James Hardie Industries - Q1 2017
August 11, 2016
Transcript
Operator (participant)
Thank you for standing by, and welcome to the James Hardie Q1 FY 2017 results briefing. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to your first speaker today, Mr. Louis Gries, CEO. Please go ahead.
Louis Gries (CEO)
Thank you. Hi, this is Louis Gries. I'm in Dublin this evening with Matt Marsh. We'll walk through the results very much like we normally do quarter-to-quarter. The slides are being managed in Sydney, so I'll be calling out the page numbers. Start with page six, which shows you the agenda. Again, same as we normally do, I'll cover the very high-level overview, a little bit on the operations. Matt will go through the financials. We'll finish up with Q&A, investors, analysts first, and then if we have any media questions at the end. I go to slide eight, which is basically the first slide overview. You probably have seen we had a pretty straightforward quarter.
In the first page, you got the green arrows pointing up everywhere but EBIT margin. That was driven by a thinner EBIT margin in the U.S. business. But as a general comment, things ran like we like to see them run in the U.S., and in the businesses outside the U.S., before I go to the next slide, which is the U.S. business, I'll just give you my quick summary up front. So the volume comp was better, basically 16, all products, that's more like an 18 on exteriors. But those of you that follow the company probably remember we had a soft comp we were going against last year because of the timing of a price increase.
So if you kind of normalize it, I'd see it more like a 13 and a 15, 15 on interiors, exterior, sorry. Prices, where it's been EBIT line a little short, given the volume increase, and that's really due to about four things. One of them was our planned SG&A increase, which we've talked to you about. Second one was we've accelerated some of our capacity startups, so you're starting to see that cost come in. Third one is the manufacturing networks just running a little bit short of where we normally like to see it, so lost a little bit on the bottom line there. And then we are running in some logistics inefficiencies due to supply chain being or supply being tighter than planned.
So anyway, if we go to slide nine, you can kind of see the result of that, with the sales in the U.S. up 15%, volume 16%, the price, like I said, 1% off, pretty much where we've been, and EBIT up 4%. A good absolute number, but obviously a little bit lower than you'd expect with that kind of a volume increase. You see all the bullet points we have on the slide there are pretty straightforward, kind of fit with my summary I just gave you. To slide 10. Let's see, EBIT margin slide. Obviously, you can be reminded, I guess, this is seven quarters now where we're comfortably on top of our range. This one for a Q1, a little bit closer to the top than you'd expect, I'm sure.
We still see the 25 top of the range performance going through the year, so we have no real concerns about how the year is going to go unless something changes externally. I think we're in good shape internally. I go to slide 11. I said price kind of been where it's been, and what I mean by that, if you look at fiscal year 2015, 2016, and 2017, we basically have a $4 spread. You probably remember we didn't take price at the end of fiscal year 2016. We reviewed it and did not take it on either interior or exterior. I mean, there were a few price adjustments. I'm talking more across the board. So you're seeing that flatness.
We did take price the year before, and it only went up $3, and that's some program costs that show up in price rather than SG&A. We will review price again this spring, as we always do. I'm not sure what decision we'll take. We're comfortable where we're at with pricing. As you know, our focus is more on the market share growth. Slide on the right, or the graph on the right, I guess, shows you, you know, coming out of the downturn, that gradual increase in housing starts, which we've talked about being pretty favorable for us as far as the way we like to run our business. Obviously, if we had more starts, we'd have more business, we'd have stronger financials.
But at the end of the day, you know, if the market gets too hot, market share growth becomes tougher. So we're comfortable where we're at in the market. Our PDG, you know, we're a little bit more encouraged by our PDG now than we were a year ago, so that's good. And like I said, pricing, we're okay with where we're at, although we know we've been flat for the last couple of years. Go to slide 12. That's the international. Again, you know, good story, internationally. I guess the only red arrow there is on volume, but you remember that was driven by the pipes business sale. So right across, well, Australia's running well, New Zealand's running well.
Philippines, you'll see in the next slide, slide 13, has a few competitive issues that we haven't faced in the past. So, our guys need to work through that, which I'm confident they will. But the country numbers, which are shown here in U.S. dollars, you guys, I know we have easy access to exchange rates, but you know, you can see Australia up 11, I guess, in local dollars, more like 16, or even EBIT's up more substantially, you know, up 38. And that's because last year had a lot of startup costs for Carole Park, and this year obviously doesn't. Similar story in New Zealand. Sales are up 12, so price is off just a hair. That's. Well, I shouldn't say a hair, a couple percent, but that's more mix.
And the EBIT's, the EBIT's down for the same reason. But again, the absolute number's good. It's just how it's comping against last year. Philippines, like I said, we're a little more competitive than we have been over there as far as facing competition. We're able to, in local dollars, improve EBIT by 8%, so we got a little help from manufacturing there because the price was off just a little bit. In Europe, numbers look big for Europe, but remember, Europe was a poor year for us last year. We had a poor year in Europe last year, so we're just comping against a bad year, and the business is, you know, kind of rebounded nicely.
But, I wouldn't get, you know, too bullish on the big percentage improvement in especially. At this point, I'll hand it over to Matt Marsh.
Matt Marsh (CFO)
Thanks, Louis. Slide 15, I'll take everybody through the financial results. So for theQ1, we reported sales of $477.7 million. They're up 12% compared to a year ago. Volumes were up, as Louis already talked about, in all the operating segments. Price was also higher in the international segment. You'll see in the, when we get to the next slide, sales were adversely impacted by about a percentage point of growth as a result of the strong U.S. dollar. For the most part, gross profits, as on a rate basis, were about flat. They increased kind of proportional to sales, up about 12%. SG&A expenses were up 17%. That's really against a low comp in the North America business from a year ago.
That'll start to normalize in the Q2, Q3, andQ4 as we were ramping up sales and marketing and PDG initiatives throughout last year. We didn't really get that work going until the back half of the year, so the Q1 a year ago was just a lower SG&A number. And then Adjusted Net Operating Profit, you know, was up 5%. That's on Adjusted EBIT, up 9% compared to a year ago. We had an increase in other expenses, about $3 million, and adjusted income tax went up proportionally with Adjusted EBIT.
If you go to slide 16, you can see the impact of the dollar and Australian dollar exchange rate had about a one-point adverse impact on net sales and gross profit as well as Adjusted EBIT and net operating profit. So, on slide 17, in North America, input costs, pulp remained relatively flat compared to a year ago, both in the market. You know, we think we continued to have effective sourcing strategies across all the inputs, including pulp. So we're purchasing better than the market. The market's about flat. Cement continues to be up. That's pretty consistent with, I think, what we've said the last several quarters. We're seeing it up about 5% compared to a year ago. Gas prices are down, and freight prices are down, market-wise.
As Louis said, you know, there's some inefficiencies due to our own internal supply constraints. So, and then on electricity, prices are down about four. So overall, input prices, you know, are trending flat to down. On slide eighteen, you know, you probably noted we've before I go into the slide, we did change our reporting segments this quarter. We thought providing better visibility into just the North America segment, and what we've done historically is had Europe in the North America segment. We thought there'd be greater clarity for investors and analysts on just reporting North America.
So, that's what we've done, and we've included Europe in the international segment, as well as broken out our non-fiber cement initiatives into its own separate segment, and then kept research and development as its own segment. So on slide 18 is that North America segment. EBIT was up four, you know, when compared to a year ago. You know, volume was good for the quarter, as Louis talked about earlier, 16% on a reported basis. That was partially offset by, you know, price was down a little bit, but the real impact on EBIT, as I indicated earlier, was the higher SG&A costs. Those dollars were invested directly into sales and marketing and commercial initiatives pointed at PDG and market penetration programs to help drive growth.
And then production costs were up slightly a bit from manufacturing, but the real driver on EBIT for North America was the increased level of SG&A. On the international segment, you know, EBIT was up 20%. Volumes were good in most of the businesses. You saw the price discussion overall, we're, you know, we're getting good price in the key businesses in international. We definitely benefited in the quarter with not having the Carole Park startup costs this year the way we did last year. And we're continuing to invest internationally, you know, in growth and organizational capability. On Slide 19, the other business segment represents our non-fiber cement businesses.
Those EBIT losses, as we've indicated, would narrow this year as we continue to make progress in the windows business on being able to operate that business the way that, you know, we wanna be able to operate it. So the growth, the higher gross profits in the quarter within the windows business drove the overall segment results. Research and development continues to be on strategy. You know, we continue to invest about 2%-3% of our net sales, you know, the normal fluctuations. You know, there's nothing unique to kind of report on R&D. General corporate costs were about flat for the quarter, for both, the general corporate costs as well as the stock compensation costs. Slide 20 is income tax expense.
We're estimating an adjusted effective tax rate for the year of about 27%, 27.1%. You know, the adjusted income tax expense and Adjusted ETR for the quarter increased, you know, due to where the earnings are increasing geographically. We continue to pay Income Taxes and have income tax payables in Ireland, the U.S., Canada, New Zealand, and the Philippines. We currently are not paying income taxes or have Payables in Europe, excluding Ireland or Australia. Australia, again, as a reminder, is just due to the tax losses, and the tax losses are primarily a result of the deduction that we received related to the AICF contribution. Slide 21, Cash Flow. Cash flow from operations, you know, was strong for the quarter.
It was a combination of the underlying, you know, Net Income Adjusted for non-cash items was up about 13%. And then we had a favorable change in receivables and accounts payable. You might remember from last quarter, you know, we showed working capital as being receivables and payables working against us and inventory levels coming down. And the explanation at that point was it was just timing of how the March 31 period ended, and what you're seeing here is that timing come back kind of the other way. So nothing unusual to read into underlying performance of the receivables or payables. It just happens to be the way the timing works.
Capital expenditures were down slightly, you know, compared to about a year ago, but relatively, you know, relatively flat, you can see there. We had a proceeds of about $3.7 million a year ago related to the sale of some property and facilities at our old Blandon facility. That's what that three seven is. Obviously, that didn't repeat. Overall, good cash performance for the quarter. On Slide 22, the Q1 CapEx spend was about $17.8 million. That was down slightly, within kind of normal variation level. From a capacity standpoint, we've commissioned, you know, the new line in Plant City during the quarter that we're in the process now of starting that up and getting sellable board off of that product, off of that sheet machine.
We're in the process of completing the Cleburne facility with a goal of completing that and then starting that up later in the year. And then as we talked about, in May, we've begun construction on a new line in the Philippines facility, and that's expected to cost about $11.7 million U.S., If we go to page 23, no change overall in the way we're thinking about the balance sheet. You know, our financials continue to be good. You know, we always start the equation that we want strong financials in the company. So for us, that's strong margins and operating cash flows, and continuing to think of the balance sheet and our overall, you know, financial management policies from a, as an investment grade credit.
We did get two upgrades recently in the quarter. Moody's upgraded us to Ba1 on the credit rating, and that was followed by S&P's upgrade in February to BB, and Fitch reaffirmed the triple B minus. No change in capital allocation, so the priorities remain the same. Our top priority is to, you know, fund the fiber cement business, both from an R&D and an OpEx and an SG&A standpoint to ensure that the plants are running well and that we've got the sales and marketing programs and the organization in place in order to be able to grow organically. Maintaining the ordinary dividends, so no change there, and continuing to execute the ordinary within the defined payout ratio.
And then everything else comes thereafter, you know, a combination of wanting to have availability of capital for strategic opportunities and non-fiber cement, whether it's market cycles, and then additional capital returns on top of that, to the extent that funds exist. From a liquidity standpoint, you know, no change there. We continue to have a conservative, you know, policy of being leveraged within one to two times Adjusted EBITDA. We still have the $500 million revolving bank facility, the $325 million senior unsecured note, and we did an additional reoffering of about $75 million of notes in July to take advantage of good pricing and a good market opportunity.
You know, that financing, as I'll talk about on the next page, creates some flexibility for us, down the road. Our weighted average maturity is about 4.4 years on bank facilities, 5.3 years in total, and liquidity is in good shape. On page 24, you can see the debt profile on the left, $500 million of a revolving facility, $325 million of an 8-year senior unsecured note. We did the reoffering of those same notes. We were happy with the execution on that reoffering. Cash remains in a good place, $95 million at the end of the period. Net debt and liquidity are within the financial management targets that we set. You can see the leverage ratio.
You know, we continue to execute within that 1-2 times, well within that 1-2 times, leverage ratio. For the fiscal year on page 25, as yeah, the analyst forecast was 264-302, right, right before the call. We're guiding to a 260-290, for fiscal year 2017. Obviously, that is predicated on several things. Housing conditions in the U.S., you know, do continue to improve at kind of a steady rate, and we're continuing to forecast U.S. housing starts on the new construction side of 1.2-1.3 million.
The Adjusted Net Operating Profit range is subject to the foreign exchange levels continuing at or near current levels, and overall market conditions remaining about the same, so with that, we'll open it up to questions.
Operator (participant)
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speaker phone, please pick up the handset to ask your question. Your first question comes from Emily Smith with Deutsche Bank. Please go ahead.
Emily Smith (Director of General Industrials)
Good morning, Louis and Matt. Just a few questions from me. Firstly, around pricing. Obviously, prices were a little bit lower in the quarter. Just wondering if you can give us some color around what we should expect going forward from a pricing perspective. Secondly, just wondering if from an SG&A perspective, you can give us a bit more color around the sorts of headcount that perhaps has been added, and if you would expect that growth to continue. And just finally, wondering around the increase in production costs, if that's something that you know you would you were expecting, and in fact, if that was is something that will likely continue for the remainder of the fiscal year? Thank you.
Louis Gries (CEO)
Okay, thanks, Emily. I think I can comment on your three questions. Pricing, we haven't done anything on pricing, and like I said, we'll review it in the spring. So I think you're seeing the type of pricing that we're gonna have through this fiscal year. It could be a little softer, as we go through the year, depending on mix, whether it be regional or products or, you know, if there's a few more programs that start to build more scale. But, and then we'll look at it at the first of the year, and if we were to go for a price increase, you'd start seeing it in next year's numbers, but not this year's numbers.
On the headcount, we did add a lot of headcount, mainly in the sales and marketing areas. Some other areas as well, but the focus was sales and marketing, either in the field or in the office. It won't continue at the same rate. You know, we started that ramp up last year, so the comps, you see the big percent increase this quarter, but that's mainly because we hadn't started adding very much early last year, but we did through the rest of the year. We'll add some more, but this is probably the biggest percent increase you'll see, my guess would be, right through, you know, the next several years. We did add a lot of SG&A.
And then finally, production cost, the accelerated startups kind of reflect the fact that we had our calculation a little bit off on how fast we could you know stretch up to higher demand levels. So we've definitely gotten a little bit nervous that we're running tighter than we should. Our service position on most products is dropped, still in acceptable range, and one product dropped below an acceptable range, so we're doing what we can to play catch up there. So you'll have some freight inefficiencies because we're gonna optimize around throughputs, you know, machine throughputs rather than freight. So you'll see some inefficiencies there. And, like I said, the plants didn't run as good as we thought they would.
It's probably in the normal variance range, but it's also possibly being contributed just because we have more activities going on with startup in PC, ramp up in Fontana, getting ready to start up Cleburne. So, and then we have some people working on our Summerville facility as well. So we're just spread a little bit thinner than we were planning to be spread, you know, at this point in the year.
Emily Smith (Director of General Industrials)
Great, thank you. I guess the 18% volume growth you mentioned on exteriors is a very solid number and implies that, you know, the market share, you guys are, you know, winning, I guess, from a market share perspective. How are you seeing primary demand at the moment? Are you pleased with that volume number?
Louis Gries (CEO)
Well, I mean, certainly, you know, we look at four-quarter rolling, and we really didn't like where we were last year, this time, and we're definitely in better shape, but I wouldn't get too attached to the eighteen. You know, and I don't want to mislead you, our volume looks good so far this quarter, so we're feeling pretty good about it, but it's, you know, it's a longer game than, you know, Q1, Q2, or Q3's. So, but we're definitely, you know, kind of ticking up on a PDG, but we're not where we want to be.
Emily Smith (Director of General Industrials)
Great. Thanks very much.
Louis Gries (CEO)
Yeah.
Operator (participant)
Thank you. Your next question comes from John Hynd with Merrill Lynch. Please go ahead.
John Hynd (VP)
Hi, good morning, Louis and Matt. Perhaps we can quickly just go, continue on from the PDG question. Are you able to give us a little bit more color on the R&R market? That seems to be, I guess, where, you know, the Holy Grail of getting more of those volumes. How are you sitting there, and are you doing anything differently this quarter versus this time last year? And then I've got one other question after we touch on that.
Louis Gries (CEO)
Yeah. No, on the R&R, most of you that are familiar with our program, R&R, it's mainly against vinyl, and it's a good program. We run it pretty well. I've commented in the past, the variability market to market and how well it's run is, you know, more than we like. You know, we got some markets you just hit it, hit it out of the park, you know, year after year. And then you have some markets that kind of don't quite get the traction we want. But I would say overall, you know, we're doing well with our R&R, R&R program. The R&R market, I think, is also pretty good. Probably the number we're looking at is just above the 4%, which is probably what we went into the year expecting.
Most of our emphasis on PDG is new construction, so you know, as we build PDG, and I hope we continue to, you know, in coming quarters, it'll be largely on holding our momentum in R&R and build more momentum in new construction.
John Hynd (VP)
Thanks. So with the split of being, you know, your typical 60/40, R&R to new this time around, this quarter?
Louis Gries (CEO)
Yeah. Yeah. I mean, I don't think that. I mean, it's the growth rate in those segments that kind of change that percentage, and I don't think the growth rate, you know, over the last year or two has been enough to really, you know, knock it too much off the sixty/forty. So, I'd say that's still a good rough estimate. You know, it may be, you know, maybe a little bit more, maybe fifty-nine, forty-one or something like that, but I wouldn't worry about that.
John Hynd (VP)
Okay. And just quickly on Plant City, obviously commissioned, can you give us some sort of estimation, where you think you'd be sitting with volumes from that plant over the next, say, 12 to 24 months? Is it, I mean, when do you expect it to be in line with the rest of your plants?
Louis Gries (CEO)
Yeah, I mean, again, it's a big sheet machine, and we're ramping it up on plank products now, and we're gonna move to trim products as soon as we get to a certain level of efficiency on the line. So we're gonna have the kind of a double ramp. First you ramp, you know, planks is an easier product, so you start the line on planks, and then once you feel you've got the thing pretty settled down, we'll put trim on, and there'll be a second ramp just to get the trim going. It's kind of what we call a product efficiency ramp rather than a process efficiency ramp.
So my guess would be, the new line in Plant City, you know, maybe by the end of this year would be two-thirds at the throughput rate. But we do focus a lot on sheet machines, but you have to, you know, there's other things that have to happen as well, and we're a little bit bottlenecked down on finishing. The sheet machines actually come up at a quicker rate than our finishing. So, we'll have to work through that. And then we also, I think we need to restart one of the lines we shut down in anticipation of the big line coming up. So we think our calculation there wasn't. It was too tight. So, so we'll be ramping up, I think it's PC3 we have down.
So we're working on that. So what you guys are gonna be looking at on our manufacturing is you're gonna be looking at a fair amount of ramp-up cost over the next six months. Now you know I think with the business as big as it is and with the extra volume we should be able to handle that. You know it won't dampen you know even as a rule because you know you're getting the extra volume to offset whatever inefficiencies you have on those new lines. So we're not that concerned about it. We're just kind of disappointed in that.
We had a schedule for bringing these lines on, and we just realized, hey, we're planning too close, so we're having to accelerate two or three of them at the same time, which I do think stretches our guys a little thin.
John Hynd (VP)
Okay, thank you very much, Louis.
Louis Gries (CEO)
Yeah.
Operator (participant)
Your next question comes from Matthew McNee with Goldman Sachs. Please go ahead.
Matthew McNee (Analyst)
Thanks, guys. Just a couple of ones just to follow up. But Louis, just on price, you said that you haven't done anything on price, but you mentioned in the, you know, in the, result, the strategic pricing and tactical pricing. So does that mean bigger rebates, you know, the bigger home builders getting lower prices? I note that LP's prices have been down a couple of % in the last couple of quarters, and also the vinyl guys are, you know, pushing their prices down on the back of lower input costs. So is that impacting you guys? And also, if we continue to see these others cut, is that gonna make, you know, a price increase next year highly unlikely?
Louis Gries (CEO)
I wouldn't be able to tell you what we'll do with price next year, but I don't think it falls into the highly unlikely category, so where we're at, you know, in the business generally and price, I guess, specifically, is we're really focused on growth, okay? Because, you know, we're well into this recovery and, you know, we hope we have, you know, a lot of years, maybe another five or six years of increasing housing starts because they haven't, you know, spiked on us, so that's good news from our perspective. And we just feel like, you know, we gotta go for the market share gains now and not let other things get in the way.
And that's why I'm a little bit disappointed that we missed on the capacity needs short term, because now we're kind of going hand to mouth, and it's you know, we'll get out of it this winter, but it's harder to grow the business. It's hard to you know, kind of sign up new business if your you know, service position has fell on you know, your base business. So having said that I saw LP was down a little bit. Their results are always a little hard for me to read because I don't know what they do with the OSB that they produce out of those plants. But vinyl I know you know the business well, Matt.
Vinyl doesn't affect us at all because we're such a premium to vinyl to the end user. Whatever moves they make, don't really change that we're a big premium. So, you know, it's a very small difference for someone deciding to spend the extra money for fiber cement. Theoretically, LP is a closer alternative to Hardie. So our pricing with them would look more like it does with competitive fiber cement. But the situation we have with pricing right now is not being impacted by LP, and I wouldn't anticipate that that's gonna become a problem for us. Because there is a very different value proposition for a builder that's gonna use our product versus chipboard.
Now, they are gonna go to chipboard to save, you know, a little bit of money, but, you know, a certain percentage of the market will be after that savings, you know, and make the trade-off, but we don't think our target customers fall into that category.
Matthew McNee (Analyst)
But the price decline is not just mixed. There's actual, you know, price declines in, you know, the-
Louis Gries (CEO)
Yeah.
Matthew McNee (Analyst)
some of the products.
Louis Gries (CEO)
Yeah. Sorry-
Matthew McNee (Analyst)
Rebates or whatever.
Louis Gries (CEO)
You had a soundbite, you had a soundbite in your question that I forgot to pick up.
Matthew McNee (Analyst)
Mm-hmm.
Louis Gries (CEO)
You said, rebates.
Matthew McNee (Analyst)
Yeah.
Louis Gries (CEO)
So, we do have higher rebates on program, some program stuff, like 100% Hardie. You know, some of our programs that bundle them, even in the nine color markets, that bundle the trim with the siding, they can get a rebate on, you know-
Matthew McNee (Analyst)
Yeah
Louis Gries (CEO)
kind of going with 100% Hardie exterior. So, our percent, discounts in new construction has increased, and that's part of, you know, what's causing-
Matthew McNee (Analyst)
Mm.
Louis Gries (CEO)
-that 1% decline.
Matthew McNee (Analyst)
It's fair to say that they only get the lower price if there's higher volume, so the two go hand in hand.
Louis Gries (CEO)
Yes. Well, yeah, that's true. So even if you say you're a siding user, you don't think you can afford our trim, we sharpen our pencil and come up with a kind of whole house cost for you that's on an MSF base, is a little bit lower for us, but higher revenue for the house. So you're right.
Matthew McNee (Analyst)
Yeah.
Louis Gries (CEO)
We'd end up with more revenue, but a little bit lower price for MSF.
Matthew McNee (Analyst)
And sorry, just quick, two very quick ones. Just on the ACNO, we only see that at the group level. So can Matt maybe give us a bit of an idea within extra $2 million, extra $5 million for the quarter for the US business? Or what sort of magnitude are we talking about?
Matt Marsh (CFO)
Yeah, it's about $10 million, Matt, for the quarter.
Matthew McNee (Analyst)
Extra, okay.
Matt Marsh (CFO)
and this is definitely the toughest comp. You know, so if a 100% increase, you know, you'd expect that to have as you go into the second half of the year. You know, and by the time you get to the Q4, we would've been well into both the headcount additions that we were doing last year and the program expenses. So you get to kind of a much more normalized rate. Another way to kind of think about it is as a percent of sales versus last, you know, versus a year ago, there's about a 1% increase as a percent of sales.
Matthew McNee (Analyst)
Yeah.
Matt Marsh (CFO)
What you'd expect kind of it to normalize towards is closer to where we were in the Q4. So if you were to take Q1 that we just reported and compare it to the most recent quarter as a % of sales, that's more of a representative run rate, and you're just seeing you know, a particularly tough comp this time because we weren't adding in the business at this stage, the way we should have been, and we didn't really get going on some of those additions and some of those programs until later in the fall.
Matthew McNee (Analyst)
Yeah. And sorry, sorry to bring this one up, Louis, but just on Ryan's recent departure, is any comments on how that changes your plans? You know, we don't need to know the exact reasons why he left, but just your plans and what it means, how long it might take to find someone else?
Louis Gries (CEO)
Yeah. No, it's fine, Matt. Yeah. So unfortunately, I think my retirement's been talked about mainly as a date, and you know, people were focused, and I also talked about my commitment to the board to stay till sixty-five. So I think everyone took that as a hard date. And you know, it shouldn't be a hard date, it should be readiness. So Ryan's exit from the business, does that change our readiness for succession? I would say yeah, if everything worked out well, we probably would have been ready you know, when I turned sixty-five. We may still get there, but we may not, and my commitment to the board is readiness rather than a date.
Matthew McNee (Analyst)
Okay. No worries. Thank you.
Operator (participant)
Thank you. Your next question comes from Peter Steyn with Macquarie Group. Please go ahead.
Peter Steyn (Division Director and Managing Director)
Morning, gents, or rather, should I say good evening. Thanks very much for your time. Could I just get a quick sense just on these capacity expansion costs? Could you give us a view of what it cost you in the quarter and how you see that progressing over the next four quarters?
Matt Marsh (CFO)
Yeah. Within the quarter, it was, you know, probably $2 million within the quarter, on that Plant City line. Now, we'll continue to incur some costs, on Plant City as we continue to ramp that up. Obviously, the early days of a startup, you get some inefficiencies, within the board that you're getting off of the line and some additional labor, and a combination of those two, you know, result in the startup costs. Once we finish the construction, in Cleburne, you know, you'd expect that in the back half of the year, probably something similar in order of magnitude, on the Cleburne plant.
Probably in total for the year, by the time you start up those two lines and get Fontana running the way that we want to get Fontana running, we could be in the $5-$10 million range of startup costs for the year between all three of the sites.
Peter Steyn (Division Director and Managing Director)
Okay. And then, just, one thing I wanted to pick up on, Louis, in his opening remarks, just, spoke about the plants not quite running at the capacity, intended, and then, on the other hand, some supply shortages leading to logistics inefficiencies. Kind of strikes me that there's some, perhaps some regional, aspect to, what you're facing there. Could you give us a bit of a sense whether there's, regional dislocations that are specifically impacting your, your capacity and, demand, linkage?
Louis Gries (CEO)
Yeah, you're right, there's always regional, but we cover up the regional shortages with freight, so that's some of the inefficiencies we talk about. But we're shorter in the south than we are in the north. And our bigger problem is right now we're short on XLD trim. So that new line in Plant City's intended to make XLD trim, but like I covered, until you have you know a certain reliability in a new line, you don't want to put a difficult product on it, or you just kind of magnify the issues. So we're kind of having to be patient to get to a certain level on the startup before we move the trim to that line. And so that's really a product that's in very much short supply.
The rest of it is just a little bit off our service position, and I think our customers are able to work through that pretty well. But the XLD's a problem we got to work through, and we'll get through it by about December one, but quite honestly, we would prefer not to have the problem at all because it's a great product line for us.
Peter Steyn (Division Director and Managing Director)
Mm-hmm. And then if I may, just a last quick one, how are you thinking about your buyback now that it's formally in place? The present day.
Matt Marsh (CFO)
Yeah, that's a good question, Peter. So, you know, I think I've said in the past, buying in the Q1 is proves always to be a lot more difficult than, I'd frankly care for it to be. Mainly because, you know, governance, and blackout windows, with the way we space out our, our Q4 results, our, from remuneration report, our notice of meeting, our annual general meeting, we did a bond within the quarter, to kind of, add an additional blackout complexity, and then obviously this quarter, this quarterly release of the new, of the new fiscal year. So it makes it, it does make it difficult in the Q1 to buy activity.
In May, you know, what I said was, we specifically went to a buyback program of $100 million, and that was to give everyone a quantum that we'd actually go execute on. And, you know, the goal was to execute on that within the first six months of the year. So, obviously, we haven't done that yet, but we have, you know, I fully intend to go execute on that. And, you know, I'll keep my comments at that. I'd say those two guideposts remain the same with respect to the buyback, though.
Peter Steyn (Division Director and Managing Director)
...Perfect. Thanks, Matt. I'll leave it there.
Operator (participant)
Thank you. Your next question comes from Simon Thackray with Citi. Please go ahead.
Simon Thackray (Director and Senior Industrial Analyst)
Thanks very much. Good evening, gentlemen. Just a couple of follow-up questions, if I can. I just wanna go to the international division. Lou or Matt, the volume for international was down 2%, and I know the impact from pipes is included in there, but ex-pipes, Australia was up nine, New Zealand was up 14, Europe was up five, and Philippines was down five. So just for clarification, what was the contribution to volume that pipes was making for volume to be down 2% overall?
Matt Marsh (CFO)
Yeah, I mean, for the year, you know, it was about the equivalent of 30 million MSF of total volume. You know, so, you know, call that within a quarter, you know, $7 million-$10 million, depending on the quarter. And, you know, obviously, that goes to zero within this quarter.
Simon Thackray (Director and Senior Industrial Analyst)
Gotcha. Gotcha. And just while we're on New Zealand, Lou, it was slightly. I'm slightly at odds and, maybe a little bit surprised. The volume's up 14, the sales are up 8, the EBIT's down 12. And I note your comment on lower average sales price and product mix. That's been probably one of the better performing housing markets in the world. Why what's actually happening there, that you're getting adverse mix and adverse price?
Louis Gries (CEO)
Yeah, I think it's just quarterly variance. So the sales are down 12 in local dollars, so the price is just off a little bit. And, it's-
Matt Marsh (CFO)
Up 12.
Louis Gries (CEO)
Up 12, yeah, sorry. Sales are up 12, so your price is down just a hair. And it's just quarterly variance. I think if it doesn't correct by the half year, you know, we'll correct as we move through the year. So we don't have any problems in the New Zealand-
Simon Thackray (Director and Senior Industrial Analyst)
Okay.
Louis Gries (CEO)
Business. We're doing well.
Simon Thackray (Director and Senior Industrial Analyst)
All right, cool, cool. We'll move on from that. In terms of the input costs, I note that the, you know, the stability, if you like, on the slide on page 17, the quarterly U.S. input costs. Probably without exception in the current quarter, all of those have ticked up. Gas is up 25%. So you've got... It seems to me, along with an improving macroeconomic backdrop, we're seeing some rising costs in the US. And no doubt, everybody will back out extra SG&A, and they'll back out ramp-up costs and all the other things this year. But with the actual input costs rising against the market recovery, are you what are you assuming in your margin guidance that you'll hit the top end of that 25% range?
Could these costs, any further acceleration of these costs, you know, derail that target for the year, given everything else that's happening?
Louis Gries (CEO)
Yeah, I think pulp would just have to go on an incredible run to do that, so.
Simon Thackray (Director and Senior Industrial Analyst)
Okay.
Louis Gries (CEO)
We don't see that, yeah.
Simon Thackray (Director and Senior Industrial Analyst)
So, no issues around cement, gas, electricity, freight, diesel?
Louis Gries (CEO)
Our contracts on cement, we know, we know what we're gonna pay, so we don't have to worry about that. And gas and power, yeah, we're pretty confident that, yeah, that's not gonna derail us, as you say. We'll, we'll-
Simon Thackray (Director and Senior Industrial Analyst)
Okay. Excellent. All right. Thanks, Lou.
Operator (participant)
Thank you. Your next question comes from James Rutledge with Morgan Stanley. Please go ahead.
James Rutledge (Executive Director)
Thanks. Good morning. Just firstly, Lou or Matt, can you remind us where your utilization currently stands? And I guess how we should be thinking about extra capacity coming online over the next couple of years? Or is it just product specific lines that need to come on given specific shortages?
Louis Gries (CEO)
Yeah. Hey, James, I don't know if you're gonna be on the September tour, but clearly, we don't like our equation, the result of the equation we had. So we are doing work in that area. But in the meantime, we've kind of taken a safe approach and dusted off, you know, all the capacity that we have ready, and we're gonna get that started up. So I could give you a much better answer, one of our guys can give you a much better answer on the September tour. And if you're not gonna be there, obviously, it'll become public. But yeah, we cut it too tight.
Our mathematicians have to go back to work and, you know, figure out what the market variance, what the PDG variance, what the manufacturing variance, what ramp up variance. We just cut it too tight, so we need more insurance in the system.
James Rutledge (Executive Director)
Okay, so we shouldn't be thinking about 72% or 75% utilization or wherever it was last quarter on that calculation.
Louis Gries (CEO)
Yeah, I think we were wrong. I don't think we had that weighted well for the machines and the product mix, so... But like I said, the guys are working on it now. Yeah, I mean, it's pretty embarrassing. We just became aware of this, you know, a couple of months ago, and you know how these things build, you know. The guys thought we were okay, and it got tighter and tighter and tighter, and before you know it, you're not okay, and you're getting further behind. But again, I wanted to point out, again, just so everyone understands, this is an XLD problem. And we have the line. We obviously should have started up earlier, we didn't. We should have.
And then the rest of our product is, you know, kind of, tighter than we'd want, but it's not what I would consider a shortage at this point, but there is a shortage on our XLD product.
James Rutledge (Executive Director)
Okay, thanks. I guess secondly, I'm just hearing that the competitive fiber cement products are being extremely aggressive on pricing in the last few months. Are you seeing any competition concerns there or anything that worries you from competitive fiber cement?
Louis Gries (CEO)
Yeah, we're not really aware of any change in approach by direct competitors.
James Rutledge (Executive Director)
... Okay, thanks. I guess just finally, given LP's volume growth and their comments around potential for further capacity lines, even greenfield lines, I guess, over the next few years, how are you thinking about them as a competitor in the context that, I guess, over the last twelve or twenty-four months, you've said that, you know, when you really need to see LP, you know, disappear almost from the market for you guys to achieve your 35% fiber cement target?
Louis Gries (CEO)
Yeah, I think, I'd have to check, but I think my comments has been, yeah, if LP grows, they're growing at our expense because we're the ones converting vinyl to fiber cement, and if they're behind us converting fiber cement to, chipboard, then that's a problem for us. So not go away because, their relative advantage on panels is real, so the shed market's a good market for them. They do all right in manufactured housing for the same reason they, the panel product's good. And their trim product is well established in a lot of markets. And it's, you know, it's like what they're trying to do with their siding.
It's not as durable as you'd wanna see for a long-term exterior product, but they're trying to grab a good enough position with a savings for the end user, whether it be a builder or contractor. The comp they just delivered was not unexpected by us, so we kind of knew because of where they were at with their capacity that they needed to come out with a comp like that. So, like we always say on narratives, we're not gonna look at it quarter-to-quarter. We're gonna look at it four-year rolling, and yeah, we don't wanna do the market development to you know see the vinyl share decline and then see them get a portion of it.
You know, if they start taking market share in any real way, that's not necessarily a showstopper for the thirty-five, ninety, but it's not our intention to see that happen. We gotta make the market understand the trade-off they're making. You're gonna have your most price-conscious end users still go for their product at times, but I don't think that's gonna be the normal situation.
James Rutledge (Executive Director)
Okay, that's clear. Thanks.
Operator (participant)
Thank you. Your next question comes from Andrew Johnston with CLSA. Please go ahead.
Andrew Johnston (Industrials Analyst)
Oh, good evening, guys. Just a couple of follow-up questions. First, on the increased marketing expenditure. I mean, the last couple of years, you've spent a fair bit of time talking to us about where you're targeting, be it metro, non-metro, R&R. So those additional, that additional R&R, SG&A or marketing expenses that you're putting in, whereabouts is that targeting?
Louis Gries (CEO)
Yeah, that's well, I commented earlier, right? We think in this business cycle, in a good recovering market, most of our share gains will come from in the new construction segment. So a lot of it is pointed toward new construction or the channel that supports new construction. But I don't wanna mislead you. We also, you know, as I said earlier, our R&R program is a bit variable market to market, so we've also shored up manning in that area. And then finally, I commented that we had some in the office as well, and it's not insignificant what we've done in the office. It goes both in the strategic marketing and tactical marketing in the office. So I would say, Andrew, I know you've been following the company for a while.
Everything we've talked about, I would say every one of those programs are still active and still getting more resources.
Andrew Johnston (Industrials Analyst)
Okay. And finally, on PDG, your comment was that it's not quite where you want it at the moment. I mean, you know, looking through the 18% number, and I know it's often easier comping that, but it's not quite where you want it. I'm guessing that when it's above 8%, you're happy. Would that be a fair guide? And so at the moment, sort of see it running around the mid-single-digit numbers.
Louis Gries (CEO)
Yeah, if we were above 8% for eight quarters in a row, I'd be happy. So you gotta play the double eight there.
Andrew Johnston (Industrials Analyst)
Okay. All right, great. Thanks very much.
Louis Gries (CEO)
Yeah.
Operator (participant)
Thank you. Your next question comes from Andrew Peros with Credit Suisse. Please go ahead.
Andrew Peros (Equities Analyst)
Thank you. Just a quick follow-on from that last question. Lou, what are you expecting in terms of volume growth for this financial year?
Louis Gries (CEO)
Yeah, we don't forecast our volume, but you guys know the market as well as we do as far as housing starts. You know, you can calculate our PDG over the last four quarters, and we expect to maybe add on to that a little bit. And by the way, we haven't talked interiors. Our interiors business is running well, so we'll get some volume off of that. But it's fair to say our volume's gonna be higher this year than what we planned going in. But you know, it's still kind of in range, but it's gonna be better than we planned going in.
Andrew Peros (Equities Analyst)
Okay. And I just wanted to also confirm that those operational issues that you had in the Q4 last year have completely washed through and there was no spill over into this quarter. I guess what I'm specifically referring to is you had the issue in Europe. You know, I know you briefly touched on Carole Park, but just want to confirm that there was no additional ramp-up costs in this quarter, and those manufacturing issues in the US had completely washed through. So any thoughts around that would be great.
Louis Gries (CEO)
Yeah, I mean, Europe has rebounded, but, you know, Yeah, I mean, it was running poorly, and it's rebounded, so you can see that in their comp. And Carole Park, yeah, the startup's pretty much behind them, so you can see that in their comp. You know, I think the reality is we're trying to grow and we're trying to grow in Australia with the new capacity. We're obviously trying to grow in the US. We got the Philippines capacity we're investing in. I think the normal for the next, you know, two, three years is startup costs will always be in our result, and we probably need to start talking about it less and just see it as part of the cost of growing, bringing on new lines.
But because it comes, you know, Carole Park startup costed more, more than it should have and more than we planned, so we did talk about that. But the Plant City startup is at this point going pretty much as planned on the cost side. And you know, if we deliver that with Cleburne and Summerville will be a little bit more difficult, but because it's been down for several years. But I think that's just gonna be the normal right through this business cycle, because you know, if we grow our market share and the market continues to recover, even at a slow rate, there's gonna be lines coming on every year.
Matt Marsh (CFO)
Maybe, Andrew, just one add-on comment. So I think you were also referencing from the Q4, we had the operational issue in one of our U.S. plants that we talked about, and that was all contained within the Q4, and there was no carryover effect into this quarter.
Andrew Peros (Equities Analyst)
Thanks, Matt. Also, just finally, the windows business, is the expectation still that this will be the final year of losses there, and it'll, I guess, effectively wash its face going into FY 2018?
Louis Gries (CEO)
I actually thought my comments in the past were next year, there'd be some small losses, and then we should be... So, you know, it depends on what we do. I mean, we continue to learn about the opportunity in windows, and we continue to learn about our capabilities, which are improving, obviously. So you can see the well, I think you can probably see the numbers come down. It's a very manageable number. What's more important to us is what's the potential for windows, and what are the trigger points for, you know, going a lot harder after windows? So, as far as the base kind of business model we're running right now, we're getting more efficient, both in the market and in operations, so the losses will come down.
But on the expense side, product line design, new segments, new markets, if we double down and wanna do a lot more with windows, you know, you're gonna see those costs hit the EBIT line. But now they're in a place where you can see them, so you'll know when it happens.
Andrew Peros (Equities Analyst)
Good. Great. And just finally, a bit of housekeeping from Matt. Any guidance around the effective tax rate for the full year, and any CapEx guidance for perhaps this year or next year?
Matt Marsh (CFO)
Yeah. So the effective tax rate, the adjusted effective tax rate, you know, for the year is the 27.1%. That's the best estimate that we've got at the end of this period. You know, we think we'll have largely maintenance CapEx this year, just kind of in line with last year. I think the one item that we weren't talking about, you know, the last couple times we've talked is Summerville. So as we start to think about getting that site ramped up, you know, that won't be maintenance CapEx.
There'll be a little bit of capacity cost at the Brownfield site, so that'll be pretty inexpensive capacity, and we'd expect that project runs, you know, a lot lower than both the Plant City and the Cleburne startups or the new lines. But we haven't gotten to a stage yet where we're ready to kind of, you know, announce what, you know, what that project will cost. You know, I'd say by the time we get to November, we'll certainly be talking about that.
Andrew Peros (Equities Analyst)
Okay, thanks very much.
Operator (participant)
Thank you. Your next question comes from Keith Chau with J.P. Morgan. Please go ahead.
Keith Chau (Executive Director of Equities Research)
Good evening, Lou and Matt. Apologies for laboring the points, but just a couple of questions on pricing and SG&A. Matt, just on SG&A, you mentioned that you expect that to continue to rise or, sorry, normalize this year. So I just wanna look at it from a dollar perspective. In the first three quarters of last year, it was tracking around the $62 million range, ramped up in the Q4 to $69 million, and now hitting $72 million. So when you say normalize, are you suggesting that that number remains at around the $70 million mark for the next three quarters, or is there an opportunity for that to increase further?
Matt Marsh (CFO)
Yeah. The number in total is gonna be pretty consistent with that Q4 number. The seventy-two, what I'm trying to figure. I'm just looking, it's got some general corporate costs in it, so the reason I paused on that was just keep in mind, the general corporate cost, you know, obviously, can fluctuate up and down with stock comp sort of expenses, which isn't, you know, operational in nature. It's more of an accounting valuation based on the share price. So, but as a rule, I think you got the right framework, Keith, that the Q4 and the Q1 look a lot alike. They're pretty similar quarter- to-quarter.
This particular quarter, if you were to compare it to one Q a year ago, you know, there's that step up in cost, and you're seeing that in the result. But you expected that to start to decrease? In terms of the comp in two Q, three Q, and four Q, and get into kind of that more normalized rate of what you've seen in the last couple of quarters.
Keith Chau (Executive Director of Equities Research)
Sure. Okay. And just, Lou, quickly, one on pricing again. I just wanna ask the question, a bit more simply. So just as a proportion of the total customer base, are a high proportion of customers receiving discounts and rebates? And are these discounting levels higher than last year?
Louis Gries (CEO)
Yeah, there's certain discount level programs that are higher than last year. And I would say the same group of customers are probably receiving the rebates, but that group of customers is doing a higher percentage of the business.
Keith Chau (Executive Director of Equities Research)
Okay. Thanks very much, Lou.
Operator (participant)
Thank you. Your next question comes from Andrew Scott with Royal Bank of Canada. Please go ahead.
Andrew Scott (Banking Advisor)
Yes. Thank you, Jane. Louis, just a question. Obviously, we're working our way through the re-segmenting here, but if we look at North America, for FY 2016, the North American division versus USFC, the margin for the 2016 year was, I think, it was about 1.8% higher. Given that as a context, I'm sort of interested that we're still talking to 20%-25% Margin Target. Should that really be sneaking its way up to sort of a couple of points higher?
Louis Gries (CEO)
I would say that would be maybe your target, but our target's still the same, 'cause our target's, you know, through the business cycle, and you remember in the bottom of the cycle, we were working hard to stay close to the twenty. And then in the top of the cycle, like you say, it's not as hard, it's not that hard to stay at the top or slightly above, so it's, you know, and this goes back to the previous question in SG&A, which Matt answered, but what I really, you know, wanna remind you is we, we've got a lot of things we think we can do to grow the business and deliver, you know, increased shareholder value in the long term.
But we gotta have the capability to do it well, and if we have the capability to do it well, and we have the money to do it, we're gonna do it. So we're gonna trade off that EBIT margin, you know, for some extra growth opportunity. Now, what we've been in in the last you know little bit is our capability to do it well was less than we'd want. So we were a little slow to you know kind of spend the money you know if we couldn't do it well. But with new resources coming into the business, and those resources kind of ramping up on both the industry and the company, I think we're gonna wanna spend at a higher rate.
Maybe not the rest of this year, but certainly years going forward, whether it be fiscal year eighteen, nineteen, twenty, something like that, so. So yeah, I mean, it wouldn't surprise me if, you know, twenty-seven became the new normal, you know, going through a recovery, but it, you know, it wouldn't be our intention for that to happen.
Andrew Scott (Banking Advisor)
Okay, great. And just in the context of spending, some of the spending a little bit ahead. I note the outlook comments talk about a margin in the top end of the 20%-25% range. I think historically, you might have said at the top end or above. Am I being too pedantic there, or do you expect it will be within that 20%-25% range this year?
Matt Marsh (CFO)
Yeah, it's a good question. You know, I think what we wanna figure out, you know, before we tighten that language is really what happens with these startups. You know, think about just Carole Park last year, where it was a startup that, you know, that we said, you know, we thought we left some money on the table by not having that startup go quite as planned. And that was a startup, you know, I think the numbers we quoted the last couple of results is, you know, $7-8 million in total for that startup. And that was a startup that didn't go according to plan.
Plant City, on the other hand, we like how that startup's going so far, but we're still in a relatively early period with that, you know, with that machine, and we've still got the Cleburne lines to start up, and then, depending on what Summerville shapes out to be. So you got those variables that, you know, we'd like to get a little bit further into the year before we incorporate that into kind of both a tighter guidance range, as well as kind of giving you some comments that help you steer towards the top end of that range versus being above that range.
Andrew Scott (Banking Advisor)
Got it. Thank you, guys.
Louis Gries (CEO)
Hey, I'm gonna go back to the first part of your question because I didn't answer it as clearly as I should have. We won't manage to a twenty-seven number. If a twenty-seven number drops out, we're obviously gonna post it, but we're not managing up to a twenty-seven number. We're managing toward the top of the range and trying to balance that with growth when we have the capability to spend the money well.
Andrew Scott (Banking Advisor)
Understood. Thanks, Louis.
Louis Gries (CEO)
Yeah.
Operator (participant)
Thank you. There are no further questions at this time. I'll now hand back to Mr. Gries for any closing remarks.
Louis Gries (CEO)
All right. Thank you very much. I appreciate everyone joining the call. Thank you.
Operator (participant)
That does conclude our conference for today. Thank you for participating. You may now disconnect.