James Hardie Industries - Q3 2016
February 18, 2016
Transcript
Operator (participant)
Thank you for standing by, and welcome to the James Hardie Q3 FY 2016 results briefing. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to your first speaker today, Mr. Louis Gries, CEO. Please go ahead.
Louis Gries (CEO)
Thank you. Hi, everybody. Thanks for joining the call this quarter. We're gonna take the same approach as we normally do. I'll do a brief overview, then Matt Marsh, the CFO, will cover the financials in some detail. When he's done with that, we'll come back for Q&A, investors first, and then when we're done with investor questions, we'll take any media questions you may have. Matt and I are in Dublin, so the slides are being run out of Sydney, so I'll just be calling out the slide numbers. So Slide two is the first page of our disclaimer. Slide three is the second page of our disclaimer. Slide four shows our short agenda there. Slide five is another overview page. So Slide six is the first one we're gonna cover. Group overview.
You can see everything's pointing up. Adjusted net operating profit, up 16 for the quarter to 56.2, and adjusted EBIT, up to 82, for the quarter. Obviously, the margin improvement, 2.6%. So basically, the story on the quarter is it went very much as expected. The volumes were good. Plants continue to run well. Price, flat to slightly up. And you can see on our final bullet point, we'll talk about the EBIT margin for the quarter, but for a little bit later. But for the full year, it's at 25.1% in the North American and Europe business. Slide seven, it gives you the details on the North American business.
You can see, price was flat, so volume and sales were both up 12%, which is a little bit stronger than we were comping the first two quarters. But again, it's pretty much in line with what we're expecting in the quarter. We felt this quarter was an easier quarter to comp against. The next quarter is actually a more difficult quarter to comp against because we had a price increase that pulled a little volume forward last year. So I think the short story on volume is, it's tracking how it has been for the last three or four quarters, which is below our targeted level. So, that continues to be our priority, to increase the primary demand growth rate in the business.
The market index, we're operating on this year with the starts where they are and, with R&R, where it is, is around 6%. So we're still in that, you know, flat to slightly positive PDG, and, you know, we expect that for the year. Obviously, we're working on it, getting it turned up, but that won't be, you know, in the next quarter. On the cost side or the EBIT side, you can see a 24% EBIT. The way we got there was a little different than usual or a little unexpected, I guess. North American EBIT margin was actually 26%.
Europe did not contribute EBIT this quarter, which is very, very unusual, and we don't expect it to continue in the future, but they had a bad quarter where they didn't contribute any EBIT dollars, so that dragged the percentage down. And then also the non-FC runs negative EBIT, as we've covered in the past, so that brought it down. So if you look at, you know, the segment as reported is 24%. The North American fiber cement business ran at 26% for the quarter. We're still getting some pretty favorable comps on freight and some of the input costs. So that's been kind of the story for the year, and that continues. But basically costs are being well controlled, plus we're getting a little help on input costs. So you know, pretty strong EBIT margin performance.
Slide eight shows the slide or shows a graph of a longer-term view of EBIT margin. You can see for quite a few quarters now, we've been either in or above our range, and our guidance has pretty much been that we expect to continue that as long as the market remains good in the U.S., which we also expect that to continue. Go to slide nine. It's our price slide. Like I said, this quarter up $3, so it's pretty flat. It's actually up 2% in the U.S. business, but when you take into account European and Canadian FX, it brings it down to almost flat.
So we do have some price improvement in the US business that just doesn't jump out at you because of the FX adjustments when we report the segment. And then top line growth, you know, the green one, green lines, you know, against the housing starts, obviously, we're getting a little further apart each time. You know, and again, would expect that to continue. And that's on a year-to-date basis, showing a 7% increase in volume and 8% on price. Slide 10 just gives you the overview of the Asia Pac business. A couple things to note on the volume. We sold the pipes business in Asia Pac, so that was in last year's volumes and not this year's volumes.
So, when you look at the existing business, it did comp up 3% in volume. And on an EBIT, from an EBIT perspective, it's obviously flatter than you would expect with the improvement in revenue. And that's really two things. One, last year's third quarter had a write back in it, so that was a one-off that it's comping against. And the Carole Park startup took longer and was less efficient than we had planned. So that chewed up some of the EBIT dollars as well. Again, I think that capacity is up and running and becoming, you know, kind of hitting the window where it's pretty reliable now.
I think we'll have some more cost inefficiencies this quarter, and my expectation with that should be the end of it, start getting the benefits of that investment starting next year. At this point, I'll hand it over to Matt Marsh for the financials.
Mattew Marsh (CFO)
Thanks, Louis. On page 12, the third quarter, we reported net sales of $414 million. They were up 7%, year over year. EBIT's up at 52.1 for the quarter, on a reported basis, and net operating profit at 25.4 on a reported basis. Net sales, as Louis talked about, increased as a result of higher volumes in both segments, Asia Pacific and the US. Higher average net sales prices in local currencies. As Louis indicated, the headline number for the North America and Europe segment, flat price.
Again, that's just about 2.5% price in North America, offset by about two points of FX and a point of each for Canada and Europe. That gets you kind of to the flat number. The gross profit margin's up about 130 basis points. We, you know, we continue to see good plant performance, and that's continuing to comp favorably versus fiscal 2015, and resulting in lower unit costs. A combination of the plants running well and input costs are down year over year. SG&A expenses have increased. You know, we're continuing to invest in the segments.
And then some of that's partially offset by stock comp, which is down year over year because of the share price performance in comparison to a year ago. And then adjusted net operating profits up. It's really driven by the adjusted EBIT is up 23%. That's really on the back of operating segments. Interest expenses up, corresponding to the increase in our debt. And taxes are up, corresponding with the operating improvement in the business. On page 13, the story for the nine months is very similar. So through nine months, we've got sales of $1.292 billion, and net operating profit of $215.6 million. So net sales up 4%.
Again, very similarly, higher volumes in both segments and similar price trends in the two segments for the nine-month period as well as the quarter. Similar story on gross profit to the prior page. You know, plant performance primarily in the U.S., combined with input costs, is driving the expansion of our gross profit margins. Drop down to adjusted net operating profit. It's up primarily because of adjusted EBIT. You'll note in the other interest and expense line item, that's favorable by about $8 million year over year. It's really driven by three things.
There's about a $4 million favorable change in foreign exchange forward contracts year over year, about a $3 million change in interest rate swaps year over year, and a $2 million gain this year on the sale of the pipes business that obviously wasn't in the prior corresponding period from last year. Slide 14. The change in the Aussie dollar versus the US dollar. You know, the US dollar continues to show a lot of strength. It did so in the quarter, and that's what this graph, you know, shows. What's shaded there is the quarter period. You can see that it's certainly leveled off for the most part throughout the quarter, but in comparison to a year ago, it's down pretty significantly.
In the table on the bottom of the page, you can see the impacts on net sales, gross profit, adjusted EBIT and adjusted NOPAT. It changes the sales comparison year over year by about four points and EBIT by about four points, as well as net operating profit by about three points, so a somewhat material change on our results as we're translating both Canadian, European, and Australian results. This being the focus of this page is primarily on Australian dollars, is on Australian dollars. On Slide 15, you get the U.S. input costs. You know, pulp has decreased by about 9% compared to a year ago. So that's obviously been a favorable impact to the business. Cement prices continue to rise year over year.
They're up about 8%, for us and up higher in the market. Gas prices have come down dramatically, as you might expect, as have electricity prices are down 20%. So, that gives you some sense of the input cost tailwind that we're seeing year over year that's helping to expand gross profits. From a segment perspective, in the North America and Europe segment, for the quarter, $79 million of EBIT in the quarter and almost $258 million for the nine months. As Louis indicated earlier, what we reported in the segment for North America and Europe for EBIT margin was a 23.9%. That was a. I'll just give you guys the pieces of that one more time.
That's a 26% underlying North America EBIT margin. And then that's partially offset by Europe, and that dragged Europe and the non-FC down to 23.9%. And then year to date, North America is at about 25.1%. Sorry, 26.7%. And very similarly, Europe and non-FC brings it back down kind of to the 25.1% range. So, for the quarter and year to date, you know, EBIT's up significantly, 24%, 25%, for the quarter and the year, primarily with lower production costs. Certainly, the list price change that we made in North America is helping as well.
Fiber cement, EBIT margins in North America did expand in the quarter and for the nine months, so they're up about two hundred and thirty basis points in the third quarter and almost three hundred and forty basis points for the half year. So while a good performance trend in a very similar year-over-year expansion we saw here in the third quarter that we saw in the first half of the year. On Asia Pacific, EBIT in local currency for the quarter and year to date increased 1% and 7%. Louis already hit on the lease write back that we had in the third quarter of fiscal 2015.
We note that in our filing, it's $2.6 million gain in the third quarter of 2015, that obviously didn't repeat this year. And then year to date, the Carole Park startup has had an impact in the $7 million-$9 million range, you know, that's also impacting the nine-month comparable. On page 17, no real change in R&D. We continue to track kind of to this range of 2%-3% of sales. There is a bit of a decrease you'll note year over year, also impacted by U.S. dollars and the strengthening of the U.S. dollar and the translation of the R&D that we have outside the U.S.
But other than that, it's just normal variations and no real change in the trends that we've talked about in prior calls on R&D. General corporate costs for the quarter, discretionary expenses were down in the quarter, but it was just that, it's discretionary. It wasn't anything kind of no strategic change, or it wasn't a change in labor. It was just the timing of some expenses. We also had a decrease in some of the FX losses. For the year to date, higher stock comp expenses, as well as a bit of a decrease in discretionary expenses. But the... I'd say, you know, corporate costs are pacing where we want them to pace.
On income tax, page 18, we're estimating a 26.6% adjusted ETR for the year. It's up slightly from what we said in November for the first half estimate for the year. That obviously changes as our estimates become actual, and we look at our geographic mix of earnings and are able to take a closer look at our taxes. But it's trending in line with where we've been pointed all year. Obviously, that changes with a geographical mix of earnings. We're paying income taxes in Ireland, the U.S., Canada, New Zealand, and the Philippines. We're not currently paying them in Europe or Australia, due to the tax losses.
And, the Australian tax losses, I'll just remind everybody, is primarily a result of the deduction we get from our annual contributions on AICF. On page 19, we had two hundred and $200 million of cash flow from operations for the nine months in fiscal 2016, in comparison to $104 million for the nine months of fiscal 2015. That's really driven by a combination of a lower annual contribution this year versus last year, and a favorable change in working capital, primarily in the US and primarily as a result of inventory. That's a combination of the plants ran, you know, really much better this year, and we built inventory earlier in the year, and then we've been able to work that inventory down.
And then that was partially offset by some, what I'll call normal variation in receivables and payables. Receivables and payables generated cash for us, just not as much as they did a year ago. CapEx continues to trend in line, you know, with our expectations, $44 million through the first three quarters of the year. It's obviously down substantially versus a year ago because of the reduction in the capacity projects. The Australian project's complete, and that's started up now in Carole Park. And then we're almost complete with our two U.S. expansions. And then on the financing side, you can see there was a decrease in the borrowings as well as that was partially offset by a decrease in the dividends paid.
On page 20, a little more color on CapEx. The green bar outlines kind of maintenance CapEx, and the gray bar outlines capacity related. So you can see the capacity CapEx is continuing to decline down, and the main feature is becoming maintenance CapEx. That's consistent with what we've said in the last few calls and is consistent with what we would expect over the next several quarters. We'll continue, obviously, investing in maintenance CapEx, and we, you know, we continue to defer both the Plant City and the Cleburne commissioning, but we're, we are, you know, constantly monitoring that both for overall capacity and product-specific capacity. On slide 21, our financial management framework remains unchanged.
Just to remind everyone, you know, it starts for us with strong financial management, and we measure that through combination of strong margins and operating cash flow, good governance, and financial ratios in line with investment and investment grade management. So all that remains unchanged, and we feel good about that. Capital allocation, no real change. You know, our top priority remains investing in the organic growth of the business, both through R&D and capacity expansion, followed by maintaining our ordinary dividend, and with our third priority being flexibility for kind of everything else. We are within our leverage range of one to two times adjusted EBITDA. We're at the low end of that range.
You'll see on the next page that we've got about 5.8-year weighted average facilities, almost $500 million revolving bank facility and 65% liquidity. So, you know, we feel good about where we are from an overall strength of our balance sheet and our overall financial management framework. On page 22, a little bit more on debt and liquidity. In the quarter, we refinanced a revolving credit facility. Sorry, we replaced our bilateral loan facilities with a revolving credit facility. We took that total amount from $590 million down to $500 million. That's on top of the $325 million-dollar senior unsecured note.
That, combined with an accordion feature that we have in the revolving credit facility, gives us available debt that you can see pictured on the left. What we have for outstanding debt is represented in the bars to the right. On our balance sheet, we've got about $95 million of cash, really strong liquidity position, and we're at the low end of our one to two times leverage range. So we feel like we're on strategy overall from a balance sheet perspective and feel good about our access to debt and to the markets.
On page 23, the guidance range, sorry, the analyst forecasts are currently projecting between $237 million and $249 million of NOPAT, adjusted net income for the year. We've raised the low end of our guidance range to $240 million-$250 million. And if you recall, last quarter, we had a range of $230 million-$250 million. Obviously, that's got a number of assumptions built into it. We've got about six weeks to go. And that's all I've got on guidance. So with that, we can open it up to any questions.
Operator (participant)
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Emily Smith of Deutsche Bank. Please go ahead.
Emily Smith (Analyst)
Good morning, Louis. Good morning, Matt. Just a couple of questions from me. Firstly, in terms of your U.S. margin, you obviously highlighted that the Q3 margin ex the European and other businesses is very strong. When I sort of look back over the last five or six years, the Q3 EBIT margin has been seasonally weaker. Is that something that you would expect to be the case in FY 2016 as well? And secondly, I just had a question on volumes. I think, you know, 12% volume growth obviously compares to a peer that everybody looks at in LP being down 5% in the quarter. And when you look at some of your other competitors, the volume growth also seems a lot lighter than what you're reporting.
While the housing starts are up 9%, I'm just wondering if you can give us some clarity as to why it doesn't all seem to be adding up. It seems to me, when you look at your competitors, that your market share growth is actually a lot better than when you look at, say, the overall U.S. housing starts data.
Mattew Marsh (CFO)
Yeah. Okay, so on the EBIT margin, yeah, the third quarter is always the toughest quarter because you got the holidays between Thanksgiving and Christmas and New Year's in the US, where activity is pretty low. So yeah, I think pretty much, if the business runs right.
Louis Gries (CEO)
...The third quarter is always the toughest one to, you know, deliver the financials. We did pretty good this quarter and kind of went through that. I guess you hit on one of it. The volume up 12 certainly helped, and then the input cost and the plants running well also helped. So, that is a fact. It's usually lower, and this year we did, well, as you can see, we did 2.6 points better on EBIT margin than we did last year. So obviously, we did relatively better in the quarter. As far as our volume comp, you know, quarterly comps are just hard. There's just a lot of variance because you either had a good quarter or a bad quarter last year, you're comping against, and then you have this quarter.
And then you have, you know, kind of volume that spills over to the next quarter or maybe was pulled into the previous quarter for whatever reason. I think we look at it on a four-quarter basis, and we forecasted things out, and, you know, we think the 12%, probably does indicate a little bit of early traction, but more so, it's just, normal variance you get in a quarter-to-quarter comp. So, certainly, we're not less optimistic about our, you know, volume tracking above the index than we were, you know, three months ago when we reported, but really, our view hasn't changed too much. I mean, we're going for a lot more volume, than we're getting right now, so we're coming up short.
We didn't come up as short in the third quarter as we did maybe in the first two, but I think by the end of the year, you know, it'll look pretty much the same.
Emily Smith (Analyst)
Great. And so the European windows businesses, are they, would you expect those businesses to continue to sort of detract from the US margin, or you sort of mentioned Europe was unusually weak?
Louis Gries (CEO)
Yeah, Europe-
Emily Smith (Analyst)
How do we approach?
Louis Gries (CEO)
Europe just had a stinker quarter, so that wouldn't—we wouldn't expect a repeat of that. Remember, we're reporting non-fiber cement initiative revenue, which is very small, and EBIT losses, which aren't large, but they're enough to drag down our EBIT margin, 1% or so. Those will stay in the segment. So until we're running, you know, positive EBITs, mainly the windows business right now, until we're running positive EBITs, yeah, it'll dampen the EBIT margin in the North America and Europe segment.
Emily Smith (Analyst)
Great. Thanks very much.
Louis Gries (CEO)
Yeah.
Operator (participant)
Your next question comes from John Hind of Merrill Lynch. Please go ahead.
John Hind (Analyst)
Good morning, Louis and Matt. Just a quick question, I guess, following on from Emily's about the market share. We've seen some of the themes coming through for the builders, U.S. home builders. Results is that they're starting to focus more on the, you know, the $250,000 and below category range. I think your shares have declined a little bit in those categories over the last couple of years. Can you expect growth over and above the market if this is a real trend for the builders going forward?
Louis Gries (CEO)
Yeah, I mean, it depends market by market, what degree we participate in, in the, say, the bottom third of the market. You know, in the southern markets like Atlanta, Houston, and even the West Coast markets, Seattle, Portland, those are like four big markets there. We'll do well in the starter and first move up home. When you get into the vinyl markets, our market development hasn't gotten that far, so we start at the top of the market, and we wouldn't be in the starter or first move home. So my answer would be, yeah, it doesn't, you know, what type of house gets built really doesn't concern us much because we obviously have targets for participating in all the different segments. It's not something we can change.
There's not some product development initiative you would, you know, launch if you felt there were going to be more starter homes built over the next, you know, ten years than there were the last ten years. So, but we're not as biased away from starter and first move-up homes as you might think, because of our big markets in the South, we do participate quite well there.
John Hind (Analyst)
Okay, great. And just on the capacity expansion, it looks like you're sort of idling two of the plants, Florida and Texas. What level of starts would you need to see to switch these back on or to ramp them up? Or is this just because there's a little bit of regional softness? I'm just a bit surprised given the 12% volume this quarter.
Louis Gries (CEO)
We've got plenty of capacity, John. One of the keys to running an organic growth business model like ours, where we have such a large share of the total category, is to make sure you never run out of capacity. So, you know, if you run out of capacity, you're just shorting the market that's come over to your product. So, it's just certainty of supply becomes an issue for your customers. So, we've always committed to deliver on that certainty of supply by having excess capacity in the system. You're right, we've got two good lines, two large lines, modern lines that we haven't started up in the U.S. business.
Our planning for those lines was, you know, based on the original housing forecast, and quite honestly, this year, a higher PDG for our result. But, you know, it doesn't come down to housing starts. We will probably start up that Florida line sometime next fiscal year, and it'll be driven more by capacity on a specific product than overall capacity, you know, that's being driven by housing starts. So, we're very comfortable where we're at capacity.
We feel like we have a lot of capacity ready if the market did turn up at a quicker rate than it's currently forecasted, or we can, you know, again, defer those startups and sure you got the carrying cost of the sheet machines, but that's not a huge problem for us, obviously.
John Hind (Analyst)
Okay, great. Thanks, Louis.
Operator (participant)
Your next question comes from Peter Steyn of Macquarie. Please go ahead.
Peter Steyn (Analyst)
Hi, Louis, Matt. Thanks very much. A couple of quick ones. Just on the notion of destocking, it seems to be a thematic that's coming out of the U.S. homebuilders and suppliers or across the board. Have you seen any impact from destocking? Clearly, in the realms of 12%, probably not much, but could you more pertinently comment on your January sales performance to date, whether there's been any acceleration as a consequence of anything related to destocking?
Louis Gries (CEO)
Yeah, no, you're right. I mean, we've seen that. I don't know what I'd call it, explanation, I guess, a kind way of saying it. We've seen that explanation in other companies' results, but we're not experiencing any of it.
Peter Steyn (Analyst)
Great. That's clear with 12%. And then just on working capital, very strong performance in inventories. Could you comment on how that progresses from here? Is the sustainability of that improvement?
Louis Gries (CEO)
Yeah, I'll let Matt cover that. He's more on top of that.
Mattew Marsh (CFO)
Yeah, I mean, we had just built-up inventory last year. Part of that was our normal winter build, but we also were putting, you know, a lot more board through the plants that were running significantly better in the back half of last year than they were in the first half of the year, and that resulted in higher stocking levels. We saw that coming into this year, and we knew that we would, you know, obviously take those inventory levels down. So, we're pretty happy with where we've got our inventory at the moment.
Obviously, we look at it by region and by product, and we feel like the majority of that, you know, that cash has gone back into the system now, and inventory is kind of at a more normalized level.
Peter Steyn (Analyst)
Thanks, Matt.
Operator (participant)
Your next question comes from Matthew McNee of Goldman Sachs. Please go ahead.
Matthew McNee (Analyst)
Louis, Matt, just a quick one, just on the margin. Matt, you talked about the impact, you know, of the weak euro and the windows business, et cetera, on the margin. But the Canadian business, I know you sort of—it's sort of part of North America, but can you give us a bit of a feel? Because that margin in that Canadian business must be sort of mid-teens at best, you know, maybe even lower. So is there any thought to maybe pushing up prices in Canada just to offset that depreciation that you're seeing in the dollar?
Louis Gries (CEO)
No. I mean, we price based on, you know, our value position in the market. By the way, the Canadian business is almost all ColorPlus on the exterior side, so it's a good even margin business for us. When we talk about the price adjustments, obviously, we're talking about Canada and Europe due to the FX. When we talk about the EBIT kind of step down, then we talk about the non-fiber cement, which is mainly windows and Europe, so we don't have a margin problem at all in Canada.
Matthew McNee (Analyst)
But when you look at that 26%, you know, in North America, you're saying Canada's doing 26% as well? I mean, US would be better, isn't it?
Louis Gries (CEO)
I don't know. No one's ever showed me that number, but I know what our price, cost, volume equation looks like up there, and I'd say it's fine. It's not something you would take a price increase to try and fix. It's not broken, so-
Matthew McNee (Analyst)
Yeah.
Louis Gries (CEO)
We don't have a problem up there.
Matthew McNee (Analyst)
Yeah, and Louis, you know, one of your competitors was sort of highlighting that another one of their competitors, which we suspect they were pointing at you, were doing some discounting in the quarter. You know, and they were saying you guys are getting aggressive. You know, is that what's driven the higher volume? Is there any credence to that?
Louis Gries (CEO)
Yeah, I'm not sure they were referring to us. The way it works, kind of, and I know you know, Matt, because you've followed us for a long time, is we set our price, and then the discounters set their discount price against us, so you know, there's little benefit in us cutting a price if it's not on a bid project, because in most of our work, obviously, is not bid, because they're just gonna take their discount and apply it to our lower numbers, so we sell at the premium, and then they pick their discounts. I'd have to assume they're talking about one of their hardboard competitors rather than us.
Matthew McNee (Analyst)
Okay. And just, sorry, final one. Obviously, it's early days, but it does look like, yeah, the PDG is picking up a little bit. Can you give us any sort of evidence or indications on specific markets, like the vinyl market? Are you trying to get, you know, you're starting to get some traction there, or does it mean more in other markets?
Louis Gries (CEO)
Yeah, you know, I mean, the variance in PDG, the normal variance in a PDG calculation is greater than whatever pickup we would have seen. So, we're not actually declaring that we've got PDG increasing. Obviously, we feel pretty confident that things we're doing in the market are gonna get us there, but you can't see it in the results yet. So, and as far as what are we working on PDG, you know, I think we talked probably in November about the rate of decline of vinyl had started to slow over the last, I think it was like, at that time, 10 or 12 months. So, that's our focus is vinyl, and most of vinyl in the, you know, kind of North and Mid-Atlantic states.
So, we are back, you know, having the right amount of resource pointed at vinyl, so I definitely expect our PDG to improve. But, you know, like I said, I think two quarters now, it's not gonna happen overnight, and we don't think it's happened yet. So, I wouldn't read too much into the 12%.
Matthew McNee (Analyst)
No worries. Thanks.
Operator (participant)
Your next question comes from Andrew Peros of Credit Suisse. Please go ahead.
Andrew Peros (Analyst)
Thank you. Just an extension of the volume question. Sorry to labor the point, but perhaps it's just a point of clarification maybe. Lou, when you talk about the quarterly variances in that 12% volume growth, you know, obviously there could be some distributor restocking or some pull-forward of activity. But when we sit here six weeks into the fourth quarter, what's your order file looking like in the context of, you know, the 12% volume growth that you delivered last quarter? You know, are you tracking above or below that? I guess, just to give us a bit of feel for how much of that is underlying activity versus, you know, perhaps that, you know, pull forward or restocking, okay.
Louis Gries (CEO)
Yeah. We'll go back to my destocking now restocking question. You know, our customers, that's not normal practice for them. I guess maybe they know they can rely on us for supply when we need it, so they're not gonna. You know, I mean, our lead times are fairly short. They're not gonna, you know, take a bigger position on inventory than whatever their seasonal demand would indicate. So, it's nothing to do with restocking. As far as our order file right now, it's fine.
But remember, I think we kind of indicated last year, and I know I think we indicated earlier this year, maybe even this call. I mentioned, you know, we had a price increase last year in March, which pulled some volume forward from 2016 into 2015. So we won't comp at 12% in the fourth quarter, but not because our order file is off. It's because our comp is a lot higher in the fourth quarter than it was in the third quarter.
Andrew Peros (Analyst)
Okay. And just in terms of, the U.S. prices, flat to, I guess, incrementally down, can you maybe disaggregate how much, of an impact you saw from the depreciation of the Canadian-U.S. dollar versus maybe some adverse mix? And maybe just that as a, as a precursor to a question about, the performance of, interiors versus the exteriors part of the business.
Louis Gries (CEO)
Yeah, well, that's where you would get a little bit of mix is, you know, relative to last year, is our interiors segment is running much better. We did a little fix-up there just over a year ago, and we're still running pretty strong on that. So, our growth rate on interiors is pretty good. And that obviously does sell at a lower average price because it doesn't have the paint or some of the other features that exterior products have. So, there is a little bit of mix, but the easy way to get to our price, we were up about 2% in the US, and then by the time you took care of the FX and Canada and Europe was flat. So US business up 2%.
Andrew Peros (Analyst)
Okay, thanks. And just a final question for Matt. Obviously, the balance sheet's in pretty good shape. Net debt to EBITDA is at the bottom end of your target range. Just wondering, at what point do you start to think about capital management again, if we get to a situation where you're below that target range again?
Mattew Marsh (CFO)
Yeah, I mean, it's not quite as formulaic. Obviously, we want to stay within our range of, you know, one to two X. I'm pretty happy with where we're at. Obviously, there's a lot of volatility in the debt market at the moment. So, you know, being towards the low end of that range, you know, at this point in time with the volatility that we see, you know, seems like a reasonable strategy. I'm happy with where we are with the balance sheet. We obviously continuously monitor where we are within that range, and you know, we'll continue to do that. But, you know, just because we're out at one versus one four wouldn't necessarily drive a strategic decision on additional returns above the ordinary dividend.
Catherine Alexander (Analyst)
Yeah, that's great. Thanks for your time.
Operator (participant)
Your next question comes from Keith Chau of J.P. Morgan. Please go ahead.
Keith Chau (Analyst)
Oh, good morning, Lou and Matt. Just a follow-up question on Matt's question on LP. Lou, with LP not raising its prices this year, it's likely it'll probably impact overall competitive dynamics in Texas and the central parts of the U.S., regardless of whether the competitor they were referring to was Hardie’s or, you know, a hardboard competitor. If you start seeing LP becoming a bit more aggressive on price themselves, would you look to pull the price lever a little bit further, either through rebates or other mechanisms?
Louis Gries (CEO)
We're always gonna use price as part of our marketing mix, whether, you know, whether it's competing, you know, for short-term business or positioning ourselves for the longer term. So, I won't say we wouldn't use price, but I want to again stress, you know, Hardie becomes somewhat easier to manage than other companies because we know that whatever we set our price, discounters are gonna pick a margin below that, that they think they can sell the volume they wanna sell. So, it really doesn't help us, you know, if your price is X, and you drop it to point nine five X, and the discounter's selling 15% below you, he's just gonna go 15% below your new price.
So, you know, we're value pricers, and, of course, we have to deal with the discounters that are trying to sell a good enough product positioning. But, you know, like I say, we're not tempted to try and chase more volume with price, 'cause we know what the rest of the market does when we do that.
Keith Chau (Analyst)
Okay, thanks, Lou, and just a second quick follow-up question on Hardie products outside of siding. The interiors segment, Lou, what percentage of total volumes is that at the moment? And just a second quick one around trim attachment rates and where you're seeing those.
Louis Gries (CEO)
Yeah. I don't have the exact percentage of interior volume, but I can tell you it's growing at about the same rate as exteriors this year, which is good. That's a much higher growth rate than they had been growing at. And, as far as trim attachment, we've talked a little bit at code about starting up Plant City number four, and Plant City number four is gonna be a trim line. So, our trim attachment is pretty good, and the trend line is pretty good in a few of our regions, Southeast being one of them. So, that's why that Plant City capacity will come on.
Overall, I'd still say we're not performing as well on trim as we want to, so we'll be doing more things on trim, you know, in the next couple of years, 'cause we're still not satisfied that we're getting the attachment levels we should.
Keith Chau (Analyst)
Okay. Thanks very much, Lou.
Louis Gries (CEO)
Yeah.
Operator (participant)
Your next question comes from Simon Thackray of Citi. Please go ahead. Mr. Thackray-
Catherine Alexander (Analyst)
Hi, sorry, Catherine Alexander, just stepping in for Simon here. Can I just ask a question around the input cost behaviors that you talked to? Can you give us a sense of the relative contribution from each of your input costs?
Louis Gries (CEO)
I think we might have that in our materials somewhere.
Mattew Marsh (CFO)
Yes. So, for, I'll give you a general sense. So, for the nine months in North America, gross margins were up about three hundred and thirty basis points. And the bulk of that came from production costs, with a little bit coming from price. So, the three thirty, you can think about that as, two hundred and eighty of that's coming from production costs and fifty basis points coming from price. And then of the production costs, about a third of that is coming from input costs, and two-thirds of that's coming from, plant performance. So, it gives you a general sense there. The dynamic obviously is a bit different in Asia Pacific for two reasons.
One, the pulp we buy is in US dollars, and as the dollar strengthens, obviously that creates input cost headwind for the Asia Pacific business. And then the Carole Park startup that we've had throughout the year is obviously inflating production cost kind of temporarily. So that's why you see for the nine months in Asia Pacific, even in Australian dollars, the gross margins are down by about one hundred and twenty basis points. And you can see the majority of that's actually or more than the majority of that is production cost, because prices are up and performing pretty well in the region. So hopefully that gives you a general sense.
Catherine Alexander (Analyst)
Yeah, that does. Thank you. And just one other question. Just looking at your maintenance CapEx spend as per slide twenty on the presentation, it looks a little bit low, just tracking against the last three quarters. Is that just seasonality? And, how should we think about that going forward?
Mattew Marsh (CFO)
Yeah, and maintenance CapEx, you know, we like, like you'd hope we, you know, we try to manage the plants to a certain level of overall maintenance. Obviously, we have the money when there's good projects or preventative maintenance to do, and sometimes the timing of those results in a bit of quarter-to-quarter kind of lumpiness. We think we're kind of in this general range of $75-$90 million per year of maintenance CapEx.
... and that's the range that we're pacing to. This year will be a little bit short of that, but, you know, what we're planning for next year is in that vicinity.
Catherine Alexander (Analyst)
Great. Thank you. And if I can just be really quick with one last question. You obviously talk about primary demand growth in the U.S. as your key metric and key focus going forward. Do you target primary demand growth in Australia and New Zealand as well?
Louis Gries (CEO)
We actually do internally talk about it the same way. Primary demand growth, you know, tries to indicate how much demand is being created by your category relative to others that would also sell in the market. So, in the US, it really does refer to our position or our growth against vinyl. We're creating primary demand for fiber cement at the expense of vinyl. In Australia, it gets a little bit more complicated because we have brick, and then we have our flooring products, which go against wood. We have our siding products go against brick, and then we have interiors products, we have commercial products. So, it's not as clear of a concept in Australia, but it is, you know, I guess, generally it's the same thing.
We don't play market share games, or category share games, so we're not gonna grow as large as we want by selling against like products. We have to create the demand for our type of product from, you know, a similar product. In our case, in the US, it's vinyl.
Catherine Alexander (Analyst)
Great. Thank you so much.
Louis Gries (CEO)
Yeah, no problem.
Operator (participant)
Your next question comes from Andrew Johnston of CLSA. Please go ahead.
Andrew Johnston (Analyst)
Good morning, Lou. Good morning, Matt. Just two follow-up things there. Most of the question's been asked. But Lou, can you just talk a little about why Europe's been so poor? And then, obviously, as part of that, how you see that progressing over the next few quarters. And then secondly, Matt, can I just get the number you mentioned about the impact on Carole Park? Was that a number for the quarter, or was it for the number for the nine months? I think it was five to nine, $7 million-$9 million.
Mattew Marsh (CFO)
Yeah, it's for the nine months.
Andrew Johnston (Analyst)
It was for the nine months. Okay. Thanks.
Mattew Marsh (CFO)
Yeah.
Louis Gries (CEO)
Yeah. And as far as Europe goes, no, it was just a management gap in Europe. You know, we just had poor performance, and no, we wouldn't expect it to continue.
We're already through the problems, so we don't expect it to continue.
Andrew Johnston (Analyst)
Okay. Was that a volume, a volume problem or a price problem, Lou?
Louis Gries (CEO)
Just keep it as management. It wasn't price.
Andrew Johnston (Analyst)
Okay.
Louis Gries (CEO)
It wasn't price.
Andrew Johnston (Analyst)
All right. Great. Thanks very much, guys.
Operator (participant)
Your next question comes from James Rutledge of Morgan Stanley. Please go ahead.
James Rutledge (Analyst)
Thanks. Good morning. I guess if I was to try and pick apart one negative from the result, I think the Asia Pac volume seemed weak, even in the context of backing out the pipes sale. It seems to have declined a bit. I guess the rate of growth has declined in the quarter, as compared to the second quarter. Just wondering if you can talk around that.
Louis Gries (CEO)
Yeah, I probably can. I probably looked at... You, I mean, you're right, three is lower than seven, so I get it. But, you know, I sat through review of the Australian business, and I kind of came away, the only issue we had in Australia is the Carole Park startup. The volume is probably normal variance. I don't know what timing of price increases and different things are, you know, are down there. But we actually like our growth rate against our market index in Australia, and I wouldn't read too much into the single quarter.
James Rutledge (Analyst)
Okay, no worries. Thanks. Just secondly, around the normalization that you're talking to for Europe, I guess, over the next 12 months, as those losses normalize, I guess that is going to improve your overall divisional EBIT margin there. And even though you're not taking a price increase this quarter, you know, if those input costs do continue to be favorable, then I guess you should be probably tracking above the 25% margin. Are you comfortable in the short term with that margin tracking above 25%, or how should we be thinking about that?
Louis Gries (CEO)
Yeah, I mean, I think our official comments have been near the top or slightly above our range, and certainly, that'll be that way, you know, this year, and my guess would be same next year. You wouldn't worry about Europe next year. You just take a look at the input costs, and if they took a radical swing around, that might pull us down a little bit, but we're pretty confident, you know, where we've been sitting now for last four quarters at the top or slightly above our range.
James Rutledge (Analyst)
Thanks a lot.
Operator (participant)
Your next question comes from David Leitch of UBS. Please go ahead.
David Leitch (Analyst)
Hi, and thanks for taking my questions. Firstly, I wanted to just quickly ask about the vinyl penetration strategy. Do you envisage a simple, similar rate of growth in R&R as a new vinyl cladding? Is it worth picking one over the other?
Louis Gries (CEO)
Yes. Yeah, it's actually, I mean, it's more of an SG&A challenge in R&R, but it's a little easier market development in R&R, because you're talking, you know, the decision maker is the individual gets the benefit of the decision, where with the builders, they tend to, you know, wanna multiply the premium by the number of houses they're gonna build, and it becomes, you know, a little bit tougher decision for them than it is for the homeowner. But the short answer to your question is, yes, we see ourselves ending up every bit as good, market share-wise in the R&R as we are in new construction or as we will be in new construction and vinyl markets.
David Leitch (Analyst)
Thanks. And my-- that sort of goes to my left field question, which really, I shouldn't be asking now, but I will anyway. Like, when I look at the population growth and housing development market, household formation in the United States, and the stats show that an incredible amount of population growth is in the over 55, over 60, over 65 age categories. And I kind of think that's gonna mean over the next 20 years, there's gonna be a big shift in the sort of houses that get built. I'm just wondering whether you think about that and does it have any influence in your product strategy, or you just take it as out of your control?
Louis Gries (CEO)
Yeah, our job is to have a strategy for each segment. So, we don't have for high-rise construction here, but pretty much every other segment, whether it be senior living, starter homes, first move, second move, you know, repair, remodels. We have our game plans, and you know, our game plans lead to more market share in those segments, and if that segment becomes relatively larger or smaller over time, then you know, we either get a little bit more or a little bit less. So, we don't have any you know, big strategies we're working on for a shifting housing market in the U.S.
David Leitch (Analyst)
Thanks, guys, cheers.
Louis Gries (CEO)
All right, thank you.
Operator (participant)
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from George Clapham of Arnhem Investment Management. Please go ahead.
George Clapham (Analyst)
Hi, Lou. Just same question I always ask, is sort of split between R&R and new construction volume over the nine months. Has there been much change in that? And you talked a bit about share growth, but share growth in maybe the re-side market, how you're addressing that, and what's happening there?
Louis Gries (CEO)
Yeah, so our rough split coming in the year and out still right now is about 60/40 between 60 in R&R and 40 in new construction. As far as our R&R game plans, I think, you know, we've got our game plans we run in vinyl markets, then we enhance that in some markets, what we call our ambassador programs. And then more in the hard siding standard markets, which are mainly fiber cement standard markets, we run our R&R a little bit differently. I won't say that we're running every market as well as we want, but you know, we're pretty effective doing market development against vinyl in the R&R segments.
We'd like to be doing it in more markets, probably doing it better in most markets, but overall, I'd say we're pretty good.
George Clapham (Analyst)
You got a-
Louis Gries (CEO)
So I think, you know, obviously, this PDG, like I said, is mainly pointed at vinyl because their rate of decline has slowed. Well, we've spent some time on other things, and we're back with the appropriate, you know, resource and focus on vinyl. And as you say, that means vinyl new construction and vinyl, which is mainly in the Mid-Atlantic and northern markets, and then vinyl R&R, which, again, it's in those same markets, but a little bit more widespread in R&R. It's more the standard in R&R even than it is in new construction.
George Clapham (Analyst)
Have you got a sort of rough share of what you got in that siding market versus vinyl, I mean, it's-
Louis Gries (CEO)
It's our estimate of our shares are almost identical, you know, they're probably both, you know, between 18 and 19 or 17.5 and 19.2, or something like that. They're very close to each other.
George Clapham (Analyst)
Yeah, that's all my other questions have been asked. Thanks, Lou.
Louis Gries (CEO)
Okay, thanks, George.
Operator (participant)
Your next question is the follow-up question from Andrew Johnston of CLSA. Please go ahead.
Andrew Johnston (Analyst)
Thanks, Lou. So I should have asked this one before, but just, can you talk about whether you're seeing different growth rates in Houston and in Texas compared with what you're seeing in the rest of the country and what you've been seeing in those markets over the last couple of years?
Louis Gries (CEO)
As far as our volume growth or the housing starts?
Andrew Johnston (Analyst)
Oh, well, I mean, we can see the housing starts numbers and those, you know, the growth rates in Houston are coming off of it. Just in terms of your volumes,
Louis Gries (CEO)
Yeah. No, we've been in pretty good shape in Texas. We've been concerned about, you know, some of the forecasts that had Texas housing coming way off. I guess Houston is softer than it had been, but then other markets, like, Austin and Dallas have been pretty good. So, you asked me about our growth rate relative to the last couple of years, and I'd say it's in the same range. You know, we're pretty in shape.
Andrew Johnston (Analyst)
Okay, great. Thanks.
Louis Gries (CEO)
Yeah.
Operator (participant)
There are no further questions at this time. I'll now hand back to Mr. Gries for closing remarks.
Louis Gries (CEO)
All right. Thank you, very much. I appreciate everyone joining the call. We'll talk to you next quarter. Bye.