James Hardie Industries PLC

ASX:JHX

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for standing by and welcome to the James Hardie Q4 FY '20 Results Briefing Conference Call. [Operator Instructions]I would now like to hand the conference over to Dr. Jack Truong, Chief Executive Officer. Please go ahead.

[Jack G. Truong, CEO & Director]

Thank you. Good morning and good afternoon, everyone. Thank you for joining us on our Q4 fiscal year 2020 earnings call. I will begin by providing our perspective on how we have been managing the ongoing COVID-19 global crisis in our company followed by a review of our Q4 and full year FY '20 operating results. Our CFO, Jason Miele, will then cover the financial details. Finally, I will end with an update on our strategic focus for fiscal year 2021 and the outlook for the current quarter.On that note, I wanted to take the opportunity to once again congratulate Jason on his recent appointment as Chief Financial Officer of James Hardie Group. His strong track record of financial and business leadership as well as his intimate knowledge of James Hardie Company will be critical as we continue to execute on our global strategic plan.Let's now turn to Page 8. While our focus of today's discussion is on Q4 and FY '20 performance, I would like to provide you with a perspective on how we have been managing the ongoing COVID-19 global crisis. Our approach on managing this crisis has always been about providing the absolute clarity of direction throughout the organization and, at the same time, being able to gain real-time feedback on key happenings from all of the markets that we participate in and from all of our frontline employees around the world. This is essential in allowing and empowering of leaders at various levels in the company to make the right decisions in real time that are fact-based rather than based on noise or assumptions.Consistent with our foundation of zero-harm culture, our primary objective is to ensure that the health and safety of our employees, customers and suppliers are taken into consideration in all business decisions we make. Toward this end, we established consistent, clear and specific pandemic protocols that were implemented across the globe to ensure we have one global James Hardie standard. These protocols include executing strict physical distancing guidelines of maintaining at least 6 feet or 2 meters of separation between employees in all of our facilities, including manufacturing locations and corporate offices. Additionally, in all facilities, we have implemented extensive disinfection and hygiene processes to eliminate the virus and to prevent the spread.Outside of our facilities, we are committed to helping our employees and their families maintain safety and well-being by providing access to personal protective equipment and hygiene kits for employees, for those who go to work every day to manufacture and to develop products as well as to service customers. The take-home kits are for personal use to ensure our employees and their families are safe. And offering additional sick leave and childcare support benefits and executing the work-from-home model where possible and applicable.While this crisis present our leadership team and our employees throughout the world with a very real challenge, I'm confident that our relentless focus on maintaining a safe and sustainable work environment will help strengthen our business continuity and to ensure that we can continue to produce products and serve our customers seamlessly.With that said, I would like to transition now to our key operational results for the fourth quarter and for the full fiscal year 2020. Let's now turn to Page 9. I'm pleased with what our global James Hardie team had accomplished in fiscal year '20. We continue to execute a global strategic plan, leading to an outstanding performance in fiscal year '20. Collectively, as a team, we have generated significant positive momentum on the transformation that we embarked on over a year ago, and we expect to continue this positive momentum into fiscal year 2021. This is now the fourth consecutive quarter that the company delivered consistently strong results.From a global perspective, our group results were highlighted by strong volume increase of 7% in the quarter, led by excellent volume growth in North America of 10%; significant growth in our adjusted EBIT of 21% in the fourth quarter, again driven by excellent EBIT growth in North America of 26% and a 4% growth in our Asia Pacific business. Our adjusted NOPAT increased 17% for the quarter and also for the full year. Our operating cash flow increased an exceptional 48%, providing improved liquidity and financial flexibility for our business. While I'm proud of the outstanding fiscal year '20 performance, I'm even more excited about our continued positive momentum into fiscal year 2021.Let's turn now to Page 10. North America continued to deliver excellent results across the board in all key financial metrics, including volume growth, EBIT growth and EBIT margin. In the exteriors business, our volume growth accelerated in the second half of the year, posting an 11% growth in Q4 and 9% growth for the full year.In the interiors business, the volume growth continued to improve each quarter during the past year. We delivered a 5% volume growth for quarter 4 and 1% for the full year. We continue to improve on the execution of HMOS, or Hardie Manufacturing Operating System, and generated $29 million of lean savings for the full year, which is ahead of plan.For the full year, our EBIT margin reached an exceptional 25.9%, exceeding the top end of our long-term target range. These results reflect the significant impact of commercial transformation from pull to push-pull and lean transformation in our network of plants. For the full year, North America delivered 7-plus percent of PDG of growth above markets and the previously mentioned 25.9% of EBIT margin. This is the first time in more than a decade that North America delivered PDG in the 6-plus percent range and an EBIT margin greater than 25%. It is another confirmation that we are now operating consistently at a new step change level.Let's now turn to Page 11 for our European results. In Europe, if you recall from our Q3 earnings call, we indicated that our commercial execution in Europe was lagging that of North America. At that time, we made several key adjustments that we expected would improve our results. I'm pleased to report that we saw a significant improvement in our commercial approach in Europe in quarter 4. Our quarterly revenue is back on track at 7% growth.In quarter 4, we continued to deliver strong revenue growth in our fiber cement business, up 50%, resulting in a full year growth of 32%. Additionally, fiber gypsum revenue improved to 3% growth for the quarter, resulting in a 2% growth for the full fiscal year. However, the positive growth in the quarter did not translate to EBIT growth due to integration costs and SG&A costs that were significantly higher than we expected. In addition, we have unfavorable freight costs in the quarter as we navigated through the various lockdowns in various countries to service our customers. We are addressing these issues, and we expect it to be back on track in the near term.Let's now turn to Page 12 for our APAC results. In APAC, our Australian business held their own, even in the face of downward market pressure, seeing continued growth above markets. However, volume, gross profit and EBIT of APAC in Q4 were unfavorably impacted due to the mandatory lockdowns in New Zealand and the Philippines as the COVID-19 crisis progressed in March. As a result, we saw moderate EBIT growth in Australian dollars of 4% in the fourth quarter and 2% for the full year. APAC EBIT margin for the full year was 22.7%, which is in the top half of our long-term range. APAC's solid financial results, driven by our Australian business performance, reflect how the team remained disciplined in their approach to executing on push-pull and the Hardie Manufacturing Operating System, leveraging best practices from other regions to continuously improve throughout the year.Now I would like to turn this over to our CFO, Jason, to discuss additional detail on our financial results.

[Jason Miele, Senior VP & CFO]

Thank you, Jack. I will start on Slide 13 with a discussion on our liquidity and cash management actions.In the graph on the left-hand side of the slide, we have laid out our liquidity position as of the end of the third quarter fiscal year '20, the end of fourth quarter fiscal year '20 and as of April 30, 2020. You can see we have made significant improvements in our liquidity position over the last 4 months, increasing liquidity by USD 114 million.I want to start by focusing on our liquidity improvement in the fourth quarter and the month of April before shifting to discussing the actions we have taken to help ensure continued strong liquidity throughout the COVID crisis.The improved liquidity from December 31 through to April 30 is primarily driven by strong sales growth and cash conversion. As Jack discussed earlier, we had a strong fourth quarter, including an exceptional March, and as you can see, the impact of the strong sales and our conversion of those sales into cash as our liquidity position increased from USD 464 million at December 31 to USD 578 million at April 30, a $114 million improvement over that 4-month period.This strong sales performance in our fourth quarter was driven by our North American, European and Australian businesses. In Europe, we returned to strong revenue growth in Q4 with revenues up 7% in euros, including a 50% increase in fiber cement sales. In Australia, the team continued to drive growth above market. And finally, in North America, the team continued to drive our commercial transformation, leading to another strong quarter of growth in our exteriors business at plus 11%, and also strong growth in our interiors business at plus 5%.While the strong sales performance improved our liquidity position significantly, it was also hugely important that we took quick and decisive actions when the COVID pandemic arose to ensure we not only maintain our liquidity position but we improve upon it. The management system we put in place over a year ago was critical in our ability to execute these initiatives across our global operations effectively and instantaneously. These included tactical cash and cost measures such as a hiring freeze, elimination of temporary and consulting-type workers, a travel freeze and a reduction in discretionary spending, amongst others. But in addition to these tactical actions, we also made more strategic and significant decisions to help ensure strong liquidity and financial flexibility going forward, including the immediate suspension of dividends, as approved by our Board and announced on May 5, and a significant reduction in capital expenditures from our 3-year run rate of USD 240 million to an estimated range of USD 80 million to USD 95 million for fiscal year 2021. Our capital expenditures in fiscal year '21 will be focused on safety, maintenance and innovation.As Jack will note later, in our first quarter FY '21 guidance, we will continue to drive -- sorry, we will continue to improve our liquidity position. This continuous improvement will be driven by not only our relentless focus on our cash and cost initiatives but also our continuous focus on serving our customers and driving strong sales.Moving on to Slide 14. On the next 2 slides, I want to recap the actions we took on May 5 to improve and secure our global operations and also discuss the financial impacts of those actions, starting on Slide 14 with the recap of the actions. To better harmonize supply and demand in North America, we took 2 significant actions. One, we will be closing our Summerville, South Carolina plant in the United States; and two, we will be delaying the commissioning of our Prattville, Alabama plant, also in the United States.In our Asia-Pacific region, we also took 2 actions. One, we will be moving to a regional model for the manufacture and supply of fiber cement in the New Zealand market. This will include the closing of our Penrose, New Zealand plant later this calendar year and the importing of products from Australia to New Zealand. The second action in Asia Pac, we are exiting our James Hardie Systems business, which we had acquired about 4 years ago. This includes the closing of the plant in Cooroy, Queensland in Australia.In our European business, we have idled our Siglingen plant in Germany temporarily to better match supply and demand in the short term in Europe.And finally, we also reviewed our organizational structure and resourcing levels globally and made strategic adjustments to ensure we are well positioned to continue to serve our customers in this fast-changing market environment. We believe these actions not only help us stay strong during the crisis but also ensure we emerge from the crisis even stronger.Moving on to Slide 15. We have outlined the financial impacts of these actions. On May 5, we announced that we anticipated approximately USD 90 million of noncash impairment expense in the fourth quarter of FY '20. We have outlined the actual amount here, which was USD 84.4 million across all 3 regions as well as general corporate costs. These impairments relate to the closure of our Summerville and Penrose facilities, the exiting of the James Hardie Systems business as well as the impairment of some noncore assets in North America and Europe. There are more detailed descriptions of these impairments within the Financial Statements and the Management Analysis and Discussion documents filed with the ASX and which are available on our website.Several of the actions we announced on May 5 resulted in reductions to our workforce, totaling approximately 375 employees around the world. We estimate that severance costs totaling approximately USD 10.5 million will be incurred and expensed. These expenses will be recorded primarily in the first quarter of fiscal year '21, with a small portion recorded in the second quarter of fiscal year '21.Consistent with the accounting guidance regarding onetime COVID-19 costs, including severance-type costs, we plan to exclude these onetime COVID-related costs from adjusted EBIT and adjusted NOPAT in fiscal year '21.We anticipate USD 20 million to USD 30 million of EBIT accretion in fiscal year '21 associated with these actions. The EBIT accretion will present itself across all operating segments and across numerous P&L line items, including depreciation, labor costs in both SG&A and manufacturing, cost of goods sold, et cetera. While we will achieve EBIT accretion in each quarter of FY '21, we anticipate the amount of accretion will increase each quarter throughout the fiscal year.I want to now spend a little time discussing how the EBIT accretion impacts each of our segments. In North America, we will derive EBIT accretion in FY '21 associated with the May 5 announced actions as follows: first, the impact of closing Summerville, primarily EBIT accretion derived through reduced head count and lower depreciation and other fixed costs associated with operating the site; second, we will also have lower depreciation due to the impairment of the USD 29 million of noncore assets we impaired in the North American segment; third, there will be labor cost savings associated with the resource realignment we announced on May 5.In Asia Pacific, we will derive EBIT accretion associated with the May 5 announced actions as follows: first, impact of closing our Penrose facility, primarily EBIT accretion derived through reduced head count, lower lease costs and other fixed costs associated with operating the site. Second, the impact of shifting to an import model for our New Zealand market, we have modeled this to be gross margin and EBIT margin accretive to our New Zealand business. Of course, these specific benefits will not arise until we have fully shifted to an import model later in the fiscal year. Third, the impact of closing our James Hardie Systems business, this business operated at an EBIT loss totaling approximately USD 5.5 million across the last 3 fiscal years. And fourth, there will be labor cost savings in Asia Pac associated with the resource realignment.And finally, in Europe, we will derive EBIT accretion associated with the May 5 announced actions as follows: first, labor cost savings from the resource realignment; and second, some minor savings and depreciation associated with the USD 5.5 million of noncore assets that were impaired in Europe.So to summarize, we expect $20 million to $30 million in EBIT accretion in FY '21 associated with the actions we announced on May 5. To be clear, that is not a full 12 months of EBIT accretion as these actions were announced in May, and some of the actions, as an example, closing Summerville, will not be fully complete until later in the fiscal year. Lastly, the $20 million to $30 million of the accretion will not occur evenly across the 4 quarters of fiscal year '21. It will be increasing or accelerating each quarters throughout the year.Okay. Moving to Slide 16 to discuss cash flows and capital expenditures. As I noted earlier, our operating cash flow increased 48% year-on-year. This was primarily driven by the strong operational performance and cash generation of our operating business units, in particular, our North America and Australia businesses. Year-on-year, there were significant changes in the amounts used for investing activities and the amounts used for financing activities. These changes are simply reflective of the fact we made the Fermacell acquisition in FY '19 and there was no such transaction in fiscal year '20.Shifting over to the right-hand side of the slide, we have provided our capital expenditure profile across the last 3 fiscal years, along with our estimates for fiscal year '21. In fiscal year '20, our capital expenditures totaled USD 194 million. This included work on 2 significant expansion projects: the greenfield site in Prattville, Alabama in the United States and the brownfield expansion of our the Carole Park facility in Queensland, Australia.We plan to complete the construction of Prattville in the next few months, so we can leave the site in the optimal position for commissioning when we need the additional capacity. For now, we do not anticipate commissioning Prattville anytime sooner than fiscal year 2022.In regards to our Carole Park expansion, we completed that project in the third quarter of fiscal year '20, and we will commission that sheet machine when we determine that demand across Australia and New Zealand requires it. We currently anticipate that to be in fiscal year 2022, but we will continue to monitor the impact of COVID-19 on the demand in New Zealand and Australia to determine the appropriate commissioning date. That sheet machine is fully constructed and is ready to commission when we need the additional capacity.Lastly, as we noted in our May 5 announcement, we have adjusted our planned capital expenditures for fiscal year 2021 to be in the range of USD 80 million to USD 95 million. Our capital expenditures in FY '21 will be focused on safety, maintenance and innovation.Moving on to Slide 17, which shows our debt structure and liquidity as of March 31, 2020. There's no change to our debt structure. We continue to have 3 sets of senior unsecured notes and the USD 500 million revolving credit facility. As we have noted in the past, the revolving credit facility does have an accordion feature, which allows for the potential to access an additional USD 250 million of credit. At this time, we have no plans to access the accordion feature. We are comfortable with our current debt structure and our liquidity position.Specific to our liquidity at March 31, 2020, we had USD 365 million available to be drawn on the $500 million revolving credit facility, in addition to the funds available to be drawn from the RCF with $144 million of cash at March 31. So between the funds available under the RCF and our cash on hand, we had a total of USD 510 million in liquidity at March 31, 2020. And as I mentioned earlier, we improved that liquidity position to USD 579 million at the end of April. We expect to continue to improve our liquidity position as set out in our guidance.Regarding leverage, we improved our leverage ratio to 1.9 as of March 31, 2020. As you are aware, our RCF has a covenant, which requires us to remain under a leverage ratio of 3.0. With our leverage ratio currently at 1.9 and the cash and cost actions we have taken, we are confident we will continue to maintain strong liquidity and a good leverage position. Overall, we remain well positioned with strong liquidity and financial flexibility.I will now hand the call back over to Jack to go through our current strategic priorities, provide a quarter-to-date trading update and Q1 fiscal year '21 guidance.

[Jack G. Truong, CEO & Director]

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

[Operator]

[Operator Instructions] The first question comes from Lee Power with CLSA.

[Lee Power, Research Analyst]

Jack, can you just talk to the biggest factor that kind of drives the bottom versus the top end of that 22% to 27% North American margin range, not only for the year but also the quarter, given that you're halfway through the quarter?

[Jack G. Truong, CEO & Director]

Yes. The -- really, the top end of that really will be driven by how efficient and how we continue to drive continuous improvement in our network of plants. And as we're now about 4 quarters into the transformation, it is important for us to continue to drive that improvement. And then the bottom end of that really depends on what type of volume that will come our way that's quite highly volatile.

[Lee Power, Research Analyst]

Okay. Sure. And then if we just look at the first quarter to date, have you got any -- I mean I know you don't like talking PDG on a quarterly basis but if you got any idea what the market did versus your PDG contribution. And just as you're answering that, you mentioned the accelerate PDG. Do you mean that the rate of PDG could be above the 7% that you achieved? Or are you talking about holding that number?

[Jack G. Truong, CEO & Director]

Well, Lee, I think it is a combination of what is the market growth going to be. And then it's really more important that -- how fast that we gain market share. And -- well, we can't control what the market growth, but we do control on how well we drive our market share gain. And what we know is that during the past few weeks that we -- our business have really -- have improved quite a bit compared to the beginning of the quarter. That really is a combination of us continuing to accelerate our market share gain as well as we also noticed that as some of these states begin to ease up on the shelter-in-place and more of the construction work going on, that the -- there is also the growth there in the markets.

[Lee Power, Research Analyst]

Okay. So do you think you would have been above 7% PDG for the period of April through to May 15?

[Jack G. Truong, CEO & Director]

So Lee, it's kind of hard to really know within the quarter what is the PDG. But certainly, what we know is that we have been growing a lot faster than what we see in the market. But really, to really understand what the actual PDG, again, that's something that we have to look at over a longer period of time.

[Lee Power, Research Analyst]

Okay. And then just one final one on Europe. You've obviously built out the head count there. Is that done? And then where did most of those roles actually end up going to?

[Jack G. Truong, CEO & Director]

Yes. Lee, it is -- we are in the process of executing that. Of course, in Europe, there's certain process that we have to go through to get that completed. And so most of the roles are really in the Western European countries. Certainly in -- Germany is certainly one of the places that the roles actually came from.

[Operator]

The next question comes from Peter Steyn with Macquarie.

[Peter Steyn, Analyst]

Just, I suppose, following on from what you're seeing in the market. It would be interesting to just get your sense of the scenarios that you're planning to across the 3 regions, Jack. At this stage, how are you guys sort of broadly delineating the planning process and the decisions that you've made?

[Jack G. Truong, CEO & Director]

Well, Peter, let me first walk through the regions. So in North America, that -- we build on our strength in the market that -- where we have very good market position, that being in the Pacific North, Northwest; in the South, Southeast; and in the East Coast, down the mid-Atlantic and the Carolinas. So in that area, it's really about, first, to continue to execute our game plan of leveraging on our Win With Color and new products, and that's the first. And second thing is that we are -- we will now begin to really accelerate our -- really leverage on our exteriors solution that I just shared with you in the presentation, is that we have a full line of products at different price points that would allow us to be able to penetrate those markets that really resonate with the builders and the homeowners at different price points. And that's -- and then, of course, wrap around that is really the continuing focus on our push-pull strategy to accelerate the demand creation while continuing to work closely with our customers to create that value with our customers. So that is in the North America.Now moving on to Europe. And it's -- really, the key opportunity we have in Europe is that we -- the flooring product is really a key growth area for our company and in Europe that's based on fiber cement. And it is a unique and differentiated product. And it is right now within the -- when the markets is quite -- when the economy is quite tough and -- which is the R&R become a really good opportunity for us, then that's an area that we're going to focus a lot more in. And also with the fiber cement, it is still the continuing approach of leveraging on the channel access and then the market access that we have with fiber gypsum in Europe to continue to gain placements, promotions and then share, which we have demonstrated that we're able to do that effectively. And again, with the focus of our European teams, we have really been moving from being just a pull company to become really push-pull. And then the team is really -- during the past 6 or 9 months, they have really grabbed on to the strategy and then really been gaining a lot of momentum in that area.And then moving on to the Australia side. It is really -- this is where we just continued to build on the momentum that we have had during the past 2, 3 years of being closer to our customers and gaining a lot more trust and credibility with our customers that would allow us to be able to sell a more broad portfolio of our products while we continue to do -- we'll put out builders to -- we're expecting a lot of our solutions to help them build homes that really allow us to build more of the lightweight homes that would be able to take share away from bricks homes. And particularly now, within the tough economy, and there -- it tends to be in our favor that the market is shifting to more of a lightweight construction in Australia. And so it's really bottom line a push-pull approach around the world and then really take advantage of the broad portfolio of products that we have. But we really put it in the solution-type as opposed to selling just products.

[Peter Steyn, Analyst]

Yes. There was a lot of useful detail. I suppose, in essence, I was curious whether you're thinking V-shaped or U-shaped recovery from here and your actions, which didn't suggest that you're a little bit more cautious.

[Jack G. Truong, CEO & Director]

Yes. I think we'll be more or less, I think, more like a swoosh, the Nike Swoosh-type. I think we're -- when we sit back and look at this, this is the health -- initially, this is a health-induced crisis. And just so before the COVID was declared pandemic, the housing market in the North America was humming. I mean it was growing -- the housing start, in January and February, it was in the 20-plus percent. And then -- but then with the lockdown, the shelter-in-place and this health-induced -- so that demand was kind of -- been dampened a little bit there. But then as time went on that you have -- and you've probably seen the same number I've seen, is that we're now -- particularly in the U.S., we have 36 million folks that are out of work. That means that there are going to be less of folks that can buy homes, at least in the short term. So that -- now that kind of becomes a little bit an economic crisis that we have to deal with. And so with -- those 2 factors are beyond our control and what we can control is really about making sure that we serve our customers a lot better than anyone else and continue to create value in the marketplace and then grow our share.

[Peter Steyn, Analyst]

And sorry, just one quick one at Jason. Jason, could you give us a sense of what your exit run rate on the $20 million to $30 million worth of EBIT optimization benefits would be? Given that it ramps up through the course of the year, but you'll be realizing $20 million to $30 million, what are you thinking about run rates at the end of the period?

[Jason Miele, Senior VP & CFO]

Yes, Peter, thanks for that question. We're not going to -- we think -- feel like we provided some pretty specific guidance around that. Certainly, at the Q1 result in August, we'll give specifics on what was achieved in Q1 and give more details around the arc. These are certainly early days with a lot -- a few of the actions we are taking primarily when you start talking about shutting down plants and those costs associated with that. So let us get through to August, and we'll give you more clarity on the exact run rate.

[Operator]

Your next question comes from Keith Chau with MST Marquee.

[Keith Chau, Building Materials & Packaging Analyst]

The first one, Jack, I just want to go back to one of your comments earlier where you were saying business has improved quite a bit through the quarter. So I know it's hard at the best of times to talk about general trends on a month-on-month basis given orders. But are you able to provide us with a bit of qualitative commentary on how those orders -- sorry, those sales have progressed through the first 6 weeks? If it was down 3% for those 6 weeks, is it possible that May volumes were actually up relative to last year? Or am I reading too much into that?

[Jack G. Truong, CEO & Director]

Well, it's -- what we provided you there is really the 6 weeks into the quarter, that's our shipment to our customers. So it's really our actual sales. So what we really saw was that really during the last 3, 4 weeks that our orders have been, again, stronger and stronger each week. And then what's -- really a couple -- a few key things that we saw is that from the new home constructions, and particularly in the South and Southeast and in the Carolinas, quite really good for us. And then moving on to the R&R side, it is kind of -- in this -- because of this health-induced crisis, what we see here is that a lot of folks, the contractors, who usually do a lot of big remodeling job are not -- really, for the first many weeks, they're not allowed to -- I mean most homeowners would not really have a lot of job for those contractors. What we saw, they tend -- the DIY, which is do-it-yourself, since there's a lot of shelter-in-home -- shelter-in-place, there's a lot of growth that actually coming from the -- from that do-it-yourself channel. So that's the kind of -- pretty much the dynamics that we have been seeing.

[Keith Chau, Building Materials & Packaging Analyst]

So Jack, in May, were your sales up versus last year?

[Jack G. Truong, CEO & Director]

No, we'll keep -- that's quite confidential right now, Keith.

[Keith Chau, Building Materials & Packaging Analyst]

Sure. Okay. No, I appreciate it. The other thing is, to what extent do you think this is or potentially could be a bit of demand catch-up from the start of the period? And if you try and distinguish between what is catch-up and what is underlying demand, do you think underlying demand is still running negative? Or is it still too early to tell?

[Jack G. Truong, CEO & Director]

I think it's really too early to tell, Keith. I think the key area that we're watching is really about how fast do people go back to work. And we still have roughly 36 million Americans that are out of a job. And I think the key is how -- of course, you know that there's a lot of stimulus that the government has put into the country, but the key is how fast do people go back to work. And that is really the key driver that we're looking for. But certainly, we know that going to the March period, the housing market in the U.S. has been on a hot area. So the demand is -- was, call it, very strong before the COVID was declared pandemic.

[Keith Chau, Building Materials & Packaging Analyst]

Okay. And with respect to your primary demand growth that was achieved in the period, reasonably a very strong result in FY '20 of about 7%. Are you able to give us a bit of a sense of which segments that's been derived from, whether it's been new build, R&R and, potentially, which products you're taking share from?

[Jack G. Truong, CEO & Director]

Yes. We do take a lot more share from the exterior siding products, Keith.

[Keith Chau, Building Materials & Packaging Analyst]

And is that principally on new build, R&R? Are you taking it from LP, vinyl?

[Jack G. Truong, CEO & Director]

For the whole market, Keith.

[Keith Chau, Building Materials & Packaging Analyst]

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

[Jack G. Truong, CEO & Director]

That's correct.

[Keith Chau, Building Materials & Packaging Analyst]

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

[Jason Miele, Senior VP & CFO]

Yes, Keith. The curve we -- or the shape of that curve we gave you previously, several times, remains the same. So the second year target is getting up to $45 million to $60 million. So there was a range within that. Certainly, we've positioned ourselves well to get higher in that range, but the shape of that range is within that already, and that remains unchanged.

[Jack G. Truong, CEO & Director]

So Keith, the way to think about that is as we go into fiscal year '21, we need to make sure that, minimum, that we continue to keep the savings of $29 million in this year and then improve on that to get to that $40 million or $45 million that Jason mentioned as a total, all right? So that's -- there's really that continuous improvement approach that the lean initiative will really deliver savings for us.

[Operator]

Your next question comes from Peter Wilson with Crédit Suisse.

[Peter Wilson, Associate]

If I can start really just on North America margins for FY '20. So a very strong full year result, 25.9%, that's exactly in line with what you said you'd deliver. But if you just look at the quarterly trend, I mean, Q2 was 27%, Q3 was 26%, Q4 was 25%, even though, I guess, lean savings would have been increasing through, then raw material input costs were improving. So can you just give us some explanation for that deteriorating quarter-by-quarter trend throughout the year?

[Jason Miele, Senior VP & CFO]

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

[Jack G. Truong, CEO & Director]

But I think Peter was asking about Q1.

[Jason Miele, Senior VP & CFO]

No, I think he was asking why Q4 was...

[Jack G. Truong, CEO & Director]

Oh, Q4.

[Jason Miele, Senior VP & CFO]

Do I have that right, Peter? You're asking why Q4 was 25.3%?

[Peter Wilson, Associate]

Yes, you have that right. My next question was just, I guess, a follow-up to Keith's question, you are going to get further lean savings this year. The comments previously have been that you would -- you intend to reinvest that. Is that still the case? And thus, should we expect to observe an increase in SG&A for FY '21?

[Jason Miele, Senior VP & CFO]

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

[Peter Wilson, Associate]

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

[Jack G. Truong, CEO & Director]

Well, yes. Peter, I think that you're asking for -- about the whole year guidance. Right now, we're not giving a whole year guidance. And what we announced here is really guidance within the quarter.

[Peter Wilson, Associate]

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

[Jason Miele, Senior VP & CFO]

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

[Operator]

Your next question comes from Simon Thackray with Jefferies.

[Simon Thackray, Equity Analyst]

Sorry about that. I had my phone on mute. I just want to follow up on Keith's question, just to understand a little better. The lean benefits, $29 million bench this year, the target is still in place for next year, which is fabulous. And you made the point, Jack, you're going to keep the $29 million to make the target. Is there any element of lean which will be volume-dependent in that target?

[Jack G. Truong, CEO & Director]

Yes. Of course, with -- Simon, the more volume that we can flow through our plants, then, of course, the savings is really coming off of how efficient that we produce the products. And that's where the lean savings will come from, in the real dollars.

[Simon Thackray, Equity Analyst]

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

[Jack G. Truong, CEO & Director]

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

[Simon Thackray, Equity Analyst]

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

[Jack G. Truong, CEO & Director]

Absolutely. And then what we mentioned in the call is that it's quite highly volatile. So we do -- we made certain assumptions on what the volume would be, the range, and that's where the 22% to 27% come from.

[Simon Thackray, Equity Analyst]

Okay. All right. Well, there's some math there that I'll have to do. But building on your insight into R&R, which I thought was really interesting versus DIY. The customer -- I'll be interested in your insights into how customers or segments have reacted in different countries given the approach to COVID has been different in different countries. Are you able to provide some insight into the sort of differentiated reaction of customers in each country? Because I think that's interesting.

[Jack G. Truong, CEO & Director]

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

[Simon Thackray, Equity Analyst]

And that would then sort of presuppose that the 60-40 rule of R&R versus new construction, that's obviously where a lot of uncertainty comes from, in the R&R channel, I presume, and therefore on the margin and the volume outlook. But you made a comment about the DIY channel. And I note from your 20F, from your F-55 that in your concentration risk, that customer A has had a fabulous, fabulous year. That's growing sales 7.5% after growing 5.5% the year before. I presume that's the Depot? Can you talk to customer A or talk to the channel and DIY on whether there was a fair amount of DIY, what we call pantry stocking, going on in the March quarter? Was there a surge in that DIY into the channel?

[Jack G. Truong, CEO & Director]

It's not so much on the surging as much as -- in terms of our teams. This isn't -- remember, Simon, you probably remember the last 4, 5 quarters, that in the interior business for us, is that -- particularly through the 2 DIY channel, is that we made a big change from being a company where we -- rather than call on the stores, now we reallocate our resources calling on to the headquarters of these 2 customers. And by doing that, our team became a lot more engaged and be more proactive in managing the promotions and hence having our products at the right locations and merchandise correctly. So that's why if you look at the progress of our interior business, it's been improving every quarter since. So it's really all about creating the demand and have our products merchandised correctly.

[Simon Thackray, Equity Analyst]

And that's reflected in that sales growth that I'm looking at in customer A, presumably, which is about 12% in North America?

[Jack G. Truong, CEO & Director]

Yes, we don't disclose who customer A is.

[Simon Thackray, Equity Analyst]

No, I know that, Jack. I thought I should ask though, I should try. And then just finally, Jason, on Prattville, just a bit of housekeeping. No commissioning until FY '22, but ostensibly done. Just in terms of any holding costs, I presume there's no depreciation until it's commissioned. I just want to be clear on the impact of no opening until '22.

[Jason Miele, Senior VP & CFO]

That's correct, Simon. Depreciation does not commence until you use the starter lineup.

[Simon Thackray, Equity Analyst]

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

[Jason Miele, Senior VP & CFO]

We may keep -- we would keep some people out there, making sure we have the facility ready to go when we want to bring it up, Simon. But it's very de minimis to what we're thinking about.

[Operator]

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

[Brook Campbell-Crawford]

Just on -- interested to understand PDG in the current weaker environment in North America, if you were to need to tweak or adjust at all any of your programs in order to capture share in the current volatile weak environment? Or is it the case of just continuing what you've done over the last 12 months?

[Jack G. Truong, CEO & Director]

Yes. It's just a case of where our teams continue to gain a lot more momentum, the know-how to execute our push-pull strategy a lot better every day. And that's just the effect of continuous improvement. And it's really, during this crisis, having -- becoming a lot closer to our customers really helped us navigate through this crisis a lot better, and that's what you see, and while we're continuing to put a lot more focus, too, on creating demand in -- with the builders and contractors with our more broad suite of solutions, products.

[Brook Campbell-Crawford]

Okay. Got it. And just the minus 3% sales growth in the quarter to date, I'm just wondering if you feel that represents market demand. So is there any sort of destocking in the channel? I'm trying to understand if your shipments into the channel of minus 3% closely represent sales out of the channel to installers?

[Jack G. Truong, CEO & Director]

Yes. I think -- yes, the way to look at this is that remember, we are a push-pull company. Traditionally, it's really, for us, it's about creating the demand. And so what you see there is not a destocking or stocking. It's just a way for us to create demand. And then if we're having our plants running efficiently, then we're able to supply to drive that demand. I hope that answers that.

[Brook Campbell-Crawford]

Okay. And then I -- no, that's clear, Jack. And last one for me. Just on the medium-term PDG targets that you've set out over the last year or so being 6% plus in the medium term, just whether or not you still feel that's a realistic target in the current environment.

[Jack G. Truong, CEO & Director]

Well, our goal is always going to be that we deliver that 6-plus percent PDG with strong results. And going -- before the crisis and during the crisis, that's still our goal.

[Operator]

Your next question comes from Craig Woolford from Citi.

[Craig John Woolford]

Just a question on the North American segment. As you pointed out to an earlier question, SG&A rose. I think in the quarter -- fourth quarter, it looks like it was up about $10 million due to higher marketing and labor that's delivered investment. Can you just clarify, do you expect that incremental $10 million in marketing and labor to carry through into 2021? Or is that part of the additional cost savings that you called out?

[Jack G. Truong, CEO & Director]

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

[Craig John Woolford]

Okay. So it is separate to the initiatives that were outlined in the slides, on the $20 million to $30 million?

[Jason Miele, Senior VP & CFO]

Which slide, Craig?

[Craig John Woolford]

Well, this -- where you're talking about the EBIT accretion in FY '21 of $20 million to $30 million.

[Jason Miele, Senior VP & CFO]

Yes, that's a bit co-mingled there, Craig. So the resource realignment would certainly be included in that number, which would impact SG&A. And then some of the items I talked about in the cash and liquidity section, the more tactical items about reducing discretionary spend, travel freeze, et cetera, are some of the things Jack was discussing that would also impact SG&A. So yes, separate. Those latter items are -- would be separate from that number.

[Craig John Woolford]

Okay. And then the volumes were down 3% in -- year-to-date for the first quarter. What's happened on pricing in the North American market? Has there been any movement in pricing in recent times?

[Jack G. Truong, CEO & Director]

Our pricing, you know that we had a price increase effective April 1. And then -- and that the pricing still holds.

[Craig John Woolford]

And last one was just is there any change that the company is looking to make? Any concerns you would have around the receivables balance given the climate, just in terms of risk of bad debt?

[Jason Miele, Senior VP & CFO]

Yes. Craig, that's a great question. Certainly, something we're looking at closely as part of our cash initiatives and keeping a close eye on receivables globally, we obviously have experience going through the GFC. As always, if we accrue for a bad debt reserve, we would have increased that appropriately considering the market we're entering. But there's not specific customers we're concerned with. It's just a prudent decision leveraging our experiences from the GFC.

[Operator]

Your next question comes from Paul Quinn from RBC.

[Paul C. Quinn]

Just one question, really. Just following on that North American exterior volume guidance -- or not guidance, but what you said, which was down 3% for the first 6 weeks in the quarter. Just trying to figure out for the quarter, does that look like that's going to accelerate through the quarter, i.e., to increase from negative 3%? Or is that coming down?

[Jack G. Truong, CEO & Director]

Well, Paul, as I mentioned it is -- we're in a high volatile market. So it's tough to kind of predict what's going to happen in the future. But certainly, what we saw and experienced is that as the quarter went on, our business is getting stronger.

[Paul C. Quinn]

Okay. So you're -- so the business is getting stronger. So it's actually getting better going forward. Okay. That's all I had.

[Operator]

Your next question comes from Sophie Spartalis with Bank of America.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

So just 3 quick questions from me. Just in regards to your order book visibility, have you seen any deterioration, any signs of deterioration in that order book visibility over the last few weeks? And if you can also just talk about how -- where the inventory level or how high the inventory levels are sitting across the supply chain in each of the 3 jurisdictions, please?

[Jack G. Truong, CEO & Director]

Yes. I mean you know that I don't like to talk about or define order book because that's just so short term. But I think given the crisis that the market is on, I will make a comment. Certainly, our order book has really gone -- have really strengthened in the past few weeks and has really been increasing. And then what is even more encouraging is that the inventory of our product in the channel is also lower.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. Okay. That's great. And then just in terms of price, can you just talk through -- you talked to volume a lot. But can you just talk through sort of your expectations on price, maybe for the next sort of 3 to 6 months? Do you think you'll be able to hold price if volumes do deteriorate significantly, your plan there?

[Jack G. Truong, CEO & Director]

Yes. We -- yes, we'll holding our price. Yes.

[Sophie Spartalis, Vice President and Senior Resources Analyst]

Okay. And Jason, just a quick question for you. Just in terms of -- given the changes in the plants, are you willing to provide any FY '21 depreciation guidance numbers?

[Jason Miele, Senior VP & CFO]

Sophie, we'll give that -- we'll give an update in August. So certainly, we give you depreciation in the appendix every quarter. In the slide where we discussed the accretion -- or the actions we took on May 5, I kind of outlined there would be depreciation savings in North America as well as in -- yes, primarily in North America. I think you know the size of our plants. Summerville is not one of our larger plants. I'll leave it at that for now. And certainly, you'll start to see that -- the impact in Q1.

[Operator]

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

[Jack G. Truong, CEO & Director]

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