James Hardie Industries - Q1 2020
August 8, 2019
Transcript
Operator (participant)
Ladies and gentle men, thank you for standing by, and welcome to the James Hardie Q1 FY 2020 Results Briefing conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Dr. Jack Truong, Chief Executive Officer of James Hardie. Thank you. Please go ahead.
Jack Truong (CEO)
Good morning, and good afternoon, everyone. Thank you for joining us. I will start with the key business and operational highlights on our first quarter performance. Then Matt Marsh, our CFO, will cover the financial details of the quarter. Finally, I will come back and update you on where we are with our three-year strategic plan. Let me begin by putting our first quarter results in the context of our three-year strategic plan. We are an organic growth company. We're built to drive growth above markets, our PDG growth in all regions of the world that we operate in, and with good returns.
In North America, we are on a commercial transformation journey to be a more focused on customer company by continuing to invest significantly in demand creation with our end users, the builders, installers, and R&R contractors, while building a more robust account management capability to serve our customers, the dealers, lumberyards, and distributors, much better. This is aimed at driving a sustainable growth of our markets in the 6% range for the long term. We also drive lean manufacturing across all of our plants in North America to take advantage of our scale, to reduce variability, and to improve productivity. We target to generate $100 million in cumulative savings over a three-year period due to lean.
In Asia Pacific, our goal is to make a good business better, hence, to continue to deliver a growth above markets, even in a contracting market that we currently have in Australia and at a good returns. In Europe, it's all about accelerating fiber cement growth based on a growing fiber gypsum business while improving our EBIT margin. Now, let's turn to page seven on group results. I'm pleased to note that we deliver very good performance in all three regions that we operate in. North America had a 5% volume growth in exterior, while EBIT margin was at the top of the EBIT range, 25.1%. Europe continued to deliver strong revenue growth, 7% in euros, at expected EBIT margin. APAC delivered solid financial results despite weakening Australian housing market. Now, let's turn to page eight on North American results.
Our exterior volume grew 5%, showing a continuous improvement in primary demand growth quarter on quarter and in sequential quarter. It is a result of our talented team executing our demand creation and account management strategy better each day. Our interior volume declined 3%, which is an improvement over a negative 10% in the previous quarter. It's also a market improvement over the previous four quarters. With increased volume, better price mix, and lean savings, we deliver an EBIT increase of 6%, despite continued raw material inflation in the quarter. Our EBIT margin in the quarter was, again, 25.1%. Now, let's turn to page nine for the European results. Our EU team delivered very good revenue growth, up 7% in euros. This is driven by 37% growth in fiber cement.
It's a good growth momentum for our fiber cement business over Q4 of fiscal year 2019, which was 22%. The team also delivered positive price mix growth in the quarter. EBIT margin was 10.7%, which was in line with our internal targets. Now, let's turn to page 10 for our APAC results. Our APAC team delivered a solid quarter, despite a significant softening of housing market in Australia. The team managed well through a choppy market dynamics. The team was able to manage price mix well to deliver revenue at the same level as Q1 of fiscal year 2019. We also had a strong volume growth in the Philippines. EBIT and EBIT margin continued to be impacted by input cost inflation and higher freight. It was offset with lean savings and cost controls.
Our APAC team delivered an EBIT margin of 23% in the quarter, which is an improvement over quarter four of fiscal year 2019, which was 20.3%. Finally, on page 11, following our updated key assumptions for fiscal year 2020. We see a modest growth in the U.S. housing market. It's about 1%, and with the U.S. residential housing starts between 1.2 and 1.3 million, and we now see our EBIT margin for the year to be at the top of our range, which is 20%-25%, and we affirm the exterior PDG growth of 3%-5% for the year in North America. In Europe, we see a slight housing market growth across our addressable markets.
The introduction of new fiber cement products in Europe will be a key focus for our team to continue to create value within our European business. We also see an EBIT margin accretion through better management of price mix and better and more improvements in our network of plants in Europe. In our Asia Pacific business, the addressable housing market in Australia is contracted, and we are estimating between 8 and 10% decline for the markets in Australia. APAC volume will be 3-5% growth above markets, and EBIT margin will be in the top half of our stated range of 20-25%. Now I'd like to hand over to Matt Marsh, our CFO, to go into the quarter into more financial details.
Matt Marsh (CFO)
Thank you, Jack. Good morning, and good afternoon to everybody. Thank you for joining the call. I'm gonna take you through the financial results at a deeper level, as we would typically do. On page 13, results for the first quarter for the group, we had net sales increased up 1%, which, in the context of the markets and the market conditions, both in North America and in Australia, we think is a good performance. The exteriors growth above the market of 5% in North America Fiber Cement represents an improvement from the previous quarter. The Asia Pacific Fiber Cement business was impacted by the continued softening of the Australian market.
So we've seen that now for several quarters, and our residential markets in Australia are definitely contracting. In Europe, as Jack mentioned, we had higher net sales, largely driven by the Fiber Cement business, driving the 37% increase in revenue. Gross profits were up 5% on net sales, up 1%. Gross margins increased a hundred and fifty basis points. Adjusted net operating profit for the quarter was $90.2 million, up 13%. We had a 6% increase in EBIT in North America, a 272% increase in our European buildings segment, and Asia Pacific in U.S. dollars was down 12%. On page 14, we'll go into the North America results a bit more.
We reported net sales for North America of $452.3 million. They were up 4%. On volume, exteriors was up 5% compared to a year ago, and interiors was down 3%, an improvement from the fourth quarter performance. Price of 1% in the quarter, we're on track for our 2% price increase for the year. We implemented our annual change in strategic pricing on April first, as we expected we would. And there was a little bit of mix and some tactical pricing in the quarter that brought that down slightly, but overall, we're on track with pricing in North America.
EBIT up 6% on sales up 4%, that leverage was driven by an improvement in manufacturing, despite continuing to see higher input costs. I'll talk more about that in a moment. We are starting to see the beginning positive effects of lean with our plant performance in the quarter, and our SG&A, as a % of revenue, has gone down as we continue to focus on optimizing our costs and continuing to invest in growth and lean. On page 15, our first quarter EBIT margins were up 40 basis points compared to a year ago to 25.1%, and those are at the top end of our target range.
As Jack said, in our assumptions for the year, we believe will be at the top end of our 20%-25% target range for the full year of fiscal 2020. On page 16, we'll talk for a moment about input costs. A bit more of a mixed story, which is a nice change from what we had discussed with you in May and the previous several quarters, where we had headwinds kind of across the commodity groups. Pricing on pulp is starting to come down, although in comparison to a year ago, you can see it's only down slightly. In comparison to the fourth quarter of fiscal 2019, which represented the peak of the market, we're down close to 6%.
So you can see we're on a good, deflationary trend, but quarter on quarter, impact was slightly, just slightly down 1%. Freight prices, on the other hand, are down fairly significantly, down 16% compared to a year ago. Cement and gas are both up, 3% and 22% respectively, as the cement market continues to have a high level of demand. And electricity prices were down. So a bit more of a mixed story, in an inflationary story in totality for North America, first quarter of fiscal 2020 in comparison to 2019, but certainly a bit of a reprieve from the significant inflationary headwinds that we experienced most of fiscal 2019. Go to page seventeen.
In Asia Pacific, we reported net sales of AUD 154.4, which was flat to the prior corresponding period. We think we had growth above the market in Australia, despite a very soft market in the housing market, down 8%-10%. Strong sales volume growth in the Philippines. You'll see that on the upcoming slide. EBIT was impacted by higher input costs and unfavorable New Zealand plant performance. We're continuing to work on getting the manufacturing plant in New Zealand operating to the standard of expectation that we have.
But that was partially offset by higher average net sales price in Australian dollars, and as you can see on EBIT, while down 12% on a US dollar basis, it was down 6% on an Australian dollar basis. So the segment results in US dollars were unfavorably impacted by the change in foreign exchange rate movements for the period. On page 18, a quick look at the by country. As we've said now, a couple of times, Australia, we believe, had a good volume result given the market conditions. We think we gained market penetration despite the soft market. The EBIT decrease was primarily driven by the lower net sales. We think the team is doing a good job of navigating a declining market.
In New Zealand, you can see overall higher input costs and unfavorable plant performance is impacting that country's results, and a very good quarter in the Philippines, with volume up, driven by market penetration, and EBIT was unfavorably impacted by higher input costs. On page 19, the European Building Products segment net sales up 7% in euros, driven by fiber cement net sales in euros, up 37%. On an EBIT basis, excluding the one-time transaction costs, you can see we had an EBIT margin rate of 10.7% and an EBIT of EUR 9.1 million, which is driven by higher gross margins.
We're continuing to invest SG&A into that business, as we build out the corporate functions and we exit the service agreements. We're very much still on track for the overall budget that we had established for integration costs. We incurred $2 million of integration costs in the quarter. We expect there's some additional costs for the year, that that'll be incurred for the remaining three quarters. We expect total year integration costs to be in the $5-$6 million range. EBIT margin, excluding those one-time costs of 10.7%, very much in line with our internal targets, and we think the European business is on track. On page 20, our other segments. So, the other businesses you're familiar with, used to be our Windows segment.
You can see there is a $400,000 gain in the quarter, which was a $500,000 gain on sale of the fiberglass pultrusion business, which we completed early in the quarter. And prior to that, we had some legacy sales of that fiberglass pultrusion business, and there was a little bit of losses associated with that. So overall, a $400,000 gain for that. We continue to remain committed to R&D investments, and you can see we're within a normal band of variation on our R&D investments. General corporate costs for the quarter were unfavorable, largely due to foreign exchange and higher stock compensation expenses.
The underlying core SG&A or general corporate costs, excluding those two items, was up slightly, but in a very normal range. On page 21, income tax. We are estimating an 18.2% adjusted effective tax rate for the year and reported in the quarter. As a reminder, income taxes are not currently paid or payable in Australia due to the tax losses associated with our annual deductions relating to the contribution to AICF. On page 22, our financial management framework remains unchanged. We continue to stay focused on having strong financial management that starts with strong margins and strong cash flow. We believe strongly in having good governance and being transparent, and, you know, we continue to operate the company as an investment-grade financial credit.
Our capital allocation priorities remain consistent with the last several quarters, with our top priority being investing in R&D and capacity expansion to support our organic growth strategy. We remain committed to the ordinary dividend, and, you know, the remaining is flexibility for cyclicality in our market cycle. On the liquidity and funding side, you know, we have our commitment to the one to two times adjusted EBITDA leverage target. We're, you know, we continue to be temporarily above that target and have good line of sight to getting that back below the one to two times range within the timeframe that we talked about, that we've been talking about, so another four quarters.
So very much financial management consistent with an investment-grade credit, and we think we've got a strong financial position to be able to withstand cycles and unanticipated events. On page 23, we reported $161.1 million of operating cash flows, up 22% from the prior year. Those were largely driven by working capital and increases in income in each of the businesses, adjusted for non-cash items. Lower investing activities, obviously, with the acquisition and closure of Fermacell in fiscal year 2019, in the first quarter. You would expect that variance. And those were partially offset as we continue to invest in CapEx. You can see it was slightly lower in the first quarter of this year in comparison to a year ago.
On Slide 24, a brief look at our liquidity profile, very consistent with prior quarters. We have $1.2 billion of net debt at the end of the period. We have nearly $421 million of available revolving credit. The structure of our corporate debt structure remains consistent with our prior quarter discussion. Our 2.2 net debt to adjusted EBITDA leverage at the end of the first quarter is very much on track with the strategy that we laid out when we bought the Fermacell business, and we believe we've got line of sight to being back below that two times leverage, high end of that leverage range, by next year at this time. So another four quarters.
So we remain on track and remain committed to returning to our 1-2 times leverage target range. On page 25, CapEx spend of $63.3 million for the quarter, down slightly compared to a year ago. No new capacity projects. We continue to start up our Tacoma Greenfield expansion. We're continuing the construction of our Prattville, Alabama, facility, and that remains on track. We continue to expand our ColorPlus product lines in two of our plants in North America, and we're nearing the end of construction and we'll be starting up the Carole Park Brownfield expansion later this year, and we remain on track to starts selling board off of that line early next year, early next fiscal year.
On page twenty-six, just to reiterate the key assumptions and talk a little bit about guidance. So we continue to think that the US housing market will have modest growth this year in the 1-ish% range. We are assuming 1.2-1.3 million US residential housing starts. As we said, a number of times already on the call, we think we'll be at the top end. We have good line of sight to being at the top end of our EBIT margin range for the year. And our assumption is that we will deliver 3%-5% primary demand growth in North America. For Europe, slight housing market growth across our addressable markets.
We also believe we'll introduce new fiber cement products for Europe, in Europe this year, and that EBIT margin will be accretive year over year. Asia Pacific, we think the housing market will be down in the high single-digit range year-on-year and contracting. APAC volume, despite that market condition, we believe will be 3-5% growth above that market index, so continuing to drive market penetration. EBIT margins will be in the top half of our 20-25% range for Asia Pacific. We believe our full year adjusted net operating profit will be between $325 million and $365 million. Just to wrap up on page 27.
We think good and disciplined financial performance in all three of our businesses. Our North America Fiber Cement business delivered a marked improvement in primary demand growth, while generating an EBIT margin at the top of our target range. Asia Pacific Fiber Cement margins were in the middle of our target range and drove market penetration in a soft market. In Europe, Building Products segment delivered strong revenue growth in euros. Our adjusted EBIT of $124.4 million was up 16%, our adjusted net operating profit after tax was up 13% at $90.2 million. We will fund $108.9 million to AICF during the second quarter of fiscal year 2020, as provided under the AFA.
So with that, I'll hand it back over to Jack to go through strategy.
Jack Truong (CEO)
Thanks, Matt. So six months ago, I shared with you the strategic plan that our global team is executing on. And just to remind you that this global strategic plan was built with the permanent value creation in mind. So if you go to page 29. This strategic plan is all about making sure that our North American business will deliver the growth with the 35/90 strong returns, which is 20%-25% EBIT margin for the long term. And for Europe, it's about creating a EUR 1 billion business with the Hardie-like returns, which is about 20% EBIT margin. And for Asia Pacific business, it's about delivering growth above market with strong returns 20%-25% EBIT range.
Turn over to page thirty, and so what, what does that mean for our strategic priorities for the fiscal year 2020 and 2022? For North America, it's all about accelerating our exterior business growth. It is about providing the total James Hardie solution for the exterior of the home. And this is really the key part about commercial transformation that that we have discussed. And second is about driving lean transformation across all of our ten plants. We are currently the world's best fiber cement producer using lean transformations that will turn us into a world-class manufacturer that really leverages on our economy of scale. And third is to reestablish interior as a growth business for us not only in North America, but also around the world. For Europe-...
The priorities are about gaining market traction with current fiber cement products that we've been commercializing in Europe, as well as about developing new fiber cement products for the European markets. Second is about to continue to drive growth of fiber gypsum and gain market penetration for this product line. And third, for the European business, is to continue to unlock existing manufacturing capacity in the five plants that we have in Europe. Asia Pacific, continue to drive growth above markets and drive lean manufacturing across all four of our plants. Turning to page 31. Just like to give you an update on where we are with lean transformation across the three regions. In North America, we have implemented our Hardie Manufacturing Operating System now through five plants, and it's progressing well.
Two additional plants will be implemented by the end of second quarter fiscal year 2020. And we're on track to deliver $100 million cost savings cumulatively in the next three years. So if you look across to the right-hand side of the chart, we estimate that the Lean savings in fiscal year 2020 to be between $15 and $20 million, and then that will carry over to the following year, where we have the additional $30-$40 million of Lean savings, which then carry over to the third year, with an additional $40-$55 million savings. And that's roughly how the $100 million Lean savings will play out within the next three years. Now, this is a globe, now becoming a global transformation with Lean.
Our European business will start to adopt the Hardie Manufacturing Operating System. Our plant management teams of our five plants in Europe have visited our North America plants that have implemented lean back in July, and the key learnings they have from this visit will form the basis for the beginning of the implementation of lean across Europe. And our Asia Pacific team, this is really the spirit of continuous improvement. You know, the lean system that we brought and implemented into North America has been improved each time that we implemented in each plant across North America. And then based on those improvements, we now will then replicate some of those key improvement back into our plants in Asia Pacific.
And so our manufacturing and plant teams in Asia Pacific plants will be visiting our North American plants in the third quarter of fiscal year twenty twenty to bring back some of those key learnings and then replicate back into our Asia Pacific plant. Now moving on to page thirty-two. This is Europe update that we continue to drive the sales synergy for fiber cement Exterior product with Fiber Gypsum Interior. This is about leveraging on the channel access as well as the end user access that we have through the Fermacell acquisition. And which allow us then to be able to market and sell additional fiber cement products based on the penetration that we have with fiber gypsum.
And if you look on the right-hand side, this is the example where we have the residential as well as multifamily projects in the U.K. and also in Switzerland, where these housings have the James Hardie fiber gypsum products as the interior liners and the James Hardie fiber cement as the siding, exterior siding. Opportunity in Europe for us to continue to drive higher return is about improving the manufacturing capability that we have in our five plants. And it is a continuous improvement that we expect to see as we drive more EBIT accretion as the quarter and the year goes on.
Our objective is to deliver the EBIT improvement quarter on quarter and year on year in Europe. Now, moving on to page 33. This is the example of how our approach to growth above market in Australia, where it is a tough market right now with contracting housing markets. Here are the key trends that's happening in Australia today. There's certainly a labor shortage, less space, and with smaller lot sizes, certainly within Brisbane, Melbourne, Sydney, and lightweight construction is in favor. And with those market trends, it really favor our fiber cement products.
And it is the opportunity for us to replace brick with our fiber cement products. And the example we see here, on the left-hand side, those are the different types of homes brick-based made from bricks, and the right-hand sides are really about the flexibility that the builders in Australia able to build homes with different aesthetics, different configuration, using a fiber cement product line, and at the same time, improve the speed of construction, improve the lot size of the home, and also improve the affordability within the slowdown markets. With that concludes my strategic plan update section, and we're open for Q&A.
Operator (participant)
Ladies and gentlemen, we will now begin the question-and-answer session. If you wish to ask a question today, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request at any time, please press the pound or hash key. Your first question today comes from the line of Peter Steyn from Macquarie. Please go ahead.
Brook Campbell-Crawford (Analyst)
Good afternoon, Jack and Matt. Thanks very much for the time. Just was curious to get a little bit more flesh around the performance from a volume perspective in North America. Could you give us a bit of a sense of the factors that influenced your outcomes in the quarter, given what one's seen around the macro environment? You know, is it regional performance or channel penetration? What's happened in interiors and early impacts on ColorPlus? Sorry, I'm giving you a few bullet points there, but just curious on those perspectives.
Jack Truong (CEO)
Okay. Well, good morning, Peter. So let me address first the growth in exterior, and then we move into interior, and then we'll talk about the status of the color. So with the exterior, we, as we discussed during the past two conference calls, is that we are traditionally, and this is where Hardie's strength is all about, creating demand in the marketplace with our end users, with the builders, with the contractor installers. And so we have significantly increased the resource toward creating those demands. While at the same time, we have put a much bigger focus in terms of manage our customers, the lumberyards and the dealers out there.
And so the execution of our team from demand creation, connecting with our customers, that certainly help increase our growth in the marketplace. And then we also saw a lot of growth coming from our traditionally strong markets, which is the high S. And also, we also saw very good growth in the low S, particularly in the Northeast and Mid-Atlantic. And now moving on to the interior business.
This is what we also have shared with you in the last conference call, that is, that we have shifted our focus from calling on a lot of different stores of our retailers to really put more focus on calling in with our key customers at the headquarters. And then be a lot more proactively manage the business with our key retailers, so that we can plan out the right promotion placements. And also, at the same time, we start to launch of our James Hardie HydroDefense interior boards. And that's continue to gain traction, and we are pleased with where with the progress of that.
And then, relative to our color program, it is right now. It's just the beginning of that launch. And we expect the momentum will build in the beginning of this quarter, and then that will grow from here onward.
Brook Campbell-Crawford (Analyst)
Thanks. Thanks very much for that, Jack. And then perhaps just a quick one around cash flows, Matt. Could you talk to us about your expectations for CapEx for the full year? And also just wanted to touch on your working capital performance, which was pretty good. What should one think about in terms of progression around working capital as the year progresses?
Matt Marsh (CFO)
Yeah. Thanks, Peter. The CapEx guidance for the next three years remains consistent with the last couple of quarterly results. We expect to spend $200 million in CapEx this year, which includes both the completion of the existing capacity projects that we've talked about in Tacoma, Prattville, and the ColorPlus product lines and Carole Park, as well as kind of normal maintenance CapEx. For fiscal 2021 and for fiscal 2022, $150 million in each of those two years. 200, 150, 150 is kind of the CapEx guidance that we are reaffirming. Regarding working capital, it was strong, as you note, as the result indicates.
Keep in mind, it was a bit weaker in the fourth quarter, and we indicated that we felt pretty strongly that was the way some of the payables and receivables had come in at the end of March in comparison to early April. We were sort of expecting the result that we got in April, and that carried forward into the year. We do expect some working capital improvement in the year. We don't think it'll be at the rate, you know, that you saw in the first quarter result. We are expecting strong cash flows overall, though, for the year.
Brook Campbell-Crawford (Analyst)
... Thanks very much, Matt. I'll leave it there.
Operator (participant)
Your next question comes from the line of Brook Campbell-Crawford from JPMorgan. Please go ahead.
Brook Campbell-Crawford (Analyst)
Yeah, good morning. Thanks for taking my question, Jack and Matt. Just on the input costs for pulp, I guess, given the lags, and that should be there between list prices and your actual COGS line. I would have thought that it would be a headwind still in the first quarter, I guess. Is that correct? And if so, what was the impact to North America EBIT from that higher pulp?
Jack Truong (CEO)
Yeah, Brooke, we actually had a headwind of raw materials within the quarter. And then so it is a lean savings that mitigate some of those. But we still have the headwinds of raw material in the first quarter. We expect that to ease going forward, but we still see it within a quarter.
Brook Campbell-Crawford (Analyst)
Yeah, no, that's fair, and I guess, given margins at 25% in the quarter, despite those headwinds, which should abate as the year progresses and you should get Lean benefits building, margins, I guess the outlook there is pretty promising. So are you telling us here that you're gonna reinvest quite a bit in SG&A to get that top line down?
Jack Truong (CEO)
Yes. So, Brooke, I think we have talked a lot during the past two conference calls that you know a key for us a long-term strategy of driving that sustainable growth is really about making sure that we invest into our market particularly in the demand creation and also investing in our customers while we ignite the innovation process within our company. And so it's a it is a the investment that we need to invest in to sustain the and to build and sustain our growth.
Brook Campbell-Crawford (Analyst)
Okay. And one final one, just on pricing, a bit lower than I was expecting there in North America. Can you provide some examples of the tactical price decisions that you made in the quarter?
Matt Marsh (CFO)
Yeah, I think it's just normal tactical pricing variation. You know, we had guided to a 2% price increase for the year. We implemented that 2% for the year. In any given quarter, you know, we'll have price and, or sorry, mix and tactical pricing. Sometimes they offset, sometimes they both go one way, and in this quarter, they happened to be a little bit stronger than the prior quarter, but very much the way we expected it to be. So we've got line of sight to 2% for the year. We thought we'd kind of get off to about a 1% first quarter start that would build, you know, in the second and the third and the fourth quarter.
Keep in mind, we're also coming off of a 5% pricing comp from a year ago. At that time, you know, we didn't overemphasize the 5% last year. We said that it was a combination of the price increase combined with, you know, mix and tactical pricing kind of going in a particular direction for that quarter. So, we like where we are in pricing. We think our strategic pricing is in a good place. We think our tactical pricing is appropriate. There's nothing sort of abnormal, you know, in the quarter.
You just happen to see a one in the quarter, which is very much in line with how we planned and what we saw, and we're still guiding to the 2% for the year.
Brook Campbell-Crawford (Analyst)
All good. Thanks for that.
Operator (participant)
Your next question comes from the line of Keith Chau from MST Marquee. Please go ahead.
Keith Chau (Analyst)
Oh, morning, Jack and Matt. Just a few quick questions. The first one is just on your distribution base. You know, quite clearly, the volume growth comp was strong relative to peers in particular. So I'm just wondering if you can perhaps characterize how many distributors you've added, perhaps over the last six months, and whether there was a stocking benefit to those new distributors within this current result, please.
Jack Truong (CEO)
Hi, Keith. No, it is. Remember, we are a PDG growth company, and our growth is really the execution of the push-pull that our team have been embarking on. We really didn't add any new distributor. This is really about us create the demand and then connect that with our customers to really drive better sales conversion. So that's really what happened.
Keith Chau (Analyst)
Okay. Thanks, Jack. And then just want to touch on Europe very quickly. So volumes are flat versus last year, fiber cement sales up, which implies the underlying fiber gypsum volumes were down for the period. I'm just wondering if you can give us a bit more color on the underlying dynamic there, please.
Jack Truong (CEO)
Actually, the volume for our fiber gypsum is slightly positive in terms of volume. It is really we have really good growth in Scandinavia, the U.K., and France, and Switzerland. We're a little bit more challenged for growth of fiber gypsum in Germany, and it is a situation that we are correcting, but that's that is really what happened in the quarter.
Keith Chau (Analyst)
... Okay, and what's driving that challenge in Germany, please, Jack?
Jack Truong (CEO)
We very recently kind of just opened up a new fiber gypsum plant in Germany, so it is a dynamics that is happening that we are just going, that the market is going through that new capacity.
Keith Chau (Analyst)
Okay, thanks very much. That's all from me.
Operator (participant)
Your next question comes from the line of Andrew Scott from Morgan Stanley. Please go ahead.
Andrew Scott (Analyst)
Morning, guys. Thanks for your time. Just a quick question. Thanks for the detail you provided on, I guess, the multi-year sort of timing of Lean. Matt, I'm wondering if you can let us know what you've delivered in this quarter and how the sort of shape of that delivery of the 15-20 this year comes through, please?
Matt Marsh (CFO)
Yeah. So we, you know, the way we've been describing Lean over a 3-year period, you can sort of think about that same cumulative framework within a 12-month period as well. So Lean is about getting 1% better every day, and that 1% improvement over a 90-day period, you know, obviously builds then for a 180-day period and a 270-day period and the full year. So you could expect, if we're guiding to kind of a $15-20 million benefit in fiscal 2020, that that would build in a very similar kind of cumulative profile, where first quarter would be the lowest, building on the second, building on up to the third, and then building up to the fourth, for that total $15-20 million.
And then that profile would sort of very much continue into the fiscal 2021 and fiscal 2022 targets. So we've really got to lock in the month one and the quarter one savings in order to deliver on the year-to-date saving target that we've put in place for each of the plants for the first half. And the first half we've got to deliver in order to get to those targets for the year. So it's very much kind of about each week, each month, and each quarter that builds to the year. So hopefully, that gives you at least sort of a framework maybe to think about the 15-20.
We're not gonna provide specific numbers by quarter, but you know, we're trying to provide a way of sort of thinking about it, and we'll continue to be transparent with how we're pacing on that 15 to 20 at the half year results.
Andrew Scott (Analyst)
Got it. And I might be mistaken, but I think this is the first time you've talked about Lean in Europe. Can you tell us, Jack, talk to us about the opportunity you see there? Is it quite similar in terms of the improvement you think you can deliver?
Jack Truong (CEO)
Yeah, Andrew, the situation we have in Europe is actually quite similar to our manufacturing plants in North America a year ago. That is, we have five manufacturing plants, fiber gypsum and cement bonded, that pretty much run independently. So with the Lean approach, is really first that we have to make sure that those plant run to the standards, and then start to have the discipline of running through the standard operating procedure. So that, that's the first step, and second is to put in the first step of our Hardie Manufacturing Operating System.
In many ways, it's very, very similar to the opportunities that we have here in North America. We're looking now to really turn that into a value in Europe in the coming months.
Andrew Scott (Analyst)
Got it. And then, Matt, finally, just last one from me. I'm sure you're aware there was an asbestos case here that got quite a bit of attention. I know it's the AICF that settles that rather than yourselves, but is there anything you're aware of from a third wave case there that set any precedents, or was there anything that's inconsistent with what the actuaries are currently thinking?
Matt Marsh (CFO)
No. You know, I'm not aware of anything, and I would just, you know, sort of remind everyone that asbestos is best looked at over a long, you know, a long term and a long period of time. And I think we'll have, you know, an assessment from the actuary at the end of this fiscal year that'll obviously consider that case and the impact. But I'm certainly not aware of anything specific to that case that would have an adverse or favorable impact for that matter on the actuarial estimate.
Andrew Scott (Analyst)
Okay, thank you.
Operator (participant)
Your next question comes from the line of Sophie Spartalis from Merrill Lynch. Please go ahead.
Sophie Spartalis (Analyst)
Good morning, team. Just a few questions from me. Just in terms of volumes, we've spoken about it already quite a bit, but just in terms of the sales force, can you provide an update as to how much that has now been bedded down in terms of the, the hunters and gatherers sort of strategy that you had? And then also, of that volume uplift that we've seen coming through in the quarter, how much of that is coming from these priority non-metro areas in the U.S.? And then just in terms of the FY twenty guidance assumptions, if you could just run through what your R&R outlook is, please. Thank you.
Jack Truong (CEO)
Good morning, Sophie. As far as our sales force, our hunters are getting close to being where we want it to be. And in terms of the farmers, it is a new capability within James Hardie that we have been building. And of course, that started with that we onboarded and hire a new head of sales, which we share with you before. And also we have just hire a new VP of sales for the interior business, who also have the capability as being a very good farmers with the big retailers.
This is the area that we are more as the beginning of the journey rather than the middle or the end, as far as the account management is concerned. Then, what's your second question, Sophie?
Sophie Spartalis (Analyst)
Just in terms of how much of that volume uplift came from the new strategy around targeting those, priority non-metro areas?
Jack Truong (CEO)
You know, Sophie, the way that we approach the market now is very really driven through our customers and then with our end users. We just don't differentiate a lot in terms of non-metro versus metro, like we used to. Relative to your question on R&R, we were making the assumption that the R&R market would be between 3% and 4% growth for the year.
Sophie Spartalis (Analyst)
Great. And just to clarify, that's for the U.S.?
Jack Truong (CEO)
For North America. For the U.S., yes.
Sophie Spartalis (Analyst)
Yeah. Great. Thank you.
Operator (participant)
Your next question comes from the line of Peter Wilson from Credit Suisse. Please go ahead.
Peter Wilson (Analyst)
Thank you. Good morning. Another question on the North America volume results. So a very strong result. Is there anything that you'd call out that means it's not a reference point? So any short-term factors which might have inflated sales this quarter, such as the strategic price increase or anything like that, which would mean that we shouldn't use it as a reference point for the rest of this year?
No, there's nothing sort of artificial, you know, in there. We're still guiding to kind of a 3-5% PDG for the full year. We think the market in the first quarter was roughly, you know, flat, and will be up just slightly for the full year. That's got new construction down slightly and repair and remodel, we think will be up about 3%. So there's gonna be some normal quarter to quarter variation. You know, the 5%, as you said, is a good result for the quarter, but we're still kind of thinking that it's a 3-5% type of primary demand growth year.
So we've tried not to stay very focused in the last several quarters on the quarter, and we think it's much more about a rolling twelve months and the result for the year, and we still think we're in this 3%-5%. That obviously implies that with a 5% coming out of the first quarter, that you could have some normal variation within the 3%-5% and still be within that range for the year. So we certainly are pleased with the result in the first quarter, but I would just reaffirm the 3%-5% is the assumption that is the one that we want you to hear, primary demand growth for the full year.
Yeah, okay, because, I mean, I accept there is quarterly variation, but in prior calls, you've built expectations that things would build, I guess, throughout the year. So the benefits of your sales strategy would build throughout the year. And in today's call, you've talked about color momentum building throughout the year and also reinvestment of some of those raw material savings. So I'm just wondering why we might not see an improvement during the year and why you might not be looking to, you know, exceed that 3%-5%.
Jack Truong (CEO)
Well, Peter, I think, you know, it is now that we get to this critical mass or the size now, that every day, every week, we have to execute our game plan correctly, and we have to earn that business every day. So it's not something that we should have a good first quarter and think that the rest will be like that. So it is a daily execution in our business now so that we can earn that business.
Peter Wilson (Analyst)
Okay. And lastly, your comments that in regards to your farmers strategy is still at the beginning of that. In the one quarter result, can you give us an estimate of how much base business erosion you lost during the quarter?
Jack Truong (CEO)
Well, it is roughly. It's less than what we used to. But in terms of the exact percentage, we'll make that confidential in our company.
Peter Wilson (Analyst)
Okay. But you are still, by your estimate, losing business, so still a negative drag?
Jack Truong (CEO)
We still have some erosion, yes. So there's room for improvement going forward.
Peter Wilson (Analyst)
Okay, perfect. That's all from me. Thank you.
Operator (participant)
Your next question comes from the line of Grant Slade from Morningstar. Please go ahead.
Grant Slade (Analyst)
Oh, good morning, Jack and Matt, and thanks for taking the question. I just had one follow-up on the PDG performance in North America. The increased sales resources and focus on your lumberyards. Do you have a sense of whether that's driving mostly fiber cement category share gains, or are you taking greater market share? Thanks.
Jack Truong (CEO)
Grant, good, good question. It is a, it's a combination of both.
Grant Slade (Analyst)
... And, okay, great. And do you have any sense, I guess, of sort of the proportion there or difficult to say?
Jack Truong (CEO)
It is too early to tell yet, Grant, but,
Grant Slade (Analyst)
Okay.
Jack Truong (CEO)
It is something that we would focus on to really have a better quantification going forward.
Grant Slade (Analyst)
Okay, great. Thanks for that.
Operator (participant)
Your next question comes from the line of Daniel Kang from Citigroup. Please go ahead.
Daniel Kang (Analyst)
Hi, good morning, everyone. Jack, just, I just wanted to get your thoughts on the marketplace. I guess in terms of overall US market, clearly a tough quarter for start. But your guidance for the full year of slightly up suggests improvement through the course of the year. Are you seeing much evidence as we move into the second quarter at this point? And maybe a second question for Matt, in terms of costs. You know, pulp prices are clearly down on a year-on-year basis, work out something like down 11% or something like that. Are we starting to see the benefits feeding through into the second quarter?
Jack Truong (CEO)
Yeah, let me answer the question on the markets. Certainly, I mean, everyone saw the data. It's certainly the first six months of the calendar year starts had been quite choppy. Depends on what source you use can be anywhere from down 4% to 6%. We see slight improvements in this quarter, and then, and then little bit for the rest of the year. But still, for the whole year, still pretty much flat for the residential starts. And then, like Matt said, our R&R is roughly about 3% growth.
Daniel Kang (Analyst)
Yeah-
Jack Truong (CEO)
For the market.
Matt Marsh (CFO)
Yeah, and on the, on the pulp question, we're seeing kind of double digit decrease in parts of the pulp market. But overall, we see that the pulp market is down closer to six in comparison to the fourth quarter peak. And just, you know, we sort of look at the contract market and the spot rate market as different markets. We also look at the U.S. and the China markets as different markets. So, there are parts of those four markets that are down more than others, and in total, we think it's down about six. You're correct that we will, and we are expecting to see, as the year goes on, the pulp headwind on a year-on-year basis to decrease.
But for the total year, we still have pulp and commodities in totality, our input costs still going up slightly.
Daniel Kang (Analyst)
Okay. Thanks, Matt. And just, I know you don't like to talk about the rain affecting the market, but, do you see, you know, dry conditions into the fall as a benefit for the rest of the year?
Matt Marsh (CFO)
We won't talk about rain, but we'll talk about drought.
Jack Truong (CEO)
Danny, you know, we are. I mean, I just like to reinforce that we are a PDG growth company, and our focus is really about how do we create more value at the end user and for our customers, so that we can really gain more and more share to the category, to the market. And so that's actually our key focus, and that will continue to be our focus going forward.
Daniel Kang (Analyst)
Got it. Thanks, Jack. Okay.
Operator (participant)
Your next question comes from the line of James Brennan-Chung from UBS. Please go ahead.
James Chung (Analyst)
Hi, Jack. Hi, Matt. Congratulations on a very strong result. Just articulating a little bit more the PDG and the volumes. Are you able to split out, you know, where you're getting that PDG in terms of whether it's against new housing or R&R? Are you weighing more, say, into one category compared to the other? Thank you.
Jack Truong (CEO)
It's really difficult to say, James, but I think, but based on the geographic spread, we tend to have more of the growth through new construction, through the South and our Southeast and South Central Mid-Atlantic, and we've also saw a lot of growth in the Northeast, which is primarily an R&R market for us.
James Chung (Analyst)
Right. So no, no, no real change in the relative exposures then to new housing versus R&R. You're getting consistent PDG in both segments?
Jack Truong (CEO)
Correct.
James Chung (Analyst)
Thank you.
Operator (participant)
Just a reminder, ladies and gentlemen, if you do wish to ask a question today, please press star one. Thank you.
Matt Marsh (CFO)
Jason, maybe one last question or we can, we can end the call.
James Chung (Analyst)
There are no further questions at this time.
Matt Marsh (CFO)
Great.
Jack Truong (CEO)
So, you know, we're pleased with the good execution of our strategic plan by all of our employees around the world. We're still more at the beginning of the journey rather than the end. We still have a lot of work to do to accomplish our long-term goals, but we're encouraged by that we're on the right path. So thank you all very much for dialing in, and have a good morning and good night.
Operator (participant)
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.