James Hardie Industries PLC (JHX) 2024 Q3 法說會逐字稿

Thank you for standing by. Welcome to the James Hardie Third Quarter Fiscal Year 2024 Results Briefing. Today's briefing is hosted by James Hardie, CEO, Mr. Aaron Erter; and CFO, Ms. Rachel Wilson. (Operator Instructions). 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, and welcome to our third quarter fiscal year 2024 Results 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.

Moving to Page 3, you will see our agenda for today. Joining me is our CFO, Rachel Wilson. For today's call, I will start by providing a strategy and operations update. Rachel will then discuss our financial results, and I will return to discuss our outlook, guidance and provide a brief closing. We will then open it up for questions. Before I share an update on our strategy and operations, 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, solutions and services to our customer partners. Our employees truly represent the very best in our industry and consistently enable our superior value proposition.

Let's start on Page 5 with a brief business update. Our team's focus remains simple: working safely, partnering with our customers, investing in long-term growth and driving profitable share gain. Our third quarter results continue to highlight how impactful that focus has been. For the third quarter, we achieved global net sales of $978.3 million, up 14% versus the prior corresponding period, with a record quarterly global adjusted net income of $179.9 million, up 39% versus the prior corresponding period. Both our global net sales and adjusted net income results were again supported by volumes in North America that have outperformed the market.

Our third quarter North American volume of 766.5 million standard feet exceeded the top end of our guidance range, and we delivered that with a record 32.7% EBIT margin. The adjusted net income result was also supported by strong year-over-year financial results in our Asia Pacific region. In the EU, business performance improved year-over-year, and we are seeing momentum in growing our high-value products. For the first 9 months of the year, we generated record operating cash flow of $749.5 million, up 73% year-over-year.

Similar to last quarter, we have continued to accelerate our investment in long-term growth, supporting our marketing tent poles, driving awareness and conversion in targeted regions to aid in sustaining profitable share gain. Rachel will share additional details in the financial section. While uncertainty continues to affect our end markets, our focus remains on partnering with our customers and controlling what we can control to outperform in the markets we participate.

Now please turn to Page 6 and our global strategic framework. As I continue to emphasize, at the heart of our global strategy, we are homeowner focused, customer and contractor driven. With that in mind, all three regions remain focused on our three key strategic initiatives: number one, profitably grow and take share where we have the right to win; number two, bring our customers high-value differentiated solutions; and number three, connect and influence all the participants in the customer value chain. I remain confident in our team and our strategy. Combined, they position us to execute at a high level and drive profitable share gains in all three regions. We accelerate our strategic initiatives by establishing competitive advantages through our strategic enablers without compromising on our foundational imperatives.

Today, I will discuss two specific components of our value proposition, unrivaled support and localized manufacturing. Let's now turn to Slide 7 to discuss those components in greater detail. At James Hardie, we offer superior products and services to all participants in our value chain. Beyond the high performance of our product offerings, our unrivaled support and localized manufacturing are both key components of the superior value proposition that we offer our customers, builders and contractors.

Unrivaled support is about enhancing the experience for our value chain participants before and after the purchase of our products. Using our North America business, which is led by Sean Gadd, as an example, some of the ways we support value chain participants include: number one, our customer integration program. This program enables our customers, in this case, our distribution partners, to assess demand, manage stock and inventory positions and ensure that they have the right products at the right place and at the right time. This program also helps our customers and our manufacturing teams plan more efficiently to ensure high levels of service while optimizing the use of working capital.

Number two, Dream builder events. Some of you will remember this as brand days from our Investor Day in 2022. At our Dream builder events, we bring together key customers and contractors with our sales teams to learn more about how to market and sell James Hardie products. These interactive in-person events cover everything from initial home design decisions to the installation of James Hardie products, providing insights and engagement from the beginning to the end of the process. In effect, we are driving the number of contractors pitching James Hardie products in the home. We have doubled the amount of such events held in FY '24 versus FY '23.

Number three, our Contractor Alliance Program, or CAP, for short, is a membership program for our R&R contractors. The program offers tiered and tailored support and services to meet the varied needs of our contractors regardless of size. Support includes the sharing of leads or referrals, generated through the James Hardie website portal. Supplying our customers with high-quality leads is a key differentiator for James Hardie. High-quality leads benefit both new contractors, just starting out with James Hardie and long-term contractors alike.

Contractors value these leads as they are real currency for the success of their businesses. Program members also have access to local sales support, technical training on using our products and installation support. All of these help our contractors improve the quality and efficiency of installing our products and ultimately assist in lowering the on-the-wall cost for their customers, increasing the overall value they provide homeowners.

And finally, program members have access to co-branded marketing materials like job site marketing kits and curated social media packages, which ensure our collective messaging is aligned and impactful. These materials boost the contractor's local presence in the community with the intention of increasing awareness for the contractor as well as driving James Hardie's presence in their neighborhood.

As an example, for every contractor's completed home that utilizes this localized marketing, they can expect to generate, on average, an incremental 12 leads and an additional 2 more jobs sold. Our unrivaled support is part of our homeowner-focused customer and contractor-driven mindset. We are investing in our customers and contractors to help grow their businesses, which will help drive ongoing material conversion towards James Hardie fiber cement.

Localized manufacturing is another part of our superior value proposition for customers, builders and contractors. We are physically close to our customers. We operate 10 manufacturing sites across the U.S., enabling a local presence to support our customers' changing needs and differentiating us from our competition. In FY '23, approximately 70% of our products were delivered within 500 miles of one of our plants. This enables us to provide our customers and partners with reliable and responsive customer support services, limiting exposure to the risk inherent in extended supply chains. Our plants are conveniently located near key sources of raw materials. In FY '23, approximately 80% of our raw materials were sourced within 150 miles of our plants. This close proximity provides their plants with efficient sourcing, which helps to minimize freight costs and the carbon footprint of our supply chains.

Finally, we invest in and support the communities within which we operate. In FY '23, we contributed $1.85 billion in incremental growth in economic activity through capital expenditure at our plants, investing in our employees and local ecosystems and across our supplier base. The benefits of our localized manufacturing are long-lasting. And through our capital allocation framework, we remain focused on investing and enhancing our localized offering.

In short, our unrivaled support and localized manufacturing benefit all of our value chain participants, our customers, our builders and our contractors. These benefits are part of the superior value proposition that differentiates James Hardie over other building materials providers and supports our growth aspirations by providing our partners with benefits that extend beyond the product.

Now I would like to hand it over to Rachel to share more details about our third quarter results. Rachel?

Thank you, Aaron. Let's start on Page 9 to discuss our global results for the third quarter. Our team has delivered a strong set of results in the third quarter compared to last year with consistent and focused execution through the first 9 months of our fiscal year.

For the quarter, group net sales were up 14% year-over-year to $978.3 million. Adjusted net income increased 39% to $179.9 million. The global adjusted EBITDA margin was 28.7%, up 440 basis points. And operating cash flow for the 9 months was a record $749.5 million, up 73% year-over-year. Our team is focused on executing on our strategy, and these consistent results demonstrate the value of focused execution.

Now turning to Slide 10. I'll detail our adjusted net income waterfall for the third quarter. As mentioned, adjusted net income increased 39% or $50.7 million year-over-year to $179.9 million and was in line with guidance provided in November. The year-over-year increase was primarily driven by strong EBIT growth in North America, which contributed $52.4 million to the increase in adjusted net income.

The year-over-year increase was also supported by growth in APAC and EU. Combined, each regions contributed $12 million to the increase in adjusted net income. During the quarter and as part of our ongoing marketing investment to drive long-term growth global SG&A investment, which includes corporate, increased 36% year-over-year to $156.3 million. This equates to 16% of revenue, up from 13.4% last year.

Sequentially, global SG&A was up 2% compared to the second quarter of fiscal year 2024. The increase in investment, primarily in our marketing tentpoles, reflects our continued focus on growing brand awareness and driving profitable share gain. In the last quarter, we have seen our James Hardie aided brand awareness inside had increase by 7%. Some of our key initiatives include increased marketing through advertising sponsorships and trade marketing to drive consideration and conversion across the value chain.

General corporate SG&A expenses increased primarily due to higher stock compensation expense, namely a higher share price as well as higher employee costs and was partially offset by lower New Zealand weather tightness expense. Our FY '24 full year estimated adjusted tax rate is now updated to 22.8%. This compares to the FY '23 full year tax rate of 20.1% and is higher in FY '24, reflecting our geographic mix. We are proud of our global team for the way they've executed in a challenging market we remain focused on consistent execution to similarly deliver in the fourth quarter.

Let's now move to Page 11 to discuss the North American results, beginning with the top line results. North America net sales at $727 million was up 13% versus the prior corresponding period, and our average net sales price was up 3%. Volume of $766.5 million standard feet exceeded the top end of our guidance range. During the quarter, overall housing end markets improved as mortgage rate eased. However, major project R&R remains down high single digits while single-family new construction was up 7% in the September quarter.

As a reminder, we use a 1-quarter lag methodology as applied to single-family new construction macro data to better align the data to the timing of our reported sales. Our quarterly volume increased 9% year-over-year is against a mixed end market. Q3 volumes exceeded guidance and historical trends, in part due to customers fully buying the amount permissible prior to the January 1 price increase. When thinking about seasonality, it's noteworthy that in October 2020, we moved our annual price increase to calendar year-end versus our fiscal year-end, based on customer feedback to better align us to their fiscal year-end. Given this movement, and disregarding 2021 to 2022 due to supply allocations, we now expect a more even North American volume distribution between Q3 and Q4. The 9% Q3 volume increased and expected 9% Q4 volume increase at the guidance midpoint highlights the success we are having. We are converting share against other competitive materials. This reflects James Hardie's superior value proposition as outlined by Aaron in his opening remarks and our material conversion advantage in building products.

Similar to the second quarter, our strategic initiative to partner with BIG Builder helped drive continued volume growth in the South Central region, which is new construction dominance. This region outperformed our total North American bond. In addition, our volumes in the Northwest have continued to remain strong as our execution focus has enabled us to take share. We are committed to serving both the new construction and R&R segments and continue to invest in the larger R&R market.

Now turning to margins. The North American EBITDA margin improved by 570 basis points versus the prior corresponding period to a record 32.7% and similar to volumes, were just above the top end of our guidance range. EBITDA, also in the third quarter, were up 37% to a record $237.8 million versus the prior corresponding period. EBIT benefited from a higher average net sales price as well as lower input costs, specifically pulp and freight. Looking to Q4, and as noted last quarter, we expect cement to remain a key headwind for our North American margin, given timing of our supply contracts and strong demand for cement globally.

We additionally anticipate higher pulp prices as well as an increase in our start-up ramp-up cost for Prattville Line 3. For the full year calendar 2024, some of our key input costs, as just mentioned, cement and pulp are expected to markedly increase. During the quarter, SG&A investment increased 40% year-over-year, off of a low base in the prior year. This investment is focused on our marketing tentpoles to drive long-term demand creation. As a percentage of sales, SG&A investment increased 2 percentage points. Despite housing market volatility, we are encouraged by our relative share performance. By partnering with our customers, the North America team delivered a strong third quarter results with record EBIT and EBIT margin.

Let's now turn to Page 12 to discuss the Asia Pacific results. Similar to North America, it was a strong third quarter for our Asia Pacific segment. Net sales improved 21% versus the prior corresponding period to AUD 206.3 million, the net sales improvement was driven by a 14% increase in our average net sales price and supported a 6% increase in volumes. Volume growth was driven by recovery in New Zealand as well as APAC focused strategies that have resulted in new customer acquisitions and successful co-creation with builders. EBIT improved 34% to AUD 56.7 million. The result was driven by a higher average net sales price, which more than offset an increase in cost of goods sold per unit.

Despite those pulp and freight costs being lower in the quarter versus last year, COGS increased modestly due to a higher price mix of sales. SG&A investment increased 22% year-over-year as we continue to invest in long-term demand creation. As a percentage of sales, SG&A investment was largely unchanged year-over-year. The APAC EBIT margin improved by 280 basis points versus the prior corresponding period to 27.5%. Given our Q3 is seasonally weaker, this was a strong margin outcome relative to prior Q3 performances. Our Asia Pacific team has continued to partner with our customers to deliver a strong third quarter. The Australian housing market remains challenged as the industry digests housing market affordability issues and a double-digit decline in building approvals. Despite this backdrop, our teams are focused on driving profitable share gains.

We will now turn to Page 13 to discuss the European results. Our European team had a solid third quarter as the team continues to execute well in a challenging market environment. The European market has declined double digits. As an example, German building permits were down 15% year-over-year in the 3 months to November. European net sales increased 8% to EUR 109.3 million. The increase was primarily related to an 18% increase in ASP as well as a EUR 4.2 million favorable true-up related to customer rebate estimates. The growth in ASP was due to our strategic price increases and growth in high-value products.

We continue to see our product mix shift towards our higher-value fiber cement offerings. We are working closely with our customers to provide products that are geared to both multifamily and single-family homes. During the quarter, our fiber gypsum volumes were down low double digits, whereas we experienced double-digit growth in our high-value products. We see strong opportunities ahead for our high-value products. And recently, we're recognized by the German Design Council with an award in the category of Excellent Product Design, Building and Elements. They recognized our latest innovation, the Hardie Architectural Panel collection .

The Architectural Panel collection has been developed in conjunction with European architects to specifically meet the design preferences of our European customers. While our high-value products are growing off of a small base, they're becoming a larger part of the overall mix, mainly with panel opportunities. On a combined basis, overall volumes declined 10%, which while significant, represents a lower decline than the overall European market.

EBIT improved year-over-year to EUR 7.1 million, driven by a higher average net sales price, which more than offset higher cost of goods sold due to lower volumes and increased costs of gypsum and energy. Similar to other geographies, SG&A investments increased 30% year-over-year. As a percentage of sales, SG&A investment increased 3.5 percentage points. In the EU, these investments included creating dedicated sales teams to commercialize our panels portfolio across Europe and driving market initiatives such as a series of events for architects in major European cities like Paris and London as well as further advertising activities on major social media platforms to generate more leads.

EBIT margin improved by 500 basis points versus the prior corresponding period to 6.5%. We remain confident in delivering mid- to high single-digit EBIT margins near term and the focus for the EU team is execution on growing high-value products. This strategic emphasis will support the longer-term margin expansion opportunity.

Turning now to Page 14 to discuss cash flow, liquidity, capital allocation and capital expenditures. Our robust operating cash flows reflect our strong margins, which stem from the superior value proposition that we offer our customers, builders and contractors. In the 9 months of FY '24, our operating cash flow was $749.5 million. This record cash flow result was driven by strong financial results in all three regions and a working capital improvement of $121 million. We continue to maintain a strong liquidity position with a Q3 net leverage ratio of 0.65x and liquidity of over $1 billion. We are stewards of investor capital. Our capital allocation framework is first and foremost to invest in organic growth. We do this while maintaining a flexible balance sheet and deploying excess capital to our shareholders.

During Q3, we repurchased 2.4 million shares for $75 million at an average per share price of USD 32.11. For the 9-month period, we repurchased 6.7 million shares for $196.3 million at an average price of $29.14. As we look to Q4, we plan to continue to repurchase shares under our USD 250 million buyback program. Regarding capital expenditures. For the first 9 months, capital expenditures totaled $328.2 million. We expect to spend approximately $515 million on capital expenditures in FY '24, and we remain committed to keeping capacity ahead of the volume. In Q4, we expect to complete Prattville sheet machine #3. In over a 12-month period, we expect to incur start-up ramp-up costs of approximately $10 million.

Looking into calendar year '24, we are continuing to invest to prepare for future demand, and we are expecting CapEx to increase year-over-year. Key investments include early works for brown and greenfield capacity additions in North America and proven initiatives globally to unlock existing capacity as well as investments in the Hardie Operating System initiative. We have robust operating cash flows, substantial liquidity and a flexible balance sheet, which enables us to invest in profitable growth. I'll now turn it back over to Aaron.

Thank you, Rachel. We have delivered a strong first 9 months and another record quarterly result for adjusted net income. In addition, we have outperformed our end markets in volatile conditions. These results are proof points that we are accelerating through this cycle and taking share, all while we have increased our investment and long-term demand creation.

Let's now move to Page 16 to discuss our market outlook and guidance. For our largest market, North America, we are providing the calendar year 2024 market outlook data from several external data providers. The average estimate for single-family new construction is for growth of 5%. Multifamily new construction is forecasted to contract 21% and repair and remodel, our largest end market, is estimated to decline 2%. Using these external ranges along with our assumed market segment exposures, the implied range for our blended addressable market is down 4% to up 6% with an average of flat.

It won't come as a surprise to you to see these third-party forecasts for our end markets have improved over the last quarter and is supported by declining interest rate expectations. Over the last 18 months, I've seen us execute on our strategy and increase our investment in long-term demand creation. Our business and team are now in a stronger position to capitalize on the expected return to growth in our end markets over the years ahead. We remain laser-focused on driving profitable share gain and are demonstrating this with our market outperformance.

If you turn to Page 17, we have again provided the volume sensitivity analysis for FY '24. This sensitivity analysis was prepared in the same manner as last quarter, which assumes our current range of expectations for raw material costs and freight rates, while continuing to invest in growth as currently planned. These volumes are simply to provide context to our EBIT margin sensitivity in North America and should not be construed as volume guidance beyond fiscal year 2024. Regardless of how markets fluctuate, we remain focused on outperforming our end markets.

Now please turn to Page 18. Today, we are providing 3 points of guidance for our fourth quarter of fiscal year 2024. First, we expect North America volumes to be in the range of 750 million and 780 million standard feet. Second, we expect North America EBIT margins to be in the range of 30% to 32%. And lastly, we expect global adjusted net income to be in the range of $165 million to $185 million. As I mentioned earlier, our team is energized and focused on driving profitable share gain, and we are positioned to deliver another strong financial result in our fourth quarter.

Finally, please move to Page 19. We, at James Hardie, are a global growth company. Over the past several quarters, I have spoken to a few of these defining attributes. Last quarter, I spoke to the Hardie Operating System and Zero Harm. In the first quarter, I highlighted James Hardie as the brand of choice, noting our premium products and our multi-segment focus. Today, I spoke about our premium service, which includes unrivaled support as well as localized supply chains. You have also heard Rachel talk about our strong financial position, underpinned by our disciplined execution, translating into sustained margin performance and superior cash generation.

We remain focused on consistently delivering while continuing to invest in growth. This is evidenced by our investments in SG&A and CapEx as we remain focused on profitable share gain in our material conversion opportunity. And enhancing our growth efforts, I would be remiss to not mention a few of our foundational supports. Our experienced management team, over the last 18 months or so, you have seen our executive leadership team expand with key areas elevated and new talent and skills at it. Combined, this provides James Hardie with the stewardship that allows for focus and simultaneous execution across multiple key areas. This includes establishing the Hardie Operating System targets, our continued investment in our people, ESG disclosure and commitments, centralized procurement and R&D focus as well as targeted investment and demand creation. All of these efforts combined to drive our ongoing material conversion and profitable share gain.

Attractive returns. Over the last 9 months, our focus on forecast accuracy and consistent execution has enabled our business to deliver on our commitments. While there are many financial return metrics I can point to, the North American EBIT growth over the last 9 months of 19% year-over-year in what has been challenging conditions with an EBIT margin of 31.9% provides one such data point. I am proud of our team's ongoing ability to navigate market conditions and execute consistently, delivering a strong third quarter result and demonstrating operational momentum as we head into the fourth quarter. We are homeowner-focused, customer- and contractor-driven.

Before I open it up to Q&A, I would like to highlight our upcoming 2024 Investor Day in late June. We are hosting a 2-day event in North America, showcasing our value proposition in the field with some of our customers and partners. We look forward to showing you, firsthand, our value proposition and how we are driving profitable share gain. If you haven't already, please use this link, [https://www.surveymonkey.com/r/CTW7VFD], to register your interest. To save the date, registry will close at the end of February. With that, I would like the operator to open the line up for questions.

(Operator Instructions). The first question comes from Keith Chau with MST Marquee.

First question on fourth quarter volume guidance, and I appreciate the comments you've provided us already, Rachel, on that one. But usually, the -- sorry, the fourth quarter is typically roughly 4% higher than the third quarter, even with the timing of price increases. So historically, prior to the price increase timing change, when price increases were 1st of April, the seasonality, 3Q to 4Q was around 11%. Now that it's changed 1st of January as of 2021. The seasonal variation is now typically up 4% Q-on-Q. So notwithstanding the comments you've given on pull-forward rates, I'm just wondering if you can give us a sense of what magnitude the pull forward was this year, whether there were limitations or the same limitations on customers as it has been in prior years or whether there were any other issues impacting the volumes between third quarter and fourth quarter.

Yes. Keith, I'll start with this, and then Rachel can jump in. Just as we said before, I mean, let's start with Q3. Lest anyone should forget, we had a very strong Q3 result in North America with volumes up 9% year-over-year, which exceeded the top end of the guidance. And our guidance for North America Q4, at the midpoint, implies another 9% year-over-year growth.

If you think about this, this strong expected growth is really against a mixed backdrop for us, where we have R&R still down year-over-year, while new construction is recovering. The pattern of our Q3 to Q4 seasonality really needs to incorporate the impact of the change in timing of our North American price increase in calendar year '21, which would be our fiscal year '22 from March to January. This, as well as the mixed backdrop, is reflected in the volume guidance range. We are performing strongly and are driving profitable share gain. This is reflected in our PDG performance over the last 9 months and in our results which set forth new financial records for us.

I think the other thing to note is, importantly, we're partnering with our customers and investing in long-term demand creation. The other thing, when you think about the backdrop we were in over those time periods is we were in periods of allocation as it relates to what customers could purchase. If we think about where we're at right now, we're able to supply what our customers need, and that's what we did and part of what we saw in our Q3 results.

Okay. That makes sense. And my follow-up question is just related to the margin guidance. So let's just say the midpoint of guidance, your volumes are flat quarter-on-quarter. But your margin guidance is 30% to 32%, which is below the outcome on the same volume outcome as in the third quarter. So given you've got price increases going up, costs going into the fourth quarter are probably flat to down. It surprised me that your margin guidance is only 30% to 32%. So just any clarity on that would be useful. And I appreciate your comments, Rachel, you're expecting costs to go up in FY '25.

Keith, I'll hand it over to Rachel, but one of the things you said is costs were going down, so that's not necessarily the case. So Rachel, do you want to give some color there?

Yes. So one of the things I highlighted last quarter and emphasized again this quarter is that we are expecting, particularly cement costs in Q4, to go up for us. It has to do with the timing of some of our contracts, which we've talked about range -- can kind of 12 to 18 months depending on the contract, but we marked Q4 for you. The other thing to point out is this is a reminder, North America EBIT last year was 29%. And as we think about this year, down from the margins all the way down to net income, the other point we should bring up is that the tax rate is expected to go up 120 basis points between Q3 and Q4. That alone is worth about $3 million drag to net income. So those are really the key factors between those raw material cost, cement and the tax rate.

The next question comes from Peter Steyn with Macquarie.

Just wanted to focus a little bit on your R&R positioning. Aaron, interesting comment about brand awareness benefits, but clearly, a lot of SG&A going in, doubled your number of Dream days or Dream builder events. Could you give us a sense of, qualitatively, what is making you excited about your positioning? How convinced are you that you can get the return on this investment?

Yes. Sure, Pete. Look, I think, for everyone on the call, just to remember, R&R is our largest opportunity as a company. If you think about the opportunity in North America, we get really excited when we talk about the 40 million homes that are 40 years old or older. So we have this pin pointed down to ZIP codes as far as what our opportunity is out there. Now, what is the good news is even though R&R has been down, we're seeing the outlook become more optimistic out there from an R&R perspective.

But we still are seeing high single-digit depressed market out there. But for R&R to improve, we really state a few things. Home prices need to go up, which we're starting to see more and more of that. We're starting to see consumer or we want -- we need to see consumer sentiment go up. So we're seeing that more positive with inflation falling. And then contractor sentiment, it's improving gradually as we talk to our contractors out there. And then the other piece is really big box transactions. We're still not seeing year-over-year growth.

But look, we know this is going to come back. The question is when. A lot of outside experts would say this would be in the back half of next year for us, which we are optimistic about. And we feel like we're in a very good position. I talk so much about our long-term growth whilst investing in our brand, which we talked -- Rachel talked about some of the brand awareness numbers.

And by the way, 7 points, when we think over a couple of quarters is very, very strong results. So it shows that we're really spending our marketing efficiently. But also, it's having people on the ground and focused on our R&R business. So this can be everyone from training, our contractors out there and then really bringing them into the James Hardie fold. We talk a lot about our contractor alliance program. I mentioned the success we're having in that. So you put all these together, Pete, it's really exciting as this starts to get some tailwind behind it. And we are very optimistic as we think into the back half of the year that we're going to be able to take advantage of that.

Right. A quick follow-up. So as much as you mentioned that the market is down high single digits, in Q3, you outperformed your expectations from a volume point of view. Could you give us a sense of whether that was R&R driven? Or was that new construction driven? Just that we understand some of the exit rates coming into this calendar year.

Yes, Pete, good question here. So, look, I think when -- it's the same story that we had last quarter. We're really seeing new construction really help us as we think about it. It's been very strong for us. I'll just give you some data points here. If you look at the south, right, we would call it the Texas region, we're seeing considerable strength there. And that's really a new construction market. We benchmark the north being more of an R&R market for us. We're still down, call it, mid-single digits there. So new construction really is carrying the day for us right now.

The next question comes from Simon Thackray with Jefferies.

Aaron, given your experience in the big box channel, I just wanted to explore with you your views on depot in particular, but I presume those will follow in trying to capture more of the contractor market and that contractor pro market. How do you see that playing out between your existing channel partnerships? And whether depot provides an incremental opportunity for Hardie? Or is it a potential threat to some of your traditional channel partners?

Yes. Look, Simon, it's a really good question. I would say this, the Home Depot and Lowes are excellent partners of ours. And a couple of things, number one, there's a lot of R&R foot traffic that goes through there. So as we think about the exposure to homeowners, that's a plus for us. There are a lot of noise in the background. And then the other thing, if we think about the Pro market, I would say that Depot and Lowe's are uniquely equipped to service certain segments of our contractor base, some of the smaller contractors, homebuilders out there. So we're working with them and our business continues to grow with them, and we see them as very important partners as we move forward.

And then, Rachel, maybe one for you. At the half, we talked to or laid out the cost out, working capital improvement targets for between '24 and '26, $100 million for HMOS, $60 million procurement and R&D and $100 million in working capital. I guess noted in this third quarter, there's no specific update on that. But could you give us a view on how that has started and which is moving faster or slower and what kind of benefits we're seeing in the programs?

I'm happy to. It's been talked about in the 9-month pack and working capital improvement is $121.2 million. So obviously, very nice progress on that. But what's interesting in this quarter, in particular, is that improvement has been driven while you're seeing our inventory levels actually going up. So that shows some of the strength of how we are getting there. But again, as I cautioned before, and I'll caution again, that is a long-term target, and this can go up and down, particularly as we start to continue to keep building inventory. But again, it's very good control here as we think about our working capital turnover ratios.

On HMOS and procurement in R&D?

Yes. So when you think about working capital, it -- sorry, there's a lot of background noise noticeable. What's driving the working capital, yes, you are investing in inventory. But as we look at our accounts receivable, as we look at our accounts payable, there's nice discipline in what's been happening there. So overall, the progress in that does reflect having that central procurement group, having that hawk discipline throughout the organization and really kind of moving to an emphasis on this and more controls around that. So again, some of this should retract as we build inventory, but overall, strong performance.

And, Simon, I would just add, as we get through our year-end, we'll report on what our HOS savings and our progress there. But, needless to say, to Rachel's point, we're making really good progress there.

The next question comes from Matthew McKellar with RBC Capital Markets.

You talked about third-party projections for R&R and how that market's a bit soft right now. But from what you're seeing in your own business, are there any differences in your outlook for R&R by region in North America that you'd call it?

Yes. Matthew, it's a very good question. I would say for us, the largest opportunity would be in the Northeast, in the Midwest. And I think that as we think about those projections, they would be right in line with that.

Okay. And one more for me. Are you content with continuing to allocate capital to the share buyback roughly the current run rates? Or are your priorities shifting at all with the strength in the share price here?

Matthew, it's Rachel. This is one where we feel very strongly that with our current performance, with our margins, with our revenue growth, we've been able to return on capital employed. We look at some of the multiples of some of our North American peers and say there's room, okay, and that we have been performing to that point. So again, we have a $250 million program. We've executed $75 million of it, and we will, as we said, first prioritize investing in organic growth. And then, of course, with excess capital, we want to make sure we are good stewards of capital, and we'll be returning to shareholders.

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

Aaron, congrats on a very solid quarter. Just wanted to get some sense for FY '24 -- calendar year '24, right, and I appreciate you won't give us explicit guidance. But if I just look at your presentation where you say that it's expected that your end market will be flat for calendar year '24. Now if you look at for this year, right, the calendar '23, your volumes were largely be flat, whereas the market is down anywhere between 5% to 6%. I'm I just curious to get your thoughts on whether you think you'll be able to continue with those market share gains in the next year. And then I have a follow-up for Rachel.

Yes. thank you for the compliment there, Shaurya. If we look to next year, of course, we're not going to give any type of guidance as we move forward. And we are focused on profitable share gain. If you look at PDG, I think you have to have a full year look, right? And we're always hungry for more. But as you think about moving forward, it gets tougher and tougher to get after that type of PDG growth that we're seeing this year. We still expect, and I'm not going to give any projections to take profitable share gain, but it gets tougher and tougher year-over-year.

That's quite helpful. And then just as a follow-up, and I think Pete asked that question, so for your first 9 months, right, your North America volumes were down 2%. Could you just give us a sense of the breakdown between repair and remodel and new construction within that? I'm guessing repair and remodel is quite weak, but could you just share some rough numbers with us?

Yes, Shaurya. We don't necessarily do that as far as the breakout. We just directionally would say 65-35 R&R to new construction. Now I will put the caveat on that. This year, it may have shifted a little more directionally towards new construction.

Sorry. I was just trying to get the growth numbers. So look, what I'm saying is like 2% up on volumes, right? What's the growth within that for R&R and new construction?

Yes. We don't give that type of breakout.

Just one quick one for Rachel. Rachel, just your comments on the input costs, right? And sort of -- I note that you point that for the third quarter, pulp and freight were soft. Could you just share, like, some numbers with us and -- for those 4 key cost items for the third quarter on a year-on-year basis, if that's easier for you?

Yes, I talked about, for input costs, for COGS, roughly 50% of our COGS are cement, freight, pulp and labor. Of those, particularly for this year, pulp and freight have been tailwinds for us. As we look to next year, we have been citing that cement, we expect to be increasing and most forecasts are expecting pulp to also become a headwind for next year.

The next question comes from Lisa Huynh with JPMorgan.

I just had a question around 4Q volume guidance. I appreciate the color around the lack of seasonality given the price rises. Just, can you talk about feedback that you've had from your customers to date and the extent that this guidance could potentially be just conservative, given we've seen rates come off over January, there's been a strong pickup from the U.S. homebuilders? And just any color from the R&R space?

Yes. Lisa, a good question, and I think you're asking us, a little bit, to speculate here because we do feel very comfortable with the guidance that we gave. I would just say this, all the reasons I mentioned before for R&R to improve have to be in place, right, and a big part of that is interest rates. So that's going to really give some tailwind, which we don't expect to be more towards the back half of the year.

I would say this, in conversations with our homebuilder partners, they're optimistic. This is the larger homebuilders, but we're starting to see some optimism from some of the smaller homebuilders, call it, the top 200 out there. So there is still demand out there for homes. And as I said before, what they're able to do is buy down rates, and they have land, so they're building. So I expect to still see some strength within the new construction area. And if you think about that, and this is why it starts to get really exciting and hence, why we keep investing in long-term growth initiatives, you get an interest rate cut and then you start to see repair and remodel accelerate as well. Now I'm not talking about Q4 necessarily, but as we look to our next year.

Great. That's helpful. And just on -- around the comment about COGS rising in FY '25. I mean, is there anything around the purchasing of pulp, Rachel, that would suggest you would say a different kind of headwind than the RISI prices that we all kind of look at?

No, I mean, we -- you look at the pulp index and that's probably a good indication for how we would be experiencing it.

The next question comes from Daniel Kang with CLSA.

Good morning, Aaron, Rachel. I just had a question on multifamily. So the outlook from the industry forecast is on Slide 16. It looks very wide, minus 45% to plus 3%. Just wondering if you can comment on what you're seeing in your own business and perhaps comment on the strategic progress with looking to penetrate this market segment.

Daniel, I would just say this, and I'll let Rachel jump in with some of the data here. If we think about multifamily, this is an area when we had supply problems, that we would put the foot on the gas and take it off again, right? And as we were ramping up this year, we did have some allocation as it relates to multifamily. We're normalized now on allocation. Also, this is a business that we believe in. We have a full up and dedicated team around multifamily as well.

And as we think about that allocation, it's really a bid-based type of business, so we didn't necessarily see that we were hurting any of our customers out there. So again, the focus for us as we move forward, but I also think there's going to be some headwinds as it relates to the multifamily's look to the future. Rachel, do you want to provide some data?

As a reminder, as we think about our split, as Aaron talked about, 35% new construction, but only 10% of that is -- within that is multifamily, so it is a smaller piece for us. As Aaron said, though, one that is a bid-based model and so one that we feel that we are ready to take advantage of as markets keep turning.

Just my follow-up just in regards to Prattville 3 and just CapEx outlook. How are you planning to ramp up Prattville 3? And I guess, can you give some color in terms of CapEx into FY '25/'26.

Daniel, really good question. How we're trying to ramp it up is very carefully and prescriptively. I think we have a very, very experienced team and our best people on Prattville. So if we look at Prattville, it's going to be critical to our success next year and into the future. So, like I said, we have our best people on Prattville.

If you think about the capacity that, that's going to give us, if we look at sheet machine #3, it's going to give us roughly $300 million standard fee additional capacity. And you heard me talk about as we think forward, right, and what gets you really excited is the prospect of R&R to take off again, we're going to need all of that. That's going to help us as we move forward. In regards to FY '25 CapEx, Rachel can take you through that.

Yes. The first thing is we've got brownfield capacity in all 3 regions, and we have greenfield capacity, both in the United States as well as in Europe. So we have a lot of options in front of us. We've talked about our need to complete Prattville #4 in the next year, continuing expansion in our Orejo facility in Spain, and then that we will be further investing in the U.S. So those are some of the primary areas that you can expect to see us employ CapEx in '25.

The next question comes from Lee Power with UBS.

Obviously, really strong gross margins. You're obviously taking the opportunity to invest in marketing. And then, some of those comments around high-quality leads, like, it seems your comments on the call are quite conservative around that flowing through to a higher PDG number. Like, is there something that you think is a sweet spot in terms of marketing spend and PDG? And are you willing to talk to what that is?

Yes. So if we talk about leads, right, really, really important. But usually, if we think about the time line of converting leads into sales, it's a rather long lead time. It's roughly 18 months, Lee. So as we think forward, there's some time that we're going to see sales from that. As far as PDG, we're not going to give any forward look on that right now. But as I said before, the higher PDG you achieve, the tougher it gets year-over-year. And then it's also dependent on the market you're going to enter in as well, so we'll leave it at that.

Okay. And then just a follow-up. Like, if you look at capacity utilization, I think it was 89% -- in the U.S., it was 89% in FY '23. Can you give us an idea of kind of where you're sitting now? And then just the economics around sending volumes further afield than that 500 miles, if you need to, given you've got, obviously, Prattville ramping up kind of in the near term and just the ability to kind of send that further afield, if you need to, into other markets?

Yes. Lee, so as far as capacity utilization, we don't give that number. I would just say this. As we think forward, over the next 3 years, we have the capacity we need to handle our growth projections. And with that said, we're constantly evaluating new capacity adds that we need to make, so we're doing that right now. On top of that, Rachel talked a little bit about HOS and our HMOS. That's going to help us just get more efficient, right, to be able to add capacity in our existing model as well. So I would just say this, we have the capacity we need to satisfy growth expectations. And Lee, I think your other piece was -- go ahead, Lee.

No, sorry, I was just going to -- I think you're getting to it, just the economics about sending things further afield, then kind of that 500 miles, at least, obviously, send most of the product.

Yes. Rachel, why don't you take that one?

Yes. I mean, the first thing is having 10 manufacturing facilities across the U.S. creates a very nice strategic moat, right? So, not only is this an advantage in terms of how we serve our customers, how responsive we could be. And also, by the way, it supports our ESG initiatives. As we think about is that far enough, can we -- do we have the flexibility to serve from another facility? Ultimately, we do. The good news, though, is that given our footprint and given the reach, it's not 1 facility, it's 10 across the U.S., we do have a really good way to reach our end markets.

The next question comes from Brook Campbell-Crawford with Baron Dewey.

Do you mind providing some color or some commentary just around your growth CapEx and your expected return on that capital? Bearing in mind, I think your group return on capital employed is 40% over the last 3 years. I think you noted that in the presentation. So how should we think about this significant amount of growth CapEx going into the business? Is 40% the number we should think about? Or is it a range? I guess, noting the new plants, I presume, will be pretty efficient and low cost relative to your average?

Thank you, Brook. The first comment is what drives a strong return on capital employed. By the way, it starts with also having strong margins, right, and discipline in your CapEx spend. So at the heart of how we've been doing on some of our return on capital is the strong margins, and that is another reason why it's very important for us to continue to invest in growth and keep our capacity ahead of demand, so that is something we are committed to.

In terms of what is that right number, we are trying to very efficiently build. That is correct. But there's also really these investments through cost as we think about how do we manufacture more efficiently and that is also a piece of how we gain productivity. So we'll be working on both of those aspects to try to maintain that performance.

Okay. That's great. And then just for the fourth quarter, FY '24, you had the January price increase. Do you mind just providing some commentary on what we should expect for ASP in North America, in the fourth quarter versus the third quarter? Should we simply just use sort of a mid-single-digit step-up there in price? Or any reasons why that might not be such a great idea when it comes to forecasting the fourth quarter ASP in North America?

Yes. Brook, I would say this. I mean, obviously, North America, we announced price increase in October of the calendar year '23, which was implemented in January 1. And then the other regions, there are different timings for that. But what we've always stated is our average sales price would be positive, right? So I think that's the right type of directional information that I would provide right now.

The next question comes from Sam Seow with Citi.

Just a question on the margins, the 32.7% looks like a record to me, and it's not lost on me that winter, and probably you had a lower mix of high-value products than when you last reported a couple of years ago. So going forward, just thinking how should we think about the margin upside in a more normalized SG&A spend environment. I mean it looks like SG&A was up 40% there in North America. And if I back out the extra $21 million to $22 million, it looks like margins could have been 35% plus. But yes, just any color around the upside there.

Yes. Sam, thanks for the questions. You said it right. I mean, margins at 32.7% in North America was outstanding. The team did a really great job. I think you mentioned the SG&A. I mean, really, Q2 to Q3 sequentially, it was flat from an SG&A standpoint. I think your question is, how should you think about margins moving forward. I would just say this, as we look at North America, for the near term, I think we're at our peak from a margin standpoint.

The reason I say this is we're going to continually invest in long-term growth initiatives. The other thing, and Rachel mentioned this, is the headwinds that we're going to face as it relates to input costs. Now we're going to be able to cancel some of those as it relates to some of our HOS savings. But we are going to see more headwinds as it relates to raw materials out there. So long term, we believe we will get to accretive margins. But more short term, near term, this is going to be the high point for us.

Got it. And then just as a quick follow-up. I mean, keen to understand obviously, anything quantitative you can provide, just so, one, we can measure the SG&A is being utilized efficiently. And two, I mean, in terms of the SG&A, it was elevated in Australia and Europe, where I guess, margins weren't at target, so any thoughts there? And then I guess, to your point on input costs, do you expect SG&A, going forward, to be correlated to gross margins?

Yes. So SG&A, the way I look at this, and I think you're looking at a percentage to sales, I look at this as what's needed to support our growth initiatives. So if you think about what we're after, it's profitable share gain for us, long-term profitable share gain. And we've invested in people. We invested in marketing. I think the question is, how do you know it's working, right? And I would just use this year-to-date as a proof point, it is working for us. I talked about leads being more longer term, so we'll have to wait there. But if I think about the people investment we've made, our investment and our customers, it's working for us, and we'll continue to invest where we think we need to, to really push that profitable share gain.

Okay. I appreciate the color. And then can I squeeze one more? And then you just talked about the profitable share gain. Could you maybe perhaps talk about where -- I mean, the PDG look quite strong there. Can you maybe talk about where that's coming from, new R&R large versus small homebuilder?

Yes. Sam, and we'll let you squeeze one more in here. But as far as our share gain, we talked about this before. This is coming from new construction. And who's benefiting in new construction, who's really driving that? That's the large builders out there. We've gone through a lot of color around those top 25 builders and the great relationships we have with them. But that's really who's driving that right now.

The next question comes from Rohan Gallagher with Jarden Group.

Most questions have been answered, but a quick one, Rachel, CapEx guidance has been reduced from $550 million to $515 million. Any -- can you sort of unpack that one, please, in terms of any reduced projects or more efficiencies?

Yes. We are on time with our biggest project here, which is the Prattville Line 3. So I think we feel quite good about how we're landing for FY '24. We also have that color plus line and it's also into the trial phase. So we feel good that it is not necessarily that we're not accomplishing our projects. It's more that we are able to trim that budget and land, sorry, background noise, but to land with a slightly reduced guide here. So it's more efficiencies.

Conscious of -- Aaron, conscious of the balance sheet, just in terms of where you're at, at the moment, could you just cover, philosophically at a high level, any -- I'm conscious of inorganic growth opportunities is not your priority. What you'd be looking for in terms of principles for M&A?

Rohan, it's a good question. What we talked about before as far as -- when we think about capital allocation, it's organic growth first. And I think we've demonstrated that, that is still our focus area. I would just say this from an M&A perspective. This has not been something, in recent years, James Hardie has talked about. We are looking at it, right? There's nothing in the works around M&A, but I think we would be remiss if we didn't look at it. And it really needs to do a couple of things, right? It needs to help accelerate our current strategy. Then it has to enhance the value proposition that we can bring to our customers.

The next question comes from Harry Saunders with E&P.

Firstly, just wondering if you could give us any idea of what your PDG actually was approximately for the first 9 months of the year. And appreciate you sort of said that was driven by new construction, but, like, was any of that from the R&R end market?

Yes, Harry. I think we answered that before. As far as -- look, PDG, it's best to give -- look at from a full year standpoint, but we're tracking really well from a PDG standpoint.

Great. And just related to that on PDG. For FY '25, I appreciate your sort of LTIP targets of 4% PDG. Could you just confirm whether that's sort of an average over 3 years? Or are you still sort of aiming for that 4% each year?

Harry, that's an average over the 3 years. One of the things I think that everyone has to remember, when we set those targets back in, call it, March of last year is the environment we were in, right? You think about a recession, climbing interest rates, very, very difficult environment, a lot of uncertainty, which -- even though we -- the environment and the outlook has gotten better, there's still a lot of uncertainty as we move forward. But those are, on average, over 3 years, Harry.

Got it. And just wondering as well on R&R, the weakness in calendar '24, could you just talk through what you see as the main drivers behind that market being off a couple of percent on average across your different forecasts and perhaps how does that look in the first half next year versus second half?

Yes. Look, I think that as we talk about R&R, the entire market, really, last year underestimated the impact that interest rates -- higher interest rates would have on R&R. You had a lot of [re-sites] being deferred, consumers lacking confidence, the list goes on and on. As I mentioned before, we really look at 3 or 4 things for the conditions for R&R to improve: one, our home price is rising; number two, consumer sentiment, contractor sentiment and then really those big box transactions. So 3 out of the 4 have just started to improve, but we still need to see more of that, I think, for the R&R business to improve. And I think that's why the projection is more of the back half of the year, Harry.

There are no further questions at this time. I will now hand it back to Mr. Erter for closing remarks. Please go ahead.

All right. Thank you, everyone, and thank you, operator. Just again, I want to thank our team across the world for making James Hardie the homeowner focused customer and contractor-driven company. I appreciate everything you do, and thank you.

This concludes our conference for today. Thank you for participating. You may now disconnect.