Earnings Call Transcript - JHX Q3 2022

Operator, Operator

Thank you for joining us, and welcome to the James Hardie Industries Q3 FY22 Results Briefing. I will now turn the call over to Dr. Harold Wiens, Interim CEO. Please proceed.

Harold Wiens, Interim CEO

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 Meili; our North American President Sean Gadd; and our Executive Vice President 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 5000 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 three regions and all 5000 team members. Our strategy incorporates our commitment to Zero Harm and ESG. It starts with a focus and strong execution around our three foundational initiatives: LEAN manufacturing, customer partnership, and supply chain integration. Over the last three years, it is these three 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 three 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 six. James Hardie team is excited and proud to announce our partnership with Magnolia, the popular home and lifestyle brand founded by Chip & Joanna Gaines. Through Chip & 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 & 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 trust, protection, and low maintenance of James Hardie Fiber Cement technology. You will recall in our investor day in May, we described home as a sanctuary, and in our It's Possible marketing campaign, we asked, is it possible to fall in love with your home again? I'd like to read to you the 'About Us' section from Chip & Joanna's website magnolia.com so you can better understand the synergy between our two 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. Through all the joys and challenges that life brings, home always seems to be right in the middle of it. It's what gets 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 that 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 that everything we do at Magnolia is in pursuit of inspiring people to create a home and a 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, we will help guide you. They're 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, Magnolia, Chip, and Joanna's platforms 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 & 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 three to four months. Now let's turn to page seven. 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 two 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 Woodloch 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 five distinctive textured panels inspired by nature. They are fine sand, mounded sand, fine sand-grooved, sculpted clay, and seagrass. 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 two new products, Hardie Architectural battens in sculpted clay and in seagrass 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 grooved 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 as 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 two-story 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 seagrass. While fine sand, molded sand, and sculpted clay are all textures that existing building materials can deliver today, our new seagrass texture we believe is truly unique. We do not believe this is an aesthetic currently delivered in the exterior building materials space, and we're energized by providing a truly new look. The rendering of the house here shows the seagrass texture used on the front of the house in gray and contrasted with the more traditional style boards in white. On the right, we have provided a close-up of the seagrass texture. This product can be installed with the seagrass 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 Woodloch 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 to debut even more design-forward exterior options as we empower homeowners, architects, and home builders 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, North American President

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. Key to driving profitable growth is our team's focus on driving a high-value product mix in partnership with our customers. They're all now familiar with a matrix on the left-hand side of this page, which provides a simple illustration of a North American product portfolio and the price achieved and value provided to our customers and the homeowners. We have added today is a Tod on the right, illustrating a shift in product mix in fiscal year ‘22. Our expectation for product mix in fiscal year ‘23 and more importantly, our long-term strategic intent. In North America for the nine months ended December 31, 2021, we have seen price mix growth of plus 10%. In addition to our strategic products increase on January 1, 2021, the 10% increase in price mix was driven by the product mix shifts you see in this chart, specifically in fiscal year ’22, the decrease in the proportion of sampling and backerboard volume, and increasing the proportion of Hardie branded exterior volume, as well as the increase in the proportion of ColorPlus volume. In fiscal year ’23, we expect to continue to drive price mix growth. We want to continue to decrease the proportion of volume attributed to our lower brand and continue to increase the proportion of volume attributed to Hardie branded products and continue to grow ColorPlus to R&R and the consumer. In addition, we will start to get small mixed benefits from the High Architectural Collection in FY23. In fiscal year ’23, we expect price mix growth in North America to be in the range of plus 7% and plus 10%. Most importantly to today's discussion is the last bar on the chart; this represents our long-term intent regarding 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. So I'll focus on three critical strategic initiatives: One, continue to partner with our customers; Two, market 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 by the right brand partners, having the products 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 broader market conditions. I've tried to summarize this at the bottom of this page. First, we already have a 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 our 44 million homes over 40 years old. Third, homeowners' wealth has never been higher in the United States. Currently, homeowners have $302,000 of equity in their homes on average, which is an all-time high. Fourth, the remodel space is resilient. There's been a lot of focus in the markets around interest rates for the past few weeks. We believe the remodel segment has more resilience to interest rate changes than other segments, specifically for homeowners taking out a home equity loan of $50,000; for a 100 basis point change in rates, any change in their monthly payment is approximately $25. We do not believe this will deter homeowners from deciding to remodel their homes, especially considering the significant 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 the penetration of the R&R market in North America. I will now hand it over to Ryan Kilcullen to discuss global capacity expansion.

Ryan Kilcullen, Executive Vice President of Global Operations

Thank you, Sean, and good morning and good afternoon, everyone. Please turn to page 12 where I will provide an update on our transformational global capacity expansion plan. As we drive profitable growth into 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 products today. These include the following ramp-ups: Prattville, Alabama, sheet machines number one and number two, which add 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 three 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 that penetrate 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 for 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're 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'll be adding two 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 of 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 nine months. And finally, we have brownfield fiber chips and capacity plans 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. In addition to these projects, we are in the planning phase for Greenfield Fiber Cement expansion in all three regions. We're currently focused on the site selection process in all three regions and anticipate making land acquisitions over the next six months, which we will announce to the market as they occur. This is truly a transformational global capacity expansion plan. Over the next four years, we anticipate investing between $1.6 billion and $1.8 billion in US dollars 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 is 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, CFO

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 three 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 increased 22% to $204.1 million, and global adjusted net income increased 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 in 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 investments in future growth through marketing innovation and talent capability. Turning now to page 16, we will discuss the European results. In Europe, in the third quarter, net sales increased 14% to €97.6 million, and adjusted EBIT increased 18% to €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 in energy costs. The cost of hyperinflation to the business was €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 A$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're required to make an annual contribution to the AICF. Per the terms of the AFFA, our contribution to the AICF must be the lower of two calculations, which are performed on June 24 each year. Calculation one 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 liquidity position. Calculation two we refer to as the top-up calculation. This calculation tops up the AICF annually, ensuring that AICF consistently has three 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 the 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. This allows you to review the calculation in detail as you see fit and better understand how the calculations work as well as the sources for the data within the calculation. Let's now move to page 20 to continue this discussion. Today, we have contributed over A$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 4th, 2022, we estimate the AICF has approximately A$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, create 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 lags by three 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 that the top-up calculation will determine our payment to be made to the AICF in fiscal year ’23. 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 three regions, combined with continued market share gains in 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 raise our full-year fiscal year '22 adjusted net income guidance to a range of $620 million 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 million and $625 million. I mentioned on that call that the adjusted net income guidance assumed that the financial impacts 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 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 from $458 million in fiscal year '21. Turning to page 23, we will discuss the fiscal year 2023 guidance. Today we are introducing a fiscal year 2023 adjusted net income guidance range of $740 million and $820 million. Specific to our North America segment, we are providing two 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 the adjusted effective tax rate in the range of 150 to 300 basis points. However, we note there's 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 & Joanna Gaines. Commercializing global innovations, late last week, we announced the launch of the Hardie Architectural Collection, including two brand new products that we will showcase at the International Builder 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 outlines 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 three 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 midpoints of $625 million. Finally, we announced that we expect our fiscal year '23 payments 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 questions about the search for a 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

Thank you. Your first question comes from Lisa Hagan from JPMorgan. Please go ahead.

Lisa Huynh, Analyst

Hi, good morning team. Can you elaborate on how you're adjusting your approach to increase product uptake this year in North America? Will you focus on promoting this product in the Northeast, or do you believe there is potential for growth in your existing markets?

Harold Wiens, Interim CEO

If I reflect on our consumer targeting, most of our efforts are focused in the Northeast, and we anticipate this will continue for at least another six months before considering expansion. We plan to achieve this through the R&R segments, and our partnership with Magnolia will help boost our market penetration. My objective is for the brand to become a national presence, and I believe we have seen growth in ColorPlus nationally.

Lisa Huynh, Analyst

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

Jason Miele, CFO

Yeah, Lisa, currently, we don't sell color products in the APAC region. But the strategy is the same across all three. It's about high-value products. They differ by location, but high-value products in Europe are different than the high-value products in North America versus Asia. However, the strategy is the same, for us it's about 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 three regions and ensuring we're delivering high-value products through our customers, which is good for our customers and for us. Ultimately, the value to the homeowner is higher.

Operator, Operator

Thank you. Your next question comes from Lee Power from UBS. Please go ahead.

Lee Power, Analyst

Hi, thank you. You've kindly told us that the North American mixed shots probably at about 7% to 10% in FY23. 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 FY23? What do you think the market is going to do and your share assumption?

Harold Wiens, Interim CEO

Yeah, thank you and good question. From my perspective, we have seen that we believe the market is going to be fairly favorable, sort of low-single digit with respect to our volume, which is going to be somewhere between 9% and 13%. So we think we're obviously going to be taking share, and then as we move up mixed more towards color, we continue to focus on driving in the R&R segment. I believe the rest will come through price mix. Understand we've already taken the 5% price increase.

Lee Power, Analyst

Yeah, and then – thank you. And then just on the price increase? I mean, we've obviously seen, and you've quoted out with hyperinflation in Europe, input cost inflation run up pretty significantly, you've traditionally taken an annual price increase. 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?

Harold Wiens, Interim CEO

Yeah, from our perspective, I guess, when you're talking more on a long-term basis, we typically would have taken 2% to 3% every year. This year we took 5%. We have planned in the North American Business Technology price increase; we'll get the rest of our price through price mix with our customers, and work together with them as we drive our strategy. Now going into next year, we'll be considering the right pricing.

Jason Miele, CFO

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

Operator, Operator

Thank you. Your next question comes from Peter Steyn from Macquarie. Please go ahead.

Peter Steyn, Analyst

Good evening, gents. Thanks very much for your time. I was keen to just ask a slightly more strategic question in relation to the market environment. Obviously, there is a lot of chatter on the affordability front. How do you see the interplay of growth tactics with some of the developments in the market? Do you foresee that these present some headwinds to the full realization of some of your intentions on ColorPlus penetration as well as on the texture panel side of things?

Harold Wiens, Interim CEO

No, I don’t – I don’t see it, Peter. I think we've got a fair amount of work to do on new products and the learning process for us. We are focusing on the repair and remodel segments, which obviously is less sensitive to noise we're hearing, and we do believe from what we've seen there is quite a lot of pent-up demand with our builders. I suspect that they'll continue to work robustly through the year, obviously, assuming they can get their labor and their materials. But we believe that they will, and we feel very strong about a commitment for next year.

Jason Miele, CFO

I'd like to add to Sean's comments as he outlined on page 11. We are highly focused on increasing our presence in the repair and remodel segments. We believe we have an effective strategy for achieving this. Homeowner wealth in North America is stronger than ever, reaching an all-time high. Sean explained the differences between a home equity loan and someone looking to purchase a new home, which are distinct situations. Therefore, we are confident in our approach to entering the Repair and Remodel market. We monitor various external sources, all of which are indicating a robust R&R market in our fiscal year 2020.

Peter Steyn, Analyst

Thanks, Jason. Just to extend the question very briefly around the architectural panel range extensions, is there a risk that you have overcomplicated supply chains much like you had with ColorPlus a number of years ago? How is the supply chain better positioned to deal with extra complexity?

Jason Miele, CFO

Yeah, Peter, that’s a good question. I'll tell you a couple of things. One is we have been working really hard with our customer partners over the last 24 months to manage our working capital, so in general most of them will be carrying less inventory than before, and then when you look at where we want to go after, which is since you are penetrating the model in the West Coast to start. We've worked with some key strategic partners to get the material on the ground, but really limited materials as we start to get the engine moving on innovative products. The complexity is pretty low.

Operator, Operator

Thank you. Your next question comes from Andrew Scott from Morgan Stanley. Please go ahead.

Andrew Scott, Analyst

Thanks, gents. Jason, 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've 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 payment? Or is that what we might call a classic operating cash flow definition?

Jason Miele, CFO

Classic definition, Andrew. The one caveat is it's based on 2006 US GAAP. So there's some minor adjustments between our stated operating cash flow and ultimately what that number is. But we've outlined that in the detail page in the appendix as well, so roughly it's our US operating cash flow.

Andrew Scott, Analyst

Got it? Thank you. And then secondly, obviously, a divergence here giving guidance so much 15 months out, I know this was 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 in the 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?

Harold Wiens, Interim CEO

Yeah, it's a little bit of both. As we will enter, we've got commitments from customers. We've also got what they determine in future forward orders. We are working with our customers to bring that back to our business, so we can again. We have strong commitments, and as we work through them, we're telling us what they see in the future. And then, with our team working with end-users and tying that all together, we feel very, very confident that the numbers are right.

Operator, Operator

Thank you. Your next question comes from Keith Chau from MST Marquee. Please go ahead.

Keith Chau, Analyst

Thanks very much. Good evening, gents. Just a follow-up to Andrew's question, Sean. In terms of the duration of line of sight. I know back in January we spoke about clearing the backlog and also the forward order visibility. If we can split out revenue and costs, would you say the first six 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? Just the same discussion of costs around how much of your cost base is locked in for the first half of FY23 versus the second half?

Sean Gadd, North American President

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

Jason Miele, CFO

Yeah, just to follow up on Keith’s question, I mean, this is still a forecast. 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 side-lines than we used to. We have great partnerships with our customers. We have commitments, but it's not through the full year. However, all the data we're currently looking at indicates 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 that we gave today.

Keith Chau, Analyst

Understood. Thank you. 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 you know 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. Thank you.

Jason Miele, CFO

Yeah, fair enough, Keith. Yeah, you bring up a good point. I mean, LEAN, we started with LEAN, is our LEAN initiative over the past several years, gives us the ability and more confidence in getting guidance sooner. The variability of our plant network is reduced, which used to be historically, something that caused variability in our P&L. It starts with LEAN, and so within costs, there are uncertainties within the raw material space. We have that built into our range as far as inflation goes. Last year, FY22, we talked about A$100 million to A$150 million globally in inflation year-on-year here. We don't see that this year, so FY23 versus FY22, we think that's more somewhere around A$40 million to A$60 million in inflationary costs. So a much better comp, per se. And we will continue to invest in SG&A, as you can see, and describe SG&A and R&D. So marketing, talent, and innovation will continue to invest strongly as we have this year, as we continue to drive growth.

Operator, Operator

Thank you. Your next question comes from Peter Wilson from Credit Suisse. Please go ahead.

Peter Wilson, Analyst

Good morning. Sean, a question for you please. Can you just give me an update on North American volume, where you're, where this capacity now, whether it's still customers and allocation, and you could also weave into that answer, we expected some rollout plan. Yeah, potential collection, and how are you going to manage that?

Sean Gadd, North American President

Thank you, Peter. From our perspective, we have some customers regarding allocation, which continues to be a factor, but it doesn't affect our customers as much as you might think. We work closely with them every day to understand their end-user needs, when and where they are required, and we adjust accordingly to ensure timely delivery. Our flow is significantly better than ever before. In terms of capacity, we are collaborating closely with Ryan to monitor cell performance in conjunction with how the plants are operating, which is under my control, as well as the new ramp-up. For the first and second phases, we are currently analyzing what has been delivered and what will be delivered by year-end into next year, and we have some startups that should allow us to enhance our growth. Regarding the Architectural Collection, we have the required capacity on the west side, but we need to focus on market development to drive growth in that area. That's where our attention lies right now, and we will be managing our product mix as we gain traction in the market.

Peter Wilson, Analyst

Okay, good. Thank you. And once you perhaps, so just the Europe energy costs, can you explain how that was able to be contained in one quarter?

Sean Gadd, North American President

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

Peter Wilson, Analyst

As for the guidance regarding European advisors, what can you share?

Sean Gadd, North American President

Oh, okay. Yeah, we understand, hyperinflation. We're still experiencing significant European energy costs. However, 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, Operator

Thank you. Your next question comes from Daniel Kang from CLSA. Please go ahead.

Daniel Kang, Analyst

Thank you very much for taking my question. I just have a couple of questions on the North American business. The first one is, are you able to comment on the Architectural Collection, the new product? What sort of on the war 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, 30% plus. 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? Thanks.

Harold Wiens, Interim CEO

I will address the first part of that and then pass it over to Jason. From our perspective, regarding war costs, there are two points I want to highlight. Historically, Hardie has focused on war costs when considering products like vinyl; this time, it’s a bit different. We are starting with labor-intensive processes, including breaking up stone, which is also labor-intensive. Given the shortage of labor, I focus less on war costs and more on design. When we think about our consumers, they appreciate design and color, and they are willing to pay what’s necessary, which shifts our perspective. As we concentrate more on design, we realize that our consumers are not as price sensitive, especially as we move into higher construction markets. In terms of war costs, this aspect is significant in our segment as we move forward.

Jason Miele, CFO

Yeah, and you also have about raw materials, I think, in a way, yes. I mean, FY23 and FY22, we use a lot more stabilization than FY22 versus FY20. In FY22, we had significant inflation headwinds, circa $130 to $140 million in FY22. So that was significant, and we were still able to deliver very strong margins in all three regions. Going into this year, FY23, we still expect some inflationary pressures, but nowhere near to the same extent.

Operator, Operator

Thank you. Your next question comes from Brooke Campbell-Crawford. Please go ahead.

Unidentified Analyst, Analyst

Yeah, hi. Just a question around the North America margin target you've given us 30% to 33% in FY23. Just wondering if the 25% to 30% range is still relevant to luxury for that division and what scenario would be 28% to get to 35%?

Harold Wiens, Interim CEO

Yeah, Brooke, 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 FY24 with guidance for FY24, etc. We won't change long-term ranges within one period, but certainly, we're very confident in 30% to 33% for FY23. However, it would take more than one year to change the long-term range. So we'll take it into consideration as we get deeper into FY23.

Operator, Operator

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

Jason Miele, CFO

Great, thank you. We'd like to thank everyone for joining us today. For those of you who have IVs in Orlando this week, we look forward to seeing you there and showing you our exciting new products. Finally, the entire leadership team would like to thank all 5000 of our employees who continue to execute our strategy every day, which makes these results possible. Thank you.

Operator, Operator

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