James Hardie Industries PLC

ASX:JHX

Earnings Call Transcript 2022-Q4

[Operator]

Thank you for standing by, and welcome to the James Hardie Q4 FY '22 Results Call. [Operator Instructions]

I would now like to hand the conference over to Mr. Harold Wiens, Interim Chief Executive Officer. Please go ahead.

[Harold Wiens, executive]

Hello, everyone, and welcome to our fourth quarter and full year fiscal year 2022 earnings call. I'm Harold Wiens, Interim CEO of James Hardie. On Page 2, you'll 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, and our North America President, Sean Gadd. Today, we'll start the presentation with a brief update on the significant transformation James Hardie has undertaken. Jason, will then discuss the fourth quarter and full year financial results. And then Sean, will provide an update on our North American strategic focus and how he and his team plan to deliver a strong fiscal year 2023. Finally, Jason will return to conclude with a discussion on guidance.

Let's turn to Page 5. Our strategy remains unchanged and we expect it to continue to drive profitable growth globally. It is embedded across all 3 regions and all 5,000 of our team members. Underlying our strategy is our commitment to Zero Harm and ESG. Our strategy starts with focus and strong execution around our 3 foundational initiatives, which are LEAN Manufacturing, Customer Engagement and Partnership and of course, Supply Chain Integration. Over the last 3 years, it is these 3 foundational strategic initiatives that drove our transformation. With these initiatives now fully embedded in our company, we're focused on continuing to drive profitable growth globally through the following 3 strategic initiatives.

First, marketing directly to the homeowner to create demand. Second, penetrating on driving profitable growth in existing and new segments. And third, commercializing global innovations by expanding into new categories. Over the next few pages, we will highlight just how different of a company James Hardie is today compared to just a few years ago. This change was driven by our strategic transformation and we enter fiscal year 2023 as a global company that has consistently delivered growth above market and strong returns.

Let's turn to Page 6. 4 years ago, we were a regional business with $2 billion of revenue, delivering $0.66 of earnings per share. In contrast, we are now probably a $3.6 billion revenue global business, delivering $1.39 of earnings per share. We have also increased our operating cash flow from $309 million to $757 million during this period and that enables us to continue to invest in growth. Our shift to a truly global business of scale began with our acquisition in Europe and was then accelerated through the successful implementation and execution of our global strategy.

Our execution of HMOS, which means Hardie Manufacturing Operating System helped to ensure consistent production within our network of plants and it is the cornerstone that enabled us to increase our long-term margin ranges in May 2021. We also engaged with our customers and partner together to deliver increased value for them and us as we develop growth above market and had a higher value product mix. And lastly, we integrated our supply chain to ensure that we could provide the right products at the right time for our customers and then in turn their customers. Every employee, team and division have contributed to our incredible transformation and growth during this period and I want to thank them all for their contributions to our success.

I will now ask Sean and Jason to discuss this transformation for each of our regions.

[Sean Gadd, executive]

Thanks, Harold. Let's turn to Page 7. In North America, we became a significantly larger and more profitable business over the past 3 years. We're now a $2.5 billion revenue division with adjusted EBIT close to [ USD 0.75 billion ]. We have step-changed our adjusted EBIT margin, increasing it by 600 basis points during this period. It is interesting to note that the net sales and EBIT result of just the North American business in fiscal year '22 represents a larger and more profitable company in the entire consolidated James Hardie Global Company of fiscal year '19.

As we increased our scale during this time, we did so in a manner that drove the leverage as we continue to invest in future growth, primarily in people, capability and marketing. Over the 3-year period, we delivered a 15% CAGR on net sales, while delivering 24% CAGR on adjusted EBIT. Later in the presentation, I will discuss our approach to deliver another fantastic result in fiscal year '23.

Jason, will now take you through APAC and Europe.

[Jason Miele, executive]

Thanks, Sean. Let's turn to Page 8. Our Asia Pacific team has also delivered a remarkable step change in performance over the past 3 years and a significant change in the scale of the business. A 58% increase in adjusted EBIT on 16% volume growth is excellent leverage across this 3-year period. More importantly, the business continues to grow in scale and at now over AUD 200 million of EBIT, it represents a substantial business that can significantly impact the group results. Similar to North America, the adjusted EBIT margin expansion is significant at 570 basis points and the team has delivered at the top end of the new long-term target range 2 years in a row.

Turning to Page 9. Let's discuss Europe. In February of 2019, shortly after the acquisition of Fermacell, we laid out long-term targets for our new European business as well as short-term guidance to measure our success against. Our long-term targets remain unchanged. In our 10th year of operations in Europe, post acquisition, we expect to be a EUR 1 billion net sales business with an EBIT margin over 20%. And over these past 3 years, the European team has delivered against the short-term targets we laid out in February of 2019. The first target we set at that time was a net sales CAGR of 8% to 12% during the 3-year period ending with fiscal year 2022. We delivered a 10% net sales CAGR, right in the middle of the range.

The second metric we committed to was exiting fiscal year '22 with a 14% EBIT margin. You'll see on this chart, we delivered 12.9% EBIT margin in fiscal year '22, which is below the original target of 14%. However, if you remove the impact of hyperinflation in fiscal year '22, the team would have delivered a full year EBIT margin of 220 basis points higher than the 12.9%, which is well above the initial target of 14% we set out in February of 2019. The European team has integrated tremendously well into James Hardie and we have a clear strategy to continue to drive growth and margin expansion into the future.

Let's turn to Page 10, which is the last slide in this section. As you have heard, Harold, Sean and I discuss, we believe as we enter fiscal year '23, we have a global company that is enabled for continued growth. Through the acquisition of Europe in April 2018 and the execution of our strategy to transform our business these past 3 fiscal years, we have step changed our financial profile and believe we have the right go-forward strategy to continue to deliver growth above market with strong returns. I want to spend a few minutes discussing the middle section of this slide. As you can see here, the financial strength of the global organization has changed significantly during this 3-year period and this is a key factor in enabling our future strategic plans, which are articulated on the right of the slide.

First, we have delivered a step change in our P&L performance and scale. Global net sales has increased to USD 3.6 billion in fiscal year '22, adjusted net income more than doubled in the past 3 years to USD 621 million. We also raised our long-term EBIT margin ranges in all 3 regions in May of 2021. And in fiscal year 2022, we delivered at the top end of those ranges. Second, we have also delivered a step change in our operating cash flows, growing from USD 304 million in fiscal year '19 to USD 757 million in fiscal year '22. And over the past 2-year period combined, our operating cash flow has exceeded USD 1.5 billion.

Third, we have significantly improved our balance sheet over this period. Our leverage has decreased from 2.4x on March 31, 2019, to 0.8x as of March 31, 2022. And we decreased our net debt from USD 1.3 billion at March 31, 2019 to USD 752 million as of March 31, 2022. And fourth, the AICF also now has a much improved balance sheet. As of March 31, 2019, the AICF had cash and investments of AUD 81 million, and as of March 31, 2022, they have AUD 350 million in cash and investments.

And as we discussed last quarter, the top-up calculation will apply in July of 2022, and we currently estimate that payment will be 19% of operating cash flow, a significant change from the historic 35% rate. Our global team has created an incredible platform upon which to enable our future growth, and we believe we have the right strategy to continue to deliver growth above market and strong returns as we move into fiscal year 2023 and beyond. We have spent a decent amount of time discussing our 3-year transformation, let's now shift to Page 12 to discuss our fiscal year 2022 results.

In the fourth quarter, the global team continued to deliver growth above market and strong returns with all 3 regions delivering double-digit net sales growth. The global team's execution resulted in global net sales increased 20% to USD 968.2 million for the quarter. For the full fiscal year 2022, net sales increased 24% to over USD 3.6 billion. Global adjusted EBIT increased 30% to USD 225.3 million for the quarter and USD 815.6 million for the full year, both representing a 30% increase over the prior corresponding period. Global adjusted net income increased 42% to USD 177.5 million for the quarter and was up 36% to $620.7 million for the 12 months.

All of our businesses performed extremely well in fiscal year 2022, and this operational performance would have delivered an adjusted net income result toward the top of our adjusted net income guidance range of USD 620 million and USD 630 million. However, higher general corporate costs in the fourth quarter resulted in adjusted net income of USD 620.7 million. Full year operating cash flow was strong at USD 757.2 million and adjusting for the one-off U.S. CARES Act tax refund in fiscal year '21, operating cash flow was up 5% versus the prior year.

Let's move to Page 13 to discuss the North America results. In the fourth quarter, the North America team delivered net sales growth of 25% to USD 694 million. The team delivered strong volume growth of 13%, an exceptional price/mix growth of 12%. The price/mix growth was delivered through continued execution in driving high-value product penetration in close partnership with our customers. In addition, with continued execution of our foundational initiatives, we were able to convert the top line results into a strong bottom line outcome with adjusted EBIT increasing 35% to USD 206.1 million at a margin of 29.7%.

For the full year, net sales increased 25% to just over USD 2.5 billion on volume growth of 15% and price/mix growth of 10%. A key contributor to price/mix growth as well as margin performance was delivery of a 27% increase in ColorPlus volumes in fiscal year 2022 versus fiscal year 2021. Adjusted EBIT was USD 741.2 million for the 12 months with an impressive, adjusted EBIT margin of 29.1%. The team delivered a 20 basis point improvement in adjusted EBIT margin for the full year. This was achieved through continued LEAN manufacturing improvements, combined with driving a high-value product mix, helping to offset cost inflation and significant investment in future growth through marketing, innovation and talent capability.

Let's move now to Page 14 to discuss Asia Pacific. The Asia Pacific team delivered fourth quarter net sales growth of 23% to AUD 200.5 million. The APAC business continues its step-change execution in driving high-value product penetration with price/mix growth of 11% in the quarter with volume growth of 12%. In the fourth quarter, 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 21% at an adjusted EBIT margin of 26.3%. It was a strong fiscal year for the Asia Pacific business with full year net sales increasing 22% to USD 777.7 million and adjusted EBIT improved 23% to AUD 217.4 million at an outstanding margin of 28%.

Turning now to Page 15, let's discuss the European results. In Europe, during the fourth quarter, net sales increased 10% to EUR 115 million and adjusted EBIT increased 3% to EUR 16.1 million. Quarterly net sales growth was delivered through the team's continued execution of a high-value product penetration strategy as well as a January 1, 2022 price increase, which led to price mix growth of 14%. Fourth quarter volume decreased 4% as we strategically shifted away from low-margin partnerships. There was some minor reduction in demand in the period and we were comping a prior year fourth quarter, which included some of our initial new innovation VL Plank stocking positions.

Encouragingly, fourth quarter adjusted EBIT margin returned to expected levels at 14%, as we had indicated they would when we spoke 3 months ago. Fiber cement net sales increased 18% in the quarter, while fiber gypsum increased 9%. Full year net sales increased 20% to EUR 420.5 million with an impressive 39% increase in fiber cement net sales and a 17% increase in fiber gypsum net sales. Adjusted EBIT improved 51% to EUR 54.2 million at a margin of 12.9%.

We are particularly pleased that European EBIT margins have improved in line with our expectations set 3 years ago. Excluding the impact of hyperinflation, the full year EBIT margin would have been 220 basis points higher in fiscal year 2022, exceeding our original target of 14% set back in February of 2019. As you know, natural gas is a key input cost for the manufacturing of fiber gypsum and with prices remaining high, the European team has taken another price increase effective on April 1, 2022.

Now that we are able to travel more freely again, I had the pleasure to be in our European business over the past few weeks, along with Harold and Ryan Kilcullen. I want to thank the team there for the excellent job they have done in integrating into James Hardie, hitting all of the targets we set together over these first 4 years and positioning the business to deliver on our initial 10-year plan of becoming a EUR 1 billion business with over 20% EBIT margins. We are extremely encouraged by the success to date and the strategy the team has in place to deliver on our long-term targets.

I will now turn it over to Sean Gadd.

[Sean Gadd, executive]

Thanks, Jas. We're going to now shift our attention to the how, meaning how we will continue to deliver growth above the market as strong returns in fiscal year '23 in North America. Let's turn to Page 17. Looking back at fiscal year '22, our outstanding performance in the North American business was driven by our continued strong execution of the strategy across all components of our business. We delivered net sales greater than USD 2.5 billion, an increase of 25% over last year and USD 741 million of EBIT, an increase of 26% over last year. We expect similar outstanding performance in FY '23. Specifically in North America, we expect net sales growth between 18% and 22%, while maintaining strong EBIT margins of between 30% and 33%. The significant net sales growth in FY '23 and corresponding strong EBIT margin will be a direct result of continuing to drive high-value product mix in the region.

Specifically, as you see in the chart on the right, in fiscal year '23, it will be driven by our continued penetration of high-value ColorPlus products in the Repair and Remodel segment, as we drive more demand by reaching our consumer more efficiently and effectively. We continue to remain focused on innovation as it will be critical in our future growth in FY '24 and beyond. But at 1% of our product mix in fiscal year '23, it will not be the key to delivering differentiated results this year. Before we dive deeper into how we will deliver fiscal year '23, [ I will tell you now ] that we did take a second price increase for this year that will become effective on June 20, 2022.

With the timing of the second price increase and how we come into the market, we expect the full year impact of both the January 1 price increase and June 20 price increase to improve our average net sales price by approximately 7% for the full year. Our views on mix have not changed since the last time we spoke in February. Thus, we expect the price/mix growth for fiscal year '23 to be between 9% and 12%. We expect the second price increase to help improve our overall top line result, while offsetting cost pressures, enabling us to deliver the EBIT margin range of 30% to 33% for the full year.

Moving to Page 18 to discuss at a high level the strategic initiatives that would drive our continued growth in fiscal year '23. First, it starts with the capacity expansion. As you know, we have Prattville Sheet Machines 1 and 2, continuing to ramp up, and we now have some of them back online and ramping up. So, we feel very comfortable that we'll be able to continue to maintain supply to meet demand. Ryan Kilcullen's team continues to ensure that we are expanding our global capacity in line with market demand, and Ryan will join us for Q&A if you have any capacity-related questions.

Second, HMOS. Our client network team continues to do an amazing job of continuous improvement. I think a lot of you have met Dave Kessner over the years who leads North America Manufacturing. He has a really talented group of Plant Managers who will all continue to develop strong teams inside our plants. The team plans to deliver improvement in net hours and well throughput yield. As you know, that is our cornerstone to enabling continued EBIT margin expansion.

Next, FY '23 will be driven by engaging and partnering with our customers. Earlier in the presentation, we talked a lot about financial changes over the past 3 years, but in my view, the most significant increase is in our relationship with our customers and the strong partnerships we have created. We have now aligned goals with our key customers in how much we plan to grow and we have an industry-leading sales team and customer relationship team, led by 2 industry veterans in John Madson and Johnny Cope.

Our strategic partnerships continue to grow stronger and will be critical in enabling us to drive growth in fiscal year '23. And lastly, we'll continue to market directly to the homeowner to drive demand of high-value products. In fiscal year '23, we'll have a heavy focus on driving ColorPlus growth in the Repair and Remodel segment. It's important for you to note that when we create this demand, we are driving it back to our customers, thus helping them grow faster as we go faster.

Let's turn to Page 19, where I want to share some of our marketing results from FY '22 and our marketing plans for FY '23. The 360 Degree Marketing Campaign that we began in earnest last spring has so far delivered significant positive results in our 3 targeted Northeast metro regions. At an overall level, this program generated over 1.4 million new web sessions, an increase of 505%, more than 33,000 marketing leads, an increase of 209%, over 6,000 sales leads, more than double over the prior corresponding period.

More importantly, the market program is delivering increased demand and sales. In the 3 regions where we implemented the marketing campaign, we saw our volume growth outpace the comparable ColorPlus regions where we did not execute the campaign by 11%. To be clear, we are seeing substantial color growth in all markets. However, in the markets where we have been running the campaign, color is growing 11% faster than those markets. We are very encouraged by these results as we're only in the first year of the campaign.

Simply put, the combination of our marketing programs, driving more leads, along with our efforts to partner with our customers, has led to more volume growth for our customers and for James Hardie in our targeted regions. As a result of the success we're seeing in the marketing program, we're expanding to 3 additional R&R ColorPlus markets in FY '23. We believe our campaign along with our continued focus on customer partnership will help drive the top line demand for high-value product mix that will enable us to deliver our net sales growth guidance of 18% to 22%.

Before I hand back over to Jason to discuss global guidance, I wanted to just briefly discuss how I see the year progressing for the North American business. We feel really good about our full year target for net sales and EBIT margin. But I do want to flag that quarters will not be identical. The first quarter will be the most significant outlier from the rest of the year. Without the benefit of the second price increase with higher costs due to inflationary pressures, the continued investment in growth initiatives, including some people actions taken to drive retention, we expect Q1 EBIT margins to be the low point of the year and below our full year range.

From there, we expect EBIT margins to improve sequentially each quarter as our second price increase begin to take effect on June 20 and ramped into those results until full realization at the start of Q3, we then have our standard annual price increase on January 1, '23. Again, we are confident in the full year target of net sales growth of 18% to 22% and EBIT margin of 30% to 33%. We're a growth business and we're investing in initiatives that will continue to drive our growth in FY '23 and beyond. The team and I are excited about the progress we have made in FY '22, but even more excited about the opportunities ahead of us in fiscal year '23, as we continue to partner with our customers to drive growth above market and strong returns.

I would now like to pass it to Jason, who will summarize our global guidance.

[Jason Miele, executive]

Thanks, Gadd. Let's move to Page 20 for an update on fiscal year 2023 guidance. Today, management reaffirms full year fiscal year 2023 adjusted net income guidance of between USD 740 million and USD 820 million. The midpoint of this guidance represents an outstanding 26% increase relative to FY '22. Further, as Sean just mentioned, in North America, we are providing guidance for net sales growth of between 18% and 22% for the full year fiscal year '23, while delivering an excellent adjusted EBIT margin of between 30% to 33%.

At the beginning of this call, we discussed our significant transformation and our financial strength as we enter fiscal year '23. We described a step change in our P&L performance, a stronger balance sheet, a stronger AICF balance sheet and operating at a substantially larger and global scale. We believe this financial strength, our foundational strategic imperatives and the right go-forward strategy have us poised to continue to deliver growth above market and strong returns.

I'll hand it back over to Harold for some closing remarks.

[Harold Wiens, executive]

Thanks, Jason. A few last comments. First, I want to thank all 5,000 of our employees who helped to deliver another fantastic year. It is with your hard work and dedication that we are able to deliver value to our shareholders. I've had a long career. And I'll tell you this is the best team I've ever been associated with and I appreciate everything you do for Hardie. Lastly, I wanted to provide a brief update on the CEO search. I'm pleased to report that we have met some excellent candidates and I believe we're on track to have a permanent CEO in place, in line with our initial expectations, which we set in January. At that time, we thought it would take place in about 6 months to 9 months. That looks to be realistic. The Board looks forward to providing you with further information when the time is right.

We have now concluded our prepared remarks. Operator, please commence the Q&A portion of today's meeting.

[Operator]

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

[Peter Steyn, analyst]

Just wanted to drill down on the ColorPlus numbers, and particularly the contribution made that you highlighted, Sean, on Page 19. Am I correct in thinking that, that 11% uplift in sales performance in those 3 metros would not have made a particularly big contribution to the 27% overall? So, ColorPlus seems to be doing exceptionally well across markets. Just wanted to get a little bit more of an understanding of what you're seeing from a demand perspective, from a competitive perspective and what's resulting in that strong performance?

[Sean Gadd, executive]

Thanks, Peter. I will say that generally, Color is running pretty well across North America, but particularly obviously in the markets where paint costs and where we go up against vinyl, so Midwest, Northeast. You're right in that those 3 -- I mean, those 3 regions are relatively large, but are still -- we've still got lots of headroom in all the markets in terms of Color. The 27% increase in Color was kind of what we were planning for. So, we do like where it's going. The order file will tell us that it's going -- we're expecting that to continue.

Our target for this year would be another 25% increase in Color. And we do expect, as we expand our marketing campaign for that to continue to drive further growth. Obviously, we know it takes same amount of time for our consumer to -- once you engage it to actually complete the project. But we feel good about what's happening in those markets, good enough that we want to expand and we'll start to see more benefit in the year relative to the work we did last year. So hopefully, that answers your question.

[Peter Steyn, analyst]

Could I sneak a follow-up just on the data. Have you seen any change in your -- in the conversion rates? Presumably, they're going up generally because you're executing quite well around your marketing. But I'm just curious whether there's been any drop off in some of the data in the context of what we're seeing in the market at the moment around rates and so on.

[Sean Gadd, executive]

Yes. No, we have not seen any of that yet and nor do we plan to. I think the backlog is relatively large in repair and remodel. Certainly, when we speak to our contractors and our customers, their backlogs are more than double what they traditionally are. So, and that would tell you that they're not getting cancellations. And interest rates for reside aren't really that big an impact, at least we don't believe it is. And so obviously, people seem to have a fair amount of cash and we haven't seen that drop off. In fact, we think we will continue to see the growth.

[Operator]

Your next question comes from Keith Chau with MST Marquee.

[Keith Chau, analyst]

Sean, you seem fairly, I guess, positive at least about the near-term outlook and your comment around the backlog for remodel as being doubled in some case, what they usually are. Can you give us a sense of how you're tracking in the first quarter, at least from a top line perspective? I know you just mentioned the margin progression through the year. But can you give us a sense of volume versus price? What you expect that mix to be within your revenue growth assumptions for FY '23? And how you've been tracking in the quarter to date on both volume and price?

[Sean Gadd, executive]

Yes, sure, sure. I will tell you, as of like yesterday, Keith, basically, I would have thought it's about 10% up so far. So, that's very encouraging. And in terms of our net sales, we think the volume -- obviously, we're indicating price is going to be -- net price will be about plus 7% and then we're getting into our net sales of 18% to 22%. So, volume will be double-digit growth year-over-year is what we predict.

[Jason Miele, executive]

Just to clarify real quick. So, we indicated on the call, Keith, the price/mix growth of plus 9% to plus 12% for the full year. We're on track for that in the first quarter. And then the 10% Sean mentioned was -- we're up 10% volume year-to-date in the order file.

[Keith Chau, analyst]

Can I ask a follow-up on the other regions being APAC and Europe. Obviously, Europe is in a bit of an unfortunate situation at the moment. Volumes were down in the period. What your expectations are for Europe and also for APAC going forward, particularly given the APAC margins looked a bit softer in the period. Any color around that would be very useful?

[Jason Miele, executive]

Yes. Thanks, Keith. I think you saw margins impacted in the fourth quarter by inflationary pressures in all the businesses. So obviously, pricing actions as we move forward will help. APAC, we're expecting a strong result for the full year. We're not giving guidance for every region, but the business is operating very strongly. We -- similar to the U.S., we see backlogs for construction and repair and remodel. So we see strong -- we see strength there. EU, as you flagged, unfortunate circumstances. Q1, we expect probably a flattish volume, maybe down slightly as the conflict continues, and we are comping again similar to the fourth quarter, some initial build of inventory positions with the VL product, that happened last Q4 and last Q1. But we will continue to drive a very strong price mix in that region and we'll expect to -- strong net revenue growth throughout the year and strong EBIT growth in Europe as well for the full year.

[Operator]

Your next question comes from Andrew Scott with Morgan Stanley.

[Andrew Scott, analyst]

Sean, this is probably a question for you. Just a great job on mix so far. Just interested in your view on what sort of the cadence and the runway looks from here, if I'm right, reading it correctly, it sounds like you're not expecting the mix benefit to be as strong in the '23. I just -- as I think forward, you've done a great job converting Cemplank to Hardie Plank, but there's only so much runway there and maybe the color conversion is a bit harder. So, can you talk about how much runway you think you've got on mix? And does it get harder from here?

[Sean Gadd, executive]

Yes. No problem, Andrew. So yes, certainly, the Cemplank timing that we start to lap that in the Q1, so that comes off. And so that's going to -- that's obviously going to slow the rate down. But because of the pricing of color today, if we hit our penetration, which we believe we will for this year, we're going to end up with the price/mix component between 9% and 12%. So, we still feel like it's got that color can drag it up. We've also got products like Trim, [indiscernible], those products all obviously are accretive. And so we're driving those. And to be honest, color is growing faster than the rest of the business. So, we do feel good about still having a fairly decent runway for this year with regards to price/mix.

[Andrew Scott, analyst]

And then just on that Cemplank to Hardie Plank conversion, how confident are you that you can keep that if we do get into affordability-focused market, particularly with the big builders? I would have thought there's going to be some people knocking on your door asking to trade back down.

[Sean Gadd, executive]

Yes. So, I've said this before. I like Cemplank. It is a fighter brand. It certainly got out of hand. And so we've reset the brand. It's now down to 5 SKUs. So, we like where it's at. It's truly a fighter brand. I don't envisage us having to open it up to any builders. But if we have -- if we feel like there's a competitive threat, I'm not afraid to use it and utilize it. But I don't at this point, envisage is going to happen this year.

[Jason Miele, executive]

I'd just add, Andrew. We're at a point now where 65% of our business is repair and remodel. And as Sean mentioned, we intend color to grow faster than the rest of the business this year, which means we're continuing to grow faster in repair and remodel. And Cemplank is not a product for repair and remodel. So, while Sean's not afraid to use a fighter brand, it's not as big an impact as it may have been 10, 15 years ago.

[Operator]

Your next question comes from Simon Thackray with Jefferies.

[Simon Thackray, analyst]

Sean, just in terms of your price/mix in North America 9% to 12% when your ColorPlus expectation is for another 25% year-on-year. So, just looking against the net sales growth of 18% to 22%, am I right in assuming that ColorPlus is a pretty significant part, obviously, of that 9% to 12% price/mix? And then to your comment earlier about first quarter margins being below the range for the year, given you had sequential improvement in margin in North America, what is the actual expectation for margin in Q1 '23?

[Sean Gadd, executive]

Yes. Okay. So, I'll start with the first part of the question, Simon. So yes, the majority of our price/mix is going to come through a drive towards color. So, that's correct. Hence, the investment in repair and remodel and the investment in the consumer. So, we'll continue to drive that. And we think -- we believe that will go -- they will go quite strong and that will be what's pulling up our price/mix for sure. And we get obviously the benefit of lapping sampling. So, we have one more quarter of that. And then at that point, it's all about color.

[Simon Thackray, analyst]

Okay. And in terms of margins?

[Jason Miele, executive]

As far as 9 points to 12 points of price/mix, 7 points of that is embedded with the price increase which was taken across all products, not just ColorPlus. And then we're not going to give specific guidance margins by quarter, but we'd expect it to be in the high-20s.

[Simon Thackray, analyst]

Okay. Thanks, Jas. But obviously, a step down from fourth quarter, which is understandable to get to those numbers. And then just a real quick follow-up.

[Jason Miele, executive]

Primarily driven, as you know, by inflation quarter-over-quarter, freight, pulp, pretty much across everything and then we'll sequentially see it go up through the year and for the full year, delivering the 30% to 33% range.

[Simon Thackray, analyst]

Okay. No, that's helpful. And Jas, just a quick follow-up question was with the consumer marketing campaign, we talked a couple of years ago about a level of investment. Can you give us a guide on the level of investment that has gone into digital marketing and marketing generally and what the guide for '23 is?

[Jason Miele, executive]

Yes. So, we would have talked about it before, kind of a $60 million, $65 million number last year. It probably ended up about $50 million to $60 million. Now some of that was just shifting dollars from things we had done in the past. And then we'll go up from there this year as we're extending the program into 3 more regions. But we're comfortable with that. It might be about a 20% increase from where we were this year. And -- but as Sean showed on Page 19, we're seeing the results we want to see. And so we're going to continue to invest in growth. And that's part of Q1 as well, Simon. I mean we are a growth company. We are investing in growth through quarter 1 and throughout the year to drive the future growth we expect.

[Operator]

Your next question comes from Peter Wilson with Credit Suisse.

[Peter Wilson, analyst]

Can I first get a comment on the state of the Europe business, the team size, morale, the cost base? And I ask that because FY '22 SG&A went down 400 bps as a percentage of sales on top of a 600 bps decrease the year before. So, I'm just wondering effectively kind of how much you've stripped that back and how sustainable it is?

[Jason Miele, executive]

Yes. The morale is high. Like I said, me and Ryan and Harold were out there 2 weeks ago. Team is in good shape. I think SG&A as a percentage of sales going down as we entered COVID, we definitely held the line on SG&A spend, but wasn't a massive reduction. It's them driving the top line that's delivering then. So then if you go back to February 2019, we said a big part of the acquisition is we're acquiring the right team. They had representation in all the key countries we wanted to be in. They had a strong team based out of Germany and that's still the case. And it's driving that top line result that's given us the leverage across the SG&A base.

That said, we will invest in SG&A in that business fairly significantly this year, just like the other 2 businesses, talent, marketing, et cetera. So, the team is good, high morale and they have the right strategy to move forward. But you'll continue to see -- I mean, if we deliver on our targets towards the [ EUR 1 billion ] as a percentage of revenue, I wouldn't be expecting SG&A to increase.

[Peter Wilson, analyst]

And one Sean, if I could on North America. Just that second price increase, can I ask whether that was a difficult decision? Because as I understand it, it is a fairly large departure from your commercial approach, which is just to do annual price increases and not to do cost plus pricing. So, just wondering kind of how you thought about the decision and whether you think there might be some future repercussions from changing your commercial approach there?

[Sean Gadd, executive]

Yes. So certainly, we thought about it quite hard. Obviously, you said it, we typically price once a year. And they're usually normally reasonable price increases. I guess the way I'd describe it is this price increase, I ended up talking to all of our key customers. We're talking about how they were going to see and get through the inflation. And we talked about what's the best way they can deal with it. And we gave options and they were the ones that actually recommended to us to take the price increase. So, one of the benefits of having strong partnerships with our customers, we're able to have good conversations like this. And so when you ask me about repercussions, I don't see them being any. They would have informed me that price increase is right. And so we talked about the size of the price increase. We landed on that as well. So, we did that in conjunction with our partners.

[Peter Wilson, analyst]

I mean why would a customer want a price increase?

[Sean Gadd, executive]

Because, well, one, it makes them more money, and they've got the same inflationary costs and certainly, freight. Freight for them is just a bigger component than for us. So, it helps them deal with the inflation that they see.

[Jason Miele, executive]

Yes. I think one thing to remember, Peter, our customers are selling product into the market and we're creating demand for them. So, when Sean was talking about our marketing campaign, if you think about some of the regions, say in the Northeast, we're pulling -- we're spending money marketing to pull revenue back into our customers and they're taking a margin on what we sell to them. So, it's a win-win.

[Operator]

Your next question comes from Lisa Huynh with JPMorgan.

[Lisa Huynh, analyst]

I guess I had a question on transport anecdotally, which has been a bit more disrupted over the quarter. I guess, can you talk about whether you've had any issues on the whole with the freight and just given how that's compared to the peer set as well whether from an execution standpoint, the customers are happy?

[Sean Gadd, executive]

Yes. From a North America perspective, we are definitely working harder to lock up the trucks and the rail cars that we need. But we haven't seen any disruption. We're paying more for it, but we haven't seen any disruption. We continue to get feedback from our customers that our flow to them is one of the better ones in the industry. So, we haven't seen any disruptions, but we are working harder at it.

[Lisa Huynh, analyst]

And I guess as a follow-up, just given how fuel surcharges and the cost of freight has risen over the quarter, is it safe to say that freight for larger [ positive ] costs now than, say, items in the past like pulp?

[Jason Miele, executive]

Freight and pulp would be the top 2 and labor. They're -- the 3 of them are growing in proportion to what proportion they would have been 5 years ago.

[Lisa Huynh, analyst]

I guess would you say freight is larger than pulp now, I guess, what I was asking.

[Jason Miele, executive]

They'd be -- they're pretty close, Lisa. We're not going to give specific numbers for our input costs. But the 3 of those items are by far the largest 3 components of our cost.

[Operator]

Your next question comes from Daniel Kang with CLSA.

[Daniel Kang, analyst]

Just Sean, I just wanted to confirm the second price hike. So, I understand the first one was a 5% price hike. Can you talk us through the second price hike, the actual level? And any potential lags or risks? I guess you talked about the risk before, but any potential lags that may come through from the effectiveness of the price hike?

[Sean Gadd, executive]

Yes. So, the price increase was essentially a 4% price increase. It goes into effect, like I said on June 20 now. It will lag because obviously, we've got orders on our order file that are sort of backdated. So, it's going to come in. You'll start to see full effect of that by the beginning of Q3. So, it will lag over time. And it will net out somewhere around 2% for the year.

[Daniel Kang, analyst]

And just a follow-up, if I may. On the -- I guess, the architectural range recently launched and well received by the market, do you expect much contribution in the FY '23 year? And I guess the follow-up to that is when do you expect a more meaningful contribution from that range?

[Sean Gadd, executive]

Yes. Right now, from FY '23, I see that pretty much as us continuing to learn and do some test sales. We are going to be expanding where it's available throughout the year, and we're going to continue to do, like I said, our test sales and learn and get our pricing right and our value proposition dialed in. To be honest, when you think about the future, I think we're starting to see something meaningful towards the back end -- second half probably of FY '24 and then into FY '25.

[Operator]

Your next question comes from Sam Seow with Citi.

[Samuel Seow, analyst]

Sean, just on guidance, backing out the price implies, I guess, growth -- the growth above the market towards the high end of your old targets. I guess, is that fair? And just on that PDG part, is there a factor to consider if the market index is a bit softer? Or you can't tell that's relatively locking?

[Sean Gadd, executive]

Yes. I guess I haven't talked about PDG for a while, but I'll tell you that we are taking share and we believe we'll continue to do that. So, we like that. And you said your second part was if the market softens. Again, repair and remodel looks pretty robust for us. So, we don't see us necessarily giving up share and we've got some capacity coming on that enable us to obviously continue to grow the way we like. So from our perspective, I'm feeling pretty confident that we'll continue to see what you term as PDG, but PDG in that range for sure.

[Samuel Seow, analyst]

And I guess just on marketing directly to the homeowner. Could you talk about that lag between the website visits and the 11% ColorPlus volume growth? Is it kind of hard to understand those 2 periods you disclosed there? And following up to that, just what regions you're planning next, timing and size?

[Sean Gadd, executive]

Yes. So I mean, the lag in reality, there is a significant lag, like I said, it's sort of 12% to 18%. Now that's on average. So, you can imagine there's consumers right at the bottom of the funnel about to make a decision and we're intercepting them and they are changing their decision. So, it isn't like a straight formula for us, but we are seeing the increase. And the increase isn't sort of a 1-month big spike, it's been over a period of time. So, we feel good about that. And we do believe we're impacting the decision maker at the right time.

Now, there's some people, obviously, who are still in deliberation. Some consumers in deliberation that we will be -- continue to influence through our marketing campaign. So, that's kind of how I think about it. We are trying to compress the parts of purchase but that is a fairly long journey to get it down, but we feel good that we are continuing to learn. We are definitely tracing consumers from the point of -- from the point they get to our website all the way through. So, we're getting some good data there, but nothing that I wanted to disclose yet. And then from an expansion perspective, we're going to be expanding into DC, Baltimore. We're expanding to Chicago. We're expanding to Minneapolis, and it will be sort of starting in Q2.

[Samuel Seow, analyst]

And so if you take those 12 months to 18 months that you're talking about, then those 1.4 million website visits to March '22 really shouldn't flow through until this year? And the 11% really was old marketing?

[Sean Gadd, executive]

I wouldn't say that for sure because when I look at the -- again, when you think about say, 12 months, that's an average. So, there are some consumers that do go through the funnel in about 2 months and some that go through in 18, 24 months. So, I don't think that's accurate. I think it's a fair mix. I don't believe our marketing was doing that great before we started this campaign and this campaign is really strong. Now, we'll also tell you that together with our customer.

So, we work pretty feverishly in those markets to make sure that when Christines, our consumer is saying, yes, she wants to go with Hardie that we've got contractors ready to actually say yes to her and then obviously get us back to our customers. And so that link is what's driving a lot of -- in my mind, a lot of the incremental growth. And just to put it in perspective, we've signed up in those 3 regions about 400 contractors, new contractors that hadn't done Hardie before into the system.

[Operator]

Your next question comes from Lee Power with UBS.

[Lee Power, analyst]

You're obviously continuing the benefit of LEAN. I mean you had a $340 million savings target out there globally for LEAN. Can you just give us an idea of how we're tracking against that target?

[Jason Miele, executive]

Yes. We saved over $215 million globally, Lee. So, it continues to deliver savings. More importantly, also delivers capacity. And then as Sean mentioned on the call, the cornerstone of what allowed us to raise our margin ranges back in May of 2021 and gives us confidence in providing margin range guidance. The way LEAN has added stability and consistency into our plants has been huge for us and we're on track with the savings. Yes, we're on track with the savings. It's over $215 million.

[Lee Power, analyst]

And then, Sean, you just obviously talked about the visibility in the pipeline before R&R robust. Can you just give us an idea of how long the backlog is that your customers are talking about and maybe how much visibility you have into the channel now?

[Sean Gadd, executive]

Yes. So from an R&R perspective, contractors are talking about sort of 8- to 12-week backlog with typically [ 4 to 6 ]. So, that's sort of the -- that they're seeing. And from our -- obviously, as we continue to work with our customers, our dealers and our distributors, we're starting to see some visibility from them. Still relatively -- relatively strong visibility, which is good for us. So, we know -- it kind of gives -- as Jason said, makes us feel fairly confident with our numbers. It also enables us to get our factory set up to make the right length of runs to be able to deliver the right products at the right time. So, the visibility for us is one of the reasons why LEAN is starting to pay off the way it does.

[Operator]

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

[Brook Campbell-Crawford, analyst]

Just on Slide 17, the stacked bar chart, looks like the gray bar there, the low-value products for FY '23 is a couple of percentage points lower than that same chart you provided in 3Q, so clearly doing well on sort of moving your customers with the price points, but just can to understand really what's changed over the last couple of months because it looks like it's a couple of percentage point change if this chart is to scale?

[Sean Gadd, executive]

Yes. So obviously, from a sampling perspective, I think you guys are around all the moves we've made there. Inside of the gray bar is also backer. And we're selling -- we're pushing away more interiors into retail. So, we're obviously trying to build a retail channel that's stronger than it is today. And part of our strategic relationship with them was to ensure even though we look to probably reduce the amount of backer that we make that retailers see growth. And so we've been pushing more of our retail -- more of backer to retail than through the professional channel.

[Brook Campbell-Crawford, analyst]

And a follow-up of sorts and COGS inflation. Previously, you're expecting it to be $40 million to $60 million. I think it was a step up in FY '23. Just keen to understand how you're expecting that? Maybe a question for Jason. What are you expecting that cost inflation to be now in FY '23, I presume, much higher, but any sort of range you can give relative to the $40 million to $60 million of the last raise?

[Jason Miele, executive]

Definitely shifted significantly since February, Brook. And globally, our estimates, we're now thinking $90 million to $130 million. So, a significant change from where we were a couple of months ago.

[Operator]

Your next question comes from David Pace with Greencape Capital.

[David Pace, analyst]

Just with respect to fiber cement penetration in Europe, how far along the European fiber penetration story are you? And I guess, in that context, how confident are you of ongoing annualized growth in fiber cement despite Ukraine in the European region?

[Jason Miele, executive]

Yes. Thanks for that question, David. The fiber cement growth is on track. But as we discussed from the get-go in February 2019, it was going to take -- bringing new products to the market. The team has done a really nice job with the VL Plank product, which is a plank that's not overlapping. It's flat on the wall. And we're seeing good growth with that this year and we'll continue to grow that market. But more broadly, Europe is not just a plank market. So, that will be a good business for us, the planks, but we're looking into different innovations and bringing products to the market.

The team has a very strong plan there. Me and Ryan and Harold were there to go through that with them. We are excited about the opportunity. I'm not going to discuss it in detail on this call for commercial sensitivity purposes, but they have a very large opportunity they're attacking. We think it will be successful and it will take us that next step towards what will become a EUR 500 million fiber cement business alongside what we believe will become a EUR 500 million fiber gypsum business in our goal to get to EUR 1 billion within the first 10 years.

[David Pace, analyst]

And just while I've got you, business is obviously flushed with cash and your gearing is low. Can you just talk us through what your capital allocation principles are and give us some heart that you're not going to be throwing it up against marginal strategies just because you flush?

[Jason Miele, executive]

Yes, David, great question. No change. So, organic growth comes first. We have a $1.6 billion to $1.8 billion 4-year plan to grow capacity that is underway and we're going to continue down that path. Obviously, we can make adjustments if the market changes, but we don't -- we believe we'll continue down that path with that investment. That comes first. Returning to shareholders is after that. And any other opportunities would be last on the list. That's always how we've managed this business. We're an organic growth company. We have some great opportunities in front of us and that's what we're focused on.

[Operator]

Your next question comes from Anderson Chow with Jarden Australia.

[Anderson Chow, analyst]

I guess just on Page 19 of the presentation, I just want to understand or link up the numbers a little bit more. In your mind, I mean, how do you measure the success of the sales conversion from the marketing lease? I mean is the 6,000 from 33,000 sort of kind of the optimal level? Or is there kind of a delay, as you mentioned before that we could see probably a higher conversion rate?

[Sean Gadd, executive]

Yes. So, the way I think about it would be, listen, 6,000 for me is not necessarily the number I care about or the 33,000. What I care about is sort of the quality of our conversion. So, this is something that our consumer will do once or twice in their lifetime. So, it's not a well thought-out process or it's not well laid out. So, she definitely gets stuck along the way. So, what I'm -- what we're working on as a team is understanding where the bottlenecks are and trying to find and develop tools to get her along the path. So, we're making pretty good progress there. And so -- and the way I manage with that or we manage with that is we actually contact the consumer and ask exactly her what she's looking for and we deliver what she needs when she needs it. And when we see that subset improving, which we are, that's the -- those are the things we're looking to now scale up and send out into the marketplace.

So, I care way more about our quality and ability to hold her hand all the way through the process than I do about the actual number. But that said, the numbers speak for themselves as far as I can tell. I mean we are seeing more people come to our website. We are seeing people asking for more samples. We are seeing people asking for more brochures and we're certainly seeing the sales volumes go up as well. So, in the end, we feel very confident that compared to the control group, this is working.

[Jason Miele, executive]

I just want to real quick clarify because we've got a couple of questions on the 11% now. Maybe it wasn't clear in the footnote or when Sean talked about it earlier. But the places we're doing the marketing, we are 11 points higher than the places we are not. So, when we say ColorPlus was up 27%, the 3 regions we're doing the marketing, it's in the 30s and the places we are not doing the marketing, we're still growing color in the 20s, but we're getting 11 points differential in the locations we're doing the marketing. So, when you say how do we measure it, we are seeing increased sales for us and our customers and that's the ultimate measurement. We're still early days learning exactly what the exact figures should be for marketing leads and sales leads and the conversion rates, et cetera. But we see success and therefore, we're going to continue to invest.

[Anderson Chow, analyst]

And I just want to quickly clarify this 2x expansion. I mean, given the sort of marketing dollar is kind of cumulative, is there any kind of sales and marketing expense growth that you could speak to in 2023 or '24, the 2x expansion?

[Sean Gadd, executive]

Yes. So a couple of things. One is we're way more efficient and effective second year round in the 3 epicenters. So, we don't need to spend as much -- as much dollars as we did last year in those regions. And then obviously, we start new regions. We've learned a lot in the last 12 months. So, there's some stuff that we won't repeat. So, we will be more effective as we continue to go down the path. But overall, we are investing more dollars from a marketing perspective this year versus last.

[Jason Miele, executive]

Probably about a 20% uptick but the lot of the core work is done centrally. So, it's not -- we can go into double the amount of places without a huge increase in cost.

[Anderson Chow, analyst]

If I may, just a last question on Asia Pacific. I mean given our -- we tend to invest ahead of growth and this significant new capacity in Victoria. I wonder if you could talk about your long-term growth expectation in Australia and New Zealand on a sort of 3- to 5-year time horizon? What are you targeting?

[Jason Miele, executive]

Yes, we don't -- we'd expect double-digit growth in revenue, which would be a mix of price/mix as well as volume. Similar to the U.S., we see good underlying market dynamics with new construction and repair and remodel in both locations. And therefore, we're continuing to invest in that greenfield site in Victoria. We'll be doing a groundbreaking this week. So, we're excited and we're going to invest in that volume to support the future growth of this region.

[Operator]

Your next question comes from Paul Quinn with RBC.

[Paul Quinn, analyst]

Just a question sitting back here, taking a look at this new marketing program. With the doubling of the 3 additional key metros, what percentage of North America will you put this marketing program to, i.e., are we in the early innings of doing this right across North America? And then when are you moving to other regions, Asia Pacific and Europe?

[Sean Gadd, executive]

I'll talk about North America. From our perspective, we're investing where we believe we've got the biggest opportunity for growth. So, that's typically for us, Northeast, Midwest. And so we will be expanding our [ CFs ] going sort of more than what we've got now for sure. That said, the last time we spoke, I would have talked about a Magnolia agreement that we've got. That's still tracking based on what we want to get done. And that will have more of a national reach. And then as we get Hardie Architectural Collection that will be combined with some marketing programs as well. So, I think our marketing will continue to move, it will continue to be at the consumer level. It will continue to move across the country. What we're driving might be different. So, in the markets where our potential collection, piece of it we'll be talking about that. But obviously, right now, the focus for this year would be color.

[Jason Miele, executive]

I'll cover off on the more global aspects of that, Paul. I think it aligns with what Sean said. I mean the marketing campaigns will be tied to our strategy. So, the strategic places, we think there's opportunity is typically where the marketing would occur. And so for this past year, it was a focus on ColorPlus in the Northeast. And we learned a lot from that and we're applying that not only within the U.S., but also globally. And so in our Asia Pac region, we have started similar marketing campaigns for the folks who live in that region, they would have seen our ads on the Aussie Open a few months back and running similar game plans in Australia currently. And then the European team is also looking at marketing campaigns to drive growth. So, we've learned a lot in the past 12 months and now how we apply that, we need to continue to do that by region and by strategic initiatives.

[Harold Wiens, executive]

I would just add to that, that the conversations with Europe and APAC happen every week to 2 weeks. So, the knowledge transfer is very quick.

[Paul Quinn, analyst]

And just you called out higher corporate costs in Q4, just if you could give us some details around what that was related to? And then whether that's a onetime or non-repeat?

[Jason Miele, executive]

Yes. It's non-repeatable, Paul. It's in the -- there's a slide in the appendix that we didn't speak to, but it lists out the items there, one being legal reserves that we feel we're fully accrued for and onetime in nature. So yes, onetime.

[Operator]

Your next question comes from Simon Thackray with Jefferies.

[Simon Thackray, analyst]

Sean, just a quick follow-up, I'm fascinated by that Slide 19 that we were just on before. Just with the changes that Apple made with IDFA, IDFA for advertising and now Google are going to be implementing as well. Did that create any impact on consumer marketing in terms of being able to attract customers through that period for those that opted out, which was about sort of 62% of mobile customers? Or are most people doing this at home on their browsers at home?

[Sean Gadd, executive]

It depends. So, it would have had a small impact for us, but because it depends where they -- stays at, Simon. So, if they're doing design work on their home, that's generally on a laptop. That's not necessarily on their phone. But certainly, looking for brochures, looking for samples, that I'm guessing is mobile. So, a bit of a mix for us. But we haven't seen it. And in terms of -- it hasn't been enough to impact us. And in terms of our learning, we've got a subset of that. So, we tried to get a hold of about 500 customers a month that we can actually go and help them get through it, just because that's the subset we're learning from. So, it does -- it hasn't impacted what we've had to do to any extent yet.

[Operator]

Thank you. There are no further questions at this time. I'll now hand back to Mr. Wiens for closing remarks.

[Harold Wiens, executive]

Well, first of all, let me thank each of you that took the time to visit with us today to learn more about our business. As you can see, it's going well. Also, I'd be remiss if I didn't reach out and thank every single one of our 5,000 employees. They are the people that are driving this. They are doing it willingly and with real focus. So, thank you, team. And thanks to everybody for coming on the call.

[Operator]

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