James Hardie Industries plc. (JHX)

JHX 
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James Hardie Industries (JHX)

Q4 2013 Earnings Call

May 22, 2013 8:30 pm ET

Executives

Louis Gries - Chief Executive Officer, Executive General Manager of U.S.A, Executive Director and Member of Financial Statements Disclosure Committee

Russell Chenu - Chief Financial Officer and Member of Financial Statements Disclosure Committee

Sean O’Sullivan - Vice President of Investor & Media Relations and Member of Financial Statements Disclosure Committee

Analysts

Simon Thackray - Nomura Securities Co. Ltd., Research Division

Andrew Peros - Crédit Suisse AG, Research Division

Andrew Johnston - CLSA Asia-Pacific Markets, Research Division

Liam Farlow - Macquarie Research

Michael John Ward - Commonwealth Bank of Australia, Research Division

Emily Behncke - Deutsche Bank AG, Research Division

Andrew Geoffrey Scott - CIMB Research

Jason Harley Steed - JP Morgan Chase & Co, Research Division

David A. Leitch - UBS Investment Bank, Research Division

Matthew McNee - Goldman Sachs & Partners Australia Pty Ltd, Research Division

Ben Chan - BofA Merrill Lynch, Research Division

Presentation

Louis Gries

Good morning, everybody. It's like we should hope for rain every results, so I could just do mine on the phone. Yes, so -- anyway, we'll run through it the normal way. Yes, this is going to be a repeat of the last result, which I did do on the phone.

We thought we were going to do a little bit better in the quarter. Obviously, we went into the year thinking we're going to do a little better for the year. Again, the summary, you guys know the summary. The volume -- volume, we're pretty happy with it. I guess, Sean has got a couple of question and I just got a question on the 8% comp on volume. I think when you look at the volume trends in the business, actually the fourth quarter came in right around where we're forecasting. So we're happy with where the market's at and we're happy with where we're at relative to the market on volume. So the work we need to do is in other areas. So I think we'll probably -- I'll go through the slides pretty quick and you got Russell go through his and then we'll kind of handle that other stuff in more -- in detail when we go through -- when we get to questions.

So anyway, you can see the operating profit for the quarter and for the year. Excluding all the other stuff, it's down $4 million. So on much higher -- 12% higher volume, so obviously, that's a disappointment from a bottom line standpoint. So again, we'll talk about that. U.S. in the quarter, yes, sales were up I think 8% -- or volume was up 8%. Sales price, I don't think it was down a full percent, but it was slightly down. Mostly that, at this point, is mix, so there's no slippage of any price in the market anymore, so it's a mix at this point, pretty much entirely.

The input costs in the business aren't a problem. They've been favorable this year, so despite the fact we didn't hit the bottom line number we are looking for, it wasn't an input cost problem. Freight is starting to get more expensive right now, started in March, which is typical for this time of the year. We are doing a lot in our capacity side, so we've got some money going to that both in Fontana. We actually have to start up Plant City ramp-up, proves come up to kind of like 3 shifts on the second line or 24/7 on the first line. So we do have some inefficiencies hitting us as we bring capacity back up. Fixed manufacturing cost, that's again a lot around -- we kind of shrunk the organization around the 7 sites and now we're getting around a more -- getting ready to do construction and run more than 7 sites. So that's going to stay in the business, the higher manufacturing cost. It will be spread as volume continues to go up, obviously.

Part of the capacity work we've done, again, the product mix pre-downturn and post downturn, because we did a pretty good job in here in our market and with a few of the kind of more or less core-like products. Our mix has changed quite a bit. So we're setting the factories up kind of for mix that we're anticipating that we'll continue to improve. I'm forgetting about the 7-plank deal, but we're talking about other products that are becoming a bigger part of the business. And then we're also moving toward regional manufacturing. So what we want to do is we want to end up with a southeast and northern and a western kind of manufacturing hub where all products are sourced regionally. This isn't all that new, but now that we're back into growth situation, the freight benefits of getting there is significant. Of course, you've got a lot of investment -- not a lot of investment, but you do have investments to get there as well.

So some of the asset impairment is about that shift that what we used to do in these plants, isn't what we'd necessarily in the future. Summerville is probably the best example of that. It used to be a siding plant, and we'd like to make it a HardieBacker plant. So there's no HardieBacker in the southeast manufacturing.

And then we talked about the organizational costs. So there's some numbers. EBIT was a little better than last year, but nothing really to comment on because it came at a lower overall EBIT margin.

In the full year result, again, we're pretty happy with the volume. We'd like the way the market is and we feel on our PDG count, we indexed just about 6% above the market. And of course, we take into account the new construction increases, but also the repair and the remodel. And we knock out a few things like high-rise in that, but for the most part, we're very happy with volume. We like our traction in the market. We think we're better in the market this year than we were this time last year so we're starting to build some of that capability back in the new construction. So we're happy with the volume. Average price when we came in a year I know I said flat plus or minus 2. It comes out minus 1 for the year, which I'll be honest with you, that's little bit of a surprise to me. I thought we'd be flat, and I knew there were some risk about -- around that in both ways but anyway, we came out minus 1.

You can see we're flat on EBIT despite the extra volume to deal with, and when we get into Q&A, I'll kind of go through how I see that thing, breaks out as far as kind of where the -- where the extra EBIT would've been lost on the extra volume.

This is our EBIT margin chart. Obviously, it's just before -- the market peaked at 2007, so fiscal year 2008. And you can see, it's been a steady decline. So obviously, it's a trend we have to reverse and you know we're committed to doing that. You can see the housing market is definitely well, number one, much lower than it used to be but definitely on a much more positive trend even in the last year. So the slope with that line, the black line, is good. And we feel it's sustainable, so it's -- we don't think anything -- it's anything that will likely flatten out in the near term.

Average flows, and we'll come back to this slide, but basically, you can see we peaked in fiscal year '11 at about $6.52, and then we lost -- let's see $6.52. I think we lost about -- I can't remember a $7 or $8, '11 to '12. And then we lost another $7 or $8 from '12 to '13. So over a 2-year period, we lost $13 and again, that's something we do have to reverse. There's 2 different parts. One, our more price-conscious segments are at lower prices than they were 2 years ago, but also we're selling more of that board relative to the overall mix, so that's the other problem. So we'll cover that, but we've got to reverse that trend.

So we talked a lot about what we put back into the business, and I think you remember in the downturn, we did pretty well because I think, number one, we did kind of scale down the size of the organization as the market opportunity went down. And two, we did a lot of reallocation of resources to make sure we hit our resources pointed at the stuff that was still going to kind of pay back for us in the down markets, so we pulled a lot of stuff off in new construction and put it on repair and remodel. So now we're in a process of reversing those trends and that's -- one, we're putting more bodies in the business but, two, we're doing some reallocation again towards new construction. So that's the kind of sales side of it, then you have a marketing component.

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