Good morning, everyone, and thank you for joining us for the Q2 Fiscal Year 2020 Earnings Conference Call. I will start with key business and operational highlights on our second quarter performance; Jason Miele, our Head of Investor Relations will then cover the financial details for the quarter. Afterwards, I will come back to update you on where we are relative to the execution of our three-year global strategic plan. As our interim CFO, Anne Lloyd, has only been in role for about 8 weeks, I had asked Jason to present with me today based on his extensive experience in finance and Investor Relations at James Hardie. Regarding the CFO position, I will make a few comments now and will not be taking questions on this topic during Q&A. As you are aware, Anne Lloyd is currently functioning as our Interim CFO, and she will continue in role until we find a permanent CFO. She had served previously as a CFO of Martin Marietta. She also served currently as a member of James Hardie Board of Directors. Anne had done an excellent job running and jumping right in as adding value to our executive team as well as to the global finance organization. I'm pleased to have this transition progressing, and we're actively recruiting. And I would anticipate we'll hire a permanent CFO in early next year. Now let's talk about our results. The global James Hardie team executed well and delivered a very strong operational performance this past quarter. We delivered positive growth, in both net sales and EBIT in all 3 regions that we operate in: North America, Asia Pacific and Europe. I would like to put our second quarter results in a context of our 3-year global strategic plan. We are an organic growth company. We've built…

Thank you, Jack, and good morning, everyone. We will start with the group results on Slide 13. You could see a strong financial performance for the quarter and the half year for the group. At the top line, straight down through to the profit metrics. We'll start with the top line. Net sales were up 2% for the quarter, as well as for the half year compared to the prior corresponding periods. That was really driven by 2 two things: growth above market and volume for all three of our segments, so North America, Asia PAC and Europe delivering growth above their markets; as well as a higher net price in all three regions as well in local currency. Moving down to the profit metrics. Gross profit was up 16% for the quarter and up 11% for the half year. Adjusted EBIT of $134.2 million was up 26% for the quarter, and it was up 21% for the half year. Finally, adjusted net operating profit of $98.6 million for the quarter. That's a record high for any quarter at James Hardie. For the group, that was up 22% for the second quarter compared to the same period last year. And a solid result for the half year as well, up 17%. Finally, operating cash flow is up 37% at $251.8 million. A pretty simple story there, driven by the strong performance of all 3 segments in the operating cash they're generating. Moving on to North America, as Jack said, a strong top line result in sales volume, up 5% for the quarter and up 4% for the 6 months, driven by strong exterior volumes. PDG is on track. Exteriors volume, plus 6% for the quarter and plus 5% for the first half. And as Jack mentioned, that's on a underlying…

So now I'd just like to give you a quick update on where we are relative to our 3-year strategic plan that we shared with you back, about 9 months ago. Just to remind you that we, for this, here are the key metrics of our long-term value creation. For North America, it's about having the 35/90 goal with strong returns. And that's roughly 6% PDG and an EBIT return of 20% to 25%. And in Europe, it's all about creating the €1 billion business, with 20-plus percent EBIT margin in about 10 years. And for APAC, it's deliver growth of our market with strong returns with a 20% to 25% EBIT margin. So here are the key strategic priorities that we've set out as a goal for our organization, our global teams around the world. So how about in North America? We accelerate the exterior growth. And what that means is that we are, we will develop, market and sell the full Hardie solution for exteriors, the HardiePlanks, HardiePanels, HardieSoffit, HardieTrim and all, HardieShingles, everything about fiber cement that provide a total exterior wrap for home construction as well as R&R. Second is about leverage on the fact that we are the world's largest fiber cement producer. And also in North America, we have a very large scale. And it is now about having all of our 10 plants running the same Hardie Manufacturing Operating System to really take advantage of our scale and capability. And third is really about make interior business a growth business again. And so these are the 3 strategic priorities that drive a lot of the key plans and then the execution for our business in North America. Europe, it's really all about gaining market traction for fiber cement and that means that we're…

Peter Steyn from Macquarie. Jack, just came to get a bit of an understanding of what happened in the North American, particularly the plant performance and essentially your input cost delta there, 270 basis points of improvement. Could you give us a sense of what freight contributed to that relative to plant performance? Just want to try to get an understanding of what's cyclical and what's potentially structural.

So we've, if you look at our operational, the operational performance, we, so we have lean savings, we have freight savings and those, and they will offset with the overall raw material headwinds in the quarter. So we take all 3 together, I would say about 50% of that is due to lean and about 40% is due to freight, and then the rest are materials, I'm sorry, 50%, 30%, 20%.

Perfect. And then perhaps, just a shout-out on Asia PAC, a really strong performance particularly from a volume perspective. You've pointed to Philippines doing reasonably well. But you're, what, from an underlying point of view, is driving the very strong performance from an execution perspective in volume, in particular, in that business?

It's really driven primarily with the, and yes, we have very, very good volume performance in the Philippines. And we also have very good growth above markets in Australia. And so despite the contraction in the Australian business of 8% to 10%, our business in Australia has performed a lot better than that. And then given now that with the focus of Hardie Manufacturing Operating System that replicate back into Asia Pacific, that's also enhanced the performance, the financial performance of our plans in the Asia Pacific. Sort of combination of volume growth and also improved, much improved operational performance in the plans.

I guess it just sort of strikes me that they're potentially doing better than the 3% to 5% PDG guidance that you've given for the full year at this point in time. So, sorry, one last one for me. Just on cash performance, working capital and lock, particularly strong. There's been a couple of movements there, but really trying to understand whether there's something fundamentally improving your inventory position. It's only up 7%. And if you think about price movements and cost movements and underlying market growth, it seems like that's a pretty decent performance. Is that some of the restructuring you've done from a supply chain point of view of the last 12 months coming to be there?

Absolutely. It's really, we discussed this back in February is that lean with the Hardie Manufacturing Operating System is really about driving a lot more of the predictability of our output. I saw a reduction in variability of our output. And at the same time, we would be able to produce more volume per hours within the, within our plants. So by now, as we continue to improve with lean that we have, of course, we can be more predictable with our output. And that would then allow us to manage our inventory better than it has been. And of course, there are just continuous improvements.

Jack and Jason, just 2 questions from me. First of all, your exceptional performance in 2Q. You've hesitated from changing any long-term targets. I guess can you just explain why the hesitation today when things are continuing to improve from where we sit today, given all the internal initiatives that you're driving? Why you're sticking to the 20% to 25% EBIT margin?

Okay. Sophie, that's a good question. There is I think 3 factors. One is that the housing market is still quite variable and then two is that we also need to make sure that we invest back into our business, particularly in innovation, particularly into how we are going to continue to do a better job, much better job of managing our key accounts, our customers. And so that means there's going to be more investments, investment in systems and so on. So it's very, very important for us to make sure that we have the right investment in place for tomorrow and be able to continue with this type of sustainable performance. And I think the third which is very, very important is that we want to be sure that we establish a good track record of delivering sustainable lead and consistently to be able for us to make some decision on what that guidance, if we need to change the guidance or not.

Okay. And then just in terms of North America, prices were up 1%. Your key competitor was talking around rebates. Can you just update them update us in terms of why that pricing increase was probably a little bit lower than expectations? And have you had to pull the rebate levers?

Well, if you remember the first half of last year, our price was relatively large. I think it was about 4% or 5% price to the same time period last year. So we're confident against a higher number. No, we don't really have to focus too much on price and how we approach the market. And it's really now more about what is growing into more we call it the mix of customers and products. And with the lean manufacturing approach now that allows us to have better operational performance that we now can afford to move into these segments like multifamily, which tend to be a lower margin than the new construction for single family, for example. So now it's really about allows us to grow into new segments. So we just worry about the price mix. So yes, we did have an increase in the invoice price, but then that's offset by the mix of customers and products.

Peter Wilson, Credit Suisse. Just following up on that kind of the relative performance. So you've printed strong volume growth by market today, LP also printed a very strong growth, above market today. Do you think, there any sense that maybe the market was stronger than you think? Or are you both just reaping share from vinyl?

Well, I think first of all, I think there's one thing I'd just like, I mean to reinforce is that for James Hardie, we are focusing on driving demand. So our sales are really based on our product get on the wall. And then as they get into the wall, then that will flow back to our dealers for a resale for our business. So it is more business more really relate back to the actual demand in the marketplace. Whereas, LP would be more, what I would call, on the push side. So it's a -- tend to be more sell to the distribution, and then -- and not so much on the pull side. So that's why you have the -- so it's when you compare the two, it can be quite different.

Okay. I know that push side, these sales go through distributors. Are that -- who are they winning distributors off or volume off? Is it -- are they winning off of you or someone else?

No, it's a push. It's really -- I mean it's -- you don't really -- first is that we don't really get the sales until they've actually been used in -- on the wall with the builders because -- that's why we're correlating more with the housing starts and R&R because that is really more about how we built our business. It's about demand creation when our product get on the wall.

Okay. And then interior, so improving momentum, has that -- I'm trying to sketch out, I guess, the -- has that business actually turned the corner? Have you actually had some tangible improvement in product placement? For example, it explains that performance. And should we expect that momentum to continue?

Yes. I think, Peter, that's a very good question. It really come down to what we discussed in New York Investors Day is that for interior business for the short term is that we have to get better placement, which we began -- our team began to get some of that and will continue to improve. Second is that we got to -- we have to have better promotion. So better promotion here is our product have to be better positioned on the retail shelf that -- be able to tell the end users, contractors out there that this is James Hardie back here. Here is our key benefits and so on and so forth. And third is really about new products. So the position and the promotions are -- start to improve, and that will continue to improve. And then we just launched the HydroDefense, the first waterproof backer board in the marketplace. And so that should continue to gain traction in the marketplace. But it's just more about [gain our position, hold our position]. But growth really come when we start to improve our new products' introduction, starting to bring new product to the category that really give us that true, sustainable growth for the long term.

Okay. And then North American margins, you've attributed 90 basis points to the gross margin increase to lower start-up cost. Would we be right to assume that, that benefit continues for the rest of the financial year. But then next year, as Prattville comes online, for it to actually reverse and maybe even double so actually a negative effect into next year?

Yes. The thing is -- or that's -- you know that this year, we -- don't forget that we also have a start-up with Tacoma 2. And so it's -- so Tacoma 2start-up commission and -- is really -- is also baked in the numbers. So for us, it's all about -- we have a long history of being -- investing to a capacity for growth. And our business is quite -- is, in terms of cost structure, very -- is highly variable. So we say, as we move on to commission the Prattville facility, that's -- that would be just a normal course of how we would manage our business.

Lee Power, CLSA. Jack, just on plant performance, you haven't increased the lean target. Is it coming through quicker than you expected?

Lee, a good question. Yes, I think we are ahead of our plan to date. It's really the key, yes, it's better than expected because the key foundation for our Hardie Manufacturing Operating System is really about driving the employee and operator engagement. And then we have targeted that product they delivered, longer time to get traction, but that's really gained significant traction. And that's how we're able to help us get better results to date.

Okay. And then in terms of the amount that you're reinvesting into growth, I mean we heard Peter's questions around LP printing some pretty big numbers. Did you put more down to the bottom line or, than you expected? Or was it the same as you we into the quarter when you delivered earlier than you expected? Did you deliver the same proportion back into growth? Or did you say we've delivered more early and we'll flow that to bottom line?

Yes. Do you know it's to invest in innovation and then to, and then all the capability for account management, for example, is really take time to make sure that we develop the plan correctly before we put money behind it. So it's just most of our investment will, which will begin in the second half. So most of the lean savings that we had in the first half has really dropped to the bottom line.

Okay. And then can you talk to that FY '20 target, what, how much higher you think that will be, lean being delivered early?

Well, Lee, I think once you know that, I'd like to know that, too.

Fair enough. And then just on interiors, you talked about know-how coming across from Europe. Can you give some examples of that? Is that on new product development, merchandising? Like where is that actually?

Yes, I think the, first and foremost, it's really about merchandising, make sure that we have the right brand placement, make sure that we make that into, our category become a destination category. Let's make it easy for contractors to find, make it easy for new contractors, who don't know about our value proposition and be able to see the product on, in retail and know why they need to pay a higher price for our products. So those are the basic retail blocking and tackling that we have to do, which is really an area that we didn't have the expertise here into North America. So that's an area that we had beefed up recently. I think at the last earnings call, I shared with you that we would just hire a Vice President for, of Interior Sales for the North American business, who, this is a leader that used to run the Home Depot account for 3M company. So he knows how to deal with the big box retailer, the different levels and how to drive the push-pull effects to the big box. So that's what help, that would be the first step towards that direction.

We can take questions from the phone.

Multiple questions on our phone. The first question, it's from Simon Thackray from Jefferies.

Just a couple of really quick ones, some of mine have already been answered. But I just want to go to Europe for a second. Jack, well, I'm trying to understand how fiber cement can grow 30-plus percentage and the fiber gypsum only goes 3% and the margins go backwards year-on-year when fiber cement was, always meant to be a higher margin product. Maybe I'm missing something. But can you set me through how margins go backwards in Europe on that kind of mix?

Yes. Simon, I think that -- this is Simon, right?

Yes.

Simon, it's just normal variations in the business. And it's just a timing of some investments. But as the year go on, we should see that smoothen out and then we still expect that for our EBIT margin for the year to be accretive and that was our expectation for Europe as we set out in the plan.

So is it just that the fiber cement is growing on such a small base that the number looks impressive but it didn't really make much difference to the overall result? Is that the better way to think about it? Or am I...

No. It's just a -- it's more investment that we've put into the business to drive growth.

And would that investment continue in this current half? Or is it likely to slow down that rate of investment? I'm just trying to understand how the margin, when the margin goes back to reflecting what should be growing margins, pretty aggressively growing margin on that kind of volume growth, what...

So, the way to think about it, Simon, is that our 4 factories, the fiber gypsum factory in Europe, as is, is now gaining more momentum in terms of running the factory more efficiently and now we open up more for capacity. And so as we get a volume of fiber gypsum growing back to where the plant is, and that's why we will get the force multiplier effect for margin accretion. That's why we'll see EBIT growth and then we still expect that as we grow more fiber cement sales. And that fiber cement has a higher margin to fiber gypsum so that would also be more accretive.

Okay. Okay. That's helpful. A small one. Jack, when do you sort of weave your magic in New Zealand? You've called that plant performance, yet again, in New Zealand. It seems to be a perennial issue with New Zealand. What's the plan for New Zealand?

Oh, yes. The New Zealand plant performance during actually during in the past 2 months is that has a step change in improvements. And then, we should expect that to continue to improve going forward. This is a case of being the new culture within our company now is that in terms of how we become more, have a global mindset and really sharing best practices as well as resources. So, as we now implement the lean manufacturing in North America and have really good success there, and what we did is that we took really, the number two leader in our Waxahachie plant and now made him the plant manager for our plant in New Zealand and effective this month. So we would expect that really an improvement and our New Zealand plant will continue to improve, if not continue to have step change improvements.

So when you were in charge of international, and that was under your remit, and you obviously demonstrated great success with Carole Park, as it just a question that New Zealand just didn't get on the bus, didn't get on the journey when you were driving change through the region? Is that the right way to understand it? Now you're fixing that with the Waxahachie manager going there?

He's asking why Penrose lagged, the other three plants in Asia Pac.

Oh, right. It is a -- it is also -- Simon, this -- that's a good question because it is also part of the priority and because Carole Park was -- it is our biggest plant in Asia Pacific. And then the second one is Rosehill, the third one's Cabuyao in the Philippines and Penrose is our smallest plant. And then it's just in terms of how we prioritize our resources to focus on the biggest opportunities, and -- which we did, and then now to -- all three plants, Cabuyao and to Carole Park and to Rosehill performed at the exceptional level, which kind of contribute to the good performance that you see in Asia Pacific this past quarter, so now we can then to -- reallocate the resources to and to really take Penrose to that next level.

Question is from Brook Campbell from JP Morgan.

Just one on the SG&A line in North America. It looks like, I guess, the first half of that SG&A expense line looked 2% to 3%. And so your comments earlier on about costs picking up in the second half, was that just relating to R&D? Or should we see SG&A expense increase in the second half? And if you could help us understand what sort of magnitude of increase we should be looking for.

Yes, Brook, thanks for that question. We talked about 3 areas of spend, our investment, it's going forward; demand creation, which is certainly would be -- most of that would be in the SG&A space; customer and management capabilities as well as customer-led or consumer-driven innovation. So how that impacts our P&L will be in a variety of places, so within the segments that may show up in SG&A. Depending on the program, it could show up in cost of goods sold. And certainly, in our R&D segment as well as our general corporate costs are all kind of the places that it could show up. We're not in a position today where we're going to provide guidance on the increase and spend, but certainly, investment is a focus going forward.

Brook, the way to think about that too is, for example, with innovation. Yes, we work in these -- the additional funding to develop new products but then as we develop those new innovative products, sometimes we need to have a new -- a certain new manufacturing process to put in to make them in the lower-cost environment and so on and so forth. So to think about it, it's -- for innovation, it cut across several different P&L lines.

That's really helpful. Jack, and one more for you while you're there. Just interested to understand if the -- I guess the hiring in the senior management team is now done. Are there any sort of open roles, I guess apart from the CFO position, which we're not talking about today, that you're looking to fill at the moment? Or restructure going forward?

Yes. I think -- yes, we're looking to have a new CFO as well as we're looking for a new Head of Manufacturing for North America.

Okay. And just one more for Jason just on mix in North America. Talked about this already, but you mentioned that you do both customer and product mix, I'm just wondering if you can sort of dig into that a bit deeper, maybe provide some examples first just to help to understand really that mix and drag in the period.

Yes, I don't know that I described it as a drag. Obviously, in the numbers, it comes through as a drag. We executed our price increase and that went into the market successfully, so the team did a good job with that. And then as you're aware, we sell across a variety of segments as well as to a variety of customers in a variety of products, so in any given year, one may be growing faster than the other. I think the key is we're doing a good job across all of our segments and across all of our products and the fact that, that's coming out with a negative mix impact is not something we're concerned with. We're trying to grow across all those spaces and we're effectively doing that. Some examples that you guys would be familiar with for any period, I'm not going to be specific to this period, but if you sold more multifamily than say, new construction, that would have an impact on mix, more prime product than a ColorPlus product, that has a product impact on mix. So it's all those types of dynamics that could impact that mix equation.

The bottom line is that we're managing our business holistically now. So the key is that we focus on driving the, our growth above our markets at the target that we have and also we are driving our EBIT to the target that we have. So anything in between is what we do to manage our business to deliver those 2 outcomes that really drive the value creation.

And our next question is from Daniel Kang from Citigroup.

Just, firstly, on, can you just provide some color on underlying markets that you've seen? I think I heard you say, Jason, that the addressable market was relatively flat in the period, can you talk about the underlying drivers there and what you're seeing, in particular, in the R&R market? I think you also mentioned that you're expecting that to be a drag for the year. That's my first question.

Yes. We wouldn't have R&R as a drag for the year. So underlying housing market in North America, Daniel, we assume, we are assuming that the data we see would be, R&R would be up 3% for the full year. And we see that consistently through the full year. So our first half, we'd be looking at, our assumption is a 3% R&R increase in the underlying markets, new construction is the space where it's a bit more, a bit, a case of 2 halves. You can look at various sources externally, including U.S. Census data. And through the 6 months ended June 30, the market would have been down 4%, 5%, 6%, looking at, depending on which data source you look at. And I used June 30 because that kind of activity lags by about one quarter into our PDG calculation. If you look at those same data sources, you're now seeing a 3% or 4% or 5% increase in, for the 3 months ended September. And so we'll see that's kind of housing markets underlying for new construction kind of impact us in our third quarter. And so Jack talked about it earlier, when he went through the assumptions page, we are still assuming, which is what we're assuming last quarter, a slight underlying housing market increase and that's when you blend, the 3% R&R increase along with something below 0%, maybe negative 2%, negative 3% for a new construction. You blend those 2 together and you end up at something right around and Jack talked about a plus 1% for our underlying market for FY '20 is kind of where we're seeing it.

That's great. And just on margins, 27% margins in North America, clearly a strong performance. But the lower pulp cost, we didn't really see much impact from that. So should we expect that 3Q, given the favorable impact of that, 3Q margins should actually be higher than 27%? Or is there other factors that I should be taking into account?

So we certainly are confident in EBIT margin that's why we raised the guidance to 25% to 27%. I think your question is what are the puts and takes going into the back half of the year. As I flagged earlier, certainly, the favorability we've been getting on freight in the first half of the year, we don't see that repeating because the freight market started correcting in the back half of last fiscal year. So that comparison will tighten. Certainly, pulp will be a tailwind for us in Q3. But then you got to remember, we've talked about investment quite a bit today, so investments would be the other thing. It sounds like you're not considering as you talk about margin going forward.

To be more continued lean improvements.

Yes.

And Jack, in terms of you spoke in the past in terms of base customer erosion that you're looking to narrow. Can you update us on the progress there? Has the base business begun to stabilize?

He's asking about base erosion.

Oh. Yes, it is really as we continue to focus more and more expand our focus more into our customers, we'll begin to gain more trust and credibility with our customers. And then also as we also bringing the demand to our customers. And so we see that our customers tend to substitute less and less, so I think that's an improvement and that's why you see some of the result that you see here is really due, in part, to that.

Our next telephone question is from Grant Slade from Morningstar.

Just one from me on the lean program in North America. I just wondered if you did have any sense as yet as to how much latent capacity in the North American manufacturing network will be, ultimately, unlocked by the lean program.

Yes. We would estimate that probably would be the equivalent of about 1 additional sheet machine for the next 12 months' capacity that we don't have to build.

Right. And how much is that in terms of million square feet?

Roughly 200 million to 250 million standard feet.

Right. Okay. And that's the total that you think, that's the total amount of latent capacity you think you'll unlock?

Right.

Okay. Is there any more questions on the phone?

We have another question from Paul Quinn from RBC Capital.

Congratulations on the results. Looks like you have a pretty good short wind -- tailwinds here. Just trying to understand the longer-term picture in the 35/90. We saw LP put up almost 7.5% growth year-over-year, you guys were 5% on volumes. Does -- to be able to get to your 35/90, does LP's growth have to slow? Or do they have to shrink?

Yes. I think -- Paul, I think they -- this is why I mentioned earlier, our growth is really coming from the demand on the marketplace where our fiber cement board to actually on the wall. And that's -- and that could be driven back to create our sales. Whereas of the competitors more in terms of selling into the channel with not a lot of the pull through, so it is a -- two different type of -- so when you look at those numbers, you have to -- you can't really compare them from period -- at the same period, you got to look at it on a long-term view to make sure that you see that as being the flow-through to the market because our -- in our case, it's really more about the flow-through to the market than being on the wall.

I completely understand the difference in methodologies. But when LP post a number of years -- and we can go back five years, and you can still see the same type of growth. The question still remains, if they're growing at this stage, does that put in jeopardy the 35/90 goal? That's all.

No, I think it is -- for us, is that we're -- the key for us to continue to drive our game plan and that is about driving the -- from pull to push-pull, and really drive the lean transformation that would allow us to expand into new markets and create a lot more demand. And then the key to 35/90 for the long term for us is innovations. And also, all of that have to deliver a strong profit growth and strong margin. So that's -- that is our game plan. That's our long-term value creation of which we are on the path and that's what we are delivering, it's really about driving that growth of our markets with strong returns and consistently and sustainably and that's our game plan.

Fair enough. Congratulations, good results and good luck going forward.

There's no further questions at this time. I'd like to hand the call back to the speakers for any closing remarks. Please go ahead.

So thank you all very, very much for your questions and your interest. I think it's -- we are, at James Hardie, a global team. We're happy with the results that we have -- just delivered in Q2. And this is about -- all 3 of our regions delivered positive growth in sales and EBIT. And then at -- which allow us then to raise our PDG target for fiscal year 2020 from 3% to 5% to 4% to 6% in North America. We also raised our EBIT margin in North America from the top of 20%, 25% range to 25% and 27% range. And also, with strong performance too in Asia Pacific and good performance in Europe, now then -- that allow us then to also raise our full-year guidance and our adjusted net operating profits to between $340 million and $370 million. Thank you.

Thank you.