James Hardie Industries - Q3 2023
February 13, 2023
Transcript
Operator (participant)
Thank you for standing by, welcome to the James Hardie third quarter fiscal year 2023 results briefing. Today's briefing is hosted by James Hardie CEO, Aaron Erter, and CFO, Jason Miele. After the briefing, we will open the lines to Q&A. I will remind participants to limit your questions to 1 plus a follow-up. After the Q&A, I'll turn it back to Mr. Erter for closing remarks. I would now like to hand the conference over to James Hardie CEO, Mr. Aaron Erter. Please go ahead.
Aaron Erter (CEO)
Thank you, operator. Good morning, and good evening to everyone. I'm Aaron Erter, CEO of James Hardie, and I would like to welcome all of you to our third quarter fiscal year 2023 briefing. Turning to page 2, you will see our standard cautionary note on forward-looking statements. Please note that the presentation today does contain forward-looking statements and the use of non-GAAP financial information. For today's call, our CFO, Jason Miele, will start by discussing our third quarter fiscal year 2023 financial results, and I will follow up with him on a strategic and operational update. We will then open it up for questions. While Jason will spend his time discussing our current fiscal year results, I will spend the majority of my time looking forward and explaining how we intend to continue to drive differentiated results into the future.
Before I hand it off to Jason, I would like to take this opportunity to thank all of our employees around the world who remain focused on safely delivering the highest quality products and services to our customer partners, despite the significant headwinds we are facing in all three of our operating regions. Our employees truly represent the very best in our industry, and I feel fortunate to work with them. With that, I will hand it off to Jason to discuss our third quarter financial results. Jason?
Jason Miele (CFO)
Thank you, Aaron. Let's start on page 5 to discuss our global results for the fiscal year 2023, third quarter, and year-to-date 9 months. In the third quarter, group net sales decreased 4% to $860.8 million. Global volume was down 11% due to the deceleration of the housing markets we participate around the world. However, in every region, our teams continued to deliver strong price mix growth, leading to group net sales down only 4%. In each region, our teams continued to drive strong product mix while executing strategic price increases, leading to price mix growth of 10% in North America, 6% in Asia Pac, and 14% in Europe.
In regards to earnings, global adjusted EBIT decreased 19% to $165.4 million, and global adjusted net income decreased 16% to $129.2 million. Every region's earnings continued to be negatively impacted by inflation. Nine-month year-to-date results were much stronger, buoyed by the stronger markets in the early months of the financial year. For the first nine months, global net sales increased 8% to $2.9 billion, and adjusted global net income increased 4% to $459.3 million. Both are records for the first nine months of the fiscal year. As you are aware, the housing markets we participate in have decelerated during our current fiscal year, and inflation continues to pressure margins.
For the full year of FY23, we are estimating inflation to be between a $160 million-$170 million headwind globally. As we adapt to the changing market conditions, and as Aaron will discuss further, we are making adjustments to our global workforce by balancing our manufacturing networks and reducing SG&A headcount. In total, we reduced our headcount by approximately 6% globally. We incurred restructuring costs of $6 million in the third quarter and will incur approximately $2.5 million in the fourth quarter. Globally, it has certainly been a challenging year with significant inflation and decelerating housing markets. Nonetheless, we are confident that the full year FY23 will produce a record for net sales with strong earnings and strong margins. Let's move to page 6 to discuss the North American results.
In the third quarter, North America net sales were flat at $645.4 million. Volume growth declined by 10%, which was fully offset by strong price mix growth of 10%. The strong price mix in the quarter was underpinned by ColorPlus volume growth of 18% in the third quarter. The volume decline of 10% was driven primarily by the rapidly decelerating single-family new construction market and also lower repair and remodel market activity. In the third quarter, the team delivered a robust bottom-line outcome with EBIT of $174.1 million at an EBIT margin of 27%. For the 9 months year-to-date, net sales increased 15%, driven by strong price mix growth of 13%, and EBIT increased 8% at 27.1% EBIT margin.
Let's move now to page 7 to discuss Asia Pacific results. Asia Pac's third quarter net sales were AUD 171.2 million, a decrease of 13%. The APAC business continued to drive high-value product penetration, leading to price mix growth of 6% in the quarter. The 19% decline in volumes was disappointing. It was primarily driven by continued market weakness in Australia and New Zealand, combined with inventory reductions from key customers in both countries. Third quarter EBIT was AUD 42.3 million, with a margin of 24.7%, driven by the volume decrease and inflationary pressures. Turning now to page 8, let's discuss the European results. The third quarter results in Europe remained very consistent with the first half.
Volume was down 10%, while the team drove strong price mix growth of 14%, leading to a net sales increase of 4% to EUR 101.2 million. Third quarter EBIT declined to EUR 1.5 million at an EBIT margin of 1.5%. The margin result was significantly lower than the first half EBIT margin of 7.4%, primarily due to restructuring actions taken in the third quarter. The restructuring charges led to a 350 basis point reduction in the Europe EBIT margin. Turning now to page 9 to discuss capital allocation and guidance. Starting with capital allocation, our framework we introduced in November remains unchanged. Our first focus is investing in organic growth. Second is maintaining a flexible balance sheet, and third is to deploy excess capital to shareholders via a share buyback.
Late in the third quarter, we began executing on the share buyback program, and during the quarter, we purchased 1.6 million shares for total consideration of $31.2 million. We intend to continue with the share buyback program when our trading window reopens. Regarding guidance, we have adjusted the fiscal year 2023 adjusted net income guidance range to $600 million-$620 million. We have lowered the guidance range for 4 primary reasons. 1, North American volumes in the second half will be lower than we expected 3 months ago. 2, APAC volumes will also be lower than previously expected. 3, persistent inflation. 4, the impact of restructuring charges in the second half.
Regarding North American volumes, in November, we stated we expected our second half volumes to be down 5%-8%. We now expect that figure to be down 11%-12%. This change was driven by the continued rapid deceleration of the U.S. housing market. In regards to APAC volumes, the underlying housing market continued to decelerate faster than we anticipated. There was significant channel destocking. Fiscal year 2023 was certainly a challenging year, with full year inflation estimated to be a headwind between $160 million-$170 million. Housing markets decelerating rapidly. That said, we expect full year fiscal year 2023 global net sales to be a record. Our adjusted net income to be the second highest ever achieved by James Hardie. I will now hand it back over to Aaron.
Aaron Erter (CEO)
Thank you, Jason. Jason just walked you through our fiscal year 2023 3rd quarter and year-to-date results. As such, I'm gonna spend most of my time discussing how we intend to drive differentiated results moving forward. In addition, I will provide you with a framework on how we intend to run our business as the markets and segments we participate in soften. Whatever challenges we face, it is our job to outperform the market while providing our customers solutions. That is what we have a history of doing and what we intend on doing moving forward, regardless of market conditions. With that, let's turn to page 11. Some key takeaways as we look at fiscal year 2023. First, significant inflation impacted our operations in all three of our regions. Second, we experienced a rapid and unexpected deceleration in the housing markets we participate in.
Third, our teams remained focused on what they can control, like bringing our customers the solutions they need and delivering strong execution of our strategy in a challenging environment. Let me briefly talk to each of these items. First, in regards to inflation, our current estimates are that for the full year, we will incur approximately $160 million-$170 million of inflation globally. That is not only a significant headwind to our financial results, but also a significant change from our expectations entering the year. You will remember that during our February 2022 results call, we stated our expectation for fiscal year 2023 was global inflation to be between $40 million-$60 million. We have been able to minimize this impact through pricing and productivity initiatives driven by the Hardie Manufacturing Operating System, or as we call it, HMOS.
Next, let's discuss the housing market segments we participate in, specifically our largest region, the United States. We have provided the growth expectations for calendar year 2022 for both single-family new construction and repair and remodel based upon a basket of market data. We have provided in the notes the methodology we use to arrive at these consensus figures. We discussed and forecasted on our last call, both of these market segments decelerated rapidly throughout calendar 2022 and were not in line with original market expectations. You can see just how quickly the single-family new construction segment decelerated. Back in December 2021, the consensus expectation was that single-family new construction segment would grow 6% in calendar 2022. By June 2022, the consensus was calling the segment to be down 1%. Ultimately, over the entire calendar year of 2022, single-family new construction starts decreased 11%.
It was truly a tale of two halves, with single-family starts seeing up 1% growth in the first half of calendar 2022 and decreasing negative 22% in the second half. You can see a similar story with the repair and remodel segment. Entering the year, consensus expectation was for R&R to be up 6%. Ultimately, the segment saw a decline of 1%. What this data clearly shows is that the rapid deceleration in the U.S. housing market was unexpected by the industry. A lot of factors drove this rapid market deceleration. They were outside of our control. I believe the James Hardie team responded quickly and have course-corrected with what is the new reality. When I look at our fiscal year 2023 through that lens, I view it as a quite strong year for our global team, despite these challenging conditions.
I think the team did a great job controlling what we could control and delivering solid results. Please turn to page 12, where I will take you through those results. The entire team is disappointed we have not achieved what we said we were gonna do in the beginning of fiscal year 2023. As I outlined on the prior page, I believe there were a lot of things outside of our control that impacted our financial results in fiscal year 2023. That said, I do believe the team executed strongly in the face of those significant challenges. When I reflect on our financial performance in fiscal year 2023, it is still a very strong set of financial results.
Globally, for the full year, fiscal year 2023, we expect our global net sales to be the highest ever achieved, our global volume to be our second highest ever achieved, our adjusted net income to be the second highest ever achieved, while delivering continued enterprise-wide productivity through HMOS. Regionally, for the full year, we expect every region to deliver its highest ever average net sales price and every region to deliver record net sales. Specific to our largest two regions, North America and APAC, we expect for the full year fiscal year 2023 to deliver EBIT margin in the middle of our long-term range of 25%-30%, despite the market and inflationary headwinds I mentioned earlier. There is a lot for us to build on as we look to the future.
Our team's ability to deliver strong results through the adversity of this year strengthens my confidence in our ability to meet the demands of the changing market and drive differentiated results moving forward. I'm excited to take you through the adjustments we are making to ensure we deliver on that. Let's turn to page 13. Simply put, we are managing quickly and decisively to accelerate our competitive advantages. We're focused on continued strong execution of our strategy, which starts with our nonnegotiable culture of zero harm, focusing on the customers and segments where we have the right to win, delivering solutions our customers want, strengthening our world-class manufacturing and supply chain networks, and marketing across the value chain and investing in our people. We are focused on driving profitable volume share gain as most of the housing markets we participate in slow.
We are effectively balancing our manufacturing network to ensure not only that we better match supply to demand, but through initiatives driven by HMOS, we do it at a lower cost per unit, and we ensure we are agile and ready to react to any market adjustments. We are optimizing SG&A for the current environment and reallocating resources to key areas and projects. We are continuing to invest in profitable growth. I like to quote a phrase from the great college basketball coach, John Wooden, that I often share with my team as we navigate through this challenging time. That is, "Be quick, but don't hurry." I believe this is what you have seen and will continue to see from us. We can be agile and adaptive to respond to significant changes in market conditions but are also thoughtful and focused on where we can accelerate our competitive advantages.
We have the right solutions that our customers are seeking. That will allow us to deliver differentiated results. Let's now move on to discuss each of these items in more detail, starting with driving profitable share gain on page 14. As we enter this period of decelerating housing markets, it is critical we remain aggressive and that we are driving profitable volume share gain in every region and segment we do business in. We are laser-focused on this and see this as a time of opportunity. I will discuss our focus in each region before diving deeper into some of the specifics regarding the North America new construction segment on the next page. Let's start with APAC. As we described in our investor day, we have a robust presence in all three of our APAC countries.
We will leverage this position to drive further penetration of these markets and segments. In Australia and New Zealand, we have a strong opportunity to continue to penetrate the modern look in both new construction and repair and remodel with our innovative products. The Hardie Architectural Collection is off to a strong start in Australia and New Zealand, comprising approximately 3% of our volume in fiscal year 2023 year to date. As our APAC President, John O'Neill, described in our investor day, the team is focused on influencing across the entire value chain, including homeowners, builders, contractors, and our customers, to ensure we are driving profitable share gain in both new construction and repair and remodel. In Europe, our new regional President, Christian Claus, and team have significant opportunity to drive profitable share gain across three key focus areas as we described in our investor day.
The first is we're gonna seek to penetrate the underfloor heating market, leveraging our innovative Therm25 fiber gypsum product. Second, we will penetrate the plank market using our fiber cement technology. Not only our existing lap plank products, but our innovative interlocking plank product, VL Plank. Third, we will penetrate the large multi-family panel market, leveraging our innovative Hardie Architectural Panels. As our North American Region President, Sean Gadd, described in our investor day, we plan to win in every segment in every region that we participate in in North America. We're gonna do that by providing the solutions that our customers need. That includes continued penetration and repair and remodel, with large opportunities in both the Midwest and Northeast.
We continue to drive strong growth of ColorPlus products and repair and remodel, as evidenced by our ColorPlus growth, 26% year to date in fiscal year 2023, after growing a strong 27% in fiscal year 2022. In addition, we're being opportunistic with our capacity to target segments and regions that we underserved over the past couple of years. Some examples would include the multi-family segment, our interiors product line, and the mountains region. Let's turn to page 15 to dive deeper into North America new construction and how we plan to continue to aggressively drive profitable share gain in that segment. As we have discussed many times in North America, approximately 65% of our volume is derived from the repair and remodel segment, and 35% is derived from the new construction segment.
As I mentioned earlier, thus far in fiscal year 2023, the new construction market has decelerated much more significantly than the repair and remodel segment. As I described in our second quarter call in November, the R&R segment is a less price-sensitive segment for us, and thus, the achievement of our January 1st price increase is complete. The single-family new construction segment is much more price sensitive, and thus, we need to make sure we are on our front foot in aggressively driving profitable share gains. It is in this segment where we must stay close to our customers to better understand their needs and bring them the premium products and services that enable us to grow together. We're focused on continually driving profitable share gain in this segment.
We can do it because we have the largest and most knowledgeable sales team in the category, and we have the team deployed, focused on winning share. We're staying close to our customers to better understand their needs and bring them the right solutions, products, and services. We're also leveraging our localized supply chain to deliver the right products to the right place at the right time. We recognize that in this decelerating marketplace, our big builder customers are experiencing volume and cost pressures, and we will continue to be aggressive with tactical pricing as needed to drive profitable share gain. On the right-hand side of the page, I have listed a few of the accomplishments achieved by our team over the past several months. First, I would like to talk about our traction with the top 25 production builders in North America.
As of this call, and ahead of the 2023 build season, I'm proud to say we have signed contracts with 24 of the top 25 production builders to make us their primary hard siding provider nationally for calendar year 2023. This is an increase from 23 of the top 25 last year. As I mentioned earlier, it is a highly competitive market, and over the last few months, we have seen some intense competitive dynamics. We have and will continue to be laser-focused on defending our position and aggressively pursuing new share gain opportunities. We have been successful in doing this in the current environment, and with our value proposition, we are in an ideal position to continue to do so.
When it comes to the big builder space, we have strong partnerships. We have never taken them for granted, and we work hard every day to earn their business by providing them the solutions and service they need. To that end, we relaunched SimPlank in select regions for our big builder partners. We believe that net of our wins and some minor losses, we have gained share within the single-family new construction segment entering the calendar 2023 new construction build season. We are focused on continuing to strengthen our key relationships and partnerships in this space. In fact, across our customer base and builder base, we have received 4 vendors of the year awards for calendar year 2022, and we'll do everything in our power to continue to serve our customers and our builders to the best of our ability.
We recognize that new construction is, and will continue to be a very competitive segment, but we believe we are well-positioned to address our customer needs with the solutions that they want and need. We will remain aggressive in gaining share by providing the best services and solutions in the industry while leveraging tactical pricing as appropriate. While I focused on discussing the single family new construction segment on this slide, I assure you that the broader team remains laser-focused on continuing our penetration of the repair and remodel segment as well, as evidenced by our ColorPlus growth of 26% year to date. In addition, the team is actively pursuing opportunities in other segments and regions that we underserved the past few years due to capacity constraints. We have a great team focused on the multifamily new construction segment and have reopened our internal quoting desk.
We expect multifamily to be an important segment this year. As per housing starts data, multifamily has been more robust than single family, with growth in calendar 2022 and projected to be down less than single family in calendar 2023. We're excited as our internal quoting desk currently has an all-time historically high number of multifamily jobs in our quoting queue. We are also refocusing on regions we underserved, such as the Mountain region. We are excited to continue to grow through our retail partners, where we sell both our exterior and interior products. When you consider the totality of our product and segment mix, we expect our net sales price to increase moving forward in North America, a topic I will discuss a bit further in a few slides.
We are laser-focused on driving profitable volume share gain in every segment, in every region we participate in. Please turn to page 16 to discuss how we are effectively balancing our manufacturing network across the globe. Our zero harm culture is nonnegotiable, and our team remains laser-focused on zero harm regardless of market conditions or changes we make to our manufacturing networks. When markets decelerate, it is imperative we lower capacity to better match market demand. This is a given. However, we also must position ourselves to be able to quickly ramp up when markets improve. While all suppliers flex their production, we believe it is an opportunity for outperformance, and we believe we can create differentiated results as follows. First, we are focused on delivering a lower cost per unit after we have made these capacity adjustments.
We believe we can do this by shifting production to our best-performing lines while continuing to drive HMOS performance improvements. My reference to lower cost per unit is performance-based and excludes future headwinds or tailwinds from inflation. Second, we learned a lot from past downturns, and we'll adjust our capacity in a manner that provides us the flexibility to ramp back up quickly and effectively when housing markets recover. On the last slide, I spoke about gaining share through the downturn, but it is also important we position ourselves to gain share as the housing markets return to growth. Third, we will continue to leverage our localized supply chains to minimize landed costs while ensuring timely delivery of our best-in-class products and solutions. In our third quarter of fiscal year 2023, we made adjustments to our manufacturing networks in all three regions.
We did this by reducing our shifts and changing shift patterns. We have not idled any lines nor shuttered any facilities. This is critical for enabling us to ramp back up quickly in the future when housing markets recover. We believe we will achieve a lower unit cost based on our adjustments while providing flexibility to ramp up as we see signs of housing market recovery. Our ability to flex our manufacturing network up and down while delivering high quality and low cost products is enabled by the HMOS discipline we have embedded globally over the past four years. This capability will enable us to drive share gain through the market downturns, while also enabling us to be in a position to drive share gain through the next cycle of market growth.
Let's shift to page 17 to discuss the adjustments we have made to SG&A. I wanna make it clear that we intend to continue to invest in profitable growth. The adjustments to SG&A were necessary but do not impede our ability to drive the outcomes we want. We reduced SG&A headcount in all three regions and at corporate. We did this to ensure our SG&A headcount better align with our strategic needs. In addition to the headcount reductions, we have lowered our discretionary SG&A spend in the second half of fiscal year 2023 compared to the first half. We are still investing significantly in strategic growth initiatives and believe we are entering fiscal year 2024 at the appropriate SG&A spend level. We will monitor it closely and apply a pedal and clutch approach to adjust as needed.
As you are aware, the largest portion of our discretionary spending within SG&A is marketing to our value chain participants. The adjustments we have made are to better balance our marketing investments across our various mediums and audiences with a focus on targeted conversions and share gain, while continuing to increase brand awareness. What I am excited about is that we continue to see great results from our marketing efforts, where we have seen an approximate 50% increase in leads year-to-date. As I noted at the beginning of this page, we will continue to strategically invest in growth initiatives, including adding the right talent and investing in marketing to all members of our value chain and adjust with the pedal and clutch approach. We will invest in the right SG&A initiatives at the right time to drive share gain through the market downturns. Now, let's move to page 18.
I discussed last quarter, we will not be providing guidance regarding fiscal year 2024 until May calendar year 2023. That said, I thought it was important that I share with you how we are managing our business, not only strategically, but what outcomes we expect to deliver. First, we plan to continue to deliver growth above market in every region. Second, as we move forward, we expect to achieve higher net price in every region. Third, as we make manufacturing network adjustments, we expect to do so while utilizing HMOS to deliver lower cost per unit on a performance basis. Fourth, we expect to manage our global SG&A spend in line with our current second half fiscal year 2023 levels. Lastly, we expect to maintain EBIT margins in North America and APAC above 25%.
This is how I expect our team to run the business. I think these targets are highly achievable. We expect to drive profitable volume share gain in all three regions while delivering strong financial returns. Finally, let's turn to page 19 to wrap up. Before I wrap up, I do wanna take this opportunity to again thank each of our 5,000 employees from around the world for their efforts in delivering the highest quality products and services to our customer partners in what remains a challenging operating environment. I am confident and excited about the future and what we will accomplish together as a team. As I shared with you all during Investor Day, we are a global growth company.
The same compelling tenets I shared then are the same that will allow us to accelerate our competitive advantages through this market downturn and enable us to come out a stronger James Hardie. We will continue to operate with a focus on zero harm and acting as a responsible corporate citizen. We have an experienced management team that is leading quickly and decisively. We have a strong balance sheet and strong cash generation to help see us through any market downturn. We have strong share gain opportunities across a variety of segments and regions, and we will be aggressive in pursuing them. We will leverage our integrated localized supply chain, strong customer partnerships, strong brand, and our premium products and services to maximize these opportunities, and we intend to deliver attractive returns throughout the market downturn. We remain homeowner-focused, customer and contractor-driven.
With that, I would like the operator to open the line up for questions.
Operator (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 two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Brook Campbell-Crawford with Barrenjoey. Please go ahead.
Brook Campbell-Crawford (Head of Cyclical Industrials Research and Director of Research - Equity)
Morning. Thanks for taking my question. Just one on guidance for FY 2023, the implied fourth quarter NPATs about $150 million, which is a step up from $129 in the third quarter. Can you just step through the drivers of the sequential pickup in NPAT quarter-on-quarter from 3Q to 4Q, please?
Aaron Erter (CEO)
Yeah, Brooke, thanks for the question. Start with price increases. Second would be the expectation that volumes are roughly in line in most regions to Q3. The expectation was better landed cost through HMOS, and some inflation decreases in our input costs would be, and then the lack of a restructuring charge would be the items walking from the Q3 net income, which I think is where you're starting from.
Brook Campbell-Crawford (Head of Cyclical Industrials Research and Director of Research - Equity)
Thanks. What's the fourth quarter North America EBIT margin expectations?
Jason Miele (CFO)
Sorry, not on slide 18. We expect to drive the EBIT margin upward in Q4 based on higher net price and lower landed costs.
Brook Campbell-Crawford (Head of Cyclical Industrials Research and Director of Research - Equity)
Okay, thank you.
Operator (participant)
Your next question comes from Keith Chau with MST Marquee. Please go ahead.
Keith Chau (Senior Basic Industrials Analyst)
Good morning, everyone. Thanks for taking my questions. Just one on price, mix. I guess the commentary suggests that prices are going up, but obviously with, you know, market share gains and new segments, there's a chance that mix is impacted. If you look at the price mix number, between 2Q and 3Q, there was a very slight decline quarter-on-quarter, but that might just be quarterly variability. Aaron, can you help us understand where you think the outcome overall will be for price mix in the context of price increases still coming through? Is there an expectation of mix to revert back to historical levels, at least to an extent? If you can help, step us through that would be much appreciated. Thank you.
Aaron Erter (CEO)
Yeah. Thanks for the question, Keith. I think part of this is the price increase that we will realize in Q4. I'll have Jason walk you through the steps to this. Jason, why don't you go ahead?
Jason Miele (CFO)
Keith Chau, we're still obviously focused on winning in the same markets, winning in every market, every segment. There'll certainly be mix impacts. Our focus is that, as Aaron Erter described on page 18, in every region, we expect net of all those movements, net price to increase year on year. Certainly, as we went through the presentation, Aaron Erter described, you know, the competitive nature of single-family new construction. We're doing really well in multifamily. You know, we have an opportunity to better serve interiors than we did during the past couple of years. There'll be quite a few different mix impacts that occur, but net of all that and our price increase, we expect to drive a higher net price year on year.
As we give formal guidance in May, we can unpack that a bit more. That's what we see moving forward.
Keith Chau (Senior Basic Industrials Analyst)
Thank you.
Operator (participant)
Your next question comes from Andrew Scott with Morgan Stanley. Please go ahead.
Andrew Scott (Head of Industrials Research)
Thank you. Morning. Aaron, this follows on nicely from Keith's question. I noted you commented on the relaunch of SimPlank. Obviously, that's a pretty important strategic decision. Can you talk about the parameters you're putting around that and how far that extends?
Aaron Erter (CEO)
Hey, Andrew. Thanks for the question. Look, you know, we talked about before, you know, bringing solutions to our customers, understanding their needs. Obviously, particularly if we look at, you know, our big builders, they're becoming more and more price conscious. It's becoming more competitive out there. SimPlank is an asset that we have in our arsenal that we brought back. On this call, I'd rather not go into the specifics for, you know, commercial sensitivity reasons. You know, as I mentioned before and Jason did, you know, I'm really confident we're gonna drive a higher net sales price as we move forward. Again, we're gonna continue to partner with our new construction building partners to ensure they have the right solutions, that allows them and us to be successful together.
Andrew Scott (Head of Industrials Research)
Okay, thank you. Jason, just interested in the cost environment. Obviously we've seen transport come away. Your expectations on when we might see some bottom line improvement, whether it's just cycling the cost comps from a year ago or where you're seeing some of those leading indicators pointing to some relief.
Jason Miele (CFO)
Andrew, we continue to see inflation be pretty stubborn into Q3. We would expect as we move into Q4 and onward to deliver a lower landed cost as we shift production to more efficient lines as Aaron's discussed. We have seen some improvement in freight. While inflation is stubborn and prices are high, we have seen the other basket of goods start to flatten. We'd expect to start to not seeing landed cost impacted as much as it has been the first three quarters of this year.
Aaron Erter (CEO)
Hey, Andrew, I'll just add on to that. Jason mentioned the high level of inflation that we saw this year, you know, unexpected almost 3 times the amount. As we move forward, it's our responsibility to offset those. Whether that be price mix, a combination of both of those, and our HMOS, you know, we're gonna work hard to make sure we're offsetting any type of inflation that comes across us.
Andrew Scott (Head of Industrials Research)
Got it. Appreciate that. Thank you.
Thanks, Andrew.
Operator (participant)
Your next question comes from Lisa Huynh with J.P. Morgan. Please go ahead.
Lisa Huynh (Investment Analyst)
Hi. Morning, guys. You know, in the context of North American volumes being off 10% in the third quarter, can you just give us an indication of how sharply R&R was off relative to new construction?
Aaron Erter (CEO)
Yeah. Hey, hey, Lisa. Thanks for the question here. You know, if we look at our expectations for North America, you know, R&R remained a little stronger than single family new construction, but we did see that dive into negative territory for us over the last quarter.
Harry Saunders (Associate Director of Research)
Yeah, Lisa, on the call, Aaron referenced a basket of providers we use to measure the different markets, that same group is signaling R&R in calendar year 2023 to be down 6%-7%. Obviously, you know, our fourth quarter would be a part of that year. While we thought last quarter we were signaling kind of flattish R&R activity, it's certainly our second half down in the low single digits.
Lisa Huynh (Investment Analyst)
Okay, sure. I guess, you know, in the context of that, you did highlight as well the competitive market environment out there. Can you just make a comment about market share at PDG or, you know, how you're seeing competition in the scheme of things?
Aaron Erter (CEO)
Yeah. Look, we have a lot of good competitors out there. I would say two of our best are vinyl substrate and wood substrate. If you remember, Lisa, I mean, you know, 65% of our business is repair and remodel, 35% new construction. You know, R&R is less sensitive, as we just talked about. New construction is much more price sensitive and thus, you know, a much more competitive market at the moment. We're prepared for that. You know, we talked about some of the things that we're doing out there. We talked about bringing SimPlank back. You know, some of the other things is, you know, we have the largest and most knowledgeable sales team in the category, right? They're focused on bringing solutions to our customers.
We're staying really close to our customers to better understand their needs. We talked about it on the call, but we're really proud of the fact that if you look at the top 25 production builders in North America, we've signed 24 of them, and for us to be their primary hard siding provider nationally. We had 23 last year. We continue, we believe, to gain share, not only in R&R, but also in this space as well. Offline, we can go through that calculation with you if you're interested.
Lisa Huynh (Investment Analyst)
Okay, sure. Thanks. Yeah, we might take that offline, but I'll leave it there. Thanks.
Aaron Erter (CEO)
Sure.
Operator (participant)
The next question comes from Simon Thackray with Jefferies. Please go ahead.
Simon Thackray (Managing Director and Senior Equities Analyst)
Thanks very much. Hi, Aaron. Hi, Jason. Aaron, just wanna drill into for a point of clarification on slide 18, you've got EBIT margins 25%+. You referenced in your pre-prepared remarks long-term North American margins of 25%-30%. Just wanna understand whether that 25%+ applies. You said you want the team to deliver that. That applies from where we are going forward and to really feel how your confidence is built around that long-term 25%-30%, how much of it is cost versus how much is price mix? Thank you.
Aaron Erter (CEO)
Simon, you know, good question. Thank you. What I went through the, on slide 18 today is really, you know, I was trying to describe the framework of how I'm gonna lead this team and how our executive leadership team will lead the business moving forward. I wanted to provide some clarity on how I plan to operate and, you know, the outcomes that we expect. I believe a margin above 25% is highly achievable moving forward. I believe that, you know, that's achievable based on our pricing position, our superior value proposition. It's not something that we're forcing, because share gain is my number one priority.
That said, you know, as I've looked at this and a lot of the volume scenarios for the next 18 months, I really believe we can operate above 25% while still investing, you know, and driving growth as well.
Simon Thackray (Managing Director and Senior Equities Analyst)
Thanks, Aaron. That's very helpful. Jason, could I just roll back to you for a comment you made about APAC, decelerating quickly? Just specifically which geographies, and are you seeing that in the order book?
Jason Miele (CFO)
Yeah, Simon, in Australia and New Zealand, we've certainly seen channel destocking and then market activity lower than what we would have entered the year expecting. The change in market activity from where we were entering the year in Australia to where we believe we'll exit is probably about 8% change, which is quite significant. You know, as we talk to everyone in the channel, that just wasn't something that people saw coming in as late as September. Aaron might add some commentary around that, but we've definitely seen the markets in Australia, New Zealand slow quickly, including some channel destocking, which is impacting the third quarter and the fourth quarter.
Aaron Erter (CEO)
Yeah. Hey, Simon, I'll just add to that. You know, being here when I first began in the September timeframe and sitting with some of our largest customers, you know, as we look forward, the outlook was pretty positive. You know, as we look now as Jason talked about with rapidly rising rates, you know, home prices, not having the affordability, you know, we see some challenges with the business moving forward in Australia and in New Zealand.
Simon Thackray (Managing Director and Senior Equities Analyst)
All right. Thanks, gentlemen.
Aaron Erter (CEO)
Sure.
Operator (participant)
Your next question comes from Samuel Seow with Citi. Please go ahead.
Samuel Seow (Analyst)
Morning, guys. Thanks for taking my question. Just wanna kinda go back to November. I guess that was halfway through the quarter where you talked about single digit volume declines. We asked, I guess, multiple times on the call about margins, which you said potentially were gonna be towards the higher end of range. Assuming that's what you were seeing at the time, does that imply the exit rate for margins were close to, you know, kinda 25% to make that math stack up? I guess that split of the margin decline, could you perhaps, you know, talk us through what was kind of the fixed cost deleverage and input cost?
Jason Miele (CFO)
Yeah, Sam. Thanks for the question. Comes down to volume certainly. You know, volume, we had our expectations we talked about on the call, R&R being flat the back half of our year, market activity, new construction down 30. You fast-forward to today, new construction starts are, were -26 in Q3 and decelerating pretty quickly.
Peter Wilson (Director of Equity Research)
We'd expect that number to be higher in Q4, our Q4. You know, as I mentioned earlier, providers of the R&R data we get signaling, this calendar year 2023 being down 6 or 7 points in R&R. We certainly saw R&R fall quicker than we expected in November. The margin is primarily volume driven. Our expectations, you're right, we were talking to early November. You know, we comped a positive October. We knew that it was starting to decelerate, obviously the deceleration was faster than we expected at that point in time.
Harry Saunders (Associate Director of Research)
Okay, cool. I guess also back then you talked about the unusual building practices. I guess, you know, this result probably shows there's a difference between Hardies and home builder completion correlation. I just wanted to check if those practices are still around, and I guess when you would expect that correlation between your volumes and completions to kind of show up again?
Aaron Erter (CEO)
Yeah. Hey, Sam, a great question. Look, just being out in the field quite a bit in North America, you know, I was in the Metro D.C. area and then Texas as well. We do see some of that still. You know, it's not as widespread. You know, thanks for the question. I think it provides me an opportunity to really clarify, you know, something I think might have been misconstrued on the last call. You know, we saw some of this phenomenon in some regions, you know, where the product was going on, it, you know, first or before other historical practices. You know, we noted that we saw instances where our siding was going on new construction before roofing or windows, like you said.
You know, we said this caught us by surprise, and it did. Essentially builders and new construction were consuming our product first because we were a manufacturer who was able to keep up with the demand. Thus, compared to suppliers who were on long backlogs, we were feeling the downturn in new construction ahead of those manufacturers whose products were on backorder. You know, I just wanna make it clear, our explanation last quarter, it was not intended as a reason for why our volumes were declining, but really, you know, rather a reason why it was happening sooner than we originally thought. We still see it.
I still have pictures on my phone because I've seen it in person, but I would say as the supply chain has caught up, it's not as widely spread, as we once saw it. Thanks for the question.
Harry Saunders (Associate Director of Research)
Okay, thank you.
Operator (participant)
Your next question comes from Niraj Shah with Goldman Sachs. Please go ahead.
Niraj Shah (Analyst)
Hi, good morning, guys. hoping you hear me. just one for me. How are you thinking about, I guess, the multiyear CapEx spend program in light of some pretty quickly changing dynamics on the ground?
Aaron Erter (CEO)
Yeah. Hey, Niraj. Thanks for the question. You know, just to really restate, you know, our expectations, you know, and me being new, I continue to review all our CapEx projects, right? You know, want updated assumptions, you know, as the market is ever changing. You know, at a high level, we still expect to spend, you know, around $1.5 billion. I think probably what you're gonna see is, you know, instead of that spread out over three years, it might be a more extended time period here for us, as you can appreciate.
Niraj Shah (Analyst)
Makes sense. Thanks.
Operator (participant)
The next question comes from Peter Wilson with Credit Suisse. Please go ahead.
Peter Wilson (Director of Equity Research)
Hey, good morning. Good evening. Just a question on gross margin. North America gross margin for the quarter was down 190 basis points. Just interested in the context of, you know, the strong price mix, high value product mix. Aaron, you mentioned earlier that inflation for the group was $160 million-$170 million for the full year. That's, you know, $120 million higher in respect to the start of the year. That should be more or less taken care of by the June price increase, I would've said, like 4%, is about equivalent to that. Just wondering why gross margins continued to decrease in the quarter even after that extraordinary June price increase and well, and in the context of your high value product mix.
Aaron Erter (CEO)
Yeah, Peter, great question. You know, just, you know, being completely transparent, even though we've done a great job from pricing as of late, you know, the team's been able to go out and utilize our strong value proposition to get price. As I look over the year, and hindsight is always 20/20, we should've had probably 2 more price increases, or the earlier price increases should have been greater than what they were. That's really the gap that you're seeing right now.
Peter Wilson (Director of Equity Research)
Okay. Just a quick one on SG&A. The changes made, do they come through in the third quarter, or is that further decreases to come in the fourth quarter and beyond? Yeah, Peter. You'll start feeling it completely in Q4, and we also had the restructuring charges above the line this quarter. It'll be Q4 will be favorable to Q3.
Harry Saunders (Associate Director of Research)
Okay, good. Thank you.
Operator (participant)
Your next question comes from Harry Saunders with Evans & Partners. Please go ahead.
Harry Saunders (Associate Director of Research)
Hi, guys. Thanks for taking my questions. Just firstly, I think you were alluding to multifamily outlook for 2023 being better than single family. Given, you know, the improved outlook being provided by U.S. home builders, I'm just wondering if you could give some color on your expectations for single family new construction in calendar 2023.
Aaron Erter (CEO)
Yeah. Hey, Harry, I think it's all relative, right? When we're looking for pockets of hope out here, right? You know, multifamily is exciting because it hasn't been an area that we've really attacked much because, you know, capacity constraints, and we are going after it. You know, we're seeing in our queue with leads more than we ever have in multifamily. What I will say, you know, as we look forward, single family, is expected to be down 17. Multifamily is supposed to, is expected to be down 14 by the data we look at. Not as severe as single family. But, you know, as we look forward, we think it's a huge opportunity for us in an area where we really have the right to win.
You know, what I'm excited about is we've opened up the multifamily desk. We're seeing a tremendous response as it relates to leads that are in our queue.
Jason Miele (CFO)
One thing I would add, Harry, is, I think as Aaron was mentioning on the call, the thing you were referring to is in calendar year 2022, multifamily was up 14% in starts, where, whereas single family was down 11, so you're starting from a better base in moving forward. Yeah, we're excited about the multifamily opportunity.
Harry Saunders (Associate Director of Research)
Great. Thank you. Just 1 follow-up. If we could just move over to price. You know, you talked about price mix growth year-over-year, but I'm just wondering, with price increase in January and then the mix impacts we could expect, should we be expecting sort of 4th quarter sequential price mix growth?
Jason Miele (CFO)
sorry, Harry, are you saying fourth quarter versus third quarter?
Harry Saunders (Associate Director of Research)
Yeah. Yeah. Sequentially.
Jason Miele (CFO)
Yes. Yeah. We took our price increase on January first, so we'll achieve some of that, if not all of that, in Q1. Sorry, our Q4. We do expect as Aaron mentioned on page 18, net price per unit increasing going forward.
Operator (participant)
Your next question comes from Anderson Chow with Jarden Group Australia. Please go ahead.
Anderson Chow (Head of Industrials Research)
Oh, yeah. Thank you. Good evening and good morning. I just have a question away from the results for a moment. There has been a few additional senior management roles appointed. I just wanna know a little bit more about Mr. Joel Wasserman. He is gonna run the corporate communication and global brand management. What is the focus on the brand management and how involved would he be with the regional sales team?
Aaron Erter (CEO)
Hey, Anderson, thanks for the question. We always like to talk about our people. We have made a few changes here and Joel is gonna lead, you know, corporate communications and global branding. The corporate communication spot is new for our company. We've never had before. We think that's an important and critical function as we move forward. Global branding is really when you think about, you know, a lot of the investments we're making in the James Hardie brand is to ensure that we're projecting and displaying the brand the right way across all the regions. To your point, Joel is gonna work very closely with the regional marketing leads to ensure we do this.
You know, Joel is someone that I've worked with before in my past, at Valspar and at Sherwin-Williams, and he has a really extensive background. I know you didn't ask about it, but, you know, I'll just throw 2 more in there. You know, Tim Beastrom is our new general counsel, so we're excited to have Tim. Tim also had worked with me in the past. Most recently, he was at Ecolab. Tim's gonna be a great addition to our team. You know, having a CHRO, a strong CHRO is really critical to our business moving forward. Farhaj Majeed is gonna join us, and his first day is gonna be next week. We brought Farhad over from Whirlpool, where he was the sitting CHRO for the EMEA region over there.
We're really excited about these, you know, three new additions to our ELT team.
Anderson Chow (Head of Industrials Research)
Thank you.
Operator (participant)
Your next question comes from Daniel Kang with CLSA. Please go ahead.
Daniel Kang (Research Analyst)
Good morning, everyone. I'm just interested in your comment on driving a higher net sales price. If I look at slide 23 of your pack, it looks like net sales price slipped in 3Q for North America and flattened in APAC. Just trying to reconcile how you expect to grow net sales price given the relaunch of SimPlank and I guess a tougher market where arguably you'd have to grant rebates.
Jason Miele (CFO)
Sorry, Daniel. Thanks for the question, Daniel. Q3 versus Q2. Our last price increase was in July. We achieved that in the second quarter. We got a price increase on January 1st that we've put through. As Aaron talked about on the call, 65% of what we do is R&R, not price insensitive, I should say. We'll achieve that in the R&R segment. Then you shift to the smaller portion of our business, the 35%. You know, Aaron went through all the things you just talked about. You know, relaunching SimPlank on a limited basis, et cetera. There'll be some mix factors there.
It's also the expectation that new construction decreases more significantly than R&R, so you should get a, you know, a mixed benefit from that. There's a lot of moving pieces this quarter or, sorry, moving into next year. Net, net, you know, we think you take all those things together with the price increase, we're gonna drive a higher net price in.
Shaurya Visen (Equity Research Analyst)
Moving forward.
Aaron Erter (CEO)
Yeah. Hey, Daniel, I'll just add, you know, to what Jason said, we intend to do this. You know, this is all after discounting as well.
Daniel Kang (Research Analyst)
Got it. Okay. I guess one of the key highlights, remains that ColorPlus Technology volume continues to perform very well. It has slipped a little bit, but what's your outlook, you know, going forward for that sort of, range for ColorPlus Technology volume?
Aaron Erter (CEO)
Yeah. Look, Daniel, it's a great question. I mean, I think the performance has been just outstanding, right? You know, as you look at, you know, I think it's over the last six quarters, we've grown this about 30%. Most recently we grew at 18%. You have to remember, this is a big focus area for us. When we think about our marketing efforts and, you know, where we're targeting really, you know, very good R&R markets like the Midwest and the Mid-Atlantic and the Northeast out there, we expect to continue to grow this, you know, at double digit rates out there and above the market. It is a high focus and we expect to continue to deliver those types of results.
Operator (participant)
Your next question comes from David Pace with Greencape Capital. Please go ahead.
David Pace (Former Co-Founder)
Hi guys. I know it's early days, but some of the calls I've done with some home builders of late have spoken about a response to a lowering of the 30-year mortgage rate just in terms of foot traffic, reduction in cancellation rates, slight improvement in sales. Again, I guess referring back to the earlier question regarding the lag between activity at the housing level and you guys actually selling board. Can you make reference to, first of all, any of those? Are you getting any of those sorts of signals from the home building companies? Secondly, you know, readdress that lag question for us?
Aaron Erter (CEO)
Yeah. Hey, hey David. You know, I know there have been a few positive comments out there, you know, from some of the recent, you know, from some of the big builders on results calls. you know, just to ground things and I hope they're right? I would be cautious there with some of these comments. you know, if we look at, you know, some of the data providers that we utilize out there, the projection we have for 2023 is for single-family new construction to still be down, you know, call it 17%.
You know, even though there was some positive comments around foot traffic, of the 12 publicly traded big builders who released earnings in the past few weeks, to my knowledge, you know, only four of them provided guidance for orders for their next quarter.
David Pace (Former Co-Founder)
Mm.
Aaron Erter (CEO)
That guidance, Jason check me here if I remember, was for orders to be down 18%, 20%, 50%, and 60% respectively.
David Pace (Former Co-Founder)
Yeah.
Aaron Erter (CEO)
Not trying to be negative, just realistic.
David Pace (Former Co-Founder)
Sure.
Aaron Erter (CEO)
You know, I think we need to be balanced here. For the most part, I mean, the fundamentals are still there in that we have a affordability issue with housing, you know, that may take some time for the markets to fully adjust to. As I said before, I mean, I keep saying this to the team over and over, we're gonna focus on what we can control, you know, and we'll win in the markets we participate in. You know, those things we can't control.
David Pace (Former Co-Founder)
With R&R continuing to outperform new construction, is 65/35 still a fair representation?
Aaron Erter (CEO)
Yeah, it's a really good question, David. I would say for now, yes. You know, it's something we're keeping our eyes on. It's a really good question. Yes, I would say for the foreseeable future.
David Pace (Former Co-Founder)
Okay. Thank you.
Aaron Erter (CEO)
Thanks.
Operator (participant)
Your next question comes from Paul Quinn with RBC. Please go ahead.
Paul Quinn (Managing Director in Paper and Forest Products Analyst)
Thanks very much. A question about your balancing the manufacturing footprint. Why reduce shifts across the network as opposed to shut one specific facility and lower the overall cost?
Aaron Erter (CEO)
Yeah. Hey, Paul, great question, and I'll have Jason jump in here because he's very experienced and has lived through this. You know, as we analyze, you know, what to do with the, with the team, one of the things that we at James Hardie always wanna be is long on capacity, you know, to make sure we're servicing our customers. When you take a whole plant down, it takes a considerable amount of time to get it up and running. You know, we wanna be there and be responsive to meet our customers' needs and be able to, you know, fulfill the demand that they have out there. It is a little bit of an investment for us, but we think the right one to make.
Paul Quinn (Managing Director in Paper and Forest Products Analyst)
All right.
Operator (participant)
Your next question comes from Shaurya Visen with Bank of America. Please go ahead.
Shaurya Visen (Equity Research Analyst)
Hi, Aaron and Jason. Thank you for taking my question. Can I circle back on pricing, please? I'm curious, have you seen any pushback on pricing from the builders? I ask that because we're increasingly hearing from some building product categories, right? Like roofing and solar come to mind. They're seeing a pushback on pricing from the builders. I'm just curious, just especially given that both these categories are also highly skewed towards R&R. Just wanted to get your thoughts on any pushback on pricing from builders. Thank you.
Aaron Erter (CEO)
As you can imagine in this really competitive time, when, you know, the big builders are seeing volumes down, certainly they are price sensitive. As I mentioned before, one of the things that we try to do, you know, by having the largest sales team out there who are, you know, hand in hand with our customers, is understanding the solutions that we can bring, you know, to our customer base, whether that be an R&R or a single-family new construction. We are utilizing tactical pricing where we need to, and we are bringing in, you know, lower cost alternatives like SimPlank where it makes sense. I would say, you know, we're adjusting and working with our customers to help them drive their business in this time.
Peter Steyn (Managing Director)
Thank you. Just a quick one specifically on just the mix by exterior and interior products. Could you just give us a sense of where that number is right now? Is it like still 90/10?
Aaron Erter (CEO)
Yes.
Peter Steyn (Managing Director)
How did the growth look like during through the quarter?
Aaron Erter (CEO)
Yeah. Shaura, I didn't get your second question, but you hit the nail on the head. It is a 90/10 exterior/interior mix, roughly. I'm sorry, what was your other question?
Peter Steyn (Managing Director)
What was the growth rate like in the third quarter, on those two categories?
Jason Miele (CFO)
They were both right around minus 10, so they were pretty consistent.
Peter Steyn (Managing Director)
Okay. Thank you.
Operator (participant)
Your next question comes from Lee Power with UBS. Please go ahead.
Lee Power (Equity Research Analyst)
Hi, Aaron. Hi, Jason. Can you just talk a little bit about inventory levels in the channel? Like, where do you think they sit now? Particularly just thoughts around risk of further destocking, given your kind of, your outlook commentary.
Aaron Erter (CEO)
Lee. Hey, thanks for the question. It really does vary by customer by customer. you know, and certainly, you know, we're seeing some customers still trying to get their inventory levels lower with the lower demand out there. I would say in general, just in building products and some of the, you know, products that are, I guess, adjacent to us, we're still seeing, you know, some pretty robust inventories. I would say with our customers, our James Hardie customers, they're in a better place with our products. I don't wanna give a exact, you know, number of days, but I would say that, you know, they're in a pretty good place, you know, at this point in time.
Lee Power (Equity Research Analyst)
Okay. Thanks. I mean, if we think about CapEx for capacity expansion, like the management pack still has that $1.6 billion-$1.8 billion number in there. I think you talked to $1.5 billion, and particularly and potentially stretching out the spend. It's still coming. It seems from when I piece that together with your comments just around margin, that you're continuing to preference share over margin. Like, given your kind of market outlook, like what do you think is an appropriate share growth number that we should actually be putting in, given that preference for share?
Maybe if you're not willing to give a range, like, do you think share growth will be kind of above the five-year average, or is there something else going on that despite you adding capacity and potentially being margins at a lower end, that you're not going to get the level of share growth that we've kind of been accustomed to over the last, you know, five years?
Aaron Erter (CEO)
Yeah. Hey, Lee, I look forward to talking to you about that in May, 'cause we'll that'll be some guidance. I will say this, I'll give you this nugget. The expectation is we're gonna grow above the markets we participate in.
Lee Power (Equity Research Analyst)
Okay. Cool. Excellent. Appreciate the color. Thank you.
Aaron Erter (CEO)
Thank you.
Operator (participant)
Your next question comes from Peter Steyn with Macquarie. Please go ahead.
Peter Steyn (Managing Director)
Hi, Aaron and Jason. Thanks very much for your time. Aaron, just a quick question in relation to some of the conversation about margins and how you lay that up against your LTIs for both North America and APAC at that 27%-32% range. Obviously, that's a forward-looking view, how do you contrast your conversation today around margins versus those targets?
Aaron Erter (CEO)
Yeah. Hey, Peter. As you can appreciate, I wasn't around when, you know, those LTI goals were set. You know, as we think of, you know, the changes in the market, they've been changing dramatically. You know, as I look moving forward, you know, I gotta give that some consideration. You know, as far as the LTI targets right now, I wasn't here when those were set. You know, they're something that we have to live with. As we look forward, I mean, it's certainly something that I'll look at.
Jason Miele (CFO)
Yeah. Peter, I guess I'll just add, I was obviously part of, you know, the board sets those, but they obviously relied on our data, et cetera. You know, at the time we set those, you know, it was prior to the year starting and the expectations around the markets. As Aaron walked through earlier in the deck, you know, we didn't see the downturn as significant as it is. Now, you know, Aaron's laid out the framework of how we'll run the business with margins above 25. You know, STIs are set at a point in time or LTIs are set in a point in time, and now you got a market that's decelerated, you know, over 10% since that time. We'll have to adjust and run the business accordingly.
Peter Steyn (Managing Director)
Sure. No worries. Thanks, gents. Appreciate it.
Aaron Erter (CEO)
Cheers. Thanks, Peter.
Jason Miele (CFO)
Thanks, Peter.
Operator (participant)
That is all the time we have for questions today. I will now hand the conference back to Mr. Erter for closing remarks.
Aaron Erter (CEO)
Yeah. Hey, just I wanna thank you all for joining the call. I would like to end reiterating what I said earlier on the call. You know, whatever challenges we face, it's our job to outperform the market while providing our customers solutions. That's what we have a history of doing and what we intend on doing moving forward, regardless of market conditions. I'm proud of the team. I think we are managing decisively and aggressively. Hopefully you've heard here we're laser focused on driving profitable share gain in every region while delivering strong financial returns. Thank you very much.
Operator (participant)
That does conclude our conference for today. Thank you for participating. You may now disconnect.