James Hardie Industries plc (JHX) Q4 2020 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to the James Hardie Q4 FY '20 Results Briefing Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator instructions].. I'd now like to hand the conference over to Dr. Jack Truong, Chief Executive Officer. Please go ahead.

Thank you. Good morning and good afternoon, everyone. Thank you for joining us on our Q4 fiscal year 2020 earnings call. I will begin by providing our perspective on how we have been managing the ongoing COVID global crises in our company followed by a review of our Q4 and full year FY'20 operating results. Our CFO, Jason Miele, will then cover the financial details. Finally, I will end with an update on our strategic focus of fiscal year 2021 and the outlook for the current quarter. On that note, I wanted to take the opportunity to once again congratulate Jason on his recent appointment as Chief Financial Officer of James Hardie Group. His strong track record of financial and business leadership as well as his intimate knowledge of James Hardie Company will be critical as we continue to execute on our global strategic plan. Let's now turn to page 8. Focus of today's discussion is on Q4 and fiscal year '20 performance. I'd like to provide you with a perspective on how we had been managing the ongoing COVID19 global crisis. Our approach on managing this crisis has always been about providing the absolute clarity of direction throughout the organization and at the same time, been able to gain real time feedback on key happenings of all of the markets that we participate in and from all of our front-line employees around the world. This is essential in allowing and empowering our leaders at various levels in the company to make the right decisions in real time rather that are fact-based rather than based on noise or assumptions. Consistent with our foundation of Zero Harm culture, our primary objective is to ensure that the health and safety of our employees, customers and suppliers are taken into consideration in all business decisions we make. Toward this end, we established consistent, clear and specific pandemic protocols that were implement across the globe to ensure we have one global James Hardie standard. These protocols include executing strict physical discipline guidelines that maintain at least six feet or two meters of separation between employees in all product facilities include manufacturing locations in COVID offices. Additionally, in all facility we have implemented extensive disinfection and hygiene processes to eliminate the virus and to prevent the spread. Outside of our facilities, we were committed to helping our employees and their families maintain safety and well-being by providing access to personal protective equipment and hygiene kit for employees. For those who go to work every day to manufacture and to develop products, as well as to service customers to take home kits for personal use to ensure our employees and their families are safe and offering additional sick leave and child-care support benefits and executing a work-from-home model where possible and applicable. While these crisis present our leadership team and our employees throughout the world with a very real challenge, I'm confident that our relentless focus on maintaining a safe and sustainable work environment will help strengthen our business continuity and to ensure that we can continue to produce products and serve our customers seamlessly. With that said, I would like to transition now to our key operational results for the fourth quarter and for the full fiscal year 2020. Let's now turn to page 9, I am pleased with what our global James Hardie team had accomplished in fiscal year '20. We continue to execute our global strategic plan, leading to an outstanding performance in fiscal year '20. Collectively, as a team, we have generated significant positive momentum on the transformation that we embarked on over a year ago and we expect to continue this positive momentum into fiscal year 2021. This is now the fourth consecutive quarter that the company delivered consistently strong results. Our global perspective of group results were highlighted by strong volume increase of 7% in the quarter, led by excellent volume growth in North America of 10%. Significant growth in our adjusted EBIT of 21% in the fourth quarter, again driven by excellent EBIT growth in North America of 26% and a 4% growth in our Asia-Pacific business. Our adjusted NOP [ph] increased 17% for the quarter and also for the full year. Our operating cash flow increased an exceptional 48% providing improved liquidity and financial flexibility for our business. While I am proud of the outstanding fiscal year '20 performance, I am even more excited about our continued positive momentum into fiscal year 2021. Let's turn now to page 10, North America continued to deliver excellent results across the board in all key financial metrics, including volume growth, EBIT growth and EBIT margin. In the exterior business, our volume growth accelerated in the second half of the year, posting a 11% growth in Q4 and 9% growth for the full-year. In the interiors business, the volume growth continued to improve each quarter during the past year. We delivered a 5% volume growth for quarter four and 1% for the full-year. We continued to improve on the execution of HMOS, the Hardie manufacturing operating system and generated $29 million of lean savings for the full year, which is ahead of plan. For the full year, our EBIT margin reached an exceptional 25.9% exceeding the top end of our long-term target range. These results reflects the significant impact of commercial transformations from pull to push-pull and lean transformation in our network of plants. For the full-year, North America delivered 7% plus of PDG or growth above market and the previously mentioned 25.9% of EBIT margin. This is the first time in more than a decade that North America delivered PDG in 6% plus range and an EBIT margin greater than 25%. It is another confirmation that we are now operating consistently at a new step change. Let's now turn to the page 11 for our European results. In Europe, if you recall from our Q3 earnings call, we indicated that our commercial execution in Europe was lagging that of North America. At that time, we made several key adjustments that we expected would improve our results. I'm pleased to report that we saw a significant improvement in our commercial approach in Europe in quarter four. Our quarterly revenue is back on track at 7% growth. In quarter four, we continued to deliver strong revenue growth in our fiber cement business of 50% resulting in a full-year growth of 32%. Additionally, fiber gypsum revenue improved to 3% growth for the quarter, resulting in a 2% growth for the full fiscal year. However, the positive growth in the quarter did not translate to EBIT growth due to integration cost and SG&A cost that was significantly higher that was expected. In addition, we have unfavorable freight cost in the quarter as we navigated through various lockdowns in various countries to service our customers. We're addressing these issues and we expect it to be back on track in the near term. Let's now turn to page 12 for our APAC results. In APAC, our Australian business held their own even in the face of downward market pressure, seen continued growth above market. However, volume, gross profits and EBIT of APAC in Q4 was unfavorably impacted due to the mandatory lockdowns in the New Zealand and the Philippines as the COVID19 crisis progressed in March. As a result, we saw moderate EBIT growth in Australian dollars of 4% in the fourth quarter and 2% for the full-year. APAC EBIT margin for the full-year was 22.7%, this is in top half of our long-term range. APAC's solid financial results driven by our Australian business performance reflect how the team remained discipline in their approach to executing on push-full and the Hardie manufacturing operating system, leveraging best practices from other reasons to continuously improve throughout the year. Now I'd like to turn this over to our CFO, Jason, to discuss additional detail on our financial results.

Thank you, Jack. I'll start on slide 13 with a discussion on our liquidity and cash management actions. In the graph on the left hand side of the slide, we've laid our liquidity position as of the end of the third quarter fiscal year '20, the end of the fourth quarter of fiscal year '20 and as of April 30, 2020. You can see, we've made significant improvements in our liquidity position over the last four months increasing liquidity by US$114 million. I'll start by focusing on our liquidity improvement in the fourth quarter and the month of April before shifting to discussing the actions we've taken to help ensure continued strong liquidity throughout the COVID crises, improved liquidity for December 31 through to April 30 is primarily driven by strong sales growth and cash conversion. As Jack discussed earlier, we had a strong fourth quarter included an exceptional March and as you can see the impact of the strong sales and our conversion of those sales into cash as our liquidity position increased from US$464 million at December 31, to US$578 million at April 30 of $114 million improvement over that four month period. This strong sales performance in our fourth quarter was driven by our North American, European and Australian businesses. In Europe, we returned to strong revenue growth in Q4 with revenues up 7% in Europe, including a 50% increase in fiber's net sales. In Australia, the team continued to drive growth above market and finally in North America, the team continued to drive our commercial transformation leading to another strong quarter of growth in our exteriors business of plus 11% and also strong growth in our interiors business at plus 5%. While the strong performance improved our liquidity position significantly, it was also hugely important that we took quick and decisive actions when the COVID pandemic rose to ensure we not only maintain our liquidity position, but we improve upon it. The management system we put in place over a year ago was critical in our ability to execute these initiatives across our global operations effectively and continuously. These included tactical cash and cost measures such as hiring, elimination of temporary consulting type workers, travel freeze and a reduction in discretionary spending amongst others, but in addition to these tactical actions, we also made more strategic and significant decisions help ensure strong liquidity and financial flexibility going forward, including the immediate suspension of dividends as approved by our board and announced on May 5 and a significant reduction in capital reduction in capital expenditures from our three-year run rate of US$240 million to an estimated ranges of US$80 to US$95 million for fiscal year 2021. Our capital expenditures in fiscal year '21, will be focused on safety, maintenance and innovation. As Jack will note later, in our first quarter FY '21 guidance, we'll continue to drive, sorry, we'll continue to improve our liquidity position, as continuous improvement will be driven by not only our relentless focus on cash and cost initiatives, but also our continues focus on serving our customers and driving strong sales. Moving on to slide 114, on the next two slides, I want to recap the actions we took on May 05, to improve and secure our global operations and also discuss the financial impact of those actions. Starting on slide 14 with the recap of the actions, the better harmonized supply and demand in North America we took two significant actions. One, we'll be closing our Summerville South Carolina plant in the United States and two, we'll be delaying the commissioning of our Prattville Alabama plant also in the United States. In our Asia-Pacific region, we also took two actions. One, we'll be moving to our regional model for the manufacturing and supply of fiber cement in the New Zealand market. This will include the closing of our [indiscernible] New Zealand plant made of this calendar year and the products from Australia to New Zealand. The second action in Asia Pac, we're exiting our James Hardie systems business, which we had acquired about four years ago, which includes the closing of the plant in [indiscernible] Queensland in Australia. In our European business, we have hired a plant in Germany temporarily to better match supply and demand in the short-term in Europe. And finally, we also reviewed our organizational structure and resourcing levels globally and made strategic adjustments to ensure we are well-positioned to continue to serve our customers in this fast changing market environment. We believe these actions not only will stay strong during the crises but also ensure we emerge from the crisis even stronger. Moving on to slide 15, we have outlined the financial impacts of these actions. On May 05, we announced that we anticipated approximately US$90 million of non-cash impairment expense in the fourth quarter of FY'20. We've outlined the actual amount here which was US$84.4 million across all three region as well as general and corporate losses. These impairments related to the closure of our Somerville and Penrose facilities, the editing of James Hardie systems business as well as the impairment of some non-core assets in North America and Europe. There are more detailed discussion of these impairments within the financial statements and the management analysis discussion documents filed with the AFX and which are available on our website. Several of the actions we announced on May 05, resulted in reductions to our workforce totaling approximately 375 employees around the world. We estimate that severance cost totaling approximately US$10.5 million will be incurred and expensed. These expenses will be recorded primarily in the first quarter of fiscal year '21 with a small portion reported in the second quarter of fiscal year '21. Consistent with the accounting guidance regarding one-time COVID19 cost, including severance-type cost, we plan to exclude these one-time COVID related cost from adjusted EBIT and adjusted [indiscernible] in fiscal year '21. We anticipate US$20 million to US$30 million of EBIT accretion in fiscal year '21 associated with these actions. The integral accretion will present itself across all operating segments and across numerous P&L line items including depreciation, labor costs in both SG&A and manufacturing, cost of goods sold etcetera. While we'll achieve EBIT accretion in each quarter of FY '21, we anticipate the amount of accretion will increase each quarter throughout the fiscal year. I want to now spend a little time discussing how the EBIT accretion impact each of our segments. In North America, we'll drive EBIT accretion in FY '21 associated with May 05 announced actions as follows. First, the impact of closing Summerville, primarily EBIT accretion derived to reduce headcount and lower depreciation and other face cost associated with operating assets. Second, we'll also have lower depreciation due to the impairment of the US$29 million of non-core assets impaired in the North American segment. Third, there will be labor cost savings associated with the resource we announced on May 05. In Asia-Pacific, we'll derive EBIT accretion associated with the May 05 announced actions as follows. First, impact of closing of our Penrose facility, primarily EBIT accretion derived to reduce headcount, lower these costs and other fixed cost associated with operating a site. Second, the impact of shifting to an import model for our New Zealand market, we model that the gross margin and EBIT margin accretive to our New Zealand business. Of course these specific benefits will not arrive until we've fully shifted to an import model later in the fiscal year. Third, the impact of closing our James Hardie systems business; this business operated at EBIT loss totaling approximately US$5.5 million across the last three fiscal years. And fourth, there will be labor cost savings in Asia PAC associated with resource realignment. And finally in Europe, we'll drive EBIT accretion associated with the May 05 announced actions as follows. First, labor cost savings from the resource realignment and second, some minor savings in depreciation associated with the US$5.5 million of non-core assets that were impaired in Europe. So to summarize, we expect US$20 million to US$30 million in EBIT accretion in FY '21 associated with the actions we announced on May 05. To be clear, that is not full 12 months of EBIT accretion, as these actions were announced in May and some of the actions as an example of closing Somerville will not be fully complete until later in the fiscal year. Lastly, the US$20 million to US$30 million of EBIT accretion will not occur evenly across the four quarters of fiscal year '21. It will be increasing or accelerating each quarter throughout the year. Okay moving to slide 16 to discuss cash flows and capital expenditures. As I noted earlier, our operating cash flow increased 48% year-over-year. This was primarily driven by the strong operational performance and cash generation of our operating business units, in particular our North America and Australian businesses. Year-on-year there were significant changes in the amounts used for investing activities and the amounts used for financing activities. These changes are simply reflective of the fact of the Summerville acquisition in FY '19 and there was no such transaction in fiscal year '20. Shifting over to the right hand side of the slide, we have provided our capital expenditure profile across the last three fiscal years along with our estimate for fiscal year '21. In fiscal year '20, our capital expenditures totaled US$194 million. This included work on two significant expansion projects with slight impact on Alabama in the United States and the Brownfield expansion of the Carole Park in Queensland Australia. We plan to complete the construction of Prattville in the next few months, so we can leave the site in an optimal position for commissioning when we need the additional capacity. For now, we do not anticipate commissioning Prattville anytime sooner than fiscal year 2022. In regards to our Carole Park expansion, we completed that project in the third quarter of fiscal year '20 and we will commission that sheet machine when we determine the demand across Australia and New Zealand requires it. We currently anticipate that in fiscal year 2022, but we will continue to monitor the impact of COVID19 on the demand in New Zealand and Australia to determine the appropriate commissioning date. That sheet machine is fully constructed and is ready to commission when we need the additional capacity. Lastly, as we noted in our May 05 announcement, we've adjusted our planned capital expenditures for fiscal year 2021 to be in the range of US$80 million to US$95 million, our capital expenditures in FY'21 will be focused on safety, maintenance and innovation. Moving on to slide 17, which shows our debt structure and liquidity as of March 31, 2020. There is no change for our debt structure. We continue to have three sets of senior unsecured notes and the US$500 million revolving credit facility. As we had noted in the past, the revolving credit facility does have an accordion feature, which allows for the potential to access an additional US$250 million of credit. At the time, we have no plans to access the accordion feature. We're comfortable with our debt structure and our liquidity position. Specific to our liquidity at March 31, 2020, we had US$365 million available to be drawn on the US$500 million revolving credit facility. In addition to the funds available to be drawn from the RCF, we have US$144 million of cash at March 31. To between the funds available under the RCF and our cash on hand, we had a total of US$510 million in liquidity at March 31, 2020 and as I mentioned earlier, we improved that liquidity position to US$579 million at the end of April. We expect to continue to improve our position as set out in our guidance. Regarding leverage, we improved our leverage ratio to 1.9 as of March 31, 2020. As you are aware, our RCF has a covenant, which required us to remain under a leverage ratio of 3.0. With our leverage ratio currently at 1.9 and the cash and cost actions we've taken, we've confident we will continue to maintain strong liquidity and a good leverage position. Overall we remain well positioned with strong liquidity and financial flexibility. I'll now hand the call back over to Jack to go through our current strategic priorities, provide a quarter to date trading update and Q1 fiscal year '21 guidance.

Thank you, Jason. Now let's now over to page 19 for an update on our fiscal year '21 swift strategy and starting with a summary of our current strategic priorities. As I stated earlier in this call, what was truly in the midst of a global crisis, I'm pleased to note that our teams still around the world are highly engaged and continue to build an improve on our commercial and lean transformation success. To that end, our current strategic priorities reflect not only on our core values, but also on our commitment to maintaining business continuity. These priorities include one, to manage a safe and sustainable work environment via our culture focus on zero hard. It is critical to our business continuity to continuing to produce and serve our customers. Two, to maintain strong liquidity and financial flexibility through specific working capital assets that Jason highlighted, along with continued to drive our engagement in our customers and be able to serve our customer to our production. Three, to continue to gain market share via our focus on push-pull, we'll stay close to our customers and service them seamlessly or continue to work with our viewers and contractors and increase demand from broad portfolio of products. Now more than ever in a down market, we are very focused on driving market share gain and via providing the best value to our customers and we'll continue to build on our disciplined approach to lean manufacturing initiatives to deliver on continuous improvement and servicing our customers and generating lean savings each and every day in our network of plans. And lastly but certainly not least, continue to develop high impact innovations that our customers expect from our company. Turning now to page 20, what I'd like to share with you an example of how James Hardie offer full experienced solution that's consistent on our strategy that we embarked on over a year ago and this is how we are going to markets that will drive more growth and provide more solutions to our customers and our end users. Now I'd like to highlight here that James Hardie is more than just a blank company. We offer viewers and contractors solutions that are both functional, with unique properties of low maintenance and durability and aesthetic with endless possibility of designs for almost all of their exterior needs. You can see that these include our ColorPlus technology to mix-and-match different color palettes. Now HardieShingles to provide access that meet viewers and customer preferences be it in Northeast of the US or in the Pacific Northwest. A true portfolio of exterior options to meet multiple architectural and design needs such as HardiePlank, [indiscernible] HardiePanels, vertical sliding and HardieTrim [indiscernible], in complement to these exciting products including HardieTrim boards and Hardie socket panels. Now shifting to page 21, this is an example of how we use the number of James Hardie broad portfolio of exterior products and our board portfolio of brands that address anything from starter homes to luxury custom-built homes and this is the example of what we've got to market in Atlanta Georgia. So you can see from a stand board brand that is used for starter homes to the first mover and into our core James Hardie exterior solutions for second mover homes and semi custom homes and now aspire collection for the luxury custom-built homes that truly is a James Hardie exterior solution for every home at any price that means and resonates with the homeowners and those different price points and different locations anywhere around the United States and Canada. As an example, this portfolio of James Hardie exterior solution allows homebuilders to build differentiated homes at price points from the starter all the way to the luxury and for our customers to serve homebuilders for more products and solutions from James Hardie as a one stop shop. Now moving on to page 22, I'd like to highlight specifics related to our quarter to date results and our Q1 fiscal year '21 guidance. Now as you know the COVID19 crisis is driven first by health issues and economic issues. It is therefore very difficult to predict how the housing market will perform this year given the highly volatile nature of the crisis. Nevertheless, we focus on what we can control and that is to continue to accelerate our market share gain while delivering strong returns based on our leading transformation. Now I would like to share our actual volume results of the 1 April 20, of this year through the 15 May of this year, which reflected the continual execution of our commercial transformation in light of the ongoing COVID19 crisis. In North America, our exterior volume is down about 3%. In Australia, the volume is flat and in Europe, the volume is down about 16%. This is primarily driven by the fact that both the UK and France, two of our top markets in Europe was almost locked down completely during this time period. Now based on our continued focus and discipline on executing our global strategy, we're providing the following guidance for quarter one of fiscal year '21. Our North American adjusted EBIT margin will be in the range of 22% to 27% in quarter one. Our liquidity will be greater than $600 million at the end of the first quarter but we'll maintain a numbers ratio of less than 2X at the end of the first quarter.. Now as we enter fiscal year '21, I'd like to reiterate that we continue the path of driving the fundamental transformation in our company while managing through this global crisis. As a company, we believe that the actions that we have outlined today, will not only enable us to manage and thrive throughout this class, but is will also strengthen our company coming out of it. This journey of transforming our company from being a big small company into being a small big company we're creating and become a customer-centric company that strives to become that trusted and valued partner from customers globally. We continue to build capabilities and processes that connect our core strengths to generate scale to deliver on profitable growth consistently. While we're on the right track, our fundamental transformation is far from complete, but we still have significant work to do across our key focus areas and as I mentioned in the last quarter's earnings call, we will continue to connect our businesses together and focus on critical few opportunities that will create value and earn our customer business every day via increased demand for our product and solution through the viewers and IRR contractors. We're having a more efficient supply chain that will serve our customers better that connect the demand through our customer back into our manufacturing plants, our network of highly efficient plants to serve our customers better. To view more enabling tool that make it easy for our customers to sell our products and even high impact in innovation to expand market opportunities for our customers. While our aim is to deliver consistently on all these objectives, we will truly be a global company that can deliver sustainable and profitable growth. We look forward to build on this momentum that was generated in fiscal year '20 and navigate effectively through the current crisis with a keen eye to coming out of the crisis as an even stronger James Hardie. I would like to thank all of James Hardie team members around the world for an outstanding year of financial performance and an unwavering commitment to zero-harm. I'm excited for what the future holds. Thank you and let's now move to Q&A.

[Operator instructions] The first question comes from Lee Power with CLSA. Please go ahead.

Jack, can you just talk to the biggest factor that draws the bottom to the top end of that 22% to 27% North American margin range not only for the year but also the quarter given that you're half way through the quarter.

We're at the top end of that driven by how efficient and how we continue to drive continuous improvement in our network of plants and then as we're now at about four quarters into the transformation, it is important for us to continue to drive that improvements and then the bottom end of that really depends on what kind of volume that will come our way that is quite highly volatile.

Okay. Sure and then if we just look at the first quarter to date, have you got any -- I know you don't like talking PDG on a quarterly basis, do you have any idea what the market deed was you're PDG contribution engine just as you're answering that, you mentioned to accelerate PDG. Do you mean the right of PDG could be above the 7% that you achieved or are you talk about holding that number?

I think it is the current combination of what the market growth is going to be and it's really more important than how that we gain market share and we can't control on what the market growth but we do control on how well we drive our market share gain and what we know is that during the past few weeks that our business have improved quite a bit compared to the given of the quarter that is a combination of us continuing to accelerate our market share gain as well as we also notice that as some of these space begin to ease up on the shelter in place and more of the construction work going on at the various the growth in the market.

Okay. So do you think you would've have been about 7% PDG for the period April through the May 15.

It is hard to really know that within the quarter what is the PDG but certainly what we know is that we have been growing a lot faster than what we see in the market but really didn’t understand what the actual PDG that's something that we have to look at over a longer period of time.

Okay. Thanks and just one final one on Europe, you obviously built out the headcount there, is that done and then where did most of these roles actually end up going to?

We're in the process of executing that. Of course in corset million euro is a process to go through to get that completed and more so the roles that really in the Western European countries certainly in Germany is certainly one of the places that those actually came from.

Thank you. The next question comes from Peter Steyn with Macquarie. Please go ahead.

Good evening Jack and Jason. Thanks for your time. Just I suppose following up from what you're seeing in the market it would be interesting to just get your scenes of the scenarios that you're planning to across the three regions Jack. At this stage, how do you guys are broadly delineating the planning process and the decisions that you've made?

Well let me first walk through the region. So in North America now our strength in the market that we have really good market position that being in the Pacific North, North West in the South east and the East Coast down the mid-Atlantic and the Carolinas, so in that area, it's really about for us to continuing to execute our game plan leveraging that we've color to new products and the first and second thing is that we're now beginning to reaccelerate really our leverage on our exterior solution that I just shared with you in the presentation is that we have a full line of products at different price point that would allow us to be able to penetrate those market that really resonate with the viewers and the homeowners at different price points. And then of course wraparound that is really the continuing focus on our push forward strategy to accelerate the demand creation while continuing to work closely with our customers to create that value with our customers. So that is in the North America and now moving on to Europe and it's really the key opportunity we have in Europe is that we the flowing of products is really a key growth area for our company and in Europe for the base of fiber cement and it's a unique and differentiated products and it is right now when the markets is quite -- the comp is quite tough and now become a really good opportunity for us and that's an area that would focus lot more and also with the fiber cement it is still the continued approach of leveraging on the channel access and market access that we have with fiber gypsum in Europe to continuing to gain placement promotions and then share which we have demonstrated that we're able to do effectively and again with the full control of our European team that's really been moving from the whole company to come really push-for and then the team is really during the past six to nine months they had really grab on to the strategy and really been gaining a lot more momentum in that area. And then moving on to the Australia side, it is really, this is where we just continue to build on the momentum that we have had during the past two, three years of being closer to our customers and gaining a lot more trust and credibility with our customers that would allow us to be able to sell more broad portfolio of our products why don’t we continue to do -- we'll put our viewers to really expecting a lot of our solutions to help them build homes that really allow us to build more of the lightweight homes that would we'll be able to take share away from bricks home and particularly now within the health economy and it tend to be in our favor that the market is shifting to more of a lightweight construction in Australia. So really the bottom push-pull approach around the world and really take advantage of the broad portfolio of products that we have but we really put it in the solution type as opposed to selling just products.

Thanks Jack that a lot of useful color. Also I am probably curious whether you're thinking V-shape or U-shape recovery from here and your actions which will suggest that you're a little bit more cautious?

Yeah I think we'll be more or less I think like a swish -- I think when we sit back and look at this, initially this is a help induced crisis and so before COVID was declared a pandemic the housing market in the North America was growing, our housing start in January and February was in a 20% plus but until with the lockdown and shelter in place and then health induced, so that demand was kind of being damping a little bit there, but then as time went on and you probably seen the same number I am seeing is that we now particularly in the US of 36 million folks are out of work. That means that there will be less of folks that can buy homes in the short term. So now that becomes little bit of the economic crisis that we have to deal with. And so but those two factors are beyond our control and what we can control is really about making sure that serve our customers a lot better than anyone else continue to create value in one marketplace and then grow our share.

And then just quick one at Jason. Jason could you give us the same what your exit run rate is on the $20 million to $30 million with the EBIT optimization benefits would be given that it runs ramps up the quarter here a bit, that you'll be realizing $20 million to $30 million, what are you thinking about run rates at the end the period?

We're not going to -- I'll provide some pretty specific guidance around that, certainly at the Q1 result in August, we'll give specifics on what was achieved in Q1 and give more details of around the quarter. Those are certainly early days with a lot of -- a few of the actions we're taking, primarily when you start talking about shutting down plants and those cost associated with that. So let's go to through to August and we'll give you more clarity on the exact run rate.

No worries. Thanks. I'll leave it there for others.

Thank you. Your next question comes from Keith Chau with MST Marquee. Please go ahead.

Good evening. Thanks for taking my questions. The first one Jack, I just want to go back to one of your comments earlier when you're saying the business has improved quite a bit through the quarter. So I know it's hard at the these times to talk about general claims on a month-on-month basis given orders, but you may be able to provide us with a bit of qualitative commentary on how those orders, sorry those sales have progressed through the first six weeks, if it was down 3% for those six weeks. Is it possible that May volumes were actually up relative to last year or am I reading too much into that?

What we've provided you there is six weeks into the that how shipment to our customers. So it's really our actual sales, so what we really saw was that really during the last three, four weeks is that our orders have been getting stronger and stronger each week and during the few key things that we saw is that from the new home constructions and particularly in the south and southeast and that in the Carolinas quite a really good trust. And then moving on the R&R side, because it's health induced crises, what we see here is that a lot of folks the contractors usually do a lot of big remodeling job are not really for the first many weeks they're not allowed to -- most homeowner would not really have a lot of job for those contractors but what we saw that the idea of why versus do it yourself since there is a lot of shelter in home, shelter in place there is a lot of growth that actually come from that do it yourself channel. So that's of kind of pretty much the dynamics that we've been seeing

So Jack in May were your sales used versus last year?

We'll keep, that's quite confident for right now Keith.

Appreciate that. The other thing is to what extent do you think this or potentially could be a bit of demand catch up from the start of the period and if you try and distinguish between want is catch-up and what is underlying demand? Do you think underlying demand is still running negative or is it still too early to tell?

I think it's really too early to tell Keith. I think the key areas that we're watch is really about how fast do people go back to work and we should have roughly 36 million Americans are out of a job and I think the keys are how of course that there is a lot of similar that the government have put into the country, but the keys are how fast to people go back to work and that is really the key driver that we're looking for. But certainly we know that go and go into the - in March periods, the - how market in the U.S. has been on the hot tab.

Okay.

So the demand was very strong before the COVID that were declared pandemic.

Okay. And with respect to your primary demand growth that was achieved in the period reasonably a very strong result. Are you able to give us a bit of a sense of which segments that's been derived from, whether it's been new build R&I and potentially which products you're taking share from?

We do take a lot of our share from the exterior side and product scape.

And is that principally a new build R&I? Are you taking it from…

For the whole market case.

Okay, thank you. And they on the lean targets, you know, another $20 million to $30 million of benefits from the reconfiguration business that was announced this morning. Is that on top of the lean savings or the lean targets that were previously disclosed?

That's correct.

Okay. So we look at the lean savings that were generated this year of $29 million of vinyl. well ahead of the initial $15 million to $20 million that was targeted this year. So perhaps if we just focused on the North America business, I think the target was a $100 million previously. Are you able to give us a sense of what the shape of lean delivery looks like in FY ‘21 and FY ‘22 to get to that a $100 million?

Yes. Keep the curve. The shape of that curve we gave you previously several times remains the same. So the second year target is getting up to $45 million to $60 million. So there was a range within that. Certainly, we've positioned ourselves well to get higher in that range, but the shape of that range has been it already, and that remains unchanged. So keep it the way to think about that. I said, we go into fiscal year ‘21. We need to make sure that minimum that we continue to keep the safe savings of $29 million this year, and then improve on that I think to get to that $40 million or $45 million that Jason mentioned as a total, right? So that's - there's really that continuous improvement approach that lean initiative will really deliver savings for us.

Okay. Okay. I'll leave it at that for now. Thanks.

Thanks, Keith.

Thank you. Your next question comes from Peter Wilson with Credit Suisse. Please go ahead.

Like a said on North America margins for ’20. So very strong full-year results you said you'd deliver, but if you just look at the quarterly trend, I mean, Q2 was 27, Q3 was 26. Q4 was 25. Even though I guess lean savings would have been increasing through then raw material input costs were improving. So can you just give us some explanation for that deteriorating quarter by quarter trend throughout the year?

Yes, Peter, I think the primary thing which we had flagged throughout the year was we were going to invest in top line growth. You certainly would have seen that in the fourth quarter with SG&A being up 110 basis points versus as a percentage of sales versus the prior fourth quarter. So as we continue to invest in SG&A, as well as innovation, which we started flagging, I believe first quarter of last year some of those costs started to increase throughout the year. That's why we had signaled the 25% to 27% range. I think the first time was at the end of the second quarter, we've delivered right within that range.

But I think Peter was asking about Q1?

I think he was asking why Q4…

Yes, my next question was are going to get to the lean savings this year, the comments previously have saying that you intend to reinvest that, is that still the case, and that's should we expect to observe an increase in SG&A for FY ‘21?

I think the totality of FY ‘21 Peter is we're not providing guidance on currently, certainly at some of the actions we announced would be reductions in SG&A. I think how do we get to the 22% to 27% range?

I'm really looking, I guess the data ends full-year, I guess, should we expect an increase in growth investment if you want to call it that, that will offset some of the lean savings that you would expect?

Well, Peter I think that you asked me about the whole year guidance and right now we're not giving the whole year guidance. And then what will be announced to you is the way the guidance within the quarter.

Okay. Q1 then - can you give us some idea of whether there were any kind of short-term spike in costs related to COVID inefficiencies or anything of that nature into Q1?

It is certainly - we're entering or we are in a volatile in certain market. There are impacts of COVID that we are experiencing, but not so significant that we don't believe we'll be able to deliver a 22% to 27% EBIT margin, but that range is first grounded in the lean program we implemented, and the savings we're driving from that. We delivered 25.9% last year, and that's kind of the basis as we entered this year with certainly the volatility of the housing market leaving us with a broad range as we enter the back half from there.

Okay. That's what, I'll leave it there. Thank you.

Thank you. Your next question comes from Simon Thackray with Jefferies. Please go ahead.

I have myself on mute. Good morning, or good afternoon, Jack and Jason, I just want to follow up on Keith's question just to understand a little better that the lean benefits $29 million this year, the target is still in place for next year, which is fabulous. And you make the point, Jack, you've got to keep the 29 to make the target. Is there any element of lean which will be volume dependent in that target?

As assignment the more about volume that we can flow through our plants, then of course the savings is coming off of how efficient that we produce the products and that's where the lean savings come from and then a real dollars.

Yes, that's what I thought Jack. I'm just wondering why you'd be so firm on the target, if you don't know where the volume is going to be in FY ’21?

Well, that's why we have the target range of between 22% and 27%.

But you've got the lean benefit range aligned with that margin outcome. So there must be a volume assumption?

Absolutely.

Okay.

And then we mentioned in the call is that it's quite highly volatile. So we did - we may send an assumption of what volume would be the range. So that's why the 22% to 27% come from.

Okay, All right. Well your insight into RNI, which I thought was really interesting versus DIY. That customer would be I am interested in your insights into how customers or segments have reacted in different countries given the approach to COVID has been in different countries. Are you able to provide some insight into the third differentiated reaction or of customers in each country? Because I think that's interesting.

Well, I think the - I mean, I would say the first few weeks when the COVID was declared as pandemic, everything was kind of shut down. If people didn't know a lot of times, a lot of folks would not be paying in terms of how to deal with - this is now a highly infectious disease, but then as time went on and that's how teams around the world start to really engage with our customers and how we then share our best practices together. And then that's what our customer depends on the new constructions or in multifamily or in the RNR. They have different approach in terms of trying to get back to work. But certainly from the new construction side, there is a lot more proactiveness to do that rather than on the RNR side that a lot of the home owners were not in having people inside the home to do remodeling.

And that would didn’t sort of presuppose that the 60/40 rule of RNR, this is new construction that that's obviously where a lot of uncertainty comes from in the RNR channel, I presume and therefore on the margin and the volume outlook, but you made a comment about the DIY channel. And I know from your 20 years from your concentration rates customer A has had a fabulous year. It's growing sales 7.5% after growing 5.5% the year before. I presume that's the [indiscernible]. Can you talk to customer A, or talk to the channel and DIY and whether there was a fair amount of DIY what we'll call pantry stocking going on in the March quarter? Is there a surge in that DIY into the channel?

It's not so much on the surgeon, as much as in terms of our team remember time, you probably remember the last four or five quarters in the interior business for us is that particularly through the two DIY channel. Is that we made the big change from being a outcome company, whoever they would rather than call on the stores. Now we reallocate our resources call on to the headquarters of these two customers. And by doing that, our team became a lot more engaged and be more proactively in managing the promotions and having our products at the right locations and merchandise correctly. So that's why I look at the progress of our interior business has been improving every quarter since. All about creating the demand and have our products, most merchandised correctly.

And that's reflected in that sales growth that I'm looking at him customer A presumably, which is what we presume in North America.

We don't disclose, who the customer is.

No, I don't -- I know, I thought should ask that. I should try. And then just finally Jason, on Prattville just a bit of housekeeping, no commissioning till FY ‘22, but extensively done. Just in terms of any holding costs I presume there is no depreciation until it's commissioned. I just want to be clear on that the impact of no opening till ‘22.

That's correct. In depreciation does not commence until use, but start a lineup.

Yep. And so are there any holding costs or other things that we'd have to be aware of or will be taken above or below the line on?

We might keep - we would keep some people out there making sure we have the facility ready to go when we want to bring it up fine, but very diminimous so thinking about.

Cool. Cool. All right, thanks so much Jack for taking my question.

Thank you. Simon

Thank you. Your next question comes from Brook Campbell-Crawford with JP Morgan. Please go ahead.

Yes, good afternoon. Thanks for taking my question, Jack and Jason. Just on a - interesting to understand PDG in the current weaker environment in North America, if you feel you need to tweak or adjust at all, any of your programs in order to capture, share in the current volatile weak environment, or is it a case of just continuing what you've done over the last 12 months?

Yes, it's just a case of where teams continue to gain a lot more momentum, the know how to execute a push poll strategy a lot better every day. And that's just the effective continuous improvement. And it's really during this crisis having become a lot closer to our customer is really to help us not navigate through this crisis a lot better and that's what you see. And why are we continuing to put a lot more focus too on creating demand with the builders and contractors without a more broad suite of solutions products.

Okay. Got it. Thanks for that. And just the minus 3% sales growth in the quarter to date. And just wondering if you feel that represent market demand. So is there any sort of destocking in the channel in front understand that your shipments into the channel of monastery closely represent sales out of the channel to install it?

Yes. I think yes - the way they look at this as a member, we are a push pull company traditionally. It's really for us is about creating the demand. And what you see - there is not a destocking or stocking, it's just a way for us to create demand and then work with our plants running efficiently and then we're able to supply to the drive that demand.

Okay. Now that's clear for me. On last one for me. Just on the medium term PDG targets and that you've set out over the last year. So it'd be 6% plus in the medium term and just whether or not you still feel that I'm a realistic target in the current environment?

Well, I'll go is - it's always going to be that we deliver that six plus percent PDG was strongly returns and I'm going go before the crisis. I'm doing a crisis that still I'll go.

Excellent. Thanks a lot.

Thank you. Your next question comes from Craig Woolford from Citi. Please go ahead.

Jack and Jason, just a question on the North American segment. As you pointed out to an earlier question SG&A rose, I think in the fourth quarter, it looks like it was up about $10 million due to higher marketing was deliberate investment. Can you just clarify, do you expect that incremental $10 million in marketing [indiscernible] to carry through into 2021 or is that part of the additional cost savings that you've pulled out?

Yes. So just to address the fourth quarter, so way before the pandemic crisis started, part of our plan was lean savings was to invest some of those back into our business, be it through demand creation to make sure that we'll have products to well communicated and then packaged correctly for our customers to take to market and sell better. That's why threw through innovation. So a lot of those that you saw in Q4 the increase in SG&A, those decisions already made a few months before the quarter. So we didn't pull back, but now going through the first quarter, it is - just like Jason has highlighted in his section, is that a part of our crisis management plan is that we actually reduced the amount of marketing expense, and also in our head count to make sure that we resource appropriately and incorrectly.

Okay. So it is separate to the initiatives that were outlined in the slides on the $20 million to $30 million? Well this way you talk about the equation in FY ‘21 of $20 million to $30 million.

Yes Craig, for the resource realignment, but certainly be included that in that number, which would impact SG&A. And then some of the items I talked about in the cash and liquidity section, the more tactical items about reducing discretionary spend, travel, freeze, et cetera, or some of the things Jack was discussing that would also impact at SG&A. So yes, separate, but those latter items would be separate from that number.

Okay. Thank you. And then the volumes are down 3% in year-to-date for the first quarter. What has happened on pricing in the North American market? Is there been any movement in pricing in recent times?

Our pricing that we had a price increase effective April 01 and then the price still holds.

And last one was just is there any change that the company is looking to make any concerns you would have around I would say renewable balance given the climate just in terms of bad debts?

Certainly it's something we're looking at closely as part of our cash initiatives and keeping a close eye on receivables globally. We obviously had experience going through the GSA as they're always either accrued for a bad debt reserve, we would have increase that appropriately considering the market we're entering but there is not specific customers we're concerned it. It's just prudent decision leveraging our experiences from the GSA.

Thank you. Your next question comes from Paul Quinn from RBC. Please go ahead.

Just one question really it's all of the North American exterior volume guidance -- or not guidance but what you said was just down 3% for the first six weeks in the quarter. Just trying to figure out for the quarter does that look like that's going to accelerate through the quarter i.e. increase from negative three or is that coming down?

Paul, as I mentioned it is, we're in a height of all volatile markets. So it's tough to predict what's going to happen in the future, but certainly what we saw and experienced is that as the quarter went on, our business getting stronger.

So business getting stronger to exactly getting better going forward. Okay. That's all I had. Thanks very much.

Thank you. Your next question comes from Sophie Spartellus with Bank of America. Please go ahead.

Just three quick questions from me, just in regards to your order book visibility, have you seen any deterioration, any signs of deterioration in that order book visibility over the last few weeks. So if you can also just talk about how or do inventory level or hard the inventory level are sitting across the supply chain and makes it a trait jurisdiction rate?

It's so short term, but I think given that the crisis that the market is on so we'll make a comment certainly our order book has really gone -- have really shirked in the last past few weeks and has really been increasing and then even more encouraging is that the inventory, our product in the channels is also lower.

And then just in terms of price, can you talk to volume a lot but can you just talk through your expectations on price and maybe for the next three to six months, do you think you'll be able to hold practice volume to deteriorate significantly, your plan there?

Yes, we're holding our price, yes.

Okay. I think just a quick question for you just in terms of given the changes in the plants are you willing to provide any FY'21 depreciation guidance numbers?

Sophie we'll give that in an update in August. So certainly we'll give you depreciation in the appendix every quarter in the slide where we discussed the accretion actions we took on May 05, I kind of outlined there will be depreciation savings in North America as well as in primarily in North America. I think you noticed our plants some of those not one of our larger plants. I'll leave it at that for now and certainly you'll start to see the impact in Q1.

Thank you. We've come to the end of our question-and-answer session. I'll now hand back to Jack for closing remarks.

So thank you all then much for calling in. I know it's certainly we're in a very uncertain time in a really volatile market environment but it's very reassuring for all but for James Hardie is that we now have a hearty management system now that will allow us to really understand in real time what's happening in the marketplace at different levels that within a company that allow our team to be able to make the right decisions and then we slow up the most important items that allow us as a leadership team level to also make the right decision from the company level. So then that means that it is important for us to really build on our strength and our strength here is it to continue to be closer to our customers and continuing to create demand in a marketplace to even during the crisis right now to ensure that we reveal on the momentum that we had to deliver this past year and then to continue to execute our lean manufacturing system so that we can generate a lot of volume that deliver on the profit returns so that we can continue to invest and continue to have the right cash flow and continue to improve the liquidity of the company as we navigate through the crisis and be able to survive and thrive however long this crises will last and so that's really what our company and for our teams around the world are focused on. Thank you all very much for joining the call and have a good day and good afternoon.