James Hardie Industries PLC

ASX:JHX

Earnings Call Transcript 2018-Q4

[Louis Gries, Chief Executive Officer & Executive Director]

Okay. Good morning. Thanks for joining the results. We're going to do it like we always do it, I'll cover the business overviews, and Matt will cover kind of all the financials and details beyond that. We'll start on Slide 7.Yes, the result was good right across the board. I think it's a little bumpy at the start of the year, we'll get into that, in North America. The only thing really worth calling out is understanding how we got to where we got in volume. But all our financials look pretty good, at least from our perspective.In North America, price was solid right through the year so we had that increase a year ago, April. Everything's stuck tactically, the guys in the U.S. have been doing better, so not a lot of leakage in our price. Obviously, we're in a win-back situation and some volume loss when were capacity constrained, so we handled that well without using a lot of price to get there.The EBIT got better as the year went through, and that was all driven by manufacturing, so we talked about -- then you'll see a slide in a little bit, but manufacturing traction's been good. And also on the market side, our traction's good. So how did we get 1% volume in the fourth quarter? I think when we talked earlier in the year, we acknowledged that having customers move over to other brands while we were out was a bit of a -- was creating a bit of a lag on our -- on the market side. All those customers weren't just automatically coming back once we got our capacity in place. So we were -- I think we had a below-index count for the year, okay? Now we did 2 different things: one's exteriors, one's interiors. Let me get interiors off the table so we understand that.When capacity was tight, just like any company, we looked at kind of where our profitability was with our different product lines and channels with interiors, and we did exit some -- we didn't participate as broadly as we had the year before. So that was a bit of the reduction in interior volume. So we got out of the gypsum channel, and we got out of 4-by-8 G2 backer. In addition to that, we just lost traction for a period of time with interiors and it's important that we're in the process of fixing that and I think that won't be an issue for us going forward this year. And all the products and all the segments we're servicing now we like in interiors, so there will be no more pulling back from any positions we have. So in the fourth quarter, interiors was down about 8%, so that was a lot of the lack of volume growth.Exteriors, I think we kind of -- in a previous Q&A I talked about -- we thought we'd work our way back to market index by year-end, and we'd be positive against the market index in fiscal year '19, and I think I gave the range 3 to 5. And basically both those things have played out. So in the third and fourth quarters, basically, we're at market index as far as our volume growth in exteriors. And our order file right now looks pretty good and we're pretty optimistic that we're starting the year in positive market index in a range. So that was the main story.The U.S. business run really well now. I mean, certainly, there's a lot of upside, but the issues we had, had when we ran out of -- that were caused by us running out of capacity, they've pretty much all been addressed and the organization has responded. And like I said, they're still upside but traction's there. This goes in the delivered unit cost.You would remember in the past we talked about -- we woke up one day and decided we were underspending on basic maintenance in our plants that would've been in parts of fiscal year '16 and early fiscal year '17. So that's -- you see the low bars in Q1 and Q2 '17. That, in addition to we had startups during this period that would have helped cause that spike, and then we've had material input cost increases right through those 8 quarters. So the story is we're kind of where we want to be with unit cost production and a step further delivered unit cost of production. That's not to say freight costs aren't up but our freight efficiencies are pretty good right now. There is more upside. So some of these lines have started up in the last 2 or 3 years, they'll definitely continue to become more efficient as we produce more board on them. But this is what really drove the EBIT in that last half of the year, the EBIT improvement was strictly delivered unit cost. I shouldn't say strictly, but that was a big contributor.This slide kind of just explained -- you can see we went from the top of our range and we dropped down to the bottom of the range, it's that unit cost spiked on us. And we pulled ourselves back up to the top end of the range and the top of the range is pretty comfortable for us right now in this market. Even with a lot of commodity cost increases, we still think we're going to be able to be up in the top of the range as we run our programs in the U.S.Not much of a story last year on price, meaning it was 5% and I think it was pretty steady right through the year. And it was, like I said, reflective of an increase we took, but also pretty good tactical pricing. This year, we did take an increase, April 1. We think we'll get over 2% on the increase this year and maybe even approach 3%, so it'd be somewhere in that range, not as big as the improvement last year. As far as the -- any leakage in our pricing tactically, we got most of that, so there's not much upside there. So you have your regional mix, your customer mix and your product mix, it'll determine where we end up in that 2% to 3% range.And then housing market's still pretty good. Gradually a little better every year, which we're good with. We just got in -- just got to get our market share growth above the index going and we'll be fine as far as the chart on the right.The international business had a very solid year. I'll talk about just 1 or 2 exceptions, small exceptions. But the business in Australia -- I'll flip through the countries. The business in Australia was just really strong. Very good on both the upside and the market side so, obviously, EBIT performance was also.New Zealand. New Zealand's kind of one of those exceptions. Obviously, New Zealand's a good business for us with good returns, but they stubbed their toe a couple of times last year, and you can kind of see it in the results. There's a reset going on there right now that I don't think is going to be that difficult to get them to point in the right direction again. It's not a big problem, it's just -- but it's outside the normal variance that you would see in a business, so it is something that needs to be addressed.The Philippines, kind of New Zealand's story last year. The Philippines has been reset and it performed really well this year, so that's in good shape.And then the last thing, Europe, like interiors in the U.S., was a bit of a reset. And I think we got to a point with what we were doing in Europe with Fiber Cement, it wasn't really leading us to where we want to go, and the profitability of some of the product lines again or the countries wasn't where we want to be. So we did do a reset in Europe pretty much all arrows point down, but I think we have a smaller but better foundation in Europe for existing Fiber Cement products.Again, Europe and New Zealand are small potatoes compared to the overall international business. So as a whole, international ran really well.I want to go into -- this is your first shot -- chance to get any information on Fermacell, so I want to make sure I kind of covered that off. So I'll take a little bit more time than I usually do. So we did close April 3. So the first look you're going to get at our numbers in Fermacell will be with the first quarter result. And again -- I just want to answer your question again. What do we do with Fermacell? Why did we think it important for our company? So everyone knows that our primary growth strategy over the last -- almost 15 years now, has been Fiber Cement in North America. We've also talked about the importance of kind of other paths for growth in the future. So when 35/90 is kind of close to being reached, then we've got other growth initiatives that are kicking in. And those -- we put in the 2 categories, we like to keep them simple, so non-Fiber Cement North America and non-U.S. Fiber Cement, okay? And that's the first thing you have to understand about Fermacell, it's a really good company. We're really glad with the quality of company we were able to buy. It's very much set up like Hardie, both on the market side and the upside. So the way they go to market, the way they approach their plants, the way they approach logistics, it's just really an easy business for us to get our arms around. And quite honestly, the Fermacell manager's joining us. They also have the comfort in that our business is kind of set up like theirs, so that's a good thing. The other thing is when we decided we want to get some growth initiatives going that will be important to us in the future, obviously, organizationally, we had to kind of prepare for that. So that's why we brought Jack Truong in the organization. His job is to lead international growth in Hardie. So this is his division. He's got everything outside of North America. There's a lot of guys in the North America on the senior management team that only have North America responsibility. Those would be guys like Merkley, Kilcullen, [Gad] and Nielsen, okay? So they're entirely focused on North America. So there's been some concerns about opportunity cost and, I guess, what I would say is we've got -- we anticipated that whatever we gain in Europe, we couldn't give up anything in North America to get there, so we anticipated and we structured accordingly.Okay. So like I said, Fermacell's a really good business. It doesn't make our returns, okay? I will give you a look at the returns or an indication where the returns are. But those returns can improve and they've got organic growth left. But again, the main reason we needed something in Europe because we didn't think we could get that -- we could get to where we want to go in Europe without a kick up, a significant kick up in regional capability and access to market. So we're trying to find a company we liked that also provided regional capability and access to market, and that's what we think we've done with Fermacell.Now you need to keep in mind because this is a long-term strategy, Fermacell, by itself, doesn't get us there, okay? So we've got future funding that we need to really commit to for product development, market development and manufacturing. So that would all be in a 5 to 7-year plan. Okay.Now I'll show you a few slides we have and see if I can walk you through them. Yes. The first thing is just the change in Europe for us, which is obviously very significant. You go from 7 employees to 900. We have a focus on a few geographies very much so on the U.K., France, Germany and Denmark. To a lesser degree, Fermacell is more right across Western Europe. We're basically like we are in other markets, either new construction or R&R. Fermacell has a nice position in commercial. They're more of an interior business. Now we do, do -- a good amount of our business in Europe is our backer board business, that doesn't clash with what they do. They kind of do sound, abuse and fire. We do wet area, so they fit together fine. They do have one small business. So you can see our -- yes, you can see our business so in Europe is about 10%. Our existing Fiber Cement business in Europe, about 10% of the new business, total new business. That cement bonded particle board, that's another 10%. So that's a smaller business than Fermacell had. It's okay. It makes okay returns, it's not just that big.Go to the next one, so there's 3. So all of this is done. The integration between -- with Hardie and Fermacell has really gone well. So everything's in market. Day 1 went really well. Day 31 went really well. Day 45 went really well. We had no mess ups anywhere along the way. So everything's going good. But these are the brands now that we have in Europe. And like I said, they -- the cement bonded particle board, about 10%; our current James Hardie, about 10%; and Fermacell, about 80% now.Their kind of footprint from a manufacturing standpoint, they have 1 plant in Spain, 1 in the Netherlands, 4 in Germany, 1 of them cement bonded particle board and one's a raw material plant. And the head office is in Düsseldorf.On the other side of the organization, which was very important to us, so like I said, Jack is President of International, has responsibility for Europe. Jörg Brinkmann has been with Fermacell for 7 years. He's been running the business. We're really impressed with him and his management team. So they bring what we need on that regional capability, that management team plus the rest of the organization really does deliver what we were looking for on regional capability.We did move in 2 experienced managers out of Australia, which I think are very good adds to that team. One of them is more of a product strategy guy, and the other is an organizational guy. So an HR -- Head of HR. So like I said, we end up with 900 employees there. When you combine them, about 200 of them are field sales.And again, we didn't get into -- we didn't buy Fermacell just for Fermacell returns. We bought it for what it enables us to do. You don't want to get hung up on the 1/3, 1/3, 1/3 as far as the colors. But this is commitment to a major initiative in Europe. We're aiming for the $1 billion in revenue with good Hardie-type returns.What did I do? I skipped over -- we said that EBIT margins about 10. Now that's putting them and us together. And like I said, we just reset that Fiber Cement part. So the Fiber Cement pulled them down a bit, but they don't have Hardie-type returns at this point. And the fiber gypsum part of it, I think we'll see those returns -- we hardly want to measure it in true returns or EBIT margin or EBITDA. You'll see those kind of come off over time. But again, that's not our main focus. Our main focus is organic growth. We got some room in fiber gypsum, and more importantly, we're kind of starting from scratch EUR 30 million base on Fiber Cement.Now we think -- if you did pin me on those 3 bars, first, I wouldn't have 3 bars. But if I was making a slide, I'd have 2 bars, and the Hardie bar, the Fiber Cement bar, would be the bigger part of the bar. So maybe 60%, 2/3, 55, somewhere in there. But we'll be a Fiber Cement company in Europe. It's not -- we're not going to be a fiber gypsum company, but we'll have the 2 divisions, kind of like we do in the States where it's interiors and exteriors. We'll have 2 divisions but Fiber Cement will be very important to European returns. Okay. I'll hand over to Matt.

[Matthew Marsh, CFO & Executive VP]

Good morning. Thanks, Louis. We'll go to the financial results. Just like in a typical quarter, we'll cover off on asbestos today given the annual actuarial report is out and we'll get going.So overall, the fourth quarter we thought was pretty strong. We had good operational momentum in North American in the second half of the year that made up for kind of where we were coming into last year as a result of the capacity constraint. And then the first half result wasn't where we wanted it to be, but the second half closed up pretty good in North America. And Australia had a really good year overall, very strong revenue growth, gained market share and good returns. Cash flow for the year was really strong and solid. I'll take everybody through that. Our capacity expansion plans continue to be on track as does our capital allocation strategy. So the last 1.5 years has -- had been a heavy focus in the business on getting capacity built out in North America, and we've also announced projects now in Asia Pacific.We declared a second half dividend of $0.30 per share today. And you can see the adjusted NOPAT of $291 million compared -- it was higher obviously than the guidance, but primarily driven by a tax item that at the time of the February result, I didn't have good clarity on, and so I'll take everybody through that. The underlying business also performed better as well. So we had strong results in the quarter and then we had a one-time item that you'll see isn't going to show up the same way in the financials in FY '19. And that was as a result of an internal restructuring transaction that we did, I'll take everybody through.Okay. A little bit on the reported results. You can see we had net sales in the quarter of about $525.9 million. They were up 6% for the group, largely on higher net sales price and volume in North America as well as just strong overall results in international, primarily driven by Australia and The Philippines.We had a reported EBIT loss of 95.8%, but the adjusted EBIT number of $103 million and unadjusted net operating profit of $81 million was up almost 49% in comparison to the prior year. A lot of that was a strong North America business off of an easy comp from the prior year, and just seeing manufacturing that business turn around, you saw that on the delivered unit cost slide. And then international just had a kind of a top to bottom really strong year.You can see for the full year, we reported net sales of $2,054.5 million, up 7%. A very similar theme, largely driven by price in North America with volume more or less for the year about flat. Louis gave you an good indicator earlier on the exterior, interior dynamic particularly in the second half and how that played out for the year. And similarly, the international growth story that I'd talked about on the fourth quarter discussion carried out for the whole year and then they performed well for all 4 quarters.We had a reported net operating profit of $146.1 million. Keep in mind that's got, obviously, the asbestos adjustments in it. When you adjust those out, you adjust the net operating profit of $291 million, it was primarily on the backs of adjusted EBITDA up almost $12 million and then the tax transaction that I'll take everybody through a bit that took adjusted ETR down for the year to a lower number than we had talked about in February. So I'll get into some more in a bit.You can see foreign exchange between the Australian and U.S. dollar didn't really have a material result on the financials last year. You can see over on the bottom right on a dollar and a percentage basis, fairly immaterial for the year so that the -- while it moved around a bit, it didn't really play a factor into our financials.What has played a factor into the financials is input cost. They continue to trend all in one direction and all up. So the freight market has had several quarters now in a row where we're getting both market price increases as well as the truck availability issue in the U.S. That, I think, is going to continue to be a feature of the result going into the new year as will most of the raw material themes that I'm going to talk through to in a minute. See pulp's continuing to be up, it's up 19%. Cement prices were up 3%. Electricity up 2%. Gas was down. But certainly, our major input costs are continuing to see inflationary pressure, sort of across the board. So I think the team's doing a good job of sourcing strategies and we're outperforming these market conditions but nonetheless, it's putting a bit of inflationary pressure on the cost structure in the business.I can see segment EBIT for the 4 segments is what I'll take you through next for both quarter and for the full year. So for North America, for the fourth quarter, EBIT was up 36%, for the full year it was up 11%. For the quarter, it was primarily on the backs of cost and cost management, lower production cost and manufacturing and overall manufacturing performance kind of where we thought it would be, back into kind of a normal band of operating performance. For the full year, it was a combination of price as well as -- that was partially offset for the full year by the first half performance in manufacturing as you -- you'll probably remember in the delivered unit cost slide, the first half delivered unit cost were elevated above our target range above prior year, but that came down as the year went on, but for the full year, production costs were up.Internationally for the fourth quarter, EBIT was up 10%, and for the full year, it was up 14%. Really the story in international, strong Australia, strong Philippines. In Australia, it's a growth story. They're doing a good job of getting market penetration. They've got the start-up in Carole Park performing well. As you probably remember, that was a slower start-up, and the teams have really kind of finished that real strong and that plant's performing well now. In The Philippines, the market and competitive issue that we would've talked about a year ago, the team has done a nice job of working through that in a way that it's a good solution for the market and a good solution for kind of the medium and long-term trend of the business. And so that's -- they've done a good job on that.The other business segment is our non-Fiber Cement business. You see on the comparative basis, we're continuing to put about the same amount of money into that business. We like where that business is at. We think the windows business can be a good the business for us, and you can see the operating performance for the year. Research and development, no material change. It's approximately a couple of percentage of sales. It's within a normal range of what we target. And general corporate costs, no real sort of extraordinary items in general corporate costs for the year. You can see that the change was primarily foreign exchange and stock comp. There's some underlying investment that we're continuing to do in the business, and mainly organization and that making sure we've got the right organizational infrastructure in place as we continue to grow and expand the company.Okay. A couple of slides on tax. The normal slide is adjusted ETR for the quarter is 20.6%. That's obviously lower than where we were in February, and I'll talk about that a bit in the next slide. For the full year, adjusted income tax expense decreased driven by U.S. amortization of IP assets and intangible assets as a result of an internal restructuring that we did as part of our normal corporate tax planning, that happened to get executed in -- pretty late in the fiscal year in March.Income taxes continue to be paid and are payable in Ireland, U.S., Canada, New Zealand, The Philippines. And I think as many of you know, income taxes are not paid or payable in Australia, largely due to the Asbestos Trust.So in the fourth quarter, we undertook an internal restructuring. As I mentioned earlier, we aligned some of our intangible assets with our U.S. business, that's part of a -- just normal corporate tax planning that we had done. That resulted in the U.S. amortization of those intangible assets as allowed under accounting and tax rules. So that had a favorable impact in the quarter on effective tax rate, which is really what drove the $10 million benefit.I mentioned that in the context of also starting in April of this year, so the fiscal '19 year, U.S. GAAP is changing. And as a result, the way that we report our tax items will change going into the fiscal year. And I'll certainly give you more in the August result on that. But starting in Q1 of this fiscal year, we'll end up recognizing a deferred tax asset arising from all previous intragroup transactions. I think the main thing I want you to hear is that from an economic standpoint, so from a cash standpoint, I think overall the impact on tax, I think, will remain either constant or improved from kind of current state and the prior year. And we'll give everyone good visibility as we get to the August result on how kind of the new adjusted ETR, while it may be more volatile given the U.S. GAAP reporting requirements from an economic standpoint and from an underlying enterprise value standpoint, we don't think that that's going to have an adverse effect on the company.Okay. So from a cash flow, we reported $295 million of cash flow from operations, more or less flat from the prior year. Net income, if you adjust it for the noncash items, it's about flat. We built inventory levels back up last year after depleting them in the prior year as a result of running tight on capacity. We increased year-on-year the payment. You can see about 10%, 12% to the Asbestos Fund. And then we had a favorable change in net operating activities. I'd say that's just from the normal course of business. I won't read much into that. It's not like working capital moved in any particular way. So I think that, that could come back and it's just normal variation. We had a higher level of investing activities in the company. We spent about $209 million on property, plant, equipment largely through the capacity expansion. I'll have more detail on that in a minute. And you see the results from the financing activity.If we go to CapEx for the full year. Like I said, we spent about $204 million on CapEx, up from about $102 million from the prior year. We had 4 major projects going on in the U.S. last year -- or wait, 5 projects going on at 4 of our sites last year. So we had 2 sheet machines that we brought online at our Plant City plant. Those are more or less completely through their start-up phases now. We commissioned our Summerville facility, that continues to start up as planned. It's been operating now for about a year, and we're pretty happy with how that start-up's gone overall. We were just out at the Tacoma site a couple of weeks ago, and they're right in the middle of starting to commission that plant and that site now, so that greenfield construction project is almost complete and will start producing at the site during the summer.And then today, we also announced that we have a $240 million expansion of our plant network in Prattville, Alabama. That will be a greenfield site. It'll end up being a 2 sheet machine site that has the ability to be expanded to more than 2 sheet machines in the future. But when we open, it'll have 2 lines in it. And that site will give us a lot of opportunity to kind of optimize the network and deliver the unit cost kind of across the natural markets and the various plant locations throughout the U.S.We're continuing to expand the capacity at our Philippines facility. So you know that we did -- that we announced the capacity project there previously in phases and we're continuing to make progress on that. And then in February, we also announced that AUD 20.5 million brownfield capacity expansion project in our Carole Park facility in order to keep the Australian capacity at or ahead of the growth in demand that we're seeing in the market.No change in the capital allocation strategy or our overall financial management objectives. Our priorities continue to be the same in the way we kind of think about capital management and the balance sheet of the company continues to be pretty consistent. It starts with strong financial management, making sure cash flows are strong and margins are good. We try to govern the balance sheet and the financial policies of the company as thought we are an investment grade credit.Our priorities are in the green column in the middle. Our number one priority in the company is to fund organic growth initiatives either through R&D or CapEx to make sure that we've got capacity across the world to continue to grow. Our second area of priority is the ordinary dividend and maintaining a dividend on an annual basis and the payout ratio. And then the third priority is really keeping flexibility. We recognize that we're in a market that's cyclical, so we want to have the capacity to weather the storms and to have capacity in our balance sheet to take advantage of transactions like Fermacell that have good, long-term strategic value to the company.From a liquidity and funding standpoint, we're -- as I said before, I'm not going to change of guidance range of 1 to 2x leverage, that's still the target range that I think is right for the company. We're going to be in this period of, call it, 8 quarters where we're going to be elevated above the range as we work through the Fermacell acquisition. We've got good line of sight to seeing that come -- seeing our overall debt levels come back down within our range. And I'll take everybody through kind of liquidity in more detail.So I think financial management has been consistent. We're trying to manage the company. We very much try to manage the company as though we're an investment grade credit and then pretty happy overall with where we are on the balance sheet.You can see from a liquidity standpoint, the available facilities are outlined on the left with our outstanding debt in the second bar. We've had about $281.6 million of cash on the balance sheet at the end of the period, about $603 million of net debt and about 80% liquidity, so very strong liquidity position. We've got a 3-tiered debt structure along with the bridge financing for the Fermacell transaction, and we'll refinance that bridge financing at some point during fiscal '19. You can see those outlined on the right. And as I said, the $1.24 million net debt as of March, while accurate, obviously doesn't reflect the actual purchase of Fermacell because that occurred in April. So you'll see those in the August result and for the first quarter of fiscal '19. That's where you'll see the net leverage jump up over $2 billion, that will reflect the additional Fermacell debt.Okay. On asbestos. The actuary report gets updated every year. And consistent with that process, it was updated at 31 March balance sheet date. The undiscounted and uninflated central estimate increased to about 100 -- AUD 1.4 billion, so that's up from the AUD 1.386 billion in the prior year. The increase of about $113 million on a net present value basis was really driven by 3 factors. So one is the underlying actuarial assumptions, were up about -- let's call it $269 million. Then there is a decrease of $83 million due to the payment that we made to the fund and then another decrease of about $73 million as a result of the amendment that was made to the AFFA in December of 2017, which removed the gratuitous service cost in Victoria. So last year, we talked about those as Sullivan versus Gordon. Those costs were removed during the year.The -- I think the number, obviously, that I think will many will focus on is the actuarial assumptions increasing. The number of total mesothelioma claims over the last 5 years has been elevated. And if you remember back in 2013, the actuary determined that there be a temporary increase in the number of claims and then they'd model out kind of the normal curve beyond that. And with the elevated level of claims that we saw in fiscal '18, it was determined that there'd be a permanent shift up in the number of claims over the longer period of the actuarial study. Sort of offsetting that though is the payment dollars per claim and a lot of the other underlying drivers of the actuarial study, they're all trending in a positive direction. So while the total number of claims has gone up, you'll see when we get to the next page, I'll talk a little bit about some of the drivers of the underlying economics and cash flow that I think are positive.For the quarter and the full year, you can see the total claims received were about 10% and 2% below the actuarial estimates. And you can see that mesothelioma claims were about 5% higher than both the actuary and the prior year, so 5% higher than the actuarial estimate and 5% higher than the prior year. So while meso claims reporting was 5% unfavorable, things like average claim size is tracking better than expectations. Aging of the population of the claims is playing more favorably into the overall economics. Large claims continue to be very favorable. There was one large claim paid last year which continues a trend of -- a favorable trend. Mill settlement rates and then the cash outflow from the fund are all trending more favorably than had been previously discussed.So for fiscal '19, a few things that we're thinking about. One is we see a housing market, like Louis said, that's overall very healthy and strong in the U.S., so we expect the market growth in the U.S. in fiscal '19 to look a lot like fiscal '18. It's kind of mid-single-digit modest kind of market index. You can see that we're working off of a U.S. residential housing start forecast of between 1.2 million to 1.3 million total starts towards the higher end of that range but it's certainly within that normal range. We expect our EBIT margins to be at the top end of our guided range of 20%, 25%. There's the normal disclaimer on there that assumes that things like our plants, exchange rates and inflationary transfer input costs all continue kind of at expectation. I will say that input costs do continue to change on us from quarter-to-quarter and really month-to-month so the commodity markets are fairly dynamic at the moment, and it's an area that we're watching. Our Australian business is expected to largely grow in line with the market index for Australia where we do the majority of our business in domestic repair and remodel and single-detached housing. And then in Europe, we think the overall macroeconomic conditions for the new fiscal year will be a lot like fiscal '18. So kind a very low market index growth in that region.So in summary, overall, good operating momentum in North America. We like where that business is at now. We feel like it's really well positioned for growth in fiscal '19 and getting back to our PDG levels throughout the year. We think Australia will continue its strong performance from the year, with strong cash generation and disciplined capital allocation. In the year, we invested almost $204 million in CapEx, did about $178 million in capital returns to shareholders and closed an acquisition on Fermacell and funded that on April 3.So with that, we'll open it up to questions. Lou, did you want to...

[Louis Gries, Chief Executive Officer & Executive Director]

Yes. Before we get questions, we'll see the -- you'll see now that we're getting ready to [indiscernible] I'll be retiring sometime in the next -- oh, maybe a year, 18 months. The board and myself have succession plans in place. We're going through process. It's been tracking very well actually. So we're all encouraged that sometime later this year, we'll probably announce that I will be leaving Hardie and we'll announce my successor and I'd stay for just a short transition period, maybe 4 to 6 months, during the handoff. The reason I want to give you an update is during the 2 days I'm down talking to investors, I really don't want to take questions on that subject, so that's the update.All right. So we'll go to questions now. Same as always, in the room and on the phone. And then that if there's any media questions, we'll take them right at the end.

[Andrew Geoffrey Scott, Executive Director]

Andrew Scott, Morgan Stanley. Just a few for me. Firstly, to your credit, you haven't called out the weather but a number of your competitors and customers have. Can you talk to us about what weather impact you might have seen in the period?

[Louis Gries, Chief Executive Officer & Executive Director]

Yes. We don't factor it in. It would be in the normal variance category for us. It wasn't a terrible winter that we'd call out. It might have impacted us a little bit but we wouldn't worry about it.

[Andrew Geoffrey Scott, Executive Director]

And secondly, just on PDG, I think you spoke to -- I think you said exteriors, you're expecting 3% to 5%. Can you tell us what you expect in interiors or in aggregate?

[Louis Gries, Chief Executive Officer & Executive Director]

Yes. Interiors is -- there's a few things going on in interiors both in the industry and the company, so I'd probably be looking for flat to slightly up, say, 1 to 3 points, if we can get it.

[Andrew Geoffrey Scott, Executive Director]

And then, Matt, just 2 housekeeping ones. Prattville, you mentioned 2 sheet machines. Can you tell us the volume there?

[Matthew Marsh, CFO & Executive VP]

Yes. It'll be about 600 million in nameplate capacity.

[Andrew Geoffrey Scott, Executive Director]

Perfect. And then the European integration cost, I assume you will take those above the line?

[Matthew Marsh, CFO & Executive VP]

The integration cost? Yes, it'll be above the line.

[Peter Steyn, Analyst]

Peter Steyn from Macquarie. Matt, could you just run us through the Fermacell numbers, and particularly the 10% EBIT margin. What you've taken into consideration there in light of your answer now in the integration cost, are we to think that, that's above the line, i.e. the 10 is net of that? And then what is the current state of the European business and its contribution. And how does that influence the 10% outcome?

[Matthew Marsh, CFO & Executive VP]

Yes. So the 10% obviously is a mix of fiber gypsum and Fiber Cement. I think we've said before, the -- I'll start with Fiber Cement. So we've -- historically, we've had about a EUR 30 million business that doesn't generate any cash. And so you can conclude pretty quickly that the EBIT margins aren't very good with that. The underlying Fermacell business is obviously above the 10%, so it's a low double-digit sort of EBIT return business, still below kind of a Hardie level of return so we've got some work to do there to get the returns where we want them to be. The 10% is kind of the ongoing operations, excluding any of the integration costs. We'll invest fairly heavily in the business in the first couple of years. As I think I've mentioned on either the February, the November result, we're carving out the Fermacell business from a private equity owned. It's been private equity owned for quite some time, and a lot of the back-office was a shared service organization for quite some time. And that shared service organization's going to be transitioned to us via a transaction -- via a service agreement. But we'll have to go through a process of standing up and carving out a back-office and investing some applicable costs in it. And then we're, obviously, incurring normal integration costs sort of on top of that. So we'll give you good visibility starting in August of what the underlying business looks like, with and without those costs. So you can kind of see those and that they don't sort of distort the underlying operation and you can see kind of where we're investing money for the long term.

[Peter Steyn, Analyst]

Perfect. And then just in light of, Lou, some of your comments on plant performance and that you'll see further upside for unit costs or I suppose downside, therefore, a positive margin outlook. If you think about your expectations for FY '19 margins at the top end of that range a few moving parts there. But I think there's probably a general expectation that you hold above the 25% in the context of what you've achieved in recent periods. How would you think about that?

[Louis Gries, Chief Executive Officer & Executive Director]

Yes. I mean, it probably won't be too different than the way you described it. The key now in the U.S., we did have a bumpy road we've got to take care of, which I think we have, but we've got to build on our momentum in both the market and the plants. And then we are funding strategic initiatives for future growth. So we've actually moved forward on some pretty key initiatives that are shaping up and shaping up well. So we'll be putting some money in those this year. So top of the range is fine now. And if we end up a little bit above, it's probably because things performed a little bit better than we thought they might.

[Peter Steyn, Analyst]

Okay. And then maybe just very quickly, is there anything we need to worry about in terms of price pull forward in this last quarter that could impact the short-term performance?

[Louis Gries, Chief Executive Officer & Executive Director]

No. In fact, I kind of indicated our order file right now looks good, so we're through the price increase, all of that boards at full price and orders are pretty good right now.

[Simon Thackray, Research Analyst]

Simon Thackray, CLSA. I just want to follow up on that PDG, that usual -- Lou would calculate it one way, you calculate it another way in terms of market index. But your comment, Matt, you expect a similar level of growth in detached housing starts. R&R, it looks like it's going 6% to 7%. It's a reasonable number. You're talking 2% to 3% price. You're talking 3% to 5% PDG on top of market index. So I just want to be absolutely crystal clear, are you expecting double -- close to double-digit growth in volume in North America?

[Louis Gries, Chief Executive Officer & Executive Director]

I think if everything lined up, we could approach 10%, but we wouldn't have our market index as high as you. So you said 6% or 7% for R&R, and we've been more like 4%. And I forget who we use. We disclosed what we used, right?

[Matthew Marsh, CFO & Executive VP]

Dodge.

[Louis Gries, Chief Executive Officer & Executive Director]

Yes, Dodge. So we'd say, "Hey, if the market index was 4% or 5% and we get 4% or 5%, you're kind of closing in on 10%." But remember, interiors won't be at that level, so the headline number for the business in North America could be a bit lower. And I'm not -- we're early in the year, but the thing I'd say on the market is, obviously, we got -- we had that drag on our order file, and we've worked through that. We thought we'd get back to market index. We did. And we thought it would be positive this quarter. Our quarterly variances are tough, but -- meaning you shouldn't put too much in them. But we look good. But I think we can build momentum with the programs we have. So speaking to you guys and the organization, I'd like to see us go harder in the market. And I'm sure that's what everyone is trying to do.

[Simon Thackray, Research Analyst]

And just -- I mean, there's a lot being made, obviously, cost inflation in the U.S. I know Peter made reference to it just before across input costs, a lot of the competitors in the commodity space, not necessarily competitors in -- against you, but in building materials, just seeing this cost inflation particularly on freight and disruptions in supply chain and lumber. So the back-end inflation and price rises that the industry are talking about, obviously, are far and above the tactical pricing that Hardie refers to. I just wanted to understand whether in that final quarter, that actually dampened the pull-forward of demand given your installers and builder customers had broader inflation and we're looking elsewhere to secure volume.

[Louis Gries, Chief Executive Officer & Executive Director]

Yes. No. Before you asked a question, I never thought about it. We're pretty simple on our price increases. We allocate enough board to customers so they can cover their commitment. So as soon as they're through that allocated part, it just flips it a new price. So we wouldn't have made any big change in how we went around about the price increase. And like I said, I don't -- there's always some slop between quarters when you have a price increase, but I don't think it's material. I don't think it dramatically slowed down the fourth quarter or it's going to not -- it's not going to bump up the first quarter. It just -- it worked pretty well.

[Simon Thackray, Research Analyst]

Got it. And then finally, on the delivered unit cost, we talked about ongoing improvement as those plants continue to ramp up. Matt, you made the point, better throughput, we should be getting unit delivered cost down as well. Just -- is that enough to obviously offset the Tacoma commissioning increase as well? How should we be thinking about that with Tacoma coming online?

[Louis Gries, Chief Executive Officer & Executive Director]

Yes. I don't know if I'd get that fine with it. I think Summerville...

[Simon Thackray, Research Analyst]

[indiscernible] fine.

[Louis Gries, Chief Executive Officer & Executive Director]

I mean, lately at Hardie, it's been what you do well and what you do poorly, and we did a few startups poorly. Now that's by our standards. Maybe we were a little rough on ourselves, but we definitely felt we could have done Plant City better than we did, and we thought we could have done Fontana, which Fontana's still not at the level we want it to be at. But having said that, we did Cleburne very well, we did Summerville well. And we're coming up to Tacoma, and I think that's going to be a pretty good startup. So I think the good news out of Tacoma is we'll probably -- we should have a very good -- efficient startup. Like Matt said, we -- [ all up there ] recently, we've kind of approached it in the right way, both organizationally and how we're going to spend our money doing those first 180 days when you don't have the big denominators to offset the cost.

[Simon Thackray, Research Analyst]

Got it. And then just quickly on Fermacell. The integration cost, Matt, are they above the line, below the line just for the purposes of...

[Matthew Marsh, CFO & Executive VP]

For fiscal '18, the integration costs were taken out. They're largely transaction costs as well as some due diligence and leading up to day 1 type costs. So those are all taken out of the result on the adjusted numbers in the appendix. It's about $10 million in total that was taken out. Going forward, we'll put them above the line, and then we'll give you a good visibility going forward of what's in -- of what's ongoing versus what's onetime.

[Simon Thackray, Research Analyst]

And I know this is now beyond your tenure, Lou, but I'll ask anyway, that 2/3 Fiber Cement in Europe in a future state. Does that imply higher R&D costs as we go forward beyond that?

[Louis Gries, Chief Executive Officer & Executive Director]

Sort of I tried to cover in my -- what I tried to cover in my comments is buying Fermacell doesn't -- it enables growth. It doesn't deliver growth other than an acquisition growth. So it's product development specific for Europe, market development specifically in Europe and then manufactured in Europe. And your time frame's about right, it's 5 to 7. All that stuff will happen in the next 5 to 7 years.

[Simon Thackray, Research Analyst]

And is that R&D for the European [indiscernible]?

[Louis Gries, Chief Executive Officer & Executive Director]

Yes. I don't do platform development. I mean, it's a different market. It's masonry construction. There's some growth in frame construction, but we've got to participate in the masonry part of the market. So there will be speed of construction or ease of construction, not so much the same value proposition we deliver with frame construction.

[Simon Thackray, Research Analyst]

But at the bucket, is it caught in the corporate R&D or will it be allocated specifically to...

[Louis Gries, Chief Executive Officer & Executive Director]

You're out of my league now.

[Simon Thackray, Research Analyst]

I can deal with that. But it goes up is the answer.

[Keith Chau, Senior Research Analyst]

Keith Chau from Evans & Partners. So just a couple of questions. The first one on PDG, a positive start to the year at 3% to 5% target. You have a strong order book. But is anything you're hearing from your sales team directly so even one lap before the order book, which suggests that, that momentum can continue? Is the -- I guess, has the sentiment within the sales team and the U.S. changed over the past 12 months?

[Louis Gries, Chief Executive Officer & Executive Director]

Yes. I mean, we don't have -- they're not trying to overcome the issue of capacity shortage. That's well behind us. So I mean, our sales organization, like most sales organizations, would be very optimistic. So if anything, you got a discount what they think rather than -- but anyway, we're good. Management right across the company feels we're in a position to get back in the positive growth against the index, and that's what we're here for and that's what we'll do. That's why we're building capacity. We're not building capacity for our current market share. We're building capacity for future market share.

[Keith Chau, Senior Research Analyst]

Sure. And then just a second one on pricing. In FY '18, average realized prices benefited from a favorable shift in mix. As we look into FY '19, how does the mix balance out between geographies and markets and, obviously, a shift back towards interiors or [indiscernible] going to be continuing favorable?

[Louis Gries, Chief Executive Officer & Executive Director]

I mean, we do have a few more things running around at price. I said we have a few good initiatives going on. We'll be repositioning a few product lines, and we'll be taking increase on other product lines. So the 2 to 3 is pretty good estimate. Now the difference between 2 and 3 is probably, like you say, how much happens in the south versus the north, how much happens in back versus exterior, and that's the difference between 2 and 3. But the calculation right now is we kind of tuned up our pricing right through the businesses, and we think we're good to go. I think -- I don't know if Simon's question had behind it, "Hey, are you going to cover your cost? Will your price increase -- cost increases? Will your price increase?" I think the answer to that is probably yes, but I also think you guys know that, that's not how we price. We never cost plus. Okay. It looks like the questions in the room are finished. Are there any questions on the phone?

[Operator]

[Operator Instructions] Your first question comes from Lee Power from Deutsche Bank.

[Lee Power, Associate Analyst]

Lou, just on exterior's growing at the market index, do you think you got any benefit from the planned transport issues that a few of your competitors have had in North America? Or do you think that just comes down the wash?

[Louis Gries, Chief Executive Officer & Executive Director]

No. I think everyone's ready to supply in the U.S. I don't think there's any -- yes, there's no tailwind in growth above the market index. You've got to get customers changed from what they're doing to what we're doing, the normal process. And I don't see any of that.

[Lee Power, Associate Analyst]

Okay. And then you mentioned you were down at the Tacoma plant recently. It looks like, just from your 3Q estimates, there's some slippage just around the timing at both Tacoma and Philippines just this quarter. Is there -- I mean, can you talk to that, what drove that slippage over the last quarter?

[Louis Gries, Chief Executive Officer & Executive Director]

Matt and I are looking at each other here. We're not thinking about it as slippage. Right now, we're -- we've got the capacity we need. They're time to come online. Just a real short story on plant startups. They start up way cheaper when you don't need the board. Then they start up when you do need the board. So basically, on a situation like we have in the Philippines and now in the U.S., we cost optimize the startups. So the length that you run is basically what you're trying to learn during that run. When you get into -- if you're in a shortage and you're starting up a plant, then the length of your run stretches out because you're trying to make board for customers that need the board. So we much prefer to be in the situation we're in with these 2 startups. And that did cause some problems on our earlier startups, both Fontana and Plant City, where we started up when board was very tight. So part of the reason they cost us more is because we weren't able to cost optimize the startup. So think of them as behind. So we're very happy with both sites and both startups.

[Lee Power, Associate Analyst]

Definitely, definitely. And then just on Fermacell, have you -- I mean, is there any specific strategies or incentives you got in place around the existing Fermacell management to keep them kind of incentivized and onboard?

[Louis Gries, Chief Executive Officer & Executive Director]

We've got all the normal stuff in place. I can say -- I was with Jack last week in Europe before the board meeting, met with the managers at Fermacell and saw another one of the sites I haven't seen. And I believe the Fermacell organization is extremely pleased to having an owner like Hardie that kind of understands organic growth, understands how to add capacity, understands how to deliver financial returns. So like I said, the parallels between the business is 2 businesses are pretty amazing. So the fit right now looks really good. But we have all that normal stuff in place, and just like our Hardie employees, they'll have their incentive plan for fiscal year '19 already in place. So it's all been taken care of.

[Operator]

Your next question comes from Sophie Spartalis from Merrill Lynch.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

It's Sophie Spartalis from Merrill Lynch. Just 2 questions from me. This year, we didn't see the usual seasonality that generally goes on throughout the year. Should we expect that in the FY '19 year? And then the second question, R&D was up 10% for the fourth quarter and the full year given the spend on the other businesses and the increasing number of projects, can you just talk through some of those initiatives, please?

[Louis Gries, Chief Executive Officer & Executive Director]

I can talk through in general terms. As far as seasonality, you're right, it's easy to make money in the summer in the U.S. than it is in the winter. It did flip around on us this year, and the reason for that was the delivered unit cost issue in the summer of last year, which I talked about. Now we had 25 third quarter and fourth quarter, I think, and it's pretty hard to get at 25 third quarter, fourth quarter. But things were -- like I said, when you have positive momentum in the business a lot of times, you get to help and it falls to the bottom line and I think that's probably what happened. Yes, I would expect this year to return more to normal where you sell the better part of your volume in the first 6 months, so your financials are better and then you get into the slower months and you take more downtime in the plants. Now we didn't take any downtime in the plants. This year, we went into a new program we call distributed inventory, which I think is something that we may do again next year. It seems to have worked very well. But I still will agree with you. Normally, first half is 2, 3 points better than the second half, and I would guess that may be the case again this year. As far as -- I think you said R&D was up -- there's 2 ways we spend R&D. The biggest way is market demand. So I said we had a couple initiatives in the market that were liking and we're going to crank up some funding. Now that won't show up in R&D, that will actually show up in our SG&A. But we would have spent a lot of money on those initiatives over the last several years to kind of get them to where they are. The R&D stuff is product platform, mainly. Some of that product platform may be replacement of raw materials as raw material supply gets to be in question or too expensive. It could be new products. You guys know we [ density ] modify. We are one of the few Fiber Cement producers that knows how to deliver both density and durability. So if our R&D is up, which I would hope it would be, it's because we're funding good projects. It's not -- we don't specifically try and tie our R&D as a ratio to our revenue. We fund R&D and then expect that revenue increase in the future as projects are successful. It's kind of a long answer, but sorry.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

So should we expect the R&D expense to be at the level posted in FY '18 then?

[Louis Gries, Chief Executive Officer & Executive Director]

I think what I would do if I was following the company, I'd just have a positive trend line on R&D cost. I'm sure, over time, we'll continue to find more and more things to invest in, in R&D that'll deliver returns in the future. So like I said, we don't have really handcuffs on the organization as tying it to a ratio. So I would expect that it would be up as a rule as we move forward but not up dramatically towards where it starts impacting our financials.

[Operator]

Your next question comes from Peter Wilson from Crédit Suisse.

[Peter Wilson, Associate]

Maybe just a follow-up -- follow-on from that last question. I mean, you mentioned a couple of times these market demand initiatives and programs you've got in place. Can you maybe just give us a little bit of color on, if you can, what they are and why you might have such confidence in the success?

[Louis Gries, Chief Executive Officer & Executive Director]

I mean, we'll probably cover -- we usually cover stuff like that at our September tour. It's pretty hard on a phone or just at a short period of time to really get into what we think can drive further market share gains in the future. But I -- just a quick reminder, Fiber Cement's, whatever, about a 20% market share. We're very committed to see it get to 35%. In order for it to get to 35%, we have to open up more opportunities either through market development initiatives, product development initiatives and, in some cases, some product platforms where Fiber Cement can deliver more in certain ways than it does now. So yes, the market initiatives I referred to, which are getting in their expensive part of their cycle, are the stuff that Sean Gadd and his team probably would have covered last September. So it's not so much new. It's just that we got them to -- we have them to a point where we're pretty excited about they're ready to go and putting a little more money into it and putting more resources in the programs.

[Peter Wilson, Associate]

Okay, fair enough. And just on the Fermacell Europe kind of revenue targets and the breakdown that you've sketched out, can you just maybe -- for the growth in the existing Fiber Cement products, can you just lay out your vision a little bit? And what I mean by that is, is the growth coming from just leveraging off Fermacell's existing distribution footprint? And if so, how immediate might that growth in that segment be?

[Louis Gries, Chief Executive Officer & Executive Director]

Yes. We will get that benefit of their market access, but that's a small part of the equation. And we will get that fairly quickly, meaning the first 3 years, starting this year and then maybe picking up a little momentum second year and possibly third. But the big part of the equation is similar to what -- roll back the clock, what Australia has done down here as far as substituting for brick construction, offering architects design options that they couldn't get to with other materials. And the U.S., the same thing, we didn't -- we were growing new demand for category based on a value proposition, which was very important in the U.S. market, especially when we entered the market. And I think that it's the same challenge in Europe. It's a really good market. Population's good. Their ability to spend money, their GDP per capita is good. Everything is good there, but it's just masonry construction. So we have to do the platform development to deliver a value proposition that really starts to penetrate in the masonry construction market. So if you look at the kind of the like the stuff that's right in front of you, you have market access, we'll give this a bump in sales in our current products. And then you look at the frame construction, which is growing, frame construction normally in the couple of markets I've seen now is [ meaning ] factory-built components rather than everything site-built, like it's normal in the U.S. And we can do well with the frame construction increasing, but that's like a 30- or 40-year penetration of frame construction against masonry. It's not going to happen fast enough. But that will be easier than the masonry construction. The masonry construction, there's a lot of possibilities, and we just got to do the work to find out degree of difficulty versus size of the prize. We got to do the work to decide which way we're doing. And we got some good ideas. And like I said, one of the individuals we moved onto that team is a guy who did similar work for us in Australia. So yes, we'll get a bump on the market access. We'll benefit from growth in frame construction. But the big hit -- the hit that ends up being $1 billion is more find our position in for masonry construction.

[Operator]

[Operator Instructions] Your next question comes from George Clapham from Arnhem Investment Management.

[George Clapham, Managing Partner and Executive Chairman]

Matt, just on the CapEx, which was increased sharply this year, what's the guidance for CapEx this year given Prattville and a few other expansions?

[Matthew Marsh, CFO & Executive VP]

$750 million over a 3-year period, and I think that's still about right. I was doing -- we're now talking about an additional period. So I think for FY '19, CapEx will be in about the $350 million range. So we under-spent a bit -- a little bit in FY '18. You'll see some of that carry over with various capacity projects we've already announced. So $350 million in '19. We think that goes to $250 million in '20 and $150 million in '21. So $350 million, $250 million, $150 million.

[George Clapham, Managing Partner and Executive Chairman]

Okay. And just guidance for your net debt at the end of this period with the Fermacell acquisition, what would your net debt be?

[Matthew Marsh, CFO & Executive VP]

Yes, depending on the period that you're speaking of. I think we'll be above our 1 to 2x debt range for 6 to 8 quarters or so. So I think we're well into the backside of fiscal '20 before we're starting to come down below the 2x level. Obviously subject to business performance and market conditions. But we think we're above our range for at least fiscal '19 into fiscal '20.

[George Clapham, Managing Partner and Executive Chairman]

Okay. So just the absolute number there roughly? Net debt [indiscernible]?

[Matthew Marsh, CFO & Executive VP]

Yes. I wouldn't give you an absolute number. I'd just give you the range.

[George Clapham, Managing Partner and Executive Chairman]

Okay. And just finally, CapEx for -- does Fermacell require much in the way of CapEx?

[Matthew Marsh, CFO & Executive VP]

The guidance that I gave on $350 million, $250 million, $150 million does include some CapEx for Fermacell. So there is -- there are some things that we want to do in the business in order to be able to invest in it. We also see lots of opportunity in the business. So for now, I'd say that the $350 million for next year does have some money set aside for Fermacell as well as $250 million in the following year. And as we get to a point where we're ready to talk about kind of material capacity projects or other related investments in Fermacell, those will be in future periods but will certainly provide visibility to those, just like we do on large capacity-related projects on the Fiber Cement business today.

[George Clapham, Managing Partner and Executive Chairman]

And just a final one. What's the sort of impact of the skyrocketing lumber prices on your competition?

[Matthew Marsh, CFO & Executive VP]

Yes. I wouldn't be in a great position to talk about the raw material input cost impact on our competition. I'm -- for our business, raw materials, almost across the board, are all up double digits. In fiscal '19, we probably had, between freight and raw material input costs, somewhere in the vicinity of $25 million of fiscal '18 versus '17 type of inflationary pressure. I think that, that will -- the very different mix that was weighted towards freight last year, both the freight market was very, very competitive. And then we had a number of inefficiencies in our freight cost last year, particularly in the first half of the year as we were coming through and out of the capacity constraint. We weren't obviously taking advantage of lowest landed cost out of each of our plants, and we were having to incur some expedited cost. And then on top of that, we weren't mode-optimized like we would normally want to be. So freight last year was probably half of the input cost inflation. I think that, that $25 million number in fiscal '18 could grow to as high as $30 million to $40 million of fiscal '19 compared to fiscal '18 type of inflationary pressure. But the mix of that will be much more slanted towards raw materials. So while the freight input -- while the freight costs are definitely up, the raw material cost on cement, pulp and utilities and some of our other raw materials are up to a pretty significant degree. So for us, there's some additional cost pressure that we're going to have to make up through performing really well on -- in the manufacturing plants, and obviously, some of that will get absorbed as a result of our growth.

[Operator]

Your next question comes from Brook Campbell-Crawford from JPMorgan.

[Brook Campbell-Crawford]

There's a question on interiors in the U.S. Just picking up on your comment around volume growth to be flat to up modestly in FY '19, I think, is what you mentioned. Do you feel that the marketing product strategy you have in place is enough? Or is there more you need to do, really, to get that business to where you want it to be?

[Louis Gries, Chief Executive Officer & Executive Director]

Can you repeat the question?

[Matthew Marsh, CFO & Executive VP]

For exteriors, specifically?

[Brook Campbell-Crawford]

Sorry, this is for interiors in the U.S., just picking up on the kind of flattish outlook for volumes. Interested to know, is there much that need to be done for the market or product strategy?

[Louis Gries, Chief Executive Officer & Executive Director]

You want to take it?

[Matthew Marsh, CFO & Executive VP]

Yes. So we don't think it's a product issue on the interiors business. When we came through the capacity constraint 18 months ago, like a lot of businesses that are under capacity constraint, you kind of have to make strategic decisions about which products get prioritized, and I think that helped us or caused us to kind of look at some of the products in our portfolio that we probably should have been looking at all along. And so we decided to exit on the interior side certain products and certain segments of the business that are good for kind of long-term returns of the company or will certainly have a benefit on the long-term returns of the company. And so there's that component that's certainly weighing on the overall result when you look at interiors growth last year. So if you look at kind of active products within interiors, we like kind of our product positioning overall, and we don't think we've got kind of a product gap or our overall product positioning issue on the interiors business that is kind of being factored into the low levels of growth last year to get back to kind of a growth game on interiors in fiscal '19. Obviously not to the same extent of the exteriors business, but overall, we think we'll start to come out of this 4%, 5%, 6%, 7% negative comp on interiors and start to track back towards our normal growth rates on the interiors business.

[Brook Campbell-Crawford]

And one more if I can, and hope you can hear me, but the margins of Fermacell, I'm talking about low double digit, clearly, a lot lower than what you're used to operating at. But given the similarities in manufacturing between the 2 businesses, can you help me understand what are some of the key drivers of the margin difference? And I guess, can you help them lift margins from where they are now?

[Louis Gries, Chief Executive Officer & Executive Director]

I could take that. I guess, the first thing is Fermacell margins are good. They're just not as good as Hardie. And I think our Hardie margins are a lot driven off market position, how we go to market and how we create demand for our product. So I wouldn't put it all on manufacturing. I actually think we have some more performance to get in manufacturing. And my first look at a couple Fermacell factories, I think they have that same opportunity. But again, our kind of bar for buying a business wasn't really what the short-term EBIT margin or returns in that business would be. Obviously, we want it to be a positive for our shareholders, but we didn't -- if we set out to only buy businesses that have as good return as ours, we couldn't buy any businesses in building materials. So they got good returns. They're definitely upside on the organic growth. And normally, when you grow a new business, grow new demand for your product through market development, you do get better returns than your base business. So there's upside for their returns, but I don't want you to think that we think they should equal Fiber Cement U.S. I just -- that's the wrong way to think about it. Now what you should think about or the way we want you to think about is, will this-- is this a step in the right direction for Hardie becoming large in Western Europe with good Hardie-like returns? I think that's -- we're pretty confident we've made a good step in the right direction for trying to deliver on that objective.

[Brook Campbell-Crawford]

Just one more if I can on thinking about Fermacell's -- the comment from Matt around CapEx. Some of that is for Fermacell in the coming years. Is the idea to add some new lines into the existing Fermacell plant network? Or is it building a whole new plant for fiber gypsum?

[Louis Gries, Chief Executive Officer & Executive Director]

We haven't had the business long enough to have a capacity strategy for Fermacell. One of the things you sign up for when you set an organic growth strategy is you're going to build capacity. So -- you're going to need more capacity. As you generate demand -- more demand, you need more capacity. They don't have a lot of excess capacity. So they fall under that category. As they generate more demand, they will need more capacity. Now there's 3 ways you can get more capacity. You can get through debottlenecking existing plants, you get through brownfield investment in existing plants or you can get through greenfield investments. And normally, that's the order you want to go in. Normally, your highest return will be debottlenecking, second would be brownfield and third would be greenfield. There's some exceptions to that, I'm afraid, if you got a hole in the market freight-wise. But we just haven't had the business long enough. They have enough capacity to do what both the buyers and the seller case said we're going to do over the next couple of years. So we don't have a short-term problem with capacity in Fermacell. And I think maybe down the path later this year or this time next year, we'll probably have a capacity plan for Fermacell that we can talk about.

[Operator]

Thank you. There are no further questions from the phones at this time. I will now hand back to Mr. Gries.

[Louis Gries, Chief Executive Officer & Executive Director]

That's good. Appreciate everyone joining the call. Thank you.