Thank you for standing by, and welcome to the James Hardie Industries JHX Q2 FY '22 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Dr. Jack Truong, Chief Executive Officer. Please go ahead.

Good morning, and good evening, everyone. Thank you for joining us on our second quarter fiscal year 2022 earnings call. This is now the tenth consecutive quarter of our company delivering on strong financial results with growth of our market and strong returns based on the consistent execution of our global strategy. I will begin today's call by providing a brief update on our global strategy, which includes sustainability; then our CFO, Jason Miele, will cover our financial results for the quarter and also provide an update on our full year guidance. After that, we'll open up for questions. Let's turn now to Page 5 for an update on our strategy. In our Investor Day and in our Q4 results presentations, both in May 2021, we described our 3 critical strategic initiatives that will enable us to drive consistent profitable growth globally by our company. Those 3 strategic initiatives are: number one, expand the James Hardie brand a premier professional brand into a market-leading consumer brand that focuses on marketing directly to the homeowners to create true demand of our products. Number two, penetrate and drive growth in existing and new markets such as repair and remodel. And number three, commercialize global innovations that allow us to expand and to other exterior looks and to take advantage of adjacent opportunities in each of our 3 regions. In addition, we will continue to execute and build on a significant foundation we have built over the past 3 years. This foundation includes continue our path of becoming a world-class manufacturer of LEAN, continue to partner closely with our customers with our push-forward strategy and continue to integrate our supply chain with our customers to serve the market. Let's now turn to Page 6 to discuss the progress of our marketing directly to…

Thank you, Jack. Good morning, and good evening, everyone. I will start on Slide 16 with our global results. This is now the tenth consecutive quarter we have delivered strong financial results with above-market growth and strong returns based on the consistent execution of our global strategy. Also, this is the fifth straight quarter with record global results, including quarterly records for net sales, adjusted EBIT and adjusted net income. And this now marks the fourth straight quarter, all 3 regions delivered double-digit net sales growth and double-digit EBIT growth. All 3 regions are executing on our global strategy, simultaneously. First and foremost, the continued strong execution of the foundational initiatives of our strategy: lean manufacturing, push pull and operating an integrated supply chain with our customers. And in fiscal year 2022, all 3 regions have good momentum on executing the newer strategic initiatives, marketing directly to the homeowner and commercializing global innovations. This strong strategic execution globally has led to global net sales increasing 23% to a record USD 903.2 million in the second quarter. This excellent top line result was underpinned by price/mix growth of plus 9% as our teams in all 3 regions successfully built momentum in driving a high-value product mix. In addition, we delivered strong volume growth in all 3 regions with global volumes increasing 14%. Global adjusted EBIT increased 26% to USD 205.7 million and global adjusted net income increased 29% to USD 154.9 million, both represent all-time record highs for our quarter. To maintain this momentum, we continue to invest significantly in our strategic initiatives, marketing, innovation and capacity expansion with significant investment in growth and while operating in the current deflationary environment, we were able to expand our global EBITDA margin by 70 basis points to 27.2%. We will now review each…

[Operator Instructions] The first question comes from Peter Steyn from Macquarie.

Just wanted to get a little more color on the mix effects and if you could give us a little bit of a sense of how the new products are faring from a product -- from a sales contribution point of view and how you're tracking against your LTI targets for FY '22?

Yes, Peter. It's a good question. We're tracking well to the LTI targets that you mentioned. But right now, as the -- our approach to the new innovations is really about market driven, and that is all about making sure that we get our products on the wall and in the home of the homeowners as the #1 priority, and that created a pull-through as supposed to a typical new products launch or just shift a lot more to the channel and then just let it trickle out. So our approach is more about the pull, it's about to create the demand with the homeowners and really build more momentum with the demand creation with the homeowners and until that gets to a critical mass, and that's when you see really a big lift and a continue lift. And then relative to your first part of your question, is that we -- as we continue to execute our high-value product mix that as time goes on, the effect of price mix will be driven more and more through to the increase in high value products that drive that price mix growth that you saw the difference between Q1 versus Q2 that we just showed. A – Jason Miele : So can I just clarify then in my mind, the interpretation there is that there’s not a heck of a lot of contribution coming from Textured Panel and VL Plank among others at this point, but it will accelerate in due course as the channel starts drawing that the customer starts drawing that more definitively. So what we’re seeing at this point is still the very early stages of that, but largely the shift from the same plant to hardie plank in the tail end of that playing out. SP02 Yes. So it’s really about the – what you see in the price mix right now is really driven more from our shift from Cemplank to prime and also the shift from Cemplank and prime to color.

Okay. Perfect. That makes sense. And then just a question for Jason. Just on cash flows, excluding the tax effect of CARES, you mentioned that your operating cash flow was up 2% in the context of EBIT, obviously growing quite substantially faster. Looking at the balance sheet, there’s no appreciable movements in working capital that would account for that. So I was just curious what this quarter delivered from a cash effective and trying to get a little bit more color on that 2% improvement in op cash. A –Jason Miele : Yes. Peter, as we’ve laid out, when you exclude the CARES Act, it is up 2%. And we’ve certainly shifted to a step change level on a rolling 12-month basis. As with any quarter, there’s some minor timing differences, but we’re very happy with where we’re at from a cash flow perspective. We expect continued improvement going forward.

The next question comes from Simon Thackray from Jefferies.

I was just kind of -- few questions, if I may. Can we just talk about the observation of any sort of capacity constraints, bottlenecks, supply chain constraints in the quarter just gone. I'm sort of particularly curious in light of the sequential growth in European sales, which was only 1.25%, notwithstanding the good margin performance. So I just want to understand if growth could have been better, but for some capacity constraint factors? And in contrast to Europe, North America and APAC results, beg the question whether there are any regions where capacity constraints now exist where you could have done better or you might be constrained as we track through to the end of the year?

Yes. Simon. Just a couple of things just to highlight the strategy of what we are driving tour right now, Simon, is that we -- the way we look at how we show the market is really a combination of driving more volume of high-value products. So it's not just about selling volume for selling volume. So that's a very big distinction of our strategy going forward. It's really about maximizing how you -- and then 2 is that we -- since our business model is really about integration of our supply chain with our customers so that we can really have the visibility of the demand a lot further out so that we can produce to ship produce to store. So it's really about -- so we -- so based on those 2 strategic criteria, that's how we we've been driving our business growth based on net sales of the high-value products. So we do have the free flow capacity for Europe, and this is why you see a very good growth for our European business. And as we continue to be more integrated with our customers in Europe, we'll have a much better demand profiles that will allow us to plan out a lot better even to serve the market better.

So Jack, just so I understand that lift, is that suggesting that whilst the net sales growth sequentially, first quarter to second quarter in Europe was pretty modest 1.25% that you would expect under the -- using those strategic initiatives that, that should accelerate. Is that what you're saying to me?

And so what we should see is that the acceleration of our growth in net sales as opposed to just for the sake of volume growth. So if you look at the product portfolio in Europe today and I think on slide was a Slide 8, something that you see that there in there is a big difference in in the pricing of the [indiscernible] Hardie brand Panel versus blank and versus backer. So it's really about us creating more value with the homeowners in Europe as well as in North America and Europe in Australia and New Zealand and the Philippines is of understanding the needs of the homeowners and we provide the right value product for them as opposed to shipping in upsell in units.

Okay. That makes sense. And if you characterize now, Jack, your percentage of sales coming from R&R versus new housing, would you say that we're continuing to see a shift towards R&R, more R&R?

Absolutely. I think right now, our R&R is semi business around the world, they're quite similar. It's more like 70-plus percent and it's that growing pretty fast.

Okay. That's great. And then just in terms of the COGS inflation, Jason, noting it's a change from the May update, but it's, but it's static on the first quarter in terms of the COGS inflation guidance. Is this COGS inflation increase because of higher cost assumptions? Or is it a function of the better volume expectations for the business since May?

A little bit of both, Simon. As we talked about last number, pulp remains elevated as does freight. We're watching markets closely, but we're comfortable with the range we've provided of USD 120 million to USD 150 million globally, and that would include our volume assumptions as well.

That's great, Jason. And then while I've got it, just on the update on Page 6. Just in terms of the SG&A spend, which obviously stepped up as per guidance, is the marketing and advertising spend now at a steady run rate? Or will it increase from here? And as we look forward with the growth that those marketing initiatives are delivering to the business, should we be thinking about the spend for marketing and advertising in dollar terms or in terms of percentage of sales going forward?

Yes, Simon. So we'll continue to invest in marketing initiatives that drive top line growth. So we will expect to be investing more next year than we did this year. But obviously, we're monitoring to ensure we're getting the outcomes we expect. And that's how we'll continue to run it going forward. As we get deeper into that, we'll then potentially think about do we provide guidance of should we be thinking of that in whole dollars or a percentage of sales, but it's all about investing to drive future growth.

Simon, the way to think about this is that as we invest more in the marketing to the homeowners as worry for us to very create the demand of our high-value products that really the homeowners need. So in terms of our business when you should expect to see gross margin expansion because of the growth of high and as we expand more into growth more into repair and remodel in segment. So then within -- you should expect that the absolute dollar term market investment will go up, but we'll be more to correlate than to the percent of sales.

Yes. That makes sense, Jack. And then just quickly on the New Zealand greenfields expansion. Is that designed to feed New Zealand? Just so I understand the Victorian greenfields. A – Jack Truong: As you know, Simon, we have a very big plant in Carole Park in the Gold Coast. And one in New South Wales. And then we see that the Victoria so a growth opportunity for us. That’s an area that we therefore, it’s important for us to have a really – a big facility to serve that market for the long term. And then you probably heard from my opening remarks that’s our ESG strategy as well is that we strategically build plants around where we operate in such a way that we sourced more than 80% of our raw material within 100 miles of our plant to be able to ship our products to at least 2/3 of it to within 500 miles of our plant. So consistent with that strategy, and this is why we are looking to the VL Plank in Victoria and not to mention that it is a big growth incentive.

The next question comes from Lisa [indiscernible] from JPMorgan.

I just had a question on the gross margin as well in terms of North America Fiber Cement. I guess there was a 4.8 percentage point gross margin drag from input costs and also the start-up cost from Prattville. Can you just give us an idea of how much will be driven by the commissioning at Prattville and when that will be done exactly? And I also, I guess, in the context of the capacity you’re planning to bring online over the next 3 years, should we continue to expect that line to be a drag in the future years as well? A – Jack Truong: Yes, Lisa, when you think about start-up costs for a competent period with not a lot of start-up costs in the prior period. So that’s why it’s a drag year-on-year as we continue forward with this transformational capacity expansion, you can expect start-up costs to be consistently part of our P&L going forward. So when you’re comping period versus period, I wouldn’t view it as a drag on investment into the future growth.

Yes. And so what was the contribution from that for the quarter? A – Jason Miele : Seen 3 and 4 in Brazil as well. So I think earlier in your question was one with [indiscernible] rate will continue to have ramp-up costs as we expand. And then we don’t – we give you that gross margin walk. We don’t break out start-up costs specifically, but it would be smaller percentage in that table compared to freight and pulp cost increases.

Okay. Sure. And then just on ColorPlus more specifically, given the uptake, can you just comment on what you’re seeing – what you’ve seen over the course of the second quarter and where you’re taking market share from up in the Northeast? A – Jack Truong: Yes. So Lisa, it is a key part of our marketing campaign to the homeowners. It’s really about delivering the type of product that Custine want and what Custine want for those homes with our Acerroduct made with ColorPlus. So our mix of ColorPlus has really been growing, particularly since the beginning of the year when we started the campaign, and we expect that to continue to have some very healthy growth going forward with our continued investments in consumer market.

[Operator Instructions] The next question comes from Daniel Kang from CLSA.

Just a first question price – a question on price mix. North America looks to be gaining momentum with 2Q contributing 9%, up from 7% in the prior 2 quarters. I realize that your guidance for price mix is only for FY ‘22 of 8% to 9%. Is there any reason why this momentum should not continue into FY ‘23? A – Jack Truong: Daniel, I mean, we believe and that will continue as we execute on our strategy, which is really about marketing directly to the homeowners. And then when we market directly to the homeowners, we after doing a lot of extensive consumer research that we know what exactly the consumers, the homeowner want and we can market those – what we call high-value products that the owners need and the one that we have. So as the exterior of products from James Hardie with Color is one of the key products that the home owners really want or need. So it is something that as we continue to execute, that should – that we would expect that the color product will continue to grow.

The next question comes from Lee Power from UBS. Q – Lee Power : Just on looking at the leads for direct consumer, 61%. Is there any difference in conversion rates that you find when you’re dealing with like direct to consumer through a contractor? A – Jack Truong: I mean when you get great demand directly with the consumer within – message is always very consistent and very clear. And that would then generate the sales lead of which then our customers, our contractor customer would be able to convert. So it is the – about the quality of leads, and then not only that, but also the ability to close that quicker as well. So the ability for us to now to connect directly to the home owner and tell that story directly on the value of the right Hardie brand product is immense.

The next question comes from Keith Chau from MST Marquee.

So my question is just in relation to the North American business. Could you just give us a sense – and this isn’t following with the previous question, whether there were any constraints in North America that may have held back sales to any issues from the hurricane activity. And then keeping with that, where the sales growth is tracking in the quarter-to-date for both exteriors and interiors volumes, please? A – Jack Truong: Yes. So Keith, as I – what we mentioned is that we are driving as we now connect and market directly to the homeowners that we with market the high-value products that the consumers or the home owners want and need. So it’s really, for us, it’s about maximizing the – our ability to produce the right products so that we can maximize our sales growth and EBIT. And so where you will see more of it’s about a lot more growth in the high-value products. And for us, it’s kind of irrespective of that in exterior or interior is really about where can we create more of that value.

The next question comes from Sam Seow from Citi.

I think if we think back – I think if we think back reinvesting, I guess, lean savings into supply chain, was a bit more of a concept and you’re still kind of proving it up. And at the time, logically, you’re only working with a few main distributors. Rolling forwards today, could you maybe give us a feel of how many of your existing distributors, you’d say you’re fully integrated or where you’d like to be with versus how many, I guess, are still to be partnered with. And I guess I’m just trying to understand the pathway left around on what’s been a really successful initiative. SP11 Just about the integration? SP02 Yes. So it is – it is a journey. And what I can say is that today, we are miles ahead of where we were 2 years ago, and this is why it’s allowed us to really produce and serve the markets better than most because our integration, our supply chain and our customers and certainly integrating our supply chain and our suppliers too. But it is about – it’s a journey, and we still have more that would like to come on board. And it is – we will continue to improve, but it is a path. It is a strategic path that we will continue.

The next question comes from Paul Quinn from RBC.

Just a question on global pulp markets. We’re seeing a really rollover. I just wondering how much volume you use in a year and how are those contracts – are they on spot pricing? Or are they on contracted volumes over a 3- or 6-month period? A – Jack Truong: Yes. Thanks, Paul. Hope would be 1 of our top 4 costs in our business. So it’s significant when bold moves to – however, as we talked about, the execution of our strategy has enabled us to expand margins through this high inflationary period. We have a variety of types of contracts, some spot and some that operates on a periodic basis, whether that’s a quarter or 6 months. So it’s a variety.

The next question comes from Peter Wilson from Credit Suisse.

Just another one on North America volume in the context of your capacity expansion announced. So Jack, I take your point that it’s not all about volume. It’s about high-value volume, but we put that just side and just focus on volume. Should we consider the 2Q volume of 791 million square feet. So would you consider that to be the limit on your volume until this new capacity comes online? Or is there more that you can eke out of the network? A – Jack Truong: No, it’s – we’ll actually be – it should be more for 3 reasons. One, that line execution will continue to open up more capacity on our existing asset; and two, is that as we continue to integrate more of our customers that allow us to have a much more of a lead time view in terms of demand on our products so that we can run out of network of plants more effectively and flow product from production to the market better and that will be more; and then three, is that we are on so right in the middle of scaling up our property of line 1 and line 2. And then we are going to be opening up the reopening our VL Plank, which will be slated to be opened in March of next year, calendar year in about 4 more months. So those are some of the key factors that would allow us to continue to drive not only growth in volume or also mix. And of course, that would give us the revenue.

The next question comes from Andrew Scott from Morgan Stanley.

Jack, just a question, if I can on price, we're at that point now where less price announcements will have gone out for 1 January. Can you just let us know what you're expecting there? And then around that, you have throughout this year stuck to that value pricing methodology, whereas vinyl and also LP maybe priced a bit more like a commodity. Can you just tell us if you think that's made a meaningful difference to the on-the-wall cost comparison?

Answer the first.

Yes, Andrew. So your first question about January 1 price increases, we'd expect price increases to be about 5% or they are about 5% for North America.

Yes. So Andrew, I think the key thing here is that we are now -- I mean, this is a true push poll that we are marketing directly to the home owners. So it is about our Honey brand products, the Hardie brand Exterior with Colors is really give endless possibilities that allow the homeowner to remodel their home that looks fantastic with different designs. But yet, they can protect their home from all the elements. So that is the value. And that's what the homeowners make their decisions on mostly is really about that is intangible effects. So -- and then, of course, the on-the-wall cost is important, but it's not as important as in terms of having the homeowners making the decision that she wants to remodel a home to have the really gift that pride enjoy, particularly with post-COVID environment where home is the castle. So it is that is where we focus on. And it's not so much as important in terms of what the price between this board versus the other board.

Thank you. That does conclude the question-and-answer session. I'll hand the conference back to Dr. Truong.

Well, before we end the call, I would just like to take the opportunity to extend my gratitude and thanks all James Hardie colleagues around the world. Our exceptional financial results in the second quarter of fiscal year 2022 a direct result of the continued execution of everyone within our company of the global strategy, and we do it together as a global company. This outstanding second quarter results are another indication that we are truly a new target. It's a company that continue to leverage on our global reach, global capabilities and global scale to execute together and deliver strong financial results consistently across all 3 regions. I'm excited for the remainder of fiscal year 2022 and beyond as we continue this next phase of profit growth. Thank you.