Our View: Yikes. With a workplace that had become overtly hostile, there was a risk of a leadership exodus from James Hardie. Therefore, the Board opted to remove the source of hostility and convinced executives to remain. We have never seen something like this but appreciate the Board’s decisive action. Investor focus is related to whether the behaviour enabled the impressive financial performance. We think that Hardie leadership struck the right tone on the call, and have confidence in their ability to identify the right leader. Therefore, we think that the pull-back presents an opportunity to add to the stock.

Management changes. Jack Truong, who was appointed CEO in February 2019, is no longer employed by James Hardie. Employees raised concerns about his work-related interactions, after which the Board undertook extensive due diligence (including retaining an outside counsel and a third-party consultant). The Board also provided opportunities and support for sincere change in Mr. Truong’s behaviour. Earlier today, the Board determined that Mr. Truong’s conduct, “while not discriminatory, extensively and materially breached the James Hardie Code of Conduct” and determined to terminate his employment, effective immediately. Mr. Harold Wiens will assume the role of Interim CEO. Sean Gadd was promoted to North America President.

This is a surprise to us. At our Forest Products conference last month, our first question for James Hardie’s Director of Investor Relations and Market Intelligence James Brennan-Chong was for a view from the inside after joining in mid-2020, and nothing seemed amiss to us (link). We do appreciate that the investigation was likely ongoing at the time and therefore not appropriate to discuss. On Glassdoor, we found no indication of broad discontent with Mr. Truong’s leadership as 90% of employees approved of the CEO (N=144).

Corporate culture is the biggest risk, but the candour from Executive Chairman Mike Hammes & team was refreshing. We hope that the next CEO brings a similar energy and communication style. The Board aims to select a new CEO within the next six months, with a focus on hiring someone that understands both the strategy, but more importantly someone who can bring the people skills that were evidently lacking by previous management. Several executives that were at risk of leaving previously have now indicated that they will stay given the ongoing changes at James Hardie. In our view, this reduces the risk of a mass exodus from the company’s leadership ranks and hopefully indicates potential for a repair of whatever damage has been done.

Increasing F22 Adjusted Net Income Guidance +$25 million to $600-625 million. The increased guidance is not overly surprising, with Consensus already above prior guidance of $580-600 million at $607 million (we are at $600 million). James Hardie also guided to 24-26% sales growth in FQ4. The Summerville and Prattville ramp-ups remain on track and a land purchase announcement is expected in the coming months for the North American Greenfield project.