James Hardie Industries - Q3 2017
February 2, 2017
Transcript
Operator (participant)
Thank you for standing by, and welcome to the James Hardie Q3 Results Briefing. All participants are in a listen-only mode. There'll 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 Mr. Louis Gries. Please go ahead.
Louis Gries (CEO)
Thank you. Hi, everybody. Thanks for joining the call. Hey, today is a little bit different. I'm in California, and Matt's in Dublin. So, hopefully, we'll be able to coordinate questions and the rest of it. The reason why I like that, I think a lot of you know I had double knee replacement just before Christmas, so everything's going well. I got back to work in early January, but I'm working out of our California office while I rehab, which is getting there, a couple weeks left. So I didn't make the trip this quarter to Dublin with Matt. So anyway, hopefully everything goes well with the telephones.
So, they're flipping slides in Sydney for us, so cover slide first, disclosures, forward-looking statements, note to reader. Slide five, some of the definitions. Slide six, just a normal approach. I'll take care of the front part of your presentation. I'll give you a few comments on the businesses. Matt will go through the financials in some detail, and when you come back, I mean, when we get done with that, we'll go to questions from investors and analysts, and then if there's any media questions, we'll take those at the end. On the questions, it's a little bit different this time, since we're in two different rooms. Anyone that can either ask the question of me or Matt up front, that'll help us figure it out.
If, if you don't, we'll figure it out, so it's no big deal. So next, next slide's another cover page slide, and then we're on to page eight. Okay. So, unfortunately, it is a very easy quarter to read. Top line, good again, but bottom line, short of what we had planned, even as recently as when we talked to you in November. It's largely driven by US manufacturing performance. Now, the problem is. Well, I'll talk about that when I get to the US page. I guess the other key point on the slide, or the other noteworthy point on the slide is, net operating cash for the year is still running strong.
Some of that's, you know, due to the inventories, but the performance has been good this year, so. Go to slide nine. This is the US slide. We see sales and volume up 10, price flat. That's slightly below what the comp is for the year, but we consider it basically in the same range, and kind of expecting similar results in the fourth quarter. Normally, we talk to you later in the quarter with our results. We're only really a month in now, but I usually kind of indicate, you know, is there anything different about this quarter, from an order file perspective? Not really.
We have a price increase announcement out, so it may, it may, you know, take a little different shape, as we get further into the quarter, but we really expect it to be pretty much in line with the first three quarters, up about that same amount, maybe a little more, a little less, but no big change. So again, on the North American business, you know, you can see the EBIT was actually down versus last year on better volumes. We are tracking the way we thought we would track with manufacturing, so the bringing new capacity on and the kind of resetting our some of our existing capacity to run more efficiently is going out as planned.
I think last quarter I said it's a two- or three-quarter kind of project. So, we're doing fine with it. The reality is, it just cost us more than we thought this quarter. Maybe we should have been able to anticipate it better. You know, you're optimizing around throughput, so you have higher freight costs. You know, the startup costs are being optimized around throughput as well, so their curves look okay, but their cost for the curve is higher than we anticipated. And, with some of the resets in the plant, same thing. A couple of plants are lagging, but, as a general comment, the positive trend line at this point, we were expecting.
We do have in manufacturing. We caught up on the order file, partly because of the positive trend line and partly because you get the, you know, kind of lower demand around the holidays. But we caught up on the order file outside of our HLD trim product pretty much, say, January one, and then on the trim product, we'll be caught up, say, middle of February. So we're working our way out of those problems and getting back into a free supply situation. Expect to be in free supply next year, but it has costed us more than we anticipated. Of course, you probably have already seen, we've changed guidance down, and that would be the biggest driver of that change.
Next slide, slide ten, EBIT margin. Of course, everyone knows our business. We're in the target range, but for this type of market, we should be at the top end or above that target like we have been the last seven quarters. So again, it's reflecting the issues we had this year, where we got behind on manufacturing. When we did the drill down, we found out that the approach had drifted and was actually you know not delivering the reliability we want in the plant. So we went through a fairly major reset, plant by plant. Started that in July.
And, like I said, in November, we had two or three quarters left, but we're confident we're on the right track, and we're confident those EBIT margins come back up in the more normal range, which is top or above for this type of market, which is a pretty good market. Obviously, it's not a high growth market from a new construction standpoint, but it's a pretty good market. Slide 11. Net price flat. You can see it's kind of flat for three years, 2015, 2016, and now 2017. We did announce an increase, as I mentioned earlier, market increase goes into effect April 1. So fiscal year 2018, we'd be back on a positive slope with the price chart. The other side of the slide, top-line growth.
You can see housing, you know, good. We don't have any complaints, but it's flatter than what it was forecasted to be. Our growth above the market index has been good this year, so no issues there for us. Next slide, 12. Brings you to international product segment, which this is a Asia Pac slide. Asia Pac's pretty much gone as planned. I think most of you know, about three years ago, we made a big commitment to the Australian business with increasing investments in SG&A and increasing investments in capacity. So those are now kind of starting to work for us.
So the Australian business has good comps, partly because they're getting a little bit of, you know, more traction, but also partly because they're going against that startup comp last year on manufacturing. Having said that, we think fiscal 2018 should be the year that we really start seeing the full benefits of both the extra SG&A and the extra capacity in Australia, so we're pretty optimistic about that. I'll go through the country walkthrough in the next slide, but basically, Asia Pac's, you know, pretty much where we want it to be. We got a little issue in the Philippines, I think we flagged last quarter. So we go to slide thirteen. You can see Australia up on all three, volume sales and EBIT. New Zealand, I commented last quarter.
Yeah, it's flat on the EBIT line, which we think is just a timing thing. I think the business is kind of pointing in the right direction there, and their EBIT improvements will start to show up, you know, that reflect the net sales improvements or revenue improvements. The Philippines definitely ran into a bit of a bump in the Philippines new competition, import. We're probably a little bit late to see it, and we're gonna work through it. It's not gonna fundamentally change the market position in that business. We've added capacity. We'll be able to grow that business beyond what we have in the past. We think the returns are gonna be good.
But right now, the comps aren't good out in the Philippines. Of course, it's a relatively small part of even that division, so not too much to worry about, but certainly on the Hardie side, we like to have all our parts working and, you know, all the business that we're in, we like to see them work and contribute. The Philippines is still contributing, but not at the same level it has been in the past. On Europe, you know, it's been a bounce back year for Europe. You know, we had a bad year last year, and the guys have kind of straightened things out and got some good positive traction in Europe.
Now, it's a small business, obviously, but they've done a good job getting it back on track. Okay, I'll hand it over to Matt now for the financial review.
Matthew Marsh (EVP and CFO)
Thanks, good morning to those of you in Australia, and good afternoon to everybody else. We're on slide 15. So, group results for the third quarter, net sales are up 10%. Like Louis said, we had higher volumes in North America, you know, that were pretty consistent in the quarter with our year-to-date run rate coming into the quarter, so volumes have been good. You know, what drove international was really good volumes considering the market, but they're also getting good price, both in terms of a smaller list price change than they had at the beginning of the year, but they're getting favorable product mix as well, and to some extent, some region mix.
And so the combination of the product mix to the Scyon brand and the region mix has helped buoying up average net sales price for international. Gross profits, you know, for the quarter were up four. Gross margin rates were down, you know, almost two hundred basis points. And that's almost exclusively driven by the manufacturing performance that Louis mentioned in North America manufacturing for the quarter. SG&A expenses were up 21% on a quarter-to-quarter basis, you know, pretty consistent in terms of a run rate. So it's not as though SG&A is ramped up significantly more. It's just it was depressed, you know, a year ago. It was that was.
We were just getting ready to start the investment and the headcount additions that we made in North America. There's also a little bit of foreign exchange losses in there, but the primary, by far, the primary driver there is the additions we've made in the business, and the investments that we're making in products, segments, and marketing. Adjusted net operating profit was down 6%. You know, it's primarily driven by North America, with EBIT being down in North America. EBIT for the group was down 10%. And you can see the next comment, you know, North fiber cement ebit was down almost 11% for the quarter. If you go to page 16, for the nine months, it's a pretty similar dynamic.
You can see for the quarter, obviously, we performed worse than the first half. So, on some of the gross margin and on some of the EBIT and net operating profit growth, it's a bit more diluted in comparison to the third quarter, but very similar story. So net sales increased 10%. You know, again, volumes for North America have been strong and sort of on track. And then similarly, on fiber cement, market down with volumes up slightly, and then price driving them up further. Gross margin rates down almost about fifty basis points for the group. Again, same similar dynamic, largely being driven by North America, and then that's largely being driven by manufacturing.
The SG&A has been up for the nine months at 16%, and net operating profit through the nine months is up 5%, largely driven by EBIT up 4%, with not much happening kind of between EBIT and net operating profit. That's worth highlighting. Slide 17 is the results of foreign exchange. You can see it's been relatively, you know, stable, some variation throughout the year. That's what's highlighted in the chart, up in green. But, you know, it's more or less been in a pretty similar range. So, FX translation's not as big of a feature in the result this year as it certainly was last year.
You can see in the lower right, the translation impact, you know, is under $1 million on a net operating profit basis, and just over $1 million on a sales basis. So not a significant item for the year. On slide 18 is North America input costs. You know, we are starting to see several of our input costs trend up in the market. So, the market price for pulp is up about 6% year over year. Cement prices have been up pretty consistently now for several quarters. We see them up about 5% compared to a year ago. Utilities are up. You know, you can see gas and electricity are both up in that high single digit range. The freight market prices are down about 2%.
Obviously, given you know, some of the, the capacity items that we're working through in the North America business, we've got some inefficiencies in freight as we're shipping product outside of the normal home markets that the product's being made at. And so, but the actual, the market prices are down about 2%. On page nineteen, a little bit more detail on the segments. So for the third quarter and the nine months, you can see in the top for North America, in the quarter, EBIT was down about 11%. EBIT's about flat year to date. You know, obviously, volume has been good. You know, price is down slightly, but more or less flat. Where the leverage is being lost is, really, you know, two or three things.
One is the plants, as we've already mentioned, and the network having, you know, not running where we want it to run, at the same time that we're incurring startup costs in the year to get additional capacity up and running. And then, we, you know, we continue to invest in the organizational capability and in some of the sales and marketing programs oriented around growth. So we've tried, you know, to not make any kind of knee-jerk reactions on the investment side, you know, despite obviously the disappointment on the way the contribution margin and gross margins are playing out for the year.
When you do that, obviously, it helps long-term performance and financials, but in the short term, it compresses EBIT, and that's what you're seeing in North America this year. On the international side, you know, I think we've touched on a lot of them. For the third quarter, EBIT was up about 35%. Year to date, it's up about 22%. You know, I think as we mentioned, a lot of that is a favorable comp from a year ago with the Carole Park. We had quite a bit of startup cost in the prior year that didn't repeat. That being said, you know, the mixed performance that we're getting in Australia, and the team driving Scyon sales is certainly helping.
And then that's partially offset for the international segment with the Philippines underperforming for the quarter and for the nine months. On slide 20, the other segments, you know, I'd say not much has changed kind of in the run rate of the other businesses. You can see there is some improvement in the other businesses as the windows business continues to, you know, we are getting traction year over year, and that's helping to drive the losses down. But you can see, you know, we're still over-investing in that segment, and it's not cash flow positive yet, or it's not, sorry, EBIT positive yet. R&D is really no real change either for the nine months or the third quarter.
You know, it continues in the range of 2%-3% of sales. And the fluctuations are, you know, well within inside the normal variances. On the general corporate cost, you know, front, you know, we do continue to invest on the corporate side in bringing in capability at, at some of the functional levels, as well as at a corporate level to try to have the organizational capability and the people in order to, you know, be able to drive future growth. And there's a small increase in foreign exchange losses, but the primary driver of what you see is the quarter on quarter and the nine months on nine-month change in growth is some investment that we've done in the organization.
Slide 21, the effective tax rate is now 25.1%, is what we're estimating for the year. Obviously, with the third quarter and the reduced level of EBIT expectations for the North America business, being that that's in a high tax jurisdiction, that has an effect on the estimated adjusted effective tax rate. And so that's what you're seeing reflected there. Most of the other comments are pretty consistent with what we said, you know, each of the quarters. You know, we continue to pay taxes in Ireland, US, Canada, New Zealand, and the Philippines, and we don't in Australia, due to the AICF deduction. On slide 22, cash flows remain strong.
You know, you can see an increase in net income especially when you adjust for the, the non-cash items year to date. There are favorable changes in working capital. You know, some of that is timing, just the normal flows of when receivables and payables happen to get paid out and collected in the quarter points. But there is an underlying overall performance where inventory levels are at a more efficient level than they were in the past. Obviously, with the supply issue that we had this year, and as a result, you know, you get a favorable cash benefit. You know, we are working in the fourth quarter to bring those inventory levels back up to more normal levels.
So some of that'll come back, but the underlying cash flow performance is still very good, and I'd expect, you know, cash flow from operations for the year to overall be strong. You know, we are spending slightly more this year on maintenance CapEx, and most of the capital, most of the CapEx that you see so far is on projects that were effectively done or are close to being done. And you'll see on a future slide that increased CapEx will be a feature going forward. And then, you know, no real change on the financing side from a previous discussion. On slide twenty-three, there's a lot of capacity work going on in North America.
You know, the third sheet machine in Cleburne started up during the third quarter, and has been on track and continues to, you know, have a good startup. We're happy with how that's gone so far. It's early. We're three months in, couple months. Yeah, we're about three months in at this point, but that team has done a nice job of both maintaining the performance of the base plant and ramping up the new line. We're continuing to start up the third sheet machine in Plant City, and we're now doing work on a fourth sheet machine in Plant City. You know, the Plant City facility startup got off to a good start.
As we switched over to the trim product, you know, that's, it's definitely hit some bumps in the road. And now with another line coming on, you know, that, that'll be an additional capacity project. It's an existing line, so it's small dollar investments, which is why we haven't noted it here, but it's nonetheless an additional capacity project. We have started work on the restart of our Summerville, South Carolina facility that was mothballed during the downturn. We're on track to commission that plant in early fiscal year 2018, and we're in the process of continuing to start up both sheet machines in Fontana. Those North American capacity projects, you know, are all going on kind of concurrently.
Additionally, today, we're announcing a $121.5 million greenfield capacity project in Tacoma, Washington. As some of you might remember, about 18 months ago, we purchased a parcel of land that's adjacent to the existing Tacoma facility, when it came onto the market, with the expectation that we would have a greenfield capacity project there, and that's what we're announcing today is that project. You know, the team is doing a lot of work to complete the engineering work and get going on the construction work, and we would expect that we would commission that in the second half of fiscal 2019, and then we are continuing to expand the capacity of our Philippines facility.
As you probably remember, that facility was very tight on capacity a year ago. Obviously, with some of the volume performance this year, it hasn't been as much of a constraint, but we don't expect we do expect that we'll need the capacity going forward, and we're continuing with that investment. You should expect over the next several quarters that CapEx and capital expenditures, you know, will continue to be a feature of the discussion. And there'll be an increase of CapEx in future years compared to what they were this year. On page 24, no real change to the overall financial, you know, management policies of the company.
You know, our ratings of the agencies are unchanged from the last time that we spoke. You know, our capital allocation priorities aren't changing, but as you might expect, you know, given that our top focus continues to be on investment in organic growth, you know, a lot of that organic growth is in the form of, OpEx through investing in the organization, but obviously also in CapEx, as we're building out the plant network, particularly in North America. And so that remains our top overall capital allocation priority. Number two is still the ordinary dividend, and, you know, we continue to maintain the payout ratio of 50%-70%.
And then number three is sort of everything else, you know, wanting enough of a balance sheet and being conservative enough in our financial policies that we can be opportunistic, should an opportunity present itself, and obviously weather any changes from a market standpoint. Overall, the balance sheet's in really good shape. You know, we are still at a very conservative level of leverage, well within the range of one to two times adjusted EBITDA. And then, you know, I'm pleased with the weighted average maturity, and our liquidity is good. So, you know, we're being consistent on the financial management framework. No change from our prior discussions. On slide twenty-five, a little more on liquidity.
You know, again, the balance sheet's in good shape. We've got about $88 million of cash, and about $411 million in net debt at the end of the quarter. 78% liquidity. No real change to the corporate debt structure, and you can see we're at the low end, you know, at 0.92 on the leverage side, but as many of you know, the third and the fourth quarter, it tends to be at a low point, and then in the first quarter, it tends to be at a high point as the outflows tend to go higher over the summer as we make the payment to AICF, and typically pay out the ordinary, the second half ordinary dividend about the same time.
So, you know, very much liquidity is on track. On slide twenty-six is guidance. You know, as Lou already mentioned, we've adjusted down, you know, two forty to two forty-five to two fifty-five. We're obviously disappointed by that. You know, that's almost exclusively driven by the performance in the third quarter being below our expectations. And for the year, we see housing starts kind of in the same range. It's obviously not on the market side. Volumes, you know, continue to be good and perform where we expect them to perform. So with that, I'll close, and we'll open it up to questions.
Operator (participant)
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. Your line is open, please get the handset to ask your question. Your first question comes from Emily Smith with Deutsche Bank. Please go ahead.
Emily Smith (Director and Equities Analyst)
Good afternoon, Louis and Matt. So just a couple of questions from me. Firstly, Louis, just wondering if you can give us an idea as to the magnitude of the price increase for April 1. Another question for you, Louis. Obviously, the production costs were higher than you expected. Do you feel that, going forward, given the continued investment required, that this is probably FY 17 we might consider a bit of an unusual year from a cost perspective? And finally, a question for you, Matt, around CapEx, around your expectations for CapEx, given the capacity addition for FY 17 and FY 18. Thank you.
Louis Gries (CEO)
Okay, I'll take the price increase and the manufacturing, and I'm going to pass it on to Matt for CapEx. On the price increase, you know, it's almost all of our markets, almost all of our product lines, but there would be some up and downs. Right now, we've got it calculated. It should come in at least 3% from a comp basis versus fiscal year 2017. It may come in a little bit more than that. So it's kind of in that typical range when we take price. You know, we're not aggressive price takers, and we weren't aggressive this year either.
On the manufacturing, yeah, certainly, fiscal year 2017, I'm hoping, is an outlier as far as our manufacturing performance. But there are three components. You know, we did kind of lose track of our approach, and should have been more on top of the top of it, but we weren't. We were late to see it. We were getting pretty good, you know, unit cost numbers out of the network right up to about this time last year. And then, you know, we started to see some reliability issues in the plant, in some of the plants. And we started talking about that, I think, it was starting last February or something.
When we really drilled down on it, obviously, you have normal variance in your network, and so right off the bat.
... you know, we probably don't think we have a problem. We think it's kind of more normal variance, but it kept going the wrong way. By the time we drilled down in it, you know, in July, we just saw that our approach had drifted. We had too focused on the numerator part of the unit cost equation, and we're losing our throughputs because we were behind on, you know, some basic maintenance in the plant. We had lost some of our organizational capabilities in the plant, and we just right there committed to, hey, we need to kind of reassess and reset. And, you know, we did that through Ryan Kilcullen's organization. And it's been a ton of work.
We'll probably, you know, we're probably still early in the process as far as, you know, rebuilding the capability and even on the catch-up side of maintenance. But we are heading down the right path. The other thing is, we've committed to a way different safety program also in July, and there's some dollars that have to be spent to support that initiative, that are being spent to support that initiative. I expect those dollars to go for two or three years. So, that wouldn't be something that would, you know, come out in fiscal year 2018. But having said that, it's a smaller part of the increase by far.
The bigger part of the increase is, has been, how we run our plants, catching up on the programs and catching up on the, you know, just basic management capability in some of the plants.
Emily Smith (Director and Equities Analyst)
So, Louis, are you-
Louis Gries (CEO)
We've covered the startups.
Emily Smith (Director and Equities Analyst)
Sorry, Lou.
Louis Gries (CEO)
Yeah, go ahead.
Emily Smith (Director and Equities Analyst)
Are you able to quantify the cost of that catch up on the programs? Has it been-
Louis Gries (CEO)
Yeah, I'll let that question go to Matt, if he wants to just give you a little bit of an indicator on that. But the other part of it is, you know, when you're starting up a line, if you're in free supply, you can cost-optimize your startup. Basically, what you try to do there is learn as much as possible, much per dollar as possible. So your runs are fairly short, your downtime in between runs are fairly long, and your organization is kind of testing equipment, identifying, you know, things that have to be resolved, shutting down, taking care of them, starting up short run. We haven't had the luxury, unfortunately, of cost-optimizing our startups.
We had to throughput optimize them, meaning we were shorting customers. So, the runs were longer than they would've been. So even though you're making board at a higher unit cost and you're running through a few issues as you do that, you're getting more board from your customers. So, we definitely see Cleburne's done a good job, by the way, of starting to get back to more of a cost optimization approach. And, with the startups we have in fiscal year eighteen, we think we're gonna have the luxury of shifting fully back to a cost-optimized approach. So your first question, do I think fiscal year seventeen's an outlier?
I absolutely do think it's an outlier, but it's not like an event that just happened on its own. Unfortunately, our management kind of approach slipped, and you know, we had to pay the price for that. And we're definitely getting it back. We've learned some things that I think will be important for us in the future, not only about keeping better track of what we're doing, but also we probably have improved our approach in a couple areas because we've had the issues. I'm very confident that you know, fiscal year 2018 is gonna be a better year than 2017 from a manufacturing standpoint, but I don't think it's a one-year kind of capability build. I think 2019 will be better than 2018.
I think that'll reflect going beyond what we've been in the past, rather than eighteen will be more just getting back to where we have been in the past. So I'll go to Matt on both the CapEx and whether he wants to give you any guidance on the, you know, how the cost on the manufacturing side break out.
Matthew Marsh (EVP and CFO)
Yeah. Yeah, so just on the manufacturing cost, but specifically on the programs, it comes in a couple different forms. Obviously, you get some OpEx, which is pretty inconsequential. It you know, it's probably $5 million, plus or minus a bit. But you also get it on... Sorry, that's on the OpEx side, but you also get it on the CapEx side. So part of the safety program is, you know, reinvesting in non-routine maintenance in the plants. It's infrastructure projects. It's addressing things in the plants, you know, like lighting or infrastructure or, you know, just things that we should be taking care of that we had we weren't. And obviously, that doesn't all immediately flow through the P&L.
And so that's probably another, you know, $5 million, plus or minus. So incremental programs are probably in that, you know, that $5-$10 million range, which is a pretty wide range. But so it's a driver for the year, but it's not the driver for the year. On capital expenditures, you know, this year, you can, you know, we can see what we've spent so far, on slide 23. You know, year to date is around $59 million. I think this year, you know, we'll end up, you know, north of $125 million. Obviously, with what we've announced over the next couple of years, that'll ramp up significantly.
I'll provide kind of wide ranges, 'cause some of it'll just depend on the timing of the outflow. But for fiscal 2018, you know, we're probably gonna be north of $275 million of CapEx, and in fiscal 2019, it'll probably be north of $200 million of CapEx. And when we get to, you know, May and obviously August, I know this will be a continued discussion, but I'll start to tighten those numbers down a bit, but I think the key point is, it'll definitely be elevated.
We'd expect the non-capacity related CapEx that you see today to probably increase a little bit as we continue to invest in the plants on safety and infrastructure, as well as just the normal business as usual items. And then the real feature going forward for the next couple of years will be the capacity and not just the Tacoma project that we've announced and wrapping up the Summerville project, but you know, there'll be additional expansion projects that we're doing work on now, and we'll start doing more work on. We'll continue to do more work on over the next six or so months.
Emily Smith (Director and Equities Analyst)
Great. Thank you.
Operator (participant)
Thank you. Your next question comes from Ramoun Lazar at UBS. Please go ahead.
Ramoun Lazar (Executive Director)
Good afternoon, guys. Just a couple for me. Just, you mentioned you're sort of catching up on the order profile in January and the coming weeks. Just wondering where you expect PDG to get back to in the coming quarter or quarters? And then also just cognizant of the fact, I think you mentioned last quarter, manufacturing issues cost you about 2% on volume growth. And then just one for Matt on the SG&A. Should we be assuming that you sort of annualize SG&A costs are around $70 million per quarter?
Louis Gries (CEO)
Okay, Andrew, I'll take the PDG question. You know, obviously, we look at, we look in reverse on PDG, and, and, normally in the business, we go back four months, go back 12 months, go back 12 months, go back 24 months. 12 months look back, you know, it's pretty good. We're, we're kind of in that target range we wanna be, six to eight. Go back 24 months, a little bit less than that. Kind of what I think on PDG, I think we had a, a, a good, bounce back year on, growth above the, index. But I also see some areas that, we're not fully, addressing the growth opportunity. We've, we've obviously, been trying to change that, and, we got, we got some new programs in place.
We got a larger emphasis on some areas that, you know, I think we are missing a bit there. So I feel pretty good about PDG, but I wouldn't want everyone to get infatuated with our, you know, fiscal year seventeen growth above the index, 'cause I think it's kind of dangerous to just take four quarters and say: Hey, that's what's gonna happen in the future. I do believe we're gonna approaching that target range, and, we'll kind of be like with the EBIT range, we'll be in our target range more often than not. And, so I think that's what we look like going forward. As far as the volume growth, 2%. Yeah, I don't know. I guess we gave you an estimate.
Of course, we've debated this internally, how much of that volume got deferred versus how much of it had to go somewhere else. We don't have an exact number. I think the reality is for us, you know, we need to go back to our customers, you know, make sure they understand their supply fiscal year 2018 and forward, and any of the customers that did go to alternative materials when we were short, you know, kind of give us a look, and we get back as many of those customers as possible. We are out of the problem now.
You know, I said middle of February for HLD trim, but I think most of the market knows that, you know, within a couple of weeks of being out of that problem as well. So I don't expect that, you know, to carry forward, but there is some earn back. As far as SG&A, Matt, you wanna comment on the SG&A?
Matthew Marsh (EVP and CFO)
Yeah. Yeah, so, I mean, we would expect to continue to invest, you know, in fiscal eighteen. You would, even if we weren't investing, you'd still expect, you know, kind of 3%-5% increase in SG&A pre-investment. That's just, you know, doing some wage increases as market wages, you know, continue to climb. But we are continuing to invest in all in the organization. You know, we're putting resources in the plants. We're building more essential capability in the operations team and Ryan Kilcullen's team, so we can avoid, you know, some of the approach issues that we, you know, that we've had this year, that have obviously cost us during the fiscal year.
And then obviously, we're gonna continue to invest in growth-oriented programs. We feel good about the selling resources that we put into the business, in the North America business, this year. But then, you know, there's programs and that are segment and product specific. So, you know, I'm not gonna provide kind of a specific number of where SG&A is for next year. Obviously, we're not ready to kind of do forward guidance, but that gives you some framework to work with, that there's the normal inflation of 3-4%, and then on top of that, there's some incremental investment that's oriented either around growth or putting capability in place to support growth.
Ramoun Lazar (Executive Director)
Okay, thank you.
Operator (participant)
Thank you. Your next question comes from Keith Chau at JP Morgan. Please go ahead.
Keith Chau (Executive Director of Equities Research)
Good afternoon, gentlemen. A couple of questions on my end. First one, just around the growth rates across different products, please, Lou. Exteriors versus interiors, and also how trim is tracking now, and whether that's penetrating the market at a faster rate than exteriors. And then just another point, on pricing. On the flip side of pricing is obviously rebates, just where rebates are sitting at the moment, and whether you're offering a higher level of rebates to try and kind of really ramp up that PDG in the coming quarters and years? Thanks.
Louis Gries (CEO)
Yeah, thanks, Keith. So, question on growth rate, exterior versus interior. Exterior is growing quicker than interiors. Interiors had a good year. They'll be up five plus or something like that, so about, you know, a little less than half of what the overall business is. And since you know the splits, or roughly know the splits between exterior and interior, you can kind of come to our exterior growth rate by factoring that in. But both, basically all of our, or both are, you know, main product lines. If you think exterior, interior, they've had good years, growth-wise.
Trim specifically, you know, we've been out of trim in the south, which is our biggest trim market, since early summer, so we didn't get an opportunity to grow our HLD trim product line like we could have. So, so we've been kind of just, you know, on tight allocation with that product line, making sure, you know, the product got to the customers that need it the most for, you know, for projects that were already committed and that. So, I think we'll come out and shoot in eighteen, back in growth mode on HLD trim. And then the other trims, NT3, okay, in the Midwest, less in the Northeast, Mid-Atlantic, but not much of a story there. Not worth talking about.
It's just kinda. I'd say, you know, you said, is it growing faster than the, the siding product line or slower? I'd say, you know, it's kind of in the same range. So our attachment rate's not really changing dramatically with the NT3. And then on the West Coast, same thing with the XLD product line. So we still have a lot of work to do with trim. You know, our product portfolio is not, you know, it's got some gaps. We still have to take care of. We've taken care of some of those gaps over the last several years, it's helped, but, you know, we still have some gaps that remain if you're gonna hit, you know, kind of all your users. As far as rebates, rebates are higher for a couple reasons.
One, you know, we use rebates as kind of the main lever for tactical pricing. So the big builders have grabbed more starts, and the big builders get more than their share of rebates in new construction. So just them grabbing more starts means our rebates go up, which is fine. We've got a good position with big builders. We think, you know, we got them positioned at the right level, price-wise. So it all works, but it, you know, the number does change. And then similar thing with some volume dealers. There's been some consolidation at the dealer level in the U.S., and so our volume dealers have been growing at a little quicker rate than, you know, more of our independent dealers.
We support the two different types of dealers differently. So the volumes are more interested in, in, you know, the price of the product and maybe a little bit extra back in rebate. The other dealers are more interested in, can we help them with creating demand or a supply chain that allows them to participate? So, and then finally, there were some, you know, kind of rebates used in competitive situations, whether it be, you know, against one of the close alternatives, whether it would be a wood product or fiber cement product. But that's kind of the three things there. I think we can do a little better with our tactical pricing in the future, but, you know, we don't have a problem.
We just had some kind of, as I said, some mix work against us has been a large part of the change.
Keith Chau (Executive Director of Equities Research)
Okay, thanks, Lou. So just a quick follow-up on that one. So in terms of the 3-4% price increase you're implementing this year, what do you think will actually flow to the bottom line on a net basis?
Louis Gries (CEO)
Yeah, you know, that may be a bit optimistic, so you might want to put a little discount on it, but I think our net will be pretty close, our net increase will be pretty close to our gross increase.
Keith Chau (Executive Director of Equities Research)
Okay.
Louis Gries (CEO)
So if we get a three gross, I'm expecting a three net. Now, it could be a fraction off, but I'm not expecting... Well, I don't know. I mean, I'm not that good a forecaster, obviously, but I'm not expecting this mix problem with the big builders, the consolidation with the dealers. I don't expect another big shift there next year.
Keith Chau (Executive Director of Equities Research)
Okay. Thank you.
Operator (participant)
Thank you. Your next question comes from Peter Steyn with Macquarie Group. Please go ahead.
Peter Steyn (Analyst)
... Morning. Thanks, gents. Should I rather say good afternoon? A quick one just on Tacoma, if you could give us a sort of sense of what drove the decision to add capacity in that market as opposed to some of the others that you have been considering? And then just on startup costs, Lou, you mentioned that from a capacity point of view, you'll be in the clear going into FY 2018. Just curious on startup costs, there's obviously still a few in the system. Do those wash out? Or so do you enter FY 2018 with a relatively clear slate from an operational cost point of view relating to those startups?
Louis Gries (CEO)
Okay, on Tacoma, why Tacoma? Yeah, it's you know we have a national network so some of our plants you know ship pretty long radiuses and a few of our plants ship very tight radiuses because you know they don't have capacity to serve the local market. Tacoma would be one of those plants that ships a very tight radius and then other plants kind of import board into the Pacific Northwest for us. So that would be Reno and Peru, Illinois, goes in there with some board. So the opportunity in Tacoma is they can take care of their local market and those plants exporting in are you know on a delivered cost basis a higher cost board in the market so we take that out.
The other thing is, I think Tacoma can easily push down to Northern California with more board, so, Northern California is a pretty good market for us. As far as the, you know, so we just kind of balance the network. Obviously, you would never kind of like bring three different plants on at the same time just for shipping radius. But when you do bring a plant on, you kind of look at the net effect across the network, for the shipping costs or shipping radius. So, and, you know, we're looking at something in the Northeast and something in the Mid-South.
We'll do them both, but even now, you can't quite tell which one will you do first, 'cause they're a pretty close call on, you know, as far as how the overall, you know, freight number drops. So it might be driven by, you know, when can you be ready first? You know, what's the total cost of investment in one versus the other? So it kind of becomes a incremental decision after you get through the freight. So Tacoma won because of the freight. And, you know, and it'll probably end up being something similar will emerge where you'll tip it either toward the Northeast or Mid-South as we get closer to those projects.
We're working to get them both ready, so we have that choice if one is preferred over the other from a, you know, which one's first. As far as startup costs, we're gonna start Summerville next year. We'll finish up Cleburne. Plant City, I would hope, would be near finished up. The big difference won't be. It will be the number of startups going on at the same time. The other thing is, I commented earlier, we feel strongly we'll be able to cost optimize these startups rather than throughput optimize them, and that'll help us as well.
So as far as having a clean slate, no, we'll have startups going on, but I don't expect them to be, you know, the same magnitude of cost to the bottom line that we did this year. I hate to do it, 'cause it was a, you know, management mistake. I'll remind you, our problem this year was we had our equation wrong as far as when we needed capacity, 'cause we just had it too tight. And then when our plants started underperforming, you know, we quickly got very tight on board, and we had to kind of really accelerate startups. So that was the big cost pull forward.
Now, you know, if we didn't have that problem, and say we got through this year okay, and we would be starting up Cleburne, maybe starting in May or something. So we pulled that, we pulled that startup forward, so theoretically, fiscal year 2017 has more startup in it than we would've planned, and fiscal year 2018, to your point, has a little less than we would've planned.
Peter Steyn (Analyst)
Thanks, Lou. Sorry, could I quickly flick one more in, just around CapEx? Matt, you know, I suppose the broad expectation is that your base load CapEx is somewhere in the $80-$100 mark. So the profile that you mentioned at $125 for the full year, that would imply that we've got a fairly big fourth quarter ahead of us. And then $275 for 2018 and $200 for 2019, those are pretty big numbers in the context of the $121 for Tacoma. Just trying to understand how those pieces of the puzzle piece together.
Matthew Marsh (EVP and CFO)
Yeah. Yeah, so for fiscal 2017, obviously, with the announcement at Tacoma, we'll have, you know, we'll have some of the costs that'll hit, we expect, over the next, you know, 60 days as we're eager to get going and get some of that equipment ordered. So that's number one. Number two, we lease a piece of the land that our Waxahachie facility is on, and we're looking to buy that piece of land, and we think that that'll likely hit at some point over the next, you know, 90 days. We expect that that outflow will occur. It's about $16 million. It's a good economic trade-off for us.
And so those two, you know, so some money for Tacoma and the Waxahachie added to the sixty plus just the normal fourth quarter run rate is kind of how you go from the sixty to the number I gave you for fiscal seventeen. Obviously, the bulk of the Tacoma expansion is sitting in fiscal eighteen and nineteen, but you know, we've talked now the last couple of quarters, and Lou just mentioned our intentions to also expand in the Northeast and Mid-South. That'll come in a couple of steps. We've got teams actively looking for sites in those two geographies, and as soon as, you know, we identify a site that we think is attractive, we'll look to buy that land.
And then, you know, during fiscal 2018, yeah, you should expect that we're talking about one of those two locations as another expansion project for later in fiscal 2019 or 2020. And so some of that, some of the funds that I've included in the forecast are sort of earmarked for either a Northeast or Mid-South expansion on top of the Tacoma expansion that we've already announced. Yeah, there's a fair bit of capacity work that's gonna get done so that we can, you know, stay ahead of demand and build back the insurance that we should have had in the network a year ago to avoid the problem we had this year.
Peter Steyn (Analyst)
Perfect. Thanks, Matt.
Operator (participant)
Thank you. Your next question comes from James Rutledge with Morgan Stanley. Please go ahead.
James Rutledge (Executive Director)
Thank you. Just questions around price. Lou, just to clarify the, the 3-4% price increase that you're talking, is that an average weighted kind of price that we'd expect to see flow through, or is that an announced price increase on exteriors, for example? And then I'd just guess-
Louis Gries (CEO)
Uh, we-
James Rutledge (Executive Director)
One question around price. The guidance for fiscal 2017, obviously, with price increases coming through first of April, you'll see a bit of forward buying into the fourth quarter. Just wondering if your guidance allows for that.
Louis Gries (CEO)
Okay, so on the price increase, we've taken increases on both exteriors and interiors. The three to four, which I must have said, 'cause you, a couple of you repeated it. I want you to think about three, but I think it's gonna come in higher than that. If it comes all the way up to four, I'd be surprised. You know, when we take a price increase, we do it market by market. So, there'd be some markets, well, there'd be a few markets, you know, where the increase, you couldn't even see it. It'd be smaller, maybe just on a couple of products, and there'd be a couple of products where, you know, the increase would be small.
Generally, the business as a whole, interiors plus exteriors, is expected from a comp basis next year to be three plus for the market price increase. James?
James Rutledge (Executive Director)
Okay. Yeah, thanks. That's clear. I just guess on the guidance, maybe, Matt?
Matthew Marsh (EVP and CFO)
Yeah. Yeah, we do have that built in into the guidance number. You know, we, because of the way the network this year has has run and being tight on supply, you know, we think that the overall impact as a result of the announced price increase will be smaller this year than than it has been you know, two years ago for example, when we when we last announced the price increase. But nonetheless, there is some pull-forward volume that we're expecting as customers take advantage of of the allocations that we've put in place. But but that's already included in the guidance range we gave today.
James Rutledge (Executive Director)
Okay. Thank you.
Operator (participant)
Thank you. Your next question comes from Kathryn Alexander with Citi. Please go ahead.
Kathryn Alexander (Analyst)
Hi, guys. Firstly, just a question around the senior executive search. I'm hoping you can provide a bit of an update in terms of how many of those positions are still vacant and needing to be filled. And then just a question, I guess, following up on the price increases. Given the sort of inflation that you're seeing in wages and input costs, do you expect the price increases to offset that net net?
Louis Gries (CEO)
Okay. Yeah, the second one, you know, we didn't take a market increase last year, so, you know, when you think of our increase running just about 3% over the two-year basis, it does cover, you know, like your normal inflation in your business. That's not how we price, but it would cover that. As far as just one year's worth of those increases, it probably the 3% exceeds that. But, like I said, if you're gonna look at it that way, you gotta look at it since we took our last increase, the 3% probably covers the inflation, inflationary items in the business model. I'm glad you asked me about the senior executive search. I meant to cover it in my overall comments.
So yeah, we definitely have some news on that point. One is, I think a lot of you people know Mark Fisher. He's been with us 23 plus years, has been on the GMT, probably the last, I don't know, I should have looked, but probably the last eight or nine years. Mark currently has responsibility for R&D and our business development outside fiber cement. mark did give me notice over the weekend, and it became official on Monday that he wanted to resign. He's looking to do other things. So he'll be leaving the business April one. So that kind of plays into what we're doing with the senior team.
First, we did identify three positions we want to recruit externally for. Those were head of HR, basically head of sales marketing in the US business and international. We do have a new head of HR, Kirk Williams, starting the business January 3rd. So he's still in the onboarding process, but we're pretty happy. We're taking a very positive step forward there. The things we wanna do organizationally, I think, Kirk kind of brings a lot of that with him to the company, and we're looking forward to kind of benefiting from, you know, much more of a leadership approach on the HR than we've had in the past.
We probably have had HR support in the past, and, you know, we were aiming for HR leadership, and I think that's exactly where we're gonna end up. The next search, priority-wise after HR was international. I'd say we're through the, we're about two-thirds of the way through that search. We do have a preferred candidate. Obviously, he hasn't joined the company yet. We're both in the process, especially on his side. I've encouraged him to do the due diligence and make sure he really understands the company and everything before we make him an offer. You know, so he is our preferred candidate.
If we bring him on, I'm gonna be very pleased, and if we don't, we've seen some other candidates that I think, you know, kind of fit what we are looking for. To brief, we're looking for in international. But, like I said, hopefully, we're well down the track there with a preferred candidate that does join the company. Head of sales and marketing in the U.S., also a GMT position. We're just coming in the first round interviews on that search within the next couple weeks. The searches have been taking us about 90 days, so, you know, I'd be hopeful that we can have that individual in the business, you know, within 60-75 days from now.
And then we will backfill for Mark with a GMT position leading our technology both fiber cement technology, which is obviously critical to the current business model, and our investment non-fiber cement technology, which started about six or seven years ago and originally focused on coatings and has been expanded to include fiberglass and some composites. We see that as you know an important part of our technology going forward. So we'll be looking to recruit, and that'll be behind the head of sales and marketing. So say there's a possibility that could be an internal choice.
We think we have some internal capability in the R&D area that we will consider, but we're certainly gonna, you know, look at the external market for that position as well. So that's kind of where we're at. We actually feel pretty good about where we're at on kind of reshaping the senior team.
Operator (participant)
Okay. Thank you. Your next question comes from Andrew Peros with Credit Suisse. Please go ahead.
Andrew Peros (Equities Analyst)
Oh, hi. Just a question on depreciation, if I may. Perhaps this one for Matt. Obviously, the depreciation charge has stepped up this year as CapEx has accelerated. So I guess I'm just wondering if you're expecting a similar step-up going into 2018. I know you mentioned that your expectations are for the purchase of the land in Waxahachie. But outside of that, if you could just give us a sense of how that might play out, that'd be appreciated.
Matthew Marsh (EVP and CFO)
Yeah, I'd, I would expect a smaller step-up in 2018 than 2019. Obviously, what's driving a lot of our fiscal 2018, you know, CapEx, will remain on the balance sheet and, you know, until we start up those projects, really with the exception of the maintenance, which is shorter term in nature and the BAU, which obviously is shorter term in nature and as you noted, the Waxahachie. But, you know, certainly most of the Tacoma and any of the land purchases that we were to do in either of the two new locations, or any of the pre-engineering or construction work for either the Northeast or Mid-South sites, I mean, all none of that would kind of flow through within the year.
So the bump up this year largely had to do with the amount of capacity that we brought online, you know, throughout the year. And as we moved through commissioning, we started appreciating those assets. I would expect there'd be a step up again next year. I don't think it'll be to the same order of magnitude as you saw fiscal 2017 compared to 2016. I do think it'll be up a bit. And obviously, with the higher amounts of capital expenditure that we're expecting in fiscal 2018 and in the out years, you'd expect depreciation to continue to step up as the plant network expands.
Andrew Peros (Equities Analyst)
Okay, that's great. Thanks.
Operator (participant)
Thank you. Your next question comes from Michael Ward with Nikko Asset Management. Please go ahead.
Michael Ward (Senior Research Analyst)
Hi. Louis, probably a question for you. You've obviously outlined Tacoma, you've outlined something in the Northeast or Mid-South. At that point, is the network sufficient to service sort of a, you know, a mid-cycle housing market of, you know, maybe 1.5 million starts, or do you think there's probably more capacity required over and above that?
Louis Gries (CEO)
Yeah, I mean, there's more capacity as our market share keeps ticking up. So you got your housing starts ticking up, and you got your good market share ticking up. So, but we probably see only one more site, you know, so, obviously, expansion of existing sites would probably be the next, the next move rather than more sites. So, that said, and, you know, yeah, Matt's given you the guidance, big numbers.
We've talked about basically three new sites. Tacoma's a sister site to our existing site. So we got kind of a weird message, right? Hey, we're not having as good a year as we want to have, but we're gonna invest a lot in this business because we're seeing what we want to see. And that's exactly how it is internally. There's a lot of frustration that, you know, as far as just taking care of the business every day. We kind of lost sight of a few important things that we've had to pay the price for this year. But on the growth side, we've done well.
You know, like Matt says, you know, kind of every you always have a bit of an overreaction, but you know, so we're trying to guard against that. We've learned our lesson this year. We're not gonna cut capacity tight. We want to get extra capacity in the system to allow, you know, some growth spurts, you know, in the future, whether it be housing start growth spurts, or more likely, market share spurts. We go Tacoma, we go New England, we go Mid-South. That's probably all in the next, you know, three to five years. Behind that, you probably go second line somewhere, Mid-South or New England. Maybe a Colorado plant shows up at some point, maybe it doesn't.
But at this point, you know, I'd say if you thought five to seven years out, you'd probably think in those three new sites take care of us, and you may have multiple machines in one or two of the sites.
Michael Ward (Senior Research Analyst)
Okay. Thank you. Yep.
Operator (participant)
Thank you. Your next question comes from John Hind, Merrill Lynch. Please go ahead.
John Hind (Equity Research Analyst)
Good afternoon, Lou and Matt. Just a quick question from me. I think you gave, Lou, you gave a little bit of, like, some broad guidance on the call last quarter, around FY eighteen volume growth and price. That was, it was quite, quite strong guidance. Are you still comfortable around that level for volume?
Louis Gries (CEO)
I can't remember if I gave you a number, but I would like to maintain our existing momentum in the market. I kind of flagged earlier that I think in order to do that, we've got to have more programs in place next year than we have this year. Sean Gadd's group are working with Mark Wallace's organization, mainly in bottom markets, to make sure we get there. And then price, price we've covered, so that's there. A lot of you asked, I think Emily started with the question, "Please tell me, fiscal year eighteen manufacturing costs are gonna be better than seventeen," and we certainly feel that'll be the case. Yeah, what I said is, we're expecting a bounce back year next year, from a bottom line perspective.
But expecting it and delivering it, you know, you guys, you know, we thought we'd do better this year, so we think we're gonna do well, but I think it takes our organization's full commitment to kind of deliver that. And I think we have that, obviously, but we'll be looking to put some runs on the board early in the year, next year.
John Hind (Equity Research Analyst)
And just one more. Given, I guess, your long-term target, this goes on from Michael's question just previously, your 35/90 target, you're obviously gonna be adding capacity that you've talked to. How do we get more confidence that the, I guess, the inefficiencies that we've seen come through in the last couple of quarters, ratcheting, you know, you see improvement in near term?
Louis Gries (CEO)
Yeah, yeah, I know it's tough because, you know, you guys, I think rightfully, think of Hardie as a good manufacturer, and we are a good manufacturer. I mean, we're lights out for our category, fiber cement. we're way ahead of everyone else that tries to do what we do. But we also kind of like to see us benchmark well against other, more established, you know, categories, something like gypsum board, paper, you know, roofing, insulation, and that. And, you know, we got, we gotta knock some of the variance out, of what we do, and part of the variance is there for good reason. That's, you know, we're changing things a lot. We're still evolving.
There's the technology, you know, certain things we use there aren't that, you know, HZ5 has only been around, I can't even remember how long, but say in the last six years or so, we've gone to HZ5, which is very different technology than HZ10. We use a lot of embossing now. We do way more density modification. We're trying to do better surface technology. So part of the reason we have the variance is there's a lot of new stuff that kind of gets introduced to the manufacturing plants that we don't talk a lot about. That would include additives. You know, we manufacture some of our own raw materials in the plants now.
So some of the variance is just because we're always doing something new, and our plant organizations have to kind of absorb that and build that new capability. But some of it is, you know, in this case, we just lost track of what makes us do well. So what are the key drivers of good manufacturing performance in fiber cement plant? And I think we got a little bit overconfident and started pushing budgets rather than, you know, started pushing the what more than the how. And I think Hardie's always been a good how-you-do-things company, and it's paid off for us. And obviously, part of our reset has been getting back to that.
It's not, just not what you're gonna do, how are you gonna do it and track it and make sure it's going the way it should go. So, you know, maybe in a September tour, Colin can kinda show you guys the kind of variance we're used to long term, and then show you the kind of variance we had this year, and then where he's at in September. I'm sure it's gonna be a good story. It's already starting to shape up as a pretty good story.
I'm highly confident that, you know, maybe not by September, but, you know, at some point in the not too distant future, say, a year and a half out, the amount of variance we have in our kinda network will be a really large reduction of what we, you know, just a fraction of what we've had even long term. I'm quite optimistic about the approach we're taking on the manufacturing side, but, you know, I'm paying the bills, you know. So you know, it's not easy seeing an EBIT performance like we had this quarter. But like, you know, like we say in the business, it's a senior team. Hey, we just gotta stay the course.
You know, these aren't, you know, most companies would be happy with these numbers. We're not happy with them, but we're not unhappy enough to really change where we, you know, what we wanna do with this thing long term, so we're just staying the course. We're gonna post the numbers. In this case, we're posting some numbers we're not proud of, but we are proud of the work we're doing there, and I think the reset is gonna be a really, you know, it's gonna be good for everyone involved over this period that we're trying to climb the market share charts, so that's where we're at. Maybe we'll show you some more in September. You know, some of you guys with your models can probably see the fluctuations.
Gotta watch the input cost, obviously. Input costs are now starting to, you know, be headwind. In the early part of the year, they were tailwind for us. But, yeah, we'll show you something in September. I don't know, I don't know how to show it in a quarterly result, but on that tour, we can do a little bit more.
John Hind (Equity Research Analyst)
Okay, thanks. Just one, I guess, follow-up from me. You know, well, obviously, there's been a few changes at the executive level that we've been made completely aware of. You're talking that you have sort of lost track of what you do best. Has there been changes at the plant levels as well, Lou, in the last twelve months?
Louis Gries (CEO)
Yeah, there are changes at the plant level. Yeah, there's been changes at the plant level. You know, Hardie's always had, you know, and I guess we've covered this in September a bit. You know, we've always had lower retention than we want. We've always lived with it fine. We've always delivered business results despite the lower retention. But, you know, it's just becoming too much work. So, our organizational efforts are, you know, really important right now, and that's recruiting, development, and just some small shifts in our culture, that we think will all lead to, you know, better retention and high, you know, just more organizational capability.
So at the plant level, we've had changes, and you know, I think, I think you know, right across Hardie, I think Hardie's going through a little bit of an organizational reset. And so some of those changes are about the organizational reset. And we definitely wanna do things in a different way going forward than we did, say, ten years ago. Now, you'd say, "Well, what about how you did them two years ago?" Yeah, I wanna do them. I think, I think our organization needs to operate differently than the organization operated two years ago. So that's why we're importing some talent on the senior team, we're importing some talent on the senior team's direct report, you know, teams, and we're importing it at the plant management level.
So, yeah, we're in the middle of a reset here. How long does it take? I don't know. I mean, you know, when the senior team, obviously, we're running, you know, with some open roles, we'll fill those, you know, sometime, you know, halfway through the year. So like that, everything will be filled. We're not running open roles necessarily in other parts of the, you know, in the plant organization. We do have one open role as a plant manager, but, you know, we've got an experienced plant manager actually in that plant on an interim basis, so. But, yeah, there's a bit of an organizational reset going on at Hardie, and it's probably gonna take two or three years.
You know, we think like everything else, whether it be product line or programs in the market or whatever, it's needed. If we wanna go to 35/90, it's needed. You know, we're committed to it, and we just gotta make it work.
John Hind (Equity Research Analyst)
All right. Thank you very much, Lou.
Operator (participant)
Thank you. Your next question comes from Christopher Kightley with CLSA. Please go ahead.
Christopher Kightley (Research Associate)
Good afternoon, gents. Just wondering, with the North America, you're saying that you expect to see the margins increase in FY 2018 as inefficiencies decline. Do you expect to see that dip again as we see more start costs coming through with the plants in FY 2019 and beyond?
Louis Gries (CEO)
Yeah. I mean, it's hard to... Yeah, I expect, you know, we should have been at the top end of our range or maybe slightly above it this year, and I would expect next year we'll be there. So, you know, there's a lot of moving parts, you know, input costs, new capacity coming online, you know, market demand. I mean, housing's, you know, pretty flat. I don't know how you all read, you know, our housing market over here, but it's pretty flat, you know, which is good. You know, it's flat to slightly up, maybe 3 or 4%. So, again, you know, I mean, things can change, but, yeah, I still expect...
We, we don't belong where we're at in the EBIT range right now, and I don't think we'll be there next year. So, there's a lot of factors that go into that, but I just don't see it playing out again next year.
Christopher Kightley (Research Associate)
Okay. And what about FY nineteen? Do you think you'll see a drop again?
Louis Gries (CEO)
No, I think with nineteen, as long as the market's good, meaning housing market's good, we should be at the top end of the range. You know, the range is really set up to where, when the market isn't that good, we can still kind of, you know, be at the bottom end of the range. So the bottom end of the range is not designed for a good market, unless there's super heavy investment going on in SG&A, and we don't have that plan for the next two years. So anyway, we expect to live at the top of the range as long as our housing market is good.
Christopher Kightley (Research Associate)
Okay. Thanks so much.
Louis Gries (CEO)
Yep.
Operator (participant)
Thank you. That does conclude our question and answer session. I'll now hand back for closing remarks.
Louis Gries (CEO)
Oh, yeah. No, no closing remarks. I appreciate everyone joining the call. Thanks, and we'll see you guys maybe in person in May. Thank you.