James Hardie warns on housing outlook, cuts earnings forecast

The materials giant said it had seen a ‘significant change’ in the last 45 days as labour shortages and unfavourable weather constrained demand for its products.

James Hardie will also launch a $US200m share buyback on Tuesday – instead of paying dividends – with net sales rising 14 per cent from $US1.747bn to $US1.999bn. Picture: Paul Miller/Getty Images

James Hardie says it has begun to see a “significant change” to the Australian housing markets outlook in the last two months, with labour shortages and unfavourable weather conditions constraining activity despite backlogs.

The company, announcing a 22 per cent jump in profit to $US330.5m ($510.1m) for the six months to September 30, said its customers had also asked to lower inventory levels amid a “period of market uncertainty”.

“Despite the reduction in our expectations for housing market activity, we are confident that we will be able to deliver growth above market and strong returns,” the ASX-listed building materials manufacturer told investors in a statement on Tuesday.

The company again lowered its earnings guidance for the year from between $US730m and $US780m to between $US650m and $US710m, although it told investors this represented a meaningful increase from the last financial year’s adjusted net income of $US620.7m.

The market had forecast earnings of around $US726m.

However, the company had earlier guided even higher full-year earnings, which had originally forecast to come in between $US740m and $US820m.

“We see a weakened housing market for the remainder of our fiscal year, softening volumes in all three regions we participate in,” said James Hardie chief executive Aaron Erter.

“To ensure we deliver on our results, our teams will be laser focused on expense control through (cost cutting), price realisation, and efficient resource allocation.”

Other local building materials manufacturers are also struggling with higher costs and wet weather. In October, Adbri removed its chief executive, Nick Miller, after less than four years in the role and issued an earnings guidance 20 per cent below market estimates.

While Adbri had implemented out-of-cycle price increases, they have not addressed ongoing cost inflation, the company said, and it was looking at further cost cuts.

The latest Australian Bureau of Statistics figures showed dwelling starts fell 28.9 per cent in the three months to June 30 – to 48,076 – compared to the same period in 2021. They fell 2.7 per cent compared to the three months ending March 31, the data showed.

The company expects volume declined in North of America in the second half of the financial year of some 5 to 8 per cent, while volumes will fall up to 4 per cent in Australia compared to the same period in the last financial year.

Mr Erter told investors and analysts that both the company and its dealer network were “surprised at the rate of decline” in demand.

‘’We were surprised and our customers were surprised. It is a rapidly changing market out there,” Mr Erter said. The update sent James Hardie shares down by 13.7 per cent, closing $4.58 lower at $29.01. They have fallen 49 per cent since December 31.

Despite the deteriorating outlook, UBS brokers Lee Power, Will Wilson and Nathan Reilly told clients they believed the company “has the right strategy and with input costs starting to moderate should drive margin recovery through (the financial year”.

At Citi, analyst Sanmuel Seow said the result was “a lot to process”. “We see price sticking and margins holding in the US as important looking forward,” Mr Seow wrote to his clients.

James Hardie will also launch a $US200m share buyback on Tuesday – instead of paying dividends – with sales rising 14 per cent to $US1.999bn.

“Conversion of dividend to $200m buyback also positive from a share price point of view. However, sharp decline in volumes will scare R&R investors,” Mr Seow wrote on his note.

“While a material downgrade, we estimate market will want to know implications for (the 2024 financial year) from this result.

“In this regard we expect while lower volumes were expected, it appears below range (primary demand growth) implied in the (second half of the financial year).

“However, reported and margin guidance was strong, which will be a key positive if company can maintain looking forward.”

But the company said sales in Europe had declined, along with the earnings margins compared to the same period in the last financial year.

James Hardie appointed Mr Erter, the former chief executive of PLZ Corporation, to the top job in September, months after it abruptly sacked Jack Truong after describing the work environment under him as “too hostile”.

Mr Truong, who was appointed chief executive in February 2019, has denied the allegations and said he had been “blindsided” by the termination. Mr Erter had spent close to two years running PLZ, a North American manufacturer of aerosol and liquid products. He has also held roles at paint and coating producers Sherwin Williams and Valspar.

On Tuesday, Mr Erter said the higher sales reflected strong price and mix growth in all three regions. “This calendar year has seen the macro-economic environment continue to change around us quite significantly, with unprecedented levels of inflation, rapidly rising interest rates, slowing housing activity, global supply chain disruptions, and a war in Europe,” he said.

“We are navigating this market uncertainty with a focus on controlling what we can control. We plan to win regardless of market conditions, and we will continue to accelerate and expand our competitive advantages.”

Mr Erter also said there had been a shift in the way homes were constructed as James Hardie products were going into a house build early on in construction, as builders faced shortages of material which would then go into the build later.

This switched order of construction would shave away at backlog work for James Hardie.

On replacing the dividends with buybacks from here on, the group said returning excess capital in this way “provides a growth company the optimal flexibility to ensure investment in organic growth is prioritised while maintaining financial strength and flexibility through cycles”. The buyback will end on October 31.