James Hardie Industries plc (JHX) Q4 2023 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to James Hardie Fourth Quarter Fiscal Year 2023 Results Briefing. Today's briefing is hosted by James Hardie CEO, Mr. Aaron Erter; and CFO, Mr. Jason Miele. [Operator Instructions] After the Q&A, I'll turn it back to Mr. Erter for closing remarks. I would now like to hand the conference over to James Hardie's CEO, Mr. Aaron Erter. Please go ahead, sir.

Thank you, operator. Good morning and good evening to everyone. I'm Aaron Erter, CEO of James Hardie, and I would like to welcome all of you to our fourth quarter fiscal year 2023 briefing. Turning to Page 2. You will see our standard cautionary note on forward-looking statements. Please note that the presentation today does contain forward-looking statements and the use of non-GAAP financial information. Also, except where we explicitly state otherwise during our prepared remarks, all references to monetary amounts should be assumed to be in U.S. dollars. On Page 3, you will see our agenda for today. I'm joined by our CFO, Jason Miele. For today's call, I will start by providing an operations and strategy update. Jason will then discuss our full year and fourth quarter fiscal year 2023 financial results, and I will return to discuss our fiscal year 2024 guidance, outlook and provide a brief closing. We will then open it up for questions. Before we begin, I would like to take this opportunity to thank all of our employees around the world who remain focused on safely delivering the highest quality products and services to our customer partners. Our employees truly represent the very best in our industry and consistently enable our superior value proposition. I feel fortunate to work with each and every one of them. Let's start on Page 5 with a look back at fiscal year '23. Last quarter, you heard me talk about our team's focus on controlling what we can control and managing decisively. And when I reflect on our fiscal year '23 results, that is exactly what we did. I'm really proud of what this team delivered. The true test of a team is how you perform through adversity. And I think our team has done an outstanding job. In FY '23, we delivered record net sales globally and across all of our regions. Record EBIT of $767.5 million in North America. Adjusted net income of $606 million. And operating cash flow of $608 million. I am pleased with how the teams adjusted and executed during the year to prepare the company to thrive through a difficult environment. And I believe that is reflected in the fourth quarter results. In the fourth quarter, we delivered sequential growth versus the third quarter across numerous metrics in every region and globally. Some highlights. Global adjusted net income improved 13% to $146.2 million. EBIT margins had meaningful growth versus the third quarter across all of our regions. Notably, North America improved 200 basis points to 29%. We took important steps forward this year to make the company stronger for years to come. We appointed a new chairperson, Ms. Anne Lloyd. We reshaped and strengthened our leadership team by adding key leaders that will help to take this company forward. We focused on SG&A for the current environment, reallocating and prioritizing resources to key areas and projects. We reset our capital allocation framework in a manner we believe aligns to a growth company, specifically with the launch and execution of our share buyback program. We strengthened our customer value proposition to continue to be homeowner focused and more customer and contractor driven and we are aligned on our go-forward strategy. I believe we not only delivered differentiated results with share gain and elevated margin in a difficult environment, but we have managed decisively and effectively to position James Hardie to not only navigate this market cycle but to accelerate our competitive advantages through the cycle and come out on the other side and even stronger company. Let's now turn to Page 6. I just walked you through some highlights that I believe illustrate our team's ability to navigate through any market conditions. We remain laser-focused on the items on this slide. We will control what we can control and continue to manage decisively to accelerate our competitive advantages despite the continued housing market pressure. We remain focused on continued strong execution of our strategy to drive profitable share gain. We are balancing our manufacturing network to ensure not only that we better match supply to demand but ensure we are agile and ready to react to any market changes. We have adjusted SG&A for the current environment and will continue to do so as necessary, reallocating resources to key areas and projects and we are continuing to invest in profitable growth. We bring the solutions our customers are seeking. We are focused on being agile and adaptive to respond to significant changes in market conditions but remain thoughtful and focused on where we can accelerate our competitive advantages. I believe our fourth quarter results are a proof point that we can indeed deliver differentiated results regardless of market conditions, and our ability to thrive regardless of the market conditions requires having the right strategy. So please turn to Page 7 to review our global strategic framework. You've heard me say numerous times that we are a homeowner-focused, customer and contractor-driven. This was top of mind as our team worked on our go-forward strategy. Last November, I stated I thought we had a very solid strategy, but we would be adding additional clarity and precision to the strategic framework and that is what we have done here. All three regions are focused on the following key strategic initiatives. Number one, profitably grow and take share where we have the right to win. That is across regions, segments, products and customers. And an example is in North America, where there are 40 million-plus homes that are 40 years old or older that we are working to convert the James Hardie siding. Number two, bring our customers high value differentiated solutions. We are doing this throughout all our regions, and Europe is leading the way with a focus on our high value product growth. Their high value product penetration is expected to be the highest in the company with their commercialization of our new technologies like Hardie Architectural Panel and Therm25 Innovative Flooring Solutions. Number three, connect and influence all the participants in the customer value chain. We are doing this across all regions. Australia is doing this by marketing directly to the homeowner via multiple media platforms, co-creating next-generation building design with architects and developers and working with builders to train and implement construction efficiencies. We will accelerate our strategic initiatives by establishing competitive advantages through our strategic enablers. Our strategic enablers are customer integration, that means staying close to the participants in the value chain and optimizing service and reliability. Innovative solutions. We will continue to improve existing products and introduce new products that meet the needs of our customers. You've seen us do this throughout our history and most recently with the Hardie Architectural Collection. And beyond just innovative products, we also want to provide innovative services and solutions, such as our contractor alliance program that provides a wide array of support and training for contractors as they start up and grow their businesses. Be the brand of choice. We are focused on being the brand of choice in the building solutions space, and we are generating demand through focused and balanced marketing programs to drive awareness, consideration and conversion across the value chain that includes builders, dealers and distributors, architects, contractors and homeowners. Global capacity expansion. We are strategically aligning our capacity with demand, enabling us the flexibility to grow profitably into the future. We are focused on ensuring we have supply ahead of demand and drive growth as the market leader. Both our strategic initiatives and strategic enablers build upon our foundational imperatives. Our foundational imperatives are the bedrock of our company and are non-negotiable as they help promote the James Hardie culture, and will ensure our future success. The first is our culture of zero harm. We operate our business with our team's safety, security and well-being as our number one priority. We will always put safety first. We believe every incident is preventable. The second is ESG. We have continued to make good progress in integrating ESG into how we operate, and we continue to make progress against the goals and targets we set out in our prior sustainability reports. We're currently in the process of setting new ESG goals and targets which you will see in our third annual sustainability report, which will be published in July 2023. Third is the Hardie operating system. If I were going to boil this down to just a few words. The Hardie operating system is how we get things done. This has crossed the entirety of our business. The Hardie operating system builds on the success of the Hardie Manufacturing Operating System, or HMOS, which you have heard us talk a lot about over the past 4 years. We have had great success with our implementation of HMOS, which has been all about how we run our plants. HMOS remains unchanged and is one piece of the Hardie operating system. What we are doing now is taking those learnings and expanding the concepts to everything we do, how we run IT projects, how we run procurement, how we forecast and more. The best companies in the world have comprehensive management systems and I believe we are ready to take that next step. I'll speak more about the Hardie operating system in the coming quarters and over time, I will set savings targets. The final and most important of these foundational imperatives is our people. My confidence in our future success stems directly from my belief and James Hardie's 5,000-plus employees and our leadership team. There is no question we have great people, but we need to improve upon how we invest in, develop and retain our people. I think with the right focus, we can make our people an even bigger competitive advantage for us than they are today. I'm not going to dive deeper into our strategic framework today, but this slide will become a foundation of every quarterly result call and I will provide more context and updates on each of these items over future quarters. What I really want you to walk away with today is, we have the right strategy, we have a reenergized focus on profitable share gain, we have added our people as a critical focus and we have expanded the success of HMOS as a comprehensive company-wide management system, the Hardie operating system. I'm confident in our team and our strategy. Combined, they position us to execute at a high level and drive profitable share gain in all three regions. Please turn to Page 8, where I want to tie our strategy to our value proposition. Our strategic intent is clear, as is our expected outcome, profitable share gain. In all three regions, we have large market opportunities to drive profitable growth for the long term. Most importantly, I believe that we have the right to win in all three regions in the specific markets and segments we are targeting. The right to win has a foundation in our superior value proposition. Our products deliver a variety of exterior designs that deliver superior curb appeal for the homeowner. Our products have superior durability and are low maintenance. We are a trusted brand in the industry that delivers unrivaled business support. And we have localized manufacturing, enabling us to deliver reliable and excellent service to our customers and ensure product gets on the wall timely. It is this superior value propositions which has helped us secure the strong market position we have today. And it is these same attributes that I believe will help us continue to capitalize on our growth opportunities and drive profitable share gain into the future. I will now hand it over to Jason to go through our financial results.

Thank you, Aaron. Let's start on Page 10 to discuss our global results for the fourth quarter and our full year fiscal 2023 results. Let's start with the full fiscal year. Global net sales of $3.8 billion is an all-time record for James Hardie, up 4% from the prior year. Adjusted net income of $605.5 million is our second best result of all time. We continued to generate solid operating cash flows with FY '23 cash flow was $607.6 million and adjusted EBITDA margin of 25.2% remains strong despite the market and inflationary pressures experienced in the year. Regarding the fourth quarter, group net sales decreased 5% to $917.8 million, driven by a volume decrease of 13%, offset by global price/mix growth of 8%. Adjusted net income decreased 18% to $146.2 million. Last quarter, we talked a lot about controlling what we can control as we navigate the cycle. So I wanted to also discuss our fourth quarter results sequentially versus our third quarter of fiscal year 2023 results. Volume of 1.1 billion standard fee up 3% from Q3. Net sales of $917.8 million was up 7% versus Q3. Adjusted EBIT of $187.5 million, up 13% from Q3. And finally, adjusted net income was up 13% from Q3 at $146.2 million. Globally, we are controlling what we can control, and have delivered a strong fourth quarter. Let's move to Page 11 to discuss the North America results. Let's start with the full year results. Our North American business set records for net sales, average net sales price and EBIT in fiscal year 2023. Net sales increased 9% to a record $2.8 billion, driven by strong price/mix growth of 11%. The record $767.5 million of EBIT was achieved at a robust EBIT margin of 27.5%. Regarding the fourth quarter results compared to the prior corresponding period, North American net sales decreased 6% to $651.5 million. Volumes were down 14% as market activity weakened but was partially offset by price/mix growth of 8%. Despite 14% lower volumes versus the prior corresponding period, EBIT dollars in the fourth quarter were down to 8% to $188.8 million at a strong EBIT margin of 29%. Lastly, I want to discuss our fourth quarter results sequentially versus our third quarter of fiscal year 2023. We delivered 200 basis points of EBIT margin accretion in Q4 versus Q3 with average net sales price up 1% and EBIT up $14.7 million. We are controlling what we can control, delivering a lower cost per unit in Q4 versus Q3, while maintaining SG&A costs and driving profitable share gain. The North American team delivered a strong fourth quarter result by managing decisively and partnering with our customers. While we expect further weakening in the U.S. housing market, we exit Q4 in a position of strength with an EBIT margin of 29%, which will enable us to continue to invest in growth while absorbing the margin pressure associated with lower volumes. Let's move now to Page 12 to discuss the Asia Pacific results. Again, we will start with the full year results. Our Asia Pacific business set records for net sales and average net sales price in fiscal year 2023. Net sales increased 1% to a record AUD 787 million, driven by strong price/mix growth of 10%. EBIT of AUD 208.8 million was achieved at an EBIT margin of 26.5%. Regarding the fourth quarter results, compared to the prior corresponding period, Asia Pac's net sales were AUD 204.6 million, an increase of 2%, driven by price/mix growth of 12%. Despite 10% lower volumes versus the prior corresponding period, EBIT in the fourth quarter was up 12% at AUD 59.1 million at a strong EBIT margin of 28.9%. Again, I want to discuss our fourth quarter results sequentially versus our third quarter of fiscal year 2023 as it illustrates how the team is managing decisively. Our quarterly volumes increased 16% sequentially and net sales price was up 4%. EBIT improved by AUD 16.8 million or 40% and EBIT margin improved 420 basis points to 28.9%. Similar to North America, our Asia Pacific team has managed decisively through the year and we exit FY '23 in a position of strength. We expect the underlying housing markets to weaken further but we are confident we will continue to control what we can control and deliver differentiated results through the cycle while accelerating for competitive advantages. Let's now turn to Page 13 to discuss the European results. Starting with the full year results. The team delivered record net sales of Є431.8 million, driven by price/mix growth of 14%, while EBIT margin of 5.8% for the full year was significantly impeded by cost inflation, primarily related to energy costs. Similar to North America and APAC, our European team had a solid close to the year with Q4 setting a quarterly record for net sales and average net sales price. Net sales were Є117.8 million, up 2% year-over-year at a record average net sales price of Є438 per thousand standard feet. Sequentially, the Europe team delivered significant improvement in Q4 versus Q3. Volume improved 6% and average net sales price improved 10%, while EBIT margin improved 520 basis points to 6.7%, and EBIT increased Є6.4 million. In line with our counterparts in North America and APAC, European team effectively controlled what they could control and enter FY '24 in a position of strength. We are laser-focused on driving profitable share gain in FY '24. Turning now to Page 14 to discuss the liquidity, cash flow, capital allocation and capital expenditures. We have maintained the standard slides on these topics in the appendix but wanted to highlight key points in our prepared remarks today. We continue to maintain a strong liquidity position with our leverage ratio at 0.99x and $475.8 million of liquidity. We expect our continued robust operating cash flows will help ensure we maintain the strong liquidity position. In FY '23, our operating cash flow was a robust $607.6 million. Our capital allocation framework remains unchanged. First and foremost, we invest in our organic growth. We maintain a flexible balance sheet and when prudent we deploy excess capital to our shareholders by the way of share buybacks. Since our announcement of our share buyback program in November of 2022, we have repurchased 3.8 million shares for total consideration of U.S.$78.4 million. Finally, let's discuss capital expenditures. In FY '23, total capital expenditures were U.S.$591.3 million. We had previously discussed with you a series of large capacity expansion projects across the globe. I wanted to provide a brief update on those projects. First, we have canceled our plans to build 2 pilot plants. We believe we have the capability to drive innovation within our existing R&D and manufacturing facilities, and we believe we have proven this over time. This will save us over U.S.$130 million in capital investment. We have continued construction of Pratt Bill 3 and 4 in Alabama with an expected completion date for Line 3 in our fourth quarter of fiscal year 2024. We continue construction of our Massachusetts ColorPlus facility, which we expect to complete in the first quarter of FY '24, which we will then utilize as a reload facility but not yet utilized the paying capacity until the market demand improves. We also continue our brownfield fiber gypsum expansion in Orejo, Spain, and we had previously announced fiber cement greenfield expansions in all three of our regions. As housing markets continue to change, we're monitoring medium-term demand closely to ensure we tie these projects correctly. We are being very prudent in how we approach these greenfield projects. In relation to our U.S.-based greenfield, last month, we purchased land in Missouri. And in Europe, we plan to finalize the purchase of land for our future fiber cement site in the next few months. For both of these greenfields, we do not expect to begin any construction at either location during fiscal year '24 based on current market demand. In total, we expect to spend approximately $550 million in capital expenditures in FY '24. What is most important to note here is that despite the changing market conditions, we remain committed to investing in capacity expansion, but we'll continuously adjust such that we are not overextending our capital but allow us to be flexible and agile to respond as demand increases coming out of this cycle. Our capacity expansion program is guided by our expectation for sustainable, long-term profitable share gain. To close, we have robust operating cash flows, substantial liquidity and a flexible balance sheet, which will help us navigate this market cycle. Please turn to Page 15 as I pass things back over to Aaron.

Thank you, Jason. We have closed FY '23 with our team executing at a high level. Let's now shift to a discussion of our fiscal year 2024 guidance and outlook before closing. Starting on Page 16. We are entering fiscal year 2024 in a position of strength. We have a clarity of mission with our team to drive profitable share gain. We approach the year with confidence and the commitment we will seize profitable share gain opportunities by bringing the right solutions to our customers. For FY '24, we are targeting growth above the market or PDG of 400 basis points in North America and APAC. Considering all of the challenges we were faced with, I believe our fourth quarter was our best of the year as each business unit delivered sequential EBIT margin improvement, which enable us to continue to invest in growth through this cycle, which in turn will help us accelerate our competitive advantages and exit this cycle a stronger company and a stronger team. And of course, this is enabled by our strong team of 5,000-plus employees worldwide, which is led by an excellent group of leaders. Our team continues to manage decisively to ensure we execute on our strategy and continue to deliver differentiated results in fiscal year '24. Please turn to Page 17 to discuss our guidance. Today, we are providing three points of guidance for our first quarter of fiscal year 2024. First, we expect North America volumes to be in the range of 680 million and 710 million standard feet. Second, we expect North America EBIT margin to be in the range of 28% and 30%. And lastly, we expect global adjusted net income to be in the range of U.S.$145 million and U.S.$165 million. For FY '24, I fully expect we will outperform the markets we participate in. With that said, I do see a challenging demand environment this year. Interest rates are still in flux, job markets are still adjusting, consumer confidence remains low, and in general, housing markets remain unsettled. This uncertainty has provided limited ability for us to give a full year guidance number at this time. We will look to provide more clarity in August. Please turn to Page 18 to discuss our market outlook. While we enter FY '24 positioned to deliver differentiated results. We are also aware that all of the housing markets we participate in remain unsettled. This is supported by external data. Specifically, today, I wanted to walk you through our market outlook for our largest market, North America. We shared some external data with you on our last call and have again presented updated information here, along with our view of market conditions for calendar 2023. In single-family new construction, the current range of estimates for the 8 data providers we track is down 10% to down 23%. In multi-family new construction, the current range of estimates for the 8 data providers we track is down 8% to down 25%. In repair and remodel, the current range of estimates for the three data providers we track is down 8% to down 15%. Our view is that all three of these markets will decrease in the top half of these external ranges. Our current view is that we will see continued weakness in both new construction and repair and remodel markets until the Federal Reserve clearly states they are done increasing interest rates. We view this as the first necessary step to enable these markets to establish a new normal and then adjust to it. Our current expectation as the underlying markets decline will lead to our North American volumes to decline sequentially each quarter through December 2023 before seeing a seasonal uplift in our fourth quarter aligned to the calendar 2024 build season. Please turn to Page 19. Noting the uncertain market conditions, we thought it would be useful to also provide a sensitivity analysis in regard to North American EBIT margins. As our largest business unit, as North America volumes change, so does our global net income. Thus, we thought this page was very relevant in a period of market uncertainty. Here, we are sharing our EBIT margin expectations at a variety of quarterly volume outcomes specific to fiscal year 2024. This sensitivity analysis does assume our current range of expectations on raw material costs and freight rates and assumes we continue to invest in growth as currently planned. Obviously, if market conditions decelerated, we would focus on pulling certain levers to bring costs down as needed. So let's walk through the sensitivity analysis for FY '24 quarterly volumes and EBIT margins. At 700 million standard feet of volume in the quarter, we would expect to deliver an EBIT margin of between 28% to 30%. At 650 million standard feet of volume in the quarter, we would expect to deliver an EBIT margin of between 26% to 28%. At 600 million standard feet of volume in the quarter, we would expect to deliver an EBIT margin of 25% to 27%. These volumes are simply to provide context to our EBIT margin sensitivity in North America and should not be construed as volume guidance for any quarter in fiscal year 2024. Regardless of how the market fluctuates, we will deliver strong financial results and I believe that is reflected in these EBIT margin ranges. Please turn to Page 20. I think our fourth quarter results and our first quarter guidance are proof positive that our team can execute regardless of market conditions. This slide, which I introduced in February illustrates how we intend to manage our business through this cycle and specifically in FY '24. First, we plan to continue to deliver growth above market in every region in FY '24. Second, we expect to achieve higher average net sales price in every region in FY '24 versus FY '23. Third, we expect to deliver lower cost per unit in FY '24 versus FY '23. Fourth, we will closely manage our global SG&A spend. Lastly, we expect to maintain full-year EBIT margins in North America and APAC above 25% and in the mid-single digits in Europe. We are managing decisively and controlling what we can control. And I think the financial results are starting to really reflect the impact our team is having by taking this approach. Globally, we have positioned ourselves to outperform the market through this cycle and enabled ourselves to continue to invest in growth while delivering strong returns. Finally, let's move to Page 21. We spent a fair amount of time today talking about how we will navigate the current market, but I also shared with you our long-term strategy and how our superior value proposition will enable us to grow into the future. And I still firmly believe that these 10 core tenants listed here remain the illustration of who we are at James Hardie, a global growth company. We have updated the metrics at the bottom of this slide to include our FY '23 results, and all four metrics remain extremely strong and support being a global growth company. We are homeowner-focused, customer and contractor-driven. With that, I would like the operator to open the line up for questions.

Thank you. [Operator Instructions] Your first question comes from Niraj Shah with Goldman Sachs. Please go ahead.

Good morning, guys. I hope you can hear me. My first question is just around the price contribution. How much of the 8% price/mix was price and how did the realization compared to what you'd asked for?

Yes, Niraj. Mix of both, obviously, I think in the fourth quarter, it would be more price as we had the January 1 price increase as well, and it's in line with our expectation. On the last call, we said we expect to get good price realization in the R&R markets. And obviously, we talked a lot last quarter about the competitive nature of new construction. So things are on track, and we expect to have price up year-on-year in FY '24. As shown in the slide, went through in the guidance now [as such] [ph].

Great. Thanks. And then just secondly, what percentage of, I guess, volumes were Cemplank in the fourth quarter? And how did that increase, I guess, into the period?

Yes. Niraj, I'm not going to get into certain percentages. I would say they were in line with our expectations of what we were projecting them to be internally. As we talked about Cemplank before, Cemplank we're utilizing as a need for our customer partners, right, as they try to hit a sharper price point. So rather than us go in at lower price, we offered one of our assets that we have out there in Cemplank. So it's meeting our expectations. And as you can see, with our performance in EBIT margin, it has not hurt us.

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

Good evening, gents. So first question, just a follow up, Aaron, on what you said earlier. I just wanted to be clear on this. So you're expecting a sequential decline on volumes from the December '23 quarter onwards? Is that correct before the seasonal uplift in the fourth quarter of FY '24?

Keith, that's correct.

Okay. So do we interpret that as an acceleration of I guess a downward trend in demand as we track through FY '24 and bottoming at some stage. The reason why I ask is, I'm just kind of get an understanding of the shape of the demand curve you're expecting for FY '24. When during FY '24 are you expecting the comps to bottom out?

Yes. As far as when we see a bottoming out, I mean, look, our expectation is -- Q1, I'll just say this, is tracking along well for us. As we look to Q2 and Q3, we see that the volume is declining. And then as we get into our Q4, Keith, we see the seasonal volume increase because of the build season. That's how we're modeling this out right now.

Okay. Thank you. And I guess if we're talking about a seasonal uplift in the fourth quarter and you're seeing that lot uplift coming through the we should have reached a trough at some point in time but in the second and third quarter of FY '24?

Hey, Keith, I think in any downturn we've experienced historically, there's always an uplift for the build season. So we're saying Q4 versus Q3, we see an uplift. We're not stating Q4 next year will be higher than Q4 this year. The market is too uncertain to call that at this point. And as we move to August, we'll provide more clarity.

For the follow-up question, maybe on Niraj's question earlier. So let's just look at average net sales price up 1% sequentially. Noting that ColorPlus volumes were only up 2% as well. And I know we're comping off a strong period in the PCP, but it certainly seems as though mix was negative in the period. Is that within the bound of what you're expecting? Can we still expect ColorPlus to grow this year at least hold volumes on an absolute basis?

Keith, I think ColorPlus up 2% in the backdrop of total volumes down 14%, with strong results and kind of leases to our comments last quarter that we'd expect R&R to hold a lot better than new construction over the cycle. And I think that's what we're seeing in our regional data and the ColorPlus data.

And Keith, I think just to add to that, when we think about ColorPlus or any of our volumes is we expect to outperform the market, right, in which we plan. So that's what we would expect with ColorPlus as well.

Your next question comes from Lee Power with UBS. Please go ahead.

Hi, Aaron. Hi, Jason. Aaron, just following on from Keith line of questioning. So if we look at your 1Q FY '24 volume guidance, I guess the PCP was strong, but that 680 to 720 implies a 16% decline year-on-year and you're talking about full year TAM being down 14% to 16%, and then you're expected to outperform the market. Like I know in your comments that you talked to continued weaker and sequential declines in the period. I'm just trying to get like reconcile that down 16 with this TAM down 14% to 16%. Like how far under your base case do you think we are actually off kind of a return to normal seasonality?

Yes. So I think the only thing that was left out of that question would be the comment of four points of PDG that Aaron talked about on the call. So if you assume that across the market range we gave, that's kind of down 10% to down 15%. And so the down 16% in Q1 is in line with that when you think about the curve we just talked about that we see the year going. Obviously, the comps in the back half of the year get a lot easier at both of those quarters, being right around 700 versus the first two quarters being 832 and 820. So yes, we'd expect to be in that range, with Q1 starting that kind of the minus 16% you're facing the midpoint of it.

Okay. Thank you. And then just a follow-up. I mean, you've obviously taken some shifts offline. Like where is capacity utilization in the network now?

Yes. I mean we have plenty of capacity to flex if needed. So we feel good about where we're at. We don't disclose that number specifically, but we're operating, as we've talked about, managing decisively and making sure we can have that network flex up or down depending on the market conditions. So we're in good shape.

Your next question comes from Peter Steyn with Macquarie. Please go ahead.

Good evening, Aaron and Jason. Thanks for your time. Just wanted to dig into what you're expecting or seeing in the R&R market? You're interested in your view that there's an 11% to 15% decline in the market in the context of what you're seeing on ColorPlus. I appreciate that the market outperformance in your ColorPlus number. But could you just sketch the R&R market to us and what you're expecting as the year progresses?

Yes. Thanks for the question, Pete. If you look at some of the outside data providers, I think that we track around three. I mean, the range goes from negative 8% to negative 15%. Our view is negative 11% to negative 15%. I think there's an interesting dynamic right now, and it just goes to the uncertainty out there. Consumer sentiment is still down. So you have people that are more reluctant to spend on a larger project. I think some of the forecasts out there in R&R for smaller projects are a little more bullish than what we have. I would say the long-term fundamentals are great for R&R. We keep talking about it's our number one focus. It's 65% of our business particularly in North America, Sean and team have initiatives to really go out and attack this market space. We keep going back to the fact that there's 40 million homes that are over 40 years old or older. So there's a huge market share opportunity for us. I think what has to happen is we get a little more certainty in the marketplace, people are going to be more comfortable with spending on a larger project. The other thing that bodes well for R&R longer term is you have probably 80-plus percent of people in North America were tied to really low interest rates. So they're not going to necessarily going to want to leave their homes and go out and try to find a new one. So that bodes well for R&R. So we are extremely confident in our long-term prospects in R&R. I think what you're seeing right now is just because of the uncertainty, and we're seeing out in the marketplace that we talked about on the call.

Thanks, Aaron. And then if I could ask a related follow-up. Regionally, what are you seeing in the R&R markets? And if you wouldn't mind giving us some color on that?

Yes. No, it's a great question. I would just say kind of a high level, the areas that you would expect to be more R&R focus, like the Mid-Atlantic, the Northeast, the Carolinas, the Midwest. We're seeing strength there, and tracking above what I would say, the rest of the regions as it relates to R&R. And you can see that by similar, when I look at some of our color growth in those markets, in particular, we're tracking very, very well.

Yes, that does correlate with that ColorPlus number. Thanks very much. I'll leave it there. Thanks, gents.

Your next question comes from Lisa Huynh with JPMorgan. Please go ahead.

Hi. Good morning. I mean I had a question around fiber cement as a category more holistically. Just given the more affordability stands at the moment, can you just talk about fiber cement how that's tracking versus vinyl and the implications for how confident you are behind that 4 percentage points of PDG?

Lisa, I just want to make sure I got your question is, how is fiber cement as a category tracking behind vinyl? Is that your question?

Yes. It sounds like just from feedback that kind of fiber cement in general is losing share versus vinyl in the market at the moment, just given affordability concerns.

Yes, Lisa. I think one of the things that we got to make sure that we're grounded on is they're apples to apples. So someone who's going to be in the market and who can afford fiber cement may be a little different than those who can afford vinyl. And then there are some that fall in between there. I would say this, we've been very successful from a market share standpoint versus vinyl. If I just look at kind of a 2-year look that we break down from a market share standpoint because I think you have to look at this in 2-year stacks. Vinyl, I would say that it has grown over that 2 years a CAGR of 1%. If you would look at us just in particular in 2-year CAGR, we've grown 11%. So I wouldn't necessarily agree with that assertion that vinyl is out doing fiber cement. So clearly, and we can provide these numbers to you, I think we're winning from a market share standpoint.

Okay, sure. And then just in terms of LEAN. I mean how are you thinking about that into FY '24? I think when you spoke to us in September, there was a potential to kind of upsize what you've done so far?

Yes, Lisa, great question. Look, we've talked so much about HMOS that was really instituted about 4 or 5 years ago in here, and the team has done a really solid job year-over-year. So we're tracking year-over-year savings. What we're going to introduce into the conversation with LEAN as well, as I mentioned on the call, our Hardie operating system. So HMOS is a part of this. And I said on the call, basically, this is our internal management system. So there's going to be some metrics tied behind that, whether that be procurement savings, value improvement that when I come back in front of you guys here in the coming quarters, we'll put some concrete targets behind that, but I feel very confident on our LEAN savings and our initiatives. And we have the entire enterprise rally behind this. It's not only our manufacturing plants, but it's our new management system across all of James Hardie.

Your next question comes from Andrew Scott with Morgan Stanley. Please go ahead.

Thank you. Good morning, good evening, I should say, I guess. Just first question for me, Aaron. I'm sorry if I missed it, but what do you think PDG was in the year just gone on the quarter just gone? And I guess, implicit with that question is, what do you think R&R was? Because I know it's a hard number to pin down, but a lot of those numbers there would suggest that it's hard to see you're gaining share if we look at some of the other numbers that are floating around.

Yes. Andrew, so I am obviously being in here about 9 or 10 months, PDG is something I knew --we used a lot in the past. So I've looked at this closely as I use the term profitable share gain. I think this falls right into that and why it falls right in line as being a major focus for us as a company. I think as we looked at FY '23, our PDG gain was roughly 3.4%. If we look at moving forward, I have set the target and expectation of 4% in North America and APAC. I think from a historical standpoint, it was looked at around 6%. And it was 6% because we also had a smaller base back then. Really, that 6% and the 4% equate to each other of being roughly 1% market share gain. So that is our target for this year and as we move forward, roughly 1% market share gain, which equates to a PDG of 4%.

Got it. Thank you. The second one, this might be for you, Jason. Well, Aaron, jump in. Just thank you for the EBIT sensitivities. I think the volume sensitivities that were helpful. It is a sort of a non-linear profile. So I'm just trying to understand the levers that you might pull there. And do we expect that, that can work when you just see the seasonal softness that we'll see. Obviously, you're not going to make a decision to take a line down just for a quarter. So just interested in how that plays out just in the seasonal swings.

Question is that we might pull the line down in the quarter. I'm not sure I got that Andrew.

Aaron, in your prepared remarks, you mentioned that you had some levers that you would pull if you did see the volumes come down, I'm just interested in what the sort of fluctuations or the tools that you've got in the toolkit to adjust to a softer market.

Yes. Look, Andrew, we're going to manage this business for the longer term. So when I think about one of our largest investments, most important investments is in our plants and in our people. It would take more than quarter-to-quarter for us to pull any type of cost out of there, particularly right now when you look at the uncertainty of the marketplace, what we have to be prepared for, and we are in all of our regions is to make sure that we have the capacity to respond. So if we have to invest to be sure of that over the next few quarters of this year, we're going to absolutely do that, because that's going to help us take care or take advantage of any type of potential market share gains, which is our number one focus.

Your next question comes from David Pace with Greencape. Please go ahead.

Aaron, just picking up on your target of 400 basis points of PDG over the next 12 months or so. How is that split across new housing multi which are coming off a very low base in R&R broadly?

David, we look at it combined altogether, I don't have that split. So we look at it combined.

Your next question comes from Simon Thackray with Jefferies. Please go ahead.

Thanks. Good evening, Aaron and Jason. Couple of simple ones, I think just in terms of your assumptions for the gross profit margin or the percentage margin in the guidance that you've provided and the extent to which you've already seen cost relief in, say, freight or I don't know if pulps rolled over yet on your lag basis? And what sort of cost relief you are expecting in the quarterly guidance that you've provided at the gross profit line?

I'll take this, and I'll let Jay jump in. Simon, thanks for the question. In our guidance range, we've assumed some inflation favorability for Q1 versus the prior year. But really in freight and energy, regarding the full year, as you're aware, we're not providing full year guidance just because of the uncertainty out there. Although we are seeing some of the favorability in freight and energy, there's other things where we're not seeing favorability. Areas like cement, so Jason, I don't know if you want to jump in here with anything?

Yes. I think we commonly talked about four key input costs in our variable cost of Simon being pulp, freight, cement and labor. So things remain where there today or the trends remain the same. And then said, we'd expect favorability in pulp and freight, but certainly, the opposite in cement and labor. And all of that is considered in our Q1 guidance as we look to give full year guidance, we'll provide more clarity on our assumptions around inflation.

Okay. That will be helpful. And while we're on sort of cost to revenue relationships backing out to your D&A from your SG&A. Just the observation over the last several years has been in multiple quarters has been, SG&A was tracking along and around 10.5% to 11% of revenue. It fell 250 basis points during the COVID period, probably a period where you were gifted some demand as well with disorganized competitors, et cetera, on having capacity. I just want to understand what the expectation should be for that SG&A to sales ratio given it did track 200 basis, 250 basis points lower during the period preceding this current downturn. Should we be expecting that to go back up given your comments about optimization of the spend, Aaron?

Yes. Look, we're focused on SG&A as necessary. I think where we've been tracking from an SG&A standpoint, is where we'll continue to track. And if you go back to our prepared remarks, I mean we lay out some fundamentals on how we're going to run this business in FY '24. So I would expect SG&A to be roughly flat to where we are. As I mentioned on the last call, we reallocated resources and we're focusing on areas to invest. One of those areas is to really be closer to our customer. So we are doing that. But we expect to run SG&A in FY '24 to pretty much be in line as how it's been tracking there, Simon.

Sure. And that's in dollar terms? Yes.

Yes. We're seeing in dollar terms, and kind of how we manage the business and make sure we're investing in the right things for growth. When you get to the top of the cycle, you'd expect that percentage to decrease not just continue to find ways to spend SG&A dollars. So top of that you'll see that to go down, but we feel good about our dollar rate of last 6 months and we intend to kind of stay right around there.

Your next question comes from Brook Campbell-Crawford with Barrenjoey. Please go ahead.

Thanks for taking my question. Just back on Slide 18, the outlook for repair and remodel. Can you give an idea of what you're seeing at the moment. So perhaps what you expect U.S. repair remodel for siding to be down in the first quarter FY '24? And how that compares to the range you have here for the full financial year?

Yes. Brook, I would just say, I mean, we would say, I would say the same remarks I did on the call. As far as how it's tracking right now. I mean, we're, call it, 1.5 months into the first quarter. So I would say it's tracking well. But still, I wouldn't change my opinion as the outlook for the rest of the year.

Yes. Okay. That's fair enough. And I haven't called the annual report yet, not sure if it's yet, but any changes in the financial metrics there for either short-term or long-term incentives for FY '24 and I guess, 3-year rolling period for LTIs. Any changes there on the metrics that you guys all measured on?

Yes. I'd just give some highlights. I would say the STI by region is more situational to what we need to do in those respective regions. Just kind of the cliff notes version if you will. If I look at APAC and I look at APAC in North America, we're focused on profitable share gains. So we have a metric in there with PDG. We also have a metric in there as far as EBIT margin for both of those. If we look to Europe, it's all about growth, and it's about growth in our high-value products namely our fiber cement products and some of the innovative flooring products that we have in there. So it's about that. And it's also about our EBIT margin as well. Just from a long-term scorecard standpoint, I would say, if you look at our strategy slide that we presented here, it's very tightly aligned with driving those strategies, which is what a long-term incentive should be. So that's just the highlights there, Brook.

Yes, Brook that will be up tomorrow. So because the 20-F is a U.S.-based document has to be filed there first. So that we'll be up around this time tomorrow.

Your next question comes from Harry Saunders with E&P. Please go ahead.

Evening. Thanks for taking my questions. Firstly, just back on price/mix expectations in '24. Just wanted to be clear, you talking about a sequential improvement across the year on the fourth quarter ASP?

We expect to have a higher average sales price in FY '24 that we did in FY '23.

Right. And you're not wanting to sort of expand on versus the fourth quarter?

Well, January 1 is when we took our price increase for the fourth quarter already has some of that built into it. So we'd expect the full year versus the full year average sales price, yes, based on the detailed dynamics we've talked about on the last call, where we expected to achieve our price increase in R&R and then we talk through the competitive nature of new construction.

Okay. Thank you. And just a question on your market outlook in APAC and Europe. Are you willing to sort of give any more color around volumes in those regions?

We're not giving any detailed guidance. Annual guidance today, Aaron, and we've focused our guidance on our biggest market in North America, along with net income, which encapsulates everything. I think you heard in our prepared remarks, we do expect market weakness in Australia, but we'll be prepared to manage decisively to that just as you've seen us do in the fourth quarter results in all three regions. All three markets are uncertain. And we're focused on controlling what we can control and delivering the type of results we did here in the fourth quarter.

Your next question comes from Paul Quinn with RBC Capital Markets. Please go ahead.

Yes. Thanks so much. I appreciate the volume sensitivity slide. Just wondering if you could provide us what your cost sensitivity is to the rollover in pulp prices recently? And then also, I missed that when you talked about Prattville 3 and 4. Can you remind me when they're coming up in both of those lines?

Sorry, Paul, all I heard the question about Prattville 3 and 4, so I'll answer that now, but I need you to repeat some of the other parts, we have a choppy line there. So Prattville 3, we expect to be ready by the fourth quarter of FY '24. And then as that gets closer, we'll provide further updates on 3 and 4, but it would lag first quarter, if you could repeat the first half of your question.

Sure. I'll give it another go. Just we've seen pulp markets roll over here. Just wondering what the timing of that and the sensitivity on the cost side to NBSK pulp?

Yes. So time wise, it's about a 3 and 4-month lag when you consider how it's priced for us and then how it fits in raw material inventory that ultimately finished good inventory. So that's kind of the lagging for us. And then, we've never given a specific sensitivity, but it's one of our four big cost inputs. So it's significant also it can have a big impact in both directions. Pulp, freight, labor and cement are our four biggest input costs.

Your next question comes from Shaurya Visen with Bank of America. Please go ahead.

Good evening, Aaron, Jason. And thank you for taking my question. I just wanted to go back to costs again. On the raw material cost and the freight costs, could you give us a sense of, in terms of perhaps numbers, how they look for you in 4Q, was like perhaps sequentially or year-on-year? And also, how do they look to the start of the year or the first quarter? Thank you.

Yes. Freight versus the start of the year would certainly be down significantly. For Q1 of FY '23 would have been a high point for freight. You see that in the market data, somewhat stabilized and kind of across the past couple of months or a couple of quarters. So Q4, don't expect a hugely different outcome in Q1 when it comes to freight. And then, as we mentioned earlier, kind of the Paul's comments and questions, we are seeing pulp start to decrease, but we are seeing headwinds when it comes to cement, and obviously, year-over-year labor on a per person basis will go up. But net-net, as Aaron talked about earlier when we talked about inflation, trends we see today are good. We've included that in our Q1 guidance. And then as we go to give the full year guidance range and targets for net income, we'll give some context as to inflation, but uncertain markets at this point, we're sticking with the Q1 guidance.

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

All right. Thank you, operator. I want to thank you all for joining us today and thank all of our employees around the world. We remain laser-focused on controlling what we can control and executing our strategy. And we remain homeowner-focused, customer and contractor-driven. Thanks, everyone.

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