James Hardie Industries plc (JHX) Q2 2019 Earnings Report, Transcript and Summary

Okay. Good morning, everybody. We'll go through this the same way we always have. Matt and I will take care of it. Everyone knows that Jack and I are in a transition period. Jack's working with the team on initial assessment of North American business and early stages of the three year strategic plan. But as far as the results go in the Q&A, Matt and I will take of those. But if you catch up with Jack later, he's right up to speed on everything that's going on in the company, so you'll get his perspective. All right, so Slide number 8, I guess. You see a lot of green arrows but our problem is our top line's better than our bottom line. We'll go through the reasons for that. And of course, the EBIT margin ends up being red because of that, meaning decline in EBIT margin both in the U.S. and in the company overall. The other unusual -- the most unusual thing in this result is we have done a strategic view of non-Fiber Cement U.S. and decided to both -- close both the Windows business and a product line which we call MCT internally but that's a resin-type technology we invested in 5, 6 years ago as a potential trim for the Northeast. And we were going to prove out the technology. We made shapes that we sell along with our current trim lines. The shapes are fine but it's not a big enough market to stay in the technology. And the technology itself, like the things we compete against, urethane, fiberglass, all those technologies just have a higher cost point than -- including our technology than we think is -- you can really sustain margins long term. So we're getting out of both of those, which this next slide covers that a bit. This also has ColorPlus. Those of you that were there in September know that one of the key initiatives for accelerating growth is what we're calling Win With Color initiative inside the North American business. Basically, you were at the point now with both scale and capability in color, we thought we could reposition the product line and would kind of go and try to kind of divide the product line and point at -- specifically at certain customers. We had a premium color line, which has some capacity that you would see and the result associated with it, which will give you the whole rainbow of colors. And then we're going to get more core with our existing color line for -- targeting most of the market that's looking for a more affordable color. The affordability comes some through manufacturing. It doesn't come through anything through paint. So the paint's exactly the same. Film, thickness, weatherability, fade, everything's the same. But it comes through manufacturing through longer runs and higher -- bigger unit sizes, lower freight. But it's really -- most of the gains are a more efficient supply chain. So we had a small writeoff that we're anticipating for obsolete inventory, colors that we're not going to make in our core offering anymore or SKUs. The Windows business, non-FC, so the next thing -- 2 items are non-FC. And I'll kind of summarize it at the end but one of them was always reported in U.S. business and that's MCT. Already commented on that. The Windows had always been kind of reported -- I think, recently, we've reported in the other categories, so it's pretty easy to see where we've been with that business. Basically, we had certain criteria for that business and over the 5 years we've been in the business, the first 3 years were a pretty rough start. Last 2 years, we actually did have pretty good progress in the business. But with a good review of it, we just decided it wasn't going to end up being what we were aiming for in the beginning. And that was mainly around potential scale of the business, not so much profitability. So the price cost was kind of tracking in line with what we thought it had to. And -- but we didn't think we'd get to the scale where it would be an important business for Hardie. So we've decided to close it. And like I said, with Jack and I in the transition period, this was done -- both of us are aligned on the decision. It's not one or the other making the decision. But timing's not so much around the transition. It's not the new CEO clearing the decks. It's -- it was scheduled for a review in October and that's when we did it. So here we are in North America. Yes, the 8%, which I think most people would be happy with, we were aiming a little bit higher, okay? So we came in a little short of what we wanted. Some of that seems to be external and some of it's internal. And internal stuff and it's a fairly small percent, say, 2% or 3%. So it's really kind of hard to tell at this point how much is which. But we're still working hard in the business to get all the momentum we want in the market. It's not like there's anyone clearly winning against us. You guys see the vinyl numbers, you see the LP numbers and those are the 2 we play against the most. But we did just come on a little bit short. Also, on EBIT margin. And EBIT margin is more about input costs that have run stronger than we were forecasting. The org cap cost is up, and the volume increase isn't quite kind of covering it for us. So when we plan the business, we were funding initiatives based on a certain volume increase. And now that we're coming in a little short on that volume increase, we're seeing the org costs being higher than ideally we'd like them to be from an EBIT margin perspective. But the stuff we're doing is good stuff. So obviously, Jack and the team are looking at things. But we're not like just pulling back because the volume doesn't divide out the way we planned it. There may be some trimming there but it'll be more about the work that we're doing. Interiors. It's quarterly earnings, so don't get hung up on the 6%. We still think that's a flat minus 1% or 2% for the year. We got a volume chart next, I'll comment more on it there. Price is tracking as planned. EBIT obviously, even when you adjust for the one-offs, it's still flat. And again, that's kind of a series of things. So it's the input, it's the SG&A -- volume being a little bit short based on SG&A. And we have started up Tacoma, so this is its first quarter. You're seeing some startup costs out of Tacoma that is affecting the number to any degree at all. Startup's going well, though. It's not an issue with the startup. Startup's going well. It's just the matter that it's going on. So when you look at the volume, you can see the red line is exteriors. Like I said, we would have rather been at 10% or 11%. That's what we were forecasting we could get to, especially on this quarterly comp. And we didn't quite get there and we're not sure if it's more external or internal. But like I said, we got some internal things. We still haven't gotten to where we want them to be. So it doesn't matter that much to us, to be honest with you. The market's still good. It's not like we're dealing in a bad market or things are pulling back or anything like that. It's just a bit of a dead market for a variety of reasons, which you've probably seen in other results. And then the interiors, like I said, the 6% is more of a quarterly variance. The first part of that chart is when we were pulling out of stuff we didn't want to be in interiors and that was the gypsum channel and the 4' x 8' board. And then we kind of feel like we're in a slightly declining opportunity market because of the change in flooring preference. But having said that, from September, really nothing's changed. We haven't -- that quarterly result doesn't bother us in any real way. The EBIT margin, you've seen 4 quarters where we're right at the top of the range and a hair above it a couple of times. Now we're right back, not quite the middle of the range but further down in the range than we would have been thinking we would be. And like I said, it's the stuff I covered. It's input costs, startup going on or cost and volume coming in a little short. So you would have seen in the writeup, I guess we're still talking the top half of the range and -- but there is pressure on the EBIT margin right now. So we're going to have to work through that during the winter quarters to make sure we end up where we think we're going to end up. This slide's kind of a nothing-new slide, price is going as we expect. You see that big slope and you think, "Well, you're taking too much price." But relative to the industry, that price is in line with the industry, so it's not like we're taking more price than the industry. So the things we compete against would have similar price curves. And then top line growth obviously is a bit short of what -- where we want to be. Asia Pac also has a less clear result than they usually do. This business is running very well -- I mean, the Australian business is running very well. Good top line growth, obviously phasing the input cost. When you look at the U.S. EBIT, obviously, that has FX in it but even when you get down to Australian dollars, EBIT very flat with a good top line. And they are funding initiatives in 2 of the countries: Philippines and Australia. They started up capacity in the Philippines and the New Zealand plant's not running as well as it should. Now recently, it's kind of bottomed out and started performing better. So hopefully, that improves as we go through the year. But there's just a few things dampening the bottom line growth on the good top line growth in Asia Pac. And then you can see the arrows for Australia. They all point up but certainly, the sales is a bigger arrow than the EBIT even in Australia. So the top line's running better than the bottom line. New Zealand, you can see their EBIT's down and it's mainly plant related, with the input cost on top of it. And then the Philippines did have a write-off on inventory, basically obsolete inventory. But other than that, that business has done really well. They did a good job resetting their market over the last, say, about 5 or 6 quarters. And they did a nice job starting up their new capacity. Europe's going as planned, both operations and integrations. So it's kind of no news is good news out of Europe. It's going as forecasted, pretty much in line where I think we indicated we think it -- we thought it would look like this year. Sales in euros are up about 6% and similar discount to the operating profit improvement in euros, so -- but it's going well in Europe. Okay, I'll hand over to Matt.

All right. Good morning, everybody. I'll go through the financials and then we'll open it up for some questions. In Q2, we had net sales that were up 23%. We reported $644.6 million of U.S. sales. It's up about almost $119 million, primarily driven by the acquisition of Fermacell. Of the $118.8 million, almost $77.8 million of that is Fermacell. Louis has already made comments on the underlying businesses and I'll do the same when we get to the segment results. Prices are up in the North America Fiber Cement segment as well as volume. Asia has both higher volumes and just good overall performance on the top line in both the Philippines and Australia. You see gross profits are up 11% on a dollar basis. Margins are down about 350 basis points. You'll see as we get into the input cost section that market rates on all the commodities and freight are up pretty significantly and don't seem to be cooling off. And that's, for the most part, what's driving the compression. We reported adjusted net operating profit in the quarter of almost $81 million. It's up about 7%. You can see for the half year, we reported about just shy of $1.3 billion of net sales, up 25%. Again, $164 million of that increase from the prior year was a result of the acquisition. Very similar, I'd say, top line dynamics at the half and the quarter, so I won't make specific comments here on those. Similarly, on gross profit, up 20% on a dollar basis, margins down about 140 basis points. The margin compression, for the most part, is input cost related. And then adjusted net operating profit, we're reporting 161 -- $160.8 million, up about 17%. Primarily North America Fiber Cement EBIT, excluding the MCT and product discontinuations, increased about 17%. Okay, so we'll go through some of the segments. For the second quarter EBIT and for the half was up 2% and 17%, respectively. We've excluded both MCT and affordable color kind of nonrecurring items, so you can see the underlying business. We try to give good visibility both in the MA and in the management presentations. You guys can see those costs and I'll take you through a slide on that in a second. The -- as I commented on earlier, both freight rates in the market, fuel cost, truck availability, the market price for pulp, cement, most of our raw materials, utilities are all up pretty significantly year-on-year and continue to be up to a much greater degree than we originally anticipated or even what we had visibility to in the August discussion. And that's what's compressing margin rates in North America. It's also having some impact on Asia Pacific. And I'll talk about that when I get to that segment. On Page 22, here's the details to the product line discontinuations. I'll just sort of remind everyone that in North America, in the Fiber Cement segment, we had both MCT and ColorPlus. Those business lines report up through that segment. Windows was in the other business segment. And so all you're seeing in North America is MCT and ColorPlus. We had $3.6 million of charges in the first half related to the discontinuation of MCT. I'd say those are very normal costs associated with product line discontinuation, things like fixed assets and excess and obsolete inventory. And a little bit of IP impairments are included in that $3.6 million. ColorPlus was E&O, excess and obsolete, inventory reserves on some of the inventory that is impacted by our decisions to discontinue some of those SKUs. The discontinuation of the Windows business has charges of $15.8 million in the quarter and the half. And those are made up of a combination of inventory and asset impairments. The asset impairments is a combination of goodwill, intangibles, some fixed assets and the like. We tried to do as much of that in the quarter as we could. I do anticipate some additional onetime costs in the second half of the year in the third or the fourth quarter as we get towards the exit of that business. And there'll be some residual amounts on the balance sheet that we'll have to properly reflect into the results that weren't estimable in the September period. Here's the chart we normally talk about on input costs. You'll see pulp's up 24% year-on-year and it's stayed elevated, I think, for a much longer period of time than -- certainly than we forecasted. And I don't think we're the only ones that were assuming that it would start to come back down. Freight's another one. You got market rates that are up nearly 20%. We're seeing it both in terms of rates and fuel. Truck availability is tight on top of it. So the freight market's pretty challenging in North America at the moment. Those 2, by far, are having the most significant impact when we talk about input costs compressing margins for the year. We still believe that those are commodity markets, they're going to cycle up and cycle down. We just happen to be at the peak at the moment, which is having some headwinds on the result. Cement's also up. You can see gas prices are down versus a year ago but there's still an inflationary trend on gas. And you can see electricity prices are kind of more flat, the green line. But gas prices going back almost 2 years ago are still pretty elevated. So almost across all of our major input costs, we're seeing single-digit to very high double-digit-type increases in input costs. And both the combination of that dynamic and a bit of the uncertainty around how much longer that'll persist versus when kind of normal supply and demand kicks in and those start to cool back down as they have in the past is creating a bit of uncertainty in the result that we'll talk about when I get to guidance. Asia Pacific, these results are obviously reported in U.S. dollars. I'm going to show you what they look like in Australian dollars. On a U.S. dollar basis for the quarter and the half, EBIT was down 10% and 2%. On a local currency basis, it was up 13% and 2%. So a pretty different dynamic in local currency versus U.S. dollar and you'll see that in the next couple of charts. Strong volume growth both in the Australia business and in the Philippines as businesses are continuing to perform well commercially and gaining both category and market share. In addition to the input costs, I'll just remind everyone that we buy pulp for the APAC businesses in U.S. dollars, so you get both higher pulp costs on top of the translation adjustment, which kind of negatively affects the segment. Louis already mentioned the Philippines kind of nonrecurring inventory item and foreign exchange. Those are all working to kind of compress margins in the first half for the Asia Pacific business. We've talked, I think, in August that the New Zealand plant is performing unfavorably at the moment. We think that's in the normal boundary of kind of plant performance. Just happens to be not performing during a period where we need it to perform. We like the trend -- the recent trend lines that, that plant's on and expect it to kind of get back into kind of where we need it to be. But it, no doubt, caused some first half and second quarter compression for the Asia Pacific business. Here's a chart on -- we typically show on translation. We -- at March 31, we were talking about an Aussie-to-the U.S. dollar translation rate of like $0.77. That's down to $0.72, so a 6% devaluation in the Aussie dollar in a pretty significant segment of our business. So as the U.S. dollar has gotten stronger, that certainly hurt us. You can see how different the impact looks if you look at the Asia Pacific business on an Australian dollar basis versus the U.S. dollar basis. I've kind of highlighted in a shading what the results in the quarter and the half look like in Australian dollars versus what we report in U.S. dollars. So almost a 7% change in average sales price, a 9% change between U.S. and Australian dollars in net sales and a 7-point difference in the EBIT percent change. So significant enough that, while U.S. dollars is, no doubt, kind of what we report, the business that we're measuring and that we're looking at for performance is performing very different in a local currency basis. On Europe, I'll just remind everyone that we've decided to take transaction and integration-related costs this year above the line in EBIT. So the EBIT has been impacted. That $1.2 million loss in the first half that you see in the green bar includes the charges that you see noted on the right side. If you -- both in the MA and in a slide in the appendix, when you add back the inventory fair value, the transaction costs, the integration costs that are included in that first half result, we've got a $19.9 million EBIT number for the Europe segment in comparison to $8.5 million a year ago. So we're kind of like 2 quarters in where the Europe business is both from a top line and a bottom line and the returns. It's kind of doing what we thought it would do. We recognize we've got a lot of work still to do in this segment but it's certainly performing the way that we hoped it would when we purchased it. The other segment is obviously Windows. Louis has already covered our decision to exit it. So you can see, for the first half, we had $19.1 million of losses, which, for the most part, are the impairments and the adjustments that we've made on inventory valuation writedowns and other liabilities. And again, we think we've gotten most of that in the September period but I do think in the second half, either in February or May result, we'll be talking a little bit more about some additional charges. On 28, I'd say no real change in R&D. We're continuing to kind of invest around 2% of our sales on R&D projects. It's an area of focus as Jack and the team are going through the strategic planning process to make sure that we've got those projects oriented on the right things going forward. But I'd say that segment -- it's really no surprise in its performance. General corporate costs, again, a bit more noise in here. So I'll just remind everyone of some of the items that are making some of the comparables look a bit odd. So we had about $2 million of stock comp; $2 million of New Zealand weather tightness that if you remember back in August that we had in the first quarter; and then a year ago, about $3 million of a gain from the sale of the Fontana building. So when you add those up, that really helps bridge you from the 14.6 -- sorry, the $22.9 million to the $29.5 million year-on-year. The underlying general corporate costs in terms of the investment that we're making in the corporation that we capture here are approximately flat. The movements are those nonrecurring items that I've just highlighted. Quickly on tax. We've updated our estimated adjusted effective tax rate for the year to 15.5%. In August, we were talking about a 17.1% number. Obviously, as the year goes on, we get better information, we have a better line of sight to what we think the full year earnings will be and cash taxes paid and adjust effective tax rate accordingly. The adjusted income tax expense decrease is primarily driven by that accounting treatment for amortization of intangibles as well as a reduction in the U.S. statutory corporate tax rate, pretty consistent with kind of what we talked about in May and what we talked about in August. And just as a reminder, income taxes are not paid or payable in Australia due to the AICF contributions. We've tried to note on the lower left of this chart kind of cash taxes paid as well. Those used to always be in the financial pages as part of our filing but we've brought that forward to highlight kind of the reduction that we're seeing at the half there as a result of the transaction that we did at the end of fourth quarter last year. From a cash flow standpoint, we had $137.6 million of operating cash flow for the first half. That was up 40%. The increase in net operating cash flow was up primarily for the cash-related net income with the underlying businesses. There's some favorable movement in inventory as a year ago. For the first 6 months of last fiscal year, we were building inventories and we're running, I'd say, at a more normal level of capacity in supply. And those inventories came back down in this period. You'll see in other net operating activities some movement between the first half of this year and the first half of last year. I'd say that's just normal variance in the results in the normal course of business, kind of nothing to really highlight there. In investing activities, you can see the $558.7 million for the Fermacell acquisition as well as an increase in capacity-related CapEx. That's consistent with what we've been saying the last several months, that CapEx this year would be elevated in comparison to prior years as we work on the Tacoma 2, the Prattville and the Australian brownfield Carole Park. So for the half CapEx, we had spend of about $140 million. That was up from the same period last year of about $56.4 million. I've highlighted the 3 major projects that we've got going on, which is Tacoma 2, the greenfield in Prattville that we started construction on and then in Australia, the brownfield capacity of another sheet machine in our Carole Park facility. In addition to that, today, we announced a $20.6 million investment in ColorPlus, which is equipment in 2 of our existing facilities in Peru and Pulaski, so 2 new premium color lines that'll help us automate and -- kind of this premium color offering that we're going to go to market with and do it in an efficient way as well as some building and facilities and the land in the Northeast for a future greenfield project related to color. On the financial management framework, no real change from previous quarters. The financial management starts with strong margins and cash flow and we adjust based on our capital allocation priorities. There's no change in our capital allocation priorities from the last time that we talked. Our number 1 priority continues to be investing in R&D and commercial activity to support organic growth. Number 2 priority is around ordinary dividend and number 3 is kind of flexibility for everything else, starting with market cyclicality and having the ability to be strategic. We had an offering in October in the European debt markets. The 3 rating agencies reaffirmed both our ratings, which you can see noted in the first column on the lower left as well as the outlook statements. From a funding and liquidity standpoint, we're going to continue to maintain our target range of 1 to 2x leverage. You can see the funding structure below, which I'll go through in a second. We're temporarily above that 1 to 2x range and will be for several quarters, as we've talked about in prior discussions, and remain committed to coming back down within that target range and getting leverage back below 2. Quickly on the debt profile. Our balance sheet continues to be very strong at the end of September. For the period, we had almost $109 million of cash, $1.261 billion of net debt and almost $371 million of revolving credit facilities. Our corporate debt structure has continued to mature and evolve. So you can see we now have the 2 U.S. notes maturing in 2025 and 2028, respectively as well as a very good inaugural offering into the U.S. -- sorry, into the European high-yield debt markets in October where we offered $400 million of debt maturing in 2026 at 3.65%, also unsecured. And we still have a $500 million unsecured revolving credit facility, and that's maturing in 2022. So I like the overall liquidity profile for the company and the debt maturity profile that we have. On leverage, you can see we ended the period at about 2.2, again, above the range, but we remain committed to coming back down within the range. I do think that, that'll continue to take us another 4 to 6, 6 to 8 quarters, something like that, to get back down within the range. But our net leverage target remains 1 to 2x adjusted EBITDA. Okay, on guidance. We've adjusted the guidance range down from our last discussion, down to $280 million to $320 million. That's an adjustment down from the previous guidance where we were talking in August of $300 million to $340 million. There's really 4 things that are causing us to adjust the range and number one is volume and the uncertainty in the U.S. market. The -- as Louis said, the first half comps were good. They were a little bit short of what we wanted. But you can see, when you look at a lot of the competitive results, the builder results, the economic news in the U.S., there's, no doubt, some uncertainty with respect to the U.S. market. And so we're a bit, I guess, uncertain as to how much of the performance that we've seen for the first half of the year is us versus the U.S. market. There's no doubt we think that it's a combination of the 2. And that uncertainty is factoring into a lower level of -- we are anticipating a lower level of market performance on top of a slightly lower performance from ourselves. Number two is input cost. So I previously talked about $40 million to $50 million of pressure or inflationary cost pressure on this year's result back in August. And that's probably about $20 million higher today than it was when I was talking to you guys 3 months ago. So we're seeing now $60-plus million of kind of year-on-year inflation. I would have expected by now that we would have seen a bit of a curtailing, particularly in pulp, and we're just not seeing that. Freight markets continue to stay very elevated on top of already inflationary environments for the other key raw materials and that's having an adverse effect. On top of that and this is primarily a feature since our last result, foreign exchange is certainly a factor. And so the Aussie dollar's decline and the U.S. dollar increase has kind of accelerated over the last 90 days in comparison to the first 90 days of the year. So we've kept the range at $40 million. So we would typically start to tighten it. We're keeping it wide at $40 million at this stage really for 2 things. We're a bigger business today than we were a year ago. We've got the integration of Fermacell now as part of our result. But a lot of what I just talked through is uncertainty on the market side. So there's no doubt there's some performance on our side that we're trying to work through and I'm sure we'll talk more about as the day goes on. But there -- a lot of the uncertainty in the range is not in our control. And so we've tried to lay out the assumptions that are sort of underpinning it and then set a range that we think wraps around what we see as the potential low and the potential high case for the year. So with that, I'll be glad to take questions and open up the floor.

Simon Thackray from CLSA. Can we just unpack that last comment now a little bit about system versus PDG and you weren't sure how much -- what was happening ultimately in the first half and what's going to happen in the second half? Did you come up with a number for PDG confidently in this first half that you think you achieved? I mean, you create the index, so we can't track the index but you do.

Yes. We know what our 4-quarter running index is and we're slightly above that, I think about 2% if I heard the number right. So our range for the year we originally forecast was 3% to 5%. 3% is probably still in play but we might come up a little bit short of that. But right now, I think the external market demand is actually harder to forecast than internally what's going on. So that's why we say we've actually -- the business, just kind of for a couple of quarters, just simplified it and focused on volume. Certainly, in our forecasting, we're focusing on volume. And we'll do a back calculation for PDG once we got the official starts and the R&R index from Hanley Wood.

So just again, I'd like just to understand that, it's harder to forecast the external market.

It's definitely -- the external market, and I'm sure you've seen other results, is not tracking as it was for, say, 4 to 6 quarters. In other words, the market was very steady for a long period of time, and now there's -- now it's not. It's not coming off, meaning we don't expect starts to reduce necessarily. But the activity in the market is below what it used to be.

Okay. So does that get reflected in your order book? Because you always talk about your order book...

Yes, yes, it definitely does, yes. So our order file is softer than what we want right now. That's getting to be a common comment by me but yes, it is. And we think -- because you're going to look at it regionally obviously. We think some of it is external and some of it's -- we haven't done a few of the things we wanted to get done and books of business we thought we'd book by now.

And you never call out weather but we obviously saw a pretty wet September, with Texas and the Carolinas who've had hurricanes. Most of the peers who have exposure in those areas have called that out. Did it have an impact?

No. Yes, that's when I said, there are several factors that are kind of affecting external demand in the industry right now, whether it's us or someone else. And of course, that would be one of them. And I can hardly say weather, you force me to. But -- and then just the builders, builder demand seems to be a bit softer as well. So we think there's a bit of a slowing down, meaning that everyone's not in such a hurry to kind of move things forward. I think there's a lot of companies just doing a little bit of a wait-and-see, which is basically what we're saying is, hey, if the recent dampening of orders below our expectations is weather related, obviously, that's going to wear off and will bounce back. And if it's related to something else, whether it be housing demand due to interest rates or anything else, a lot of people said there was a lot of wondering about what's going to happen with the midterms. Well, we don't have to wonder anymore. So we just see what the impact of that is.

Got it.

And so again, we're not trying to flag a big issue either internally or externally. We were about 2.5% or 3% short than where we planned to be this quarter. So we delivered 8% instead of 11%. And right now, as we sit here in November, 5 weeks in, we're a hair below what we were forecasting for the third -- similar amount below what we were forecasting for the third quarter. So we're just not bullish on our volume right now, yes.

Yes. And just on that comment previously about the interiors, it was down 6%. You're still saying it finishes the year down 1%. How does that...

Flat, flat to 2. I mean, that 6% is -- if you take the 6 months, it's down 2% and we think that's more typical. And we entered the year with some of that product line exit still impacting numbers to a small degree. It's -- we're not losing share, so we have visibility to share. So it's a market opportunity situation. But the quarter was just bad -- good comp, bad comp-type you had factor to factor in there, yes. So I wouldn't worry about the 6%. I'd be thinking about the 2% and I'd be thinking about a market opportunity that's likely in slow decline. And Hardie is not losing share in our channels. But Hardie is working to increase share incrementally or marginally in our channels to kind of offset some of that slow decline. And right now, I'd say we're staying flat share-wise, which puts us a little bit down because of the opportunity.

Opportunity, okay. And Matt, just in terms of the tax rate, I know you normally say you can only assume for the full year what you're saying there for the half. So that 15.8%, call it 16%, that's what we assume for the full year?

Yes, that's right. That tax rate just adjusts as our -- as we get better visibility.

Appreciate that. So if I sort of back out for that and maybe $50 million of interest costs and then kind of get back to an EBIT number, it's looking like the second half will be down on the first half. That's the implication, therefore, for the guidance at the midpoint of that guidance.

Yes, I think that math is probably about right.

Yes. Okay. And driven presumably out of this input -- $20 million of input costs that you've increased, the sort of the range of the input cost, that's a big driver. And then second part is this uncertainty around the second half outlook for the market. Is that the way to interpret it?

I think it's a pretty good way to look at it.

Keith Chau from Evans & Partners. Lou, just going back to your comment around the expectations for exteriors growth in the third quarter. So in the second quarter, just to recap, so the expectation was -- or sorry, the internal forecast was 11% and 8% was delivered. For the third quarter, you're a similar level below compared to the second quarter. What is your forecast -- internal forecast for the third quarter, please?

Yes, we're not going to give you our internal forecast but it wasn't 11%. The -- now we expected the back half volume comp to be lower, because they're tougher comps from last year winter than they were summer. So that's why -- the reason we had 11% for this quarter was more we had a weak comp same quarter last year.

Okay. But I guess, the long and short of it, the 3% to 5% PDG at the bottom end looks slightly more achievable?

Yes, I think -- like I said, I think the 3% is in play. I mean, I don't want to -- again, I'm not flagging anything major but I am flagging that our organization's ability to get out in front of it has been less than I would expect it to have been. So now like I say, it's kind of hard to triangulate, because you see vinyl is down over the last 3 quarters, LP is up just marginally like we are and a little bit less than us. So it's kind of hard to triangulate. That's why -- but we know which business we're aiming at and we're not knocking it off at the rate we think we can knock it off. So there's an internal component. Now is there more traction now than there were 6 quarters ago? Yes, there's more than 6 quarters ago. But like in September, when we saw a lot of you in September, we say, "Hey, this company and everything we do is around 6% PDG." And the reality is we're not there again. So we still have a lot of work to do to get back into that regular 5%-, 6%-, 7%-PDG type 4-year trailing results. We're at 2% now and who knows, maybe we -- by the end of the year, we end up 2% again or maybe 3% but it's still not 6%. So we still have work to do.

Sure. And just circling back to interiors. I think last quarter, we were talking about a 1% to 3% up result from interiors for the full year. Now we're talking flat to down.

Yes, Jason reminded me of that.

As we look kind of beyond this year, is there a point where you think the market for interiors will actually flatten off and stop deteriorating? Or is that a longer-term issue that...

I'm going to be honest with you. Again, keep in mind, we're the big player on the floor and the floor is what we're talking about. So it's hurting us more than our competitors, because the companies that make their living on the wall aren't seeing the same thing. Do I think it's going to continue? I do think it's going to continue. I think it'll be a slow decline for a lot of years and then who knows, tastes change again and maybe it swings back the other way, I'm not sure. But I said, Jack and the team just started to work on their strategic planning. Certainly, they're looking at product opportunities in interiors to offset the decline in the flooring opportunity.

And when do you think those benefits could start to materialize? I mean, it's not going to be the next few quarters.

No, I mean, they're kind of 6 weeks into a 3-month project. But I would say, we do have product development going on, so it's not like way down the road but I wouldn't put it in next year's results.

Okay. And just one for Matt. I think you mentioned on the guidance, input costs are about a $20 million higher drag than expected previously. I mean, given the, I guess, the lag between your market index cost and actually what Hardies sees in its numbers, how come there's been such a large change within such a short amount of time? I mean, kind of for a $20 million delta within 3 months when there's been clear visibility in the past or input costs on a lag basis? Is there anything else in there that's resulted in that high number for the full year?

No, not really. I mean, it's mainly input costs. I mean, when we were doing our guidance discussion in early August, we've got visibility and call it, late July. I think back in late July, we thought that we had seen the peak for the year and that they were going to come back down in the second half. So you've got, at that stage of the game, kind of 9 months in the fiscal year, you probably got 6 to 8 months if you exclude kind of any of the cost of goods manufactured that stays in the balance sheet via inventory. So we got a solid 6 months of raw material costs still to go. At that point, we're assuming it starts to reverse and it just didn't start to reverse on the raw material side. On the freight side, we are starting to see some efficiency, but still pretty elevated levels. That's a good 3 to 5 months later than what we would have expected back in August, when we were talking. So I think the costs have just remained elevated. We've had as good of a visibility into it as I think we can have. The price of pulp -- the NBSK price for pulp has just stayed high and it hasn't come down. So we were starting to assume a normal cycle of it's going to start to come down, and it just hasn't. So I've stopped assuming it's going to come down until I actually see it come down.

So is the embedded assumption that pulp prices stay high or continue to rise?

Continue at the current trends.

To go up?

They've been flat. I mean, just depends on what your reference point is. So they've been flat, I'd say, more recently over the last, I think, 30 to 60 days, they've started to flatten out. But if you were to look at over a 6-month period, they're up. I don't remember the exact assumption I've got in the second half of the year but I've got at least flat to where it currently is.

Sophie Spartalis from Merrill Lynch. Just going back to the cost profile. Is there anything that you can do going forward or have done in terms of initiatives to get on top of some of these external factors, whether it'd be hedging in terms of your gas costs or trying to do a different sort of balance on the freight?

Yes. I mean, I'm not a big fan of hedging. I think all you're trying to do is outguess the market. And if you're really good at that, you're probably not working in a manufacturing company, you're probably working somewhere else. I'd rather have the business and the organization focused on trying to get operations efficiencies. And there's a big focus that we talked a little bit about in September that, I think, will become a core part of the strategy around getting operational efficiencies and driving lean into the manufacturing processes. That's not a short-term fix. We, for better or for worse, make a product that uses commodities and we just happen to be at the part of the cycle where all the commodities are going against us. 2, 3 years ago, they were all -- it was all tailwind. And we also didn't spend a whole lot of time then thinking about how to kind of maximize or optimize on the tailwind. What we're primarily trying to do is convert raw materials into a great product for the market and then gain market share by substituting out vinyl and wood-like products. So we're not spending almost any time in the short term or almost at all trying to figure out what we could do other than the normal sourcing and procurement strategies. So if pulp is up 20-something percent, we're not up 20%. So we're looking at a combination of the types of materials, sourcing arrangements, where we're buying it from. And so we're not trending up 20%. The market is up 20%. We're going to trend below that. Same thing on cement. I think the cement market in the U.S., pricing is up 6% to 8% again this year on top of it was up 6% to 8% last year. Our impact on that is not 6% to 8%. We've got sourcing strategies in place that try to reduce that and minimize that and we measure the teams on their sourcing effectiveness. But we're not spending almost any time trying to figure out how to financially use derivatives or hedging or other financial engineering as a way to prop up short-term results.

Okay. And then that dovetails into the next question. In terms of your ability to keep pushing through price increases against the backdrop of an uncertain market, where do you see your ability to offset those cost pressures in the current market?

Yes. I mean, I'll just remind everyone that we value price. We generally sort of think about 3 types of pricing models in building materials. You can price based on costs, you can price based on capacity and you can do what we try to do, which is we look at the value of our product in the marketplace relative to the alternative product in the market. And then it becomes a decision about recovering any value that we see versus that competing product in the market. And balancing that with our primary objective in life, which is to gain market share. So when we make a pricing decision on an annualized basis, we're not doing it in the context of kind of what's happening on the input cost or the manufacturing performance. That being said, in a 10-year period, you'll probably see us take a pretty modest price, 2%, 3%, 9 out of those 10 years, 8 out of those 10 years. We're going to kind of be modest price takers in most years, where we want to recover some of that value. That 3% -- the way that 3% -- it's talked about as a national average. The way it actually gets executed and strategically gets set is a matrix of by product, by region, where we're making specific product and regional pricing decisions on an annual basis based on what our market share objectives are and what the alternatives are in the marketplace. So we took about a 3% price increase this year. What you're seeing in the reported numbers was a little bit of mix on top of that, a little bit of tactical pricing on top of that. So we'll probably take another 3% in most of the future years. That's a pretty reasonable assumption. We haven't determined what we're going to take for next year yet but we certainly won't do it per se in the context of what input costs are doing, because the main objective with pricing is to balance pricing with gaining market share.

Peter Wilson, Credit Suisse. If you focus on margins, just the discontinuation expenses, so you've taken the one-off. I assume the trade-off is an improvement in ongoing profitability. Is there going to be anything meaningful there that might help offset some of those input costs?

It's more about the future cash flows in those -- in 2 of the 3 situations with MCT and Windows. It's more about the ongoing investment in comparison to the ongoing future costs -- or sorry, the ongoing future cash inflows. And obviously, based on the decision, it's easy to conclude that we thought the future cash flows weren't as attractive. And so you probably -- with both MCT and with Windows, you can see the Windows losses, because we report it as a segment, it's basically the only thing in that segment. So it's pretty reasonable to expect once we get out of the Windows business and we've exited it that those losses that have occurred -- that certainly comes back into the group result, you get rid of those losses and you're not having that drag on the business. MCT is pretty marginal in the grand scheme of kind of North America. That's more about getting the business focused on a set of development technologies and R&D efforts and commercialization of a product that -- it's just about trade-offs and where we're going to deploy resources. And we didn't feel like, based on the returns and the growth that we were seeing in the MCT business, that we were effectively deploying resources. But I'd say it'd be pretty hard to see kind of the MCT benefit, if you will, directly in the North America result. It'll be there, it'll just sort of get overwhelmed by the size of that segment. So you won't kind of necessarily see it. On affordable color, that's very different. I think that's more about repositioning a product line where we see future growth. And the win with color strategy is about driving color penetration in parts of the U.S. market that we think have the largest market growth opportunities as we drive towards 35/90. So as we drive towards 35/90, we need affordable color as a way to bring value into certain regions. And we think that by segmenting premium and core colors, it allows us to deliver value to different customers based on what problems they're trying to solve.

Okay. And also, in the first half, the reason for the margin decline was that the volumes haven't come through, so cost have run ahead of volumes. As we move into the second half, should the volume growth not come through, the volume growth slow down, how does that play out in your margins and your ability to offset some of these costs coming through?

Yes. I think we probably won't give you all the pieces in the second half that, I think, some of the questions are kind of driving towards. What we're trying to do for the year is tell you that we think we're going to be in the top half of the range, so you can kind of see where we are at the half. And I think you can sort -- you can start to back into what a second half margin profile looks like if we're going to stay in the top half of that guidance range 20%, 25%. Keep in mind, the 20%, 25% for us is about balancing internally as well as externally, a message around we want returns along with growth. And we're trying to always, in both the short and the long term, balance those 2 things. We could optimize margins in any quarter or year and drive towards a bigger result but we're trying to balance the long-term objective of driving market penetration in all of our regions. We -- I'd say on volume, I think Louis has given a pretty good profile already of first half versus second half. Our comps in the first half were a bit more in our favor. So the comp numbers I think that you see in the reported result for the first half are going to be better than they are in the second half. That's pretty consistent with what we would have said back in May and in August with respect to coming into this year, we saw the first half as being an easier comp than the second half will be.

Okay. And Fermacell transaction integration cost, I'm a little bit confused with what you've booked in the second quarter. So I think first half total costs are $21 million but you booked $15 million in the first quarter and then another $12 million in the second quarter. Has there been some kind of restatement? To me the math just doesn't quite add up.

Yes. I mean, in total, for the year, we expect about $30 million in total, okay. It's got 3 major types of costs in there. Number one is a non-cash cost. It was the inventory fair value as a result of purchase price accounting, about $7 million. That was done in the first quarter, it was reflected in the August result. You can see it in the first half result. The second is ongoing integration costs, real true integration costs, onetime costs to largely drive integration as well as set up a back office and some of the similar, I'd say, integration-related expenses. And then the third is the transaction costs, which were all incurred as of the April closing date. So that's, I'd say, a very customary-type of transaction-related costs. So 2 of those 3 are sort of done. Purchase price accounting is for the most part, we think, is done. We've got up to a year to kind of make an adjustment, we're not anticipating having to do that. And transaction costs are paid upon the close. And so what you're down to is really integration cost. We think we've got about $10 million of integration costs that are remaining in the third and the fourth quarter. So kind of what you see in that table in the MA or in the result on the slide that I went through in the first half. If you were to add about $10 million, that's kind of where you'll get to for the full year and that'll take you up to -- I think it's $27 million, $28 million, $30 million, something like that, of total year cost related to Fermacell. Does that answer your question?

Gives me enough to go on. Lou, maybe one on North America competitive environment. So LP has been working on a smooth product for a long time. They're now targeting first quarter to go to market with that. And it's part of their -- I guess that they see it as an enabler for them to go after the R&R market, which is Hardie's bread and butter. I was just wondering if you can give us a comment on whether you think that's a material change to competitive environment and give some feel for what percentage of sales in the R&R segment is a smooth product or similar.

So you're asking me if smooth product, if they're successful, is a game-changer for LP? As far as...

Yes, they comment along the lines of they see it as an inhibitor of their growth.

The short story on why you don't make OSB out of smooth and with smooth surface is because it swells. And smooth shows it more than textured. So I'm not exactly sure how they're pursuing smooth. If they feel they have a way to make sure their product doesn't swell as much when it gets wet or if -- I'm not sure how the product ends up trying to perform in a smooth profile. We don't have it factored in as a big change for us competitively. Smooth product in the U.S. has grown over the years and it's really been enabled by fiber cement, because hardboard OSB, which was in the market before fiber cement came along, they went away from smooth because of the swelling issues. So you see it at the joints. And back in the early '90s, you face nailed siding. So you saw it at the nail heads and you saw it at the joints. Now most siding is not faced nailed. We introduced blind nailing to the market in the '90s and they've been able to follow with blind nailing applications as well. So they don't have the swelling-around-the-nails problem but they will still -- or they still do have swelling-at-the-joints problem. Now what is it? It's less than 20% but it's grown from 2% or 3% when we entered the market to whatever it is now, 17% or 18%. Certain regions like it a lot more, so like the Northeast has a strong preference for smooth. But just generally, most markets have gone toward more of a preference for smooth. So -- and we're talking about flooring and interiors in a market moving away from us. They would be experiencing the same thing with the market moving towards smooth. So I think they have a compelling reason to try and launch a smooth product. So -- but as far as us, I mean, I think most of the people that buy siding know kind of the difference. And if they're going to position a good enough smooth to the price-conscious buyer, they'll have some target customers. But anyway, we don't see it as a big change for us competitively. There's just -- the biggest opportunity for us against wood products remains selling maintenance. And selling maintenance really requires a full-wrap exterior from Hardie. So we've done that regionally in certain areas and not in others. So I think the basic position in our products versus LP doesn't change if they have smooth or just texture. They are more limited if they don't have smooth but basic product position. If you value map the products, it's the same, it wouldn't change.

Matt, Andrew Scott, Morgan Stanley. Just -- can you just remind me on your -- you had some reasonably lengthy downtime for the Fermacell business with one of the facilities. Can you just remind us on the timing on that and to the extent that made a noticeable difference in the financials?

It went really well. The guys handled that extremely well. We had set aside as much as 12 weeks to do the job. They did it in 8 and they brought it in just slightly under budget. So everything with the Fermacell business is going at plan or slightly better than plan.

If we look at the numbers, there's a noticeable difference across the numbers there for the Fermacell business overall.

We came in higher than we forecasted for Fermacell, because we had forecasted the 12-week down, which has the increased cost of being down the 12 weeks but also has higher freight rates, because you're covering for that plant with higher freight. So being down only 8 weeks did help us on the EBIT for the quarter.

And lastly, Lou, you experimented a bit through the winter with a bit of distributed inventory and flexing your plant patterns. What's the view on that? Is that -- was that a success? Is it something you're going to do again this year?

Yes, they'll keep our low-cost lines running higher utilizations, basically 4 shifts through the winter. We talked about volume a great degree, so we don't need as much board as we projected we need in the winter. So we'll have some of our higher-cost plants come down to either 3 shifts or 2 shifts. I did -- questions on the phone?

Lee Power from Deutsche Bank.

Maybe just for clarity, the 3% PDG, is that a full year target? Or is that an end-of-year run rate that you're looking towards?

Yes. Full year target, the run rate. What I -- originally, we set a 3% to 5% full year, fiscal year target. Everyone knows the math on PDG is not like small-numbers math. So you don't want to do less than 4 quarters and you really want to do it nationally rather than a specific region. When your numbers get small, the variance gets too big and kind of gets lost. So when I said 3% is still in play but we might come up a bit short, I was talking April 1, look back 4 quarters.

Okay, got it. And then on volumes, just on the margin basically, you said volume is going to be the largest driver of recovering that. Or do you think a bigger component is going to be the other levers you can pull? I know Matt has talked to lean and a couple other things.

I think lean is a good -- I mean, we've been talking about -- even though we're by far the highest throughput producer of fiber cement, there's a lot of manufacturing upside. And we've been talking about it for a couple of years and it's starting to become right in front of us now. So that's a lean initiative that Jack ran in Asia Pac, we got very good results, Rosehill, Carole Park, Philippines. New Zealand has been slow to get on the program but they're now moving in that direction. And so the mystery's over for the U.S. We don't have to design our game plan, it's a lean game plan. We've already implemented it in Asia Pac. We've got the capabilities in Asia Pac to help the U.S. guys get started. But that's -- it's still like 2- or 3-years benefits. I mean, I guess, the whole term, continuous improvement, as you get the benefits last a long time. But it's not low-hanging fruit, so you don't get it right out of the chute. You don't go backwards right out of chute but we have to build to get your performance to start showing up in financial results. But -- yes, and then it gives me an opportunity to circle back. There were some good optimization questions. We don't hedge because people who provide hedges make money and we have plenty of cash flow. So we never really thought we should give them our money to just smooth out our earnings. So that's the reason we don't hedge. We believe that commodities go up and down and we're more than happy to ride up and down with them rather than pay a third party to provide the hedge. If a pulp mill -- we did explore this a lot over the years, if a pulp mill was willing to sell us at a fixed rate, we would be willing to buy at a fixed rate. So if there wasn't a third party in the middle trying to smooth it out, we would consider it. But in their industry, basically, they can't sell at fixed rates, because they got to keep up with their competitors. So they're worried what that happens when pulp is expensive, they're missing the boat. So we don't hedge. We do, do a lot of optimization but we don't have the same flexibility as most building materials. Most building materials can really start substituting different raw materials. When 1 gets expensive, they substitute another that's maybe not as expensive. When I ran a recycle mill, that was -- you almost did that monthly, depending on what was happening in recycled prices. Because we're selling durability as our number one attribute to the market, we stay on a set formula. So we don't start moving cement, silica, additives or pulp up and down based on how expensive it is. So we're a little bit tied there but there's still a lot of optimization that goes on in Hardie. It's just not with the formulation of the product. And of course, just like I talked, we have different costs at different plants, so we also optimize around sourcing. And now that we're ahead of capacity, more of that's available to us than it has been in the last couple of years. As far as keeping the -- as far as keeping the EBIT margin kind of where we want it, of course, our EBIT margin is supposed to be a wave. And it dips down when things gets expensive and it goes up when things get cheaper, meaning the inputs. So we understand we're at the dip-down period. But we also see things in the business, like any business, we can do better. So the focus will be on doing some things better and ramping up that EBIT margin at a relative volume. And it will be necessary in the winter months. As some of you guys have picked up on, our volumes are going to be lower, and we got our org costs a little bit ahead of volume. So that situation is unlikely to get better in the winter. So we've got to get better at a few other things to offset it.

Okay. And then maybe just for Matt, I think you guided to $350 million being CapEx for the full year. How has that changed? And then my line just broke up a little bit on the Tacoma startup comment. Are the startup costs still in line with expectations?

Yes. There's no change on the full year guidance on CapEx. The $350 million that we've talked about previously is still a good number. It's really 2 big projects -- sorry, the 3 big projects, which is finishing up Tacoma 2, getting going on Prattville and the brownfield in Carole Park. And that still remains, then obviously, then we've got kind of ongoing maintenance CapEx. So we're still, I think, tracking towards that $350 million number for the year. And the Tacoma startup costs are right on -- right where we thought they'd be.

Your next question comes from Peter Steyn from Macquarie Group.

Lou, you mentioned a number of times the internal factor for weight on your sales execution. Could you maybe just give a bit of a sense of the detail there? So what are the things that you would see you could improve on?

Yes. I mean, we are talking about -- even though in volume, it comes out to be a lot of trucks, it's a small percentage. And you just really can't dissect it. But I mean, basically, you run market development against vinyl and we run an R&R program that basically builds an annuity for you. And then you either defend or grow against close alternatives. So I would say generally, we're kind of starting to get up to where we want to be in each of the 3 areas but we're just not quite there yet. So I've seen the organization perform better in the past. And I expect it to perform better in the future. And part of that is game plan design and part of that is game plan execution. I think there's just marginal improvements in a lot of different areas that is the difference between the PDG we're currently delivering and the PDG we're aiming for. Now like I said, Jack and his team have been doing some pretty good assessment work in my view. And I do think there'll be some reallocation of resources. I think we've gotten a little bit behind on moving the investment where the opportunity is rather than keeping the investment where the volume is too long. So there's going to be some game plan design changes which I think will help but we also need some game plan execution improvements as well. Again, I want to stress, it's not like we haven't gotten them but the slope of the line is a little bit less than I would've anticipated.

Perfect. And then maybe just a quick question around costs and the impending application of further tariffs. Is there anything to worry about there via either direct or indirect impact?

Sorry, Peter, you broke up just a little bit. The impending what type of cost?

The tariff-related issues going into calendar '19, Matt, if we get the 25% imposed. Is there any product categories that worry you?

Probably the one that comes to mind is steel costs, as we're looking to build out plants. It's definitely going to have an impact, an adverse impact, on the steel component of building new factories. Outside of that, I don't think it's as big of a driver as kind of the market fluctuations that we're seeing.

I mean, there's nothing that worries you in the indirect sense?

Lots of things worry me indirectly. Nothing else that sort of comes to mind though, Peter.

Okay, we won't go down that rabbit hole.

That's -- it does me an opportunity to comment. So the market for what we're trying to do is good. So I don't want you to -- anyone to think that builders are repositioning how they're setting up their business models. They still want to build more houses, sell more houses, sell at a higher price. It's just a little bit, like I said, I refer to as kind of a dead period in the market. So the question is, does that kind of self-correct? Or is that a signal that maybe the market won't be as good next year? But we're not anticipating we won't have a good market to sell in, in fiscal year '19. So whether it's stuff that goes on at the government level or interest rates or whatever it is, we're anticipating a pretty flat to slightly better housing market next year and we should do well in that market.

Your next question comes from Daniel Kang from Citigroup.

Just a question on Europe, if I may. Excluding integration costs, EBIT margins underlying looks to have fallen versus the first quarter. Was that primarily due to higher raw material and freight costs? And where do you expect EBIT margins to be in the second half?

I mean, I would see it more as a quarterly variance.

Yes. I was going to say, there's not a big difference between what we said in the first quarter and the second quarter. If you go back to what we talked about in August, we would've said that -- and we think it was 11-something percent that we posted in the first quarter. We would've said that, that was on the high side and that we thought that, that was just normal quarterly variance. And now we're at I think 9.7% or something like that this quarter. When we gave initial guidance on kind of what we thought the Fermacell business looked like once it was part of Hardie, we were talking about kind of 10-plus percent margin rates. And I'd say that's kind of right where we're at. We're pretty happy with it. We think the second half is going to look a lot like the first half. You're going to get any quarter-to-quarter a little bit of variance. The 9.7%, you got to sort of keep in mind that we had a plant down for a little bit. So that's going to drag it down a bit but it's not like I would tell you that the 11.8% is any more likely in the second half than the 9.7% from the second quarter. We think Fermacell is about a 10-plus-percent type of margin business and we're working hard to try to drive margins up from there.

Great. Matt, just while you've got the floor, are you able to quantify the impact of weather disruptions in the quarter, also the impact of the stronger dollar? And just while we're there, I know it may be a little bit early, but are you able to provide some guidance as to the tax rate in FY '20?

I'll start with the easy one. No on FY '20. I mean, it's just -- you can see we're in a pretty different tax landscape than we've ever been. I think we've got our arms around it, but we're still trying to digest the corporate tax reform from last year. Obviously, there's a fair bit of variation within -- with what we think is happening within the year and all that's kind of got an effect on effective tax rate. I will say that the number that we're reporting for this year, we think, is a good number and should be a decent proxy for kind of a future year. But I'm definitely not in a spot to talk about FY '20 from a tax standpoint. I'm sorry, what were the other...

The other one was weather. So we didn't use the word weather, we used external. So we -- like I said, we're maybe like 2 or 3 points behind where we thought we'd be on volume growth for the year. We don't think all that's external but we don't think it's all internal either. So I think the market is definitely softer than we anticipated it would be at this point in the year. So whether that's 2/3 external and 1/3 internal, it's just too fine of a calculation at this point. So we're not going to speculate. But I would say it's -- everyone seems to be a little slower than they thought they'd be at this point and that's our dealers, our distributors, our builders, our competitors. Everyone seems to be a little bit slower than they thought they'd be.

Got it. And there's one that you missed in terms of the impact of the stronger dollar, Matt.

Yes. We tried to outline that. It was in one of my slides. So at the half, on Pages 25 and 26, it looks like on an adjusted net operating profit basis for the half, it looks like it had about a 1% adverse effect.

There are no further questions from the phones at this time.