James Hardie Industries - Q1 2018
August 7, 2017
Transcript
Operator (participant)
Thank you for standing by, and welcome to the James Hardie Quarter One Financial Year 2018 Results Briefing Conference Call. 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 speaker, Mr. Louis Gries, CEO. Please go ahead.
Louis Gries (CEO)
Thank you very much. Hi, everyone, this is Louis Gries. I'm in Dublin with Matt Marsh. We'll walk through our quarterly result, you know, pretty much similar to every quarter. So, the slides will be flicking in Sydney, so I'll call out slide numbers, page two, page three, page four, and there's an agenda on page five. And there's page seven, that's just slides I'm gonna talk to.
Obviously, you can see our financial accounts were negative versus same quarter last year. This was driven by poor performance in the U.S. You can see the bullet points below. The first two relate to the U.S. and we'll talk through the U.S. in some detail. So I'll just go through those two bullet points.
The third bullet point kind of just highlights we had a good quarter internationally. And along with the other financial metrics, cash flow is down a bit. And final point, we made the contribution and payment to the AICF consistent with the AFFA that was run in $2.2 million. Slide eight. It is the first slide on the North American business. We'll go to volume first. So, flatter than I think most people would expect. It was pretty close to flat to the market index in exteriors, and then we had a negative comp in interiors. The negative comp in interiors was driven by a few things, two things.
One, we raised our price April one, and we basically experienced the same thing pretty much anytime we take a price. It creates some inertia, which is driven by, to a large extent, driven by retail business. And normally, kind of lose volume after that price increase, and you gotta work your way back. And we've been doing that, but through the quarter, we would have been down.
The other thing we did is we had reviewed our product line profitability and our segment profitability earlier this year, and we discontinued our four-by-four G2 product line, which was not a tiny product line for us. It was a small product line, but you know, it didn't hit a profitability hurdle. And same thing with the gypsum segment.
That product line went largely in the gypsum segment, and most of that segment was that product line. So exiting one meant we exited the segment as well. On the price, the price was good. I think our guidance has been, you know, three, three plus, based on our market increase, we took on April one. That's kind of how it came out. We got a little help on mix.
The market increase, you know, fully came through, maybe, maybe a bit more than we were expecting, but not significantly more than what we were expecting. As you know, the story in previous quarters has been manufacturing, and that was the biggest driver of the poor financials, relative to targets this year.
We had foreshadowed that, you know, we were gonna kind of work our way through our manufacturing issues over a two- or three-quarter period, and that we felt in fiscal year 2018, we'd be better as we went through the year. We do have that positive trend line, where month to month, unit cost is improving. I think it was five out of the last six months, we had a decrease in unit cost. We're still incurring relatively high freight because of the product shortages we had. So the, you know, the delivered cost when you comp it to last year, is still quite a bit higher. Having said that, I think we're on the right track.
We're through some of the big startups that were putting the drag on the financials. Those are, you know, Plant City, Fontana, which I'll probably comment later on Fontana. It's through its startup, but where we're at, capacity-wise now, we have brought Fontana down to running one line at a time until they can get their efficiencies on those lines up to where we need them to be to, you know, fit well in the network.
So even though we're through the startup, there's still some work to do in Fontana. Cleveland startup went very well. Now, the new startup we have that did hit the first quarter was Summerville. But that's a single startup at this point.
So it won't have the same kind of impact as the various startups had last year, but we do need to work our way through that startup and get into our target range for unit cost in Summerville. So that kind of covers it in manufacturing. I'm sure I'll get some questions. But we did foreshadow last result that our order file was soft.
It is, it is still soft, so there's no doubt, we're having to work our way back, on basic, you know, customer demand coming out of the period of, you know, shortage, which resulted in allocation, longer lead times in multifamily, and until just recently, a service position that was below expectations for both us and our customers, so we go to slide nine and you can see the impact over the last couple of quarters.
We're at the bottom of the range. Obviously, this kind of market, first quarter, we wouldn't, we wouldn't expect to be at the bottom of the range, although we did, we did kind of foreshadow, that's, that's what this year was gonna shape up like.
We probably had a little bit more volume factored in the equation, you know, when we did results last time, so it's a little bit short of what we expected. But from a manufacturing standpoint, it's kind of going in the direction we thought it would. May take us an extra quarter or so to get, you know, right in the targeted range on unit costs, especially when you're looking at it on a delivered unit cost, because even right now, we're still experiencing higher freight than you would in a free supply situation.
Go to slide 10. It shows the, you know, obviously, the impact of the price increase, and like I said, price increase came fully as expected, a little bit of mix versus the four. And then top line growth. So I guess I should bring us back to the calendar year, because we did have the price increase moving volumes around. So calendar year, you know, was more like eight, better than that in exteriors, but certainly the quarter was only about half that in exteriors.
So we're experiencing weaker demand. There's no way around that. And obviously, we're refocusing our efforts now that we are back into a service range that is more acceptable to our customers. We're back, you know, we're back focused on winning whatever business we lost during the shortage from whoever picked it up. Slide 11. Like I said, international, we had a good quarter.
Pretty much, the volume, price, you know, revenue and EBIT, all kind of in, well, sales and EBIT, about the same range as far as improvement. We get there if you go to slide twelve; we get there in a strong quarter in both Australia and New Zealand. Philippines, I think I commented last time about some more sheer competition.
So there's been a bit of work going on in the Philippines as far as, you know, addressing the segments specifically rather than, you know, the market as a whole. So that work's being done now. Sales were down as a result, mainly on the price side. EBIT was down again on the price side, and volume up, obviously, from the year on year. Europe was down on all three, but not enough to worry about, so just pretty evenly down. At this point, I'll hand it over to Matt to get through financials.
Matt Marsh (CFO)
Yeah, thanks, Louis. Slide 14 is the first quarter group results on a consolidated basis. You can see we reported sales of $507.7 million, which was up 6%. And Louis hit the highlights already of those key drivers, average net selling price in both North America and International, and higher volumes in both regions, although not as high in North America as we expected them to be. Gross profits down 4%, and gross margin percentage down about three hundred and seventy basis points, primarily as a result of the continued delivered unit cost compression that we're seeing, that we spoke about already. SG&A expenses increased 2%. As you'll see they're up slightly more than that.
There was a gain on a building disposition that we did unrelated to any of our production facilities. Excluding those gains, that gain of about $3 million, SG&A is probably up 3%. And in the business units, you know, we're continuing to invest in organizational capability, labor, as well as marketing programs related to future growth.
And an adjusted net operating profit for the quarter of 61.7, down 7% from a year ago, primarily as a result of North America Fiber Cement EBIT decreased about 16% versus the same quarter a year ago. On page 15 is the change in Australian dollars on FX. You can see on a percentage basis, really no material change from an FX translation on sales, profit, or adjusted EBIT.
A 1% difference on adjusted net operating profit. But you can see the Australian dollar, the US dollar exchange rate relatively stable over the last 90 days. On page 16, you can see our quarterly US input costs look almost all the input costs are up to varying degrees. You can see pulp is up about 12% versus the prior corresponding period. Cement's up about 6%.
Freight is up from a market standpoint, freight rates and fuel are up about 10%, in addition to that, we're obviously incurring freight inefficiencies as we work through the network supply and capacity constraints. Gas prices are up about 50-plus%, and electricity prices are about flat.
So, in the quarter, you know, input costs were a headwind of, call it $3-$5 million. We expected that'll hold fairly constant throughout the year, and trail off towards the end of the year. But, input costs and inflationary pressures, you know, will be a feature for the next several quarters on gross margins. If we go to slide 17, we go through the segments, you can see in North America, you know, EBIT decreased 16%. It was primarily the result of softer volumes and higher production costs, as well as continuing to invest in organizational costs in the business.
And those were partially offset by price in the 4% range, trending a little bit higher than we had expected it to. But nonetheless, the result on EBIT in North America was EBIT down about 16% for the quarter compared to the first quarter of fiscal 2017. International EBITs were up about 10% compared to the prior corresponding period. We were able to get price in both Australia and New Zealand, as well as higher volumes in Australia and New Zealand.
Australia average selling price is up about 6%. That's a combination of some modest strategic price increases that we did at the beginning of the year and you know, favorable mix. The New Zealand market you know continues to be healthy. It's up about 5%.
We also realized about a 3% selling price increase in New Zealand, and then the Philippines market's up higher than our volume, but our volume is definitely stabilized from the last several quarters. We're back to a favorable comp in the Philippines, and we've deployed some tactical pricing for certain segments to address some of the market dynamics that we talked about on previous calls.
On slide 18, our other businesses are fairly stable. You can see, you know, we continue to incur losses primarily in our windows business, as you know, as we continue to follow our strategy on windows, and you can see that that's up a little bit from last year and more or less flat over the last three years.
Research and development, no material change from the prior three first quarter results, all around $6 million quarter. So that continues to be on strategy, just normal variations from period to period. General corporate costs, we reported $9.8 million in general corporate costs. That's where we had a $3.4 million gain on, we had a storage facility out in our Fontana, California, property that we were just using for storage, that we've had on and off the market for some time now, and we closed on that and sold that during the quarter.
So there was a gain on that transaction. When you add the gain back, the general corporate costs for the period are $13.2 million, which is pretty comparable to the last several quarters. That's got a little bit of additional underlying labor costs as we fill out the management team, bring on various members of the GMT and Louis's direct reports. And then this particular quarter, you don't see that fully this quarter because of stock compensation was down a little bit in the quarter.
That sort of makes it look flat. On slide 19, income tax for the year is estimated on an adjusted effective tax rate basis to 24.1%. The adjusted income tax expense for the quarter decreased due to the geographical mix of earnings and the lower adjusted operating profit before income tax. No real change on where we pay taxes.
We continue to pay taxes and have taxes payable in Ireland, the U.S., Canada, New Zealand, the Philippines, and do not currently pay or have payables in Europe or Australia. And Australia is due to the AICF deduction. On slide 20, you can see we reported $102.9 million of cash flows from operations, down 11% from a year ago.
In addition to the decrease in net income, which was primarily the result of the EBIT performance in the North America business, we're rebuilding inventory levels. We built up about almost 35-40 million standard feet of inventory in the quarter. And you'll see on the balance sheet analysis, a year ago, we went from about a $6 million drain of inventory to about an $11 million build of inventory in this period.
So that's largely what's driving the working capital change, and then I'd say normal quarterly variations almost across the other current asset accounts. Higher investing activity, you can see the increase in capacity expansions. We've completed the Summerville, and that started up, but we've ordered equipment for our Tacoma Greenfield and are actively in the construction phase of that, and I'll talk about that a bit later, as well as we've done some early equipment ordering for our Prattville, Alabama, facility.
And then you can see the proceeds from the sale of the Fontana building were about $7.9. We had a book value, and the difference between the book value and the $7.9 you see in the cash flow is the gain.On slide 21, we had reported first quarter CapEx spend of $48 million. That was an increase of $30.3 million compared to prior corresponding period. We started up our fourth sheet machine in our Plant City facility, so we have four active sheet machines now.
We've commissioned the Summerville facility, and that startup is they've been producing for about 60 days. We also, as I said, we've ordered equipment in our mid-construction on the Tacoma, Washington, facility that'll be adjacent to our existing Tacoma facility. That was a previously announced capital, I think, two results calls ago. So in February, we announced that capacity expansion. We expect to commission that site in the first quarter of next fiscal year, so in about four quarters.
And then, right after our last result call, we announced with the state of Alabama and the city of Prattville our intentions to greenfield a new facility and commission that facility in the second half of fiscal 2019, so either the third or fourth quarter of fiscal 2019. And that'll be a new facility to the network. We're almost complete in the Philippines with that facility expansion.
We expect to be fully complete here later, either in 2Q or 3Q. On page 22, the financial management framework hasn't changed. You know, it continues to start with strong financial management. Obviously, margins and operating cash flows aren't as strong as they've historically been, but they're still quite strong, you know, by most measures.
You can see our ratings with the agencies have not changed during the quarter. We continued to maintain the same ratings and outlooks from when we talked in May. No change in the capital allocation. Obviously, our priority from funding the business at the moment is on organic growth and particularly on capacity expansion between the two already announced greenfield projects and the additional wrap-up of the startups that have other facilities have already started up.
That continues to be the focus of our investment dollars. We've continued to, you know, maintain the ordinary dividend within the defined payout ratio, and no real change to how we think about flexibility for everything else.
So we want to have enough flexibility to be strategic on inorganic opportunities as well as, you know, have plenty of liquidity and funding in the event of a change in the cycle. You can see on the right, our leverage, you know, continues to be within, well within the range of one to two times. No real change in the overall underlying capital structure of the business. Our weighted average maturity is three point four years and four point four on total debt and plenty of liquidity, almost 70% at the end of the quarter. On page 23, the debt profile, you can see the mix of available debt on the left.
We continue to have a very strong balance sheet, with over $112 million of cash, almost $428 million in net debt, 70% liquidity on our bank debt. No change in our corporate debt structure, and at 1 times net debt to adjusted EBITDA, excluding asbestos, we're right at the low end of kind of our target range. On page 24, guidance for the year. The current range coming into the call was a low of $248 and a high of $297.
Given where we've started the year, with exterior volume and interior volume, and our expectation about manufacturing in the U.S. and the continued recovery in delivered unit costs back to our historical expectations, we expect our net operating profit for the year to be between $240 million and $280 million. Obviously, that assumes a number of things outside of our control around U.S. housing starts and input costs and foreign exchange. We're assuming those as we've outlined on that page. With that, that'll wrap up the presentation, and I'll open it up to questions.
Operator (participant)
Thank you. If you wish to ask a question, please press star, then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Ramon Laviña with UBS. Please go ahead.
Ramon Laviña (Analyst)
Good morning. Good morning, guys. Can you hear me okay?
Louis Gries (CEO)
Yeah, I hear you again. Yep.
Ramon Laviña (Analyst)
That's good. Just wanted to clarify a couple of things on volumes, Louis. Did I hear that you said, excluding the drag from interiors, exterior volumes were up 4%? And if so, just wondering what you sort of see the impact from pull forward versus capacity being in the quarter, if you can quantify that?
Louis Gries (CEO)
Yeah, you, I'd say that's pretty hard to quantify, especially the capacity, because the capacity is kind of more of a drag that's kind of developed over time, meaning summary on the allocation, we came off in the winter, went on, we had long lead times on multifamily, so we lost business in that segment through the lead times.
And then, we had a price increase, so the full quarter and volume on the price increase pulled our inventories down, so we got into a bit of a service position. So it's kind of not been good for customers for probably 15 months now. I think it's clear, you know, we placed a drag on our efforts in the market, probably not so much on the market development stuff we're doing for the future business.
But just maintaining our base business, you know, we're out of trim products last year. We were short on a lot of different products in the south. So I can't remember what our estimate was for the, you know, full forward in the fourth quarter. But if you look at a two-quarter basis, you know, our, we are definitely, you know, we're definitely behind where we were, say, the four quarters coming into that.
So we unfortunately have, we, we've, you know, we've unfortunately put a drag on the business with the capacity problems, and now it's our job to work our way out. But market index, you know, somewhere between five and six. So for the quarter, you know, we're behind the market index.
For the four previous quarters, you know, rolling, we're above the market index, but kind of losing ground every quarter. So we gotta start turning around and gaining, you know, the market's confidence back that, you know, we can supply and we'll be in free supply.
Ramon Laviña (Analyst)
Okay. And just, I guess just to follow up on that, how are you thinking about the step through towards the back end of the year? I think end of the fourth quarter, you were sort of saying volumes should still be up about 12% for the full year-
Louis Gries (CEO)
Yeah, we're not-
Ramon Laviña (Analyst)
But otherwise.
Louis Gries (CEO)
Yeah, we wouldn't be looking. I think we did 12, I think, or right around 12 last year. We won't do 12 this year. Like I said, we got out of kind of a product line in interiors, so if interiors ends up flat for us, we've probably done a good job to make up that volume through you know, market index and a bit of growth against the index. Exteriors, you know, right now I'm sitting in the same spot we were last result. Our order files weak, so I don't expect a good volume comp this quarter, although I do expect a better EBIT comp this quarter, I don't expect a good volume comp.
So, if we can get to the market index plus a little bit this year, I think unfortunately that's the best we're gonna do. On the manufacturing side, which got us into trouble, you know, we did make quite a bit more board this quarter, first quarter this year than last, like 22% more board. So we definitely got ahead of that problem, now we gotta stay out of it.
So, you know, we got the Summerville plant startup to help us stay ahead of it, and then we got the Tacoma coming on next year. And the reason we needed 22% to get out of trouble, because, you know, first quarter last year, we were pulling down inventories. In first quarter this year, we had to build inventories.
So we're now at the point pretty close to our target inventory, I mean, within, like, 10% or something. So we'll start mixing the plant volumes a little bit different to give us a little bit of advantage on the unit cost as well. So that's kind of where we're at. Manufacturing, I won't say it, it's going as easily as... We know it was gonna be hard, but it's a little harder than we thought. But the, you know, we're at the point now where we see enough traction. We still have a couple of sites that aren't performing the way they should, and we're still working hard on those.
But we see enough traction to feel like, okay, we got the supply thing straightened out for our customers, so now it's a matter of getting back in front of all of our customers and seeing who made the switches off our product and who didn't come back, and see if we can win that business back, which I'm quite sure we will, but it won't be a flip of the switch.
Ramon Laviña (Analyst)
Okay, great. And just one for Matt. Matt, just on the tax rate, I guess if you could just give us a bit of color on what you expect that to be for the full year?
Matt Marsh (CFO)
Yeah. I'd expect it to be in that 24% range. You know, the way the effective tax rate estimate works is that first quarter is a pretty good indicator of kind of where we think it's gonna be for the year, and then it adjusts, obviously, as our forecast adjusts. For the year, I'd expect it to kind of be 24%, you know, plus or minus a half a point, half a percent.
Ramon Laviña (Analyst)
Yeah. Okay, great. Thanks very much.
Operator (participant)
Thank you. Your next question comes from Emily Smith with Deutsche Bank. Please go ahead.
Emily Smith (Director of General Industrials)
Hi, Louis. Hi, Matt. Just a couple of questions from me. I think if you put together the higher costs you talk about, it's just over nine percentage points, and I think that equates to around $38.5 million, and you said $3-$5 million headwind from higher input costs. So there's like $35 million there that I just wonder if you can sort of give us some, a feel for how much you think, you know, you can take out versus how much you think, you know, might remain in the system. Is my first question. And the second question is, I was just wondering if there was any update on some of those management positions that were outstanding?
Louis Gries (CEO)
Yeah, I'll leave the numbers up to Matt. As far as management, yeah, we announced that we brought Jack Truong on, I think, January. So he's in role or no, he came on in April. Kirk Williams came on in January. And Sean Gadd is coming on, end of this month, August twenty-first, he starts, and he'll be our head of sales and marketing in North America. So, pretty happy with the way that recruitment of all three individuals has gone. So our plan to strengthen the North American management team, I think is the game plan is working as we laid it out. So obviously, there's a lot to do.
These three individuals are very capable with good experience in other companies, so, but they're still, you know, kind of learning the business model, learning the industry. All three of them come from outside our industry. So obviously, we're not getting full impact yet, but, we like where we're headed there. So I'm gonna hand it to Matt for your question on, I think you do more.
Emily Smith (Director of General Industrials)
Sure.
Matt Marsh (CFO)
Yeah.
Emily Smith (Director of General Industrials)
Sorry, Louis, can I just ask quickly, so does that mean that those senior management hires are now complete?
Louis Gries (CEO)
I'd still like to bring in a CTO. It's not as high urgency as the first three were. So, you know, with the first three, we really did find the type of individual we were looking for. We're into the CTO search and coming up a little bit short on the type of individual we're looking for. So, that's not super urgent for us, but we'll bring a CTO in the next, I would guess, six, eight months.
Emily Smith (Director of General Industrials)
Got it.
Louis Gries (CEO)
Maybe, maybe, you know, maybe pretty quick if we find the right person, but it may take six or eight months.
Emily Smith (Director of General Industrials)
Okay.
Matt Marsh (CFO)
Emily, on your nine points of gross margin, and we reference this in our NDA. Yeah, so think about that as about half of that is plant performance, which is just a variety of inefficiencies that we're really pushing the base network, which is already performing, you know, at a level that's consistent with kind of historical highs. Obviously, when we're in a capacity, you know, constraint, every % that it's off of it is sort of at the nameplate, we feel. But nonetheless, plant performance accounts for about half of that. Freight is another 2-3 points.
A component of that, so if it's three points, think of that as a third market and two-thirds inefficiency, you know, as a result of us having to make product in plants that are outside their natural markets that they would normally win, normally service, as well as us having to expedite. And we would expect that some of that inefficiency, you know, would certainly decrease as we get back to more normal operation.
Then the remaining three points is kind of equally split across inflation on input costs, startup costs, and some fixed costs, as we continue to invest in things like non-routine maintenance and infrastructure back into the facilities and some fixed labor costs back into the plants.
Emily Smith (Director of General Industrials)
Right. So I guess, if you sort of, is that half, that is that plant performance, what you think you can, you know, over the course of the year, is that what you guys think that you can, reduce? Is that... And, and maybe some of the freight inefficiency, is that fair?
Matt Marsh (CFO)
Yeah, that's fair. So it's the you know the four to five points of plant, and you know if there's three points of freight, you know, there's one to two that's that's you know inefficient freight that's not related to the market. So there's that five six seven points you know margin that over time you'd expect to work it out. I think you know obviously the key is how quick can we work it out of the system.
And as Louis said earlier in the call of the last six or seven months you know we've seen a good trend on five out of the six or six out of the seven. So we can definitely start to see it now. That gives us you know more confidence that it's gonna come. It's just a matter of how fast it's gonna come out.
Emily Smith (Director of General Industrials)
Right. And okay, and so when you talk about the guidance range for 20%-25% margin for FY 2018, I mean, you know, what, what are the chances that you could get to the 25%?
Matt Marsh (CFO)
For the year?
Emily Smith (Director of General Industrials)
Yeah.
Matt Marsh (CFO)
Yeah. I don't think we'll get to the twenty-five for the year.
Emily Smith (Director of General Industrials)
Yeah.
Matt Marsh (CFO)
You know, but I think where we said it in May was that we, you know, we could get to the middle of the range, maybe the upper end of the range. And, you know, that's probably about as good as I think we're gonna do, you know, for the year, just given where the volume is in the first quarter and what we're seeing in the order file here in early August through the first six weeks of the second quarter.
Emily Smith (Director of General Industrials)
Okay. That's great. Thank you.
Louis Gries (CEO)
Thank you. Your next question comes from Peter Steyn with Macquarie Group. Please go ahead.
Peter Steyn (Analyst)
Good evening, gents. Can I just clarify your response very briefly to Emily's final question, Matt? So that your comment around margin, that would obviously be for full year perspective? So on a quarterly basis-
Matt Marsh (CFO)
Yeah.
Peter Steyn (Analyst)
you would still expect to get a little bit towards the upper end of the range?
Matt Marsh (CFO)
Yeah, that's right, Peter. Yep, you know, I think what we had been saying in May, and I'd say is pretty consistent now, is that we were gonna have a tough comp in the first quarter because a lot of the manufacturing inefficiencies didn't really start to come into full light until the second quarter or so last year and into the winter. And then we had input costs really as a tailwind up through the first six months of last fiscal year, and you know, there obviously a slight headwind here in the first quarter.
So those dynamics, I think, are still the case, which is putting the first quarter EBIT margins, which are historically high, you know, when you look at the EBIT margin by quarter on slide nine, they're higher in the first. They tend to be high in the first quarter. We're starting obviously with a low, and it'll still build in the second quarter, in the third quarter, in the fourth quarter.
So we're still expecting that. I don't think that math each quarter will get us to an EBIT margin that's at, you know, 25 for the year. But I do think it'll get us to an EBIT margin for a new year that's either, you know, in the middle of the range or maybe in the upper end of the range.
Peter Steyn (Analyst)
Okay. Perfect. So then, just very quickly, could you talk us through the franchise health? I'm really interested to understand how our customers are thinking about your ability to supply. Lou, you made comments about confidence. Yeah, so that in the context of your ability to supply now. I mean, I'm sort of assuming that you have got an ability to deliver to orders now. How does that sort of all come together in terms of how customers are thinking about you as a business partner?
Louis Gries (CEO)
Yeah, I mean, obviously, it depends on the customers in the market, but some of them will be fully back with us, and some of them would be lagging. You know, the reality is, there's a percentage of our customers that had to find a different solution for whatever it is they were after last year, and in a lot of cases it would have been trim. And you know, they've landed on that solution, whether they're builders or dealers carrying for builders.
Now it's just reengaging and going back and, you know, like you say, letting them know that we got our supply side straightened out, and we want to get back on our product, which they ran in the first place, we think, for the right reasons, so we just got to get them back there. So it's just a lot of reengagement, and I don't want to, you know, mislead you. There's a lot of our customers that, if they did have to do any switching, they'd switch right back.
When you're talking about, you know, the type of percentages we're talking about, there's going to be other customers who landed on a different product and not their highest priority to get back to Hardie, and we just got to be proactive with them and kind of reestablish our value form.
Peter Steyn (Analyst)
Great. And then just a very quick one on pulp. Matt, perhaps 12% increase in the period relative to index, but was probably a little bit below that. Just curious why an above average number out of pulp?
Matt Marsh (CFO)
Yeah, I mean, we still bought below the market index for the quarter. So it just happened, you know, that's just where the, you know, the pulp index was for the quarter. I don't, you know, I don't have a-- There was no inefficiency on our side, or it's not like we had a bad quarter with respect to how we bought.
You know, we just happened to catch a quarter where pulp was up. But, you know, we've-- Our impact on the quarter was lower than that 12% you have on the input slide. That input slide is meant to be a market index indicator. Our sourcing strategies were better than that.
Peter Steyn (Analyst)
Okay, great.
Operator (participant)
Thank you. Your next question comes from Simon Thackray with Citigroup. Please go ahead.
Simon Thackray (Director and Senior Industrial Analyst)
Thanks. Good morning, Lou. Good morning, Matt. Just a quick one on qualification. I think you called out DIFOT level at the fourth quarter. Just wanted to understand how DIFOT levels are tracking by region, because you said the north and the south in the US, to start with.
Matt Marsh (CFO)
Sorry, Simon. Could you just repeat what level?
Simon Thackray (Director and Senior Industrial Analyst)
That DIFOT, the delivery in full on time. You called those out last quarter.
Louis Gries (CEO)
Yeah. All right, sorry, but you got a different acronym than we have in the U.S. Anyway, it was tighter in the South because I don't know if you recall, but we were short capacity, but we were specifically short of XLD capacity. So the Plant City line, which we built and started up last year, is a product-specific line, or the majority of it goes out toward trim. So we shortest on trim for the South. In the North, you know, our service position slip, but not anywhere to the degree that it did in Texas and the Southeast.
Simon Thackray (Director and Senior Industrial Analyst)
Okay, that's helpful, Lou. Just a couple of questions. The average selling price jump that we saw in the US, obviously appreciating the eight to one price rise, but you also made reference to the tactical withdrawal from G2 and interior going backwards, versus the PCP. So to what extent was the ASP influenced by the withdrawal from G2 and from interiors itself going backwards?
Louis Gries (CEO)
Yeah, it was, like I said, the mix benefit was less than 1%. So, and that mix benefit is kind of a backward use of the term. It was less multifamily because of our lead times and less backer because of our pulling out of that product line. So it wasn't like we sold more high-value products, we sold less of the lower priced products.
Simon Thackray (Director and Senior Industrial Analyst)
... Okay, that makes sense. Thank you. And then just in terms of the SG&A spend, you know, of course, backing out the property sale, $3 million on the property sale for a second. Was it more or less effective, you know, given this issue of customer allocation and customer pushback, was it more or less effective in the R&R market than the new housing market, or are they both behaving the sam e way?
Matt Marsh (CFO)
Yeah, I'd say the SG&A spend is not directly related to, you know, the R&R or the new construction market. I mean, we've got programs that are aligned with, you know, different segments and different products at any given time. The increase in SG&A, you know, continues to be associated with us putting more management capability and numbers into the organization. So we're continuing to put labor costs into the business as we're trying to build out the management team and, you know, provide bandwidth and provide more capability in certain departments.
Simon Thackray (Director and Senior Industrial Analyst)
Okay, that's helpful, Matt. So just maybe I can ask the question a different way, but in terms of the, you know, re-winning hearts and minds of customers, is that more in the new housing, you know, major home builder market, or is it more in the repair and remodel market, where the issues of getting people back on board are?
Louis Gries (CEO)
I think everyone protects R&R to a greater degree, whether you're a dealer or a manufacturer, because it's a more profitable segment, so now our big builder business is protected with contracts, so it would be more the guys, you know, kinda not the biggest builders, but you know the guys that use Hardie on a regular basis and buy it through the dealer without any direct contact with Hardie.
And you know that's probably the easiest stuff for someone to switch it off when their dealer needed to switch it off, or I guess would mainly be a dealer, but you know it was across the board. If you use trim, you had to work hard to find our trim. That would have hit all the segments on the plains to a lesser extent, I would say.
Simon Thackray (Director and Senior Industrial Analyst)
Okay. So then, I'll, I won't labor the point, but, if I go straight to the outlook and the range, the 242 million NPAT, and your comment about you'd be happy to meet the sort of index growth for the market of about 5%-6%. I think that's what you called out, Lou, correct me if I'm wrong. I'm just trying to understand what the assumptions are. They're at a pretty wide range, you know, that's the best part of a quarter's profit in that range. What are the assumptions to get to that number this year?
Louis Gries (CEO)
That kind of range, I mean, I don't know if I've looked back on previous years, but we always start wide and narrow it down as we get later in the year. So we're not seeing it as a wide range. The assumptions, obviously, external are housing starts, R&R index, and input costs.
The internals would be current order file is weak, you know, so it's hard to be overly optimistic on, you know, just snapping that around. And then in manufacturing, you know, we've got a decent trend line, but you know, there's variance in how things work in plants, and we hope we're on a...
You know, we're gonna maintain our positive trend and hit the targeted, you know, costs we're after, and then cost rate as well. So you got a mix of internal and externals there, and we don't think the range is that wide for an August call for the full year.
Simon Thackray (Director and Senior Industrial Analyst)
Okay. Fair enough. That's fair enough, Lou. And then just into Matt, just in terms of that inventory build, which was 203, and it went up to 215, so 203 at March and 4Q, so up to 215. Is that all, but presumably it's all the US, and you called out that you're still short in the south, Lou. So where is that inventory, and what was the benefit to gross margin for that credit for the inventory in the period?
Matt Marsh (CFO)
Yeah, I mean, the inventory is sort of evenly distributed throughout the network, so it's not in a particular region. We, you know, still have some areas of the country where we've got certain products that are below, you know, our minimum inventory band, and I'd expect us to continue to build inventory in the second quarter and then do the normal inventory build in the winter in order to get ready for, you know, spring shipping season.
So I think we'll continue to put material into inventory over the next couple of quarters. And I'd say it's by region and by product, so it's not a, you know, it's not one plan or even one product. It's kind of a mix. We definitely got more plants that are now in the band, and we've got more regions that have more products that are now within our range than we would've a quarter ago, or certainly, you know, several quarters ago.
Simon Thackray (Director and Senior Industrial Analyst)
Sure. And just what was the financial benefit to that in the margin in the quarter, the U.S. margins, Matt?
Matt Marsh (CFO)
Yeah, I mean, we don't disclose kind of variance level, you know, detail to standard. I mean, it obviously washes out, you know, over a 90-day period or so. We tend to turn inventory stock with about 60, 70 days.
Louis Gries (CEO)
I think what you're saying, I think the question, if I read it right, is you're saying, well, you made more than you sold, so you got the benefit of making more.
Matt Marsh (CFO)
Correct.
Louis Gries (CEO)
Is that what you're saying?
Matt Marsh (CFO)
Correct.
Louis Gries (CEO)
Okay. Yeah, we're not at our targeted inventory, and you know, we'll you know, it's interesting that you see it that way, 'cause we're kind of seeing it the other way. Our cost of goods manufactured is lower than our cost of goods sold, 'cause we got you know, inefficiencies coming along, so but it takes six weeks to find a way to the unit line. So I'd say I'd say whatever benefit there is is more than being kind of offset by the fact that we're working our way down on unit costs. So what we sold this quarter was more expensive than what we produced.
Simon Thackray (Director and Senior Industrial Analyst)
Got it. Okay, thanks. Thanks, Jim.
Operator (participant)
Yeah. Thank you. Your next question comes from Andrew Johnson with CLSA. Please go ahead.
Andrew Johnston (Head of Basic Industrials and Services)
Good evening, gentlemen. A couple of questions. First of all, particularly, looks like the issues with fulfilling customer demand has been focused in the South. What are customers shifting to? Are they shifting to alternative fiber cement suppliers?
Are they shifting to engineered wood? Where do you think that's going? Has that got anything to do with what you're seeing, as you mentioned, Lou, a little harder? It appears to be, if I hear you correctly, it appears to be that you're finding it a little bit harder to get those customers back than what you thought.
Louis Gries (CEO)
Yeah, just so everyone on the call, I mean, I did put it out there, but everyone on the call needs to realize it's on the margins. So we're talking about, you know, maybe 3% or 4% or 5% growth is missing. So 95%, 97% of our customers are probably fully back. But where it goes, it goes to close alternatives. You can be pretty sure it doesn't go to vinyl.
So it probably doesn't go to stucco, it doesn't go to brick. So you got your wood products and your cement products, so you got your direct fiber cement competition. I think there's been a little bit of opportunistic importing of trim products, because that's the product we're shortest on.
So the trim manufacturers are MiraTEC, LP, and I think you got some Collins trim still out there. So it's going hardboard, it's going OSB, it went CFC, which is converted fiber cement. So it would have sprayed. There's no big winner out there. It just would have sprayed around, depending on what the market is and what the customer need was.
But I still wanna I, I want to point out again, this isn't a rush, you know, a big run from Hardie. You know, where a large percentage of our customers haven't come back. This is, again, probably more customers that we don't touch directly, and we just got to work harder and work through the channel and make sure we get all our touches in.
Andrew Johnston (Head of Basic Industrials and Services)
Elementia announced that they now started shipping, fiber cement product into, I suppose you'd call it the Midwest, ahead of the Indiana plant restarting later this year. Are you seeing any of that, or is that just too small to come up on your radar?
Louis Gries (CEO)
I think they're probably shipping their excess capacity from Oregon end, but we haven't tracked it. I mean, we know they have plans to start up the plant. You know, the CFC kind of market position is, you know, it's kind of one that we don't spend a lot of time on because, you know, they're gonna find a number they can sell a certain percentage of their board at.
They don't seem to quite sell out even when we're sold out. So, yeah, whether they want to sell it in the Midwest or in Denver or in Texas or wherever they want to sell it, I mean, you know, it's just the same equation, so we don't really chase them around. That's, I guess, my short answer.
Andrew Johnston (Head of Basic Industrials and Services)
Okay. And final question, just around the international. Is there any insights around, you know, how Australia is going, Philippines? Any quick comments there?
Louis Gries (CEO)
Yeah-
Andrew Johnston (Head of Basic Industrials and Services)
Europe, I suppose. Sorry.
Louis Gries (CEO)
You can see from the slides, Australia and New Zealand, they both had nice quarters. Philippines has that little bit of a reset, don't do any capacity coming online. So they're giving up a little price to protect market share against some importing. In Europe, kind of even though all three arrows are down, it's more flat to down than down down, you know. So we're still working in Europe to you know find a better path forward. So that hasn't changed.
Andrew Johnston (Head of Basic Industrials and Services)
Okay. All right, thanks very much.
Louis Gries (CEO)
Yes.
Operator (participant)
Thank you. Your next question comes from Keith Chau with Evans and Partners. Please go ahead.
Keith Chau (Analyst)
Oh, good morning, Lou and Matt. A couple of quick questions on my end. Just firstly, with respect to volume growth progression as we get through FY eighteen. I appreciate your comments of getting back to around market index or above by the end of the financial year.
Will it be likely that it's more going to be the third quarter that you get back to market index rather than the second quarter? So I guess, put it simplistically, should we expect PDG to still be negative in the second quarter? And then just secondly, on price, you know, as you kind of try and win back customers, you know, will you be discounting more and actually ceding a little price to get some customers back?
Louis Gries (CEO)
Yeah, I don't think I'm worried about price. I mean, like I said, it's a small percentage of your customers, so even if you did use some price incentives, it wouldn't be across the board price moves. Not saying that that's kind of the answer, because I'm not sure it is. It's really certainty of supply, I think is way more important at this point to the customers that had been on Hardie and haven't come back yet.
So, yeah, I wouldn't worry about that. And like Matt said, we're almost six weeks into the quarter, and we got a soft order file, so you read it right. If we If we start picking up again above the market index, we'd probably start having it in the third and the fourth quarter.
Keith Chau (Analyst)
Thanks very much, Lou.
Louis Gries (CEO)
Yeah.
Operator (participant)
Thank you. Your next question comes from Andrew Peros with Credit Suisse. Please go ahead.
Andrew Peros (Industrial Analyst)
Thank you. Lou, I just wanted to circle back to your answer that you gave to Andrew Johnson's questions about where the loss or gains of share are kind of going in terms of price. I guess if I look at the Ply Gem results overnight, the vinyl guys are obviously calling out victory over the past quarter, saying that vinyl gained market share over the past quarter, and they're also saying that Texas was particularly weak.
So I guess, in light of your weak order file that you're calling out, just wondering if you can reconcile that to perhaps what the vinyl guys are seeing and maybe the Texas market, and maybe we're kind of, you know, overanalyzing, you know, one quarter's volume weaknesses as maybe something systemic when perhaps it's not.
Louis Gries (CEO)
Yeah, I, you know, you asked me my view on a vinyl comeback. I don't see a vinyl comeback. So if they got a positive quarter, which I haven't seen the result, obviously, we follow the volumes through the Vinyl Siding Institute, and we track their volumes against our volumes and our close alternatives. We don't see a vinyl comeback. Your other question was, they referred to a weak Texas. Is that what you said?
Andrew Peros (Industrial Analyst)
Yeah.
Louis Gries (CEO)
Yeah, we've had some weakness in Texas, so we're not sure how much of it is carryover from our supply problem versus, you know, if there's a temporary kind of gap in market demand down there. But we are a little bit weaker in Texas than we'd want to be.
Andrew Peros (Industrial Analyst)
Okay. Thanks a lot.
Operator (participant)
Thank you. Your next question comes from Michael Evans with Quest Asset Partners. Please go ahead.
Michael Evans (Director)
Sorry, I've had my question answered. Thanks very much.
Operator (participant)
Thank you. Your next question comes from Brook Campbell-Crawford with J.P. Morgan. Please go ahead.
Brook Campbell-Crawford (Analyst)
Good evening, Lou and Matt. I just had a question on regional volume performance. You talked a bit about the South and the Southeast, where there's some capacity issues in servicing customers. But how are you seeing volume performance relative to market, and therefore PDG in some of the other areas like the Midwest, or the South or the West, rather, for instance?
Louis Gries (CEO)
Yeah. You know, PDG is a metric that gets less accurate, the smaller things you measure. That's why we don't measure it quarterly, and we don't use it so much regionally as well. We use it a little bit by division. To answer your question on what do we think about regionally, it kind of goes back to, I think it was Andrew's question before you.
Texas was the only one that we looked at the volume and said, "Hmm, something wrong there." So we kind of drilled down there. We saw a few of our own internal problems, so we're patching those up. And then we didn't really answer, you know, where's the market at?
You know, it's not officially kind of a slow market, but it seems like market demand's not as strong as you'd expect. So it's a market that builds less in the summer and more in winter when it starts cooling off down there. So it may just be a little bit more of a kind of a weird thing around the timing. Like I said, Texas is a great market.
They're back on the front foot as far as growth projections. We did find some gaps in our programs down there. Of course, they use a lot of our XLD trim, which we were short of last year. So we think we'll get Texas tracking where we want it to. The and that's the only one worth commenting on. Everything else is kind of, you know, what you'd expect.
Brook Campbell-Crawford (Analyst)
Okay, thanks for that. Just a question for Matt on the balance sheet. Talked about leverage being at the low end of the range, and appreciate you've just made the debt payments, and there's some CapEx to go in for the plants in the coming periods. But interested in your thoughts around capital allocation. Should people start to be thinking about buybacks in the coming periods at all?
Matt Marsh (CFO)
No. You know, they shouldn't be thinking about buybacks or returns kind of above. We're going into a period of pretty significant, you know, CapEx due to the capacity expansions. We've got, obviously, the ones we've announced. Tacoma, we've already announced, is $121 million of incremental capacity on top of the land we bought a couple years ago.
So that'll be $150 million CapEx to $25 million of land that's already been spent, and we've pre-ordered some equipment. We got, you know, quite a bit of Tacoma spend still to come. We haven't announced a price tag on Alabama, but you should assume it's gonna be at least, you know, the price of the Tacoma.
That's to come. That's just sort of in the immediate term, meaning over the next, call it, 12-18 months. We're continuing to look at, you know, kind of a greenfield or brownfield capacity after Alabama. With all that kind of in mind and just thinking about how I think about the balance sheet, knowing kind of margins are, you know, in the part of the range we really want them to be, a combination of those two things. You know, we would continue to fund organic growth, continue to fund capacity expansion, maintain the ordinary dividend. I wouldn't expect any kind of special returns, though.
Brook Campbell-Crawford (Analyst)
Thanks for that. Appreciate it.
Operator (participant)
Thank you. Your next question comes from Ramon Laviña with UBS. Please go ahead.
Ramon Laviña (Analyst)
Hey, just a follow-up question, Matt. Just one on CapEx. Just following up from Brooke's question. So what are your expectations now around CapEx for this year and the next two years, given those capacity expansions?
Matt Marsh (CFO)
Yeah. Yeah, thanks, Ramon. I think in May, I said, you know, roughly $250 million per annum for each of the next three years, and I still think that's about how it will play out. I think this year, meaning fiscal 2018, could be higher than that. I won't be surprised if we're up in the $300 range, depending on how we decide to design the Alabama plant and how much of that spend gets done before the end of March.
But given that we've, you know, accelerated the build-out of Tacoma, you know, you should expect almost all that Tacoma spend to go in. I'd expect a large portion of Alabama to go in, you know, into this year. And then we've got a normal maintenance CapEx. And so right there, you know, you can easily start to see we're probably in that $250-$300 million range this year. And then we've got to finish Alabama next year, do our normal kind of $100 million of maintenance CapEx.
And then we're still working through what additional capacity we need once we get Alabama designed and constructed. So I still think that roughly $250 million a year for each of the next three years is about right. I think the profile will end up looking slightly different, but I don't have better guidance for you at this stage, but that I'd say would change any of the models materially.
Ramon Laviña (Analyst)
Okay, great, and just one last one also for Lou. Just, Lou, just keen to get your sort of thoughts around feedback from customers on these new OSHA silica rules. I think they're meant to, the compliance date is from September this year, so just, I guess, what are you hearing there, and has there been, do you think, any impact on the way customers are thinking about fiber cement?
Louis Gries (CEO)
Yeah. I'd start with the last part of your question and say, no. Now, we have worked hard to enable the market through saws with vacuums and other cutting methods so they can stay, you know, compliant with the new standard. So we spent a little bit of money, which, you know, we talked about our SG&A bill.
Certainly we've spent a fair amount of money in that area to kind of really enabling the market to hit the lower standard. And, of course, some of our plant work was to make sure that all our plants are at the lower standard as well. So, but no, I don't think anyone's... You know, so many building materials have silica, is one of the key raw materials or have silica in the process. I don't think anyone's looking at fiber cement as, you know, less viable because of the change.
Ramon Laviña (Analyst)
Okay, great.
Operator (participant)
Thank you. Once again, if you wish to ask a question, please press star, then one on your telephone, and wait for your name to be announced. Your next question comes from Peter Steyn with Macquarie Group. Please go ahead.
Peter Steyn (Analyst)
Thanks. Just a quick follow-up. Louis, you mentioned manufacturing flexibility in general. You alluded to Fontana running on an optimized schedule now, obviously still battling with the one line. Could you talk us through just how you're seeing that startup play, the startups playing through the year? Summerville's pretty much done and been running along the expected curve. But just wanting to get a little more detail there, on how you see the plant strategy working through the year.
Louis Gries (CEO)
Yeah. So, I think we might have put out the wrong sound bite on Summerville. It has been in startup mode for a couple of months, mainly commissioning in June and then startup in July. It hasn't made a lot of material yet. We got parts of the plant kind of fully commissioned and other parts we're still working on. And then, of course, with a new site like that, the organizational capability is one of the key drivers of how productive you know, startup can be. So we're still working through Summerville. I'd say we're still in the early stages of the startup. I think they're like the way you described it, well through their startup.
I think they get another four or five months before we call them well through their startup. Now, the other sites, you know, like I said, PC four, Natchez, PC three, Cleburne three, Fontana one and two, they're officially out of startup mode, and they're in run mode. That doesn't mean they're running full efficiency, but it means they're, with the exception of Fontana, kind of in a target unit cost band that we're comfortable with.
We still got some work to do in Fontana. And then we got the rest of the network, and a couple of those sites, we'd like to see some improvement, and we've been working at that and kind of haven't gotten there in a couple of sites yet.
But overall, you know, we're ahead of, we're ahead of demand. Unfortunately, part of that's because demand's softer than we'd like it to be. But, you know, we produced 22% more board this first quarter than we did last year, first quarter. So you can see, we got a lot of capacity working for us now, and still some upside in multiple lines in the company. So, we won't run 24/7 through the winter, is the way we're reading it, but we will run pretty strong until we till we get up to the targeted winter inventory levels. We'll take annual downs in each facility this year, to make sure we stay up on the maintenance requirements.
So our manufacturing plan has basically gone from catch up, catch up, catch up. Now that we're caught up, it's okay. How do I do this balance forward in cost, service position, annual downs, you know, kind of work schedules for our employees, stuff like that. So that's what we'll be doing through the winter. And we'll probably in the September tour give you guys more guidance, you know, just how what's running what and why, and why the different lines are, some are running twenty four/seven. And by that time, I think, you know, at least you have a couple of them running three shifts.
Peter Steyn (Analyst)
Thanks, Chris.
Operator (participant)
Thank you. Your next question comes from Keith Chau with Evans and Partners. Please go ahead.
Keith Chau (Analyst)
Oh, hi, Lou. Sorry, just a quick one from me, just to clarify. So from what we're hearing, is it the case that you've got enough capacity now to service potentially a couple of years of growth, and it is simply just about getting volumes back into the system from customers?
Louis Gries (CEO)
Yeah, and Keith, by the way, just for everyone on the call, we're in I think our third or fourth follow-up question. So we'll cut the call after this question, unless we have one last one to take, and I'll take that last one. I wouldn't oversimplify it like that. You know, our old thirty-five, ninety model has manufacturing improvements built into the model.
In other words, the financial model for Hardie isn't near as good if every time we, you know, sell another couple hundred million feet of board, we need another line. So we've been getting gains in the network, and that needs to continue. That's part of our enabling strategy in manufacturing.
Otherwise, we're just building plants way too often and spending a lot of dollars on CapEx that, hopefully we don't have to spend if we get more out of existing lines. What we did, you know, last year is obviously we misread some startups, and we also had a flat to down period on some of the key lines in the network. So that's how we got into trouble.
So in the future, we'll plan more buffer in there. But believe me, you know, as long as you follow Hardie, Hardie will be working hard to get more out of existing lines because, kind of what Simon was referring to, you get that at a lot better incremental cost. You get it at an incremental cost, basically, and you get it without the investment.
So that's always plenty for us is more out of existing lines and then build lines as you need them. So I wouldn't oversimplify and say, "Hey, you're all set. You're two years ahead." If we do what we think we're supposed to do, we got our capacity lined up with enough buffer in place to where if there's some small variances, we're not going to get in trouble again.
Keith Chau (Analyst)
Excellent.Thank you.
Louis Gries (CEO)
All right.
Operator (participant)
There are no further questions at this time. I'll now hand back to Mr. Gries for closing remarks.
Louis Gries (CEO)
Yeah, that's great. I appreciate everyone joining the call, and for those of you coming to the September tour, we'll see you in a month or so. Thank you.