James Hardie Industries PLC

ASX:JHX

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the James Hardie Q1 FY '20 Results Briefing Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Dr. Jack Truong, Chief Executive Officer of James Hardie. Thank you. Please go ahead.

[Jack G. Truong, CEO & Director]

Good morning, and good afternoon, everyone. Thank you for joining us. I will start with the 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 3-year strategic plan. Let me begin by putting our first quarter results in the context of our 3-year strategic plan. We are an organic growth company. We're built to drive growth of our markets, 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 for our end users, the builders, installers and R&R contractors, while building a more robust account management capability to serve our customers, the dealers, lumber yards and distributors much better. This is aimed at driving a sustainable growth of our market in a 6% range for the long term. We also drive lean manufacturing across all of 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 3-year period due to lean. In Asia Pacific, our goal is to make a good business better. Hence, to continue to deliver growth of our markets even in a contracting 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 3 regions that we operate in. North America had a 5% volume growth in exterior, while EBIT margin was at the top of EBIT range, 25.1%. Europe continued to deliver strong revenue growth of 7% in euros at expected EBIT margin. APAC delivered solid financial results despite weakening Australian housing market. Now let's turn to Page 8, our 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 a 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 a negative 10% in the previous quarter, is also a market improvement over the previous 4 quarters. With increased volume, better price mix and lean savings, we delivered 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 of our 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 targets. Now let's turn to Page 10 for our APAC results. Our APAC team delivered a solid quarter despite a significant softening of housing market 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 continuing 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 4 of fiscal year '19, which was 20.3%. Finally, on Page 11, following 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 million 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 -- and improvement in our network of plants in Europe. In our Asia Pacific business, the addressable housing market in Australia is contracted. And we are estimating an 8% and 10% decline for the markets 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 of 20% to 25%. Now I'd like to hand over to Matt Marsh, our CFO, to go into the quarter into more financial details.

[Matthew Marsh, Chief Financial Officer]

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 that 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 exterior's growth above the market of 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 addressable markets in Australia are definitely contracting. In Europe, as Jack mentioned, we had higher net sales, largely driven by the fiber cement business driving the 37% increase in revenue. Gross profits were up 5%, and 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 20 -- 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 for North America of USD 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've implemented our annual change in strategic pricing on April 1, 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 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 for the year is we believe we'll 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, the impact was slightly -- just slightly down 1%. Freight prices on the other hand are down fairly significantly, down 16% 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 AUD 154.4 million, 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 volumes growth in the Philippines. You'll see that on the 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 of 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 segment results 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 of times, Australia, we believe, had a good volume result given the market conditions. We think we gained market penetration despite the soft market. The EBIT decrease was primarily driven by the lower net sales. We think the team is doing a good job of navigating the mining market. In New Zealand, you can see overall higher input costs and unfavorable plant performance has -- 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 onetime transaction costs, you can see we had an EBIT margin rate of 10.7% and an EBIT of EUR 9.1 million, which was 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 will be incurred for the remaining 3 quarters. We expect total year integration costs to be in the $5 million to $6 million range. EBIT margin, excluding those onetime costs, of 10.7% very much in line with our internal targets. And we think the European business is on track. On Page 20, our other segments. So the other businesses you're familiar with, used to be our Windows segment. You can see there's a $400,000 gain in the quarter, which was $0.5 million gain on sale of fiberglass pultrusion business, which we completed early in the quarter. And prior to that, we had some legacy sales of the -- of that fiberglass pultrusion business. And there's 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 costs for the quarter were unfavorable, largely due to foreign exchange and higher stock compensation expenses. The underlying core SG&A, or general corporate costs, excluding those 2 items was up slightly, but in a very normal range. On Page 21, income tax. We are estimating an 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 to 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 having good governance and being transparent, and 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, we have our commitment to the 1 to 2x adjusted EBITDA leverage target. We're -- we continue to be temporarily above that target and have good line of sight to getting that back below the 1 to 2x range within the time frame that we talked about -- that we've been talking about, so another 4 quarters. So very much, financial management, consistent with an 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 driven by working capital and increases in income, and each of the business is adjusted for noncash items. Lower investing activities. Obviously, with the acquisition and closure of Fermacell in fiscal year '19 in the first quarter, you would expect that variance. And that was partially offset as we continue to invest in CapEx. You can see it 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 USD 421 million 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 EBITDA 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 2x leverage -- high end of that leverage range by next year at this time, so another 4 quarters. So we remain on track and remain committed to returning to our 1 to 2x leverage target range. On Page 25, 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 Color Plus product lines in 2 of our plants in North America. And we're nearing the end of construction, and we'll 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 million 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 on being at the top end of our EBIT margin range for the year. And we -- our assumption is that we will deliver 3% to 5% primary demand growth in North America. For Europe, slight housing market growth across our addressable markets. We are -- 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 continuing 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 adjusted net operating profit will be between USD 325 million and USD 365 million. So just to wrap up on Page 27. So we think good and disciplined financial performance in all 3 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 our 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 USD 124.4 million was up 16%. Our adjusted net operating profit after tax was up 13% at USD 90.2 million. And we will fund $108.9 million to AICF 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 the strategy.

[Jack G. Truong, CEO & Director]

Thanks, Matt. So 6 months ago, I shared with you the strategic plan that our global team that is executing on. And just to remind you that this global strategic plan was built with [long term] value creation in mind. So if you go to Page 29. So for -- this strategic plan is all about making sure that our North American business will deliver the growth with the 35/90 with strong returns, which is 20% to 25% EBIT margin for the long term. And for Europe, it's about creating a EUR 1 billion business with Hardie-like returns which is about 20% EBIT margin. And for Asia Pacific business, it's about delivering growth above market with strong returns, 20% to 25% EBIT range. Turning over to Page 30. And so 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 is about driving the lean transformation across all of our 10 plants. We are currently -- we are the world's best fiber cement producer. Using lean transformations, it will turn us into a world-class manufacturer 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 but also around the world. For Europe, the priorities are about gaining market traction with current fiber cement that we -- products that we've been commercializing in Europe as well as about developing new fiber cement products for the European markets. Second is about -- to continue to drive growth of fiber gypsum and gain market penetration for this product line. And third, for the European business is to continue to unlock existing manufacturing capacity in the 5 plants that we have in Europe. Asia Pacific, continue to drive growth above markets and drive lean manufacturing across all 4 of our plants. Turning over to Page 31. I would just like to give you an update on where we are with lean transformation across the 3 regions. In North America, we have implemented our Hardie Manufacturing Operating System now through 5 plants and have been progressing well. Two additional plants will be implemented by the end of second quarter of fiscal year 2020. And we are on track to deliver $100 million cost savings cumulatively in the next 3 years. So if you look across to the right-hand side of the chart, we estimate that the lean savings in the fiscal year '20 to be between $15 million and $20 million, and then that would carry over to the following year where we have the additional $30 million to $40 million of lean savings, which then carry over to the third year with an additional $40 million to $55 million savings. And that's roughly how the $100 million lean savings will play out within the next 3 years. Now this is a globe -- now becoming a global transformation for -- with lean. European business will start to adopt the Hardie Manufacturing Operating System. Our plant management team of 5 plants in Europe have visited our North American plants that have implemented lean back in July. And the key learnings they have from this visit will form the basis for the beginning of the implementation to lean across Europe. And our Asia Pacific team, this is really the spirit of continuous improvements. The lean system that we have brought and implement into North America has been improved each time that we implement it in each plant across North America. And based on those improvements, we now will then replicate some of those key improvements back into our plants in Asia Pacific. So our manufacturing and plant teams in Asia Pacific plant will be visiting our North American plants in the third quarter of fiscal year 2020 to bring back some of those key learnings and then replicate back into our Asia Pacific plant.Now moving on to Page 32. This is 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 and -- which allow us then to be able to market and sell additional fiber cement products based on the penetration that we have with fiber gypsum. And if you look on the right-hand side, this is the example where we have the residential as well as multifamily projects in the U.K. and also in Switzerland, where these housings have the James Hardie fiber gypsum products as interior liners and the James Hardie fiber cement as the side and exterior side. Opportunity in Europe, for us to continue to drive higher return, is about improving the manufacturing capability that we have in our 5 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 objective is to deliver the EBIT improvement quarter-on-quarter and year-on-year in Europe. Now moving on to 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 the contracting housing market. Here's the key trends that's happened in Australia today. There's certainly the labor shortage, less space and with smaller lot sizes, certainly within Brisbane, Melbourne and Sydney. And Lightweight construction is in favor. And with those market trends, really favor the -- 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 just different types of homes base -- made from bricks. And the right-hand side are really about the flexibility that the builders in Australia are able 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 slowdown market. Well, that concludes my strategic plan update section, and we're open for Q&A.

[Operator]

[Operator Instructions] Your first question today comes from the line of Peter Steyn from Macquarie.

[Peter Steyn, Analyst]

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 factors that influenced your outcomes in the quarter given what one's seen around the macro environment? Is it regional performance or channel penetration? What happened in interiors and early impacts on ColorPlus? Sorry, I'm giving you a few bullet points there, but just curious on those perspectives.

[Jack G. Truong, CEO & Director]

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 exterior, we -- as we discussed during the past 2 conference calls is that our -- that we are a traditionally -- and this is where -- what's Hardie 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 towards creating those demands. And while at the same time, we have put a much bigger focus in terms of managing our customers, the lumberyards and the dealers out there. And so the execution of team from demand creation, connecting with our customers, that certainly help increase our growth in the marketplace. And then we also see -- saw a lot of growth coming from our traditionally strong markets, which is the high S. And also -- we also saw growth, 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 of all the retailers to really put a 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 that we can plan out the right promotion placements. And also at the same time, we start the launch of the James Hardie HydroDefense Interior board. And that continue to gain traction, and that we are pleased with where -- with the progress of that. And then relative to our color programs, it is -- right now, it's just the beginning of that launch. And we expect the momentum will build in the beginning with this quarter, and hence that will grow from here onward.

[Peter Steyn, Analyst]

And then perhaps, just a quick one around cash flows, Matt. 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?

[Matthew Marsh, Chief Financial Officer]

Yes. Thanks, Peter. The CapEx guidance for the next 3 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 2 years. So $200 million, $150 million, $150 million 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 carry forward into the year. So we do expect some working capital improvement in the year. We don't think it will be at the rate that you saw in the first quarter result. We are expecting strong cash flows overall, though, for the year.

[Operator]

Your next question comes from the line of Brook Campbell-Crawford from JPMorgan.

[Brook Campbell-Crawford]

Just on the input costs for pulp. I guess, given the lags, and 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?

[Jack G. Truong, CEO & Director]

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

[Brook Campbell-Crawford]

Yes, 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 and margins, I guess the outlook there is pretty promising. And so are you telling us here that you're going to reinvest quite a bit in SG&A to get that top line goal?

[Jack G. Truong, CEO & Director]

Yes. So Brook, I think we have talked a lot during the past 2 conference calls that a key, first, of long-term strategy of driving that sustainable growth is really about making sure that we invest into our market, particularly in the demand creation and also investing in our customers, while reigniting innovation process within our company. And so it is the investment that we need to invest in to sustain the -- and to build and sustain our growth.

[Brook Campbell-Crawford]

Okay. And one final one, 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?

[Matthew Marsh, Chief Financial Officer]

Yes. I think it's just normal taxable pricing variation. We had guided to a 2% price increase for the year. We implemented that 2% for the year. In any given quarter, we'll have pricing -- 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 of get off to about 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 make -- we didn't overemphasize the 5% last year. We said that it was a combination of the price increase combined with mix and tactical pricing kind of going in a particular direction for that quarter. So we like where we are in pricing. We think our strategic pricing is in a good place. We think our tactical pricing is appropriate. There's nothing sort of abnormal in the quarter. You just happened to see 1 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 percent for the year.

[Operator]

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

[Keith Chau, Building Materials & Packaging Analyst]

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 6 months and whether there was a stocking benefit to those new distributors within this current result, please.

[Jack G. Truong, CEO & Director]

Keith, no, it is -- remember, we're a PDG growth company, and our growth is really the execution of the push-pull that our team have been embarking on. And we really didn't add any new distributor. This is really about us that create the demand and then connect that with our customers to really drive better sales conversion. So that's really what happened.

[Keith Chau, Building Materials & Packaging Analyst]

Okay. And then just want to touch on Europe very quickly. So volumes were 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.

[Jack G. Truong, CEO & Director]

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

[Keith Chau, Building Materials & Packaging Analyst]

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

[Jack G. Truong, CEO & Director]

We very recently kind of just opened up a new fiber gypsum plant in Germany. So it is dynamics that is happening that we are just going -- that the market is going through that new capacity.

[Operator]

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

[Andrew Geoffrey Scott, Executive Director]

Just a quick question. Thanks for the detail you provided on, I guess, the multiyear sort of timing of lean. Matt, I'm wondering if you can let us know what you delivered in this quarter and how the sort of shape of that delivery of the $15 million to $20 million this year comes through, please.

[Matthew Marsh, Chief Financial Officer]

Yes. So the way we've been describing lean over a 3-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 obviously builds then for 180-day period, a 270-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 on 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 2022 targets. So we've really got to lock in the month 1 and the quarter 1 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. In 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 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 million to $20 million. 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 we'll continue to be transparent with how we're pacing on that $15 million to $20 million at the half year results.

[Andrew Geoffrey Scott, Executive Director]

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?

[Jack G. Truong, CEO & Director]

Yes. And Andrew, the situation we have in Europe is actually quite similar to the -- to our manufacturing plants in North America a year ago. And that is we have 5 manufacturing plants, 5 gypsum and cement bonded that pretty much ran 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 to the standard operating procedure. And so that's the first step. And second is to put in the first step of our Hardie Manufacturing Operating System. So in many ways, it's very, very similar to the opportunities that we have here in North America, and we're looking now to really turn that into a value in Europe in the coming months.

[Andrew Geoffrey Scott, Executive Director]

Got it. And then Matt, finally, just last one from me. I'm sure you're aware, there was an asbestos case. Here, they've 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 actuaries are currently thinking?

[Matthew Marsh, Chief Financial Officer]

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 and they'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 assessment.

[Operator]

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

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Just a few questions from me. Just in terms of volumes, we've spoken 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 being bedded down in terms of the hunters-and-gatherers sort of strategy that you had? And then 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 U.S.? And then just in terms of the FY '20 guidance assumptions, if you could just run through what your R&R outlook is, please.

[Jack G. Truong, CEO & Director]

Sophie, as far as the sales force, our hunters are getting close to being where we want it to be. And in terms of the farmers, it is a new capability within James Hardie that we have been building. And of course, that started with -- that we have on-boarded 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, someone who has the capability as being a 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 the account management is concerned. And then, so what's your second question, Sophie?

[Sophie Spartalis, Vice President and Senior Resources Analyst]

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

[Jack G. Truong, CEO & Director]

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

[Sophie Spartalis, Vice President and Senior Resources Analyst]

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

[Jack G. Truong, CEO & Director]

For North America -- for the U.S., yes.

[Operator]

Your next question comes from the line of Peter Wilson from Crédit Suisse.

[Peter Wilson, Associate]

Another question on the North American volume results, so a very strong result. Is there anything that you'd call out that means it's not a reference point? Or any short-term factors which might have inflated sales this quarter, such as the 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?

[Matthew Marsh, Chief Financial Officer]

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 in repair and remodel. We think it 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% type 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 result for the year. And we still think we're in this 3% to 5%. That obviously implies that with the 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 that 3% to 5% is the assumption that -- is the one that we want you to hear, primary demand growth for the full year.

[Peter Wilson, Associate]

Yes, okay. Because I mean, I accept there is quarterly variation. But in prior calls, 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 today's call, you've talked about color momentum building throughout the year and also reinvesting -- 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%?

[Jack G. Truong, CEO & Director]

Look, Peter, I think it is now that we get to this critical mass or 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 can have a good first quarter and think that the rest will be like that. So it is a daily execution in our business now that -- so that we can earn that business.

[Peter Wilson, Associate]

Okay. And lastly, the -- you commented that in regards to your farmers strategy is still at the beginning of that. In the 1 quarter result, can you give us an estimate of how much base business erosion you lost during the quarter?

[Jack G. Truong, CEO & Director]

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

[Peter Wilson, Associate]

Okay. But you are still, by our estimate, losing businesses, so still a negative drag?

[Jack G. Truong, CEO & Director]

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

[Operator]

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

[Grant Slade, Analyst]

And I just had one follow-up on the PDG performance in North America, the increased sales resources and focus on your lumber yards. Do you have a sense of whether that's driving mostly fiber cement category share gains? Or are you taking greater market share?

[Jack G. Truong, CEO & Director]

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

[Grant Slade, Analyst]

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

[Jack G. Truong, CEO & Director]

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.

[Operator]

Your next question comes from the line of Daniel Kang from Citigroup.

[Daniel Kang]

Jack, I just wanted to get your thoughts on the marketplace. I guess in terms of an overall U.S. market, clearly, a tough quarter for starts. The guidance for the full year of slightly up suggests improvement through the course of the year. Are you seeing much evidence as we move into the second quarter at this point? And maybe a second question for Matt. In terms of costs, pulp prices are clearly down on a year-on-year basis, I worked out something like down 11% or something like that. Are we starting to see the benefits feeding through into the second quarter?

[Jack G. Truong, CEO & Director]

Yes, let me answer the question on the markets. Certainly, I mean, everyone saw the data. Certainly, the first 6 months of the calendar year started quite choppy. It depends on what -- where. The source of 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 still -- for the whole year, still pretty much flat for the residential starts. And then like Matt said, our R&R is roughly about 3% growth for the market.

[Matthew Marsh, Chief Financial Officer]

Yes, 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, down closer to 6 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 the China markets as different markets. So there are parts of those 4 markets that are down more than others, and in total, we think it's down about 6. You're correct that we will -- we are expecting to see, as the year goes on, the pulp headwind on a year-on-year basis to decrease. And -- but for the total year, we still have pulp and commodities. In totality, our input costs still going up slightly.

[Daniel Kang]

And just -- I know you don't like to talk about the rain affecting the market, but do you see dry conditions into the fall as a benefit for the rest of the year?

[Matthew Marsh, Chief Financial Officer]

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

[Jack G. Truong, CEO & Director]

Danny, as you know, we are -- I mean, I'd just like to reinforce that we are a PDG growth company, and our focus is 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 through the market. So that's really our key focus, and that will continue to be our focus going forward.

[Operator]

Your next question comes from the line of James Brennan-Chong from UBS.

[James Brennan-Chong]

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 against new housing or R&R? Are you winning more, say, into one category compared to the other?

[Jack G. Truong, CEO & Director]

It's really just difficult to say, James, but I think based on the geographic spread, we tend to have more of the growth through new construction, through the South -- in our Southeast and South Central, Mid-Atlantic. And we also see -- saw a lot of growth in the North East, which is primarily an R&R market for us.

[James Brennan-Chong]

Right. So no real change in the relative exposures into new housing versus R&R? You're getting consistent PDG in both segments?

[Jack G. Truong, CEO & Director]

Correct.

[Operator]

[Operator Instructions]

[Matthew Marsh, Chief Financial Officer]

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

[Operator]

There are no further questions at this time.

[Matthew Marsh, Chief Financial Officer]

Great.

[Jack G. Truong, CEO & Director]

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

[Operator]

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