James Hardie Q1 Earnings: Growth Story Remains Intact (NYSE:JHX)

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All things considered, leading fiber cement provider James Hardie’s (NYSE:JHX) revised fiscal 2023 guidance range was better than expected, getting trimmed slightly while implied growth remained in the double digits %. More impressively, JHX is making headway into its high-value mix strategy, with ColorPlus volume growth accelerating in Q1 ’23. And with the latest round of price hikes being implemented alongside some easing in cost pressures, I see a clear path to margin expansion in the upcoming quarters. Nonetheless, there are risks to the James Hardie story, including a decline in housing activity as long bonds and mortgage rates move higher. Yet, shares offer a wide margin of safety against these risks at the current discount to historical levels, despite the company retaining strong through-cycle FCF generation and growth opportunities. The upcoming September investor day and the pending new CEO appointment will be key re-rating catalysts to look out for.

Recapping A Resilient Quarter

James Hardie recorded solid Q1 ’23 numbers, with adjusted NPAT (“net profit after taxes”) of $154.3m (+15% Y/Y). On the revenue line, the key contributor was broad-based price/mix growth in all three regions – North America led the way at +17%, followed by Europe at +14%, and the Asia Pacific at +12%. Encouragingly, the quality of the growth shows the higher-value product strategy is paying off, as the +5% price increase for the period implies a +12% benefit from an improved product mix. ColorPlus remains the standout, with its continued market penetration driving accelerated volume growth of +31% (up from +27% in fiscal 2022). All this culminated in North America delivering an impressive +28% headline revenue growth for the quarter (previous guidance was for +18-22% revenue growth in fiscal 2023).

Q1 '23 North America Overview

James Hardie

Europe, on the other hand, has been a source of weakness – revenue was down c. 5%, with fiber cement sales down a steeper c. 10% Y/Y (+1% in EUR terms). Production and distribution costs were also a c. 300bps gross margin headwind, with energy costs the main driver at +62% YoY. As a result, EBIT margins finished at 10.3% for the Europe segment – a generally weaker margin outcome than expected as costs rose substantially across the board. Overall EBIT margins were stronger at 25.9%, although cost inflation was also a factor. The biggest cost headwind was pulp (+16% Q/Q) and freight (+9 Q/Q), followed by natural gas, labor, and cement (+5% Q/Q). In total, these costs led to a massive c. 310bps in net gross margin pressure. Nonetheless, the company’s plan to implement further price increases should provide relief. In the Asia Pacific, for instance, the company has shown it has the pricing power to recoup significant cost increases, while the North American price increase (effective July) should also deliver margin improvement throughout the fiscal year.

Lower Guidance But Well-Positioned To Come Out Ahead

Unsurprisingly, James Hardie lowered its adjusted net income guidance range for fiscal 2023 to $730-780 million (previously $740-820 million). By region, North American net sales growth is guided at 18+% (compared to previous guidance of 18-22%), with EBIT margins of 28-32% (down from the previous 30-33%) set to increase Q/Q through fiscal 2023. Management noted the following impacts as driving the lower guide – inflation, a softer European outlook, unfavorable FX fluctuations, along with housing market uncertainty. In light of the cost pressures and prevailing market uncertainties, a reduction makes sense to me. In fact, the slightly lowered guide could even be conservative, considering management also outlined various scenarios where growth could exceed the prior upper end of guidance at 22%.

Guidance Overview

James Hardie

Interestingly, the price/mix guidance remains strong at up “low teens” on further momentum from more ColorPlus and Trim capacity coming onstream and marketing efforts gaining traction in North America. The company’s previously announced June price increases in Asia (c. 5% effective in September in Australia and October in New Zealand and the Philippines) will also be central in driving margins higher after the cost inflation seen in Q1 ’23. Heading into 2023, JHX plans to implement even more price increases, which should support margins in the upper half of the 25-30% range for the upcoming year. Also notable was management’s indication that it expects to revert to value-based January increases, potentially indicating expectations of moderating cost-push inflation trends. Even without cost moderation, expectations for sequential margin improvement through the year seem very likely as the recent price hikes become effective.

Reducing The Cyclicality

In the face of a slowing new housing market, the fact that James Hardie gets c. 65% of its business from less cyclical R&R (“repair and remodel”) markets will come as a welcome relief. Per management, the order book remains strong, with a healthy backlog remaining intact in R&R and volumes expected to hold firm through to the upcoming fiscal year. Management is also getting ahead of any potential inventory issues by “starving the channels,” which could yield a potentially favorable outcome in light of the macro uncertainties ahead.

Repair and Remodel Approach

James Hardie

Broadly speaking, the commercial relationships with channel partners appears to have improved, allowing for better demand management based on end demand developments. Case in point – management noted good visibility, even in the R&R market, through to Q4 ’23. Furthermore, the company has also developed various scenarios to deal with a potential market downturn. These include pausing non-critical hiring and implementing an ROI-focused approach to SG&A spending. Capacity additions are also on hold in light of the uncertain outlook, which should further bolster the very solid balance sheet (net leverage was at c. 0.7x at quarter-end).

Final Take

James Hardie’s strong execution capabilities were on full display this quarter, as the company continued to deliver positive growth and share gains through the cycle on the back of successful price hikes and strategic initiatives to move higher up the value chain. With management also positioning the business for future uncertainties and maintaining its outsized exposure to the resilient repair and remodel end-market, the company is well-positioned to navigate slower markets. All in all, the recent share price de-rating (to a historically wide discount) seems overdone at this point, and I view the current pullback as a buying opportunity. While I acknowledge the risk of housing activity declining, the implied rate cuts in fiscal 2023 (based on the forward rate curve) and the wide margin of safety at current valuation levels should give investors plenty of comfort. Looking ahead, next month’s investor day could be key in lifting the management succession overhang and re-focusing the market on the medium to longer-term growth story.

James Hardie EV To EBITDA
JHX EV to EBITDA data by YCharts

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