Stronger margins have propelled James Hardie's second quarter result to another good outcome despite rising raw material costs. Management is seeing enough momentum in the business to lift its FY22 guidance range.
For the fourth consecutive quarter, all three of JHX's regions delivered double-digit sales and EBIT growth. Global price/mix growth of 9% was due to North America (+9%), Europe (+8%) and Asia Pacific (+4%) as customers increasingly purchase more high value products.
In addition to the improvement in its product mix, all divisions were able to maintain strong margins despite significant raw material cost headwinds. This points to a good operational performance across the group. With volume and price growth in the offing, we think North American Fiber Cement margins will remain robust throughout the year and could even expand into FY23f. Average realised prices will lift due to price increases and favourable mix shift and this could be accompanied by volume growth from further market penetration. While pulp and freight costs particularly have been heightened this year, there are early signs this pressure is easing. Transport costs seemed to have plateaued as well.
In the first quarter, JHX announced its strategic initiatives for the next three years. These included marketing directly to homeowners to accelerate demand, driving profitable growth in existing and new segments, and commercialising global innovations. The strategy of selling direct to homeowners has been pursued rigorously through its marketing and there is evidence it is succeeding, helped along during a period of tight materials supply.
NAFC volume growth is tracking at mid-teens levels just as JHX's capacity is gradually picking up. The company's Prattville sheet machines are expected to hit full run rate capacity by 4Q22. The Summerville plant restart will happen in March 2022 adding further capacity.
Investment view
The confluence of rising price and mix together with on-going volume growth is happening just as raw material and transport costs might be peaking or even declining. This combination points to even higher margins for JHX and this explains why management has lifted its FY22f profit guidance to US$580-600 million. If demand falls away or costs do not abate, this would out earnings growth at risk.
The momentum in the business is encouraging, particularly as it is occurring in all regions at the moment.
We retain our Buy recommendation on JHX.
