James Hardie Industries plc (JHX) Q2 2023 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the James Hardie Second Quarter Fiscal Year 2023 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. James Brennan-Chong, Director of Investor Relations and Market Intelligence. Sir, please go ahead.

Thank you, operator. Good morning to everyone in Sydney, and hello to others from around the world. I'm James Brennan-Chong, Director of Investor Relations and Market Intelligence at James Hardie. And I would like to welcome you all to our second quarter fiscal year 2023 results call. Turning to Page 2, you will see our standard cautionary note on forward-looking statements. Please note that this presentation does contain forward-looking statements and also the use of non-GAAP financial information. Let's move to Page 3. Here, you will see our agenda and speakers for today. CEO, Aaron Erter; as well as our CFO, Jason Miele. Today, Aaron will begin the presentation with a brief update on our strategy as well as provide an operations update. Jason will then discuss the second quarter financial results, before Aaron returns to discuss guidance and close. After this, we will open it up to Q&A. I will now hand it over to our CEO, Aaron Erter.

Thank you, James. Good morning and good evening to everyone. Welcome to our second quarter earnings call. Before I begin, I would like to take a moment to thank each of our 5,000 employees from around the world for their efforts in delivering a highest quality products and services to our customer partners and what remains a challenging operating environment. I've had the pleasure of meeting many of the James Hardie team over my first 2 months here, and the collective commitment to executing our strategy, and delivering strong results, all while working safely is truly inspiring. I am confident and excited about the future and what we will accomplish together as a team. With that, let's turn to Page 5. As I stated at our Investor Day in September, I believe that our strategy is solid, and will enable us to deliver sustained profitable growth. Many of you on the call have seen the slide on the screen many times before. And rather than reiterate each component on this page, what I would like to do is focus on the insights I've gathered about our strategy and enhancements I see us making as we move forward. Please turn to Page 6, where I have briefly outlined those insights. Let's start with our foundational strategic imperatives, which are at the bottom of the diagram in green. They are zero harm ESG, lean manufacturing, customer engagement, and supply chain integration. All of these are foundational strategic imperatives supporting our growth, and it is clear to me that they are understood within the business and are embedded within our team. These foundational initiatives will remain a core focus as they enable us to drive sustained profitable growth across the entire company. As we move forward, have added our people and how we develop our organizational capability as critical to our future growth. Investing resources in our organizational capability will be a key focus, and our people will be foundational to our strategy. Next, let's move to the top of the page and the blue section, which outlines the three key tenets to our strategic plan. They are market to homeowners to create demand, penetrate and drive profitable growth in existing and new segments and commercialize global innovations by expanding into new categories. First, let me start by discussing marketing. I'm really encouraged by the progress we have made in marketing to the homeowner. In Q2, we continue to see incremental reach with homeowners and strong lead growth. We are still in our early stages, but I am pleased with the execution in North America and Australia. As we build our brand and continue our journey to be the brand of choice with homeowners. It's important that we execute targeted demand creation with the entirety of our supply chain, our customers, contractors, and homeowners. Our marketing strategy is developing and becoming well rounded for our target audiences, product segments and regions we participate. You can see this philosophy articulated at the bottom of the page. We must be homeowner focused, customer and contractor driven. As I've spent time visiting all three regions, it is clear we provide superior value to our customers, contractors and homeowners. We do this not only with great products, but with value added services. That service includes the education and inspiration we provide to homeowners through our Web site, the sales training we provide our customer partners, the install assistance for contractors, and the collaborative supply chain partnership we offer. As you hear me talk about strategy and our execution in the future, you will certainly hear me focus on the concept of delivering superior value to our customers, contractors and homeowners. Lastly, I wanted to touch on two areas which I described as long-term strategic enablers to our future success, capacity expansion and innovative products and services. They are both critical to the long-term success of our strategy. The execution of our capacity expansion program enables the continued growth of our high value products. Today we are excited to announce our plans to expand our ColorPlus finishing capacity by adding ColorPlus capability to our Prattville, Alabama facility. We expect this added ColorPlus capacity to be available at the end of calendar 2024. We continue to deliver strong ColorPlus growth 31% for the half year following 27% growth in fiscal 2022. In the quarter, we commissioned our Trim Finishing capability in Prattville, which provides us much needed trim capacity. When I speak about innovation, you will note I mentioned products and services. We are and will continue to be focused on both. We just launched a customer visualization tool that allows a homeowner or contractor to digitally visualize a before and after look at a hearty remodeling project. This improves the design and purchase process and drives quicker conversion rates. As you have heard me say many times over the past 2 months, we have the right strategy. I am more confident than ever, our execution will enable us to continue to drive sustained profitable growth globally. We are homeowner focused, customer and contractor driven. Now let's turn to Page 7. I introduced this slide at our Investor Day to highlight the fact that we are a growth company. Over the past 10 years we have delivered a net sales CAGR of 11%. We have tripled our annual operating cash flow in the past 10 years. Our 5-year average return on capital employed is 36%. And over the past 10 years, we have delivered an adjusted net income CAGR of 16%. These metrics highlight our ability to consistently generate attractive returns through execution of global strategy. As I reviewed our past results, one metric which I do not think we highlight enough is our return on capital employed. Our 5-year average return on capital employed of 36% indicates our ability to invest in and execute on the right growth initiatives. Let's turn to Page 8 to discuss ROCE further. The chart on the left summarizes our annual ROCE from fiscal year 2018 through fiscal year 2022. We delivered significant growth over the 5-year period with a 51% ROCE in fiscal year '22, and an outstanding average ROCE of 36% across the 5-year period. These metrics demonstrate that we have consistently invested in organic growth in an efficient and effective manner. My focus is to ensure we continue to prioritize organic growth by investing in our key initiatives, capacity expansion, innovative products and services and targeted demand creation. Our ability to invest in organic growth efficiently and effectively will enable James Hardie to drive sustainable, profitable global growth into the future. As we look to ensure investment and organic growth is prioritized, we are adjusting our capital allocation framework. Please turn to Page 9 for a summary of that adjusted framework. We believe this new capital allocation framework better matches who we are, a growth company. This framework lays out our priorities for remaining capital after funding operations, including our contribution to the AICF. Our number one and primary focus of our capital allocation is to invest in organic growth. Our 5-year ROCE of 36% is proof that investing in growth should be our first use of capital. Second, we want to ensure we maintain financial flexibility through market cycles, and thus we intend to keep our leverage below 2x throughout market cycles. Third, after we have invested in our organic growth and ensure the right financial flexibility is in place, we will deploy excess capital to shareholders by a share buybacks. We believe returning excess capital to shareholders by a share buybacks rather than ordinary unfranked dividends, provides a growth company the optimal flexibility to ensure investment and organic growth is prioritized, while maintaining financial strength and flexibility through cycles. And if we shift to Page 10, today we are pleased to announce the replacement of our unfranked ordinary dividend with a share buyback program to acquire up to $200 million of issued capital between now and October 31, 2023. Now, let's move to Page 11, for an operations update. First, I'm going to provide a brief update on the operational results of each region over the first half before moving on to discuss the shifting market decisions we are facing globally and in each region. Let's start in North America, where Sean Gadd and his team delivered excellent results in the first half and what remains a very challenging operating environment. Net sales grew 23% and EBIT saw growth of 15% at an EBIT margin of 27.1%. Price mix grew 14%, which included January and June price realization. Included in this result was continued ColorPlus growth of 31% for the first 6 months of our fiscal year. The team continues to deliver on our superior value proposition to the entirety of the supply chain, enabling these outstanding results. In addition, Sean and team continue to position our organization for long-term growth by continuing to partner with our customers. Over the first half of the year, we have been recognized organizationally by a number of our trade partners, from vendor of the year with the largest private lumber distributor to a series of national builder awards, which recognize our partnership cross functionally, with sales, manufacturing supply chain in their construction, purchasing and sales functions. Proof points to the value our customers place in our products, services and people and a testament to the great work of not only our sales team led by John Matson, but the work of our supply chain and manufacturing organizations who ensure our customers receive the products they want, when they need them, even under the most challenging of conditions. Also, during the first half, the North America team launched our partnership with Magnolia Home and Chip and Joanna Gaines. We see this partnership elevating our brand awareness with homeowners by assisting them in their remodeling journey with an inspired collection curated by Joanna Gaines herself. This collection will allow homeowners to truly transform the look of their homes. I want to thank the entire North American team for their continued operational excellence. Moving to Asia Pacific, where John Arneil and the team delivered a solid outcome of 8% growth in net sales under continued inflation, labor shortages and supply chain disruptions in the first half of the year. As we have faced these headwinds, our EBIT margin has been under pressure. But we are partnering with our customers in executing price increases to ensure we are able to continue to provide the high-level of service they expect. With that said, we expect EBIT margin growth in the second half of the fiscal year with price realization and continued higher mix products. In September, I had the pleasure of spending time with several of our key customers in Australia. And it was clear to me how much they value our products and services. We will continue to partner with our customers, contractors and homeowners to drive growth above market in the APAC region. In Europe, our business continues to face significant headwinds from inflationary pressures and a slowing market. However, the team has done a tremendous job of navigating the environment to deliver a hard fought 2% growth in net sales. The commercial and marketing teams have done an outstanding job in commercialization of our new product innovations we discussed at our Investor Day. These include VL Plank and Hardie Architectural Panels, which will help to drive our growth in fiber cement, and Therm 25, which is exciting solution for underfloor heating that is helping us drive fiber gypsum penetration. The early reads on these products are exceeding our expectations, and we're seeing continued adoption from the trade. Last week, we were excited to announce the appointment of our new European leader, Christian Claus, who will join us at the start of January. I believe Christian is a great fit to lead our European business, who will help us accelerate our penetration within that region. Christian has a stellar track record of leading high performing teams and we are excited to welcome him to James Hardie in January. Okay, let's move on to discuss the outlook for the second half. Over the past 45 days, we've seen a significant change to the outlook of housing market activity for the second half of our fiscal year in most of the geographies where we participate. In North America, single-family new construction starts have slowed significantly and market expectations for the remainder of our fiscal year have declined sharply. The repair and remodel segment in North America is seeing moderation due to several factors including, but not limited to falling home prices and declining consumer confidence due to uncertain economic outlook. During our last call in the middle of August, our expectation for the second half volume was for mid-single-digit growth, which we then reaffirm at our Investor Day in early September. However, based on the significant decline in the market expectations over the past 45 days, which we have reviewed with our customer partners, we now expect second half volume growth to be between negative 5% and negative 8% to the prior year, which is a significant reduction to our August September projections. We do expect regions with more exposure to repair and remodel to remain more buoyant than regions more exposed to new construction. And in our projections for the second half of the year, we see volume growth in our regions that are more R&R focused, but see significant volume decreases in those regions skewed toward new construction. In And Australia, labor shortages and unfavorable weather conditions have constrained housing market activity despite strong contracted backlogs. In addition, we have had our customers ask to lower inventory levels as we enter this period of market uncertainty. These conditions result in our APAC volume declining by 4% in Q2. For the second half of our fiscal year, we expect volume growth will be in the range of minus 4% to flat versus the same period last year. In Europe, we expect the second half to be very similar to the first half as that region contends with a tense macro economic situation. We do believe we will continue to deliver relatively strong price mix growth, resulting in net sales in the second half to be slightly down versus the same period last year. That is certainly a unique time, but housing markets changing quickly due to a variety of factors. That said, despite the reduction in our expectations for housing market activity, we are confident that we will continue to deliver growth above the market. Before I hand it over to Jason, I wanted to discuss further the change in our outlook for second half North American volumes. The primary reason for the reduction in our outlook for second half volumes is new construction. On September 20 and October 19, the census data was released for new construction for August and September activity. Few notable items in that data. First, single-family starts were down 17% versus the same 2-month period last year. Second, for the first time this year completions are now outpacing starts. Over the 2-month period completions were 11% higher than starts, which reduces a new construction backlog. In addition to the census data, we learn through big builder quarterly announcements that their cancellation rates have increased substantially, which also reduces new construction backlogs. And lastly, over the past few weeks, as we dug into the backlog deeper, we discovered that builder practices had changed in some regions, whereby our product was being installed earlier in the process than it historically has been over the past 30 years. Specifically, in regions where roofing materials and windows were a constraint, our product was going up ahead of those items. And thus some of the outstanding completions in the industry already have our product installed, again, reducing our addressable backlog. In addition, we have seen two additional Fed rate hikes on September 21 and November 2, which we believe will continue to drive starts downward and keep cancellations high. All in all, we are now expecting our addressable new construction activity to be down 30% plus in our second half, which is the primary basis for a reduced volume outlook. While we are significantly reducing our expectations for the second half volumes. To put that in for context, we still expect our second half of fiscal year '23 to be one of the largest [indiscernible] in the history of our company. And from a net sales dollar perspective, we expect it to be the second largest half year net sales in our history. Over the past few years, we have significantly step changed our top line results by driving volume growth and price mix growth, which puts us in a position to deliver, again, the second largest half year net sales dollar results in our history despite the market slowdown. This adjusted outlook for the second half still puts us in a position to deliver EBIT growth year-over-year and an EBIT margin in the top end of our 25% to 30% range, while continuing to make the right investments in our long-term growth. We will continue to focus on what we can control and position ourselves appropriately for fiscal year 2024. With that said, I would like to hand it off to our CFO, Jason Miele, who will share details about our second quarter financial results.

Thank you, Aaron. Let's now shift to Page 13 to discuss our fiscal year 2023 second quarter results. In challenging macro conditions, the global team has continued to deliver growth above market with strong returns. In the second quarter, group net sales increased 10% to just under $1 billion. Group net sales was highlighted by strong price mix growth in every region, with price mix growth of 14% in North America, 11% in Asia Pac and 12% in Europe. The unfavorable change in foreign exchange rates between the second quarter of FY '23 and the second quarter of last year had an unfavorable impact on net sales in U.S dollars of $30.9 million. Global adjusted EBIT increased 6% to $218.5 million, driven by the global net sales growth of 10% partially offset by inflationary pressures in all regions. The unfavorable change in foreign exchange rates between the second quarter of FY '23 and the second quarter of last year had an unfavorable impact on adjusted EBIT in U.S dollars of $3.2 million. Global adjusted net income increased 13% to $175.8 million in the second quarter. We have seen substantial growth in adjusted net income over the past few years. From the second quarter of fiscal year 2020 through to this result, we have now seen our second quarter adjusted net income growth 22%, 29% and now 13% over the past 3 years. During the quarter, the European team sold surplus land from an old unused site as part of their work to find a suitable site for our future greenfield fiber cement plant. The sale of land generated gains net income net of tax of $8.9 million. For the half year, net sales increased 14% to just under $2 billion, and adjusted net income increased 14% to $330.1 million. Operating cash flow for the first half of the year was lower year-over-year at $264.6 million. The lower operating cash flow was driven by an unfavorable change in working capital in the current year versus a favorable change in working capital in the prior year, primarily related to the timing of payments within accounts payable and prepays and also included an increase in inventory during the half year. Let's move to Page 14 to discuss the North American results. In the second quarter, the North American team delivered robust net sales growth of 18% to $750.6 million, driven by volume growth of 4% and excellent price mix growth of 14%. The strong price mix in the quarter was underpinned by ColorPlus volume growth of 31% in the second quarter. Volume growth of 4% was below our expectations of mid to high-single-digit growth in the quarter, due to our customers partnering with us to lower their inventory levels as well as the impact of hurricane Ian Florida, which required us to close two of our plants for multiple days at the end of the quarter. In the second quarter, the team delivered a strong bottom line outcome with EBIT increasing 17% to $212.8 million at an EBIT margin of 28.4%. As we foreshadowed in August, we are pleased to report a 250 basis point sequential increase in EBIT margin for the second quarter to 28.4% from 25.9% in our first quarter. As discussed in August, this improved EBIT margin was driven primarily by the execution of our June 2022 price increase, while we maintained SG&A spend relatively flat to Q1. Persistent inflation kept cost of goods sold per unit relatively flat to Q1 and comparing Q2 versus Q1, while we saw freight improve, pulp natural gas and other input costs increased into Q2 almost entirely offsetting the favorable change in freight. Over the past 3 years, we've seen substantial growth in North American net sales and EBIT from the second quarter of fiscal year 2020 through to this results, we have seen our second quarter North America net sales grow 12%, 23% and now 18% over the past 3 years, and have seen our EBIT grow 19%, 23% and now 17%. We continue to drive growth on top of growth in our North American segment. Let's now move to Page 15 to discuss the Asia Pacific results. The Asia Pacific team delivered second quarter net sales growth of 7% to AUD$211.1 million. Importantly, the APAC business continue to drive high value product penetration with price mix growth of 11% in the quarter. The 4% decline in volumes was primarily driven by the constrained housing market in Australia as well as customers in Australia, New Zealand adjusting inventory levels lower. Despite strong contracted backlogs, unfavorable weather conditions and labor shortages are slowing market growth in Australia. Second quarter EBIT declined 7% to AUD$56.1 million with a margin of 26.6%. EBIT margins were adversely impacted by lower volumes as well as higher freight and pulp costs, which more than offset continued execution of lean manufacturing and growth in high value innovations. Similar to our discussion of our North American business last quarter, in our Asia Pac business and Q2 continued inflationary pressures have constrained margins. And as we execute price increases in all three countries in September and October, we expect margin accretion in the back half of the year. Over the past 3 years, we have seen substantial top line growth in Australian dollars. From the second quarter of fiscal year 2020 through to this result, we have seen our second quarter Asia Pacific net sales grow 4%, 15% and now 7% over the past 3 years. Turning now to Page 16, let's discuss the European results. During the second quarter, net sales decreased 2% to €102 million, driven by a 14% decline in volumes, which was a result of the slowdown in the European housing market. However, the team's continued execution of a high value product penetration strategy resulted in strong price mix growth of 12%. Second quarter EBIT declined to €4.4 million at an EBIT margin of 4.3%. Margins were adversely impacted by higher prices for natural gas, freight, gypsum and paper compared to the prior corresponding period. In addition, SG&A investment increased 10% primarily in marketing and talent capability. For the half year, Europe net sales increased 2% To €212.8 million. As stated at the Investor Day, our European team remains focused on ensuring effective execution of our long-term strategy to become a €1 billion net sales business with 20% plus EBIT margins. We remain confident in the strategy and the European business. I will now hand it back over to Aaron.

Thank you, Jason. Let's turn to Page 18 for an update on guidance. As I discussed earlier in the operational update, over the past 45 days, we have seen a significant change to the outlook of housing market activity in the second half of our fiscal year. This has been a consistent sentiment across most industry participants. I discussed earlier our expectations for volume in each of our regions for the second half of our fiscal year. These expectations have reduced significantly in the past 45 days, and are the basis for the change in our guidance range. We are navigating this market uncertainty with the focus on controlling what we can control. This includes costs, price realization, HMOS productivity initiatives in outperforming our competitors and the underlying markets we participate in with our outstanding value proposition. Due to the decline in volume expectations, we are adjusting our full year fiscal year 2023 adjusted net income to between $650 million and $710 million, which represents a 10% increase at the midpoint relative to fiscal year 2022. More specifically for North America, our largest region, we expect fiscal year 2023 net sales growth of 13% versus fiscal year 2022 at an EBIT margin between 28% and 30%. As I mentioned earlier, while we have reduced our expectations for the second half in North America due to the changing market conditions, we still expect to deliver the second largest half year in net sales in James Hardie's history. As we look to the back half of the year, we expect to continue to face challenges. But we are confident in our ability to outperform our competitors in the markets we participate. You could turn to Page 19. Before we open for Q&A, I'd like to take this opportunity to state how proud I’m to be a part of the James Hardie team. This Group has managed through COVID, global supply chain disruptions, rapid inflation and an extended period with the leadership backing. Through all that, this team has delivered strong results. I'm invigorated by the can do attitude that exists here. People are at the heart of what we do. And over the past several weeks, I've witnessed firsthand how strong, capable and dedicated the James Hardie employees are. The future is bright for James Hardie. When I reflect on why James Hardie for investors, I go back to what I shared with you all at our Investor Day, and who we are, a global growth company. As we look to the future, I'm confident we are well-positioned to successfully navigate any market uncertainty and emerge out of any such period stronger than when we entered it. With that, I would like the operator to open the line-up for questions.

[Operator Instructions] Your first question comes from Keith Chau at MST Marquee. Please go ahead.

Hi, Aaron and Jason and team. Thanks for taking my question. Thanks for the context Aaron on the change of guidance for the year. I just want to go back to the comment made at the last quarterly results revenue growth expectations. That was laid out as possible to get 22% plus growth and I know things have changed rapidly since then, with where mortgage rates are sitting. But just part of the reason for that guidance change at the last quarter was because of this visibility that parties has improved with customers over the last couple of years, which seems to have unraveled a bit over the last few months. So I'm just wondering if you can help us understand, based on your discussions with customers and things change that dramatically for those customers such that, what was this apparent backlog of work in the system and [indiscernible] disappeared. And secondly, is there an element of destocking going into the end of the year from not only new construction, but also the dealer distributed channel that's impacting volumes. Thank you.

Hey, Keith, thanks for the question. You're right. At our Investor Day, we said we've never been more connected with all of the participants in our supply chain, that's our customers, contractors, builders and homeowners, and I think that’s continued. We're very close, we can always be better. I think what's changed, and we would talk to say our dealer network, I think they were surprised at the rate of decline that as we were out there. One of the things I mentioned is, we probably looked at our backlogs in a way that we hadn't seen before. We found our products continue to flow to the wall, but there was really a change in the building practices. Our products were going up ahead of other supply constrained products like windows and roofs and that really reduced the addressable backlog for us and for our customers out there. And with the big builders is you can see some of the data out there. Cancellations have really increased and the completions have outpaced starts. So I would say, we were surprised and our customers were surprised. It's a rapidly changing market out there. And if we talk about destocking, if you will, I feel like if we would ask our customers and we would ask our sales teams, we are at the right levels right now. They signaled to us in the quarter their desire to lower stocking levels late within the quarter. If you look through COVID, we adjust -- adjusted downward on stocking levels with our key customers from historic levels, as we improved how we connected our supply chains, and as most of now again lowered inventory levels to adjust for really what's the changing market out there. So we don't think there's any significant room for lower stocking levels as we move forward.

Thanks, Aaron. And then my follow-up is just with respect to the new construction estimate for the second half. But down 30% for new construction seems quite aggressive given at least they're still remaining or do you think some backlogs that are still remaining. Can you give us a sense of where you see R&R in the second half? And ultimately, what your market share gain assumption is and whether your volume deterioration accelerated into the fourth quarter? Thank you.

Yes. So we expect R&R to remain more robust than new construction. And as we said before, we're going to continue to try to outperform the marketplace. So if you look for ColorPlus, you can see some of the progress we've made there, up 31%, year-over-year. So we continue to grow R&R, in particularly, some of the focus areas like ColorPlus. But like every segment in every region, we would expect the growth rate to slow. If I just have to put numbers on it, if I would look at R&R volume in the second half, I'd probably call it flattish.

Thanks, Aaron. And then market share, or market share growth?

Yes, Keith, as far as market share growth, I would just say that we're looking to outperform the markets that we participate in.

Okay, that's great. Thanks very much, Aaron. I will circle back.

All right. Thanks, Keith.

Thank you. Your next question comes from Simon Thackray at Jefferies. Please go ahead.

Thanks very much. Good evening, Aaron. Good evening, Jason. Keith sort of covered off, I think on the first part about visibility into R&R. But I'm interested, maybe just to extend the question a little bit on the visibility part. You get visibility into new construction, quite clearly with your contracts with the large home builders [indiscernible] with a little less reliable, I think. What are your contractors actually telling you on the ground today as to the order flow?

Yes, and I think I got the question as far as what are contractors telling us about the order flow?

Yes, in R&R, in particular, Aaron.

Yes, from an R&R standpoint, as I said, R&R is more robust. But we are seeing the rate of orders come down. And as I mentioned in for our guidance, obviously new construction is a big piece of it. But we expect R&R to slow down, and also we're seeing different. If I look at North America, it depends by region of the country, right. Those regions of the country that are more focused on new construction, we're seeing that decline more, and then those that are more robust as far as R&R, like we talked about the Midwest, the Northeast, they're doing better for us, and we expect them to do better than us because they're exposed more to R&R versus new construction.

Okay, that's helpful. And then, just in terms of the narrowing of the North American EBIT margins this year, though, they were 28 to 32. They're 28 to 30, for reasons which are very easy to identify. You'd mentioned the margin target before 25 to 30. Just any view of the medium to long-term, North American EBIT margin, which has been set at 25 to 30. Is there an expectation that could be lowered?

Hey, Simon. This is Jason. I will start with the current year, last quarter, we have talked about 28 to 32, requiring us to hit the top line estimates. And obviously, with us calling down the back half of the year from volume perspective, that's why that's lowered.

Yes, I understand that.

As we move forward, we will still be at operating in the long-term range. Obviously, we're tracking market conditions going into Calendar '24 and beyond.

Okay, okay. So long-term 25 to 30, we can stick with? Is that right?

Yes, if you look at the back half of this year, we're obviously calling between 28 to 32 for the back half, which is a much lower volume outcome than previously assumed.

All right. Thank you.

Thank you. Your next question comes from Lisa Huynh at JPMorgan. Please go ahead.

Hi, morning. So thanks for the color around the order backlog being reduced. Can you just confirm that customers are still on allocation and well within the guidance you expect that to roll off?

Hey, Lisa. We are actually in full supply for the most part with a couple of exceptions, the most notable being our TRIM product in the south. But we expect to be in full supply shortly in the next couple of months. So it's an opportunity for us to really drive and beat the market.

Okay, sure. Then within that ColorPlus, growth still remains quite strong, I guess. Can you talk about where you're seeing the slowdown the most to get across the product range? And is it largely same plank, or how should we be thinking about that?

Yes. As far as ColorPlus, we are seeing exceptional growth we've mentioned, up 31%. And we expect, as I said before, that to remain robust, and a lot better than new construction. So the regions that we sell ColorPlus are more highly indexed R&R in new construction. If we think about some of the products that we would see a slowdown, they would be focused on new construction. In those regions I mentioned, some of the regions that are more highly concentrated in new construction would be areas like Texas, for instance.

Hello?

Yes, we're still there, Lisa.

Yes. Can I just tack on to that? So when throughout FY '22, did ColorPlus growth take off? I just want to know when we should start cycling some of the strong growth we saw in the prior year baseline.

We had strong growth throughout last fiscal year, Lisa. We closed the year, full year 27% growth, which was steady throughout the year, started picking up, accelerating towards the back half, but it was strong all year. And then, obviously, the first two quarters of this year, both at 31%.

Okay, sure. Thanks. I'll leave it there.

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

Hi, Aaron. Hi, Jason. Just on the visibility piece [ph], I guess, I'm a little bit confused as to was it you're wrong on the visibility that you thought was there? Or did that kind of backlog get cancelled on you and given what's happened with house prices and things like that, particularly in R&R? And then just to be clear, Aaron, can you actually tell us what you think backlog visibility is in weeks under the -- under these kinds of new operating conditions that you've got?

Yes, that's a good question, Lee. So, look, as we dove into the backlogs as I mentioned, we found that the backlogs were less than we thought with our products. And that really involved a fundamental change in building practices. As we think about North America, where you had products that were going up, like our products, were they in a different order than they usually did. If you looked at things that were supply constrained, like windows and roofs, they were putting our products on, and then they were putting these after the fact. So that really reduced the addressable backlog for us. So, just in full transparency, this is probably the piece we should have identified sooner. But you're really talking about a change to a well rooted practice that has existed since we really started doing business here in the U.S over -- for over 30 years. So all of those factors decreased our estimate of the addressable backlog. And then as we look forward, we just think about all the economic indicators that we see, and hence the addressable backlog being lower, we think about some of the two additional Fed rate hikes on September 21 and November 2, where we think that's going to continue to drive starts down from the current levels, and it's going to continue to put pressures on cancellation. So, hence the reduced guidance here. And as far as where do we see addressable are the backlogs now, I just say, it's a much shorter window than what we've seen in the past.

Are you willing to put a week or months number on that?

No, Lee, I'm not.

That's all right. And then just on lean, can you give us an idea of what's been achieved and the confidence that you still get that benefit as this is like to probably softer volume environment come through?

Yes, Lee, it's a great question. I mean, I've been here roughly 2 months, and I've really been impressed with our team's focus on lean and productivity. This is something that's part of our scorecard and part of our DNA as a team. So, we've really shifted from looking at dollars as a total team to look at net hours and our yield, and those are going to be really important for us to continue to focus on as we move forward. And I'm stating the obvious in that, lean execution has never been more important in what is a high inflationary environment. And what becomes a more challenging environment for us as we think from a manufacturing standpoint.

Okay, thank you.

Thanks, Lee.

Thank you. Your next question comes from Peter Steyn of Macquarie Group. Please go ahead.

Good evening. Good evening, Aaron and Jason. Thanks very much. Appreciate your time. Aaron, could you talk through your cost intentions or cost management intentions under the circumstance, what you're going to be doing around market development expense and the like? And then also, perhaps just some of the CapEx intentions in the context of where things are headed?

Yes, absolutely. Peter, good to hear from you. Look, we're going to continue to focus on what we need to control. As I came in here, what I was impressed with the team already had a certain look at scenarios, right, and we probably have accelerated some of those scenarios sooner than we thought, when we look at the difficult market conditions. So we're going to continue to make sure we're focusing on the right growth initiatives. But as the market slow down, we're going to ensure that we're optimizing our SG&A. If we look at our capital expense, we have slowed in some areas that we don't deem critical right now. But we are moving forward with some key projects that are important to us, right. We talked about Prattville expansion, which we're going to continue to invest in. So, Peter, needless to say, we're going to continue to invest in the key growth initiatives. But we're also going to respond to the slowing market conditions where we deem necessary.

Got you. Just two very quick follow ups. So from an SG&A perspective, everything that you're doing around consumer marketing, essentially is probably not going to change much. I assume and then Crystal City, the announcement that you put out a few weeks ago that you're presumably just doing front end engineering and some design work on before actually breaking ground there.

Yes, so in regards to marketing, we're going to continue to focus on marketing, because we are -- initial results are very good for us, right. We talked about the growth we're seeing with ColorPlus and R&R. The Midwest and the Northeast will be a continued focus with our marketing efforts. I would say, with marketing, we're learning more and we're getting more efficient, right. So we can really dial in that spin as it relates to marketing. And as I said before, as it relates to capacity expansion, Prattville is our main focus right now and we're ramping that up. But we do have some other things that were more slow playing. And if we need to shift in higher gear, we will do so.

Got you. Thanks, Aaron. Appreciate that.

Thank you. Your next question comes from Andrew Scott at Morgan Stanley. Please go ahead.

Thank you. Aaron, just a question for you. I know there's a lot of moving parts and things are moving quickly. But North America 4% volume growth, and [indiscernible] we can probably debate whether starts or completions are more relevant, but completions are up 8% in the period. How confident are you that you actually grow share during the period?

Yes, it's a great question, Andrew. We are confident that we're outperforming the market in which we're participating in, particularly as we look at our R&R growth and you see some of the numbers as it relates to ColorPlus, but we are confident we're outperforming the market in which we participate in.

Okay, we're going to get a long time to get a bigger better data sample there. Second question, when we're in New York, I think it was, Aaron mentioned that one of the reasons you're appointed was the need to sort of add a level of corporate infrastructure to get Hardie's to probably the -- what is warranted for a company of this size and scale. Just interested in your observations there. You've been there a little bit longer and maybe what we should expect coming forward on that cost line.

Andrew, are you speaking of additional process as it relates to the -- we think of corporate?

Correct, corporate infrastructure, et cetera?

Yes, it's a great question. I think the big thing that I'm looking at here is how do we prioritize? And now are there ways that we can shift costs, right, from a prioritization standpoint. So, one of the things that I just did recently is I had our lead ESG person come right into me, report directly into me, also our Chief Information Officer writing to me. So I wouldn't say that we're going to see a lot of additional costs initially. I think we're just going to reprioritize, and have a better focus on what really helps to accelerate our strategy.

Thank you. I'll jump off.

Thanks.

Thank you. Your next question comes from Sam Seow at Citi. Please go ahead.

Well, thanks, guys. Appreciate the time. Obviously, not the best one in outlook. But looking forward, I think the 28% and 30% margin target is fairly positive actually. Just want to understand thinking about what's offsetting that reversal with fixed cost leverage? And I mean, is it continued growth in mix or costs coming off? But yes, keen to understand the factors there, whether they're sustainable through FY '24?

Yes, Sam. Thanks for the question. So I will start by saying, you'll see in Q2, we delivered on what we said we would from a margin perspective, last quarter in August when we spoke. So we said we delivered that through the price increase primarily. And that's what's happened. So we delivered 250 basis points accretion in Q2 versus Q1. Certainly to your point in the back half of the year, the volume number will be lower. But as Aaron mentioned on the call, it's -- it will still be our second highest half of revenue ever. So you still do have a robust top line that helps us deliver still a strong margin in the top end of that long-term range. So I think it's the continued price accretion as well as mix and then cost control, as Aaron mentioned earlier.

Got it. And I guess, a couple of years ago, you did upgrade your margin targets. But when I look back at those targets, you actually put a cap on them for 3 years, it looks like. So just want to understand why you put that cap [indiscernible]. And I guess, Aaron, perfect timing as the new CEO, what are your thoughts about extending those [indiscernible]?

Yes, Sam, I think at the time, we could see out 3 years, we felt that was the appropriate change. I mean, it was a big change. We're changing a 500 basis points from a long-term range of 20% to 25% to 25% to 30%. At the time, we felt signaling a 3-year period, which was kind of a period of time we do our planning for, made sense that certainly not at Aaron's on board. We'll revisit that and make sure we provide clarity.

Thanks. Appreciate it.

Thank you. Your next question comes from Daniel Kang at CLSA. Please go ahead.

Good morning, everyone. Just in terms of, Aaron, you mentioned about Prattville expansion. There's also further new capacity coming through in the industry. How do you see this being digested in the current slowing market?

The further capacity being introduced?

Yes.

Yes, look, I mean, obviously, as you have a market slowdown and you have more capacity, you're going to have, if you have equal product, you're going to have a lot of fight over new business, right? I think what we look at is focusing on what we can control, right. And so what we can control is the value proposition that we offer to our customers, right. I mentioned a lot of our focus, or what we talked about here internally is really to be homeowner focused customer and contractor driven. That really means along that supply chain, with the homeowner, with the customer and the contractor, we have to provide an outstanding product, which we do, an outstanding service. So if you're asking, are we going to go out and fight on price? The answer is going to be no. We are going to continue to provide that value proposition that customers all along that supply chain are going to be willing to pay for.

Thanks, Aaron. And I guess you put a chart in terms of mix of volume for North America in the past. Has that chart necessarily change given the slowdown in market?

No, it shouldn't, it won't change.

Got it. And just one quick follow-up, if I can. You expanded the consumer marketing campaign to three new regions in Minneapolis, Chicago and Washington. Can you talk us through how that launch has been received?

Yes, look, it's early days, what we're focused on awareness, preference and leads. So those are all things that we're still trying to quantify. I won't share the exact numbers here on this call. But needless to say, we're pleased with what we're seeing. That's why we are going to continue to invest in the homeowner focus marketing campaign.

Good to hear. Thanks, Aaron.

Thank you.

Thank you. Your next question comes from Anderson Chow with Jarden Group Australia. Please go ahead.

Good evening, Aaron and Jason. Thanks for taking my questions. I just have two questions, if I could. I mean, the rapid market slowdown also caught me by surprise, I guess. You mainly talk about new starts slowing down. But isn't the R&R market rose is rapidly decelerating. I mean, if I look at LIRA index is barely positive and new home sales -- I mean, existing home sales is still declining. So how do you think we have place for a potential shrinking of the R&R market, probably going into 2024 as well when new start is already weak?

Yes, look, Anderson, we'd like the fundamentals of the R&R market. We certainly see it moderating. As Aaron mentioned earlier, the contractors we partner with are certain -- certainly seen their calls flow. But with the conditions of new construction, we do like the fundamentals from the R&R market, and we believe it will remain buoyant. So we think going forward, our focus is right, as we've over the past 10, 12 years shifted to be a much more heavily focused R&R, or a lot more of our volume goes into R&R. So we think that plays well or us moving forward. Certainly, consumer confidence is low. We do see R&R moderating. We think it'll be strong going forward.

Okay. And just related to that. And we basically cap the CapEx steady $1.6 billion to $1.8 billion. But I'm just trying to understand sort of the logic behind that, because we are seeing a rapidly changing market to the downside in volume. And industry is still increasing capacity, we are increasing capacity. I mean, what will what will be roughly a break even production utilization rate for new plants. And if North America is only going to operate about 50 or 60% production utilization rate, what would that do to our EBIT margin or EBIT, if you could discuss that?

Yes, Anderson. I guess that first start with the headline number you mentioned. And that will get stretched out over a longer period of time, barring a drastic change in market conditions. So the majority of the projects we've been highlighting on that map slide, we've shown you a lot. We still think are the right projects we're not -- we don't believe we're anywhere near the terminal share in North America and will need to add those that capacity over time. How you time that obviously will adjust. So right now, we really like the Prattville 3 and 4 project. We want to add more color to [indiscernible] Prattville as we announced today. We have the Asia Pacific plants going in, in Victoria. For those projects, we'll continue to move forward with construction that are long lead times, some of the more Greenfield sites, and they buy the land and then wait. So we have a lot of flexibility. You've seen us do it in the past. We added Prattville 1 and 2 several years ago, and then paused before we started those lines up and we were still able to deliver very strong EBIT margins through that period. So we will monitor the markets and will flex as we need to.

Okay, thank you. I will leave it at that. Thank you.

Thank you. Your next question comes from Peter Wilson at Credit Suisse. Please go ahead.

Thanks. Good evening. Good morning. This might be question best directed to Sean Gadd, if he is on the line. But just to follow-up the assertion that you are outperforming competitors in North America, just had one of your major competitors [indiscernible] almost 10% volume growth and forecast further volume growth in the next quarter. And specifically, I guess they refer to or they're confident they're gaining market share in the new construction segment. And then I'd also say that your 30% -- your expectation of 30% down in the second half is -- in that segment is it's probably worse than -- it's worse I've heard. So it would appear that you are losing market share in that new construction segment. So my question is, do you agree with that? How would you respond? And is it time to bring back the [indiscernible] brand?

Yes, a great question and Sean is out selling. So we have him out selling today. So let's talk a little bit. Before we talk about other companies results, let's talking about ours. Just to remind you, our first half in North America, we posted 23% increase in revenue. That was on top of 21 -- 25%, first half revenue growth last year. So, if you think about the comps, we have some really tough comps that were going against. So we continue to grow the business here. One of the things I would say also is we have been consistent on having supply to our customers. And so part of the reason our comps are so tough is the supply that we've been able to give to our customers out there. As far as Cemplank, Cemplank is a fiber brand. And we've described it as such in the past and one thing you need to remember is in the past, we lost some discipline. And we're allowing this product to move within the market to end users segments where it should have been, and it was ultimately over 20% of our mix. We corrected that. And we're going to make sure we stay disciplined. I will say as we look forward and we look at some of the changing market conditions, if it's the right move to use it to defend a position, we will do that. So as we think for with Cemplank, we would only offer that to some of our large builders. So that's our stance on Cemplank. But we like our strategy. We think we have a strong value proposition. As I mentioned before, the products and services we provide, and we're targeting them at the right segments.

Okay, thank you. And to you Jason, just a follow-up on Sam's question around the second half margin, North America. I'm not really understanding where the margin growth is coming from. Because you've just reported 27.1% EBIT margin for the first half, 28.4% for the second quarter, and then the midpoint of your guidance would imply 31% in the second half. So I'm just wondering, what's causing that? Is there some lagged [ph] price or other.

Yes, Peter, as we talked about in August, we were showing you a chart that would have shown additional price. So the June 22, 2022 price increase, we wouldn't fully realize that in Q2 and get some more of that in Q3. And then we have the annual price increase on January 1. So you got those two items across the two quarters. We do expect -- we have seen as I talked about on the call, we've seen freight improvement in Q2, and we see that improving into Q3 as well. In Q2, as I discussed earlier, we saw that offset with other increases [indiscernible] natural gas, we do expect some of that to moderate. So we do expect to see total COGS improvement per unit on top of the price increases, helping offset the lower volumes.

Okay, thank you. I'll leave it there.

Thank you. Your next question comes from Brook Campbell-Crawford at Barrenjoey.com. Please go ahead.

Yes, thanks for taking my question. Just following up on the last points around price, can you confirm what your price increase [indiscernible] is in North America for January '23? And if you're able to sort of comment on sort of gross price increase in expectations around rebates coming through, I guess probably asked to happen in the new construction channel. So any color on that will be great. Thank you.

Yes, Brook, for North America for January we're targeting 5% price increase.

And that is a net price increase after rebates?

Yes, that would be net, sorry.

Okay, brilliant. Thanks. A couple of other questions around the idea of ramping up capacity into a slowing market. I mean, I guess just to follow-up on that, I mean, are you thinking about even if you ramp up, Alabama 3 and 4, which I guess is already underway. Are you considering mothballing [ph] all the plants? Like, I guess what the business did back in the early days of COVID, taking down some of those [indiscernible] I guess you'll have the fixed cost recovery issue to sort of work through.

Yes, as we look at our plant network, one of the things is having multiple plants around the country. We have the ability to flex, where we think the volume is going to be and so we will make sure that we're doing that as we continue to monitor the market conditions.

Okay, thanks.

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

Yes, thanks very much and good morning, guys. So just checking on your North American sales guidance for the plus 13% for fiscal year '23, my rough and dirty math has your second half sales down 12% over the first half. Is that correct?

Sorry, Paul, not sure I'm tracking with you. We'd expect sales to be up in the back up here.

Okay. Just on your '20 -- fiscal year '22 sales of 2.55 billion. Sorry, just taken 13% of that and taken off the first half, and I got you back down in the second half. Is that right?

So you're asking is the second half net sales lower than the first half, is that the question?

Yes. Yes. And then how does that shake out on volume and price?

Sorry, I missed that last part of that question [indiscernible].

So if you're -- sorry about that. If you're down in the second half, how does that shake out on volume and price?

As we referenced earlier, we expect second largest revenue have ever and you're correct in saying, the highest ever would be the first half of this fiscal year. And then, yes, we'd expect the volume, the second half to be lower than the first half as well. The price -- average price would be higher.

Okay. And then I'm also really confused with the guidance going forward, because LP just reported last week, and they're guiding a 30% revenue increase in the calendar Q4, not the second half of their year, but just what is -- are you seeing them showing up more competition between you and LP on the siding product?

Yes, Paul, I would say we have a lot of good competitors out there. What I would say is we have not lost a customer, and we'll continue to utilize our value proposition that we have. And as I said before, we're very confident we're going to outperform the markets we're in.

Okay. I'm confused with the result, because your first half of the year, your volumes up 8%, LP's was up 10%. They've had customers in allocation 2 years in a row now. So I’m just trying to understand why you're losing a growth when you're not as constrained as LP.

Yes, Paul, I think as we talked about on the call, we're flowing product to the wall consistently, and we're not constrained in the past several quarters. And so I think part of what we're, we believe is that as the downturn was coming, we're feeling it faster as our backlog -- sorry, our backlog, the new construction backlog became less addressable to us as our product on the wall.

Okay, that helps. Thanks, guys. Best of luck.

Thanks.

Thank you. Your next question comes from [indiscernible] at Bank of America. Please go ahead.

Hey, good morning. Thanks for taking the question. I had a quick one on your input cost, perhaps a follow-up from Peter and Andrew [indiscernible]. So last quarter, you called out on the cost inflation, right, a few line items that you thought were pretty high. Just wanted to get a sense that for this quarter, were there any such items? And also, what are you seeing on the cost side if you have any visibility? Thank you.

Yes, thanks for the question. I think you're referring to the slide last quarter, where we kind of called up [indiscernible] cement. So we still versus second quarter of last year, all would be up double digits. So we still saw significant cost inflation, Q2 of FY '23 versus Q2 of FY '22. As I mentioned, on the call, we did see favorability. So I think sequentially from Q1 into Q2, we've seen freight come down modestly about 10%. But we saw that offset by pulp ticking up and natural gas ticking up from -- into Q2 from Q1. So net-net, our total COGS per units essentially remained flat Q2 versus Q1. And then obviously, a lot of inflation in Q2 versus prior Q2.

Thanks, Jason. Did you just discover [indiscernible] what you're seeing, like, is there an expectation that sort of the input costs continue to trend down as we head into the year-end, or what are you seeing there?

We're seeing freight continue to tick downward from our Q2 levels into October November, which is a positive for us. That's good. We're seeing moderation in pulp, but cautious that there can be a continued inflation across our basket of inputs. But those two big ones, like I said, we're seeing moderation in pulp and freight continued to tick down, which is a positive.

Okay, thank you.

Thank you. That concludes our question-and-answer session. I would like to hand back now for some closing remarks.

Just want to thank everyone for being on the call. Just in closing, our focus remains on being a growth company. As I said before, we're going to continue to focus on what we can control, which is working safely, grow above the market by leveraging our value proposition. We're going to continue to invest in our key strategic growth initiatives. So with that, thank you, everyone.

Ladies and gentlemen, that concludes our conference for today. Thank you all for participating. You may now disconnect your lines.