James Hardie Industries PLC (JHX) 2023 Q3 法說會逐字稿

Thank you for standing by, and welcome to the James Hardie Third Quarter Fiscal Year 2023 Results Briefing. Today's briefing is hosted by James Hardie's CEO, Aaron Erter, and CFO, Jason Miele.

(Operator Instructions)

I would now like to hand the conference over to James Hardie's CEO, Mr. Aaron Erter. Please go ahead.

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 third 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. For today's call, our CFO, Jason Miele, will start by discussing our third quarter fiscal year '23 financial results, and I will follow up with him on a strategic and operational update. We will then open it up for questions.

While Jason will spend his time discussing our current fiscal year results, I will spend the majority of my time looking forward and explaining how we intend to continue to drive differentiated results into the future. Before I hand it off to Jason, 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 despite the significant headwinds we are facing in all 3 of our operating regions. Our employees truly represent the very best in our industry, and I feel fortunate to work with him.

With that, I will hand it off to Jason to discuss our third quarter financial results. Jason?

Thank you, Aaron.

Let's start on Page 5 to discuss our global results for the fiscal year 2023 third quarter and year-to-date 9 months. In the third quarter, group net sales decreased 4% to USD 860.8 million. Global volume was down 11% due to the deceleration of the housing markets we participate around the world. However, in every region, our teams continued to deliver strong price/mix growth, leading to group net sales down only 4%. In each region, our teams continue to drive strong product mix while executing strategic price increases leading to price mix growth of 10% in North America, 6% in Asia Pac and 14% in Europe.

In regards to earnings, global adjusted EBIT decreased 19% to USD 165.4 million and global adjusted net income decreased 16% to USD 129.2 million. Every region's earnings continue to be negatively impacted by inflation. 9-month year-to-date results were much stronger buoyed by the stronger markets in the early months of the financial year.

For the first 9 months, global net sales increased 8% to USD 2.9 billion, and adjusted global net income increased 4% to USD 459.3 million, both are records for the first 9 months of the fiscal year. As you are aware, the housing markets we participate in have decelerated during our current fiscal year and inflation continues to pressure margins.

For the full year of FY '23, we are estimating inflation to be between USD 160 million to USD 170 million headwind globally. As we adapt to the changing market conditions, and as Aaron will discuss further, we are making adjustments to our global workforce by balancing our manufacturing networks and reducing SG&A headcount. In total, we reduced our head count by approximately 6% globally. We incurred restructuring costs of USD 6 million in the third quarter and will incur approximately USD 2.5 million in the fourth quarter. Globally, it has certainly been a challenging year with significant inflation and decelerating housing markets.

Nonetheless, we are confident that the full year FY '23 will produce a record for net sales with strong earnings and strong margins.

Let's move to Page 6 to discuss the North American results. In the third quarter, North America net sales were flat at USD 645.4 million. Volume growth declined by 10%, which was fully offset by strong price mix growth of 10%. The strong price/mix in the quarter was underpinned by color plus volume growth of 18% in the third quarter. The volume decline of 10% was driven primarily by the rapidly decelerating single-family new construction market and also lower repair and remodel market activity. In the third quarter, the team delivered a robust bottom line outcome with EBIT of USD 174.1 million and an EBIT margin of 27%.

For the 9 months year-to-date, net sales increased 15%, driven by strong price/mix growth of 13% and EBIT increased 8% at 27.1% EBIT margin.

Let's move now to Page 7 to discuss Asia Pacific results. Asia Pac's third quarter net sales were AUD 171.2 million, a decrease of 13%. The APAC business continued to drive high-value product penetration, leading to price mix growth of 6% in the quarter. The 19% decline in volumes was disappointing was primarily driven by continued market weakness in Australia and New Zealand combined with inventory reductions from key customers in both countries.

Third quarter EBIT was AUD 42.3 million with a margin of 24.7% driven by the volume decrease and inflationary pressures.

Turning now to Page 8, let's discuss the European results. The third quarter results in Europe remained very consistent with the first half. Volume was down 10%, while the team drove strong price/mix growth of 14% leading to a net sales increase of 4% to EUR 101.2 million. Third quarter EBIT declined to EUR 1.5 million at an EBIT margin of 1.5%. The margin result was significantly lower than the first half EBIT margin of 7.4%, primarily due to restructuring actions taken in the third quarter. The restructuring charges led to a 350 basis point reduction in the Europe EBIT margin.

Turning now to Page 9 to discuss capital allocation and guidance. Starting with capital allocation, our framework we introduced in November remains unchanged. Our first focus is investing in organic growth. Second is maintaining a flexible balance sheet and third is to deploy excess capital to shareholders via a share buyback. Late in the third quarter, we began executing on the share buyback program. And during the quarter, we purchased 1.6 million shares for total consideration of USD 31.2 million. We intend to continue with the share buyback program when our trading window reopens.

Regarding guidance, we have adjusted the fiscal year 2023 adjusted net income guidance range to USD 600 million and USD 620 million. We have lowered the guidance range for 4 primary reasons: Number one, North American volumes in the second half will be lower than we expected 3 months ago; two, APAC volumes will also be lower than previously expected; three, persistent inflation; and four, the impact of restructuring charges in the second half. Regarding North American volumes, in November, we stated we expected our second half volumes to be down 5% to 8% and we now expect that figure to be down 11% to 12%. This change was driven by the continued rapid deceleration of the U.S. housing market.

In regards to APAC volumes, the underlying housing market continued to decelerate faster than we anticipated, and there were significant channel destocking. Fiscal year 2023 was certainly a challenging year with full year inflation estimated to be a headwind between USD 160 million to USD 170 million and housing markets decelerating rapidly. That said, we expect full year fiscal year '23 global net sales to be a record, and our adjusted net income to be the second highest ever achieved by James Hardie. I will now hand it back over to Aaron.

Thank you, Jason. Jason just walked you through our fiscal year 2023 third quarter and year-to-date results. As such, I'm going to spend most of my time discussing how we intend to drive differentiated results moving forward. In addition, I will provide you with a framework on how we intend to run our business as the markets and segments we participate in soften. Whatever challenges we face, it is our job to outperform the market while providing our customers solutions. That is what we have a history of doing and what we intend on doing moving forward regardless of market conditions.

With that, let's turn to Page 11. Some key takeaways as we look at fiscal year '23: First, significant inflation impacted our operations in all 3 of our regions; second, we experienced a rapid and unexpected deceleration in the housing markets we participate in; and third, our teams remain focused on what they can control like bringing our customers the solutions they need and delivering strong execution of our strategy in a challenging environment.

Let me briefly talk to each of these items. First, in regards to inflation, our current estimates are that for the full year, we will incur approximately $160 million to $170 million of inflation globally. That is not only a significant headwind to our financial results, but also a significant change from our expectations entering the year. You will remember that during our February 2022 results call, we stated our expectation for fiscal year '23 was global inflation to be between USD 40 million to USD 60 million. We have been able to minimize this impact through pricing and productivity initiatives driven by the Hardie manufacturing operating system, or as we call it, HMOS.

Next, let's discuss the housing market segments we participate in specifically our largest region, the United States. We have provided the growth expectations for calendar year 2022 for both single-family new construction and repair and remodel based upon a basket of market data. We have provided in the notes the methodology we use to arrive at these consistent figures. As we discussed and forecasted on our last call, both of these market segments decelerated rapidly throughout calendar 2022 and were not in line with original market expectations. You can see just how quickly the single-family new construction segment decelerated.

Back in December 2021, the consensus expectation was that single-family new construction segment would grow 6% in calendar 2022. By June 2022, the consensus was calling the segment to be down 1%. And ultimately, over the entire calendar year 2022, single-family new construction starts decreased 11%. It was truly a tale of 2 halves with single-family starts seeing up 1% growth in the first half of calendar 2022 and decreasing negative 22% in the second half.

You can see a similar story with the repair and remodel segment. Entering the year, consensus expectation was for R&R to be up 6%, but ultimately, the segment saw a decline of 1%. What this data clearly shows is that the rapid deceleration in the U.S. housing market was unexpected by the industry. A lot of factors drove this rapid market deceleration, and they were outside of our control, but I believe that James Hardie team responded quickly and have course corrected with what is the new reality. And when I look at our fiscal year 2023 through that lens, I view it as a quite strong year for our global team despite these challenging conditions.

I think the team did a great job controlling what we could control and delivering solid results.

Now please turn to Page 12, where I will take you through those results. The entire team is disappointed. We have not achieved what we said we were going to do in the beginning of fiscal year '23. But as I outlined on the prior page, I believe there were a lot of things outside of our control that impacted our financial results in fiscal year '23. That said, I do believe the team executed strongly in the face of those significant challenges. And when I reflect on our financial performance in fiscal year 2023, it is still a very strong set of financial results. Globally, for the full year fiscal year '23, we expect our global net sales to be the highest ever achieved; our global volume to be our second highest ever achieved; our adjusted net income to be the second highest ever achieved while delivering continued enterprise-wide productivity through HMOS.

Regionally, for the full year, we expect every region to deliver its highest ever average net sales price in every region to deliver record net sales. Specific to our largest 2 regions, North America and APAC, we expect for the full year fiscal year '23 to deliver EBIT margin in the middle of our long-term range of 25% to 30% despite the market and inflationary headwinds I mentioned earlier.

There is a lot for us to build on as we look to the future. Our team's ability to deliver strong results through the adversity of this year strengthens my confidence in our ability to meet the demands of the changing market and drive differentiated results moving forward. I'm excited to take you through the adjustments we are making to ensure we deliver on that.

Let's turn to Page 13. Simply put, we are managing quickly and decisively to accelerate our competitive advantages. We're focused on continued strong execution of our strategy, which starts with our nonnegotiable culture of Zero Harm. Focusing on the customers and segments where we have the right to win, delivering solutions our customers want, strengthening our world-class manufacturing and supply chain networks and marketing across the value chain and investing in our people. We are focused on driving profitable volume share gain as most of the housing markets we participate in slow. We are effectively balancing our manufacturing network to ensure not only that we better match supply to demand, but through initiatives driven by HMOS, we do it at a lower cost per unit, and we ensure we are agile and ready to react to any market adjustments. We are optimizing SG&A for the current environment and reallocating resources to key areas and projects. We are continuing to invest in profitable growth.

I'd like to quote a phrase from the great college basketball coach, John Wooden that I often share with my team as we navigate through this challenging time. That is, "Be quick, but don't hurry." I believe this is what you have seen and will continue to see from us. We can be agile and adaptive to respond to significant changes in market conditions, but are also thoughtful and focused on where we can accelerate our competitive advantages. We have the right solutions that our customers are seeking and that will allow us to deliver differentiated results.

Okay. Let's now move on to discuss each of these items in more detail, starting with driving profitable share gain on Page 14. As we enter this period of decelerating housing markets, it is critical we remain aggressive and that we are driving profitable volume share gain in every region and segment we do business in. We are laser-focused on this and see this as a time of opportunity. I will discuss our focus in each region before diving deeper into some of the specifics regarding the North America new construction segment on the next page.

Let's start with APAC. As we described in our Investor Day, we have a robust presence in all 3 of our APAC countries. We will leverage this position to drive further penetration of these markets and segments. In Australia and New Zealand, we have a strong opportunity to continue to penetrate the modern look in both new construction and repair and remodel with our innovative products. The Hardie Architectural Collection is off to a strong start in Australia and New Zealand, comprising approximately 3% of our volume in fiscal year '23 year-to-date.

As our APAC President, John Arneil described in our Investor Day, "the team is focused on influencing across the entire value chain, including homeowners, builders, contractors and our customers to ensure we are driving profitable share gain in both new construction and repair and remodel." In Europe, our new Regional President, Christian Claus and team have significant opportunity to drive profitable share gain across 3 key focus areas as we described in our Investor Day. The first is working to seek to penetrate the underfloor heating market leveraging our innovative Therm 25 fiber gypsum product. Second, we will penetrate the Plank market using our fiber cement technology, not only our existing overlap Plank products, but our innovative interlocking plank product, VL Plank. Third, we will penetrate the large multifamily panel market leveraging our innovative Hardie architectural panels.

As our North American region President, Sean Gadd, described in our Investor Day, "we plan to win in every segment and every region that we participate in, in North America. We're going to do that by providing the solutions that our customers need. That includes continued penetration in repair and remodel with large opportunities in both the Midwest and Northeast. We continue to drive strong growth of ColorPlus products and repair and remodel as evidenced by our ColorPlus growth, 26% year-to-date in fiscal year '23 after growing a strong 27% in fiscal year 2022.

In addition, we are being opportunistic with our capacity to target segments and regions that we underserved over the past couple of years. Some examples would include the multifamily segment, our interiors product line and the Mountains region.

Now let's turn to Page 15 to dive deeper in the North American new construction and how we plan to continue to aggressively drive profitable share gain in that segment. As we have discussed many times in North America, approximately 65% of our volume is derived from the repair and remodel segment and 35% is derived from the new construction segment. As I mentioned earlier, thus far in fiscal year 2023, the new construction market has decelerated much more significantly than the repair and remodel segment. As I described in our second quarter call in November, the R&R segment is a less price-sensitive segment for us and thus, the achievement of our January 1 price increase is complete.

The single-family new construction segment is much more price sensitive. And thus, we need to make sure we are on our front foot and aggressively driving profitable share gains. It is in this segment where we must stay close to our customers to better understand their needs and bring them the premium products and services that enable us to grow together. We are focused on continually driving profitable share gain in this segment. And we can do it because we have the largest and most knowledgeable sales team in the category, and we have the team deployed focused on winning share. We're staying close to our customers to better understand their needs and bring them the right solutions, products and services. We're also leveraging our localized supply chain to deliver the right products to the right place at the right time.

We recognize that in this decelerating marketplace, our big builder customers are experiencing volume and cost pressures, and we will continue to be aggressive with tactical pricing as needed to drive profitable share gain.

On the right-hand side of the page, I have listed a few of the accomplishments achieved by our team over the past several months. First, I would like to talk about our traction with the top 25 production builders in North America. As of this call and ahead of the 2023 build season, I'm proud to say we have signed contracts with 24 of the top 25 production builders to make us their primary hard siding provider nationally for calendar year 2023. This is an increase from 23 of the top 25 last year. As I mentioned earlier, it is a highly competitive market. And over the last few months, we have seen some intense competitive dynamics. We have and will continue to be laser focused on defending our position and aggressively pursuing new share gain opportunities.

We have been successful in doing this in the current environment. And with our value proposition, we are in an ideal position to continue to do so. When it comes to the big builder space, we have strong partnerships but have never taken them for granted, and we work hard every day to earn their business by providing them the solutions and service they need. To that end, we relaunched Cemplank in select regions for our big builder partners. We believe that net of our wins and some minor losses, we have gained share within the single-family new construction segment and entering the calendar 2023 new construction build season, and we are focused on continuing to strengthen our key relationships and partnerships in this space.

In fact, across our customer base and builder base, we have received 4 Vendor of the Year awards for calendar year 2022, and we'll do everything in our power to continue to serve our customers in our builders to the best of our ability. We recognize that new construction is and will continue to be a very competitive segment, but we believe we are well positioned to address our customer needs with the solutions that they want and need. We will remain aggressive in gaining share by providing the best services and solutions in the industry while leveraging tactical pricing as appropriate. While focused on discussing the single-family new construction segment on this slide, I assure you that the broader team remains laser-focused on continuing our penetration of the repair and remodel segment as well, as evidenced by our ColorPlus growth of 26% year-to-date.

In addition, the team is actively pursuing opportunities in other segments and regions that we underserved the past few years due to capacity constraints. We have a great team focused on the multifamily new construction segment and have reopened our internal quoting desk. We expect multifamily to be an important segment this year as per housing starts data, multifamily has been more robust than single-family with growth in calendar 2022 and projected to be down less than single family in calendar 2023. And we're excited as our internal quoting desk currently has an all-time historically high number of multifamily jobs in our quoting queue.

We are also refocusing on regions we underserved, such as the Mountain region, and we are excited to continue to grow through our retail partners, where we sell both our exterior and interior products. When you consider the totality of our product and segment mix, we expect our net sales price to increase moving forward in North America, a topic I will discuss a bit further in a few slides. We are laser-focused on driving profitable volume share gain in every segment and every region we participated.

Please turn to Page 16 and to discuss how we are effectively balancing our manufacturing network across the globe. Our Zero Harm culture is nonnegotiable, and our team remains laser-focused on Zero Harm regardless of market conditions or changes we make to our manufacturing networks. When markets decelerate, it is imperative we lower our capacity to better match market demand. This is a given. However, we also must position ourselves to be able to quickly ramp up when markets improve.

While all suppliers flex their production, we believe it is an opportunity for outperformance and we believe we can create differentiated results as follows. First, we are focused on delivering a lower cost per unit after we have made these capacity adjustments. We believe we can do this by shifting production to our best-performing lines while continuing to drive HMOS performance improvements. My reference to lower cost per unit is performance-based and excludes future headwinds or tailwinds from inflation. Second, we learned a lot from past downturns and we'll adjust our capacity in a manner that provides us the flexibility to ramp back up quickly and effectively when housing markets recover.

On the last slide, I spoke about gaining share through the downturn, but it is also important we position ourselves to gain share as the housing markets return to growth. Third, we will continue to leverage our localized supply chains to minimize landed costs while ensuring timely delivery of our best-in-class products and solutions. In our third quarter of fiscal year '23, we made adjustments to our manufacturing networks in all 3 regions. We did this by reducing our shifts and changing shift patterns. We have not idled any lines nor shuttered any facilities. This is critical for enabling us to ramp back up quickly in the future when housing markets recover.

Again, we believe we will achieve a lower unit cost based on our adjustments while providing flexibility to ramp up as we see signs of housing market recovery. Our ability to flex our manufacturing network up and down while delivering high-quality and low-cost products is enabled by the HMOS discipline we have embedded globally over the past 4 years. And this capability will enable us to drive share gain through the market downturns while also enabling us to be in a position to drive share gain through the next cycle of market growth.

Let's shift to Page 17 to discuss the adjustments we have made to SG&A. I want to make it clear that we intend to continue to invest in profitable growth. The adjustments to SG&A were necessary, but do not impede our ability to drive the outcomes we want. We reduced SG&A headcount in all 3 regions and at corporate. We did this to ensure SG&A headcount better align with our strategic needs. In addition to the headcount reductions, we have lowered our discretionary SG&A spend in the second half of fiscal year '23 compared to the first half. We are still investing significantly in strategic growth initiatives and believe we are entering fiscal year '24 at the appropriate SG&A spend level. We will monitor it closely and apply a pedal-and-clutch approach to adjust as needed. As you are aware, the largest portion of our discretionary spending within SG&A is marketing to our value chain participants. The adjustments we have made are to better balance our marketing investments across our various medians and audiences with a focus on targeted conversions and share gain while continuing to increase brand awareness.

What I'm excited about is that we continue to see great results from our marketing efforts where we have seen an approximate 50% increase in leads year-to-date. As I noted at the beginning of this page, we will continue to strategically invest in growth initiatives, including adding the right talent and investing in marketing to all members of our value chain and adjust with the pedal-and-clutch approach.

We will invest in the right SG&A initiatives at the right time to drive share gain through the market downturns.

Now let's move to Page 18. As I discussed last quarter, we will not be providing guidance regarding fiscal year '24 until May calendar year 2023. That said, I thought it was important that I share with you how we are managing our business, not only strategically, but what outcomes we expect to deliver. First, we plan to continue to deliver growth above market in every region. Second, as we move forward, we expect to achieve higher net price in every region. Third, as we make manufacturing network adjustments, we expect to do so while utilizing HMOS to deliver lower cost per unit on a performance basis. Fourth, we expect to manage our global SG&A spend in line with our current second half fiscal year '23 levels. Lastly, we expect to maintain EBIT margins in North America and APAC above 25%.

This is how I expect our team to run the business, and I think these targets are highly achievable. We expect to drive profitable volume share gain in all 3 regions while delivering strong financial returns. Finally, let's turn to Page 19 to wrap up. Before I wrap up, I do want to take this opportunity to again thank each of our 5,000 employees from around the world for their efforts in delivering the highest quality products and services to our customer partners in what remains a challenging operating environment. I am confident and excited about the future and what we will accomplish together as a team.

As I shared with you all during Investor Day, we are a global growth company. The same compelling tenants I shared then are the same that will allow us to accelerate our competitive advantages through this market downturn and enable us to come out a stronger James Hardie. We will continue to operate with a focus on Zero Harm and acting as a responsible corporate citizen. We have an experienced management team that is leading quickly and decisively. We have a strong balance sheet and strong cash generation to help see us through any market downturn.

We have strong share gain opportunities across a variety of segments and regions, and we will be aggressive in pursuing them. We will leverage our integrated localized supply chain strong customer partnerships, strong brand and our premium products and services to maximize these opportunities, and we intend to deliver attractive returns throughout the market downturn. We remain homeowner focused customer and contractor driven.

With that, I would like the operator to open the line up for questions.

(Operator Instructions)

Your first question comes from Brook Campbell-Crawford with Barrenjoey.

Just one on guidance for FY '23. The implied fourth quarter NPAT is about $150 million, which is a step up from $129 million in the third quarter. Can you just step through the drivers of the sequential pickup in NPAT quarter-on-quarter from 3Q to 4Q, please?

Yes, Brook, thanks for the question. I'll start with price increases. Second would be the expectation that volumes are roughly in line in most regions to Q3. The expectation was better landed costs through HMOS and some inflation decreases in our input costs would be -- and then the lack of a restructuring charge would be the items walking from the Q3 net income, which I think is where you're starting from.

What's the fourth quarter North America EBIT margin expectations?

Yes. As we talked about on Slide 18, our expectation is to -- sorry, not on Slide 18. We expect to drive EBIT margin upward in Q4 based on higher net price and lower landed costs.

Your next question comes from Keith Chau with MST Marquee.

Just one on price mix. So I guess the commentary suggests that prices are going up, but obviously, with market share gains and new segments is the chance that mix is impacted. And if you look at the price mix number between 2Q and 3Q, there was a very slight decline quarter-on-quarter, but that might just be quarterly variability. But Aaron, can you help us understand where you think the outcome overall will be for price mix in the context of price increases still coming through? Is there an expectation of mix to revert back to historical levels at least to an extent? If you can help step us through that, that would be much appreciated.

Yes. Thanks for the question, Keith. I think part of this is the price increase that we will realize in Q4. I'll have Jason walk you through the steps to this. Jason, why don't you go ahead?

Yes, Keith. We're still obviously focused on the same -- winning in the same markets, winning in every market, every segment. There'll certainly be mix impacts. Our focus is that, as Aaron described on Page 18, in every region, we expect net of all those movements, net price to increase year-on-year. So certainly, as we went through the presentation, Aaron described the competitive nature of single-family new construction. We're doing really well in multifamily. We have an opportunity to better serve interiors than we did during the past couple of years. And so there'll be quite a few different mix impacts that occur, but net of all that, and our price increase, we expect to drive a higher net price year-on-year. And as we give formal guidance in May, we can unpack that a bit more, but that's what we see moving forward.

Your next question comes from Andrew Scott with Morgan Stanley.

Aaron, this flows on nicely from Keith's question. I noted you commented on the relaunch of Cemplank, Obviously, that's a pretty important strategic decision. Can you talk about the parameters you're putting around that and how far that extends?

Yes. Andrew, thanks for the question. Look, we talked about before bringing solutions to our customers understanding their needs. So obviously, particularly if we look at our big builders, they're becoming more and more price conscious. It's becoming more competitive out there. So Cemplank is an asset that we have in our rationale that we brought back. But on this call, I'd rather not go into the specifics for commercial sensitivity reasons. But as I mentioned before, and Jason did, I'm really confident we're going to drive a higher net sales price as we move forward. And again, we're going to continue to partner with our new construction building partners to ensure they have the right solutions that allows them and us to be successful together.

Okay. And Jason, just interested in the cost environment. Obviously, we've seen transport come away your expectations and when we might see some bottom line improvement, whether it's just cycling the cost comps from a year ago or where you're seeing some of those leading indicators pointing to some relief?

Yes, Andrew, we continue to see inflation be pretty stubborn into Q3, but we would expect, as we move into Q4 and onward to deliver a lower landed cost as we shift production to more efficient lines as Aaron discussed, and we have seen some improvement in freight and we're currently not seeing while inflation is stubborn and prices are high. We have seen the other basket of goods start to flatten. So yes, we'd expect to start to not see landed costs impacted as much as it has been the first 3 quarters of this year.

Yes. Andrew, I'll just add on to that. Jason mentioned the high level of inflation that we saw this year, unexpected almost 3x the amount. But as we move forward, it's our responsibility to offset those. So whether that be price mix, a combination of both of those and our HMOS, we're going to work hard to make sure we're offsetting any type of inflation that comes across us.

Your next question comes from Lisa Huynh with JPMorgan.

In the context of the North American volumes being off 10% in the third quarter, can you just give us an indication of how sharply R&R was off relative to new construction?

Yes. Lisa, thanks for the question here. If we look at our expectations for North America, R&R remained a little stronger than single-family new construction. But we did see that dive into negative territory for us over the last quarter.

Yes, Lisa, and then on the call, Aaron referenced a basket of providers we use to measure the different markets. And that same group is signaling R&R in calendar year '23 to be down 6% to 7%. And then obviously, our fourth quarter would be a part of that year. So while we thought -- last quarter, we were signaling kind of flattish R&R activity, certainly our second half down in the low single digits.

Okay. Sure. And then, I guess, in the context of that, you did highlight as well the competitive market environment out there. Can you just make a comment about market share, PDG or how you're seeing competition in the scheme of things?

Yes. Look, we have a lot of good competitors out there. I would say 2 of our best are vinyl substrate and wood substrate. And if you remember, Lisa, I mean 65% of our business is repair and remodel, 35% new construction and R&R is less sensitive as we just talked about. New construction is much more price sensitive and thus, a much more competitive market at the moment. But we're prepared for that. We talked about some of the things that we're doing out there. We talked about bringing Cemplank back. But some of the other things is we have the largest and most knowledgeable sales team in the category, right? So they're focused on bringing solutions to our customers.

And we're staying really close to our customers to better understand their needs. We talked about it on the call, but we're really proud of the fact that if you look at the top 25 production builders in North America, we've signed 24 of them with -- for us to be their primary hard siding provider nationally. We had 23 last year. So we continue, we believe, to gain share not only in R&R, but also in this space as well. So in off-line, we can go through that calculation with you if you're interested.

The next question comes from Simon Thackray with Jefferies.

Aaron, just want to drill into -- for a point of clarification on Slide 18, you've got EBIT margins 25-plus percent. You referenced in your preprepared remarks, long-term North American margins of 25% to 30%. I just want to understand whether that 25-plus percent applies, you said you want the team to deliver that. That applies from where we are going forward and to really feel how your confidence is built around that long-term 25% to 30%. How much of it is cost versus how much is price mix?

Simon, good question. Thank you. What I went through on Slide 18 today is really I was trying to describe the framework of how I'm going to lead this team and how our executive leadership team will lead the business moving forward. I wanted to provide some clarity on how I plan to operate and the outcomes that we expect. I believe a margin above 25% is highly achievable moving forward. I believe that, that's achievable based on our pricing position, our superior value proposition. It's not something that we're forcing because share gain is my #1 priority. But that said, as I've looked at this and a lot of the volume scenarios for the next 18 months, I really believe we can operate above 25%, while still investing and driving growth as well.

That's very helpful. And then, Jason, can I just roll back to you for a comment you made about APAC decelerating quickly. I'm just -- specifically which geographies? And are you seeing that in the order book?

Yes, Simon, in Australia and New Zealand, we've certainly seen channel destocking and then market activity lower than what we would have entered the year expecting. So the change in market activity from where we were entering the year in Australia to where we believe we'll exit is probably about 8% change, which is quite significant. And as we talk to everyone in the channel that just wasn't something that people saw coming in as late as September. And Aaron might add some commentary around that. But we've definitely seen the markets in Australia and New Zealand slow quickly including some channel destocking, which is impacting the third quarter and the fourth quarter.

Yes. Simon, I'll just add to that. Being here when I first began in the September time frame and sitting with some of our largest customers. As we look forward, the outlook was pretty positive. But as we look now, as Jason talked about, with rapidly rising rates, home prices not having the affordability, we see some challenges with the business moving forward in Australia and in New Zealand.

Your next question comes from Sam Seow with Citi.

Just want to kind of go back to November, I guess, that was halfway through the quarter where you talked about single-digit volume declines, and we asked, I guess, multiple times in the call about margins, which you said potentially were going to be towards the higher end of the range. So I assume that's what you're seeing at the time. Does that imply the exit rate or margins were close to kind of 25% to make that math stack up? But I guess that split of the margin decline, could you perhaps talk us through what was kind of the fixed cost deleverage and input cost?

Yes, Sam, thanks for the question. It comes down to volume, certainly. So volume, we had our expectations we talked about on the call, R&R being flat the back half of our year, market activity, new construction down 30%. You fast forward to today, new construction starts were minus 26% in Q3 and decelerating pretty quickly. So we'd expect that number to be higher in Q4 -- or Q4. And as I mentioned earlier, providers of the R&R data we get signaling this calendar year '23 being down 6 or 7 points in R&R. And we certainly saw R&R fall quicker than we expected in November. So the margin is primarily volume driven our expectations. You're right, we were talking to you early November. We comped a positive October. We knew that it was starting to decelerate. But obviously, the deceleration was faster than we expected at that point in time.

Okay. Cool. And then I guess also back then, you talked about the unusual building practices. I guess this result probably shows here the difference between parties and homebuilder completion correlation. So I just wanted to check if those practices are still around? And I guess, when you would expect that correlation between your volumes and completions to kind of chew up again?

Yes. Sam, a great question. And look, just being out in the field quite a bit in North America, in the Metro DC area and then Texas as well. We do see some of that still. It's not as widespread. And thanks for the question. I think it provides me an opportunity to really clarify something, I think, might have been misconstrued on the last call. We saw some of this phenomenon in some regions where the product was going on at first or before other historical practices. We noted that we saw instances where siding was going on new construction before roofing or windows like you said. And we said this caught us by surprise.

And it did essentially, builders and new construction were consuming our product first because we were a manufacturer who was able to keep up with the demand. And thus, compared to suppliers who are on long backlogs, we were feeling the downturn in new construction ahead of those manufacturers whose products were on back order. So I just want to make it clear. Our explanation last quarter, it was not intended as a reason for why our volumes were declining, but really rather a reason why it was happening sooner than we originally thought. So we still see it. I still have pictures on my phone because I've seen it in person, but I would say as the supply chain is caught up, it's not as widely spread as we once saw it. But thanks for the question.

Your next question comes from Niraj Shah with Goldman Sachs.

Just one for me. How are you thinking about, I guess, the multiyear CapEx spend program in light of sort of pretty quickly changing dynamics on the ground?

Yes. Niraj, thanks for the question. Just to really restate our expectations, me being new, I continue to review all our CapEx projects, right? Want updated assumptions as the market is ever changing. But at a high level, we still expect to spend around $1.5 billion. I think probably what you're going to see is instead of that spread out over 3 years, it might be a more extended time period here for us, as you can appreciate.

Our next question comes from Peter Wilson with Credit Suisse.

Just a question on gross margin. So North America gross margin for the quarter was down 190 bps. So that's interesting in the context of the strong price/mix, higher value product mix. Aaron, you mentioned earlier that inflation for the group was $160 million to $170 million for the full year. So that's $120 million higher than you expected at the start of the year. That should be more or less taken care of by the June pricing increase, I would have said like 4% is about equivalent to that. So just wondering why gross margins continued to decrease in the quarter even after that extraordinary June price increase and in light and in the context of your high-value product mix?

Yes, Peter, great question. Just being completely transparent, even though we've done a great job from pricing as of late. The team's been able to go out and utilize our strong value proposition to get price. As I look over the year and hindsight is always 2020, we should have had probably 2 more price increases or the earlier price increases should have been greater than what they were. That's really the gap that you're seeing right now.

Okay. And just a quick one on SG&A. The changes made. Did they come through in the third quarter? Or is that further decreases to come in the fourth quarter and beyond?

Yes, Peter. We'll start feeling it completely in Q4, and we also had the restructuring charges above the line this quarter. So it will be -- Q4 will be favorable to Q3.

Your next question comes from Harry Saunders with Evans & Partners.

Just firstly, I think you were alluding to multifamily outlook for '23 being better than single family. And so given the improved outlook being provided by U.S. homebuilders, I'm just wondering if you could give some color on your expectations for single-family new construction in calendar '23.

Yes. Harry, I think it's all relative, right, when we're looking for pockets of hope out here, right? Multifamily, it's exciting because it hasn't been an area that we've really attacked much because capacity constraints, and we are going after it. And we're seeing in our Q with leads more than we ever have in multifamily. What I will say, as we look forward, Single-family is expected to be down 17%. Multifamily is expected to be down 14% by the data we look at. So not as severe as single family. But as we look forward, we think it's a huge opportunity for us in an area where we really have the right to win. And what I'm excited about is we've opened up the multifamily desk. We're seeing a tremendous response as it relates to leads that are in our Q.

And 1 thing I would add, Harry, is, I think as Aaron was mentioning on the call, the thing you were referring to in calendar year '22, multifamily was up 14% in starts. Whereas single-family was down 11%, so you're starting from a better base. And moving forward, yes, we're excited about the multifamily opportunity.

Great. And just 1 follow-up. If we could just move over to price. You talked about price mix growth year-on-year. But I'm just wondering, the price increase in January and then the mix impact we could expect, should we be expecting for the fourth quarter sequential price mix growth?

Sorry. Harry, are you saying fourth quarter versus third quarter?

Yes. Yes. Sequentially.

Yes, yes. So we took our price increase on January 1. So we'll achieve some of that, if not all of that, in Q1 -- sorry, our Q4. And we do expect, as Aaron mentioned on Page 18 net price per unit increasing going forward.

Your next question comes from Anderson Chow with Jarden Group Australia.

I just have a question away from the results for a moment. There has been a few additional senior management roles appointed. I just want to know a little bit more about Mr. Joel Wasserman. He is going to run the corporate communication and global brand management. What is the focus on the brand management and how involved would he be with the regional sales team?

Yes. Anderson, thanks for the question. We always like to talk about our people. We have made a few changes here. And Joel is going to lead corporate communications and global branding. The corporate communications spot is new for our company. We've never had before. So we think that's an important and critical function as we move forward. And global branding is really when you think about a lot of the investments we're making in the James Hardie brand is to ensure that we're projecting and displaying the brand the right way across all the regions.

So to your point, Joel is going to work very closely with the regional marketing leads to ensure we do this. Joel is someone that I've worked with before in my past, at Valspar and at Sherwood Williams, and he has a really extensive background. And I know you didn't ask about it, but I'll just throw 2 more in there. Tim Beastrom as our new General Counsel. So we're excited to have Tim. Tim also had worked with me in the past, most recently was at Ecolabs. So Tim is going to be a great addition to our team.

And then having a CHRO, a strong CHR is really critical to our business moving forward. So Farhaj Majeed is going to join us and his first day is going to be next week. And we brought Farhaj over from Whirlpool where he was the sitting CHRO for the EMEA region over there. So we're really excited about these 3 new additions to our ELT team.

Your next question comes from Daniel Kang with CLSA.

Just interested in your comment on driving a higher net sales price. If I look at Slide 23 of your pack, it looks like net sales price lift in 3Q for North America, flat end in APAC. Just trying to reconcile how you expect to grow net sales price given the relaunch of Cemplank, and I guess, a tougher market where, arguably, you have to grant rebates?

Yes, Anderson. Thanks for the -- sorry, Daniel. Thanks for the question, Daniel. Yes, Q3 versus Q2, our last price increase was in July. We achieved that in the second quarter. So we got a price increase on January 1 that we've put through. As Aaron talked about on the call, 65% of what we do is R&R, not pricing sensitive, I should say. And so we'll achieve that in the R&R segment. And then you shift to a smaller portion of our business, the 35%. And Aaron went through all the things you just talked about, relaunching Cemplank on a limited basis, et cetera. So there'll be some mix factors there. It's also the expectation that new construction decreases more significantly than R&R. So you should get a mix benefit from that. So there's a lot of moving pieces this quarter -- or sorry, moving into next year.

Net-net, we think you take all those things together with the price increase, we're going to drive a higher net price in -- moving forward.

Yes. And Daniel, I'll just add to what Jason said, we intend to do this. This is all after discounting as well.

Got it. Okay. And I guess one of the key highlights there remains that ColorPlus volume continues to perform very well. It has slipped a little bit, but what's your outlook going forward for that sort of range for ColorPlus volume?

Yes. Look, Daniel, it's a great question. I mean I think the performance has been just outstanding, right? As you look at -- I think it's over the last 6 quarters, we've grown this about 30%. And most recently, we grew at 18%. And you have to remember, this is a big focus area for us. When we think about our marketing efforts and where we're targeting really very good R&R markets like the Midwest and the Mid-Atlantic and the Northeast out there. We expect to continue to grow this at double-digit rates out there and above the market. So it is a high focus, and we expect to continue to deliver those types of results.

Next question comes from David Pace with Greencape Capital.

I know it's early days, but some of the calls that we've done with some homebuilders of late have spoken about a response to a lowering of the 30-year mortgage rate just in terms of foot traffic, reduction in cancellation rates, slight improvement in sales. Again, I guess, referring back to the earlier question regarding the lag between activity at the housing level and you guys actually selling Board. Can you make reference to first of all, any of those -- are you getting any of those sorts of signals from the homebuilding companies and secondly, readdress that lag question for us?

Yes. David, I know there have been a few positive comments out there from some of the recent -- from some of the big builders on results calls. But just to ground things, and I hope they're right, right? But I would be cautious there with some of these comments. If we look at some of the data providers that we utilize out there, the projection we have for 2023 is for single-family new construction to still be down, call it, 17%. And even though there were some positive comments around foot traffic, of the 12 publicly traded big builders who released earnings in the past few weeks to my knowledge, only 4 of them provided guidance for orders for the next quarter.

And that guidance, Jason, check me here, if I remember, was for orders to be down 18%, 20%, 50% and 60%, respectively. So not trying to be negative, just realistic. I think we need to be balanced here. So for the most part, I mean, the fundamentals are still there and we have affordability issue with housing that may take some time for the markets to fully adjust to. So as I said before, I mean I keep saying this to the team over and over, we're going to focus on what we can control, and we'll win in the markets we participate in, but those things we can't control.

And with R&R continuing to outperform new construction, is 65-35 still the fair representation?

Yes. It's a really good question, David. I would say for now, Yes. But it's something we're keeping our eyes on. So it's a really good question. But yes, I would say for the foreseeable future.

Your next question comes from Paul Quinn with RBC.

Just a question about your balancing the manufacturing footprint. Why reduced shifts across the network as opposed to shut 1 specific facility and lower the overall cost?

Yes. Paul, great question. And I'll have Jason jump in here because he's very experienced and has lived through this. But as we analyze what to do with the team, one of the things that we at James Hardie always want to be, is long on capacity to make sure we're servicing our customers. When you take a whole plant down, it takes a considerable amount of time to get it up and running. And we want to be there and be responsive to meet our customers' needs and be able to fulfill the demand that they have out there. So it is a little bit of an investment for us, but we think the right one to make.

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

Jason. Can I circle back on pricing, please? Now curious, have you seen any pushback on pricing from the builders? And I ask that because we're increasingly hearing from some building product categories, right, like roofing and (inaudible) come to mind? Are they seeing a pushback on pricing from the builders? I'm just curious, especially given that both these categories are also highly skewed towards R&R. Just want to get your thoughts on any pushback on pricing from builders.

Yes. So as you can imagine, in this really competitive time when the big builders are seeing volumes down, certainly, they are price sensitive. So as I mentioned before, one of the things that we try to do by having the largest sales team out there who are hand-in-hand with our customers is understanding the solutions that we can bring to our customer base, whether that be an R&R or a single-family new construction. So we are utilizing tactical pricing where we need to, and we are bringing in lower cost alternatives like Cemplank where it makes sense. So I would say we're adjusting and working with our customers to help them drive their business in this time.

And just a quick one, quickly on just a mix by exterior and interior products. Could you just give us a sense of where that number is right now? Is it like still 90-10? Also, how did the growth look like during the quarter?

Yes. So the -- and So, I didn't get your second question, but you hit the nail on the head. It is a 90-10 exterior interior mix roughly. I'm sorry, what was your other question?

And what was the growth rate like in the third quarter on those 2 categories?

They were both right around minus 10%. So they were pretty consistent.

Your next question comes from Lee Power with UBS.

Can you just talk a little bit about inventory levels in the channel, like where do you think they sit now? And particularly, just thoughts around risk of further destocking given your kind of your outlook commentary?

Yes, Lee, thanks for the question. It really does vary customer by customer. And certainly, we're seeing some customers still trying to get their inventory levels lower with the lower demand out there. But I would say, in general, just in building products and some of the products that are I guess, adjacent to us, we're still seeing some pretty robust inventories. But I would say with our customers, our James Hardie customers, they're in a better place with our products. I don't want to give an exact number of days, but I would say that they're in a pretty good place at this point in time.

Okay. And then I mean if we think about CapEx for capacity expansion, like the management pack still has that $1.6 billion to $1.8 billion number in there. I think you talked to $1.5 billion and particularly and potentially stretching out the spend, but it's still coming. And so it seems when I piece that together with your comments just around margin that you're continuing to preference share over margin. Like given your kind of market outlook, like what do you think is an appropriate share growth number that we should actually be putting in given that preference for share? And maybe if you're not willing to give a range, like do you think share growth will be kind of above the 5-year average? Or is there something else going on that despite you adding capacity and potentially being margins at the lower end that you're not going to get the level of share growth that we've kind of been accustomed to over the last 5 years?

Yes. Lee, I look forward to talking to you about that in May because that will be some guidance. But I will say this. I'll give you this nugget. The expectation is we're going to grow about the markets we participate in.

Your next question comes from Peter Steyn with Macquarie.

Aaron, just a quick question in relation to some of the conversation about margins and how you lay that up against your LTIs for both North America and APAC at that 27% to 32% range. Obviously, that's a forward-looking view. But how do you contrast your conversation today around margins versus those targets?

Yes. Peter, as you can appreciate, I wasn't around when those LTI goals were set. So as we think of the changes in the market, they've been changing dramatically. So as I look moving forward, I got to give that some consideration. But as far as the LTI targets right now, I wasn't here when those were set, but there's something that we have to live with. But as we look forward, I mean it's certainly something that I'll look at.

Yes. Peter, I guess I'll just add is obviously part of the Board sets those, but they obviously relied on our data, et cetera. And at the time we set those as prior to the year starting and the expectations around the market as Aaron walked through earlier in the deck, we didn't see the downturn as significant as it is. And so now Aaron's laid out the framework of how we'll run the business with margins above 25%. STIs are set at a point in time -- or LTIs are set in the point of time and now you got a market that's decelerated over 10% since that time, we'll have to adjust and run the business accordingly.

That is all the time we have for questions today. I will now hand the conference back to Mr. Erter for closing remarks.

Yes. Just I want to thank you all for joining the call. And I would like to end reiterating what I said earlier on the call, whatever challenges we face, it's our job to outperform the market while providing our customer solutions. That's what we have a history of doing and what we intend on doing moving forward regardless of market conditions. I'm proud of the team. I think we are managing decisively and aggressively and hopefully, you've heard here, we're laser-focused on driving profitable share gain in every region while delivering strong financial returns. Thank you very much.

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