James Hardie Industries plc (JHX) Q1 2020 Earnings Report, Transcript and Summary

Ladies and Gentlemen, thank you for standing by, and welcome to the James Hardie Q1 FY20 results briefing conference call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Dr. Jack Truong, Chief Executive Officer of James Hardie. Thank you, please go ahead.

Good morning, and good afternoon, everyone. Thank you for joining us. I will start with key business and operational highlights on our first-quarter performance. Then, Matt Marsh, our CFO, will cover the financial details of the quarter. Finally, I will come back and update you on where we are with our three-year strategic plan. Let me begin by putting our first-quarter results in the context of our three-year strategic plan. We are an organic growth company. We're built to drive growth above market, our PDG growth in all regions of the world that we operate in, and with good returns. In North America, we are on a commercial transformation journey, to be a more focused-on-customer company, by continuing to invest significantly in demand creation, where our end users, the builders, installers, and R&R contractors. We are building a more robust account management capability to serve our customers, the builders, lumber yards, and distributors much better. This is aimed at driving a sustainable growth above market in the 6% range for the long term. We also drive lean manufacturing across all our plants in North America, to take advantage of our scale, to reduce variability, and to improve productivity. We target to generate $100 million in cumulative savings over a three-year period, due to lean. In Asia-Pacific, our goal is to make a good business better, hence, to continue to deliver growth above market, even in the contracted market that we currently have in Australia, and at good returns. In Europe, it's all about accelerating fiber cement growth, based on a growing fiber gypsum business, while improving our EBIT margin. Now, let's turn to page 7, on group results. I'm pleased to note that we delivered very good performance in all three regions that we operate in. North America had a 5% volume growth in exterior, while EBIT margin was at the top of the EBIT range, 25.1%. Europe continued to deliver strong revenue growth, 7% in Euros and expected EBIT margin. APAC delivers solid financial results, despite weakening of Australian housing markets. Now, let's turn to page 8, on North American results. Our exterior volume grew 5%, showing a continuous improvement in primary demand growth, quarter-on-quarter, and in sequential quarter. It is the result of our talented team executing on-demand creation and account management strategy better each day. Our interior volume declined 3%, which is an improvement over negative 10% in the previous quarter. It's also a marked improvement over the previous four quarters. With increased volume, better price mix, and lean savings, we deliver an EBIT increase of 6%, despite continued raw material inflation in the quarter. Our EBIT margin in the quarter was again, 25.1%. Now, let's turn to page 9 for the European results. Our EU team delivered very good revenue growth, up 7% in Euros. This is driven by 37% growth in fiber cement. It is a good growth momentum for a fiber cement business, over Q4 of fiscal year '19, which was 22%. The team also delivered positive price mix growth in the quarter. EBIT margin was 10.7%, which was in line with our internal target. Now, let's turn to page 10 for APAC results. Our APAC team delivered a solid quarter, despite a significant softening of housing markets in Australia. The team managed well through the choppy market dynamics. The team was able to manage price mix well, to deliver revenue at the same level as Q1 of fiscal year '19. We also had a strong volume growth in the Philippines. EBIT and EBIT margin continue to be impacted by input cost inflation and higher freight. It was offset with lean savings and cost controls. Our APAC team delivered an EBIT margin of 23% in the quarter, which is an improvement over quarter four of fiscal year '19, which was 20.3%. Finally, on page 11, the following are our updated key assumptions for fiscal year 2020. We see a modest growth in the U.S. housing market. It's about 1%-ish, and with the U.S. residential housing starts between $1.2 and $1.3 million. And we now see our EBIT margin for the year to be at the top of our range, which is 20 to 25%, and we affirm the exterior PDG growth of 3 to 5% for the year in North America. In Europe, we see a slight housing market growth across our addressable markets, and the introduction of new fiber cement products in Europe will be a key focus for our team, to continue to create value within our European business. And we also see an EBIT margin accretion through better management of price mix, and better improvements in our network of plants in Europe. In our Asia Pacific business, the addressable housing market in Australia is contracted, and we are estimating between 8 and 10% decline for the market in Australia. APAC volume will be 3 to 5% growth above markets, and EBIT margin will be in the top half of our stated range, 20 to 25%. Now, I'd like to hand over to Matt Marsh, our CFO, to go into the quarter, into more financial details.

Thank you, Jack. Good morning, and good afternoon to everybody. Thank you for joining the call. I'm going to take you through the financial results at a deeper level, as we would typically do. So, on page 13, results for the first quarter for the group, we had net sales increased up 1%, which, in the context of the markets and the market conditions, both in North America and in Australia, we think is a good performance. The exteriors growth above the market at 5% in North America, fiber cement represents an improvement from the previous quarter. The Asia Pacific fiber cement business was impacted by the continued softening of the Australian market, so we've seen that now for several quarters, and our adjustable markets in Australia are definitely contracting. In Europe, as Jack mentioned, we had a higher net sales, largely driven by the fiber cement business, driving a 37% increase in revenue. Gross profits were up 5%, net sales up 1%. Gross margins increased 150 basis points. Adjusted net operating profit for the quarter was $90.2 million, up 13%. We had a 6% increase in EBIT in North America, a 272% increase in our European buildings segment, and Asia Pacific in U.S. dollars was down 12%. On page 14, we'll go into the North America results a bit more. We reported net sales in North America of $452.3 million. They were up 4%. On volume, exteriors was up 5%, compared to a year ago, and interiors was down 3%, an improvement from the fourth-quarter performance. Price of 1% in the quarter. We're on track for our 2% price increase for the year. We implemented our annual change in strategic pricing on April 1st, as we expected we would, and there was a little bit of mix and some tactical pricing in the quarter that brought that down slightly, but overall, we're on track with pricing in North America. EBIT up 6%, on sales up 4%. That leverage was driven by an improvement in manufacturing, despite continuing to see higher input costs. I'll talk more about that in a moment. We are starting to see the beginning, positive effects of lean with our plant performance in the quarter, and our SG&A as soon as a percent of revenue has gone down, as we continue to focus on optimizing our cost and continuing to invest in growth and lean. On page 15, our first-quarter EBIT margins were up 40 basis points, compared to a year ago, to 25.1%, and those are at the top end of our target range. And, as Jack said in our assumptions in for the year, we believe will be at the top end of our 20 to 25% target range for the full year of fiscal 20. On page 16, we'll talk for a moment about input costs. A bit more of a mixed story, which is a nice change from what we had discussed with you in May, and the previous several quarters, where we had headwinds, kind of across the commodity groups. Pricing on pulp is starting to come down, although, in comparison to a year ago, you can see it's only down slightly. In comparison to the fourth quarter of fiscal '19, which represented the peak of the market, we're down close to 6%. So, you see we're on a good deflationary trend, but quarter-on-quarter impact was slightly down, 1%. Freight prices, on the other hand, are down fairly significantly, down 15%, compared to a year ago. Cement and gas are both up, 3% and 22%, respectively, as the cement market continues to have a high level of demand. And electricity prices were down, so a bit more of a mixed story, an inflationary story in totality, for North America, first quarter of fiscal '20 in comparison to '19, but certainly a bit of a reprieve from the significant inflationary headwinds that we experienced most of fiscal '19. Go to page 17. In Asia Pacific, we reported net sales of A$154.4, which was flat, to the prior corresponding period. We think we had growth above the market in Australia, despite a very soft market in the housing market, down 8 to 10%. Strong sales volume growth in the Philippines. You'll see that on an upcoming slide. EBIT was impacted by higher input costs and unfavorable New Zealand plant performance. We're continuing to work on getting the manufacturing plant in New Zealand operating to the standard expectation that we have. That was partially offset by higher average net sales price in Australian dollars, and, as you can see on EBIT, while down 12% on a U.S. dollar basis, it was down 6% on an Australian dollar basis, so the second result in U.S. dollars were unfavorably impacted by the change in foreign exchange rate movements for the period. On page 18, a quick look at the by-country. As we've said now a couple times, Australia, we believe had a good volume result, given the market conditions. We think we gain market penetration, despite the soft market. The EBIT decrease was primarily driven by the lowered net sales. We think the team is doing a good job of navigating a declining market. In New Zealand, you can see overall higher input costs, and unfavorable plant performance is impacting that country's results. And a very good quarter in the Philippines, with volume up, driven by market penetration, and EBIT was unfavorably impacted by higher input costs. On page 19, the European building products segment. Net sales up 7% in Euros, driven by fiber cement net sales in Euros up 37%. On an EBIT basis, excluding the one-time transaction costs, you can see we had an EBIT margin rate at 10.7%, and an EBIT of 9.1 million Euro, which is driven by higher gross margins. We're continuing to invest SG&A into that business as we build out the corporate functions and we exit the service agreements. We're very much still on track for the overall budget that we had established for integration costs. We incurred $2 million of integration costs in the quarter we expect that there's some additional costs for the year, that'll be incurred for the remaining three quarters. We expect total-year integration cost to be in the $5 to $6 million range. EBIT margin excluding those one-time costs of $10.7, very much in line with our internal targets, and we think the European businesses is on track. Page 20, our other segments. So, the other businesses, if you're familiar with, used to be our windows segment, you can see there is a $400,000 gain in the quarter, which was a half a million-dollar gain on sale of fiberglass protrusion business, which we completed early in the quarter. And prior to that, we had some legacy sales of that fiberglass protrusion business, and there was a little bit of losses associated with that. So, overall a $400,000 gain for that. We continue to remain committed to R&D investments and you can see we're within a normal band of variation on our R&D investments. General corporate cost for the quarter unfavorable, largely due to foreign exchange in higher stock compensation expenses. The underlying core SG&A or general corporate costs, excluding those two items was up slightly, but in a very normal range. On page 21, income tax, we are estimating 18.2% adjusted effective tax rate for the year and reported in the quarter. As a reminder, income taxes are not currently paid or payable in Australia due the tax losses associated with our annual deductions, relating to the contribution to AICF. On page 22 our financial management framework remains unchanged. We continue to stay focused on having strong financial management that starts with strong margins and strong cash flow. We believe strongly in and having good governance and being transparent and, you know, we continue to operate the company as an investment-grade financial credit. Our capital allocation priorities remain consistent with the last several quarters, with our top priority being investing in R&D and capacity expansion to support our organic growth strategy. We remain committed to the ordinary dividend, and the remaining is flexibility for cyclicality in our market cycle. On the liquidity and funding side, you know, we have come into the one to two times adjusted EBITDA leverage target. We continue to be temporarily above that target, and have a good line of sight to getting that back below that the one the two times range, within the time frame that we talked about, that we've been talking about, so another four quarters. So, very much financial management-consistent, with investment-grade credit, and we think we've got a strong financial position to be able to withstand cycles and unanticipated events. On page 23, we reported $161.1 million of operating cash flows, up 22% from the prior year. Those were largely determined by working capital and increases in income in each of the business, adjusted for non-cash items. Lower investing activities, obviously, with the acquisition and closure of Fermacell in fiscal year '19, in the first quarter, you'd expect variance. And those were partially offset, as we continue to invest in CapEx, you can see, was slightly lower in the first quarter of this year, in comparison to a year ago. On slide 24, a brief look at our liquidity profile, very consistent with prior quarters. We have $1.2 billion of net debt at the end of the period, nearly US$421 of available revolving credit. The structure of our corporate debt structure remains consistent with our prior quarter discussion. our 2.2 net debt to adjusted EBIDTA leverage at the end of the first quarter is very much on track with the strategy that we laid out when we bought the Fermacell business, and we believe we've got line of sight to being back below that 2 times leverage, the high end of that leverage range, by next year this time, so, another four quarters. So, we remain on track and remain committed to returning to our on to two times leverage target rate. On page 25, a CapEx spend of $63.3 million for the quarter, down slightly compared to a year ago. No new capacity projects. We continue to start up our Tacoma greenfield expansion. We're continuing the construction of our Prattville, Alabama facility, and that remains on track. We continue to expand our ColorPlus product lines in two of our plants in North America, and we're nearing the end of construction and will be starting up the Carole Park brownfield expansion later this year, and we remain on track to start selling board off of that line early next year, early next fiscal year. On page 26, just to reiterate the key assumptions and talk a little bit about guidance. So, we continue to think that the U.S. housing market will have modest growth this year in, the 1-ish% range. We are assuming 1.2 to 1.3 million U.S. residential housing starts. As we've said a number of times already on the call, we think we'll be at the top end. We have good line of sight to being of the top end of our EBIT margin range for the year, and our assumption is that we will deliver 3% to 5% primary demand growth in North America. For Europe, slight housing market growth, across our adjustable markets. We also believe we'll introduce new products this year, new fiber cement products for Europe, in Europe this year. And that EBIT margin will be accretive, year-over-year. Asia Pacific, we think the housing market will be down, in the high single-digit range year-on-year, and contracting. APAC volume, despite that market condition, we believe will be 3% to 5% growth above that market index, so continue to drive market penetration. And EBIT margins will be in the top half of our 20% to 25% range for Asia Pacific. So, we believe our full-year adjust in that operating profit will be between $325 million and $365 million. So just to wrap up, on page 27. So, we think good and disciplined financial performance in all three of our businesses. Our North America fiber cement business delivered a marked improvement in primary demand growth, while generating an EBIT margin at the top of a target range. Asia Pacific fiber cement margins were in the middle of our target range, and drove market penetration in a soft market. In Europe, building products segment delivered strong revenue growth in Euros. Our adjusted EBIT of $124.4 was up 16%. Our adjusted net operating profit after tax was up 13%, at $90.2 million, and we will fund $108.9 million to AICS during the second quarter of fiscal year 2020, as provided under the AFFA. So, with that, I'll hand it back over to Jack to go through strategy.

Thanks, Matt. So, six months ago I share with you the strategic plan that our global team is executing on, and just to remind you that this global strategic plan was built with the following value creation in mind. So, if you go to page 29, this strategic plan is all about making sure that our North American business will deliver the growth, with the 35/90 at strong returns, which is 20%-25% EBIT margin, for the long term. And for Europe, it's about creating a €1 billion business, with the Hardie-like returns, with about 20% EBIT margin. And for Asia Pacific business, it's about deliver a growth above market with strong returns, 20% to 25% EBIT range. Turn over to page 30, and what does that mean for our strategic priorities for the fiscal year '20 and '22. For North America, it's all about accelerating our exterior business growth. It's about providing the total James Hardie solution for the exterior of the home. And this is really the key part about commercial transformation that we have discussed. And second, it's about driving lean transformation across all of our 10 plants. We are, currently, we are the world's best fiber cement producer, sung lean transformations that will turn U.S. into a world-class manufacture that really leverages on our economy of scale. And third is to reestablish interior as a growth business for us, not only in North America, also around the world. For Europe, the priorities are about gaining market traction, with current fiber cement products that we've been commercializing in Europe, as well as about developing new fiber cement products for the European fiber cement market. Second, it's about continuing to drive growth of fiber gypsum and gaining market penetration for this product line. And third for European business is to continue to unlock existing manufacturing capacity in the five plants that we have in Europe. Asia Pacific, continue to drive growth above market, and drive lean manufacturing across all four of our plants. Turning over to page 31, I'd just like to give you an update on where we are with lean transformation, across the three regions. In North America, we have implemented our Hardie Manufacturing Operating System now through five plants, and so it has been progressing well. Two additional plants will be implemented by the end of second quarter for fiscal year 2020. And we're on track to deliver $100 million cost savings, cumulatively in the next three years. So, if you look across to the right-hand side, the chart, we estimate that the lean savings in fiscal year '20 to be between $15 million and $20 million, and then, that would carry over to the following year, where we'll have the additional $30 million to $40 million of lean savings, which then carry over to the third year, for an additional $40 million to $55 million savings. So, that's roughly how the $100 million lean savings will play out within the next three years. Now, this is becoming a global transformation with lean. Our European business will start to adopt the Hardie Manufacturing Operating system. Our plant management team of five plants in Europe have visited our North American plants that have implemented lean, back in July, and the key learning they have from this visit will be the basis for the beginning of the implementation of lean across Europe. In our Asia Pacific team, this is really the spirit of continuous improvement. You know, the lean system that we have brought and implemented into North America has been improved each time that we implement it in each plant, across North America. And based on those improvements, now, we'll then replicate some of those key improvements back into our plants in Asia Pacific. And so, our manufacturing and plant teams in Asia Pacific plant will be visiting our North American plants on the third quarter of fiscal year 2020, to bring back some of those key learnings, and then replicate back into our Asia Pacific plants. Now, moving on to page 32, this is a European update, that we continue to drive the sales synergy for fiber cement exterior product, with fiber gypsum interior. This is about leveraging on the channel access, as well as the end-user access that we have through the Fermacell acquisition, which allow us, then, to be able to market and sell additional fiber cement products, based on the penetration that we have of fiber gypsum. And if you look on the right-hand side, this is the example where we have the residential as well as multi-family projects in the UK, and also in Switzerland, where these housings have the James Hardie fiber gypsum products as the interior liners, and the James Hardie fiber cement as the siding, exterior siding. Opportunity in Europe for us continue to drive higher returns. It's about improving the manufacturing capability that we have in our five plants, and it is a continuous improvement that we expect to see as we drive more EBIT accretion as the quarter and the year goes on. And our objecting is to deliver the EBIT improvement quarter-on-quarter and year-on-year in Europe. Now, if you look at page 33, this is the example of how our approach to growth above market in Australia, where it is a tough market right now, with a contracting housing market. Here's a key trend that's happening in Australia today: there's certainly a labor shortage, less space, and with smaller lot sizes, certainly, in Brisbane, Melbourne, Sydney, and lightweight construction is then favored. And those market trends really favor our fiber cement products. And it is the opportunity for us to replace brick with our fiber cement products. And the example we see here on the left-hand side, those are the different types of homes made from bricks, and the right-hand side are really about the flexibility that the builders in Australia are going to build homes with different aesthetics, different configurations, using our fiber cement product line, and at the same time, improve the speed of construction, improve the lot -- the size of the home, and also improve the affordability within the slow-down markets. With that, concludes my strategic plan update section, and we're open for Q&A.

Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] Your first question today comes from the line of Peter Stein from Macquarie. Please go ahead.

Good afternoon, Jack and Matt. Thanks very much for the time. Just was curious to get a little bit more flesh around the performance from a volume perspective in North America. Could you give us a bit of a sense of the fact of the difference to outcomes in the quarter, given what one's seen around the macro-environment? You know, is it regional performance or channel penetration, what's happened in interiors, and early impact on ColorPlus? Sorry, I'm giving you a few bullet points there, but I'm just curious on those perspectives.

Okay, well, good morning, Peter. So, let me address, first, the growth in exterior, and then we'll move into interior, and then we'll talk about the status of the color. So, with the exteriors, as we discussed during the past two conference calls, we are traditionally, and this is where Hardie's strength is all about creating demand in the marketplace with our end users, with the builders, with the contractor installers. And so, we have significantly increased the resource toward creating those demands, while at the same time, we have put a much bigger focus, in terms of manage our customers, the lumber yards and the dealers out there. And so, the execution of our team, from demand creation, connecting with our customers, that certainly helped increase our growth in the marketplace. And we also saw a lot of growth coming from our traditionally strong markets, which is the high-S. And we also saw very good growth in the low-S, particularly in the northeast and mid-Atlantic. And now, moving on to the interior business. This is what we also have shared with you in the last conference call, that is that we have shifted our focus from being calling on a lot of different stores about retailers, to really put more focus on calling in with our key customers at the headquarters, and then be a lot more proactively manage the business with our key retailers, so we can plan out the right promotion placement. And also, at the same time, we start to launch the James Hardie HydroDefense interior boards, and that's continued to gain traction, that we are pleased with the progress of that. And then, relative to our color programs, it is, right now, just the beginning of that launch, and we expect the momentum will build in the beginning of this quarter, and then will grow from here onward.

Thanks very much for that, Jack. And then, perhaps also a quick one around cash flows met. Could you talk to us to your expectations for CapEx for the full year? And also, just wanted to touch on your working capital performance, which was pretty good. What should one think about in terms of progression around working capital, as the year progresses?

Yeah, thanks, Peter. The CapEx guidance for the next three years remains consistent with the last couple of quarterly results, so we expect to spend $200 million in CapEx this year, which includes both the completion of the existing capacity projects that we've talked about in Tacoma, Prattville, and the ColorPlus product lines, and Carole Park, as well as kind of normal maintenance CapEx. And then, for fiscal '21 and for fiscal '22, $150 million in each of those two years. So, 200, 150, 150 is kind of the CapEx guidance that we are reaffirming. Regarding working capital, it was strong, as you note, as the result indicates. Keep in mind, it was a bit weaker in the fourth quarter, and we indicated that we felt pretty strongly that was the way some of the payables and receivables had come in at the end of March, in comparison to early April So, we were sort of expecting the result that we got in April, and that carried forward into the year. So, we do expect some working capital improvement in the year. WE don't think it'll be at the rate that you saw in the first quarter result. We are expecting strong cash flows overall, though, for the year.

Your next question comes from the line of Brooke Campbell-Crawford from JPMorgan. Please go ahead.

Yeah, good morning, thanks for taking my question, Jack and Matt. Just on the input costs for pulp, I guess, given the lags that should be there, between list prices and your actual cogs line, I would have thought that it would be a headwind, still, in the first quarter. I guess, is that correct, and if so, what was the impact to North America EBIT from that higher pulp?

Yeah, Brook, we actually had a headwind of raw materials within the quarter, and so, it is a lean savings that mitigates some of those. But we still have the headwinds of raw material in the first quarter. We expect that to ease, going forward, but we still see it, within the quarter.

Yeah, no, that's fair. And I guess, given margins at 25% in the quarter despite those headwinds, which should abate as the year progresses, and you should get lean benefits building margins, I guess the outlook there is pretty promising. And so, you're telling us here that you're going to reinvest quite a bit in SG&A to get that top line down.

Yes. So, Brook, I think we had talked a lot during the last two conference calls, that the keys for long-term strategy, driving that sustainable growth is really about making sure that we invest into our market, particularly in demand creation, and also investing in our customers, while we ignite the innovation process within our company. And so, it's the investment that we need to invest in, to build and sustain our growth.

Okay, and one more, just on pricing, a bit lower than I was expecting there, in North America. Can you provide some examples of the tactical price decisions that you made in the quarter?

Yeah, I think it's just normal tactical pricing variation. You know, we had guided to a 2% price increase for the year. We implemented that 2% for the year, and any given quarter, we'll have pricing, or sorry, mix and tactical pricing. Sometimes they offset, sometimes they both go one way. In this quarter, they happen to be a little bit stronger than the prior quarter, but very much the way we expected it to be. So, we've got line of sight to 2% for the year. We thought we'd kind a get off to a 1% first-quarter start that would build in the second and the third and the fourth quarter. Keep in mind, we're also coming off of a 5% pricing comp from a year ago. At that time, we also didn't over-emphasize the 5% last year. We said that it was a combination of the price increase, combine with mix and tactical pricing kind a going in a particular direction for that quarter. So, we like where we are on pricing. We think our strategic pricing is in a good place. We think our tactical pricing is appropriate. There's nothing sort of abnormal, you know, in the quarter. We just happened to see a one in the quarter, which is very much in line with how we planned and what we saw, and we're still guiding to the 2% plus for the year.

Your next question comes from the line of Keith Chau from MST Marquee. Please go ahead.

Morning, Jack and Matt. Just a few quick questions. The first one is just on your distribution base. Quite clearly, the volume growth comp was strong, relative to peers, in particular. So, I'm just wondering if you can perhaps characterize how many distributors you've added, perhaps over the last six months, and whether there was a stocking benefit to those new distributors within this current result phase.

Hi, Keith. Remember, we are a PDG growth company, and our growth is the execution of the push-pull that our team have been embarking on. And we really didn't add any new distributors. This is really about us creating the demand, and then connect that with our customers to really drive better sales conversion. So, that's really what happened.

Okay, thanks, Jack. And then, I just want to touch on Europe very quickly. So, volumes are flat versus last year, fiber cement sales up, which implies the underlying fiber gypsum volumes were down for the period. I'm just wondering if you can give us a bit more color on the underlying dynamic there, please.

Actually, the volume for out fiber gypsum is slightly positive, in terms of volume. It is really, we have really good growth in Scandinavia, the UK, and France, and Switzerland. We're a little bit more challenged for growth of fiber gypsum in Germany, and it is a situation that we're correcting, but that is really what happened in the quarter.

Okay, and what's driving that challenge in Germany, please, Jack?

We very recently just opened up a new fiber gypsum plant in Germany, so it is a dynamic that's happening that we are just going -- that the market is going through that new capacity.

Your next question comes from the line of Andrew Scott from Morgan Stanley. Please go ahead.

Good morning, guys. Thanks for your time. Just a quick question, thanks for the data you provided on, I guess, the multi-year sort of timing of lean. Matt, I wonder if you can let us know what you delivered in this quarter, and how the sort of shape of that delivery of the 15 to 20 this year comes through, please.

Yeah, so the way we've been describing lean over a three-year period, you can sort of think about that same cumulative framework within a 12-month period as well. So, lean is about getting 1% better every day, and that 1% improvement over a 90-day period, you know, obviously builds, then, for a 180-day period and a 27-day period, and the full year. So, you could expect, if we're guiding to kind of a $15 million to $20 million benefit in fiscal '20, that that would build in a very similar kind of cumulative profile, where first quarter would be the lowest, building on the second, building up to the third, and then building up to the fourth, for that total $15 million to $20 million. And then, that profile would sort of very much continue into the fiscal '21 and fiscal '22 targets. So, we've really got to lock in the month-one and the quarter-one savings, in order to deliver on the year-to-date savings target that we've put in place for each of the plants for the first half, and the first half we've got to deliver in order to get to those targets for the year. So, it's very much kind of about each week, each week, each month, and each quarter that builds to the year. So, hopefully, that gives you at least, sort of a framework maybe, to think about the 15-to-20. We're not going to provide specific numbers by quarter, but we're trying to provide a way of sort of thinking about it and continue to be transparent with how we're packing on that 15-to-20 on the half-year results.

Got it, and I might be mistaken, but I think this is the first time you've talked about lean in Europe. Can you tell us, talk to us about the opportunity you see there? Is it quite similar, in terms of the improvement you think you can deliver?

Yeah, and Andrew, the situation we have in Europe is actually quite similar to our manufacturing plants in North America a year ago, and that is, we have five manufacturing plants of fiber gypsum and cement bonded, that pretty much run independently. And so, with the lean approach, it's really first that we have to make sure that those plants run to the standards, and then start to have the discipline of running through the standard operating procedure. And that's the first half, and second is to put in the first step of our Hardie Manufacturing Operating System. So, in many ways, it may be very similar to the opportunities that we have here in North America, and we're looking now to really turn that into value in Europe in the coming months.

Got it. And then, Matt, finally, the last one from me. I'm sure you're aware, there was an asbestos case here that got quite a bit of attention. I know it's the AICF that settles that, rather than yourselves, but is there anything you're aware of, from a third-wave case there, that set any precedents, or was there anything that's inconsistent with what the actuary's actually thinking?

No, I'm not aware of anything, and I would just sort of remind everyone that asbestos is best looked at over a long term and a long period of time, and I think we'll have an assessment from the actuary at the end of this fiscal year, that'll obviously consider that case and the impact. But I'm certainly not aware of anything specific to that case that would have an adverse or favorable impact, for that matter, on the actuarial estimate.

Your next question comes from the line of Sophie Spartalis from Merrill Lynch. Please go ahead.

Good morning, team, just a few questions from me. Just in terms of volumes, we've talked about it already quite a bit, but just in terms of the sales force, can you provide an update as to how much that has now been bedded down, in terms of the hunter and gatherer sort of strategy that you had. And also, of that volume uplift that we've seen coming through in the quarter, how much of that is coming from these priority non-metro areas in the US? And then, just in terms of the FY'20 guidance assumptions, if you could just run thought what your R&R outlook is, please. Thank you.

Good morning Sophie. As far as our sales force, our hunters are getting close to being where we want it to be. And in terms of the farmers, it is the new capability within James Hardie that we have been building. Of course, that started with, we onboarded and hired a new head of sales, which we shared with you before, and also, we have just hired a new VP of sales for the interior business, to also have the capability of being very good farmers with the big retailers. So, this is the area that we're more at the beginning of the journey, rather than the middle or the end, as far as account management's concerned. And then, so, what's your second question, Sophie?

Just in terms of how much of that volume uplift came from the new strategy around targeting those priority non-metro areas.

You know, Sophie, the way we approach the market now is very driven through our customers, and then with our end users. And we just don't differentiate a lot in terms of non-metro versus metro like we used to. And then, so relative to your question on R&R, we are making the assumption that the R&R market will be between maybe 3% and 4% growth for the year.

Great, just to clarify, that's for the U.S.

For North America, for the U.S., yeah.

Yeah, great, thank you.

Your next question comes from the line of Peter Wilson from Credit Suisse. Please go ahead.

Thank you, morning. Another question on the North American volume results. So, a very strong result. Is there anything that you'd call out that maybe is not a reference point, so any short-term factors which might have inflated sales this quarter, such as a strategic price increase, or anything like that which would mean that we shouldn't use it as a reference point for the rest of this year?

No, there's nothing sort of artificial in there. We're still guiding to kind of a 3% to 5% PDG for the full year. We think the market in the first quarter was roughly flat, and will be up just slightly for the full year, that's got new construction down slightly, and repair and remodel, we think, will be up about 3%. So, there's going to be some normal quarter-to-quarter variation, the 5%, as you said, is a good result for the quarter, but we're still kind of thinking that it's a 3% to 5% kind of primary demand growth year. So, we've tried not to stay very focused, in the last several quarters, on the quarter, and we think it's much more about a rolling 12 months, and the results for the year, and we still think we're in this 3% to 5%. That obviously implies that, with a 5% coming out of the first quarter, that you could have some normal variation within the 3% to 5% and still be within that range for the year. So, we certainly are pleased with the result in the first quarter, but I would just reaffirm the 3% to 5% is the assumption that is the one that we want you to hear, primary demand growth for the full year.

Yeah, Okay, because I accept that there is quarterly variation, and probably because you've built expectations that things would build, I guess, throughout the year, so the benefits of your sales strategy would build throughout the year. And, in closed call, you've talked about color momentum building throughout the year, and also, reinvestment of some of those raw material savings. So, I'm just wondering why we might not see an improvement during the year, and why you might not be looking to exceed that 3% to 5%.

Well, Peter, I think, you know, it is now that we get to this critical mass of the size now, that every day, every week, we have to execute our game plan correctly, and we have to earn that business every day. So, it's not something that we have a good first quarter and think that the rest will be like that. So, it is a daily execution in our business now, so that we can earn that business.

Okay, and lastly, your comments in regards to your farmers strategy is still at the beginning of that. In the one-quarter result, can you give us an estimate of how much base business erosion you lost during the quarter?

It is roughly, it's less than what we used to. But in terms of the exact percentage, we will make that as confidential in our company.

Okay, but you are still, by your estimate, losing business, still a negative drag.

We still have some erosion, yes, so there's room for improvement, going forward.

Okay, perfect. That's all from me. Thank you.

Your next question comes from the line of Grant Slade from Morningstar. Please go ahead.

Good Morning, Jack and Matt, and thanks for taking the question. I just had one follow-up on the PDG performance in North America. You increased sales resources and focused on lumberyards. Do you have a sense of whether that's driving mostly fiber cement category share gains, or are you taking greater market share? Thanks.

Grant, good question. It is a combination of both.

And, okay, great. And do you have any sense of, I guess, sort of the proportion there, or difficult to say?

It is too early to tell, yet, Grant, but it is something that we would focus on to really have a better quantification going forward.

Your next question comes from the line of Daniel King from Citigroup. Please go ahead.

Good morning everyone. Jack, I just wanted to get your thoughts on the marketplace. I guess in terms of overall U.S. market, clearly a tough quarter for the start. But your guidance for the full year of slightly up, suggests improvements through the course of the year. Are you seeing much evidence as we move into the second quarter, at this point? Maybe a second question for Matt, in terms of cost. Pulp prices are clearly down on a year-on-year basis, I work out something like down 11% or something like that. Are we starting to see the benefits feeding through into the second quarter?

Let me answer the question on the markets. Certainly, everyone saw the data, certainly, in the first six months of the calendar year have been quite choppy. Depends on where the source you use, can be anywhere from down 4% to 6%. We see slight improvements in this quarter, and then a little bit for the rest of the year. But we're still, for the whole year, still pretty much flat for the red residential starts. And then, like Matt said, our R&R is roughly about 3% growth, for the market.

Yeah, and on the pulp question, we're seeing kind of double-digit decrease in parts of the pulp market, but overall, we see that the pulp market's down closer to six, in comparison to the fourth quarter peak. And just, we sort of look at the contract market and the spot rate market as different markets. We also look at the U.S. and China markets as different markets. So, there are parts of those four markets that are down more than others, and in total, we think it's down about six. You're correct that we will, and we are expecting to see, as the year goes on, the pulp headwind on a year-on-year basis decrease. But for the total year, we still have pulp and commodities in totality, out input costs still going up slightly.

Great, thanks, Matt. And just, I know you don't like to talk about the rain affecting the market. Do you see dry conditions in the fall as a benefit for the rest of the year?

We won't talk about rain, but we'll talk about drought.

I mean, I'd just like to reinforce that we are a PDG growth company, and our focus so really about how do we create more value, at the end-user and for our customers, so that we can really gain more and more share to the category to the market. So, that's really our key focus, and that will continue to be our focus going forward.

Your next question comes from the ling of James Brennan-Chong from UBS. Please go ahead.

Hi, Jack, hi, Matt. Congratulations on a very strong result. Just articulating a little bit more the PDG and the volumes. Are you able to split out where you're getting that PDG, in terms of whether it's again, new housing or R&R? Are you winning more, say, into one category, compared to the other? Thank you.

It's really difficult to say, James, but I think, based on these graphic spreads, we tend to have more of the road to new construction, through the south and southeast, and south-central mid-Atlantic. And we also saw a lot of growth in the northeast, which is primarily an R&R market for us.

Right, so no real change in the relative exposure, then, to new housing versus R&R. You're getting consistent PDG in both segments.

Correct.

Thank you.

[Operator Instructions] Thank you.

Jason, maybe one last question, or we can end the call.

There are no further questions at this time.

So really, we're pleased with the good execution of our strategic plan for all of our employees around the world. We saw more at the beginning of the journey, rather than at the end. We still have a lot of work to do to accomplish our long-term goals, but we're encouraged that we're on the right path. Thank you all very much for dialing in, and have a good morning and goodnight.

Ladies and Gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.