James Hardie Industries plc (JHX) CEO Jack Truong on Q3 2020 Results – Earnings Call Transcript

James Hardie Industries plc. (NYSE:JHX) Q3 2020 Results Earnings Conference Call February 11, 2020 5:00 PM ET

Company Participants

Jack Truong – CEO

Jason Miele – Head, IR

Anne Lloyd – Interim CFO

Conference Call Participants

Simon Thackray – Jefferies

Peter Wilson – Credit Suisse

Sophie Spartellus – Bank of America

Lee Power – CLSA

Peter Steyn – Macquarie

Keith Chau – MST Marquee

Jack Truong

Good morning, everyone. Thank you for joining us in our Q3 Fiscal Year 2020 Earnings Call. I will begin by discussing key business results and operational highlights on the third quarter and for the first nine months. Jason Miele will then cover the financial details and finally I will come back with an update on our global strategy.

I am very pleased with the progress our entire James Hardie team has achieved during the first nine months. We are executing our strategy to that generated strong financial results in each of the last three quarters. It’s a very good start to the transformation that our company embarked on a year ago.

I would like to take a few minutes now to highlight the key transformational changes that we are making to put some context to the results that we’ll report today. We are currently drive in a fundamental transformation in our company. This is not about returning to the Hardie of old. What we execute in is much more significant in that. We execute on our plan to go from being a big small company to being a small company. This is about building capabilities and processes that connect to core strengths of our company to generate critical mass to deliver a profitable growth, while creating a culture of being a customer centric company.

We drive in a fundamental transformation across our company. Our goal as a small, big company is to deliver a sustainable and profitable growth. However, if you look at our results during the past 10 years, we have not met that bar.

Let’s use North America as an example. When you look at the past 10 years, we have had some good PDG years and we have had some good EBIT margin years, but we have not accomplished both together. This year however, we have delivered both.

Through nine months, we delivered PG of about 6 plus percent with EBIT margin of 26 plus percent. This is a good step in the right direction of where we want the new Hardie to be. Delivering growth above market and strong EBIT margin consistently is hard to do, but that is our goal across all of our business segments.

We believe, we are now on the right track where the fundamental transformation is not easy. There’s still a lot of work left to do and there are several key areas we need to focus on, and invest in. We need to continue to connect our businesses together, and then focus on critical few opportunities to create value to earn our customer’s business every day via increased demand of our products with the builders on our contractors. We’re having more efficient supply chain to serve our customers better, more in enabling tool that make it easy for our customers to sell our products, and with high impact innovation that expand market opportunities for our customers.

When we’re able to deliver on all of those objectives, we would truly be a global company that can deliver sustainable and profitable growth. I’m excited by our progress to date, as I believe, we’re on the right track to get there.

Let’s now move into the business and operational highlights. Now turning to Page 7, on group results. From the group perspective, we had another quarter of strong profitable growth, led by outstanding performance in our North America segments, and a very good performance in our Australian business.

For the group, volume was up 6% in the quarter, and 4% for the 9-months year-to-date. Net sales were up 5% for the quarter, and 3% for the 9-months year-to-date. And adjusted EBIT was up 18% for the quarter and 20% for the 9-months year-to-date.

Adjusted net operating profit for the group grew 17% in the quarter and in the first nine months of the fiscal year. Globally, our team will execute on our strategic plan resulting in strong financial results in each of the last three quarters.

Let’s turn to page 8, our North America results. Our exterior business delivered exceptional results. Volume grew 13% in the quarter and 8% in the 9-months as our commercial transformation is gaining momentum. We are estimating our addressable market growth for the full fiscal year 2020 to be between 1% to 2% and we’re confident that we’ll deliver 6 plus percent PDG or growth above market for Fiscal Year 2020.

Additionally, our interior business returned to growth posting a 3% volume growth for the quarter. We’re now on track to deliver a full year expectation of flat-to-slight volume growth for the interior business.

Now with more volume of fiber cement flowing through a network of more efficient fiber cement manufacturing plants driven by lean, we deliver an increase of 30% in EBIT dollars. And our EBIT margin was 26.1% a 380-basis point improvement over quarter 3 a year ago.

Our EBIT margins for both the quarter and for the first nine months exceed the top end of our long-term target range. Our commercial transformation is gaining momentum, supported by continued traction and a lean transformation. Continued success in both of these initiatives is critical to delivering sustainable and profitable growth. We are pleased with the nine-month results of 6 plus percent PDG and 26% EBIT margin.

Let’s now turn to Page 9 for European results. Fiber cement growth momentum continues with net sales up 27% for the first nine months. Fiber gypsum net sales were soft and below our expectations. A large contributing factor was certainly this softening housing market in Western Europe, particularly in Germany, France and the U.K. where we also experienced a dip in our commercial execution during the past three to four months.

And as you know from our global strategy, one of the key disciplines in our company is the continuous improvement mindset to PDCA, plan, do, check and adjust. We believe that we have done the right checks, and recently, made the right adjustment relative to our plan to ensure we deliver improved fibre gypsum growth going forward.

Now our EBIT margin was 9.6% for the nine months year-to-date. Our European strategy is on track, and we are excited about introducing innovative fiber cement products into this market.

Now listening to page 10 for APAC results. Our Australian business with a standout in APAC, driving growth above market in a contract and housing market, and delivering strong EBIT dollars growth. Overall, APAC saw moderate EBIT growth for the quarter of 5% and EBIT margin remain in the top half of our long-term target range.

Similar to my comments on Europe, the business saw strong strategy, but we adjust and as necessary to ensure our New Zealand business execute at the same level as Australia. And finally, on page eleven, our updated key assumptions for fiscal year 2020.

In North America, we see modest growth in U.S. housing markets. We expect our addressable market to be up 1% to 2% closer to the 2% range. U.S. residential housing start will be approximately 1.3 million. As we continue to gain traction in our commercial lean trend formation and executions in North America, we are now raising our full year PDC 2020 target from 4% to 6% to 6 plus percent and we’re reaffirming our EBIT margin range of 25% to 27%.

In Europe, we continue to expect the addressable housing markets to be slightly down for the full year. We continued to introduce new fiber cement products and the one change in our European assumptions for the year is that we now expect EBIT margins to be flat year-on-year rather than increasing. The primary driver in the change in our EBIT margin expectations is the soft fiber gypsum sales growth I discussed on a European slide.

In APAC, there’s no changes to our assumptions. We expect the addressable housing markets in Australia to be down mid-to-single digit. APAC is expected to deliver volume growth of our markets of 3% to 5% and EBIT margin in the top half of the range.

Finally, we raised our guidance on adjusted net operating profit to be between $350 million and $370 million. Overall, I’m very pleased with the progress the team has achieved in the first nine months of this year, especially in North America and Australia. We have posted three consecutive quarters of strong financial results. Our teams are executing against our strategic plan, and our results to date have demonstrated that.

I will now hand over to Jason to take you through the financial review and highlights. Jason?

Jason Miele

Thank you, Jack. Good morning everyone. We will start on Slide 13 on the group results. As Jack mentioned, a strong financial performance across the group, starting with our top line results. You’ll see sales volume up 6% for the quarter, and up 4% for the 9-month period.

Net sales are up 5% and 3% respectively. The top line strength is driven by the outstanding performance Jack discussed in our North American business. On the profit metrics, you see gross profit increased 15% for the third quarter and 12% for the 9-months. It’s being driven by the improvements in lean globally across our businesses, as well as the strong top line performance.

You also see the lean performance coming through in our gross margin percentage with the nine months up 290 basis points. Finally, EBIT margin, adjusted EBIT is up 18% for the quarter, and 20% for the 9-month period and net operating profit is up 17% for both periods, driven by the strong adjusted EBIT growth and also partially offset by higher tax expense and higher general corporate costs.

Moving on to the North America result. As Jack mentioned, PDG is very much on track. We’ve raised our target to plus 6% for FY ’20. Exteriors volumes were up 13% for the quarter and 8% for the 9-month period. The momentum of our commercial transformation continues in our exteriors business, and we’re also starting to see the acceleration of our interiors volumes continuing to improve.

You’ll remember in FY ’18 and FY ’19 our interiors volumes were down, both of those years. Last February, we would have signalled that we expected FY ’20 to be flat year-on-year and we’re very much on track to deliver that target in FY ’20.

Price was favorably impacted by our price increase on April 1st to start the year, partially offset slightly by mix with both periods being up 1%. The EBIT metrics were quite strong. EBIT dollars excluding were up 30% for the quarter, and up 20% for the 9-month period with both periods being at 26.1% EBIT margin, which continues to be above our long-term range.

EBIT results were driven by the higher net sales, lean savings as well as lower freight costs and the quarter in particular was also helped by lower pulp costs.

The next slide on Page 15 is our long term six-year view by quarter of EBIT dollars and EBIT margin. You’ll see the three bars there on the far right represent our Q1, Q2 and Q3 FY ’20 EBIT dollar performance. You’ll note that those are the three highest quarters we’ve achieved over that six-year period, while also delivering margin above — at the top of our range.

And as Jack mentioned, we reiterated our target for FY ’20 of 25% to 27% for our North American business.

Moving on to input costs, this continues to be a more positive story than it was last year. Pulp is down 22% for the quarter, so that is the three-month period ended December 31st 2019 versus the same three months in the prior year. I’ll remind everyone that, that those are market prices and a market metric that kind of activity helps us kind of on a one quarter lag.

Freight was also down 12% quarter-over-quarter. Sorry to be specific, but the December quarter versus the December quarter. That is starting to narrow a bit from what we saw in the first half of the year, but still a very good trend. And lastly, cement prices were up slightly. Gas prices were down 29% and electric prices were up 6%.

Moving on to Asia Pac. As Jack discussed, certainly the top line metrics are being impacted by a softening, continued softening in the Australian housing market and sales volumes down 4% for the quarter and 2% for the 9-month period and sales down 3% and flat respectively.

Australia was the standout for the segment, driving strong growth above market and delivering those top line results. Price was strong throughout the region at plus 3% for both periods.

EBIT in Australian dollars was up five points, 5% for the third quarter and 1% for the 9-month period. Those results are being driven by the higher average net sales price across the region. Lean savings particularly in our Australian plants, lower pulp costs offset partially by higher freight.

As a reminder, our U.S. dollar results when translated are being negatively impacted by unfavorable FX rates for both periods. Moving on to Europe, on page 18. So as Jack mentioned, the third quarter result in Europe is certainly softer than we wanted. Strategy is on track, but that third quarter is impacting obviously also the 9-month period.

Third quarter results are primarily a result of the softer fiber gypsum volume growth that you see also impacting the profit metrics. For the 9-month period, sales were up 4% with average price up 1%. We had fiber cement net sales up 27% for the 9-months ended. And fiber gypsum net sales up 2%.

Higher SG&A costs are driving EBIT down year-on-year as well as EBIT margin excluding of 9.6% for the 9-month period is 70 basis points off of last year. And as Jack stated, we’ve lowered our expectations to have a flat full year FY ’20 versus FY’19.

For EBIT margin, adjusted but margin in Europe. And that was a sorry. Last thing would be on integration costs. We did have higher than anticipated integration costs, certainly higher than we signalled to start the year. I believe, we started the year with a range of €4 million to €7 million. We are now at €8.6 million through nine months and €3.9 million in the third quarter. We’d anticipate to have roughly €2 million to €3 million more, euros left to go in in FY ’20. In FY ’21 we will not be recording integration costs.

Moving on to these other segments and income tax. The other business on the top left there as you know we announced the exiting of our Windows business in North America last year in FY ’19. So those are the charges you see being taken in FY ’19. And we wrapped up that process and completely ceased that business early this year. So we are seeing essentially no activity for the full year for the 9-months and zero now in Q3, that will continue at zero.

Research and development, down slightly for both periods. We are continuing, committed to R&D investments as Jack’s mentioned in our September investor tour. And earlier, we are committed to innovation, and we’d anticipate continued investment in our R&D segment.

General corporate costs are driven higher due to — primarily due to higher stock compensation expenses for both periods. I’ll talk about that in a bit more detail on the next slide. We get to finally on the slide adjusted ETR is right in line with our expectations and what we’ve been signalling all year. Three months ago, we estimated 17.9%, and now we view as at 17.8% for the full year.

As mentioned, diving a bit deeper into the general corporate cost line, we’ve presented here a few things, a trend line as we have the FY ’19 quarterly average of general corporate costs along with the three quarters from this year. And also noting in the current quarter the 24.3 million of general corporate costs includes a unusual item of 3.5 million related to the acceleration in the timing of accounting for expenses associated with a retired executive, as the effective service term for that executive has shortened. We are required to accelerate the accounting for these expenses over the remaining service life, which is now the end of March 2020.

Thus these expenses from an accounting perspective have been accelerated into the third quarter, as well as the fourth quarter. If you look at general corporate costs excluding that, that amounts were at 20.8 million for the quarter. The increase versus the prior several quarters is primarily driven by higher stock comp expense as mentioned, which is driven by not only a higher share price, but a increasing share price during the period from the first balance sheet date to the last balance sheet date of the period.

We’ve also increased investments in our corporate capabilities, which we had signalled last quarter we’d be increasing investment throughout our business and that’s also part of the increase you’re seeing here.

Finally, page 21, this combines two of our slides we used to present separately cash flows and capital expenditures. On the left, cash flows is very straightforward, a very good results with cash flow from operations of $84 million period-over-period or 27% at 393 million, a very strong result, which has been driven by the increased profitability and cash generation of our business units.

Year-over-year you also see significant changes in investing activities and financing activities which is primarily driven by the Fermacell acquisition in the prior year, and no repeating of an acquisition in the current year.

On the right-hand side, capital expenditures 161 million through the nine months right on track to be right around what we signalled of 200 million to start the year. In North America, we continue the construction of our Prattville Alabama facility, and in Asia Pac, we’ve completed the construction of our brownfield construction at Carole Park, and we now anticipate we’d commission that in Q1 of FY ’22 as we monitor demand.

Moving onto liquidity profile, note no change from past several quarters. We have the same instruments in place, $800 million of U.S. notes €400 million of notes and 500 million revolver, that’s remained the same for several quarters now. Our leverage is continues to remain on track. We’re at 2.1 times net-debt-to-adjusted EBITDA remains slightly above our range, which is 1x to 2x, but is down from 2.3 in the prior period or at as of September 30th 2019, and we continue to anticipate to have that firmly within our range in the next two to three quarters which is on track with what we’ve said to you three months ago.

Finally, a repeat of a slide in Jack’s deck, the FY ’20 key assumptions and market outlook. I’ll just reiterate the items that have changed. So in North America, we’ve refined our estimate of around U.S. residential housing from a range of 1.23 million, sorry 1.2 million to 1.3 million to be approximately 1.3 as the data comes in, and also raised our PDG guidance for exterior’s volume to plus 6% from 4% to 6% last quarter.

In Europe, we have the third bullet there. We’ve lowered our expectations on EBIT margin. We had originally anticipated EBIT margin accretion FY ’20 versus FY ’19. We’re now signalling that to be flat year-on-year.

No changes in Asia Pac. And finally, we’ve raised our adjusted net operating profit guidance from 340 million to 370 million to 350 million to 370 million.

With that I will hand it back over to Jack to go through a strategic update.

Jack Truong

Thanks, Jason. Now the fun part. Now let’s turn to page 25 for an update on our strategy, and starting with the fundamental transformation that were undertaken. Now we’re moving from being a big small company to small big company with a keen focus on delivering the most value to our customers and earn the business every day. So what does it mean by being a small big company? It doesn’t really mean about connecting different functions together, connecting different businesses together as one, as one global James Hardie team, and focus on the critical few opportunities and drive for those results.

And as we continue to connect different pieces or companies together, love it from those core strengths and focus on the right priorities. That’s just when we’re going to get the momentum and the growth, the profitable growth that we would expect for being a smart big company. So it’s really important for us is about for all of us about the priorities to be a customer centric company, and we start with commercial.

And this is what we went from being a poor company that was focused primarily on demand creation with the builders and contractors to one that is not only focus on demand creation with a builder and a contractor but also focus on adding significantly more value to our customers.

And we were up in our game on demand creation to poll why we engage when our customer pushed to make it easier for our customers and make more money selling our products in our competition. And then really from the operations side, is that as we create more and more demand, it’s important for us then as we flow those demand through our plants that those plants also operate as one. So traditionally, each and every one of our fiber cement plants across North America and Asia Pacific used to run independently. But through Hardie manufacturing and operating system based on lean principles, all of our fiber cement plants are now running as one interconnected network to produce consistently good quality products with more predictable service for our customers while reducing waste.

And market driven innovations is also that transformations is this is all about delivering to high impact innovations, the critical fuel that our customers need instead of what our R&D engineers want.

And through a support of these three critical transformation, our culture needs to answer change to enable those connections. For example, we’re — we used to be more top down within our company now is more the empowerments. It’s really about making sure that the decision-making process is really driven deeper within the organization and also the accountability that comes with it. And that has really energized our employees across the company and around the world. And rather than work in silos and decision makings are made separately, we now work together as one cross-functional team that would allow us to make better decisions, more holistic decision for the better, good of the total company or the total business.

And so, we went from being regional based company to now more globally connected company with the mindset of learning that is, that what’s could be all in one part of the world can also be new in a different part of the world. So it’s really about the culture of really learning from each other and really trying to maximize and raise the standard of our company across the globe.

And it’s moving from being just reactive to the situation to be more proactive, to really think ahead, where it’s around the corner. And then prioritize as a total company and really address those issues before it become a bigger issue. And most important to our companies about being that 1% improvement a day is really that continuous improvement mindset. How do we take the total company, interconnected, connected together and make the improvement 1% a day.

And that’s just really the transformation our company is going through from the cultural perspective as well from the business perspective, that really what we strive and aspire to do going forward. And we have started on this journey a year ago.

Now just to give us some example. On page 26, and we’ll share with you here really what the customer focused strategy and really in action at the International Builders Show that we just had recently in Las Vegas last month. Over three days at the show, our leadership team along with our cross-functional team members met with similar teams about top 25 customers, where we took the time to discuss, learn and share our plan together to further align our partnerships.

And then we reiterated our commitment to our customers that we want to earn and win the businesses each and every day with the values that we create in our company for them, specifically for them, each and every one of them. And it was a very successful show, and you can see the engagement that we have had with our customer throughout the show with the engaged employees that we have at the show, from a cross-functional perspective.

And we look forward to building on this momentum, to help, deliver our sustainable profitable growth going forward. This is just an example then in action.

Now on to page 27, it will provide you an update on our progress with lean transformation. Now we have now deployed our Hardie manufacturing operating system in all of our facilities in North America, and have recently started our European deployment.

In fact, I was in Oreo, Spain last week to participate in the first HMOS deployment in our fiber gypsum plant in Europe. And we plan to deploy HMOS in all of our European sites within the next 12 months. And you see this is the continuous improvement mindset. So we started the lean journey in Asia Pacific during the past few years, and we took those learnings and then replicate to the North American and improve on it, and which then become the Hardie manufacturing operating system, which we deploy across North American plants.

Now we take the HMOS in North America, now replicate to Europe, and improve on it based on the European capabilities and then we also will replicate this back to Asia Pacific to really drive the improvements as expected.

And what we would expect in a year from now, is that the HMOS implemented, deployed in Europe, now within replicate back to North America with those loans. So that is the continuous improvement mindset, and the strategy that we were deploying within our company using the lean principles, to really drive, tour producing our products, with consistent quality, with predictable service. And of course, to really take the unnecessary costs out of our manufacturing and supply chain system.

And we are currently on track to deliver against our lean cost out for each of the regions in North America. Our lean cost target is $100 million cumulative through fiscal year 2022. And so we have now deployed HMOS in 100% of our existing facilities in North America.

Our teams are solely focused on continuous improvements and quality cost, and predictable delivery of our products. And also very pleased with how engaged our employees are in embracing and executing our lean principles and our results show. Year-to-date after three quarters, we have already reached the target that we have set for the year, which is really faster than any one of us had expected it.

In Europe, our target costs up is $20 million. And recently, we launched our first facility in Oreo, Spain and Europe will be incorporating and replicating key learning from North America and we expect our plants to be transformed to lean by the end of fiscal year ’21.

In Asia Pacific, our cumulative target to fiscal year ’22 is $US19 million with focus on continuous improvements while replicating learning to our North American deployments. Our teams are sharing best practice, and are becoming more globally connected everyday. And our focus on lean transformation is a key initiative to support our goal of sustainable and profitable growth.

Now let’s turn to page 28 and discuss another core pillar of our corporate strategy. Market driven innovation. Our approach is to translate the megatrends, integrate these with customer insights, to develop winning products concepts, and ultimately bring these to markets, that the customers and the market really want.

And as a company, we’re committed to increase investments in and usage of our dedicated global R&D team to deliver innovations that address our customer’s needs and support our long-term growth expectations.

And today I would like to speak about three of these innovations in more detail, our Hardie Windbreaker, ExoTec Vero and Easytec’s products. First, if we look at the Hardie Windbreaker, which is a critical innovation for our European and Australian businesses.

In Europe, we launched the product in May of 2019 and we market the product as Hardie Windbreaker sheet and products, and then that innovation is then replicated back to Australia how we launch an improved product for the Australian markets in November of this past year as an RAB board. This product get installed beneath external cladding [ph] or rain screen and it delivers superior water resistance, long term climate durability, and superior strength.

We target in these products through our residential segment including single and multifamily housing, and we are excited about it, and specifically how we addresses a definite market and customer pain points, and we look forward to support its growth into future periods.

Now moving on to slide 30, we also just launch our ExcoTec Vero Facade Panels. This product would launch in Australia in this past November and offer a pre-finished concrete look façade panel is noncombustible and offered a look that this market is asking for is targeted to our commercial segment. Certainly, with this use as a test site as well, the learning from this will also allow us to replicate in other markets around the world.

And lastly on page 31, we launch our EasyTec’s cladding innovation in Australia just this past month. This product is a fiber cement panel uses as external cladding with the embedded fine rendered texture which eliminate the need for render of wet trades and really simplify the way renders been put on at the exteriors of homes. It’s also feature an interlocking mechanism for faster construction.

This product is targeted at our single-family new construction segments. Now these three new products are based on few of our ongoing innovations. And above all else, our philosophy is about delivering the products that our customers want and need while addressing market trends, easy and fast to install, low maintenance with high durability. And I’m excited about what the future holds as we identify new market-driven innovations and continue to address our customers needs each and every day.

In closing, I would like to reiterate that we’re focus on becoming the leading global building material company that deliver a sustainable and profitable growth. I believe that we’re on this path and that the last nine months have been a strong start.

Now, I’d also like to take the opportunity to thank all 5,000 employees, global employees across the James Hardie company for excellent work and very good execution during the past nine months. Thank you. We open for Q&A.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin question and answer session. [Operator Instructions]. And your first question today comes from Simon Thackray from Jefferies. Please ask your question, Simon?

Simon Thackray

Thanks very much. Good morning, Jack, good morning guys. And thanks for taking my questions. I only got couple of quick ones. Just in terms of North America, and in pricing performance year-on-year from a volume prospective, exterior is at 13%, you turned around interiors. We have pulps down 20%. You’ve got lean benefit running ahead of schedule. It was like you’re saying a very easy comp you had low growth last year and weather effect and all sort of stuff. And yet with EBIT margin of 26.1 with no disrespect the gross margin sequentially for the group was down 60 basis points, and the EBIT margin for North America was down 100 basis points with all those tailwinds slowing. I’m trying to understand that consequence from all of those tailwinds being reflected in that margin. Albeit that’s a good 1% [ph] for PCP, its down sequentially in a quarter that look really, really favorable point. Can you just help me understand that?

Jack Truong

Thanks for your question. To summarize, I think its essentially 27% last quarter dropping to 26.1% this quarter. Why? I think we had similar questions last quarter as looking forward. And I think what I would’ve said last quarter remains the same. So, third quarter is our lowest volume quarter. So I think that’s the number one driver when you’re talking about margin. We’ve talked about freight narrowing a bit in the back half of the year. Certainly to your point, pulp was a tailwind for Q3 versus the same period last year, but versus Q2 not as — it was a tailwind, but not as significant as that was ramping down over time.

But again — and lastly, we signaled we would continue to invest and we have. And so, I think those things combined, you end up at 26.1%, which is a great outcome, 26.1% for the nine months, while delivering a PDG for the full year at six plus percent. We’re quite pleased with how the quarter turned out.

Simon Thackray

Yes, yes. No, I typically asked it, I’m not criticizing the EBIT margin. I’m just looking at the extraordinary volume growth you got, that notwithstanding whereas the quarter weaker, one would have expected there would be more leverage in that volume to the cost input etc cetera. So what I would like to…

Jack Truong

So, if I think about, so you’ve asked the question a couple ways, Q3 versus Q3, we did expand margins significantly over 300 basis points. Q3 versus Q2, I don’t have the number, off top my head, but volume would certainly be down Q3 versus Q2 due to seasonality.

Simon Thackray

Yes. That’s the seasonality of the volume. By while at the same token, the gross margin is normally better in Q3 than any other quarter as well. Though I can look at that sequentially looking at the gross margin Q-on-Q. What I would like to ask is the following; it’s a very strong PDG with upgraded guidance of PDG, which is excellent. If hypothetical to exit [ph], we think permit [ph] accelerating in U.S. which is great. You’re now delivering positive comp on interiors, I should say going forward. If we were to see U.S. housing start, let’s say, up 7% or 8% in FY, 2021 and you can post positive interiors growth in sort of low to mid single digits and R&R picked the longest sort of mid single digit level. Are you still able in that environment with that change in mix to achieve the kind of PDG target that we’re looking at, because that was a sort of another low double digit volume?

Jack Truong

I did not understand what you talk about. It’s quite hard to hear you. I think a lot of math there. But you’re saying, if the underlying housing market grows 7%, 8%, R&R still at about 2% to 3%. Can we still drive? Can we still drive PDG results similar to this year? Is that your question?

Simon Thackray

I’m trying to understand, if the mix in interiors and new housing would have an impact for PDG, just to understand?

Jason Miele

Yes. So let’s cover off on that part first. So interiors is not part of our PDG calculation. PDG is a calculation associated strictly to our exteriors volumes. So then within exteriors, you have new construction in R&R. Do you want to cover off whether you believe we can drive the PDG result in a accelerating market, 8% new construction growth and 3% R&R growth?

Jack Truong

Yes, Simon. Just a couple of things to remember as we head into the next — this coming year is that the first six months of 2019 was a very soft new construction in North America, because of all type of weather, the [Indiscernible] and so on, I think it was like — was down for the first six months where the new construction were down like minus 6%, 7%. So as you look into the comp — if you look at it comp for the next six months, you’re going to see a higher comp. But in reality the actual new construction unit is still the same as we have in this past quarter. So it’s just about — so we have to keep that as a fundamental level set.

And then the second part is that, as I mentioned before is that we’re now becoming a small big company now that we have a much bigger critical mass. And it’s important for us that every day that we execute well as a team, cross functionally to focus on the critical few parameters to really drive the results — expected results. Then we have to earn that business every day. So — with the strategy we have and how we’ve been executing, I’m confident that we can do that. But at the same time it is something that we have to earn out every day. It’s not a guarantee.

Simon Thackray

Sure, sure. I appreciate that. So I’m just sort of trying to understand is there any mix shift I mean, historically with it 65% R&R, 35% new housing, up 75% or so volume, 25% interiors. How does that mix shift if at all, change the target of PDG? That’s all I was trying to understand in a sort of hypothetical perspective and whether obviously [Indiscernible]?

Jason Miele

We’re getting a ton of feedback of this call. We’ll move to the next question.

Simon Thackray

Sorry.

Jason Miele

Sorry, Simon, we’re getting a ton of feedback in the room of your line. So we’re going to move on to the next question in the room. Peter Wilson.

Peter Wilson

Peter Wilson, Credit Suisse. So North American experience a very strong volume. Can you give us some more color on where you want that business, so, in which geographies, products, which customers, where did it actually come from?

Jack Truong

So, as we started this journey a year ago from pull to push-pull and so we have reallocate it and put the resources on the pull with the true pull where we have the hunters go out and really get our business on the wall. And then, while we invest in the key account to manage with our customers is a lot better. So it’s really a — now it’s really come to a dynamic of those two are working together. Therefore the hunters have been about to gain some really good conversion against other categories and competitors and be able then to translate that into sales with our customers. And so we have very, very strong growth in South Central or in the Texas area, the Southeast to mid-South area and also we’ve been gaining a lot of momentum in the Northeast. So certainly the area that we have focus on as part of our strategy to continue to gain market share.

Peter Wilson

Okay. And the Q4 result, would you be happy for the market to drove like that forward? Or is there anything unusual about the quarter, i.e., was there in your view volume pull forward or something of that nature?

Jack Truong

No. We didn’t raise the price until this quarter. So is really that is — so the result from this past quarter is as pure push-pull, no more driving the business that our company has been on.

Peter Wilson

Okay. And on price, so I mean, it’s slightly soft result 1% which would put down to mix. I want to understand, what’s the margin impact to that? Is there’s a mix on price? Is there a comparable mix shift on cost of goods sold? Or is there actually a negative margin impact for softer price?

Jack Truong

Yes. I think there’s a couple of things to remember now, Peter is that, we we’re now moving into HMOS for a lean transformation. So our network of plant become more and more efficient everyday. So, the key for us is really about having the degree of freedom to manage volume price mix, to ensure that we have the maximum amount of volume fiber cement flowing through our now more efficient plants. As we do that we will generate significant leverage to drive more EBIT dollars. So, when it come to price mix, what we want to do, too, is that the mix that we are also beginning to go into is that we see opportunities. So we currently have low penetration in multi-family. And so we are putting a focus to gain more penetration in that area. And of course products in the multi-family has a lower price point, because it’s a different type of products. But as there are also fiber cement and they also flow to the same network of plants and we by doing that we still generate a lot more EBIT dollars.

And so that’s was the mix that we talk about and the other is on the price is that a big part of our price growth that we plan this year is really about the increased penetration of our win with color program. And so we had a soft start, a rough start to the launch of this program a year ago and that’s kind of not meeting the plan that we have put in. But we expect going forward our Color program will become a growth generator as well as the price generator in our business in North America.

Sophie Spartellus

Good morning. Sophie Spartellus from Bank of America. Just in terms of seasonality, I recall at the Investor Day, you talked around the internal initiatives being able to smooth out the seasonality that we generally see Q-on-Q. We did see a bit of seasonality this quarter. Can you talk about how long that will take to flush through the accounts?

Jack Truong

Well, I think if — I think the new construction was stronger in the last three, four months than in the previous year. So you probably saw that the construction activities have picked up. And so, it’s just as — we are — at the end of day were a pull company, we are a demand creation company. So as the builders start to build and as the contractors that want to remodel home, we are supplying that service. So that’s is that phenomenon that you see that we track pretty very well with that as well.

Sophie Spartellus

Okay. So we should expect to see that continued seasonality going forward. You don’t have any internal, I guess, pull factors to smooth that out?

Jack Truong

No, because its really we’re the demand generated company.

Sophie Spartellus

Okay. And then just in terms of Europe, the differential between fiber cement and fiber gypsum, you talked around a softer European market in some of the markets there? Can you just maybe talk through a little bit more around why fiber gypsum sort of had that shortfall?

Jack Truong

Yes. It is a transformational journey for our company globally. Now here in North America up until a year ago we were primarily a pull company. We didn’t really focus a lot on push. We just really manage our customers better. And the same thing with our European business. And also to a large extent our business in Australia is that our business with fiber gypsum in Europe was primarily a pull business. That means that most of our sales team have been focused on going to the architects, going to designer, going to specify and specified in fiber gypsum as a technical product on the wall. And we didn’t focus a lot on the customer side.

And so with whole global strategy now to drive bigger growth, it’s important that we become the push-pull. And that transition was take a lot longer for our European team than we had expected it. But as of last week we spent a lot of time together. And I believe that the team really get it now, not only at the leadership level, but really deeper down within the organization. And I would expect that big adjustment will happen pretty quickly similar to what you see in North America going forward. But that’s just what happened. That’s really been a pull company. And our key competitors are pretty much in the channel in Europe.

Lee Power

Lee Power, CLSA. Jack, just when you talked a bit about achieving high margin and high PDG at the same time. Is there any — and that’s kind of come with very little lean reinvestment. Is there any change in thinking about the level of lean that needs to be reinvested to maintain 6% PDG over the longer term?

Jack Truong

Well, first of all, I just want to, if you look if you look back at our historical result in North America and its in our annual region report, look at the last 10 years. Our average PDG during the last 10 years excluding this year is about 3.8% and then our EBIT margin was 22.7%. And most of the PDG there’s more than 6% really happened in the first three, four years after the global financial crisis. And after that was been kind of below the range and so on. So really the business model that we have to change now is really driven from being run in many different plants independently into one network as one plant pretty much like one super sized plant if you will. And that is the one allow us to be were to — be were to be at the new baseline of performance.

And for us to really the new business model that we on. And we just need to execute that game plan more consistently for us to be able to be more predictable and what that should be and how much investment we should put in as we need to go into the future. But as of right now is a little bit more about ad hoc as we see how things developing, because we’re still in — doing this transformation.

Lee Power

And then just following on from Peter’s question. You talked about the hunters doing really well. I mean, in the past you’ve talked about base erosion. Is that still occurring? And how — and then maybe how you reconcile that with LP’s results, which is also same [ph]?

Jack Truong

Yes. So remember, we are a push — we have traditionally a pull company. We haven’t really put lot of into push. So, and now as we’ve put together a push-pull is really demand creation that drive our sales. And with now a lot more — our total company now more customer focus or customer centric. We don’t have a lot of erosion as much erosion that we used to have in the past. And that’s is really what we see as a result of our company that with the consistent result that we have been delivering in the past three quarters. And also keep in mind though is what we strive to do here is to grow, but grow at the profitable growth. So it’s not just about again the volume.

Lee Power

Okay. Thanks.

Peter Steyn

Peter Steyn from Macquarie. Jack, with that EasyTec slides behind you, and ExoTec as well. Just curious, how you thinking about the possibility of the application of some of these products particularly in the Stockholm market in the U.S.? And how that could alter your addressable market over time?

Jack Truong

Yes. So really the key part of the innovation process is really about for us to understand those unmet needs particularly in this case, the Stockholm markets in the U.S. or the render market in Western Europe is really about to understand those unmet needs. And what we have right now it just is a product, EasyTec. And so based on our knowledge now of what’s going on with the unmet need in the North American markets in Europe then would allow us then to have the right product — really find the right products that we can use our technology to really develop. And that is really where we’re going. So it’s the EasyTec is just the beginning of a platform that would allow us to really innovate.

Peter Steyn

Right. Thanks. And then just following on the lean conversation. Could you give us a sense of where you are from an annualized run rate point of view in the realization of the gains that you’ve envisaged?

Jack Truong

Well, we’ll give you more definitive numbers in May when we come back here it gives you guidance for fiscal year 2021. But as of right now, I mean, certainly you can see that in our EBIT results. But why I can also say is that the first three quarters of lean execution, we pretty much nearly the same as what we had anticipate for the whole year. So we’re ahead of the plan.

Peter Steyn

Okay. Perfect. And I just wanted to pick up on a small item or smaller item not to discount the New Zealand business, but sales down 18% in New Zealand. Obviously there’d be a bit of currency impact there as well. But I’m just curious to get to your sense or some of the challenges in getting that business back on its feet again?

Jack Truong

Well, I think this is some sort of case of what I mentioned at the beginning of the strategy section is that to move into small, big company, we got to integrate the function together and really focus on the right priority, the critical few priorities and make better decision holistically. And that is the area that we’ve been lacking in our New Zealand business at the leadership level. And so we’re looking to address that. We have deploy one of our best manufacturing leaders in our North American plant to become a new plant manager of our fiber cement plant in New Zealand for example. So we start to really strengthen the bench strength in New Zealand to really address that issue, because this needs to be addressed.

Peter Steyn

Perfect. I’ll leave it there. Thanks.

Jason Miele

No more questions. Go to the questions on the phone please operator.

Operator

Thank you. Your next question comes from Keith Chau from MST Marquee. Please ask your question, Keith.

Keith Chau

Well, good morning Jack, Jason. Two questions on my end. Just firstly, circling back on price. Just wondering if you can give us a sense of what like-for-like price increase was in the period? And also what the expectation going forward is recognizing that price increases have been announced I think, is at the table?

Jack Truong

Yes. We announced our price increase this quarter is between 2% and 3% really depends on the region.

Keith Chau

And they just want a like-for-like basis, Jack?

Jason Miele

Like for — what do you mean by that Keith?

Keith Chau

So excluding the mix impact on the quarter what would the like-for-like price increase has been?

Jason Miele

So, at the beginning of the year we signaled we expected a 2% price increase that flow to the financials. And so the mix is what’s driving that down to 1%. So the difference in what you’re selling, whether you say more multi-family, more interiors as a percent of the total period-over-period. So we achieved our price increases. The price increases we took in the market we got. The team did a great job of that. And now it’s just as the periods roll by, we are getting different mixes than what we necessarily expected when we said, we’ll deliver too.

Jack Truong

Keith, just some something to think about too is that the like-for-like, if you look at the first nine months, this year versus last is that the — that we had expected a win Color Program to be more penetrated. We didn’t meet the expectation. And the second is that we made a conscious decision to really grow more into the multi-family segment. So that’s really the mix, the two key mix that really drove the price that we have today.

Keith Chau

Okay. Thanks, Jack. And then, secondly, just circling back on lean. So tracking ahead of expectations, I think the expectations for this year with the range of 15 million to 20 million. So I’m just wondering if you could give us a sense of where within that range we’re sitting at the nine month for this year? And also is it at all possible that lean benefits get reinvested at a faster pace in delivery either in the fourth quarter of this year or in the FY 2021?

Jack Truong

Yes. Keith. So, I think as Jack said earlier regarding the $15 million to $20 million target through nine months were there. So we’re running kind of one quarter ahead of schedule. As far as reinvestment outpacing leans, that probably would not occur if you look over the next three years. We’ve set our targets of 15 to 20 and then escalating up to 100 in Year three. So the investment wouldn’t exceed that.

Keith Chau

Okay. Thanks Jason. On price performance, I think you noted in the pack that price performance did improve relative to last year. I think previously in the slide that we had on the U.S. investment [ph] on a quarter-on-quarter basis. The price performance that continued to improve. But notwithstanding some of the movement we’ve seen in gross profit margin, are you satisfied that price performance is continuing to improve on a quarter-on-quarter basis?

Jack Truong

Just to clarify your question, Keith, obviously most of what we present is this fiscal year versus last fiscal year. You’re asking has the plant performance improved Q3, FY 2020 versus Q2 FY 2020?

Keith Chau

Yes, that’s right.

Jack Truong

Yes, we continue to lean, continues to accelerate. So similar to how you — we laid out at the Investor tour and in previous presentations the three year targets for lean. And you can kind of see that increasing over time. Think about the quarters in a similar way to FY — for FY 2020.

Keith Chau

Okay.

Jason Miele

Just to add on to what Jason says too is that for lean it’s really about us continuously improve every month and of course then every quarter. And that is the premise for us to be able to deliver on that $100 million cumulative savings.

Keith Chau

Thanks, Jack. On the interiors business, Jason, I think you mentioned the target for this year was to get back to the flat outcome. I think for the first three quarters of year you’re at flat already. Though the implication that the fourth quarter you’re expecting volumes to be flat or should we be thinking volumes are going to make — the volume momentum that we’ve seen in interiors continued through into the fourth quarter and or a positive comp in the FY 2021?

Jack Truong

I think my comment was we’re on track to achieve the goal we stated last February. We’ll provide guidance specific to FY 2021 in May. But I think if you go back and look at some of the things we’ve talked about the interiors business including on prior calls and our September tour, it’s about retail fundamentals currently and we said, we believe that could get us back to flat or slightly positive, and then into the future to really make it a significant growth business. It was about innovation and delivering new products into the retail channel. So we’re right on track with where we want to be Keith, and will provide FY 2021 guidance in May.

Keith Chau

Okay, excellent. And just lastly, for me on corporate calls. Just wondering if you can give us some guidance on what could be a reasonable assumption before Q3 or at least was embedded within the guidance range, and also if it is at all possible to give us a bit of a steer in FY ’21 please?

Jack Truong

Yes, I think I’d say obviously, the, the normalized number I talked about on slide 20, 20.8 is at the December 31st share price and it is excluding the one-off or the unusual item I talked about. So that could probably be a starting point for your analysis. And then, in my comments, it’s quite clear that the acceleration will also occur into Q4. So you should consider that in your fourth quarter number.

Keith Chau

And then into FY 2021 or is that something that we should hang tight on until the full year result?

Jack Truong

Certainly, when we provide our NOPAT guidance for FY 2021 will include our range for general corporate costs, but I think my comment a second ago around 20.8, that is our result excluding abnormal item. So I think that could be, if you look at that in prior quarters to, forecast and develop your model for FY ’21.

Keith Chau

Okay, thanks very much, Jack and Jason.

Jack Truong

Thanks, Keith.

Operator

I will now hand the conference back to your presenters. Please continue.

Jack Truong

Well, thank you all very much for attending our conference call. We are very excited about the results that we have delivered within the first nine months. Our strategy is on track. We still have much work to do, but we’re excited about it. Thank you.

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