James Hardie Industries PLC

ASX:JHX

Earnings Call Transcript 2022-Q3

[Operator]

Thank you for standing by, and welcome to the James Hardie Industries Q3 FY '22 Results Briefing. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions]I would now like to hand the conference over to Harold Wiens, Interim CEO. Please go ahead.

[Harold J. Wiens, Interim CEO & Independent Non]

Hello, everyone, and welcome to our third quarter fiscal year 2022 earnings call. I'm Harold Wiens, Interim CEO of James Hardie. On Page 2, you will see our standard cautionary note on forward-looking statements. Please note that this presentation does contain forward-looking statements and also the use of non-GAAP financial information.Let's move on to Page 3, where you will see our agenda and speakers for today. I'm proud to be joined by our CFO, Jason Miele, our North American President, Sean Gadd; and our Executive Vice President of Global Operations (sic) [ SVP of Global Operations ], Ryan Kilcullen. Today, Sean, Ryan and I will start the presentation with a strategy update. Then, Jason will discuss the third quarter financial results, provide an update on AICF funding and review guidance. After that, we'll take your questions. Before we begin, though, I would just like to take this opportunity to thank each of our 5,000 employees from around the world for their continued effort to deliver our strong results. None of our financial results would be possible without their commitment and execution of our global strategy.With that, let's turn to Page 5. Our strategy remains unchanged and it is embedded across all 3 regions and all 5,000 of our team members. Our strategy incorporates our commitment to Zero Harm and ESG. Our strategy starts with focus and strong execution around our 3 foundational initiatives. They are lean manufacturing, customer partnership and supply chain integration. Over the last 3 years, it is these 3 foundational strategic initiatives that drove our transformation. With these initiatives fully embedded in our company, we are now focused on continuing to drive profitable growth globally through the following 3 strategic initiatives; marketing directly to the homeowner to create demand, penetrating and driving profitable growth in existing and new segments, and finally, commercializing global innovations by expanding into new categories. Today, we'll provide updates on all of these strategic initiatives.Now please turn to Page 6. James Hardie team is excited and proud to announce our partnership with Magnolia, the popular home and lifestyle brand founded by Chip and Joanna Gaines. Through Chip and Joanna's wildly successful show, Fixer Upper, Magnolia became a trusted household name across America. We are proud that James Hardie products have been utilized on Fixer Upper projects in the past. And we look forward to more of the same being featured across the brand's omnichannel to help transform the lives of homeowners and design clients to come.With Magnolia, Chip and Joanna have continued to broaden their reach with homeowners having recently launched their own television network in partnership with Discovery, Inc. called Magnolia Network. In my opinion, we could not have found a better partner for James Hardie. At James Hardie, we want to enable the homeowner to design the home of their dreams, while providing them and their family with the trusted protection and low maintenance of James Hardie fiber cement technology.You will recall at our Investor Day in May, we described home as a sanctuary and in our -- it's possible marketing campaign, we ask, is it possible to fall in love with your home again. I'd like to read to you the About Us section from Chip and Joanna's website, magnolio.com., so you can better understand the synergy between our 2 brands and why we believe this is such a great partnership. We believe in home. We started Magnolia with a simple rallying cry back in 2003. And what was true then is still true today. Home is our favorite place to be.Throughout all the joys and challenges that life brings, home always seems to be right in the middle of it. It's what catches us and also what lifts us up. It's where we retreat, where we are restored and also where we bring our community together to share a meal at the table. But we've learned that home doesn't have to be a physical destination. Any place that you feel known, loved and always welcome back is a home of its own. We believe these things so deeply is that everything we do at Magnolia is in pursuit of inspiring people to create a home and the life they love. And whether you find us mostly online or at the market here in Waco, inside the pages of our magazine or on the shows of Magnolia Network, it is our ongoing desire that any time you spend with us will help guide you there, signed Chip and Jo.Now when I read that, it reaffirms my belief that we have found the perfect partner for James Hardie. In addition to this alignment and supporting the homeowner, their multifaceted omnichannel presence makes them a fantastic partner. As I previously mentioned, they have their own television network, successful television shows, a magazine and as you can see on this page, a significant social media presence. More specifically, on Instagram, the global social network that focuses on image and video sharing across Magnolia, Chip and Joanna's platforms, they have close to a combined 24 million followers.Instagram is a fabulous platform for us to showcase our products and building solutions to the homeowner. North American-based homeowners view Chip and Joanna and their Magnolia brand as a trusted resource in guiding their remodel and renovation decisions. We are honored to partner with Magnolia and are excited about how our brands will work together in the future. You should expect to see more news on this partnership over the next 3 to 4 months.Now let's turn to Page 7. As I mentioned earlier, commercializing global innovations is a key strategic initiative to ensure that we drive future profitable growth. And we could not be more excited about the launch of 2 new products and the rebranding of the innovations we launched in May. The team is pleased to announce the Hardie Architectural Collection. This collection is our most significant expansion beyond wood-look designs to date. Designed in collaboration with architects, the Hardie Architectural Collection will empower homeowners to reimagine their homes with fresh, modern exterior looks. We believe that these products will help to change how the world builds by reimagining what is possible for the exterior of the home as well as aiding the speed of construction.The first generation of the Hardie Architectural Collection is comprised of 5 distinctive textured panels inspired by nature. They are Fine Sand, Mounded Sand, Fine Sand-Grooved, Sculpted Clay and Sea Grass. Since May, we have shared many images of our Fine Sand and Mounded Sand textures with you, which deliver aesthetics similar to stucco and render. Today, I want to spend a little time showing you some more details about our 2 new products, Hardie Architectural Panels in Sculpted Clay and in Sea Grass textures. And as I mentioned earlier, these products will be on display at the International Builders Show later this week in Orlando.Now let's turn to Page 8 to take a deeper look at Sculpted Clay. Here, you see a rendering of a home with our Sculpted Clay texture as the primary cladding with the Fine Sand group texture used as a central accent. On the right is a close up of the Sculpted Clay texture. When we performed insights research with architects and homeowners, some referred to this product as almost appearing like slate, while many described it looking like clay, hence, the ultimate name of this texture. We believe this product provides a fantastic alternative to stone, brick and other masonry techniques used on the bottom half of a 2-storied house. As you can see in this image, it pairs well with our Fine Sand panel textures but could also be used with Hardie Planks or other Hardie Architectural Panel textures to deliver a myriad of exterior design and aesthetics.Finally, please turn to Page 9 to take a look at Sea Grass. While Fine Sand, Mounded Sand and Sculpted Clay are all textures that existing building materials can deliver today, our new Sea Grass texture, we believe, is truly unique. We do not believe this is an aesthetic currently delivered in the exterior building material space and we're energized by providing a truly new look. The rendering of the house here shows the Sea Grass texture used on the front of the house in gray and is contrasted with a more traditional style boards in white.On the right, we have provided a close-up of the Sea Grass texture. This product can be installed with a Sea Grass texture pointing vertically as shown here, but also looks great installed horizontally. We look forward to showing more builders, architects, customers and homeowners these new products at IBS later this week. As I mentioned earlier, this is our most significant expansion beyond wood-look designs to date. However, we are not done. This is only the first generation of the collection. Our intent is to continue to evolve the collection at to debut even more design forward exterior options as we empower homeowners, architects and homebuilders with endless design possibilities.I am pleased to now hand over to Sean Gadd to discuss some of our strategic progress in North America.

[Sean Gadd, President of North America]

Thank you, Harold, and good morning, and good evening, everyone. It is a pleasure to speak to you all again. Let's turn to Page 10. Continued driving profitable growth is our team's focus on driving a high-value product mix in partnership with our customers. We are all now familiar with the matrix on the left-hand side of this page, which provides a simple illustration of our North American product portfolio and the price achieved and value provided to our customers and the homeowners. What we have added today is a chart on the right, illustrating our shifts in product mix in fiscal year '22, our expectations for product mix in fiscal year '23 and more importantly, our long-term strategic intent.In North America, for the 9 months ended December 31, 2021, we have seen price/mix growth of plus 10%. In addition to our strategic price increase in January 1, 2021, the 10% increase in price/mix was driven by the product mix shift you see in this chart. Specifically, in fiscal year '22, a decrease in the proportion of Cemplank and Backer Boards volume, an increase in the proportion of Hardie-branded exterior volume and increase in the proportion of ColorPlus volumes.In fiscal year '23, we expect to continue to drive price/mix growth. We want to continue to decrease the proportion of volume attributable to our Fiber brand, continued to increase the proportion of volume attributable to Hardie-branded exteriors and continue to grow ColorPlus through R&R and the consumer. In addition, we will start to get small mix benefits from the Hardie Architectural Collection in FY '23. In fiscal year '23, we expect price/mix growth in North America to be in the range of plus 7% and plus 10%.Most important to today's discussion is the last bar on the chart. This represents our long-term intent in regard to our North American product mix. As you can see, our intent is to drive significant growth with our innovative new products and to continue to expand the proportion of ColorPlus. We believe that this is achievable to our focus on 3 critical strategic initiatives. One, continue partnering with our customers; two, marketing directly to the homeowner; and three, commercializing innovative new products.Now let's turn to Page 11 to discuss the importance of continuing to penetrate the Repair and Remodel segment in North America. We believe the opportunity for future growth in the repair and remodel market is significant and we believe we are well positioned to accelerate our penetration of the repair and remodel market in North America. We will do this by marketing directly to the homeowner, enhancing trust and credibility with the homeowner via the right brand partners, having the product that homeowners want, including innovative new products and partnering closely with our customers. What is exciting about the remodel market is the size of the opportunity and its resilience to the broader market conditions. I've tried to summarize this at the bottom of this page.First, we already have strong position in the R&R market with approximately 65% to 70% of our current mix being sold into R&R. Second, the opportunity is large with over 44 million homes over 40 years old. Third, homeowner's wealth had never been higher in the United States. Currently, homeowners have $302,000 of equity in their home on average, which is an all-time high. Fourth, remodel space is resilient. There's been a lot of focus in this market around interest rates over past few weeks.We believe the Remodel segment has more resilience to interest rates changes than other segments, specifically for homeowners taking at a home equity loan of $50,000, a 100 basis point change in rates only changes their monthly payment by approximately $25. We do not believe this is deterrent to homeowners deciding to remodel their home, especially considering the record amount of home equity I mentioned earlier. I believe we have the right strategy, the right products, the right team and the right partners to accelerate our penetration of the R&R market in North America.I'll now hand it over to Ryan Kilcullen to discuss global capacity expansion.

[Ryan Kilcullen, Senior Vice President of Global Operations]

Thank you, Sean, and good morning, and good afternoon, everyone. Please turn to Page 12, we'll provide an update on our transformational global capacity expansion plan. As we drive profitable growth in the new and existing segments, it is imperative that we regularly add capacity to ensure that supply is kept ahead of demand. We have a globally integrated plan to ensure we do just that. Not included on this slide are capacity expansion projects, which are already in the commissioning phase and which are delivering saleable product today.These include the following ramp-ups: Prattville, Alabama's Sheet Machines #1 and #2, which adds 600 million standard feet of nameplate production capacity to our North American network; ColorPlus finishing capacity in Tacoma, Washington; and ColorPlus finishing capacity in Peru, Illinois. These 3 projects continue to ramp up well, adding additional capacity to our network and additional ColorPlus product, which, as Sean mentioned earlier, is critical to our product mix goals and penetrating the R&R segment.In addition to those ongoing ramp-ups, we have significant additional capacity coming online in the next 24 months. Those projects are indicated in blue on this slide and we have identified the expected commissioning dates of each. These projects are as follows. In North America, the restart of our Summerville, South Carolina facility, which will add 190 million standard feet of nameplate production. We plan to ship our first truck of product from Summerville to our customers later this month.We're adding trim finishing capacity in our Prattville, Alabama facility and we expect to be commissioning between July and September of this year. This finishing capacity enables us to deliver more high-value HLD trim to our customers. In Westfield, Massachusetts, we are adding ColorPlus finishing capacity to a new facility with commissioning scheduled for about 12 months from today. This ColorPlus capacity is strategically located within our Northeast market. Finally, in North America, we will be adding 2 Sheet Machines to our Prattville, Alabama facility, which will add another 600 million standard feet of nameplate capacity. We expect to begin commissioning in Q3 fiscal year '24, which is about 19 months from today.In Asia Pacific, we are adding additional brownfield capacity at our Carole Park facility in Brisbane, Australia. We plan to commission this site in approximately 9 months. And finally, we have brownfield fiber gypsum capacity plant at our Orejo, Spain site, which is scheduled to be commissioned approximately 24 months from today. What these projects demonstrate is that we have clear plans to continue to add capacity ahead of demand for the next 24 months. And in addition to these projects, we are in the planning phase for greenfield fiber cement expansion in all 3 regions.We are currently focused on the site selection process in all 3 regions and anticipate making land acquisitions over the next 6 months, which we will announce to the market as they occur. This is truly a transformational global capacity expansion plan. Over the next 4 years, we anticipate investing between 1.6 and $1.8 billion on the expansion projects on this page. As I mentioned earlier, as we drive profitable growth into new and existing segments, it is imperative that we regularly add capacity to ensure that supply has kept ahead of demand. The short and long-term initiatives that I've spoken about today will accomplish just that.With that, I'll now hand it over to our CFO, Jason Miele.

[Jason Miele, Chief Financial Officer]

Thank you, Ryan. Good morning and good afternoon, everyone. I'm going to keep my commentary on the financial results brief today and focus on the third quarter. We want to make sure we have time to provide an update on AICF funding, discuss guidance and answer all of your questions. There are a few of our standard financial slides I will not speak to today, but we have included them within the appendix for your reference.I will start on Slide 14 with our global results. In the third quarter, the global team continued to deliver growth above market and strong returns, as all 3 regions delivered double-digit net sales growth and double-digit adjusted EBIT growth. The global team's execution resulted in global net sales increasing 22% to $900 million, global adjusted EBIT increasing 22% to $204.1 million and global adjusted net income increasing 25% to $154.1 million. To support and maintain our momentum, we continue to invest significantly in our strategic initiatives.Let's move to Page 15 to discuss the North American third quarter results. In the third quarter, the North America team delivered net sales growth of 24% to $644.9 million. The team delivered strong volume growth of 12% and exceptional price/mix growth of 12%. The price/mix growth was delivered through continued execution in driving high-value product penetration and close partnership with our customers. In addition, with continued execution of our foundational initiatives, we were able to translate the top line results into a strong bottom line outcome with adjusted EBIT increasing 18% to $183.3 million at a margin of 28.4%. We continue to make significant investment in future growth through marketing, innovation and talent capability.Turning now to Page 16, we will discuss the Europe results. In Europe, in the third quarter, net sales increased 14% to EUR 97.6 million and adjusted EBIT increased 18% to EUR 10.4 million. The net sales growth was delivered through the team's continued execution of the high-value product penetration strategy. Fiber cement net sales increased 22% in the quarter, which contributed to an outstanding 13% growth in price/mix. As I flagged in January, the European business was adversely impacted by hyperinflation and energy costs. The cost of hyperinflation to the business was EUR 4.3 million in the quarter and resulted in the adjusted EBIT margin being 440 basis points lower than it otherwise would have been. The Europe business remains on track and continues to gain momentum.Let's move now to Page 17 to discuss Asia Pacific. The Asia Pacific team delivered net sales growth of 20% to AUD 196.5 million in the third quarter. The APAC business continues its execution in driving high-value product penetration, resulting in price/mix growth of 11% across the region. Execution on lean manufacturing and a focus on high-value product mix helped to offset the inflationary environment, leading to strong adjusted EBIT growth of 17% and an adjusted EBIT margin of 27.3%.Now moving to Page 19 to provide an update on AICF funding. Per the terms of the Amended Final Funding Agreement, we are required to make an annual contribution to the AICF. Per the terms of AFFA, our contribution to the AICF must be the lower of 2 calculations, which were performed on June 24 each year. Calculation 1 is the percent of cash flow cap calculation. This calculation is a set percentage of James Hardie's operating cash flow. This percentage has been 35% since the inception of the AFFA. This calculation does not consider the AICF's liquidity position. Calculation 2, we refer to as the top-up calculation. This calculation tops up the AICF annually, ensuring that the AICF consistently has 3 years of liquidity.Based on our current forecasts, we believe the top-up calculation will be utilized on June 24, 2022, to determine the James Hardie annual contribution to the AICF to be paid in fiscal year '23. We estimate that this contribution will be approximately 15% to 20% of our fiscal year 2022 operating cash flow. Further, given the significant growth in our operating cash flow in recent years, we anticipate that top-up calculation will continue to determine our contribution to the AICF when these calculations are performed in June 2023 and June 2024. In the appendix on Page 29, we have provided the details of the June 2020 calculation, along with references to the source of the data so you can review the calculation in detail as you see fit and better understand how the calculations work and the sources for the data within the calculation.Let's now move to Page 20 to continue this discussion. To date, we have contributed over AUD 1.8 billion to the AICF. In the past few years, our contributions have increased significantly as our operating cash flow has grown significantly. This has resulted in the AICF cash and investment balance increasing dramatically in the past few years. And as of January 4, 2022, we estimate that AICF has approximately AUD 300 million in cash and investments.The AICF's robust cash balance, combined with the actuaries projected reducing claims curve and our strong operating cash flows, creates a situation where we believe the top-up calculation should persist. We anticipate the top-up calculation will continue to determine our contribution to the AICF when these calculations are performed in June 2023 and June 2024. If the top-up calculation does indeed persist over the longer term, a simple way to approximate the future James Hardie contributions to the AICF is the claims curve on this page lagged by 3 years.As an example, the top-up calculation in June 2024 should approximate the estimated claims paid in fiscal year 2027. To reiterate, specific to the upcoming calculations in June 2022, we believe the top-up calculation will determine our payment to be made to the AICF in fiscal year '23. And we anticipate this amount to be approximately 15% to 20% of our fiscal year 2022 operating cash flow. We remain committed to the AICF and the terms of the AFFA and we are pleased that the AICF now has a robust cash and investment position, which we will continue to contribute to annually.Now let's turn to Page 22 to discuss guidance. Our demonstrated momentum in high-value product mix penetration in all 3 regions combined with continued market share gains and lean execution gives us confidence in raising the fiscal year 2022 adjusted net income guidance range as well as in providing fiscal year 2023 guidance. We raised our full year fiscal year '22 adjusted net income guidance to a range of 620 and $630 million. One item to specifically note as it relates to this guidance. On January 7, 2022, we updated adjusted net income guidance to a range of 605 and $625 million. I mentioned on that call that the adjusted net income guidance assumed that the financial impact of the CEO termination and related benefits and costs would be excluded from full year fiscal year '22 adjusted net income.Subsequent to January 7, we have determined we will, in fact, not adjust earnings for benefits and costs associated with the CEO termination, but will rather leave these amounts in regular reported earnings in both fiscal year '22 and fiscal year '23. In fiscal year 2022, we expect a net favorable impact on adjusted net income of approximately $8 million related to these benefits and costs. The fiscal year '22 revised guidance range represents a 35% to 38% year-on-year improvement in adjusted net income, up from $458 million in fiscal year '21.Turning to Page 23, we will discuss fiscal year 2023 guidance. Today, we are introducing a fiscal year 2023 adjusted net income guidance range of 740 and $820 million. Specific to our North America segment, we are providing 2 points of guidance for fiscal year '23. First, we expect net sales growth of 16% to 20% and we expect an EBIT margin of 30% to 33%. Lastly, I wanted to point out that we currently anticipate an increase in adjusted effective tax rate in the range of 150 basis points to 300 basis points. However, we note there is the potential for movement in international taxes that could further impact our adjusted ETR and we will provide updated guidance throughout the year on adjusted ETR as appropriate.Before moving to questions, we wanted to summarize the highlights of today's presentation on Page 24. We continue to have strong execution against our strategic initiatives, marketing directly to the homeowner. Today, we announced a significant brand partnership with Magnolia, the popular home and lifestyle brand founded by Chip and Joanna Gaines, commercializing global innovations. Late last week, we announced the launch of the Hardie Architectural Collection, including 2 brand new products that we will showcase later this week at the International Builders Show.High-value mix. Today, Sean described how we will drive continued price/mix growth in fiscal year '23, but more importantly, our long-term strategic intent to continue to drive price/mix growth. The repair and remodel market. Sean, outlined our clear and decisive strategy to accelerate our penetration of this large and resilient segment. Global capacity expansion. As Ryan outlined, we have a clear plan to ensure we continue to add capacity ahead of demand. We believe our continued strong execution against our strategy will enable us to continue to deliver strong profitable growth.In regards to financial highlights, we announced the fiscal year '22 guidance range that is more than double the adjusted net income of just 3 years ago. In fiscal year '19, adjusted net income was $301 million. We have truly transformed into a new James Hardie. This is illustrated by our fiscal year '23 adjusted net income guidance of $740 million to $820 million, which is an increase of 18% to 31% compared to our fiscal year '22 guidance midpoint of $625 million. Finally, we announced that we expect our fiscal year '23 payment to the AICF to be between 15% to 20% of our fiscal year '22 operating cash flow.Before we head into the Q&A session, I wanted to flag that we will not be answering any questions regarding the termination of the prior CEO nor question about the search for our new CEO. Those questions should be directed to the Chairman. If you have any further questions in this regard, please reach out to our IR department and they can arrange for those questions to be answered. We appreciate your understanding.Operator, we have concluded our prepared remarks. Please commence the Q&A session.

[Operator]

[Operator Instructions] Your first question comes from Lisa Huynh from JPMorgan.

[Lisa Huynh, Analyst]

So in terms of North America, can you just elaborate on how you're tailoring your approach to drive better uptake of ASP through ColorPlus next year? Will it go through driving this product in the Northeast? Or you think you can get some uptake in your existing markets?

[Sean Gadd, President of North America]

Yes, I'll answer that. From our perspective, it's obviously, it goes back to us going -- targeting our consumer. Most of that work remains in the Northeast. So we expect that to remain in the Northeast for at least the next sort of 6 months before we look to expand it. And it's going to be through the R&R segment. So that, together with our partnership with Magnolia, will basically, from our perspective, look to accelerate our penetration. Now Magnolia as a brand is a national brand. So I do expect the color penetration would grow nationally not just in the Northeast.

[Lisa Huynh, Analyst]

Yes, that's right. So it looks like now you're pursuing higher ASP in APAC as well, which is new. Can you just talk about whether the more recent ASP shifts we've seen in APAC is driven by moving that generics board to Hardie board, or should we expect a bit more ColorPlus uptake in the other regions outside of North America?

[Jason Miele, Chief Financial Officer]

Lisa, currently, we don't sell color product in the APAC region, but the strategy is the same across all 3 regions. It's about high-value products. They differ by location. The high-value products in Europe are different than the high-value products in North America versus Asia Pac, but the strategy is the same. So partnering with our customers, penetrating the right segments where we can push more of those higher-value products through the homeowner. So the way we're connecting to the homeowner is the same in all 3 regions and ensuring we're delivering high-value products through our customers, which is good for our customers and for us. And ultimately, the value to the homeowner is higher.

[Operator]

Your next question comes from Lee Power from UBS.

[Lee Power, Analyst]

You've kindly kind of told us that the North American mix chart is probably 7% to 10% in FY '23. Is it possible to step through how we should get from there to the 16% to 20% net sales growth guidance you've given for FY '23. So what do you think the market is going to do in your share assumption in there?

[Sean Gadd, President of North America]

From our perspective, we believe the market is going to be fairly favorable sort of low single-digits. We suspect that our volume is going to be somewhere between 9% and 13%. So we think we're going to obviously be taking share. And then as we move our mix more towards color, we continue to focus on driving in the R&R segment I suspect for I believe that the rest will come through price/mix. I understand we've already taken a 5% price increase January 1.

[Lee Power, Analyst]

And then just on the price increase, I mean, we've obviously seen and you've called out with hyperinflation in Europe, input cost inflation run up pretty significantly. You've traditionally taken an annual price increase. Like how do you think about doing more than one price increase a year? And how do you think the market generally will be placed to accept that if it needs to happen?

[Sean Gadd, President of North America]

From our perspective, I guess, look at pricing more on a long-term basis. We typically would have taken 2% to 3% every year. This year, we took 5%. We don't plan in the North American business to take another price increase. We'll get the rest of our price through price/mix with our customers and working together with them as we drive our strategy. And then obviously, going into next year, we'll be considering the right price increase.

[Jason Miele, Chief Financial Officer]

Yes, I'd just add to that, Lee. Last January 1, we took a 3% price increase, we've obviously had significant inflation this year and significant investments back into the business through talent acquisition, marketing and innovation and we've delivered a 28.8% EBIT margin in North America through 9 months. And now we're in a position where we've given you guidance for next year of 30% to 33% for North American EBIT margin with a strong top line growth of 16% to 20%. That is with assuming just one price increase. And as Sean said, it's about long-term partnerships with our customers that are going to continue to drive growth for Hardie long into the future.

[Operator]

Your next question comes from Peter Steyn from Macquarie.

[Peter Steyn, Analyst]

I was keen to just ask a slightly more strategic question in relation to the market environment. Obviously, a lot of chat, Sean on the affordability front. How do you see the interplay of your tactics with some of the developments in the market? Do you foresee that there's perhaps some headwinds to the full realization of some of your intentions on ColorPlus penetration, as well as on the textured panel side of things?

[Sean Gadd, President of North America]

No. I don't foresee it, Peter. I think we've got a fair amount of work to do with new products. First of all, we're learning process for us with our focus in the Repair and Remodel segment, which obviously is less sensitive to all the noise we're hearing. And we do believe from more the kind, we've seen, there's quite a lot of pent-up demand with our builders. So I suspect that, that will continue to work robustly through the year, obviously, assuming they can get their labor and their materials, but we believe that they will. So we feel relatively strong about our commitment for next year.

[Jason Miele, Chief Financial Officer]

Yes, Pete, and I'd add to Sean's comments. As he described on Page 11, we're very focused on penetrating the Repair and Remodel segment. We think we have a great game plan on how we're going to do that. Homeowner wealth has never been stronger in North America. It's at an all-time high. And I thought Sean did a good job explaining the impact on those home equity loans versus someone thinking to buy a new home, it's very different scenario. And so we think the game plan we have to penetrate repair and remodel market is strong. We track multiple external sources. All of them are calling for a strong R&R market in our fiscal year '23.

[Peter Steyn, Analyst]

And just to extend the question very briefly around the Architectural Panel range extensions. Is there a risk that you have overcomplicated supply chains, most likely you had with ColorPlus a number of years ago? How is the supply chain better positioned to deal with extra complexity?

[Sean Gadd, President of North America]

Peter, that's a good question. I'll tell you a couple of things. One is we're working really hard with our customer partners over the last sort of 24 months to lower working capital. So in general, most of them will be carrying less inventory than ever before. And then when you look at where we want to go after, which is essentially repair and remodel in the West Coast to start, we've worked with some key strategic partners to get some material on the ground but really limited materials as we start to get the engine moving on innovative products. The one thing I'll also add Peter, this is a prime product. So the complexity is pretty low.

[Operator]

Your next question comes from Andrew Scott from Morgan Stanley.

[Andrew Geoffrey Scott, Executive Director]

So Jason, a question for you to start with the important milestone with the AICF and thanks for the update there. I just want to be clear, when you made reference to the 15% to 20% of operating cash flow, is that the operating cash flow as referenced by the AFFA, i.e., after prior year payment? Or is that what we might call a classic operating cash flow definition?

[Jason Miele, Chief Financial Officer]

It's a classic definition, Andrew. The one caveat is it's based off of 2006 U.S. GAAP. There's some minor adjustments between our stated operating cash flow and ultimately, what that number is. But we've outlined that in the detailed page in the appendix as well. So roughly, it's our U.S. operating can flow.

[Andrew Geoffrey Scott, Executive Director]

And then secondly, obviously, a divergence here giving guidance, what's almost 15 months out. I know this has spoken about in January, and you said your integration with your customers was much improved, and therefore, your visibility was also improved. Just want to understand how much of what you're guiding for particularly North American business is committed with customers versus just insights, just given the fact that rates are rising and the market can turn on a dime at times?

[Sean Gadd, President of North America]

It's a little bit of both is the real answer. We've got commitments from customers and we've also got what they are determining the future-forward orders, which we're working with our customers to bring back to our business, so we can plan again. So we've got fairly strong commitments. And then as we work through them telling us what they see in the future and then with our sales team working with end users and tying that all together, we feel very, very confident that the numbers are right.

[Operator]

Your next question comes from Keith Chau from MST Marquee.

[Keith Chau, Basic Industrial Analyst]

Just a follow-up to Andrew's question, Sean, in terms of duration of line of sight. So I know back in January, we spoke about clearing the backlog and also the forward order visibility. But if we can split out revenue and costs, your revenue or at least your volumes, you know what you're going to get, would you say the first 6 months of the year is broadly locked in and then it's a general estimation based on what you can see from customers for the second half of the year? And just the same discussion on costs around how much of your cost base is locked in for the first half of FY '23 versus the second half?

[Sean Gadd, President of North America]

I'll tell you, Keith, it's not as clear as you just described it, but we certainly have a backlog of orders that are being committed. We are working with all of our customers to understand the future -- for future unlock. All our customers would tell us that they're pretty bullish on where the market is at and what their end users need. And as I think through repair and remodel still being 65% to 70% of our business, that's going to be robust for quite some time. So we feel good about it. Now it's not quite -- you say 6 months, 12 months, it's not quite as clear as that, but we feel really good about what we've been communicated with and what orders are coming into our system.

[Jason Miele, Chief Financial Officer]

I just I'd add, Keith, and we have a similar question. I mean this is still a forecast. I mean, it's dependent on how many homeowners are going to remodel their homes this year, how many new construction starts are going to happen. Obviously, we have much better sidelines than we used to. We have great partnerships with our customers. So we -- and we do have commitments but not through the full year. But all the data we're currently looking at indicate a strong R&R market and a strong new construction market. There's a lot of backlogs within the new construction space as well, a lot of uncompleted homes. So we feel very confident in the 16% to 20% revenue guidance growth that we gave today.

[Keith Chau, Basic Industrial Analyst]

And then just a follow-up question on the cost side in terms of your contracted costs. If you can just run through that, please, Jason, and Sean. And then what the assumptions are around SG&A reinvestment, lean, the typical indicators that you've provided in the past? If you can give us a sense of how the costs are moving, that would be useful as well.

[Jason Miele, Chief Financial Officer]

Fair enough, Keith. You bring up a good point. I mean, lean -- it starts with lean and so our lean initiative over the past several years gives us the ability and more confidence in giving guidance sooner. So the variability of our plant network is reduced, which used to be historically something that caused variability in our P&L. And so it starts with lean. And so within costs, though, there are uncertainties within the raw material space, but we have that built into our range.As far as inflation goes, last year, FY '22, we talked about $100 million to $150 million globally in inflation year-on-year. We don't see that this year. So FY '23 versus FY '22, we think that's more somewhere around $40 million to $60 million in inflationary costs. So a much better comp percent. And we will continue to invest in SG&A, as you described, SG&A and R&D. So marketing, talent and innovation, we will continue to invest strongly as we have this year as we continue to drive growth.

[Operator]

Your next question comes from Peter Wilson from Credit Suisse.

[Peter Wilson, Associate]

Sean, a question for you, please. Give us an update on North American volume? Where you're at versus capacity now? Whether there's still customers on allocation? And [indiscernible] weave into that as you expect to roll out plants, yes, Architectural Collection and how you're going to manage that?

[Sean Gadd, President of North America]

From our perspective, so, we have got some customers that are still on allocation. Obviously, hence, we got the backorders. That continues, but it doesn't really -- doesn't impact our customers to the degree that you think because we're working every day with them to understand their end-user usage when they need it, where they need it and then when we adjust to make sure that board gets there in the right time. So our flow is tremendously better than it's ever been.In terms of our capacity, obviously, working closely with Ryan on capacity and making sure that our sales are being tracked together with how the plants are performing, which obviously is under my control, but also the new ramp-ups of Prattville 1 and 2, we still got some upside there, and what's going to deliver between now and the end of the year and into next year. And then we've got the startup of Summerville, which would allow us to get more board out or will [ drive ], eventually help us in terms of our growth.And then the final question around the Architectural Collection. We've got the capacity on the west side where we need it. We've got some work to do from a market development perspective to get that really growing. I think that's our focus right now and we will be sort of managing our mix and coming out of the plants in which it gets made as we get momentum in the marketplace.

[Peter Wilson, Associate]

And what you perhaps, Jason, just the Europe energy cost, can you explain how that was able to be contained in one quarter?

[Jason Miele, Chief Financial Officer]

Sorry, Peter, what do you mean by being contained?

[Peter Wilson, Associate]

As far as I see the guidance is for Europe EBIT margins to return to mid-teens in Q4.

[Jason Miele, Chief Financial Officer]

Oh, okay. Yes, I understand what you're saying. So hyperinflation, we're still experiencing significant European energy costs, Peter. We do think that abates at some point. But the European team did take a price increase on January 1, which will help generate a better margin going forward, including Q4.

[Operator]

Your next question comes from Daniel Kang from CLSA.

[Daniel Kang, Research Analyst]

Just a very quick follow-up in terms of the guidance for FY '23. Jason, I guess your responses from the prior questions, just quite clear confidence on the top line expectation. Can I just confirm that you see raw materials as the key variable with regard to the low and high end of the guidance range? Any other variables that may impact the low and high end of the range?

[Jason Miele, Chief Financial Officer]

Yes, Daniel. Obviously, volume is always -- volume can swing a year or quarter significantly, obviously, so that's volume assumptions. Sean gave you a price/mix range of $7 to $10 and then raw material costs create a range and then ultimately, plant performance, while it's a much more narrow-band than it used to be and we have that under control, there is some potential for variation there and we consider all of that when developing natural range of outcomes. All that said, we do feel confident in all 3 points of guidance we put on the page there.

[Daniel Kang, Research Analyst]

And Sean, just I was interested in your comment on rising rates annual work that 100 basis points will unlikely impact R&R demand. With the Fed forecast to raise rates more aggressively, do you see that becoming an issue? At what point does it become an issue?

[Sean Gadd, President of North America]

I think the only issue I see is potential consumer confidence. As I said, it doesn't -- the payment is not going to be large enough to deter a $50,000 reside. And from my perspective, the equity in households in the U.S. is at an all-time high. It is remarkable how much money everyone's got in their home. So there's not enough inventory to go buy new homes. And so I don't see people moving out of their homes and so that's an opportunity for us. And I do see, at this point, R&R being pretty robust, at least for the next 24 months.

[Operator]

Your next question comes from Simon Thackray from Jefferies.

[Simon Thackray, Equity Analyst]

Just a couple of questions. The mix shift that you're identifying, which is in the guidance is terrific. I mean I get it, move towards high-value products and the commodity board becomes a much smaller component of the overall mix. But I just want to understand strategically and tactically, whether you are leaving the commodity board to the competitors now, in which case the way that it used to be explained, Sean was, we would never leave it to them because they would learn capabilities in fiber cement if we left it to them altogether. So what's -- just to be clear, what's the view on capacity and the Fiber brands and Hardie's ongoing commitment to have some of that capability to ensure that competitors don't develop capabilities to take Hardie on?

[Sean Gadd, President of North America]

Yes. Simon, it's good. We always take a long-term look view when we think about product mix. You noticed our future states still have a Fiber brand in it. So we have deliberately left 2 of the largest builders in North America on their product. They're the only 2 they get it. We've been pointed directly into their homes. We know exactly which times are being built when and that product gets delivered to their job site than they need it. The reason for that, we're not eliminating it completely because I'd like to share they take a long-term view. I'm not sure at what point the market will turn in the future. And at that point, I mean, I'm not afraid of Fiber brand. I think Fiber plays are an important role in our product portfolio.What's important, though, is when we unwound our sampling view, it certainly had drifted from what was originally meant to do. And that meant our SKUs -- the number of SKUs have increased, which we basically have reset, it's back down to 4 SKUs and also it's linked to lots of segments we do like. So now we've built the capability to understand from our end users, which homes need it, when they need it, and we're able to get it to our customers to get there. So as we think about in the future and that's not today, but as future capacity or demand there maybe outsource capacity and there's opportunity for other competitors to get in, then we'll start to consider where we point it next. And so the capabilities we learn now will allow us to pinpoint exactly where it needs to go. So I feel much better about where it is and where it's going to go, but I haven't eliminated for that very reason.

[Simon Thackray, Equity Analyst]

So it's still consistent in terms of the historical strategy and in terms of protection. So just quickly, Sean, just the new Architectural Collection, the structural panel, I'm just trying to understand, does this displace or replace some of the other Hardie fiber cement panels that we've seen over time in terms of like the Scyon range, et cetera. Does that actually get rid of those? Does it replace those altogether?

[Sean Gadd, President of North America]

We're -- so I can't talk about Scyon, that's -- it's an Australian brand. So I have to leave that to Jason. But I will tell you from the U.S. perspective, we've started on the West Coast for the very reason to really make sure we're opening up a new category. We're not trying to -- we're not trying to cannibalize our own existing lines. Now there will be opportunity to do that. And it's still good for our financials as we do it. But our purpose is to go after the other 49% that we said wasn't accessible to us in May.And so these are the first step into more designs. And obviously, with Sea Grass, you can see we're able to get designs that don't exist today. So we get into a place where, one, we can deliver a look. It's very different to anybody or any one of our competitors, which puts us in a great spot. So we see that as more as a, I guess, growing a new category and not necessary cannibalizing the demand.

[Jason Miele, Chief Financial Officer]

Yes, and I'll cover off on the other piece. So the panels we made to date deliver would look. The panels you see in this Architectural Collection are non wood look, so they are different. How people end up utilizing them will vary within regions. But the focus is on delivery nonwood looks. So we have 4 textures there that you can see that we've delivered and it's exciting and as Sean mentioned, when we think about North America, it's helping us penetrate the 49% of the market that is nonwood look.

[Operator]

Your next question comes from Sam Seow from Citi.

[Samuel Seow, Vice President]

Great kind of price/mix outcome, I guess, today and over the past few quarters. But when I look back, the improvement we've seen, it seems to have started well before TV ads, et cetera and website visits have only recently started picking up. Given I assume you can't build a consumer brand in a couple of months, just wanted to ask whether or not the price/mix results that you're seeing [indiscernible]? And really, how much Christine is actually in this quarter's result and whether the Christine program should really only flow through in future periods?

[Sean Gadd, President of North America]

I guess from my perspective, I think we are definitely seeing an impact of our marketing campaign. If you ask me how to size it, I can't do that yet. We're working on that. I do also think that when I get into the marketplace, the way it is contract does have a backlog just like the new construction. So we've got about a 4-month backlog. So I do suspect that a lot of the jobs and the impact we've had so far will impact into next year, but we're going to double down on that next year.So obviously, we have to continue to market directly to the consumer. We're going to continue to work with our customers to get access to contractors who are ready to basically say, yes, to the work that's going to come out of that demand. And then adding the Magnolia partnership who are really going to focus on, yes fiber cement, but really color is going to be, in my mind, the accelerant and then the question is how long does it take between job being -- a contract being signed and being installed. I have no control over that, but I feel like that's the extent of demand for us.

[Samuel Seow, Vice President]

And I guess, obviously, shipping board from U.S. to Europe, in this environment where I think you can basically sell everything you make, it kind of appears you're choosing to sell board at 18% margin instead of [ 30% ]. I know it's only small, but how do we factor that in when we read, I guess, to segment results and think about Europe looking forward?

[Jason Miele, Chief Financial Officer]

Yes. Sam, Europe is a strategic focus for us. We want to continue to penetrate Europe. We will continue to ship product across the ocean to Europe to ensure we deliver that growth. Fiber cement, when we started with Europe, we said 10 years from now, we'll launch EUR 500 million of fiber cement, EUR 500 million of fiber gypsum. And that's the path we're on, and we'll continue to execute that growth through North American capacity until at the right time, we will put a fiber cement plant in Europe.So it's a global company. We think about it globally. We have those conversations as a global team, but there's a full commitment to ensuring we're growing that fiber cement business in Europe. It's a big opportunity. Western Europe has a significant population and a significant number of homes that if we can create the right fiber cement business there, it's a big win for global James Hardie.

[Operator]

Your next question comes from Paul Quinn from RBC Capital Markets.

[Paul C. Quinn]

Just a question on your Slide 10 here. Just taking a look between year '22 and '23. If I'm looking at the scale rate, it looks like Cemplank is 25% going to 20% and ColorPlus is 20% going to 25%. Just wondering if I'm in the ballpark there? And then if you could describe the margin uplift from Hardie Exterior to ColorPlus and then from ColorPlus to innovation?

[Jason Miele, Chief Financial Officer]

Just a real quick Paul, just make sure your percentage is roughly right. The gray bar includes Backer Board as well though, and a few other products. So the chart on the left is does not include all of our products. But the gray bar represents low-value products, which is Cemplank, Backer Boards and a few others. But your percentages are roughly right. As far as the margins between the various products, you see the price points there as we push further up into innovation and ColorPlus. Those would help us deliver a higher margin. And that's some of what you're seeing in our guidance for next year at the 30% to 33% level. We don't give specific margins by product group.

[Operator]

Your next question comes from Anderson Chow from Jarden Australia.

[Anderson Chow, Analyst]

I just have a couple questions on North American business. First one is, are you able to comment on the Architectural Collection, the new product, what sort of on-the-wall cost comparison it may have with say, stucco? And also just on the cost inflation that you talked a lot about in previous questions, I just want to clarify. On the raw material side, are we kind of starting to see that kind of stabilize? So hence, we are kind of talking about EBIT margin for 2023 at 30% plus. And also, with regards to marketing, are you able to say anything about the new partnership we have how much of that probably contributed to the higher SG&A in the quarter?

[Sean Gadd, President of North America]

Anderson, I'll take probably the first part of that, and I'll hand it over to Jason. So from our perspective, you talked about on the wall cost. There's 2 things that, I guess, I'd like everyone to think about one is. I know historically, Hardie has been all about on-the-wall cost when we think about our plank and our wood look business going after products like vinyl. And at that point, it becomes pretty critical. For this, it's a little bit different. One, we're going after stucco, very labor-intensive. We're also going after brick, we start again, very labor-intensive, and labor, there's shortage of labor.So I'm less, I do -- I spend less time thinking about the wall cost and I think mainly more about design. So as you think about consumer, she likes the design and she likes the color, she's willing to pay what's required. So it's just a very different thought for us as we think about more and more about design. The more we realize that she's not nearly as price-sensitive, but obviously, as you go after new construction when a buyer got to think about I'm building 150 homes [indiscernible]. So on the wall cost, it's less significant in our R&R segment and when we go after consumer, it will be much [indiscernible].

[Jason Miele, Chief Financial Officer]

You also asked about raw materials stabilizing. I think in a way, yes. I mean FY '23 compared versus FY '22, we do see a lot more stabilization than FY '22 versus FY '21. In FY '22, we had significant inflation headwinds, circa $130 million to $140 million in FY '22. So it was significant, yet we were still able to deliver very strong margins in all 3 regions. Going into this year, FY '23, we still expect some inflationary pressures, but nowhere near to the same extent. And then -- sorry, you had another question around marketing costs, what we announced today would have not had any impact on Q3. However, it would be in our forecast guidance that we provided today.

[Operator]

Your next question comes from Brook Campbell-Crawford from Barrenjoey.

[Brook Campbell-Crawford]

I had just a question around North America margin target you've given us 32% -- 33% in FY '23. I'm just wondering if the 25% to 30% range is still relevant at all actually for that division? And what scenario would need to play out to get you to 35%?

[Jason Miele, Chief Financial Officer]

Yes, Brook, the 30% to 33% is specific for fiscal year '23. The 25% to 30% was an increase to a long-term range that used to be 20% to 25%. Depending on market conditions and how things persist this year and what we see going into FY '24, we give guidance for FY '24, et cetera. And we won't change long-term ranges within one period. But certainly, we're very confident in the 30% to 33% for FY '23, but it would take more than 1 year to change the long-term range. So we'll take it into consideration as we get deeper into FY '23.

[Operator]

Thank you. That does conclude our time for questions. I'll now hand back to Jason Miele for closing remarks.

[Jason Miele, Chief Financial Officer]

Great. Thank you. We'd like to thank everyone for joining us today. For those of you who got IBS in Orlando this week, we look forward to seeing you there and showing you our exciting new products. And finally, the entire leadership team would like to thank all 5,000 of our employees who continue to execute our strategy every day, which makes these results possible. Thank you.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.