James Hardie Industries - Q2 2021

Transcript

Operator (participant)

Thank you for standing by, and welcome to James Hardie Industries Q2 FY 2021 results briefing conference call. Today's call will be hosted by Dr. Jack Truong, CEO, and Mr. Jason Miele, CFO. There'll be a presentation followed by a question-and-answer session. All participants are in a listen-only mode. If you wish to ask a question, you'll need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to CEO, Dr. Jack Truong. Please go ahead.

Jack Truong (CEO)

Good morning and good afternoon, everyone. Thank you for joining us on our Q2 Fiscal Year 2021 Earnings Call. I will begin by providing an update on the progress of how we have been executing our global strategy to deliver on our financial results consistently. Our CFO, Jason Miele, will then cover our Q2 and first half fiscal year 2021 financial results. Before I get into the content of the presentation, I would like first to extend my gratitude and thanks to all James Hardie colleagues around the world. Their continued execution of global strategy, hard work, and relentless focus on health and safety have led the company to achieving a record quarter for total company in net sales, adjusted EBIT, adjusted net operating profit after tax, and operating cash flow.

Our success was driven by exceptional performance in delivering growth of our markets and strong returns across all three of our operating regions, North America, Europe, and Asia Pacific, and as a total company, this marks the sixth straight quarter that we have delivered strong financial results. Our employees' commitment to continuous improvement and our strategic imperatives has been instrumental in delivering these strong results. Let's turn now to page five for an update on our global strategy. Now, back in August, I shared with you the summary of the progress toward our vision of transforming James Hardie from being a big, small company to a small, big company that can deliver consistent growth of our markets with strong returns.

While significant and measurable progress has been made over the past six quarters, the critical actions we took in year one form a strong foundation for James Hardie to become a high-performing, small, big company. First, it was important that we started by executing lean manufacturing strategy via our unique Hardie Manufacturing Operating System, HMOS, to transform James Hardie from being the world largest fiber cement producer to being a world-class manufacturer. It means that as a network of plants, we will be on a continuous improvement path of becoming more predictable and with less variations in production output, quality, and efficiency. Our significant progress during the past two years has enabled us to consistently and efficiently deliver premium quality products and service to our customers, and subsequently to the market, at a lower and more predictable cost.

Second, we shifted the focus of the commercial organization from being a pull organization to a push-pull organization. It's about being a customer-focused company. Our true customers are the dealers, retailers, and distributors. They are the focal point where we create more value for them every day by creating more demand for our products with the builders, contractors, and installers, and with better service and with being easier to do business with. Instilling the customer-focused mindset throughout our company is critical to the success of our strategy.

As a result of these two foundational strategic approaches, we delivered strong fiscal year 2020 results, including a 7% growth of our markets and 26% adjusted EBIT margin in North America, an increase of 17% year-over-year in total company's adjusted net operating profit after tax, and a 48% year-over-year increase in total company's operating cash flow. Now, with a strong foundation established in fiscal year 2020, we're now building on that momentum as a global company in fiscal year 2021. Thus far, in fiscal year 2021, our teams all around the world have performed very well, continuing to execute and deliver consistent financial results quarter on quarter. We continue to strengthen the engagement and integration of our supply chain operations with our customers for mutual benefits.

This has ensured that we are able to continuously service the market seamlessly through our customers, providing the markets the products they want and when they need them. While the global pandemic causes disruptions in the markets around the world, it is an opportunity for us to accelerate our engagement with our customers to add more value for them and for their customers. It enables us to improve working capital for our customers while driving more demand and share gain of our products in the marketplace. Our consistent strategy and execution enabled us to deliver record financial results for total company in Q2, fiscal year 2021, which includes strong growth of our market and returns in all three of our regions, North America, Europe, and Asia Pacific. We have significant positive momentum headed into the second half of fiscal year 2021 and into fiscal year 2022.

We expect to continue to execute very well our strategy and to build on our performance through the end of this year and beyond. Toward that end, as we approach fiscal year twenty twenty-two and the third year of our transformation, we will expand our focus toward developing new global growth platforms. It will allow James Hardie to continue to deliver consistent and profitable global growth well into the future. Innovation will enable us to enter adjacent markets and leverage on our core strength in fiber cement technologies and our fiber gypsum technologies, our brand strength, and market access. Of critical importance is our intention to launch the first innovation platform in North America, Europe, and Australia at the beginning of fiscal year twenty twenty-two. This innovation platform is truly global in nature, and I'm very excited about what this will deliver for our company moving forward.

As we move into the second half of fiscal year twenty twenty-one, it's important that we continue our progress on the strategic initiatives we have put in place to shift into a small, big company. We will continue to execute on our critical few initiatives and deliver consistent profitable growth for our total company. As I mentioned back in August, a transformation of this magnitude is not easy. Critical to this transformation and underpinning its success continue to be the integrated and globally connected management system we put in place two years ago. This management system continues to allow us to make better decisions holistically at various levels within the company. It's also enabled teams making appropriate adjustments quickly to keep our transformation on the right track.

I remain very pleased with the progress over the past two years to transform James Hardie from a big, small company to a small, big company. Now, let's turn to page six. Before we get into some details on the progress of some of our core initiatives, I want to take a step back and provide some perspective on our global financial performance over the past 10 years. This will also put our recent results into context. For clarity, the black line represent our global net sales by quarter in millions of U.S. dollars, while the green dotted line represent our global adjusted EBIT margin percentage by quarter. Starting on the left-hand side, between fiscal year 2011 and fiscal year 2018, you will notice a high degree of variability in the adjusted EBIT margin, with steady, albeit slower, global sales growth.

This volatility is indicative of a company that did not have the right globally connected and integrated processes to deliver consistent global profitability. It's also indicative of a manufacturing company that has high variability in cost per unit, as it is not operating under a globally connected lean methodology, and of a company that is not closely connected with its customers to understand true demand in the market and flow the right products to the right customers and when they need them. What I'm describing is, and what the charts show over that time period, is of a big, small company. As you move to the right, however, you will begin to see where we started our transformational journey to become a small, big company. First, in Q1 of fiscal year 2019, we started to create a new James Hardie Europe with our acquisition and integration of Fermacell.

You will notice that at this inflection point, our global EBIT margin declined, largely as a result of this acquisition. But as you will see over time, as we progress on the integration, our global EBIT margin would rebound. Which brings me to the second inflection point in Q4 of fiscal year 2019, when we began our lean manufacturing transformation. Through the implementation of lean capabilities and processes across our network of plants, we were able to reduce variability in our manufacturing processes and improve the predictability of output, and consequently, on the manufacturing cost reductions. You can see the significant improvement in our global EBIT margin shortly after we began the transformation, as we translated this reduction in variability and improvement in predictability into true cost savings across our network.

Which bring me now to the third significant inflection point in Q2 of fiscal year 2020, where we initiated the strategic transformation of our commercial organization from pull to push-pull. This concerted effort to shift from a focus solely on various contractors and installers to a primary focus on our customers, while maintaining connections to our various contractors and installers, was instrumental in driving real value for all. As we develop more meaningful partnerships with our customers, the financial result follows as we started to gain share, drive growth, and deliver strong returns. As we continue to replicate these North American strategies into our European and APAC businesses, we start to see true consistent global growth.

In fact, it is the three important milestones, the integration of Fermacell, the execution of lean transformation, and our shift from pull to push-pull, that led directly to James Hardie delivering record worldwide financial results in Q2 of fiscal year 2021, which is also our sixth straight quarter of delivering strong results. On the prior slide, I reviewed the three-year strategy that would take James Hardie from being a big, small company to a small, big company. What this chart reaffirms is that continued focus on global lean manufacturing, increased integration of customers across the world, combined with market-led innovation, will drive accelerated profitable sales growth with consistent EBIT margins moving forward. Now, let's turn to page seven.

As I just mentioned, one of the critical actions we took in fiscal year 2020 was to implement lean capabilities and processes across our network of plants via a Hardie Manufacturing Operating System, with the objective of becoming a world-class manufacturer. Today, I want to share the significant financial impact we made since the beginning of fiscal year 2020, when our lean journey began. On the left-hand side, you can see North America strong quarterly progress to date. In fiscal year 2020, we generated close to $28 million in cost of goods sold savings. Through the first six months of fiscal year 2021, we generated close to $18 million in year-to-date savings, versus the fiscal year 2019 baseline costs. In the 18 months since inception, we delivered close to $46 million in cumulative savings due to lean.

Now, in addition to cost savings, consistent lean execution also unlocked an incremental 12% of our operating capacity across the North American network of plants. Moving to the right-hand side, you will see our global lean savings quarterly progress, which follow in line with our North American results. APAC and Europe generated $16+ million in cost of goods sold lean savings, versus the FY 2019 baseline since inception. Global lean savings now total $62 million during the past 18 months. Our lean program not only deliver a lower cost per unit outcome for our operations, it's also unlocked an incremental 12% of operational capacity across our North American network of plants. While our focus on lean has returned some impressive financial results, I'm just as pleased with the impact it has had on employee engagement and retention.

As an example, in North America, our manufacturing employee retention was 85% in fiscal year 2020, as we cut our staff turnover rate in half. I would like to take a moment to thank all of our manufacturing employees around the globe. The O in HMOS really stand for operators, as they have been critical to the success of our lean initiative. But what I have been most impressed with is their commitment to work safely through the pandemic, while maintaining safe practices and continuing to drive our lean initiatives with results. This continued momentum in lean manufacturing execution was instrumental in delivering savings while unlocking incremental capacity to meet increased demands in the marketplace. Turning now to page eight. In fiscal year 2021, one of our critical initiative is about increased end-to-end engagement and integration of our customers through supply chain.

This is about a true customer partnership, where all facets of supply chain working together in concert to mutual benefits. Specifically, this involves incorporation of our customer's demand signal into James Hardie supply chain operations, which in turn enable us to provide them with the products they want, when they need them, and flow them through the value chain to the sites of builders and contractors. While this critical element of our strategy started in earnest earlier this fiscal year, the results to date have been outstanding. On the left-hand side of this slide, you can see the quarterly breakout of the North American net sales growth in the dark green shaded bars, and the inventory declines in the third quarter of fiscal year 2020, the black line.

What you will notice is that over the past nine months, North American net sales have increased $85 million, or 20% increase, to $515 million in Q2 of this year, fiscal year. While at the same time, total inventory decreased $76 million, or 35%, to $142 million. Throughout this working capital optimization, we were able to serve the market well to our customers, while helping to improve our customers' working capital as well as ours. Simply put, improved integration of our customers, flow products on our network of now more efficient plants and more predictable plants to our customers, to the job sites, has not only helped to drive sales growth and share gain, but also helped to increase efficiency across the value chain and freed up valuable working capital in the process.

I'm very pleased with the strong start to the supply chain engagement and integration of our customers. And I truly expect to continue developing this critical partnership through the remainder of fiscal year 2021 and beyond. Now, moving on to page nine. On the left-hand side, you can see the trend in the operating cash flow over the past four years, shown in half year periods. I think this slide is a good summary of the success of our strategy over the past two years. The strong, profitable sales growth, coupled with continuous improvement in our lean manufacturing performance and the integration of our supply chain to our customers, has led to a step change in our operating cash flow.

For the half year in fiscal year 2021, our operating cash flow was $416.8 million, an all-time high and an increase of 66% versus the previous corresponding period. This strong operating cash flow helped increase our liquidity to $886 million. It's also leveraged and lowered our leverage ratio to 1.32x as of September thirtieth, 2020. The step change in our cash generation capability and our confidence in the execution of our strategy, as demonstrated both in growing markets and in highly volatile markets, put us in a position today to announce a further strengthening of our balance sheet by paying down $400 million of debt by the end of the fiscal year, and the reinstatement of ordinary dividends at the end of this fiscal year. I would now like to turn this over to our CFO, Jason Miele, to discuss additional details in our financial results. Jason?

Jason Miele (CFO)

Thank you, Jack. I will start on slide eleven with our global results. As Jack mentioned earlier, this is the sixth straight quarter of strong global financial returns, and pleasingly, we had strong results in all three regions. As we continued to execute and accelerate our strategy, we were able to deliver strong top-line results in both the second quarter and the half year, and more importantly, also translate that top-line growth into strong bottom-line results and record operating cash flows. For the second quarter, global volume increased 8% and net sales increased 12%. This was driven by strong commercial execution across all three regions. As I just mentioned, we were able to turn that strong top-line result in the second quarter into an even stronger bottom-line outcome. Global adjusted EBIT and global adjusted net operating profit both increased 22% in the second quarter.

Our ability to drive a 22% adjusted EBIT improvement with net sales up 12% was due to strong execution against our foundational strategic priorities Jack discussed earlier: lean manufacturing and our continued integration with our customers. In the second quarter, we delivered strong EBIT growth in all three regions. In North America, adjusted EBIT increased by $23.9 million, a 19% increase. Europe increased adjusted EBIT by EUR 4.2 million, an 81% increase, and our Asia Pacific region increased adjusted EBIT by AUD 14.6 million, a 37% increase. For the first half, global net sales increased 4% to approximately $1.36 billion. For the first half, global adjusted EBIT increased 11%, driven by strong North American performance, where adjusted EBIT increased $41.3 million.

Moving to adjusted net operating profit, our second quarter results of $120.5 million increased 22% as compared with prior year and represents a quarterly all-time high for the James Hardie group. For the first half, adjusted net operating profit was $209.8 million, an 11% increase versus the first half of fiscal year 2020. Lastly, our operating cash flow for the first half increased 66% to $416.8 million. This outstanding cash flow generation is a true step change, and in my view, is a clear indicator and measure of the success of our globally integrated strategy. This cash flow result starts with strong commercial execution and partnership with our customers to drive profitable sales growth. It continues with our planned strong execution of lean manufacturing performance.

It includes the integration of our supply chain with our customers to flow inventory versus holding inventory, and is finalized with better discipline around the cash conversion cycle. This record cash flow, and more importantly, the sustainable nature of the cash flow, has enabled us to announce today our plan to further strengthen our balance sheet and the reinstatement of dividends at the end of this fiscal year. Moving to slide 12, we will discuss the North American business. In North America, we had another outstanding quarter. Volume increased 11%, while net sales increased by 12% in the second quarter versus the prior corresponding period. Our exteriors volume increased 11% in the second quarter, driven by our continued share gain as our team continued their focus on customer engagement.

In interiors, volume increased 7% for the quarter versus the prior corresponding period, as the interiors repair and remodel market rebounded in the second quarter post the initial pandemic slowdown in the first quarter. While not listed on this slide, I will point out that average net sales price increased 1% for both the quarter and the half year. Average net sales price continues to be impacted by product mix, market mix, and geographic mix. It is worth noting, we have shifted our annual price increase to now take place on January first of each year rather than April 1st. This has been announced to the market, and we'll begin with the price increase on January first, 2021. We anticipate achieving an average net sales price increase of approximately plus 3%.

Our outstanding top-line results were coupled with even better adjusted EBIT growth, as adjusted EBIT increased by 19% in the second quarter versus the prior corresponding period. This outstanding EBIT result was driven by continued strong execution of lean manufacturing and our continued integration with our customers. Specifically, adjusted EBIT improved in the second quarter versus the prior second quarter, due to continued lean manufacturing savings, lower pulp costs, and lower SG&A expenses. These improvements were partially offset by higher freight costs in the quarter. Overall, in the second quarter, in the first half, the North American team delivered another set of exceptional results, with continued strong growth above market and outstanding returns, including an adjusted EBIT margin of 28.9% for both the quarter and the first half. Now, turning to page 13, we'll discuss the European results.

In August, we communicated that Europe was the region most affected by the COVID-19 pandemic, as net sales decreased 12% in the first quarter, driven largely by government-imposed shutdowns in two of our key markets, the United Kingdom and France. I'm pleased to be discussing a very different outcome for our second quarter result here today. Our European team was able to manage through the first quarter uncertainty and drive significant improvement in the second quarter. The markets in the United Kingdom and France reopened, helping drive strong fiber cement growth in the quarter, and our team in Germany did a great job driving fiber gypsum growth in the Germanic countries. In the second quarter, net sales increased 8%. By product group, fiber cement net sales increased 14%, and fiber gypsum net sales increased 7% versus the prior year second quarter.

Entering the second half of the year, the team remains focused on driving gross margin improvement through growth in high-margin products and continued penetration in existing and new fiber cement markets. In the second quarter, adjusted EBIT was EUR 9.4 million, an 81% increase from the second quarter last year, and adjusted EBIT margin was 11.1%. We are encouraged by our Europe team's ability to quickly return the business to top line and bottom line growth with improved EBIT margins. Let's now move to page 14 for our Asia Pacific results. Our Asia Pacific region also had to navigate volatile and uncertain markets during the first quarter, with the first quarter results being significantly impacted by the government-imposed COVID-19 lockdowns in the Philippines and New Zealand. In the second quarter, as those countries began to ease restrictions, our financial performance recovered.

The second quarter result was led by very strong results by both our Australia and New Zealand businesses. They both drove growth above market and strong returns. Our New Zealand team really delivered an outstanding result in the second quarter, driving double-digit sales growth and excellent EBIT growth. You will remember that on May 5th, 2020, we announced the closure of our James Hardie Systems business, as well as the closure of our Penrose, New Zealand, manufacturing facility. The closure of the James Hardie Systems business is now complete, and we're in the final stages of shutting down our Penrose facility. The shift of production from New Zealand to Australia is driving a better cost per unit outcome for the ANZ region, and the exiting of the unprofitable James Hardie Systems business has also had a positive impact on EBIT margins for Asia Pacific.

It is important to note that the Asia Pacific EBIT margin is benefiting from a country mix impact, as the Philippines remained on tighter COVID restrictions during the second quarter compared to Australia and New Zealand, and thus, as a percentage of sales and a percentage of EBIT dollars, the Philippines represented a smaller portion of our Asia Pacific business in the first and second quarters of this year, fiscal year 2021, compared to prior periods. This country mix EBIT margin benefit will reverse as the Philippines returns to the normal proportion of our Asia Pacific business. That said, there are real systemic improvements in the Asia Pacific EBIT margin versus the prior periods. The shift of production from New Zealand to Australian manufacturing facilities, the exiting of the unprofitable James Hardie Systems business, and lean manufacturing improvements. These are all long-term and sustainable improvements to our Asia Pacific business.

In the first six months, adjusted EBIT and adjusted EBIT margin for Asia Pacific both benefited from lower SG&A expenses. We will invest in profitable growth in Asia Pacific beginning in the second half of fiscal year 2021. Now, moving to page 15, we'll briefly cover off on the other segments. Starting on the left-hand side of the slide, you'll see a significant increase in general corporate costs in fiscal year 2021, second quarter and first half, as compared to the prior corresponding periods. There are two items driving the increases in both the quarter and the first half, increased stock compensation expenses and higher legal expenses. The increase in stock compensation expense is driven by share price accretion. On the right-hand side of the slide, you can see R&D expenditures remain relatively flat year-on-year within the R&D segment.

However, it is important to note the last bullet on this page. Product development R&D expenses, which are recorded in the relevant business unit segment results, are up 14% in the second quarter and 5% in the first half as we continue to invest in market-driven innovation. The global innovation team remains focused on market-driven innovation, and we anticipate continued additional investment in innovation as we prepare for the launch of the first innovation platform, as Jack discussed in his strategy update. Now, turning to page 16 for a summary of our second quarter worldwide results. In line with the outstanding segment results for the second quarter we have discussed on the prior slides, adjusted net operating profit increased 22% versus the prior corresponding period. This was driven by strong performance across all three operating segments.

The strong operating results were partially offset by higher general corporate costs and a higher adjusted effective tax rate. Collectively, our operating business units, North America, Asia Pacific, Europe, and R&D, combined to deliver $41.4 million in adjusted EBIT growth versus the prior year's second quarter. Second quarter adjusted EBIT of $163.1 million and adjusted net operating profit of $120.5 million are both record all-time quarterly highs for the James Hardie Group. Moving now to page 17, we'll discuss the first half worldwide results. Adjusted net operating profit for the first half increased 11% to $209.8 million. This was driven by strong performance in North America and Asia Pacific, which delivered EBIT growth of 17% and 18% in the first half, respectively.

For the first half, the strong adjusted EBIT performance was partially offset by higher general corporate costs and a higher adjusted effective tax rate. In addition, adjusted net interest expense decreased 11% due to the lower average revolving credit facility balance, which has remained at zero for most of the year. This is a direct result of our strong cash flow generation. These strong results for the first half of the year provide strong positive momentum as we enter the second half of the fiscal year and fiscal year 2022, and they position us to invest in growth. The investment in future growth will be thoughtful and strategic and will include investments in innovation, marketing and branding, and capacity, to name a few. Moving on to page 18, to discuss cash flows and capital expenditures. On the left-hand side of the slide, we'll start with cash flow.

As Jack and I have both mentioned earlier in our presentation, operating cash flow increased 66% for the first half versus the prior corresponding period, driven by increased engagement with our customers, driving strong sales growth globally, continuous improvement within lean manufacturing, and integration with our customers through to our supply chain to serve the market with reduced working capital for the entirety of the value chain. Note that we have reduced inventory by $83.7 million during the first half. You have heard Jack and I mention the cash flow improvement as a step change. I just wanted to briefly put the $416.8 million of operating cash flow into some additional context.

While an improvement of 66% versus the first half of last year is significant, it is also worth noting that our best full year, full fiscal year operating cash flow result was last year in fiscal year 2020. For the full 12 months of fiscal year 2020, we generated operating cash flows of $451.2 million. So through 6 months of this fiscal year, we have already achieved 92% of last year's full fiscal year operating cash flow. And I think that helps put in perspective why we are describing this as a step change in operating cash flow performance. Now, shifting to the right-hand side of the slide, where you'll see a summary of our capital expenditures.

For the first half of this year, capital expenditures spend was $44.7 million, down approximately $79 million versus the prior corresponding period, as we had lower capacity expansion year-over-year. It's important to note this lower capacity expansion expenditure was made possible via our lean initiative. We often talk to you about the direct cost savings impact of lean, specifically the reduction in cost per unit, but as Jack mentioned earlier, lean execution has unlocked an incremental 12% of effective operating capacity. Moving on to future capacity expansion. Due to our strong customer integration driving market share gains and significant volume growth in North America, we plan to commission sheet machine number one in our Prattville, Alabama, facility in the fourth quarter of this fiscal year.

Further, we are now planning to commission the second sheet machine in Prattville around the middle of calendar year 2021. In Asia Pacific, we plan to commission the new sheet machine in Carole Park in the third quarter of fiscal year 2021, more specifically, this month. We now expect our full year, fiscal year 2021 capital expenditures to total approximately $120 million. Let's turn to page 19, where I'll discuss our liquidity profile. There's been no change in our debt profile. We still have the three sets of notes in place, along with the revolving credit facility. As Jack mentioned earlier in the presentation, we continue to improve our liquidity position and our leverage position, driven by our strong operating cash flows.

We ended the first half with $885.9 million of liquidity, an improvement of $376.1 million since March 31, 2020. We also improved leverage to 1.32 times, an improvement from 1.9 times at March 31, 2020. Over the six months, we have significantly changed our liquidity and financial flexibility and now have a very strong cash and liquidity position, which provides a nice segue to the next slide. On page 20, we'll discuss capital management. Throughout the pandemic, we have been committed to strengthening our liquidity, our leverage, and our financial flexibility. As our liquidity position continues to strengthen, we've refined our short-term capital management focus. At the start of the global COVID pandemic, we had to make some difficult decisions, including the suspension of dividends.

However, those difficult decisions enabled us to drive our business strategy aggressively, knowing we had taken the necessary actions to ensure our liquidity and improve our financial flexibility. Over the first half of the fiscal year, we've generated record operating cash flows and improved our liquidity to $886 million, including $391 million of cash at September 30th, 2020. Our confidence in our global business and its resiliency to various market conditions and our confidence in future cash flows has enabled us to refine our short-term capital management focus. Most notably, we will reduce gross debt by $400 million by the end of fiscal year 2021, and we will reinstate dividends with a full year, fiscal year 2021 dividend to be announced in May 2021.

Our outstanding first half performance, coupled with our pragmatic approach to cash management throughout the pandemic, has afforded us the financial flexibility necessary to support the investment in our growth strategy and to strengthen our balance sheet and reinstate dividends. Finally, moving to slide 21. Today, we are reaffirming the guidance range we announced just over three weeks ago on October 14th. The full year, fiscal year 2021 adjusted net operating profit guidance range is $380 million-$420 million. Operator, we'll now open the call for questions.

Operator (participant)

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star and then two. If you are on a speakerphone, please pick up the handset to ask your question. Please keep questions limited to one per person, with one follow-up question allowed. The first question comes from Brook Campbell-Crawford, from JPMorgan. Please go ahead, Brook.

Brook Campbell-Crawford (Executive Director and Industrials Equity Analyst)

Hey, good morning. Thanks for taking my question. First one, Jason, is actually just for you on North America freight. It looks like the freight costs picked up quite significantly, actually, in the quarter. Are you able to quantify, you know, the dollar increase or the percentage increase? Since it seems like a very big number to offset benefit sales for pulp, lean, cost out, et cetera.

Jason Miele (CFO)

Yeah, Brook, thanks for that. I can't specifically drill into every metric and provide that data, but certainly there's market data out there. As the housing market has been robust, flatbed truck demand is also high, which is driving that increase in freight pricing for us. So it was fairly significant, but with the continuation of our lean progress, then the lower pulp costs, we were able to still drive a higher EBIT margin outcome.

Brook Campbell-Crawford (Executive Director and Industrials Equity Analyst)

Okay, thanks. And one for Jack, just on the new global platforms, are you able to provide any sort of further color? You mentioned, you know, adjacent markets, which sound very interesting. Anything at this stage you can provide us on, you know, potentially what to expect from that later on, or next calendar year, actually?

Jack Truong (CEO)

Yeah. Hi, Brooke. What we're looking at here is really about entering new adjacent categories. I mean, so it means that it's not just only about the wood look or the vinyl look that we would confine our sights on. You know, what our core strategy that we announced to the market back in February 2019 is that we would like to expand our exterior business. And exterior business means that the market opportunity for us is really about all the potentially all the exterior wall markets. And that is what we are driving for with innovations.

Brook Campbell-Crawford (Executive Director and Industrials Equity Analyst)

Okay, thank you.

Operator (participant)

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

Peter Steyn (Managing Director of Equity Research)

Morning, Jack and Jason, thanks very much. Just maybe a quick one on Prattville. Interesting to see your intention to stick to your commissioning. Is that in response to a pretty tight supply environment? You know, if you could just simplify for us what your thoughts are there, supply, demand, and how Prattville plays into that.

Jack Truong (CEO)

Yeah, Peter, what we see is that we, as we continue to execute our global strategy, not only that we are continuing to gain share in the marketplace, but we also have an increased demand. And third is that, with the innovation that we plan to come out in the next fiscal year. So when you add all those together, it show that our demand going forward will really increase and that will give us the confidence to really pull forward the Prattville as well as knowing that we continue to drive lean execution. So as we continue to do that, we will continue to unlock more of our existing capacity.

Peter Steyn (Managing Director of Equity Research)

Thanks, Jack. I'll take another question and leave it there.

Operator (participant)

Thank you. Your next question comes from Sophie Spartalis from Bank of America. Please go ahead, Sophie.

Sophie Spartalis (Senior Research Equities Analyst)

Oh, good morning, Jack and Jason. Just a quick one from me. Just in terms of the lean savings and production capacity unlocks that you're getting, I'd get interested to hear, how much more production capacity you think that there is to be unlocked across the North American network?

Jack Truong (CEO)

Yeah. So, hi, Sophie. Right now, compared to 18 months ago, we have unlocked about 12% more capacity on what will be the total capacity in North America when we started this journey 18 months ago. And what lean continuous improvement is is that you know, we will continue to improve our execution of lean, and that means we will continue to unlock more. And also equally important, Sophie, is that by executing lean and continuing to do it better, we would reduce the variability in our production output. That would drive more predictability on what we make and how much we make and where we make them. That is the one, one of the key factors that will allow us to be able to open up customers to flow products to in the marketplace more fluidly.

Sophie Spartalis (Senior Research Equities Analyst)

Okay, and so just a follow-up then. You know, we've seen over the last 12 months a reduction in your SKUs, reduction in your color offerings to try and streamline your production output. I guess next year we'll see the introduction of new innovative products. Can you just talk through how that marries in with your hope to be very streamlined on the manufacturing side of things?

Jack Truong (CEO)

Yeah, good, good question, Sophie. You know, as part of, of a lean approach is really about, really understanding what is the true demand in the marketplace. And then based on those true demand, that, we want to make sure that we offer the right product portfolio, and then based on that product portfolio, that the market really need and want, and that would drive our production planning.

And so it's a, so it is now, you know, and with lean as being a part of culture, it is a continuous process that we always evaluate, you know, what type of product and SKUs and portfolio that will continue to resonate with the market and what don't. What don't resonate are the ones that now that we have the process to be able to eliminate them sooner, because so that it make room for the new products that we plan to launch, not only within our warehouse or our production, but also for our customers to have more resource capability to carry our innovative products.

Sophie Spartalis (Senior Research Equities Analyst)

Okay, that's great. Thanks, Jack. Thanks, Jason.

Operator (participant)

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

Peter Wilson (Equity Research Analyst)

Thanks. Good morning. Just a couple on the cost base. So slide seven, the North America lean savings. So it does appear that you're on track to meet or exceed the $100 million target, which is a great result. But the green bars tend to suggest that the rate of improvement versus the FY19 baseline have stalled. I'm just wondering what that means in terms of getting additional savings in FY 2022 versus that 19 cost base.

Jack Truong (CEO)

Yeah, so, hi, Peter. I think we had this discussion in Düsseldorf once, Peter. It is really in lean. It's really about every quarter or every month that we want to ensure that what are the savings that we were able to gain, say, last month or last quarter? The following month, we got to make sure that we keep that gain and then improve on it, because by keeping that gain, it is already a saving....

So the way to read this chart is that essentially $46 million of cumulative savings since the beginning of Q1 of FY 2020 is that we have to make sure that going forward that we continue not only to improve, but keep that gain. And that gain will be if we keep that gain going forward for the next six quarters, then just to keep that gain, that's already another $46 million. So anything else on top of that will be the additional savings.

Because what lean savings is really about is to ensure that whatever the improvement that we made from whatever the baseline that we started, that is still locked in. And that is one of the key factors in driving the consistency in the gross margin or EBIT margin of a business. So the key is to sustain the gain, really very, very important, and then add on top.

Peter Wilson (Equity Research Analyst)

Got it. Okay, and if I could reprise another question I've asked you before. Just in terms of Prattville, the margin impact you expect in the early quarters there, you know, both gross margin and the EBITDA that'll come through?

Jason Miele (CFO)

Yeah, Peter, thanks for that question. I think you can look back at historical results to try to model that as well. So we would have brought on, you know, Tacoma recently, obviously not the same size facility, but still a significant amount of capital expenditure, that as we brought that on, would have started having the depreciation, and obviously selling product from that plant. You could see in the prior year, 26% EBIT margins, and in the current year, 28.9% margins. So certainly as you bring on a new facility, especially one sheet machine across a large facility, there'll be some, you know, incremental depreciation there. But if we're selling products from that facility, which obviously we will be, it also has a high gross margin.

Peter Wilson (Equity Research Analyst)

Okay. Thank you. I'll leave it there.

Operator (participant)

Thank you. The next question comes from Lisa Huynh. Sorry to interrupt.

Jack Truong (CEO)

No, I just, I just wanted to close the loop with Peter on that one. So just to look at the lean savings, so essentially, with $46 million dollars savings cumulative for the first six quarters, that we will be ahead of the plan.

Operator (participant)

Thank you. The next question comes from Lisa Huynh, from Citi. Please go ahead, Lisa.

Lisa Huynh (Research Analyst of Building Materials)

Sure. Thanks. Morning, all. So I just have a question on SG&A. I guess you've done a good job reducing SG&A during the period, which is helping the strong margin result. Some of these costs will naturally be added back in, but as you mentioned, you've made some structural changes to the cost base. Can you just give us a sense of what the cost savings you delivered from these initiatives were, and to what extent we should expect SG&A to step back up, particularly in Asia Pacific, where we're seeing a strong EBIT margin result? Thanks.

Jack Truong (CEO)

Hi, Lisa. So it is roughly between 200 and 300 basis point for both North America and Asia Pacific, primarily in Australia. And so what structurally, you know, what happened during the pandemic when we had this cost rationalization, really to make our structure more lean, and then as we're going through this pandemic, we essentially have a different way of driving growth in the marketplace. So it's also an opportunity for us to now really look at the critical few that will move the needle in terms of driving demand.

And so going forward, what you're going to see more is that, you know, that 200-300 basis points of SG&A will come back to our business, so that we can really drive and the accelerated profit growth in the mid to long term.

Lisa Huynh (Research Analyst of Building Materials)

Okay, sure. Got it. And I guess, just an extension of that question then, would you expect your Asia Pacific EBIT margins to continue to run ahead of your North American margins over the next six to 12 months, in that respect?

Jack Truong (CEO)

No, it should be moderated lower than what you see in this quarter that we just reported. I think Jason had mentioned, you know, what you saw with a very good EBIT margin for APAC on this past quarter, really four factors, right? I mean, first one is that the New Zealand business really had a great quarter due to the big pent-up demand, as well as more efficient cost structure of product coming from now the plant in Australia. And now, and also our more efficient plants in Australia have more volume coming in from the New Zealand. That's also lower our product cost structure.

And then, third is really about the, you know, in this past quarter, the Philippines really didn't have a lot of growth, but now, we see growth coming back in the Philippines in a very good way this quarter. So, so it's like when you look at the EBIT margin, that's really the combination of EBIT dollars and net sales dollars. So you should expect that to really not to be at the level that you see, it should be lower.

Lisa Huynh (Research Analyst of Building Materials)

... Okay, thanks.

Jack Truong (CEO)

Looking forward.

Operator (participant)

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

Andrew Scott (Head of Industrials Research)

Hi, gents. Thank you. Just first question from me, maybe for Jason. With the shifting of the timing of the price increase, can you talk to us about how you now think about the sort of cadence or seasonality of the quarters? Usually third quarter is the softest. Presumably, you see some buying ahead of the price increase. How would you sort of expect to see that the year pan out now?

Jason Miele (CFO)

Yeah, certainly, steadies that out, the seasonality aspect a bit there, Andrew. And then I think you also have to remember this year is also a different year than any other year. But just going forward, yes, Q3 is historically the lowest volume quarter, and yes, historically you get a pull forward from a price increase. So as you look out into future years, that'll help moderate that and drive some consistency throughout the four quarters.

Andrew Scott (Head of Industrials Research)

Okay, thank you. And Jack, just a question to you, a bit of a variant on Brook's question. You spoke about sort of the global growth expansion. Just wanted to sort of inquire, does global mean anything outside of your existing footprint at the moment? Do you have further aspirations there, or is it really, are you trying to tell us just across the platforms that you're in at the moment?

Jack Truong (CEO)

Yeah, Andrew, so it's really, you know, one of the key global growth platform for us to really... It's also Europe. And I think we have discussed this in our annual investors tour last year, is that for us to really drive the accelerated profitable growth in Europe for the ten-year ambition, is really about having true innovations in fiber cement that would cater to the needs of homeowners in Western Europe, specifically.

So it's a key part of our innovation approach that we have been working on during the past twelve months is really, and not only to allow us to create new growth platform in North America and Asia Pacific, to also fuel the growth for Europe. And that is all about making sure that we can develop and commercialize the right products that meet the European homeowners' requirements.

Andrew Scott (Head of Industrials Research)

Jack, if I can just jump in. I know it's only two, but just to clarify and be more direct, no broader Asian plans within that?

Jack Truong (CEO)

Not in the short or mid-term, Andrew. This is really about making sure that we can drive our value creation in Europe, where we just made a very transformative acquisition.

Andrew Scott (Head of Industrials Research)

Thank you.

Operator (participant)

Thank you. Your next question comes from Abraham Akra from Jefferies. Please go ahead.

Abraham Akra (Equity Analyst)

Hi, Jack. Hi, Jason. Thanks for your time. My first question relates to capacity utilization. It looks like 19% in FY 2023, if net volume continues to grow by double digits year-on-year, then it would be 12% in incremental capacity being unlocked and Alabama coming online. What is the capacity utilization in terms of that you see, that will trigger a new plant or brownfield plant expansion?

Jack Truong (CEO)

Yeah. Abraham, you know, we don't disclose our utilization of our plant, but I think what you can see is that, you know, our business continue to grow, particularly during the last six quarters here in North America. And we continue to have very good growth potential, and at least in the near term, that we can supply the market, and then with Prattville coming online, it should very drive a lot of the more capacity for us to serve the market.

Abraham Akra (Equity Analyst)

Sure. That's understandable. And lastly, can you please allow-

Jason Miele (CFO)

And, Abraham, sorry, just real quick, as to that, you're also talking about deeper into the future. It was a little hard to hear you-

Abraham Akra (Equity Analyst)

Yeah.

Jason Miele (CFO)

But I think you're talking about FY 2023, FY 2024. Remember that the way we built Prattville, it can fit four sheet machines over the long term. So, we've announced when we're going to start sheet machine one, and today we announced when we plan to start sheet machine two. There's still brownfields capacity on at that site.

Abraham Akra (Equity Analyst)

Okay, got it. And lastly, can you give some color on the trading update in terms of how you're performing in terms of volume across all regions? Thank you.

Jack Truong (CEO)

Yeah. So, I would say right now in North America, quarter-to-date, our business is really at about upper mid to upper teens growth. And then in Europe, it is also at a double digit growth. And in Asia Pacific, probably around mid to upper single digit growth, total, as a total Asia Pacific.

Abraham Akra (Equity Analyst)

Thank you.

Operator (participant)

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

Paul Quinn (Managing Director and Equity Research Analyst of Paper and Forest Products)

Yeah, thanks, Jack and Jason, for taking my question. Just, like other building material producers, Hardie's benefited from, you know, some of the COVID lockdowns and people fixing up their houses. Today's announcement by Pfizer on the vaccine, what do you expect the implication on your growth going forward?

Jack Truong (CEO)

Paul, you know, I would say, you know, I think it's too early to tell regarding the vaccine from Pfizer. But we certainly see in the marketplace that there's gonna be an increased focus in remodeling. And certainly more and more people will be working from home, and there are gonna be more opportunity for remodeling. But for us, as we look at remodeling, it's really more about re-siding. And, you know, there's still a lot of homes, a very large percent of homes in North America that's, you know, between 30-40 years old, and those are prime targets for re-siding.

So irrespective of what the vaccines are gonna turn out or not, I think we still see a lot of growth opportunity for us, particularly in North America, due to the structural nature of the housing market here when it comes to re-siding and remodeling.

Paul Quinn (Managing Director and Equity Research Analyst of Paper and Forest Products)

Great. Thanks, guys.

Jack Truong (CEO)

Thank you, Paul.

Operator (participant)

The next question comes from Keith Chau from MST Marquee. Please go ahead, Keith.

Keith Chau (Senior Basic Industrials Analyst)

Oh, hi. Hi, Jack and Jason. Just a follow-up question on your trading comments. Just wanna confirm that the numbers that you've just provided to North America are up mid to mid-teens, Europe double digits, and APAC mid to upper single digit. Is that volume growth? And just to confirm that that is the period to date for the third quarter, please.

Jack Truong (CEO)

Yeah. So Keith, for quarter to date-

Keith Chau (Senior Basic Industrials Analyst)

Mm-hmm.

Jack Truong (CEO)

for North America, that's volume growth. That's really mid-teen to upper mid-teen.

Keith Chau (Senior Basic Industrials Analyst)

Mm-hmm.

Jack Truong (CEO)

For Europe, that would be revenue growth in the double digits. And then for Asia Pacific, it is volume growth, and that will be in the mid to upper single digits. And again, this is quarter to date.

Keith Chau (Senior Basic Industrials Analyst)

Okay, thanks.

Jack Truong (CEO)

And then for [crosstalk] major Asia Pacific, that's what volume, Keith.

Keith Chau (Senior Basic Industrials Analyst)

Volumes. Okay, got it. The other one, I just want to go back to the net price increase, Jason, that you mentioned. The expectation for FY 2022 is +3%, which I think ultimately assumes that there are some rebates flowing through as well. Just wondering if you can give us a sense on the expectation on mix going forward, whether that's gonna be a tailwind or a headwind in FY 2022. And as an extension of that question, whether there are commercialization of new products coming through in FY 2022, that may move the dial on price or volume?

Jason Miele (CFO)

Yeah, Keith, as you know, with the strategy, we're certainly focused on, Jack mentioned, innovation platforms. We're obviously driving color penetration and high margin products, but certainly, you know, in a year like this year, you know, that's the mix. You know, we achieved price everywhere we wanted to, and the mix kind of is what it is, where the South's doing very strong, and single family new construction is doing better than other segments, and so that's just fine. As long as we're executing our price increase and getting price where we want, mix is just kind of an outcome. The 3% we talked about is what we believe we will achieve in the financial statements next year, so that's inclusive of mix.

But obviously, if there's something shocking to the market that changes it, like this year, then it... The mix impact is, you know, can change.

Keith Chau (Senior Basic Industrials Analyst)

Mm-hmm.

Jason Miele (CFO)

3% is our estimate today of what we believe we'll achieve.

Keith Chau (Senior Basic Industrials Analyst)

That's great. Thanks very much. Thanks, Jason. Thanks, Jack.

Jack Truong (CEO)

Sure, sure. Mm-hmm.

Operator (participant)

Thank you. And your final question comes from Lee Power, from CLSA. Please go ahead, Lee.

Lee Power (Equity Research Analyst of Building Materials and Steel)

Hi, all. So if I take the $46 million line in the U.S., and if you assume you do, you know eight like, just a current, like what you're currently doing now, so like 8.4 for the next two quarters, you kind of get to $63 million, which is obviously above the range that you have for 2021. Do you want to just chat a little bit about is that still just coming through faster? Are you unlocking more than you thought you would unlock, and maybe how we should think about the longer-term targets?

Jack Truong (CEO)

Yes, Lee, so if you look at the, I think for... If you look at the, just let's focus on North American number here, is that, you know, so right now, what we're saying here, where we are now, which is at the beginning of FY20, is that our cost structure is about $46 million more efficient than six quarters ago. So that means that, you know, that means that if we continue to perform the same level as we do now, and that means that, and for the next six quarters, then we will gain that $46 million additional just to keep at the same level of performance now, which is a very hard thing to do.

So if we do that, then that will be the equivalent of essentially $94 million of saving out of the $100 million that we said beginning of fiscal year 2020 when we introduced Lean. But you know, we expect that the continuous improvement that we will continue to improve, and that is where that additional will push us to or above at or above $100 million. But recognizing that as every month from here going forward, we have to make sure that we keep the momentum where we are now, just to lock in that gain. Because if we don't perform to the level we are now, we're gonna roll back.

So it is a, from here going forward, every inch is getting tougher and tougher, but that is where a lot of the work will go in, in terms of how we can lock in those gains, for good. And that it will be through a lot more of the process and engineering, a lot more of the manufacturing technology that we need to introduce into our manufacturing processes to really fundamentally, and quote, unquote, "mechanically" lock in those gains.

Lee Power (Equity Research Analyst of Building Materials and Steel)

Okay. So when you say at or above a hundred million, should we think of the hundred as like a worst case scenario, assuming you don't get that sort of-

Jack Truong (CEO)

No, I mean, it's, I mean, when we set out on this journey, you know, six quarters ago, 100 million seemed to be like a very, was a very big number. And then, of course, we work hard and galvanize the whole company toward delivering that every day. And so as we stand right now, I would say that we are ahead midway through, we're ahead of that path, but recognizing that every month going forward, it will be tougher and tougher, just not only to keep the gain that we have, but we've got to also add on top of that.

So I wouldn't say $100 million is a worst case, but certainly there's a, now halfway through that three-year plan, it looks a lot more attainable than it was, six quarters ago. But certainly, we'll take your word as a challenge, Lee.

Lee Power (Equity Research Analyst of Building Materials and Steel)

Okay. Thank you very much.

Jack Truong (CEO)

Thanks, Lee.

Operator (participant)

Thank you, and there are no further questions at this time. I'll now hand back to Dr. Truong for closing remarks.

Jack Truong (CEO)

Thank you all very much for joining our call. You know, we are in the middle of really continuing to execute our global strategy as one global company to continue to deliver growth of our markets as a global company. And it's really great to see the progress that we have made so far. And I'd just like to take the opportunity to thank nearly five thousand employees of James Hardie around the world, who have worked very hard every day, despite the pandemic, to rebuild our business and make our business stronger as a result of it. And we're confident about what the future holds despite all the uncertainties.

But we see the growth opportunity ahead for us not only with the buoyancy in the housing market that we see right now, but also with the share gain that we are continuing to have and to earn, as well as the excitement that we have within our company on the innovations that we plan to roll out in fiscal year 2022. Again, thank you all very much, and have a great day.