James Hardie Industries PLC

ASX:JHX

Earnings Call Transcript 2019-Q3

[Jack G. Truong, CEO & Director]

Let me first begin by saying that I'm honored to serve as the CEO of James Hardie and to lead its more than 5,000 employees worldwide into the future. I want to thank the board for their trust in me to lead this incredible company. I would also like to take the opportunity to thank Louis Gries for his vision and leadership during the past 14 years as James Hardie CEO. I'm grateful for the very strong foundation that he had built. This is a company with global presence, with great products and great people, and a company that had consistently delivered strong operational and financial results over the long period of time. However, more recently, Louis had been very clear with you that he felt our North American business have not been performing to its expectation and to its potential. I agree with Louis 100% on this point. But just to be clear, though, and to level set the baseline, during the past 2 years, our North American business has been growing and delivering just about at the market rate, in the EBIT range of 23% to 24%, despite the significant headwinds in input costs and freight in more than a decade. However, this performance on the surface may look good, but we, at James Hardie, are not satisfied with these results, and we know that our North American business can do better to a high-performance level, and this is to deliver consistently a PDG of 6% growth in the range of -- in the higher end range of 20% to 25% EBIT. The good news here is that most of the issues that prevented us from delivering those results are internal. So today, before we jump to the Q3 earnings call, I want to spend some time outlining for you our strategic plan on how we're going to change that, and I will share with you on how we're going to transform the way we operate so that we can and will meet our expectations and our potential and to deliver on the next phase of James Hardie growth, and not just only in North America but also in Asia Pacific and also in Europe. Specifically, I will spend some time this morning to go through our global strategy, the long-term goals for each of our business units and specific about strategy and the priorities for the next 3 years.Now this is still a Q3 results call so, unfortunately, I would not be able to go through a lot of details in depth about each strategic priorities as I would like, but I intend to provide you enough details and specific that you have clarity on where we're going. And at a high level, you should walk away with at least 3 things: one, our long-term goals and targets are unchanged; two, we have significant growth potential in all 3 of our businesses; and three, we have a clear strategy in place to drive those particular profitable growth.Now Slide 2 to Slide 6 are really the cautionary notes on forward looking, but now let's go into the agenda. So for the next 25 minutes, I will share with you our strategy and then in about 10 minutes, review the group operating results in Q3. And Matt will go through the financial review, and then we'll take Q&A at the end.Now on to the global strategy. So this is our strategy in one page. At the very top is pretty much our North Star for our business, and that is we're committed to be an organic growth company that will deliver growth above markets everywhere that we operate in. And in North America, it's about 6% PDG growth for the long term. And in Asia Pacific, it's really about the 5% PDG growth for the long term. And in Europe, it's about deliver on the EUR 1 billion business in 10 years. And we will be #1 -- we operate in every markets around the world where we are #1. And so we are currently #1 in North America, in Australia, in New Zealand, in the Philippines, and in Europe with the acquisition of Fermacell. We're also #1 in fiber gypsum. That will provide a platform for us to grow into a leading position in Europe. So that is our guiding principle for our company's growth for the long term. And the 4 pillars that would help us get there, which is the priority for the company, would be that we will focus on being the full line supplier for Hardie exteriors. And we will make the interior as a growth business and reestablish as a growth business in North America and also in Asia Pacific and Europe. Innovation will be 1 of the 4 key pillars that will support our growth in the long term, and this is an area that you will see a lot more focus within the company. And so you'll hear a lot more going forward. Lean transformation. Lean manufacturing will be one of the key focus in our company to really take advantage of the fact that we are now the world leader in fiber cement and implement in lean manufacturing that would take us to the next level of transformation to deliver better cost savings, improve the predictability of our manufacturing outputs as well as reducing the variability. And through that, we have more cost savings within our manufacturing system that will help fund a lot of the growth initiatives we have as well as to help with our financial. And how we're going to achieve that is really about shifting of the culture within the company, and this is really the key part of how we're going to be able to deliver our result for the long term. And if you look at the first part, it's really about the shift in our culture from being top down to more empowerment and accountability. This is really about having the structure in place and the capability within the organization that -- where we would push the decision within the company down, within the organization to really create the force multiplier effect within the great people that we have within our company. And another example here would be cross -- from being a silo approach to a more cross-functional. This is about how we can take advantage of the different functions within the company to approach a business opportunity and be able to deliver on the results faster and more effectively. And shifting our culture from being regional business to more global. And this is really about taking advantage of the know-how, the best practices that we have around the world, and replicate in different parts of the world to allow us to get the performance at a higher level faster. And at the center is what we call the continuous improvement mindset, the PDCA mindset, and that is "Plan, Do, Check, Adjust." And it is a culture within our company now that, as we have a plan and as the organization come together to execute, then we would have regular meetings across the whole company and up and down the organization to review, check where we are relative to our plan and then make the right adjustment in time so that we can deliver on the results that we expect based on the strategy that we have developed. And Zero Harm will continue to be the foundation, the DNA, of who we are as a company. And so in a nutshell, this is where the strategy for our company going forward that would help us take our company from being where we are now to be a great company that all of us expect we will be performing.So let's reiterate. For long-term value creation of our business, we're reaffirming for North America 35/90 with strong return is really the key North Star in North America. In Europe, it's about creating a EUR 1 billion business in 10 years at the Hardie-like margin. In APAC, deliver growth of our markets with strong returns in the 20% to 25% EBIT margin. In North America. And the next few slides is really about what are the key strategies that we're executing. One is to accelerate exterior growth and value creation here. For fiscal year '20, we're looking at a PDG target of 3% to 5% and to return to 6% PDG after that. And we're going to drive lean transformation to really take advantage of the critical mass for us being the world leading fiber cement manufacturer that will make us even better and more effectively. And our EBIT margin will be in the top half of the range. And to reestablish the interiors as a growth driver in our company. And with the lean cost-out program that we have in place, we look to have a $100 million cost out in savings cumulatively in the next 3 years. So those are clear targets that we have within our company that everyone will be executing toward to get us back on that growth track.Now let's talk about the -- how we will accelerate the exterior growth. So really 4 things. First and foremost, about really about the new approach to execution. And I just want to draw your eyes to the left side of the chart. We're now -- the Fiber Cement now has roughly a 20% market share in the exterior, and we have about 90% category share. And as we now get to that critical mass, that base business becoming a bigger part of our business -- but traditionally, within James Hardie, what made us successful up to this point has really been focusing in getting new business and new customers, which is really on the fourth column here. And a lot of the focus that we have had is really about going out to create new customers, new businesses. But what we have is really what we call the base business, which represents a significant amount of our daily business. We have not had the right focus on how to take advantage of the business and the customer that we already have to gain more share and to grow. And so the transformation for commercial is about -- moving to the right-hand side, is that we restructured our sales organization where we have a strong focus on account management. It's really about managing our base business, essentially the very large business that we currently have with a very large group of customers that we already have. And through the new skill set, new focus on a lot more analytics and make better decisions into how we create more value with the customer we currently have so that we can continue to gain more share with those customers rather having some potential erosion with those customers. So the key focus for us is about driving the account management with our base business today so that we can continue to grow that base business, gain more share with the existing customers while we continue to invest in a separate organization, the very targeted at growing, and more account within the vinyl against the engineered wood, against wood. So we have separate teams with different skill sets that are now targeted at how we're going to continue to convert the vinyl home to fiber cement with Win With Color program and how do we convert more businesses from the engineered wood with Win With Color program, with our Full Hardie Wrap program and how do you convert more businesses from wood into fiber cement with the Aspyre program. So that's the key transformation from a commercial side of how we're going to make it different to allow us to drive to the expected PDG growth for the long term.And if you look on the upper end, that is the volume of engineered wood, vinyl and wood over time that we should be converting to gain. So initially during the first few years, it's important for us to continue to gain more share from engineered wood and convert more wood while invest in more market development for vinyls so that we can gain more of those businesses 2 to 3 years from now. And that is the path for us to drive to more PDG growth sustainably for the long term.And for lean transformation. So we are the world leader in fiber cement production, and this is about first -- now to shift in -- to take advantage of the fact that we have the scale and allow us to manufacture fiber cement in a way that's become more consistent, reduce the variability and improve the predictability. And that is -- that will create significant long-term value creation by improving our efficiency and cost. Now you turn your view to this wheel here. This is -- in a nutshell, that's what lean is. Lean is all about having the manufacturing operating system that connects the work done at the operator and supervisor level to engineer and maintenance and to plant management and reengage the operators and the supervisor on a daily basis to run the machine to the standards. And so if there is some variability within that shift, the operators and the supervisor are empowered to make the decision to adjust back to the centerline. If something go above the limits, those would be bubbled up to the meetings at the level of engineering and maintenance so that those can be resolved in a timely manner. And if those issues are not resolved at that level, it would be floated up to the management level to be resolved. So really, that whole system allow us to run a factory to the right standards and consistently over time.Now this is a manufacturing system that we will replicate from Asia Pacific where we have started to implement a few years ago, and during the past 18 months, we have seen very, very good results that allow us to see that replication in North America will be a good success. And we are building out an organization in North America to accomplish this. And we just hired a vice president of lean manufacturing to build out an organization to execute along with the fact that we just moved our lean manufacturing manager, who runs our program in Asia Pacific, to North America.The next step for us is really about -- to have the trainings of our team in North America in Asia Pacific and then bring them back to North America to drive the lean manufacturing program in North America. We expect to have $100 million savings coming from the lean program in our factories.Next is I want to talk to you about the interior growth. This is a business that we see as a growth opportunity for our company. And our approach to this is really about how we go to market in North America as well as about innovation to the market. So when you look at -- when you talk about new execution in the marketplace. Traditionally, we have put a lot of our sales team -- half of our sales team in the interior have been calling on the stores, the many thousands of stores of our retailers in North America. The business now shifting more to -- we need to call in more at the headquarters where we can drive more value through having our products being prominently displayed and promoted at the headquarter level and across the country. And so we're shifting that sales force in interior that call on the stores to the exterior and to build more capability at the headquarter level. And second is that we are coming out with this great innovation in the marketplace. And just this past month, we just launched the industry's first and only waterproof backer board. And with this product, it would allow the markets to reduce the one -- one step of -- reduce the coating of the waterproof material and allow us to provide that value to the contractor and installers. So this is the new innovation that would allow us to grow within the interior business.Now let's shift into Europe. Our strategic priority still is that we have to grow our fiber gypsum business. And this is a consistently good business that we have bought and we continue to invest to grow for the long term. We expect that core fiber gypsum business to continue to grow around 5% to 7% a year. And on top of that, we are leveraging on the new products coming from our Asia Pacific business, as well as the U.S., to launch into Europe in Fiber Cement. And this area of our business is really going well and we expect this business to continue to gain a lot of momentum. Revenue CAGR for the next 3 years, we expect that to be between 8% and 12% CAGR. And EBIT margin will be accretive and will be roughly about 14% at the exit of fiscal year 2022.Our Asia Pacific business is -- will continue to perform well. During the past 2 years, we have built more organizational capability in this business. And we expect the growth above market in APAC to continue, and we continue to drive more lean transformation in Asia Pacific, and that journey will continue. And we expect our EBIT margin continue to be in the top half of the range. So in closing, this is our 3-year plan. We are committed to deliver on our North American objective to get back to PDG of 6% through transformation to commercial and transformation in our manufacturing operations. We're committed to deliver to -- in our European business, EUR 1 billion in the long term, in 10 years, with Hardie-like returns, and in Asia Pacific, growth of our markets at strong returns. And how we can get there is through people and culture evolution as well as focusing on the 4 pillars of our business, being a full exterior business, reestablish our interior business as a growth business, drive lean transformation and drive more innovation to the marketplace.Now switching gear a little bit and talk to you about Q3 results.Globally, in Q3, our volume increased 18% and our EBIT is down by 10%. Now our North American business delivered improved PDG for the 12-month basis, but below our expectations. Australia and the Philippines continued to deliver strong results. European business continued to deliver good results. And our input costs remain high. And so we're focused on improving plant performance. And operating cash flow improved by 11%.North American business. Volume grew 1%, revenue is up 2%. Our EBIT is down by 15% with an EBIT margin of 22.3%. And housing market demand was soft in the quarter. Continuous improvement in our exterior business, but still below our expectation in PDG. We're in the middle of the range of EBIT. And ColorPlus product will be launched in the first quarter of fiscal year '20.Our APAC business is -- they delivered very strong results. Volume increased 11%, driven by top line growth -- volume growth from New Zealand and the Philippines in double digits and Australia in high single digits. Revenue increased 12% and EBIT is up 1%. And this is driven primarily by a -- tough headwinds in input costs. Our European business have good top line growth. It's 5% in U.S. dollars, so 8% in local currency. Our EBIT in Europe improved 95% pro forma. And this is on -- for the 9-month period, they have improved 25% in EBIT in U.S. dollars. And EBIT margin for the quarter, at 9.2%; for the 9 months, about 10.2%, within our expectation.And with that, just want to hand over to Matt to go over the financial review. And I will come back up for the Q&A.

[Matthew Marsh, Executive VP]

All right, good morning, everybody, and thanks, Jack. I'm going to take everyone through the financials, which will be a combination of slides for those of you that have been following us for a bit that I would normally have done as well as taking some of the financial slides that Louis would have had in his section and kind of combined them into a financial section. So you'll see those. I think Jason sent a note around to some of the analysts today, just helping to map the presentation that we used to do to the new format so that you can see we didn't delete anything. We just kind of moved stuff around as we were accommodating some of the changes as we go through transition here.Okay. So for the quarter, we had net sales of 3 -- of $586 million. They were up 18%, primarily because of Fermacell. Fermacell added almost USD 79 million in the quarter. Excluding kind of on a pro forma basis, we had sales up 3%. Sales up in both North America and price up in North America as well. We had higher volumes, as Jack noted, in Asia Pacific, in all 3 countries. Gross profits of $192.2 million, up 5%. Gross margin rate was down. I'll talk about that more as we get into the segments. It's a continuation of what we've been talking about throughout the year, largely an input cost feature and higher freight cost. Adjusted net operating profit of $67.9 million, down -- sorry, $65.9 million, down 10%, largely driven by the underlying businesses. Margin rate has been down, that I'll go through as we get into the segments. For the 9 months, net sales increased 23% or approximately $353 million to $1,881,000,000. Obviously, those are largely driven by the Fermacell business. Similar story in North America and Asia Pacific, kind of a moderate growth in North America, just slightly above the market index, below our expectations. Very good volume growth in Asia Pacific, in all 3 countries; and Europe performing at our expectation. Adjusted net operating profit at $226.7 million, up 8%. We had North America Fiber Cement EBIT, excluding the product line discontinuation, up 5%, and you'll see that more as we get into the financial presentation. North America. As we noted in the release this morning, we thought the housing market demand was soft in the third quarter. We're cautiously kind of optimistic. We'll talk about that when we get to guidance that what we saw in the third quarter was just a temporary pause in the market and that the market is going to return back in the fourth quarter in fiscal '20, back to kind of a moderate single-digit growth rate. But nonetheless, the market is one of the things that caused sales volumes, up 1%, for North America. You can see net sales up 2%. Price was down -- was up 1%, which is off where we were at the half. We still like price for the year right in that 3% range. So we're not concerned at the 1%. We think that's just a little bit of seasonality, a little bit of mix through the quarter, but we like where both strategic pricing is and we're happy with what we're doing on tactical pricing as we drive towards volume growth. So no concerns on price. EBIT down 15%. It's primarily an input cost story. You'll see that when we get to the input cost later. Pulp remains elevated for the year. I think it's up year-on-year, almost -- still in the firm double digits. It has started to plateau, which we're thankful for, in the quarter. And so input cost is certainly one feature of the decreasing EBIT. The second is, obviously, plant variation in the quarter end performance, which is one reason that we're optimistic that the focus on lean manufacturing strategy will help reduce variation and drive waste down, which will have a cost benefit. Obviously, those 2 adverse features are offset by price for the quarter. For the 9 months, we had EBIT excluding of $292.8 million, up 5%. It's a combination of volume and price are up. Input costs and higher freight are headwinds to that.Our North America Fiber Cement EBIT margins, the chart we've shown for a long time, 22.3% in the quarter, 23.3% year-to-date. You can see, we're comping from a year ago, off of a 26.9%. You might remember a year ago, we were coming out of a capacity constraint. The plants were also performing kind of at the higher end of their band at the time. Those, combined with volume and price, kind of pushed up to the 26.9%. We're -- the 22.3% is right in line with the expectation that we had. It wasn't -- it's very much in line with kind of what we were expecting. Here you can see input costs. I mean, all the key input costs still remain elevated on a year-to-date basis. Pulp is still up 15%-plus on a market rate basis year-on-year. So pulp continuing with the trend of trading close to $1,400 a ton, which is creating quite a bit of margin pressure for us. That, as I indicated, has started to at least -- it would have seems like to -- it's plateau. It's not coming back down yet but, at least, it stopped going up, which is slightly positive. For the year, input costs will be a significant headwind not just in the North America business, but also in our Asia Pacific business. You can see electricity is up, freight is up, cement is all up. We're buying better than what we're showing here. So pulp is up 17%. Our electricity is up 6%. We're not up as high as the market rates are up. But nonetheless when the market rates are up that much, there's only so much our procurement strategy can do, and that's, in part -- that's having an adverse effect on our margin rates for the year.A real strong quarter again for the Asia Pacific business, for the 9 months. We had volumes up 10% in Australia, 10% in New Zealand, almost 17% in the Philippines. Very strong quarter across all 3 countries as well. And Australia and New Zealand, in particular, we think we're gaining both market and category share. So we're very happy with how the 3 businesses in our Asia Pacific segment are performing. Foreign exchange is having an adverse effect on the segment. You'll see in the Appendix the normal foreign exchange slide that we show and kind of the effects that it has. On an EBIT basis, you can see in local currency, AUD 32.7 million for the quarter, up 1%, up about 1% for the 9 months as well, but you can see, when you report that in U.S. dollars, kind of what the impact is. Again, for the Asia Pacific business, most of the margin compression is the result of input costs. They buy pulp in U.S. dollars, which only adds to kind of the margin pressure. The underlying businesses are performing well, though. We like where we are with price in the Asia Pacific business, and overall, the manufacturing performance is very good.A quick look by country. As I said, Australian market penetration and growth is right on track. EBIT for the quarter was down but for the 9 months is up, with the combination of higher sales, compressed by -- margin rates, compressed by input costs. We like where we are in New Zealand. Very good volumes in that business. I've mentioned in the last call, the plant isn't performing to our expectation. That sort of continued, although I'd say most recently, we're starting to see that start to turn around as well. And we're happy with where we're at in the Philippines. Volume up for both the quarter and the 9 months. The -- if you were to exclude the impact of pulp, that business is performing well as well. So you can really see in the core businesses for Fiber Cement, volumes and price were up. North America volume kind of underperforming where we want it to, and margin rates compressed almost across the board by input costs and higher freight for the year.For Europe, we had $86.8 million of sales on a U.S. dollar basis in the quarter; $269.6 million. Both of those are up on a reported basis, obviously because of the Fermacell transaction occurring April of this year. So on a reported basis, not in the comparable year. We had a good core volume growth, as Jack showed, on a pro forma basis and revenue growth in the Fermacell business. EBITs are reported at $4.1 million for the quarter and $2.9 million for the 9 months. Just reminding everyone that, that's got transaction and integration costs in it. We've noted those in both the MD&A as well as a footnote on the page. When you exclude those for the purpose of looking at the business on a recurring and ongoing basis, we had margin rates of about 9.2% for the quarter and 10.3% for the 9 months, and almost $8 million of -- on a U.S. dollar basis in the quarter of EBIT, excluding those onetime costs and $27.9 million. We like where we are with integration so far. It continues to go really well both commercial and manufacturing culturally and standing at the back office. We've got a little bit more of integration activity to go here in the fourth quarter and in the first part of fiscal '20. But so far, so good with Europe. It's performing as we had expected it to. The other business segment you know is the Windows business. In November, we had announced our decision to exit Windows. We've executed that in 2 steps. Windows is a combination of 2 businesses. There's a fiberglass window assembly business and a fiberglass pultrusion business. It's a supplier of parts to the market and to the assembly business. Both of those, we are -- we had explored options for sale. The Windows assembly business, we concluded that process in the quarter and announced the closure of that business. Took remaining asset write-offs associated with the assembly business in the quarter, which I'll show you on a schedule here in a minute. We're still looking at strategic alternatives for the fiberglass pultrusion business, and we have set a target of wrapping that up during this fiscal year, so during the fourth quarter of fiscal '19. We'll either conclude that there's an interested party or we'll also shut that business down. So for the year, we've had product line discontinuation expenses of about $4.8 million in the third quarter. That was additional expenses associated with shutting down the assembly business. For the year, about $20.6 million all-in for accounting adjustments and expenses related to exiting the segment. Here's that schedule that I mentioned. It shows for both the North America Fiber Cement segment and the other business segment, the product line discontinuation charges that we've taken within the year and notes what those are for. Most of them we took in the second quarter. You can see Windows drives $20.6 million of the $26 million for the year of charges that we've taken associated with the closure of the Windows business, the discontinuation of MCT and exiting certain aspects of the ColorPlus product portfolio as we rationalize that as part of our Win With Color strategy.R&D, I'd say nothing really to note. $21.9 million of expenses for the 9 months, very much in line with both our expectations and our historical rates. And general corporate costs, those, on a quarterly basis, decreased as a result of lower stock comp. That's partially offset by a charge we took for a specific claim on New Zealand weathertightness. For the 9 months, they're up slightly about $2.5 million. There's really 3 major things that are going on for the 9 months. One, the underlying general corporate costs were up about $2 million, $2.5 million, so as we just invested in the business. And then you had, in the prior year, obviously the gain on sale from Fontana. This year, we've got some New Zealand weathertightness and stock compensation for the year is down about $5 million. So those 3 items create a little bit of noise in general corporate costs. But the underlying cost structure that's going on the general corporate costs for the 9 months, up about $2.5 million.Income tax. Our estimate for the adjusted effective tax rate is 14.9%. So an adjustment down slightly from the 15.5% when we talked in November. We're continuing to implement based on the regulations that continued to come out on U.S. tax reform that was passed last December. As we do that -- as we continue to implement that and the segment earnings become more clear for the year. The geographic mix of those. Obviously, those are the 2 main things that are affecting effective tax rate. So about a 60 basis point drop, but still in the range of what we talked about in November. So 14.9% for the year.On the cash flows. We had cash flows from operation of 18%, almost $282.1 million for the 9 months ending. The net income adjusted for noncash items is largely the driver. We had some favorable movements in working capital, largely as a result of inventory a year ago that we are building up as we are coming out of our capacity constraint. That wasn't -- that didn't repeat, obviously, this year, so that was a benefit to cash. Higher investing activities for the year. You can see property, plant and equipment is up as a result of capacity CapEx up to $228.4 million. So up about 50% for the 9 months compared to last year as well as obviously the 500 -- almost $59 million we spent on the acquisition of Fermacell.So year-to-date, our CapEx is continuing to pace right in line with our expectation for the year. We've got 3 projects that are ongoing in North America: we've got the continued start-up of the Tacoma greenfield project that we started up in the first quarter of this fiscal year. That's been going as we've planned it to go; the continuation in construction of our Prattville, Alabama facility that we anticipate opening in the second half of fiscal year '20; and the continued expansion of our ColorPlus product line. Last quarter, we announced that we've purchased some land in the Northeast, and we'll continue to invest in ColorPlus manufacturing equipment in our existing network during fiscal year '20. In Asia Pacific, we've got 2 projects. We almost completed the Philippine start-up. We expected that we'll finish its ramp-up during this fiscal year. And then the Carole Park brownfield expansion is being constructed as we speak and is set to start up in the first quarter of fiscal '21.Okay, on to the balance sheet. No real change on the financial management framework for the company. So number one, our ratings with the 3 agencies remain as they've been, no change on those. Two, our capital allocation priorities also remain unchanged. So we're going to continue to invest in organic growth. That's going to come in the form of R&D and manufacturing capacity and organization costs are aligned with the strategic priorities that Jack set out at the beginning of the hour. Following that, our #2 priority continues to be the ordinary dividend and then managing the balance sheet so that we've got good flexibility as well as that we can weather any variations in the external market. The -- I'm happy overall with kind of where the balance sheet is. We'll talk in the next slide -- on this slide just on liquidity. So we continued to be well-placed from a balance sheet standpoint and a debt structure. Obviously, we continued to be above our 1x to 2x target as we expected that we would. We've got good line of sight to getting back down back within that 1x to 2x range, so coming under that 2x target. Here, over the next 6 quarters or so, and we very much seem to be pacing right on the expectation. So I'm happy with where we are on the balance sheet. I feel like we've got good flexibility with funding our strategic priorities and being able to weather any sudden changes in the market when they occur.Guidance. So we've updated the guidance range. Obviously, we've tightened the range and raised the midpoint for the year. So we've updated the range to $295 million to $315 million from our previous discussion. Since we talked last November, the second half volumes are a little bit stronger than what we saw in -- for the second half of the year when we talked in November. That, combined with kind of moderating levels of inflation, are really the 2 reasons for us tightening the range and raising the midpoint up slightly. As I said earlier, we're kind of cautiously optimistic that the soft market that we saw in the third quarter was just a momentary pause in the market, and that we'll return back to kind of low single-digit market growth numbers in the fourth quarter and for fiscal '20. So with that, Jack and I are happy to take questions.

[Operator]

Your first question comes from Brook Campbell-Crawford with JPMorgan.

[Simon Thackray, Research Analyst]

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

[Jack G. Truong, CEO & Director]

Simon, it's a good question. When I came into the business, I look at the -- how we've been measuring relative to the market. And let's assume that there's so much variation from month-to-month and quarter-to-quarter. And so we're looking at our data now based on the rolling 12 months so that we don't look at all the variations and not knowing which one is a signal, which one is a noise. And by doing this, then we can really focus on what is our long-term strategy and how we build to execute based -- to deliver, as opposed to react to those noise along the way. And here, we could see it's not really an exact science when you look at the markets versus how we shift. And when you look at over a 3-month period, it's just too much of a variation. So that's how, for us, it's important first to look at this over a rolling 12-month versus the market and measure ourselves accordingly.

[Simon Thackray, Research Analyst]

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

[Jack G. Truong, CEO & Director]

So we -- for example, we look at, in this case, the rolling growth of our exterior business over the 9 months, the first 9 months of this fiscal year comparing to the market. And the -- our exterior business, for the first 9 month, grew a little more than 5% in volume and the market's roughly, we believe, between 3% and 5%. And so we'll -- we were not beating the market that much, but we're certainly -- comparing to the rolling 12 months a year ago, we were negative, I think negative 2. So if we look at that trend line, it's not rising as fast as we like it to be, but it certainly -- we're at that plus 1-ish PDG growth. And the more important question is we need to be at 4% and then 6%. And so that means that when you look at the 12-month rolling trend like that, we realize and know that if we continue to do the same thing we've been doing, we're not going to get to where we need to be. And therefore, as we look more into -- went through the strategic plan and we look into more data of the markets, our customers, how we go to market, we realize that we needed to transform, to change our commercial approach because what we have been doing is really not what's -- will be successful as to capture the market going forward.

[Simon Thackray, Research Analyst]

That's very helpful. So when you target now 3% to 5% PDG for FY '20, is that an exit rate? I mean, I'm just thinking to your comment, Matt, about guidance and your confidence on the fourth quarter. You did $90 million adjusted EBIT for this quarter. To get to the numbers, you got to do like $110 million EBIT for this fourth quarter. So you must be making certain assumptions about your PDG rate both in the current quarter based on the order book. And then also are we going to ramp up to 3% to 5%? Or what should be PDG expectations as we exit FY '19 and enter FY '20?

[Jack G. Truong, CEO & Director]

Well, we are aiming for the fiscal year '20 to be at around 4%-ish. So it means that...

[Simon Thackray, Research Analyst]

For the full year.

[Jack G. Truong, CEO & Director]

For the full year, yes. So we are -- Simon, we're right now in the middle of transformation in our commercial approach as we speak. And the big part of this transformation, which we're excited about, is that what we -- based on the market data and how we went to market for the past few years, we know what needed to be changed. And this is a step change on how we approach and how we deploy our resources, how we put the right skill set in driving the base business in terms of how we organize to go after the engineered wood businesses and how we go after to convert the businesses from vinyl to fiber cement and wood to fiber cement. So we have made this change in structure, the alignment to allow us to execute for that step change. And as with anything, this is the strategy, the structure. The key now is put the right people with the right skill set in place to really make this happen. So one of the key things I'd mentioned briefly in the strategy there is that a substantial amount of our daily sales, of daily business, monthly business coming from the base business, the business that we have already won, the business that we have already shipped, the business that we already have with the existing customers that we know very, very well. So the key there -- and we have not been focused on that group -- on that business because our -- the DNA of Hardie has always been let's go out and build new businesses. But we don't go to that critical mass because that base business is very big. And so they take a different skill set to manage it and technology in enabling the data to allow us to manage correctly. And one of the key opportunities there in terms of step change is that once you have our customer base and the approach is more in terms of how do we serve our markets, our customer better to create more value through these current customers and take share, more share that we have with that customer, that's where we're confident that we can deliver the growth in that short term. Why we're investing in terms of creating a lot more business that might -- taking share away from vinyl, taking share away from wood and also engineered wood, and that will bring us that continuous basket of new business for 2 to 3 years from now.

[Simon Thackray, Research Analyst]

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

[Jack G. Truong, CEO & Director]

We discussed that includes distributors, dealers, builders, the customer that we already have businesses with.

[Simon Thackray, Research Analyst]

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

[Jack G. Truong, CEO & Director]

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

[Peter Wilson, Associate]

Pete Wilson, Crédit Suisse. To go back onto that base business erosion, can you elaborate exactly what's happening there? And like who is it that's coming back and stealing the share off you? Is it engineered wood? Is it vinyl? What exactly is actually going on there with the base business erosion?

[Jack G. Truong, CEO & Director]

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

[Peter Wilson, Associate]

Okay. And when you look at it, how long has this been going on? Has this just been a drag on growth the last 12 to 24 months? Or is it something that you have recognized has been happening for a much longer period?

[Jack G. Truong, CEO & Director]

I think it's hard to say how long has it been, but certainly, through the -- some of the analysis of data that we have gone through now through the strategic planning process, certainly, we -- that's probably been happening, at least, for the last 2 years.

[Peter Wilson, Associate]

Do you get a feeling for like how many points that's been taken off your growth over that period?

[Jack G. Truong, CEO & Director]

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

[Peter Wilson, Associate]

Okay. And the cost out in the North America business is $100 million. Where would that come through? Is it going to be freight, labor, waste? And what do you intend to do with it? Because I assume it's not going to translate to a lower selling price or a step change in margin. So what do you intend to reinvest that back in?

[Jack G. Truong, CEO & Director]

Well, it's -- the lean transformation is really, really about making sure that -- let me take it one step back. We have 10 plants in North America. All plants make fiber cement. All make using the same equipment, nearly the same raw materials. Today, most of those plant, they operate very differently. There's no standardized processes that allow those plants to run through the same standard consistently day in and day out. So lean transformation is really about having the standard work that allow the operators and the supervisor on those production lines who run through these standards everyday so that we have a consistent way to manufacture across our network. And the same thing that we have leader standard work for the managers and the plant managers and the management team to manage the plant accordingly so that we have a more predictable result coming out and more -- and then reduce the variability. So that would allow us then to go after the waste reduction. And waste reduction here is the amount of boards that leave our factory. Our plants after go through all the production steps, should have a higher yield. And as you probably would know is that a high percentage of our manufacturing cost is in raw materials. So if particularly in years like we have the inflation time with raw material like this, having a reduction in waste of improving the yield coming out of each plant is quite a substantial savings. And the second part is really about being able to drive the more production output through our sheet machine, which is a high and intensive capital asset. That would allow us to produce more of boards with the existing and current cost structure. And so by doing that, it's where we will get savings. And the third part, please keep in mind, lean transformation is -- the idea behind this is continuous improvement. That is every day, every week, our operation will continue to improve. Therefore, we would lock in the gains as each day and each week and each year. So the savings is cumulative throughout the years. So that's where the $100 million savings will come from in the next 3 years in North America.

[Peter Wilson, Associate]

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

[Jack G. Truong, CEO & Director]

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

[Lee Power, Associate Analyst]

Lee Power, Deutsche Bank. So Jack, just talking about how much you're putting back into the business, how much to the bottom line of that $100 million. Is there any -- have you -- can you give me any idea of -- is it like 50% back into the business, $0.50 at the bottom line?

[Jack G. Truong, CEO & Director]

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

[Lee Power, Associate Analyst]

Okay. And maybe in terms of the $100 million over 3 years, how should we think about it? Is it, what, $30 million a year? Or is it ramping up?

[Jack G. Truong, CEO & Director]

No, because it should ramp up because it's a continuous improvement. That means the savings that we have, say, for example, we delivered savings in fiscal year '20, we should expect that savings to continue into the next 2 or 3 years. And then on top of that, we will have additional savings, so it will build as time goes on.

[Lee Power, Associate Analyst]

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

[Jack G. Truong, CEO & Director]

Yes, it's a cumulative target, but yes.

[Lee Power, Associate Analyst]

And then maybe just touching on PDG again. So do you think the lack of PDG is purely an internal thing? Is it just an execution thing? Or is there something broader going on in the market?

[Jack G. Truong, CEO & Director]

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

[Lee Power, Associate Analyst]

Okay. But you think it's internally Hardie slipping rather than LP or some other competitor having a bit of...

[Jack G. Truong, CEO & Director]

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

[Lee Power, Associate Analyst]

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

[Jack G. Truong, CEO & Director]

Absolutely because the mindset for an accountant management is really about the first question you're going to ask is that how am I as a representative, a sales representative for James Hardie can create more value, show them more value that this account B can make more money by -- really push the James Hardie product better than the close alternatives. And that is -- take a different mindset to be able to network within the customer that we currently have from the CEO, from the owners all the way through supply chain, designers and so on and so forth to make that happen, so manage we currently have. Whereas the other, where you're going to go after the vinyl. And on this side, the result can come pretty quickly, right? So whereas in the, say, the vinyl development is you take the skill set, what we call the hunter or the -- motivated by just go now and know where the likely target that will have the most chance for that -- for the salesperson to convert and then -- and really use the different skill set to be able to win that business away from vinyl. And that's the mentality that the folks that -- or used to said no and energized by the fact that they can convert big deals. So it's really 2 different mindset, 2 different type of time horizon of when they see the result. So for the hunter is that they can work for -- they can go out and try to convert for many months, but they don't see things develop until many months later. And that's a different mindset and a different way for us to compensate and motivate those type of sales professional versus someone who manage the bigger account, bigger size of sales but take a different approach to create growth. Whereas the hunter on this side, we have to motivate and reward those sales hunters in a different way because the result may not come for 6 months or 12 months. But when they come, it will come in an avalanche of businesses.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

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

[Jack G. Truong, CEO & Director]

Sophie, good question. The way -- first of all, the way that we approach our plan is really about what we can do within our control to drive business growth because our business model is about taking share away from other categories in the marketplace. So I just want to make sure that, that's what we're built to do. So the -- if the market grow or market dropped, it's just a -- it's just something that we just have to navigate through. So relative to the North American market, we are -- yes, I think right now as we look at the market as we see today, it looks somewhat choppy and a little bit scary. But looking forward to what are some of the macro, underlying macro conditions, we're cautiously optimistic about the North American market. Look, I mean, we get the -- yes, last year, the Fed raised rate 4x, but the rates after 4x that they raised it is still a lot lower than what it was right before the global financial crisis in 2008. And they -- just 2 weeks ago, they announced that they're not going to raise any rate in 2019. And then unemployment in the U.S. right now is still at an all-time low. And I think the reality of the new baseline have set in that most consumers think that the rate, yes, they raised 4x is still low compared to what it was. And we were cautiously optimistic that the market will come back for North America. On the other hand, when we move over to Australia, we do see a slowdown. And in fact, we see that in calendar year 2019 that the blended market for us is going to be down between 3% and 5%. And then also, we see in Europe the housing market is also -- roughly a year ago is about 2.5%. Today, based on the latest data that we see, they're forecasting next year is about 1.3% to 1.4%. But regardless of what the market is, what our teams and within our company is really driving for is how do we continue to grow above the market.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

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

[Jack G. Truong, CEO & Director]

The costs?

[Sophie Spartalis, Vice President and Senior Resources Analyst]

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

[Jack G. Truong, CEO & Director]

Those $100 million cost savings are net numbers.

[Andrew Martin, Portfolio Manager]

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

[Jack G. Truong, CEO & Director]

Absolutely. Can I have your name, please?

[Andrew Martin, Portfolio Manager]

Andrew Martin.

[Jack G. Truong, CEO & Director]

Andrew. Absolutely. I -- during the past 2 months, I have had the chance now to meet with a lot of R&D folks around the company not only in the U.S. but also in Australia. We have a lot of very creative R&D folks within the company. That's a lot of very good ideas, a lot of different technology that they have been working on. And so there's not a lack of new and great ideas coming from James Hardie. So what we did during the past really about 6 to 8 weeks during our strategic planning process is that we put a process in place of how do we then be able to filter through those different ideas in and distill them into the potential technology that we should focus on, the critical few that we should focus on and fast track that to the marketplace to help deliver on our 4 -- on our 2 growth pillars. And that will be the full exterior and then to make and reestablish the interior business as a growth business. So as I mentioned, the waterproof is truly the industry's first and only waterproof board. And then you should expect with the full exterior that we're going to put a lot more focus on how to deliver trim products that would work throughout the country include in the Pacific Northwest and also the Northeast. So that's an area that we can pay -- put a lot more focus, resources to fast track and to accelerate. That's a key part of our full exterior strategy. And also at the top end of our markets in terms of going after wood with our Aspyre line, we just -- we will be launching a new product, too, at the industrial -- the International Builders' Show this coming month. It's the artisan brand shingles. And it's a wood-like shingle, and that have the fiber cement properties that really help deliver the full house -- the full exterior value for the homeowners and the builders. So there -- you should expect more and more relevant customer-focused and inspire innovations coming from James Hardie.

[Peter Steyn, Analyst]

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

[Jack G. Truong, CEO & Director]

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

[Peter Steyn, Analyst]

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

[Jack G. Truong, CEO & Director]

That's an excellent question. It's a -- it is a way for us now to really -- as we continue to invest more into our marketing capability, it will allow us to understand what it takes. We really like the 4 Ps: what does it take besides products and how are we going to promote and what kind of price points and then where we should focus the effort. And so that will be a one -- one of the key areas that we'll be focusing in to drive more growth. And certainly with the cost savings, we can invest that in terms of the marketing and to create more awareness. And so certainly, we will be willing to do some tactical pricing for some strategic opportunities that would enhance and sustain our long-term growth.

[Peter Steyn, Analyst]

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

[Jack G. Truong, CEO & Director]

I'll start with that and then Matt will jump in. It's more surgical in terms of where because, really, the 4 piece is that placement where are we -- where do we want to grow more our share, to what level and what margin for the long term. And so it's very surgical. It's not broad-based.

[Matthew Marsh, Executive VP]

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

[Peter Steyn, Analyst]

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

[Matthew Marsh, Executive VP]

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

[Jack G. Truong, CEO & Director]

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

[Andrew Geoffrey Scott, Executive Director]

Andrew Scott from Morgan Stanley. Jack, just appreciate the color you gave us on the strategic slides there. I just want to understand, to what extent are these aspirational targets? You have put time frames there. Are they targets that you're happy to sort of stand up in 3 years and be judged on? Or are they aspirational targets that we should be thinking about directionally that's where we're working towards?

[Jack G. Truong, CEO & Director]

It's -- look, I mean, we're about 4 months into the beginning of the strategic plan and then we just execute on the key part of the strategic plan and then we start to put the right organization together with the right skill set and build the capability. I would -- right now what I would say is that it is something that we believe that is within the capability of James Hardie assets but in terms of when, how, how much we -- I would say that at the next annual investors meeting September that we can provide a lot more color, a lot more guidance for the 3 years that we show up here.

[Andrew Geoffrey Scott, Executive Director]

And sort of expanding on that, one of the things you mentioned was 8% to 10% -- 8% to 12% top line growth in Europe. And I think, in your comments, you mentioned fiber gypsum, you look for sort of 5% to 7%, so it's implying fiber cement itself coming through quite strongly. Can you talk about where we're at, at understanding the market, what the product is going to be there that wins and how far advanced that is?

[Jack G. Truong, CEO & Director]

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

[Matthew Marsh, Executive VP]

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

[Operator]

Question comes from Brook Campbell-Crawford with JPMorgan.

[Brook Campbell-Crawford]

[Audio Gap]if you're able to quantify the savings achieved today in APAC from these initiatives?

[Matthew Marsh, Executive VP]

Brook, I think there was a little bit of a technical issue. Would you mind repeating your question? We only caught the last 4, 5 words.

[Brook Campbell-Crawford]

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

[Jack G. Truong, CEO & Director]

Want to answer that?

[Matthew Marsh, Executive VP]

Yes. Yes, we have, and I'd say they're proportional to the size of the network in Asia Pacific compared to the North America network. And there's a phasing in aspect to the savings as well. So the lean approach in Asia Pacific was really initiated in our Rosehill manufacturing facility several years back. And those savings and that approach then translated more recently to our Carole Park facility. And we're in the middle of now rolling that out. We have rolled that out kind of to our other 2 facilities in Cabuyao and in Penrose, our Auckland facility. So the -- much like we're going to do in North America, where it was a phased-in rollout in Asia Pacific, we'll also have a phased-in rollout in North America. We'll start with some subset of the plants. We're in the process of determining the exact number. We think it'll be less than half, more than 1/3 of the plant, something like that. 3, 4 plants will go in Phase 1., and then we'll have a Phase 2 that follow. It's important that the site is ready for lean, so it requires both a leadership approach and a level of resourcing with the right types of resources on site in order to realize those benefits. And then there's obviously a pretty intensive training and reorientation for the management team on how we're asking them to run the day-to-day operation and measure the day-to-day operation differently. So that phasing approach that we took in Asia Pacific will translate into the U.S. But to answer your question, yes, we do have kind of sort of measurable savings in the Rosehill plant and Carole Park in Asia Pacific in fiscal '19 and targets for fiscal '20. I'd say they're proportional to the targets that we have set for the rollout and the implementation in the U.S.

[Brook Campbell-Crawford]

Just a question on North America. I gather there's been an adjustment to staffing levels at a plant in the U.S. Just interested to understand the decision underpinning or the driver of that decision really for the plant in the U.S.

[Jack G. Truong, CEO & Director]

Yes. So if I understood your question, you say that once we execute lean, does that mean that we can delay the launching of new plants. Is that your question?

[Brook Campbell-Crawford]

No. Sorry, Jack, I was just asking around -- in the Pulaski facility, I gather there's been changes to some of the staffing levels at that facility. Just keen to understand really the driver of that decision.

[Matthew Marsh, Executive VP]

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

[Operator]

Your next question comes from Rushil Paiva with Evans & Partners.

[Rushil Paiva, Associate analyst]

Sort of quick question regarding the forward order books. Just building on some recent commentary from U.S. homebuilders suggesting that March '19 quarter may be a little bit soft from a demand perspective. Just wondering if that's reflected in your forward order book in this stage given you've now seen the January trading data.

[Matthew Marsh, Executive VP]

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

[Rushil Paiva, Associate analyst]

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

[Matthew Marsh, Executive VP]

No.

[Rushil Paiva, Associate analyst]

Okay, perfect. And sorry, just to be explicitly clear on the question that was asked earlier, just the calculation of the market index. I mean, previously, we'd used a 3-month lag than the U.S. using U.S. housing dollar but now it appears that you're using a 9- or 12-month rolling index. Is that right?

[Jack G. Truong, CEO & Director]

That's correct.

[Operator]

We are showing no further questions on the phones.

[Matthew Marsh, Executive VP]

Right on time.

[Jack G. Truong, CEO & Director]

Well, thank you all very much.

[Matthew Marsh, Executive VP]

Thanks, everybody.

[Operator]

That does conclude our conference for today. Thank you for participating, you may now disconnect.