James Hardie Industries plc (JHX) Q3 2019 Earnings Report, Transcript and Summary

Let me first begin by saying that I'm honored to serve as the CEO of James Hardie and to lead its more than 5,000 employees worldwide into the future. I want to thank the Board for their trust in me to lead this incredible company. I would also like to take the opportunity to thank Louis Gries for his vision and leadership during the past 14 years as James Hardie’s, CEO. I'm grateful for the very strong foundation that he had built. This is a company with global presence with great products and great people. And a company that had consistently delivers strong operational and financial results over the long period of time. However, more recently Louis had been very clear with you that he felt our North American business have not been performing to its expectation and to its potential. I agree with Louis 100% on this point. But just to be clear though, and to level set the baseline, during the past two years our North American business has been growing and delivering just about at the market rate in an EBIT range of 23% to 24%. Despite the significant headwinds in input cost and freight in more than a decade. While this performance on the surface may look good, but we at James Hardie are not satisfied with these results. And we know that our North American business can do better to high a performance level. And this is to deliver consistently the PDG of 6% growth in the range of -- on the high-end range of 20% to 25% EBIT. The good news here is that most of the issues that prevented us from delivering those results are internal. So today before we jump to the Q3 earnings call. I want to spend some time outlining for you our strategic plan on how we're going to change that. And I will share with you on how we're going to transform the way we operate so that we can and will meet our expectations and our potential and to deliver on the next phase of James Hardie growth, not just only in North America also in Asia Pacific and also in Europe. Specifically, I will spend some time this morning to go through our global strategy, the long-term goals for each of our business units and specific about strategy and the priorities for the next three years. Now, this is still a Q3 results call so unfortunately I will not be able to go through a lot of details in depth about each strategic priority that I would like, but I intent to provide you enough details and specific that you have clarity of where we're going. And at a high level you should walk away with at least three things. One, our long-term goals and targets are unchanged; two, we have significant growth potential in all three of our businesses; and three, we have a clear strategy in place to drive those particular profitable growth. Now slide two to slide six really the cautionary note on forward-looking, but now let's go into the agenda. So for the next 25 minutes, I will share with you our strategy and in about 10 minutes review the group operating results in Q3, and Matt will go through the financial review and then we'll take Q&A at the end. Now on to the global strategy, so this is our strategy in one page. At the very top it's pretty much our North Star for our business. And that is we're committed to be an organic growth company that will deliver growth above markets everywhere that we operate in. And in North America, it's about 6% PDG growth for the long-term. And in Asia Pacific really about the 5% PDG growth for the long-term and in Europe it's about delivering on the €1 billion in 10 years. And we will be number one, we operate in every markets around the world we are number one. And so we are currently number one in North America, in Australia, in New Zealand, in Philippines and in Europe with the acquisition of Fermacell we're also number one in fiber gypsum that will provide a platform for us to grow into a leading position in Europe. So that is our guiding principle for our company's growth for the long-term. And the four pillars that would help us get there and which the priorities for the company would be that we will focus on being the full line supplier for Hardie exteriors, and we will make the interior as the growth business and reestablish as a growth business in North America and also in Asia Pacific and Europe. Innovation will be one of the four key pillars that will support a growth in the long term. And this is an area that you see a lot more focus within the company and so we will hear a lot more going forward. Lean transformation, lean manufacturing will be one of the key focus in our company to really take advantage of the fact that we are now the world leader in fiber cement and implementing lean manufacturing that would take us to the next level of transformation to deliver better cost savings, improve the predictability of our manufacturing output as well as reducing the variability. And through that we’ll have more cost savings within manufacturing system that will help fund a lot of the growth initiatives we have as well as to help with our financial. And how we're going to achieve that is really about shifting of the culture within the company. And this is really the key part of how we're going to be able to deliver our results for the long-term. And if you look at the first part, it's really about the shift in our culture from being top-down to more empowerment and accountability. This is really about having the structure in place and the capability within the organization that where we would push the decision within a company down with the organization to really create the force multiplier fact within the great people that we have within our company. Another example here would be cost from being a silo approach through a cross-functional. This is about how we can take advantage of the different function within the company to approach a business opportunity and to be able to deliver on the results faster and more effectively, and shifting our culture from being regional business to more global. And this is really about taking advantage of the knowhow, the best practices that we have around the world and replicate in different part of the world to allow us to get the performance at a high level faster. And at the center is what we call the continuous improvement in mindset, the PDCA mindset and that is plan, do, check, adjust. And it is a culture within our company now that as we have a plan and as the organization coming together to execute and we would have a regular meetings across the whole company and up and down the organization to review check where we are relative to our plan and then make the right adjustment in time so that we can deliver on the result that we expect based on the strategy that we have developed. And zero harm, we’ll continue to be the foundation, the DNA of who we are as a company. And so, in a nutshell, this is where the strategy for our company going forward that would help us take our company from being where we are now to be a great company that all of us expect we will be performing. So let's reiterate and for long-term value creation of our business, we reaffirming for North Americas 35/90 with strong return is really the key North Star in North America. In Europe it’s about creating a €1 billion business in 10 years at the Hardie like margin. In APAC deliver growth above market with strong returns in the 20% to 25% EBIT margin. In North America, the next few slides is really about what are the key strategy that we’re executing. One, is to accelerate exterior growth and the value creation here is that for fiscal year 2020 we're looking at a PDG target of 3% to 5% and to return to 6% PDG after that. And we’re going to drive lean transformation to really take advantage of the critical mass for us being the world leading fiber cement manufacturer that really make us even better and more effectively and our EBIT margin will be in the top half of the range. And to reestablish the interiors as a growth driver in our company and with the lean cost out program that we have in place we looked to have $100 million cost out savings cumulatively during the next three years. So those are clear targets that we have within our company that everyone will be executing tour to get us back on that growth track. Now let's talk about the -- how we are going to accelerate the exterior growth. So really four thing, first and foremost really about the new approach to execution and I just want to draw your eyes to the left side of the chart. We're now -- the fiber cement now has roughly a 20% market share in the exterior and we have about 90% category share, and as we now get to that critical mass that the base business becoming a bigger part of our business. But traditionally within James Hardie what made us successful up to this point to really been focusing in gaining new business and new customers, which is really on the fourth column here, and a lot of the focus that we have had really about going out to create new customers, new businesses. But what we have is really what we call the base business, which represent a significant amount of our daily business. We have not had the right focus on how to take advantage of the business and the customer that we already have to gain more share and to grow. And so was -- so the transformation from commercially is about moving to the right hand side is that we restructure our sales organization where we have a strong focus on account management is really about managing our base business essentially the very large business that we currently have with very large group of customers that we already have and through the new skill set, the new focus on a lot more analytics and make better decisions in terms how we create more value with the customer, we currently have so that we can continue to gain more share with those customers rather having some potential erosion with those customers. So the key focus for us is about driving the account management with our base business today so that we can continue to grow that base business, gain more share with the existing customers. While we continue to invest in separate organization that very targeted at growing and more account within the vinyl against the engineer wood against wood. So we have separate teams with different skill sets that now targeted at how we are going to continue to convert to vinyl home to fiber cement with Win With Color program. And how do we convert more businesses from the engineer wood with Win With Color program and with our full HardieWrap program, and so how to convert more businesses from wood into fiber cement with the Aspyre program. So that's a key transformation from a commercial side of how we're going to make it different to allow us to drive through the expected PDG growth for the long-term. And if you look on the upper end that is the volume of engineer wood, vinyl and wood over time that we should be converting to gain. So initially during the first few years it's important for us to continue to gain more share from engineer wood and convert more wood, while invest in more market development for vinyls so that we can gain more of those businesses two to three years from now. And that is a path for us to drive to a more PDG growth sustainably for the long-term. And for lean transformation, so we are the world leader in fiber cement production. And this is about for us now to shifting our -- to take advantage to the fact that we have the scale and allow us to manufacture fiber cement in a way that has become more consistent, reduce the variability and improve the predictability. And that is -- that will create significant long-term value creation by improving our efficiency and cost. Now you turn your view to this wheel here this is in a nutshell that's what lean is. Lean is all about having a manufacturing and operating system that connect the work done at the operator and supervisor level to engineer and maintenance and to plant and management. And really engage the operators and the supervisor on the daily basis to run the machine to the standards. And so if there is some variability within that shift, the operators and the supervisor empowered to make the decision to adjust back to the center line. We have something that go above the limit, those would be bubble up to the meetings at the level of end engineer and maintenance, so that those can be resolved in a timely manner. And if those issues are not resolved at that level will be flow up to the plant and management level to be resolved. So really that whole system that allow us to run a factory through the right standards and consistently overtime. Now, this is a manufacturing system that we will replicate from Asia Pacific where we have started to implement a few years ago. And during the past 18 months, we have seen very, very good results that allow us to see that the replication in North America will be a good success. And we are building out an organization in North America to accomplish this. And we just hire a Vice President of Lean Manufacturing to build out an organization to execute along with the fact that we just move our Lean Manufacturing manager, who run that program in Asia Pacific to North America. The next step for us is really about to have the trainings of our team to North America in Asia Pacific. And then bring them back to North America to drive the Lean Manufacturing program in North America. We expect to have $100 million savings coming from the Lean program in our factories. Next is we're going to talk to you about the interior growth. This is a business that we see as a growth opportunity for our company. And our approach to this is really about how we go to markets in North America, as well as about innovation to the market. So you look at -- we have a new execution in the marketplace is that traditionally we have put a lot of our sales team -- half of our sales team in the interior having calling on the stores, the many thousands of stores of our retailers in North America. The business now shifting more to and we need to call in more at the headquarters where we can drive more value through having our products being prominently display and promoted at the headquarter level and across the country. And so, we’re shifting that sales force in interior, that calling to stores through the exterior and to build more capability at the headquarter level. And second is that, we're coming out with this very innovation in the marketplace. And just this past month that we just launch the industry’s first and only waterproof backer board. And with this products it would allow the market to reduce the 1 step of -- reduce the coating of the waterproof material and allow us to provide that value to the contractor and installer. So this is the new innovation that would allow us to grow within the interior business. Now let's shift into Europe. Our strategic priority still is that we have to grow our fiber gypsum business. And this is a consistently good business that we have bought and we continue to invest to grow for the long-term. We expect that core fiber gypsum business to continue to grow around 5% to 7% a year. And on top of that we are leveraging on the new products coming from our Asia Pacific business as well as the U.S. to launch into Europe in fiber cement. And this area of our business is really going well and we expect this business to continue to gain a lot of momentum. Revenue CAGR for the next three years we expect that to be between 8% and 12% CAGR. And EBIT margin will be accretive and with a roughly about 14% at the exit of fiscal year 2022. Our Asia Pacific business is -- will continue to perform well. During the past two years we have built more organizational capability in this business and we expect the growth above market in APAC to continue and we’re continuing to drive more lean transformation in Asia Pacific and that journey will continue and we expect our EBIT margin continue to be in the top half of the range. So in closing, this is our three year plan. We are committed to deliver on our North American objective to get back to PDG of 6% through transformation to commercial and transformation in our manufacturing operations. We are committed to deliver to -- in our European business, €1 billion in the long-term in 10 years with a Hardie like returns. And in Asia Pacific growth above market with strong returns and how we can get there is through people and culture evolution as well as focusing on the four pillars of our business being a full exterior business, reestablish our interior business as a growth business, drive lean transformation and drive more innovation to the marketplace. Now switching gears a little bit and talk to you about Q3 results. Globally in Q3, our volume increased 18% and our EBIT is down by 10%. Now our North American business delivered improved PDG for on a 12 month basis, but below our expectations. Australia and the Philippines continue to deliver strong results. European business continuing to deliver good results and our input costs remain high and we're focus on improvement plant performance. And operating cash flow improved by 11%. North American business, volume grew 1%, revenue is up 2%, our EBIT down were 15% with a EBIT margin of 22.3%. And housing market demand was soft in the quarter. Continuous improvement in exterior business, which is still below our expectation in PDG. We're in the middle of the range of EBIT and ColorPlus product will be launched in the first quarter of fiscal year 2020. For APAC business is they delivered very strong results. Volume increased 11%, driven by top-line growth, volume growth from New Zealand and the Philippines in double-digits and Australia in high-single digit. Revenue increased 12%, and EBIT up 1%, and this is driven primarily by tough headwinds in input cost. Our European business have good top-line growth is 5% in U.S. dollars so 8% in local currency. Our EBIT in Europe improved 95% pro forma and this is on for the nine months period they have improved 25% in EBIT in U.S. dollars and EBIT margin for the quarter at 9.2% or for the nine months about 10.2% within our expectation. And with that, just want to hand over to Matt to go with the financial review. And I will come back for our Q&A.

Good morning, everybody. And thanks, Jack. I'm going to take everyone through the financials, which will be a combination of slides for those of you who've been following us for a bit that I would normally have done as well as we're taken some of the financial slides that Louis would have had in his section and kind of combine them into a financial section. So you'll see those I think, Jason send a note around to some of the analysts today, just helping to map the presentation that we used to do to the new format so that you can see we didn't delete anything we just kind of moved stuff around as we were accommodating some of the changes as we go through transition here. Okay, so for the quarter, we had net sales of $586 million, they were up 18% primarily because of Fermacell. Fermacell added almost $79 million in the quarter excluding kind of on a pro forma basis, we'd have sales of 3%. Sales up in both North America and price up in North America as well we had higher volumes as Jack noted in Asia Pacific in all three countries. Gross profit of 192.2 million, up 5%, gross margin rate was down I'll talk about that more as we get into the segments. So the continuation of what we've been talking about throughout the year largely an input cost feature and higher freight cost. Adjusted net operating profit about $65.9 million, down 10% largely driven by the underlying businesses, margin rates being down that I'll go through as we get into the segments. For the nine months, net sales increased 23% or approximately $353 million to $1.881 billion. Obviously those are largely driven by the Fermacell business. Similar story in North America and Asia-Pacific, kind of moderate growth in North America just slightly above the market index below our expectations, very good volume growth in Asia-Pacific in all three countries, and Europe performing at our expectation; adjusted net operating profit of 226.7, up 8%. We had North America fiber cement EBIT excluding the product line discontinuation up 5% and you'll see that more as we get into the financial presentation. So as North America, as we noted in the release this morning, we thought the housing market demand was soft in the third quarter. We're cautiously kind of optimistic, we'll talk about that when we get to guidance but what we saw in the third quarter was just a temporary pause in the market and that the market is going to return back in the fourth quarter and fiscal 2020 back to kind of a moderate single digit growth rate. But nonetheless the market is one of the things that cause sales volumes up 1% for North America. You can see net sales up, price was down -- was up 1%, which is of where we were at the half. We still like price for the year right in that 3% range. So we're not concerned at the 1%, we think that's just a little bit of seasonality a little bit of mix for the quarter, but we like where both strategic pricing is and we're happy with what we're doing on tactical pricing as we drive towards volume growth, so no concerns on price. EBIT down 15%, it's primarily an input cost story you'll see that when we get to the input cost later, pulp remains elevated for the year. I think it's up year-on-year almost still in the firm double digits. It has started to plateau, which we're thankful for in the quarter and so input cost is certainly one feature of the decreasing EBIT. The second is obviously plant variation in the quarter and performance, which is one reason that we're optimistic that the focus on a lean manufacturing strategy will help reduce variation and drive waste down, which will have a cost benefit. Obviously those two adverse features are offset by price for the quarter, for the nine months we had EBIT excluding of $292.8 million, up 5%. It's a combination of volume and price are up input cost and higher freight are headwinds to that. Our North America fiber cement EBIT margins, this is the chart we've shown for a long time a 22.3% in the quarter 23.3% year-to-date. You can see we're comping from a year ago off of a 26.9%. You might remember a year ago we were coming out of a capacity constraint, the plants were also performing kind of at the higher end of their band at the time. Those combined with volume and price kind of pushes up to the 26.9%. We’re -- the 22.3% right in line with the expectation that we had it wasn't -- is very much in line with kind of what we are expecting. Here you can see input costs, I mean all the key input costs still remain elevated, on a year-to-date basis pulp is still up 15% plus on a market rate basis year-on-year. So pulp is continuing its trend of trading close to $1,400 a ton, which is creating quite a bit of margin pressure for us. That as I indicated has started to at least what it seems like is plateau, it's not coming back down yet but it's at least stop going up, which is slightly positive. For the year input costs will be a significant headwind not just in North America business, but also in our Asia Pacific business. You can see electricity is up, freight is up, cement is all up. We're buying better than what we're showing here. So pulp is up 17% or electricity is up 6%. We're not up as high as the market rates are up. But nonetheless when the market rates are up that much there's only so much a procurement strategy can do and that's impart what's having an adverse effect on our margin rates for the year. A real strong quarter again for the Asia Pacific business, for the nine months we had volumes up 10% in Australia, 10% in New Zealand, almost 17% in the Philippines, very strong quarter across all three countries as well. In Australia and New Zealand in particular we think we're gaining both market and category share. So we're very happy with how the three businesses in our Asia Pacific segment are performing. Foreign exchange is having an adverse effect on the segment you'll see in the appendix the normal foreign exchange slide that we show and kind of the effects that it has on an EBIT basis you can see in local currency Aussie dollars of $32.7 million, up 1%, up about 1% for the nine months as well, but you can see when you report that in U.S. dollars kind of what the impact is. Again for the Asia Pacific business most of the margin compression is the result of input costs they buy pulp in U.S. dollars, which only adds to kind of the margin pressure. The underlying businesses are performing well though, we like where we are with price in the Asia Pacific business and overall the manufacturing performance is very good. A quick look by country, as I said Australia market penetration and growth is right on track. EBIT for the quarter was down, but for the nine months is up. It's a combination of higher sales compressed by -- margin rates compressed by input costs. We like where we are in New Zealand, very good volumes in that business. I'd mentioned in the last call the plant isn't performing to our expectation that sort of continues although I'd say most recently we're starting to see that start to turn around as well. And we're happy with where we're at in the Philippines, volume up for both the quarter and the nine months. The -- if you were to exclude the impact of pulp that business is performing well as well. So you can really see in the core businesses for fiber cement, volumes and price were up North America volume kind of underperforming where we want it to and margin rates compressed almost across the board by input costs and higher freight for the year. For Europe, we had $86.8 million of sales on a U.S. dollar basis in the quarter, $269.6 million. Both of those are up on a reported basis obviously because of the Fermacell transaction occurring April of this year. So, on a reported basis not in the comparable year. We had a good core volume growth, as Jack showed on a pro forma basis and revenue growth in the Fermacell business. EBIT are reported at 4.1% for the quarter and 2.9% for the nine months. Just remind everyone that that's got transaction integration costs in it we've noted those in both the MD&A as well as a footnote on the page, when you exclude those for the purposes of looking at the business on a recurring ongoing basis we had margin rates of about 9.2% for the quarter and 10.3% for the nine months and almost $8 million on a U.S. dollar basis in the quarter of EBIT excluding those one-time cost on 27/9 [ph]. We like where we are with the integration so far it continues to go really well both commercially, manufacturing, culturally and standing up the back office. We've got a little bit more of integration activity to go here in the fourth quarter and in the first part of fiscal 2020, but so far so good with Europe it's performing as we had expected it to. The other business segment, you know is the windows business. In November, we had announced our decision to exit windows. We've executed that in two steps. Windows is a combination of two businesses. There's a fiberglass window assembly business and a fiberglass protrusion business that is a supplier of parts both to the market and to the assembly business. Both of those we are -- we had explored options for sale the windows assembly business. We concluded that process in the quarter and announced the closure of that business took remaining asset write-offs associated with the assembly business in the quarter, which I'll show you on a schedule here in a minute. We're still looking at strategic alternatives for the fiberglass protrusion business and we have set a target of wrapping that up during this fiscal year. So during the fourth quarter fiscal 2019 we’ll either conclude that there's an interested party or we'll also shut that business down. So for the year, we've had product line discontinuation expenses of about $4.8 million in the third quarter. That was additional expenses associated with shutting down the assembly business. For the year about $20.6 million all-in for accounting adjustments and expenses related to exiting the segment. Here's that schedule that I mentioned. It shows for both the North America Fiber Cement segment and the other business segment. The product line discontinuation charges that we've taken within the year and notes what those are those. Most of them, we took in the second quarter, you can see windows drives $20.6 million of the $26 million for the year of charges that we've taken associated with the closure of the windows business, the discontinuation of MCT and exiting certain aspects of the ColorPlus product portfolios we rationalize that as part of our Win With Color strategy. R&D, I'd say nothing really to note $21.9 million of expenses for the nine months very much in line with both our expectations and our historical rates. And general corporate costs, those on a quarterly basis decreased as a result of lower stock comp that was partially offset by a charge we took for specific claim on New Zealand whether tightness. For the nine months they’re up slightly about $2.5 million, there's really three major things that are going on for the nine months. One, the underlying general corporate costs are up about $2 million and $2.5 million, so as we just invest in the business. And then you had in the prior year obviously the gain on sale from Fontana this year we've got some New Zealand weather tightness and stock compensation for the year is down about $5 million. So those three items create a little bit of noise in general corporate costs. But the underlying cost structure is going on and general corporate costs for the nine months up about $2.5 million. Income tax, our estimate for the adjusted effective tax is 14.9%, so an adjustment down slightly from the 15.5% when we talked in November. We are continuing to implement based on the regulations that continue to come out on the U.S. Tax Reform that was passed last December. As we do that as we continue to implement that and the segment earnings become more clear for the year the geographic mix of those. Obviously those are the two main things that are affecting effective tax rate. So about a 60 basis point drop, but still in the range of what we talked about in November so 14.9% for the year. On to cash flows, we had cash flows from operations of 18%, almost $282.1 million for the nine months ending. The net income adjusted for non-cash items is largely the driver. We have some favorable movements in working capital largely as a result of inventory a year ago that we were building up as we are coming out of our capacity constraint that wasn't -- that didn't repeat obviously this year so that was a benefit to cash. Higher investing activities for the year, you can property plant and equipments up as a result of capacity CapEx up to $228.4 million so about 50% for the nine months compared to last year as well as obviously the -- almost $59 million we spent on the acquisition of Fermacell. So year-to-date, our CapEx is continues to pace right in line with our expectation for the year. We've got three projects that are ongoing in North America. We've got the continued startup of the Tacoma greenfield that we started up in the first quarter of this fiscal year that's going as we planned it to go. The continuation in construction of our Prattville, Alabama facility that we anticipate opening in the second half of fiscal year 2020 and the continued expansion of our ColorPlus product line. Last quarter we announced that we had purchased some land in the Northeast and we'll continue to invest in ColorPlus manufacturing equipment in our existing network during fiscal year 2020. In Asia Pacific we got two projects. We're almost complete with the Philippines startup, we expect that that will finish its ramp up during this fiscal year, and then the Carole Park brownfield expansion is being constructed as we speak and is set to start up in the first quarter of fiscal 2021. Okay, on to the balance sheet. No real change on the financial management framework for the company. So number one, our ratings with the three agencies remain as they've been no change on those. Two, our capital allocation priorities also remain unchanged. So we're going to continue to invest in organic growth that's going to come in the form of R&D and manufacturing capacity and organization cost that are aligned with the strategic priorities that Jack set out at the beginning of the hour. Following that our number two priority continues to be the ordinary dividend, and then managing the balance sheet so that we've got good flexibility as well as that we can weather any variations in the external market. I'm happy overall with kind of where the balance sheet is. We'll talk on the next slide, on this slide just on liquidity. So we continue to be well placed from a balance sheet standpoint and a debt structure. Obviously, we continue to be above our one to two times target as we expected that we would. We've got good line of sight to getting back down within that one to two times range so coming under that two target. Here over the next six quarters or so and we very much seem to be pacing right on the expectations. So I'm happy with where we're on the balance sheet. I feel like we've got good flexibility with funding our strategic priorities and being able to weather any sudden changes in the market that may occur. Guidance. So we've updated the guidance range. Obviously we've tightened the range and raised the midpoint for the year. So we've updated the range to $295 million to $315 million from our previous discussion. Since when we talked last in November the second half volumes are a little bit stronger than what we saw for the second half of the year when we talked in November. That combined with kind of moderating levels of inflation are really the two reasons for us tightening the range and raising the midpoint up slightly. As I said earlier, we're kind of cautiously optimistic that the soft market that we saw in the third quarter was just a momentary pause in the market and that we'll return back to kind of low-single digit market growth numbers in the fourth quarter and for fiscal 2020. So with that, Jack and I are happy to take questions.

Thanks very much. Simon Thackray from CLSA. Just a question straight on PDG and volume growth. Given the 1% you said you did a positive print Jack in North America. So therefore the implication is system growth is either flat or down and I know you use a different measure to the way we can calculate it, which is not altogether helpful. But what was the system growth as you calculated it in that quarter to say that you had positive PDG?

Simon, it's a good question. When I came into the business I look at the -- how we've been measuring relative to the market and it just seem that there's so much variation from month to month from quarter-to-quarter. And so, we're looking at our data now based on the rolling 12 months. So that we don't look at all the variations and not knowing which one is the signal which one is the noise. And so by doing this then we can really focus on what is our long-term strategy and how we build to execute based to deliver as supposed to react to those noise along the way. And we can see there is not real exact science, when you look at the markets versus how we ship and we look at over a three month period it’s just too much variation. So that's how for us -- it's important for us to look at this overall rolling 12 months versus the markets and measure ourselves accordingly.

So when you say you got positive PDG and it was 1% volume growth. My question is, what do you think the underlying benchmark was for you to make that statement that you got positive PDG. The other way to ask the question is, what was the PDG? How much was PDG in the quarter.

So we -- for example we look at in this case the rolling growth of our exterior business over the nine months, the first nine months of this fiscal year compared to the market and our exterior business for the first nine months grew a little more than 5% in volume and the market is roughly we believe within 3% and 5%. And so we maybe not beaten the market that much, but we're certainly comparing to the rolling 12 months a year ago we were negative, I think negative 2%. So if you look at that trend line it's not rising as fast as we'd like it to be, but it's certainly we're at that plus 1-ish PDG growth. And more important question is we need to be at 4% and then 6%. And so that means that when you look at the 12 month rolling trend like that, we real realize and know that if we could continue to do the same thing we've been doing, we're not going to get to where we need to be. And therefore as we looked more into -- went through the strategic plan and we look into more data of the markets our customers how we go to market and we realized that that we needed to transform to change our commercial approach because what we have been doing is really not what’s will be successful to capture the market going forward.

That's very helpful. So when you target now 3% to 5% PDG for FY 2020, is that an exit rate, I mean, I'm just thinking to your comment, Matt, about guidance and your confidence on the fourth quarter you did $90 million adjusted EBIT for this quarter to get to the numbers you got to do like $110 million EBIT for this fourth quarter. So you must be making certain assumptions about you PDG rate both in the current quarter based on the order book and then also are we going to ramp up to 3% to 5% or what should be PDG expectations as we exit FY 2019 and enter FY 2020?

Well, we are aiming for the fiscal year 2020 to be at around 4%. So it mean that for the full year, yes. So we are -- Simon, we’re right now in the middle of transformation in our commercial approach as we speak. And the big part of this transformation, which we're excited about is that what we based on the market data and how we went to market for the past few years, we know what needed to be changed. And this is a step change on how we approach and how we deploy our resources. How we put the right skill set in driving the business in terms of how we organize to go after the end engineering wood businesses and how can we go after to convert to businesses from vinyl to fiber cement and wood to fiber cement. So we have made this change with structure the alignments to allow us to execute for that step change. And as with anything this is the strategy, the structure, the key now is put the right people with the right skill set in place to really make this happen. So one of the key thing I mentioned briefly in the strategy, there is that a substantial amount of our daily sales of daily business, monthly business coming from the base business, the business that we have already won, the business that we have already shipped, the business that we already have with the existing customers that we know very, very well. So the key there and we have not been focused on that group of that business because our -- the DNA of Hardie has always been let's go out and build new businesses. But we don't get to that critical mass, that business is very big. And so to take a different skill set to manage it and technology and enabling the data to allow us to manage correctly. And one of the key opportunities there in terms of step change is that once you have the customers base and the approach is more in terms of how do we serve our markets, our customer better to create more value through the current customers and take share, more share that we have with that customer that's where we will confidence that we can deliver the growth in that short-term. While we are investing in terms of creating a lot more business, but taking share away from vinyl, taking share away from wood and also engineer wood. And that would bring us that continuous basket of new business for two to three years from now

And just to be clear Jack, when you talk about the base business and the customers, you're talking about the distributors and dealers in that channel?

We discussed, that includes distributors, dealers, (inaudible) the customer that we already have businesses with.

Got it, got it. Okay. That makes sense. So you're in a period of implementation to this ramp up, I understand. So if I'm reading that correctly, I'm assuming then that the fourth quarter PDG, to hit your numbers to get moved from $90 million to $110 million EBIT is market driven. It relies more on the market to deliver those numbers than it does on PDG ramping up?

So it will be a combination of both Simon, I think since December when we made this transformation and at that point our team started to focus more on what we just talked about. And of course it is a journey and it's a change management as well. And we start to begin to see some of the effects of those changes. And what's really very encouraging is that as we -- and that was one of the key decision for us to create commercial organization that led by one leader that Sean Gadd to make sure that, we always have this great idea, great new strategic products and program somehow I just want to go and execute into the field they get diluted. And then it's just does not create that critical mass, it does not create the force multiplier that really move the needle in driving growth. So by having align under one leader then allow us to align and with clarity of direction and with clear the growth and responsibility and put the right skill set in place and that's the formula. And we just announced this morning that we have a new sales leader that will join the company next week, who will report to Sean Gadd and this person is an industry leader coming from Electrolux and he's -- he has demonstrated that, he was able to drive a lot of growth through become more customer -- creating customer value and gain share as well as with the existing customers as well as gaining new customers.

Pete Wilson from Credit Suisse. Just to go back on to that base business erosion. Can you elaborate on exactly what's happening there and like who is it that’s coming back and stealing the share off to you? Is it engineered word, is it vinyl, what exactly is actually going on there with the base business erosion?

Well it's a base business that’s very large now. And as we get to the certain market share that everybody will be going after everyone's business. So when we have business with a lot of dealers, customers, dealer distributors and dealers out there. If we don't focus on them, then someone can go behind us once we convert into the business and they can just take that away from us. So the first will be the close alternatives that will the one that can go after us to take our share away from our existing business customers. So it's very, very important that we pay very close attention to customer we currently have and make sure that we continue to create value with them, show them how they can grow their business make more money by selling more of our products. And that mean we have to engage with those customers on a more regular basis and proactively deliver the value to help them grow. And that take a different mindset, take different capability from what traditionally been the modus operandi for the commercial side for James Hardy that is just go out and convert more and more new accounts and then just assume that the rest will continue to be with us.

Okay. And when you look at it, how long is this been going on? Is this just been a drag on growth last 12 to 24 months or is it something that you've recognized as being happening for a much longer period?

I think it's hard to say how long it has been, but certainly through some of the analysis of data that we have gone through now through the strategic planning process. Certainly we -- that probably been have been at least for the last two years.

Do you get a feeling for like how many points it’s been taking off the growth over that period?

It's early to tell, but certainly when the base business is so large. For every point of erosion it can take a lot of new business growth to compensate for that erosion. But the converse is true is that for the big -- now that we have a big business with those big customers that we only have. If 1% share growth with those customers that we already have they can accelerate. Because it's a lot more easy and not more, but more easy and less expensive to grow with the existing customer rather than go out and gain new customers.

Okay. And the cross sales in the North America business $100 million, where will that come through, is it going to be freight lighter [ph] waste. And what do you intend to do with it? So I assume it's not going to translate to a lower selling price or a step change to margin. So what do you intend to reinvest that back in.

Well it's a lean transformation is really about making sure that -- let me take it one step back. We have 10 plants in North America all plants make fiber cement, all make using the same equipment nearly the same raw materials. Today, most of those plant, they operate very differently, and there is no standardized processes that allowed those plant to run through the same standard consistently day in and day out. So lean transformation is really about having a standard work that allow the operators and the supervisor on those production lines to run through these standards every day, so that we have a consistent way to manufacturing across our network. And the same thing that we have leader standard work for the managers and the plant managers and a management team to manage the plant accordingly, so that we have a more predictable result coming out and more -- and then reduce the variability. So that would allow us then to go after the waste reduction. And waste reduction here is the amount of board that leave our factory, our plants after going through all the production steps should have a higher yield. And as you probably would know that is a high percentage of our manufacturing costs is in raw materials. So if particularly in the years like we have the inflationary time with raw material like this having a reduction in waste or improving the yield coming out of each plant is quite substantial savings. And the second part is really about being able to drive the more production output through our sheet machine, which is a high intensive capital asset that would allow us to produce more of board with the existing and current cost structure. And so by doing that is we’re -- we will get savings. And the third point, please keep in mind, lean transformation is the idea behind is continuous improvement that is every day, every week our operations will continue to improve. Therefore we would lock in the gains as each day and each week and each year. So the saving is cumulative throughout the years so that's where the $100 million saving will come from in the next three years in North America.

Okay. And the second part of that question, what you intend to do with that $100 million?

Well, it's I think very, very important that first that we actually see that our North Star is to drive growth of our market at the high performance level and that mean that we have to invest in market development and a lot more in terms of creating awareness with our -- with the homeowners, the consumers and the builders. So a lot more marketing dollars that we need to invest in. And also for us to get to that 35/90 we need to invest in innovation until the customer inspire innovation and that would take resources and funds to do that. So we're going to -- as we gain those savings of course some of that would go into the investment for the future and some will go into our bottom line.

Lee Power, Deutsche Bank. So Jack, just talking about how much you were putting back into the business, how much to the bottom line of that $100 million. Is there any -- can you give me any idea of is it like 50% back into the business, 50% to the bottom line.

Lee, I think it’s hard to say because it really depends on as we look to drive investment for the future then we make those investment depends on the year. So it's hard to separate.

And then maybe in terms of the $100 million over three years, how should we think about it. Is it $30 million a year or is it ramping up?

No because it should ramp up because it's a continuous improvement that means the savings that have say for example we deliver savings in fiscal year 2020. We should expect that savings to continue into the next two or three years. And then on top of that, we will have additional savings. So it will build as time goes on.

Okay. So shall we consider a $100 million target at the end of the third year.

Yes, it is a cumulative target.

Excellent, thank you. And then maybe just touching on PDG again, so do you think the lack of PDG is purely an internal thing, is it just an execution thing or is there something broader going on in the market?

So really if I were to look at the pure definition of PDG is really what did we do in volume the last 12 months. What we can do and how are we going to deliver our volume and what we deliver on our volume in this next 12 months. The difference and then we’ll subtract that against what the market growth is. And that's really PDG and -- or the growth of our markets. For us is, yes. To get to that second base line we need to build new account new business, but at the same time the base that we currently have, we also -- can also grow through the current customer that we have. So when you have a much bigger base it doesn't take a lot of percentage growth through deliver a significant more significant amount of standard feet awards. So it's really about making sure that we can protect and grow the share that we currently have in our existing customers, while we invest for the future, so we have to do both.

Okay. But you think it's internally Hardie slipping rather than [indiscernible] or some other competitor?

That’s right. Because we have been focused a lot more and going out and getting new customers and new businesses and not really managing and proactively managing this big base of business that we currently have.

Okay. And then just a final question, do you think it's a different skill set going out and winning work versus managing your -- and how you’re transition?

Because the mindset for an account management is really about to push question that you're going to ask is that how am I as a representative of sales, representative for James Hardie can creating more value showing more of a value that this account B can make more money by really push the James Hardie product better than the close alternatives. And that is -- that take a different mindset to be able to network within the customer that we currently have from the CEO from the owners all the way through supply chain designers and so on and so forth to make that happen. So manage we currently have or as the other where you're going to go after vinyl. And on this side, the results can come pretty quickly. So whereas in the -- say the vinyl development is take the skill set what we call the hunter or the motivated by just going out and know where they likely target that will have the most chance for the sales push and to convert. And really use the different skill set to be able to win that business away from vinyl. And that's a mentality that the folks that are used to said no, and energized by the fact that they can convert big deals. So it's really two different mindset, two different type of time horizon when they see the results. So for the Hunter is that they can work for -- they can go out and trying to convert for many months, but they don’t see things developed until many months later. And that's a different mindset and different way for us to compensate and motivate those type of sales professional versus someone who manage the bigger account, bigger size of sales. But it take a different approach to create growth. Whereas the hunter on this side we have to motivate and reward those sales hunters in a different way, because the result may not come for 6 months or 12 months. But when they come will come in an avalanche of businesses.

Okay thank you.

Good morning, Jack. Sophie Spartalis from Merrill Lynch. Just in terms of the presentation today. You’ve put a lot of I guess longer term aspirational targets out there. How confident are you in terms of the macro assumptions holding up in order for you to achieve what you’ve put out there today. I know you spoken a lot about what you need to do internally, but obviously it's also depending on external factors. So can you just maybe talk through the visibility and the confidence you have in terms of both in Europe and also in the U.S. in terms of the housing situation?

So Sophie good question, the way -- first of all the way that we approach our plan is really about what we can do within our control to drive business growth. Because our business model about taking share away from other categories in the marketplace. So I just want to make sure that that's what we built to do. So if that the market grow or market dropped it's just something that we have to navigate through. So relative to North American market, yes I think right now as we look at the market as we see today is look somewhat choppy and a little bit scary. But looking forward, to what are some of the macro -- underlying macro conditions, we're cautiously optimistic about the North American markets. Look I mean we get the -- yes last year the Fed raised rates four times. But the rates after four times they raised it is still a lot lower than what it was right before the global financial crisis in 2008 and they just two weeks ago they announced that they're not going to raise any rate in 2019. And then unemployment and in the U.S. right now is still at an all-time low. And I think the reality of the new baseline have set in that most consumer think that the rate yes, they raise four time are still low comparing to what it was and we are cautiously optimistic that the market will come back for North America. On the other hand, when we move over to Australia, we do see a slowdown. And in fact we see that in calendar year 2019 that the blended market for us can be down between 3% and 5%. And also we see in Europe, the housing markets is also roughly a year ago is about 2.5%, today based on the latest data that we see they’re forecasting next year is about 1.3% to 1.4%. But regardless of what the market is what our teams and within our company is really driving force how do we continue to grow above market.

Okay. And then just a quick follow-up question, just in terms of that $100 million target, what are the costs associated with achieving that target?

The cost?

Yes, so you talked about having to re-motivate the troops, no doubt invest in the sales force. Are there any costs associated with that that are going to offset that $100 million?

Those $100 million cost savings are net numbers.

Thank you.

Andrew Martin from Peak Investment Partners. I’m just wondering with you focusing on rebuilding the interior businesses, have you got any other innovative products on the drawing board that we're going to see soon.

Absolutely. Can I have your name please?

Andrew Martin.

Andrew, absolutely. I during the past two months, I have had the chance now to meet with a lot of our R&D folks around the company, not only in the U.S. but also in Australia. We have a lot of very creative R&D folks within the company. There is a lot of very good ideas, a lot of different technologies that they have been working on. And so there's not a lack of new and great ideas coming from James Hardie. So what we during the past really about six to eight weeks, doing our strategic planning processes is that we put a process in place. So how do we then be able to filter through those different ideas in and still them into the potential technology that we should focus on, the critical few that we should focus on and fast track that to the marketplace to help deliver on our four -- on our two growth pillars and that would be the full exterior and then to make and reestablish the interior business as a growth business. So as I mentioned, the waterproof is really the industry first and only water proof board. And you should expect with the full exterior that we're going to put a lot more focus on how to deliver trim products that would work throughout the country, including the Pacific Northwest and also the Northeast. So that's an area that we can pay -- put a lot more focus resources to fast track and to accelerate. Because that’s a key part about full exterior strategies. And also at the top end of our markets in terms of going after wood with our Aspyre line. We just -- we will be launching a new product too at the industrial -- the International Builder Show this coming month is the artist and brand shingles. And it is a wood like shingles and that had the fiber cement properties that really help deliver the full house, the full exterior value for the homeowners and the builders. So there you should expect more and more relevant customer focus and inspire innovations coming from James Hardie.

Morning, Jack, Matt. Peter Steyn from Macquarie. Just delving into the cost out very briefly again, Jack just curious whether this comes on top of the potential benefits of mega plants and some of the work that you've obviously done around the plants from a color point of view. So getting yourself ready for that so presumably this $100 million is on top of those benefits, those potential benefits in the medium term.

Peter, it’s a good question, this is the lean costs are separate and savings are separate. What the Win With Color program is really about allow us to have -- to be able to have a better on the wall cost in the marketplace that would allow us to penetrate deeper within the market that is allow us to go for example in the vinyl markets, allow us to compete in the lower price points of those homes.

And then obviously on top of mega plant benefits from a unit cost point of view in the longer term as well. So leading from that and some of the previous conversation around the reinvestment of the $100 million. What I'm curious about is whether you start thinking about product strategy in the medium to longer term and actually more aggressively driving price points that just change the dynamics of the competitive landscape from your perspective whether that be alternatives in the vinyl world other than color or perhaps something completely new. How are you guys thinking about that?

That's an excellent question. It is a way for us now to really as we continue to invest more into our market and capability it will allow us to understand what it takes really about the four piece. What does it take besides products and how are we going to promote and what kind of price points and where we should focus the effort. And so that will be a one of the key areas that we'll be focusing in to drive more growth and certainly with the cost savings we can invest that in terms of the market and to create more awareness. And certainly we will be willing to do some tactical pricing for some strategic opportunities that would enhance and sustain our long-term growth.

Sorry. And then I'm going to just go very quickly into some detail on some of the comments you made, tactical pricing should we read that as your pricing power as under pressure or you're just being very specific and you’d essentially still be targeting sort of circa 3% sort of headline price growth on a go forward basis.

I'll start with that and then Matt will jump in. Is more surgical in terms of where because really the four piece is that placement where are we -- where do we want to grow more our share to what level and what margin for the long-term. And so it’s very surgical is not a broad base.

Yes. There's no change in the full year guidance on 3% for price. We were a little bit higher than that. I think we're like 5% at the half and the quarter was a little bit softer. But some normal variation a little bit of surgical tactical pricing we like 3% for the year next year we're going to do another price increase we announced it in January goes into effect in April. Will be around 2% next year and we're pretty happy with overall where we're at with pricing.

Perfect. And then very quick one on cost, labor costs, Matt, do we have to worry about that. You called it out probably for one of the first times in a while that how you guys thinking about labor costs.

Yes, I'd say nothing to kind of worry about. Look there's no doubt labor is more expensive in the U.S. We tend to take our labor cost up in line with the market rates every year. So I'd say the year-on- year pressure for labor costs isn't significant. I don't think it'll really be a feature of what we're going to talk about in the future.

Peter, I think one thing I’d like to add on to what, Matt was saying to is that going forward, our -- as we drive more of our cultural behavior is that is going from silo to cross functional and really about leveraging on the resources that we have is that our rate of growth in terms of headcount is always going to be around half of the growth rates of our sales growth. So that should be kind of the key modus operandi that Matt and I as well as the executive leadership teams have really been driving to make sure that we drive the cross functional behavior, the cross functional work to increase the productivity and results at the same time not adding a lot of costs and are not driving the value added.

It's Andrew Scott from Morgan Stanley. Jack, just appreciate the color you gave us on the strategic slides there. I just want to understand, to what extent are these aspirational target. So you have put timeframes there. Are they targets that you're happy to sort of stand up in three years and be judged on or are they aspirational targets that we should be thinking about directionally that's where we're working towards?

Look I mean we're about four months into the beginning of the strategic planning and then we just execute on the key part of the strategic planning. And then we start to put the right organization together with the right skill set and build the capability. Right now, what I would say is that it is something that we believe that that is within the capability of James Hardie assets. But in terms of when, how much we -- I would say that at the next Annual Investors Meeting in September that we can provide a lot more color, a lot more guidance for the three years that we show up here.

Okay, thanks. And so expanding on that one of the things you mentioned was 8% to 12% top-line growth in Europe. And I think in your comments you mentioned fiber gypsum, you look for sort of 5% to 7%. So that's implying fiber cement itself coming through quite strongly. Can you talk about where we're at understanding the market what the product is going to be there that wins and how far advance that is?

Yes. I mean we -- is our play for the European growth is really a lot more about PDG. Right now and frankly, Andrew, I would not be able to share with you in full detail yet, because we're in the process of really come out with some of the introduction for the next 12 months. But really -- our growth is really about taking advantage of the trend in Europe, Western Europe today, and that is one. There's a lack of affordable housing, two. There's a lack of skilled labor, three. And there's a big need to shift from traditional masonry construction to more lightweight, which will play into our strength. And by taking advantage of the fact that a lot of the products, the current product that we have here in Australia is a very relevant and fits more into the European markets and we based on that, our team have been doing a very good job at market understanding and really put that based on the market understand that they have built into a series of product concepts that we can modify some our existing product and be able to come up with new product that will meet those unmet needs in the marketplace today. It's quite exciting, but it's not something that we're ready to share with that yet. But in time that will happen.

Thank you.

It looks like we're done with the questions in the room, are there any questions on the phone?

Question comes from Brook Campbell-Crawford with JPMorgan.

And if you able to quantify the savings achieved to-date in APAC from these initiatives?

Hey Brook, I think there was a little bit of a technical issue, would you mind repeating your question we only caught the last four-five words?

Yeah sure, Matt. So I was just asking about lean manufacturing in APAC we understand these initiatives have been underway for some time. Are you able to quantify the savings achieved to-date from lean manufacturing in Australia?

Yes, we have. And I'd say they're proportional to the size of the network in Asia-Pacific to the North America network. And there is a phasing in aspect to the savings as well. So the lean approach in Asia-Pacific was really initiated in our Rosehill manufacturing facility several years back. And those savings and that approach then translated more recently to our Carole Park facility. And we're in the middle of now rolling that out -- we have rolled that out kind of our other two facilities in Cabuyao and in Penrose our Auckland facility. So much like we're going to do in North America where it was a phased in rollout in Asia Pacific, we'll also a phase in rollout in North America. We'll start with some subset of the plants for in the process of determining the exact number we think it will be less than half more than a third of the plant something like that three, four plants will go in phase 1. And then we'll have a phase 2 that follow. It's important that the site is ready for lean. So it requires both a leadership approach and a level of resourcing with the right types of resources on site in order to realize those benefits. And then there is obviously a pretty intensive training and reorientation for the management team on how we are asking them to run the day-to-day operation and measure the day-to-day operation differently. So that phasing approach that we took in Asia-Pacific will translate into the U.S. But to answer your question yes, we do have kind of sort of measurable savings in the Rosehill plant and Carole Park in Asia Pacific in fiscal 2019 and targets for fiscal 2020. I'd say they are proportional to the targets that we have set for the rollout and the implementation in the U.S.

Thanks for the detail, Matt. Just a question on North America, I got it there has been an adjustment to staffing levels at our plants in the U.S. just interested to understand the decision not depending by the drop of the decision ready for the plants U.S.?

Yes. So, if I've understood your question to say that once we execute lean does that mean that we can delay the launching of new plant, is that your question?

No, sorry Jack. I was just asking around in the Tallahassee [ph] facility I got it has been changes to some of the staffing levels at that facility. Just keen to understand really the driver of that decision?

Yes, like we have a continues process in the company where we're always evaluating our production hours and our volume requirements based on inventory levels and demand levels. And we did do some adjustments in the fourth quarter at various sites, one of which was Pulaski that impacted the employee population there. I'd say that's very much in line with kind of normal adjustments that we would be making based on supply and demand, and nothing kind of outside of that. So the reference that you're making for the action that we took in December was just in line with our normal production planning cycles.

Okay, thanks.

Your next question comes from Ruchir Peita with Heavens [ph] and Partners.

Hi, Jack and Matt. Thanks for taking my question. Just had a quick question regarding the forward order book just building on some recent commentary from U.S. homebuilders suggesting that March 2019 quarter may be a little bit soft from a demand perspective. Just wondering if that's reflected in your forward order book at this stage given you've now seen the January trading data.

Yes, we certainly think we've got a good line of sight to our what's our fourth quarter or the March ending period quarter market conditions and volume one of the reasons that we've changed and tightened our guidance range this quarter was it certainly looks like from the last couple of months that the way December and January have played out are slightly more positive than what we had as indicators when we were sitting here in November for how the trends in the market would look. Well we don't think it's going to be a robust market, we certainly think the pause that we saw in our third quarter doesn't continue into the fourth quarter and our fourth quarter guidance range and full year guidance range kind of accounts for that.

Okay, great. Thanks for that. I know Hardie doesn't like to talk about the impact of weather, but just again given commentary from some of the competitors in the region, was there any impact from weather in the third quarter?

No.

Okay, perfect. Just to be explicitly clear on a question that was asked earlier just the calculation of the market index. I mean previously we’d use a three month lagged using U.S. housing data but now it appears that you are using a nine or twelve month rolling index. Is that right?

That's correct.

Perfect, thank you very much.

We are showing no further questions on the phone.

Well thank you all very much.

Thanks everybody.