment on what you’re seeing – what you’ve seen over the course of the second quarter and where you’re taking market share from up in the Northeast? A – Jack Truong: Yes. So Lisa, it is a key part of our marketing campaign to the homeowners. It’s really about delivering the type of product that Custine want and what Custine want for those homes with our Acerroduct made with ColorPlus. So our mix of ColorPlus has really been growing, particularly since the beginning of the year when we started the campaign, and we expect that to continue to have some very healthy growth going forward with our continued investments in consumer market.

[Operator Instructions] The next question comes from Daniel Kang from CLSA.

Just a first question price – a question on price mix. North America looks to be gaining momentum with 2Q contributing 9%, up from 7% in the prior 2 quarters. I realize that your guidance for price mix is only for FY ‘22 of 8% to 9%. Is there any reason why this momentum should not continue into FY ‘23? A – Jack Truong: Daniel, I mean, we believe and that will continue as we execute on our strategy, which is really about marketing directly to the homeowners. And then when we market directly to the homeowners, we after doing a lot of extensive consumer research that we know what exactly the consumers, the homeowner want and we can market those – what we call high-value products that the owners need and the one that we have. So as the exterior of products from James Hardie with Color is one of the key products that the home owners really want or need. So it is something that as we continue to execute, that should – that we would expect that the color product will continue to grow.

The next question comes from Lee Power from UBS. Q – Lee Power : Just on looking at the leads for direct consumer, 61%. Is there any difference in conversion rates that you find when you’re dealing with like direct to consumer through a contractor? A – Jack Truong: I mean when you get great demand directly with the consumer within – message is always very consistent and very clear. And that would then generate the sales lead of which then our customers, our contractor customer would be able to convert. So it is the – about the quality of leads, and then not only that, but also the ability to close that quicker as well. So the ability for us to now to connect directly to the home owner and tell that story directly on the value of the right Hardie brand product is immense.

The next question comes from Keith Chau from MST Marquee.

So my question is just in relation to the North American business. Could you just give us a sense – and this isn’t following with the previous question, whether there were any constraints in North America that may have held back sales to any issues from the hurricane activity. And then keeping with that, where the sales growth is tracking in the quarter-to-date for both exteriors and interiors volumes, please? A – Jack Truong: Yes. So Keith, as I – what we mentioned is that we are driving as we now connect and market directly to the homeowners that we with market the high-value products that the consumers or the home owners want and need. So it’s really, for us, it’s about maximizing the – our ability to produce the right products so that we can maximize our sales growth and EBIT. And so where you will see more of it’s about a lot more growth in the high-value products. And for us, it’s kind of irrespective of that in exterior or interior is really about where can we create more of that value.

The next question comes from Sam Seow from Citi.

I think if we think back – I think if we think back reinvesting, I guess, lean savings into supply chain, was a bit more of a concept and you’re still kind of proving it up. And at the time, logically, you’re only working with a few main distributors. Rolling forwards today, could you maybe give us a feel of how many of your existing distributors, you’d say you’re fully integrated or where you’d like to be with versus how many, I guess, are still to be partnered with. And I guess I’m just trying to understand the pathway left around on what’s been a really successful initiative. SP11 Just about the integration? SP02 Yes. So it is – it is a journey. And what I can say is that today, we are miles ahead of where we were 2 years ago, and this is why it’s allowed us to really produce and serve the markets better than most because our integration, our supply chain and our customers and certainly integrating our supply chain and our suppliers too. But it is about – it’s a journey, and we still have more that would like to come on board. And it is – we will continue to improve, but it is a path. It is a strategic path that we will continue.

The next question comes from Paul Quinn from RBC.

Just a question on global pulp markets. We’re seeing a really rollover. I just wondering how much volume you use in a year and how are those contracts – are they on spot pricing? Or are they on contracted volumes over a 3- or 6-month period? A – Jack Truong: Yes. Thanks, Paul. Hope would be 1 of our top 4 costs in our business. So it’s significant when bold moves to – however, as we talked about, the execution of our strategy has enabled us to expand margins through this high inflationary period. We have a variety of types of contracts, some spot and some that operates on a periodic basis, whether that’s a quarter or 6 months. So it’s a variety.

The next question comes from Peter Wilson from Credit Suisse.

Just another one on North America volume in the context of your capacity expansion announced. So Jack, I take your point that it’s not all about volume. It’s about high-value volume, but we put that just side and just focus on volume. Should we consider the 2Q volume of 791 million square feet. So would you consider that to be the limit on your volume until this new capacity comes online? Or is there more that you can eke out of the network? A – Jack Truong: No, it’s – we’ll actually be – it should be more for 3 reasons. One, that line execution will continue to open up more capacity on our existing asset; and two, is that as we continue to integrate more of our customers that allow us to have a much more of a lead time view in terms of demand on our products so that we can run out of network of plants more effectively and flow product from production to the market better and that will be more; and then three, is that we are on so right in the middle of scaling up our property of line 1 and line 2. And then we are going to be opening up the reopening our VL Plank, which will be slated to be opened in March of next year, calendar year in about 4 more months. So those are some of the key factors that would allow us to continue to drive not only growth in volume or also mix. And of course, that would give us the revenue.

The next question comes from Andrew Scott from Morgan Stanley.

Jack, just a question, if I can on price, we're at that point now where less price announcements will have gone out for 1 January. Can you just let us know what you're expecting there? And then around that, you have throughout this year stuck to that value pricing methodology, whereas vinyl and also LP maybe priced a bit more like a commodity. Can you just tell us if you think that's made a meaningful difference to the on-the-wall cost comparison?

Answer the first.

Yes, Andrew. So your first question about January 1 price increases, we'd expect price increases to be about 5% or they are about 5% for North America.

Yes. So Andrew, I think the key thing here is that we are now -- I mean, this is a true push poll that we are marketing directly to the home owners. So it is about our Honey brand products, the Hardie brand Exterior with Colors is really give endless possibilities that allow the homeowner to remodel their home that looks fantastic with different designs. But yet, they can protect their home from all the elements. So that is the value. And that's what the homeowners make their decisions on mostly is really about that is intangible effects. So -- and then, of course, the on-the-wall cost is important, but it's not as important as in terms of having the homeowners making the decision that she wants to remodel a home to have the really gift that pride enjoy, particularly with post-COVID environment where home is the castle. So it is that is where we focus on. And it's not so much as important in terms of what the price between this board versus the other board.

Thank you. That does conclude the question-and-answer session. I'll hand the conference back to Dr. Truong.

Well, before we end the call, I would just like to take the opportunity to extend my gratitude and thanks all James Hardie colleagues around the world. Our exceptional financial results in the second quarter of fiscal year 2022 a direct result of the continued execution of everyone within our company of the global strategy, and we do it together as a global company. This outstanding second quarter results are another indication that we are truly a new target. It's a company that continue to leverage on our global reach, global capabilities and global scale to execute together and deliver strong financial results consistently across all 3 regions. I'm excited for the remainder of fiscal year 2022 and beyond as we continue this next phase of profit growth. Thank you.