James Hardie Industries - Q3 2019
February 4, 2019
Transcript
Jack Truong (CEO)
...Let me first begin by saying that I'm honored to serve as the CEO of James Hardie, and to lead its more than 5,000 employees worldwide into the future. I wanted to thank the board for their trust in me to lead this incredible company. I would also like to take the opportunity to thank Louis Gries for his vision and leadership during the past 14 years as James Hardie CEO. I'm grateful for the very strong foundation that he had built. This is a company with global presence, with great products and great people, and a company that had consistently delivered strong operational and financial results over a long period of time. However, more recently, Louis has been very clear with you that he felt our North American business have not been performing to his expectation and to his potential.
I agree with Louis 100% on this point, but just to be clear, though, and to level set the baseline, during the past two years, our North American business has been growing and delivering just about at the market rate, in an EBIT range of 23%-24%, despite the significant headwinds in input costs and freight in more than a decade. While this performance on the surface may look good, but we at James Hardie are not satisfied with these results, and we know that our North American business can do better, to a high performance level, and this is to deliver consistently the PDG of 6% growth in the range of... on the higher end range of 20%-25% EBIT. The good news here is that most of the issues that prevented us from delivering those results are internal.
Today, before we jump into the Q3 earnings call, I want to spend some time outlining for you our strategic plan on how we're gonna change that. I will share with you on how we're gonna transform the way we operate, so that we can and will meet our expectations and our potential, and to deliver on the next phase of James Hardie growth. Not just only in North America, but also in Asia-Pacific, and also in Europe. Specifically, I will spend some time this morning to go through our global strategy, the long-term goals for each of our business units, and specific about strategy and the priorities for the next two years.
Now, this is still a Q3 results call, so unfortunately, I will not be able to go through a lot of details in depth about each strategic priorities that I would like, but I intend to provide you enough details and specifics that you have clarity on where we're going. And at a high level, you should walk away with at least three things. One, our long-term goals and targets are unchanged. Two, we have significant growth potential in all three of our businesses. And three, we have a clear strategy in place to drive those particular profitable growth. Now, slide two to slide six are really the cautionary note on forward-looking, but now let's go into the agenda.
So for the next twenty-five minutes, I will share with you our strategy, and then, in about ten minutes, review the group operating results in Q3, and Matt will go through the financial review, and then we'll take Q&A at the end. Now, on to the global strategy. So this is our strategy in one page. At the very top is pretty much our North Star for our business, and that is, we're committed to be an organic growth company that will deliver growth above markets everywhere that we operate in. And in North America, it's about 6% PDG growth for the long term. And in Asia Pacific, it's really about the 5% PDG growth for the long term. And in Europe, it's about deliver on the 1 billion EUR business in ten years. And we will be number one.
We operate in every market around the world where we are number one. And so we are currently number one in North America, in Australia, in New Zealand, in the Philippines, and in Europe. With the acquisition of Fermacell, we're also number one in fiber gypsum that will provide a platform for us to grow into a leading position in Europe. So that is our guiding principle for our company's growth for the long term. And the four pillars that would help us get there, and which the priority for the company, would be that we will focus on being a full line supplier for full Hardie exteriors. And we will make the interior as a growth business and reestablish as a growth business in North America and also in Asia, Pacific, and Europe.
Innovation will be one of the four key pillars that will support our growth in the long term, and this is an area that you see a lot more focus within the company, and so you hear a lot more going forward. Lean transformation, lean manufacturing will be one of the key focus in our company to really take advantage of the fact that we are now the world leader in fiber cement, and implementing lean manufacturing that would take us to the next level of transformation to deliver better cost savings, improve the predictability of our manufacturing output, as well as reducing the variability. Through that, we have more cost savings within our manufacturing system that will help fund a lot of the growth initiatives we have, as well as to help with our financial.
And how we're going to achieve that is really about shifting of the culture within the company. And this is really the key part of how we're going to be able to deliver our results for the long term. And if you look at the first part, it's really about the shifting our culture from being top-down to more empowerment and accountability. This is really about having the structure in place and the capability within the organization, that where we would push the decision within the company down within the organization to really create that force multiplier effect within the great people that we have within our company. And another example here would be costs from being a silo approach to more cross-functional.
This is about how we can take advantage of the different function within the company to approach a business opportunity, and to be able to deliver on the results faster and more effectively. And shifting our culture from being regional business to more global. And this is really about taking advantage of the know-how, the best practices that we have around the world, and replicate in different parts of the world to allow us to get the performance at a high level faster. And at the center is what we call the continuous improvement mindset, the PDCA mindset, and that is plan, do, check, adjust.
And it is a culture within our company now that as we have a plan, and as the organization coming together to execute, then we would have a very good regular meetings across the whole company and up and down the organization to review, check where we are relative to our plan, and then make the right adjustment in time so that we can deliver on the result that we expect based on the strategy that we have developed. And Zero Harm will continue to be the foundation, the DNA, of who we are as a company. And so in a nutshell, this is where the strategy for our company going forward, that would help us take our company from being where we are now to be a great company that all of us expect we will be performing. So let's reiterate.
So for long-term value creation of our business, we're reaffirming for North America, 35.9% with strong return is really the key North Star in North America. In Europe, it's about creating a 1 billion EUR business in ten years at the Hardie-like margin. In APAC, deliver growth of our markets with strong returns in the 20%-25% EBIT margin. In North America, the next few slides is really about what are the key strategies that we're executing? One, is to accelerate exterior growth. And the value creation here is that for fiscal year 2020, we're looking at a PPDG target of 3%-5%, and to return to 6% PPDG after that. And we're going to drive lean transformation to really take advantage of the critical mass for us being the world-leading fiber cement manufacturer, that will make us even better and more effectively.
And our EBIT margin will be in the top half of the range. And to reestablish interiors as a growth driver in our company. And so with the lean cost out program that we have in place, we look to have $100 million cost out savings cumulatively through the next three years. So those are clear targets that we have within our company, that everyone will be executing toward to get us back on that growth track. Now, let's talk about the how we will accelerate the exterior growth. So really four things. First and foremost, about, really about the new approach to execution. And I just want to draw your eyes to the left side of the chart.
You know, we now, the fiber cement now is, has roughly a 20% market share in the exterior, and we have about 90% category share. As we now get to that critical mass, that the base business becoming a bigger part of our business. But traditionally, within James Hardie, what made us successful up to this point is really been focusing in getting new business and new customers, which is really on the fourth column here. And a lot of the focus that we have had is really about going out to create new customers, new businesses. But what we have is really what we call the base business, which represent a significant amount of our daily business.
We have not had the right focus on how to take advantage of the business and the customer that we already have to gain more share and to grow. So the transformation for our commercially is about moving to the right-hand side, is that we restructure our sales organization, where we have a strong focus on account management. It's really about managing our base business, essentially, the very large business that we currently have, with a very large group of customers that we already have. And through the new skill set, the new focus on a lot more analytics, and make better decisions in terms of how we create more value with the customer we currently have, so that we can continue to gain more share with those customers, rather than having some potential erosion with those customers.
The key focus for us is about driving the account management with our base business today, so that we can continue to grow that base business, gain more share with the existing customers. While we continue to invest in a separate organization that's very targeted at growing and more account within the vinyl, against the engineered wood, against wood. We have separate teams with different skill sets that now targeted at how we're gonna continue to convert vinyl home to fiber cement with Win with Color program. And how do we convert more businesses from the engineered wood with Win with Color program, with our full HardieWrap program? And how do you convert more businesses from wood into fiber cement with the Aspyre program?
So that's the key transformation from a commercial side, of how we're gonna make it different, to allow us to drive to the expected PDG growth for the long term. And so if you look on the upper end, that is the volume of engineered wood, vinyl and wood, over time, that we should be converting to gain. So initially, during the first few years, it's important for us to continue to gain more share from engineered wood and convert more wood, while invest in more market development for vinyls, so that we can gain more of those businesses two to three years from now. And that is a path for us to drive to a more PDG growth sustainably for the long term. And for lean transformation.
We are the world leader in fiber cement production, and this is about for us now to take advantage of the fact that we have the scale and allow us to manufacture fiber cement in a way that's become more consistent, reduce the variability, and improve the predictability. That will create significant long-term value creation by improving our efficiency and cost. Now you turn your view to this wheel here. This is in a nutshell, that's what lean is. Lean is all about having the manufacturing operating system that connects the work done at the operator and supervisor level to engineering maintenance and to plant management. It really engages the operators and the supervisor on a daily basis to run the machine to the standards.
And so if there is some variability within that shift, the operators and the supervisor are empowered to make the decision to adjust back to the center line. We have something to go above the limits, those will bubble up to the meetings at the level of engineering and maintenance, so that those can be resolved in a timely manner, and if those issues are not resolved at that level, will be flow up to the plant management level to be resolved, so really, that whole system allow us to run a factory to the right standards and consistently over time. Now, this is a manufacturing system that we will replicate from Asia Pacific, where we have started to implement a few years ago.
During the past eighteen months, we have seen very, very good results that allow us to see that the replication in North America will be a good success. We are building out an organization in North America to accomplish this. We just hire a vice president of lean manufacturing to build out an organization to execute, along with the fact that we just moved our lean manufacturing manager, who run that program in Asia Pacific, to North America. The next step for us is really about to have the trainings of our teams in North America, in Asia Pacific, and then bring them back to North America to drive the lean manufacturing program in North America.
We expect to have $100 million dollar savings coming from the lean program in our factories. Next, we're gonna talk to you about the interior growth. This is a business that we see as a growth opportunity for our company, and our approach to this is really about how we go to markets in North America, as well as about innovation to the markets. So you look at, when you talk about new execution in the marketplace, traditionally we have put a lot of our sales team, half of our sales team in the interior, calling on the stores, the many thousand of stores of our retailers in North America.
The business now is shifting more to, and we need to call on more at the headquarters, where we can drive more value through, having our products being prominently displayed and promoted at the headquarters level and across the country. And so we're shifting that sales force in interior, that call on the stores, to the exterior, and to build more capability at the headquarters level. And second is that we are coming out with this very innovation in the marketplace. And just this past month, that we just launched the industry's first and only waterproof backer board.
With this product, it would allow the markets to reduce the one step of reducing the coating of the waterproof material, and allow us to provide that value to the contractor and installer. This is the new innovation that would allow us to grow within the interior business. Now, let's shift into Europe. Our strategic priority still is that we have to grow our fiber gypsum business, and this is a consistently good business that we have bought, and we continue to invest to grow for the long term. We expect that core fiber gypsum business to continue to grow around five to seven% a year.
On top of that, we are leveraging on the new products coming from our Asia Pacific business, as well as the U.S., to launch into Europe in fiber cement. And this area of our business is really going well, and we expect this business to continue to gain a lot of momentum. Revenue CAGRs for the next three years, we expect that to be between 8% and 12% CAGR, and EBIT margin will be accretive, and with a roughly about 14% at the exit of fiscal year 2022. Our Asia Pacific business, this will continue to perform well. During the past two years, we have built more organizational capability in this business.
We expect the growth above market in APAC to continue, and we continue to drive more lean transformation in Asia Pacific, and that journey will continue. We expect our EBIT margin to continue to be in the top half of the range. In closing, this is our three-year plan. We are committed to deliver on our North American objective, to get back to PDG of 6% through transformation, commercial, and transformation in our manufacturing operations. We are committed to deliver, in our European business, EUR 1 billion in the long term, in ten years, with highly like returns. In Asia Pacific, growth above market and strong returns.
And how we can get there is through people and culture evolution, as well as focusing on the four pillars of our business being a full exterior business, reestablish our interior business as a growth business, drive lean transformation, and drive more innovation to the marketplace. Now, to switch gear a little bit and talk to you about the Q3 results. Globally, in Q3, our volume increased 18%, and our EBIT is down by 10%. Now, our North American business deliver improved PDG for a twelve-month basis, but below our expectations. Australia and the Philippines continued to deliver strong results. European business continued to deliver good results. And our input costs will remain high, and so we're focused on improving plant performance. And our operating cash flow improved by 11%. North American business.
Volume grew 1%, revenue is up 2%. Our EBIT is down by 15%, with an EBIT margin of 22.3%. Housing market demand was soft in the quarter. Continuous improvement in its exterior business, which is still below our expectation in PDG. We're in the middle of the range of EBIT, and ColorPlus product will be launched in the first quarter of fiscal year 2020. For APAC business, they deliver a very strong result. Volume increased 11%.... driven by top line growth, volume growth from Aus, New Zealand and the Philippines in double digits, and Australia in high single digits. Revenue increased 12%, and EBIT's up 1%. Now, this is driven primarily by tough headwinds in input costs.
Our European business have good top line growth, is five percent in US dollars, so eight percent in local currency. Our EBIT in Europe improved ninety-five percent performer, and this is on for a nine-month period, they have improved twenty-five percent in EBIT in US dollars, and EBIT margin for the quarter at nine point two percent, are for the nine months, about ten point two percent within our expectation. And with that, just wanna hand over to Matt to go with the financial review, and then we'll come back for Q&As.
Matt Marsh (CFO)
Thanks, Jack. All right, good morning, everybody, and thanks, Jack. I'm gonna take everyone through the financials, which will be a combination of slides for those of you that have been following us for a bit that I would normally have done, as well as we've taken some of the financial slides that Louis would have had in his section and kinda combined them into a financial section. So you'll see those. I think Jason sent a note around to some of the analysts today just helping to map the presentation that we used to do to the new format so that you could see we didn't delete anything. We just kinda moved stuff around as we were accommodating some of the changes as we go through transition here.
Okay, so for the quarter, we had net sales of $305.86 million. They were up 18%, primarily because of Fermacell. Fermacell added almost $79 million USD in the quarter. Excluding, kind of, on a pro forma basis, we'd have sales up 3%. Sales up in both North America and price up in North America as well. And we had higher volumes, as Jack noted, in Asia Pacific in all three countries. Gross profits of $192.2 million, up 5%. Gross margin rate was down. I'll talk about that more as we get into the segments. It's a continuation of what we've been talking about throughout the year, largely an input cost factor, and higher freight costs.
Adjusted net operating profit of sixty-seven point nine, down... I'm sorry, sixty-five point nine, down 10%, largely driven by the underlying businesses' margin rates being down. That'll go through as we get into the segments. For the nine months, net sales increased 23%, or approximately $353 million to $1.881 billion. Obviously, those are largely driven by the Fermacell business. Similar story in North America and Asia Pacific. Kind of moderate growth in North America, just slightly above the market index, below our expectations. Very good volume growth in Asia Pacific in all three countries, and Europe performing at our expectation. Adjusted net operating profit of 226.7, up 8%.
We had North America fiber cement EBIT, excluding the product line discontinuation, up 5%, and you'll see that more, as we get into the financial presentation. So here's North America. You know, as, we noted in the release this morning, we, we thought the housing market demand was soft in the third quarter. We, we're cautiously kind of optimistic, we'll talk about that when we get to guidance, that, what we saw in the third quarter was just a temporary pause in the market, and, that the market's gonna return back in the fourth quarter in fiscal 2020, back to kind of a moderate single-digit growth rate. But, but nonetheless, the, the market, is one of the things that caused sales volumes up 1% for North America.
You can see net sales up 2%. Price was up 1%, which is off where we were at the half. We still like price for the year right in that 3% range, so we're not concerned at the 1%. We think that's just a little bit of seasonality, a little bit of mix for the quarter. But we like where both strategic pricing is, and we're happy with what we're doing on tactical pricing as we drive towards volume growth. So no concerns on price. EBIT down 15%. It's primarily an input cost story. You'll see that when we get to the input cost later. Pulp remains elevated for the year. I think it's up year on year, almost, you know, still in the firm double digits.
It has started to plateau, which we're thankful for in the quarter. So input cost is certainly one feature of the decreasing EBIT. The second is obviously plant variation in the quarter and performance, which is one reason that we're optimistic that the focus on a lean manufacturing strategy will help reduce variation and drive waste down, which will have a cost benefit. Obviously, those two adverse features are offset by price for the quarter. For the nine months, we had EBIT excluding of 292.8, up 5%. It's a combination of volume and price are up, input cost, and higher freight are headwinds to that.
Our North America fiber cement EBIT margins is the chart we've shown for a long time, at 22.3% in the quarter, 23.3% year to date. You can see we're comping from a year ago off of a 26.9%. You might remember a year ago, we were coming out of a capacity constraint. The plants were also performing kind of at the higher end of their band at the time. Those combined with volume and price kinda pushed up to the 26.9%. We're the 22.3% is right in line with the expectation that we had. It wasn't. It was very much in line with kinda what we were expecting. Here you can see input costs. I mean, all the key input costs, you know, still remain elevated.
On a year-to-date basis, pulp is still up 15% plus on a market rate basis, year on year. So pulp's, you know, continuing its trend of trading close to $1,400 a ton, which is creating, you know, quite a bit of margin pressure for us. That, as I indicated, has started to at least, what it seems like, plateau. It's not coming back down yet, but it's at least stopped going up, which is slightly positive. For the year, input costs will be, you know, a significant headwind, not just in North America business, but also in our Asia Pacific business. You can see electricity is up, freight's up, cement's all up. We're buying better than what we're showing here, you know.
So if pulp's up 17%, our electricity is up 6%. We're not up as high as the market rates are up, but nonetheless, when the market rates are up that much, there's only so much a procurement strategy can do, and that's in part what's having an adverse effect on our margin rates for the year. A real strong quarter, again, for the Asia Pacific business. For the nine months, we had volumes up 10% in Australia, 10% in New Zealand, almost 17% in the Philippines. Very strong quarter across all three countries as well. In Australia and New Zealand, in particular, you know, we think we're gaining both market and category share. So we're very happy with how the three businesses in our Asia Pacific segment are performing.
Foreign exchange is having an adverse effect on the segment. You'll see in the appendix, the normal foreign exchange slide that we show, and kind of the effects that it has. On an EBIT basis, you can see in local currency, AUD 32.7 million for the quarter, up 1%, up about 1% for the nine months as well, but you can see when you report that in US dollars, kind of what the impact is. Again, for the Asia Pacific business, most of the margin compression is the result of input costs. They buy pulp in US dollars, which only adds to kind of the margin pressure. The underlying businesses are performing well, though.
We like where we are with price in the Asia Pacific business, and overall, the manufacturing performance is very good. A quick look by country. As I said, Australian market penetration and growth is right on track. EBIT for the quarter was down, but for the nine months is up. It's a combination of higher sales compressed by margin rates compressed by input costs. We like where we are in New Zealand, you know, very good volumes in that business. I'd mentioned in the last call, the plant isn't performing to our expectation. That sort of continues, although I'd say most recently, we're starting to see that start to turn around as well.
We're happy with where we're at in the Philippines. Volume up for both the quarter and the nine months. If you were to exclude the impact of pulp, that business is performing well as well. So you can really see in the core businesses for fiber cement, you know, volumes and price were up. North America volume kind of underperforming where we want it to, and margin rates compressed almost across the board by input costs and higher freight for the year. For Europe, we had $86.8 million of sales on a US dollar basis in the quarter, $269.6 million.
Both of those are up on a reported basis, obviously, because of the Fermacell transaction occurring April of this year, so on a reported basis, not in the comparable year. We had a good core volume growth, as Jack showed, on a pro forma basis, and revenue growth in the Fermacell business. EBIT is reported at 4.1 for the quarter and 2.9 for the nine months. I'll just remind everyone that that's got transaction and integration cost in it. We've noted those in both the MD&A as well as a footnote on the page.
When you exclude those for the purposes of looking at the business on a recurring, ongoing basis, we had margin rates of about 9.2% for the quarter and 10.3% for the nine months, and almost $8 million on a US dollar basis in the quarter of EBIT, excluding those one-time costs and 27.9. We like where we are with the integration. So far, it continues to go really well, both commercially, manufacturing, culturally, and standing up the back office. We've got a little bit more of integration activity to go here in the fourth quarter and in the first part of fiscal 2020. But so far, so good with Europe. It's performing as we had expected it to.
The other business segment you know is the windows business. In November, we had announced our decision to exit windows. We've executed that in two steps. Windows is a combination of two businesses. There's a fiberglass window assembly business and a fiberglass pultrusion business that is a supplier of parts, both to the market and to the assembly business. Both of those we had explored options for sale. The windows assembly business, we concluded that process in the quarter and announced the closure of that business. Took remaining asset write-offs associated with the assembly business in the quarter, which I'll show you on a schedule here in a minute.
We're still looking at strategic alternatives for the fiberglass pultrusion business, and we have set a target of wrapping that up during this fiscal year, so during the fourth quarter of fiscal 2019, we'll either conclude that there's an interested party or we'll also shut that business down. For the year, we've had product line discontinuation expenses of about $4.8 million in the third quarter. That was additional expenses associated with shutting down the assembly business. For the year, about $20.6 million, all in for accounting adjustments and expenses related to exiting the segment. Here's that schedule that I mentioned.
It shows for both the North America Fiber Cement segment and the Other Business segment, the product line discontinuation charges that we've taken within the year, and notes what those are for. Most of them, we took in the second quarter. You can see Windows drives $20.6 of the $26 million for the year of charges that we've taken associated with the closure of the Windows business, the discontinuation of MCT, and exiting certain aspects of the ColorPlus product portfolio as we rationalize that as part of our Win with Color strategy. R&D, I'd say nothing, nothing really to note. You know, $21.9 million of expenses for the nine months, very much in line with both our expectations and our historical rates.
And general corporate costs, those on a quarterly basis, decreased as a result of lower stock comp. That was partially offset by a charge we took for a specific claim on New Zealand weather tightness. For the nine months, they're up slightly, about $2.5 million. There's really three major things that are going on for the nine months. One, the underlying general corporate costs are up about $2, $2.5 million, so as we just invest in the business. And then you had in the prior year, obviously, the gain on sale from Fontana. This year, we've got some New Zealand weather tightness, and stock compensation for the year is down about $5 million.
So those three items are, you know, create a little bit of noise in general corporate costs, but the underlying cost structure that's going on in general corporate costs for the nine months, up about $2.5 million. Income tax, our estimate for the adjusted effective tax rate is 14.9%, so an adjustment down slightly from the 15.5% when we talked in November. We're continuing to implement based on the regulations that continue to come out on the U.S. tax reform that was passed last December. As we do that, as we continue to implement that, and the segment earnings become more clear for the year and the geographic mix of those, obviously, those are the two main things that are affecting effective tax rate.
About a 60 basis point drop, but still, in the range of what we talked about in November, so 14.9 for the year. On to cash flows. We had cash flows from operations up 18%, almost $282.1 million for the nine months ending. The net income adjusted for non-cash items is largely the driver. We had some favorable movements in working capital, largely as a result of inventory a year ago that we were building up as we were coming out of our capacity constraint that didn't repeat, obviously, this year, so that was a benefit to cash. Higher investing activities for the year.
You can see property, plant, and equipment's up as a result of capacity CapEx up to $228.4 million, so up about 50% for the nine months compared to last year, as well as obviously the almost $59 million we spent on the acquisition of Fermacell. So year to date, our CapEx continues to pace right in line with our expectation for the year. We've got three projects that are ongoing in North America. We've got the continued startup of the Tacoma greenfield project that we started up in the first quarter of this fiscal year. That's going as we planned it to go.
The continuation and construction of our Prattville, Alabama, facility that we anticipate opening in the second half of fiscal year 2020, and the continued expansion of our Color Plus product line. Last quarter, we announced that we'd purchased some land in the Northeast, and we'll continue to invest in Color Plus manufacturing equipment in our existing network during fiscal year 2020. In Asia Pacific, we've got two projects. We're almost complete with the Philippine startup. We expect that will finish its ramp-up during this fiscal year. And then the Carole Park brownfield expansion is being constructed as we speak, and is set to start up in the first quarter of fiscal 2021. Okay, onto the balance sheet. No real change on the financial management framework for the company.
You know, so number one, our ratings with the three agencies, you know, remain as they've been. No change on those. Two, our capital allocation priorities also remain unchanged. So we're gonna continue to invest in organic growth. That's gonna come in the form of R&D and manufacturing capacity and organization costs that are aligned with the strategic priorities that Jack set out at the beginning of the hour. Following that, our number two priority continues to be the ordinary dividend, and then managing the balance sheet, so that we've got good flexibility, as well as that we can weather any variations in the external market. I'm happy overall with kind of where the balance sheet is. We'll talk on the next slide, on this slide, just on liquidity.
So we continue to be well-placed from a balance sheet standpoint and a debt structure. Obviously, we continue to be above our one to two times target, as we expected that we would. We've got good line of sight to getting back down within that one to two times range, so coming under that two target here over the next six quarters or so. And we seem you know, very much seem to be pacing right on the expectations. So I'm happy with where we are on the balance sheet. I feel like we've got good flexibility with funding our strategic priorities and being able to weather any you know, sudden changes in the market that may occur. Guidance.
So, you know, we've updated the guidance range. Obviously, we've tightened the range and raised the midpoint for the year. So we've updated the range to $295 million-$315 million from our previous discussion. You know, since we talked last in November, the second half volumes are a little bit stronger than what we saw for the second half of the year when we talked in November. That, combined with kind of moderating levels of inflation, are really the two reasons for us tightening the range and raising the midpoint up slightly.
As I said earlier, we're kind of cautiously optimistic that the soft market that we saw in the third quarter was just a momentary pause in the market, and that we'll return back to kind of low single-digit market growth numbers in the fourth quarter and for fiscal 2020. With that, Jack and I are happy to take questions.
Simon Thackray (Analyst)
Is that on? Thanks very much. I'm Simon Thackray from CLSA. Just a question straight on PDG and volume growth. Given the 1%, you said you did a positive print, Jack, in North America, so therefore, the implication is system growth was either flat or down. And I know you use a different measure to the way we can calculate it, which is not altogether helpful, but what was the system growth as you calculated it in that quarter?
Jack Truong (CEO)
Right
Simon Thackray (Analyst)
... to say that you had positive PDG?
Jack Truong (CEO)
Right. Simon, well, that's a good question. You know, when I came into the business, I looked at how we've been measuring relative to the market. And it's just seen that there's so much variation from month to month, from quarter to quarter. So we're looking at our data now based on the rolling twelve months, so that we don't look at all the variations and not knowing which one is signal, which one's the noise. So by doing this, then we can really focus on what is our long-term strategy and how we build to execute, based to deliver, as opposed to react to those noise along the way.
And, you know, we can see it's not a real exact science when you look at the markets versus how we ship. And we look at over a three-month period, it's just too much of variation. So that's how, for us, it's important for us to look at this over a rolling twelve months versus the markets, and measure ourselves accordingly.
Simon Thackray (Analyst)
So when you say you got positive PDG, and it was 1% volume growth, my question is: What do you think the underlying benchmark was for you to make that statement that you got positive PDG?
Jack Truong (CEO)
We look so.
Simon Thackray (Analyst)
Or the other way to ask the question is, what was the PDG? How much was PDG in the quarter?
Jack Truong (CEO)
So, for example, we look at, in this case, the rolling growth of our exterior business over the nine months, the first nine months of this fiscal year comparing to the market. And our exterior business for the first nine months grew a little more than 5% in volume, and the market is roughly, we believe, within 3% and 5%. And so we're not beating the market that much, but, you know, we're certainly comparing to the rolling 12 months a year ago, we were negative, I think negative 2%. So if we look at that trend line, it's not rising as fast as we like it to be.
Simon Thackray (Analyst)
Mm-hmm.
Jack Truong (CEO)
But it's certainly we're at that plus one-ish PDG growth. And the more important question is we need to be at 4% and then 6%. And so that means that when you look at the 12-month rolling trend like that, we realize and know that if we continue to do the same thing we've been doing, we're not gonna get to where we need to be. And therefore, as we went through the strategic plan and we look into more data of the markets, our customers, and how we go to market, we realize that that we needed to transform, to change our commercial approach, because what we have been doing is really not what will be successful as to capture the market going forward.
Simon Thackray (Analyst)
And that's very, very helpful. So when you target now 3-5% PDG for FY 2020, is that an exit rate? I mean, I'm just thinking to your comment, Matt, about guidance and your confidence on the fourth quarter. You did 90 adjusted EBIT for this quarter. You're... To get to the numbers, you've got to do, like, 110 million EBIT for this fourth quarter. So you must be making certain assumptions about your PDG rate, both in the current quarter, based on the order book, and then also, are we gonna ramp up to 3-5, or what, what, what should be PDG expectations as we exit FY 2019 and enter FY 2020?
Jack Truong (CEO)
We are aiming for the fiscal year 2020 to be at around 4%. So it's mean that-
For the full year.
For the full year, yes. So we are, Simon, we're right now in the middle of transformation on our commercial approach as we speak. And the big part of this transformation, which we're excited about, is that, based on the market data and how we went to market for the past few years, we know what needed to be changed. And this is a step change on how we approach and how we deploy our resources, how we put the right skill set in driving the base business, in terms of how we organize to go after the engineered wood businesses, and how we go after to convert to businesses from vinyl to fiber cement and wood and fiber cement.
So we have made this change of the structure, the alignments, to allow us to execute for that step change. And as with anything, this is the strategy, the structure. The key now is put the right people with the right skill set in place to really make this happen. So one of the key thing I mentioned briefly in the strategy there, is that a substantial amount of our daily sales, of daily business, monthly business, coming from the base business, the business that we have already won, the business that we have already shipped, the business that we already have, with the existing customers that we know very, very well.
So the key there, and we have not been focused on that group of, on that business, because our DNA of Hardie has always been, "Let's go out and build new businesses." But we don't get to that critical mass, that base business is very big. And so they take a different skill set to manage it. And technology and enabling the data to allow us to manage correctly.
And one of the key opportunities there, in terms of step change, is that once you have a customer base, and the approach is more in terms of how do we serve our markets, our customer better, create more value through these current customers, and take share, more share that we have with that customer, that's where we're confident that we can deliver the growth in that short term. While we're investing, in terms of creating a lot more business that might taking share away from vinyl, taking share away from wood, and then and also engineered wood. And that would bring us that continuous basket of new business for two to three years from now.
Simon Thackray (Analyst)
And just to be clear, Jack, when you talk about the base business and the customers, you're talking about the distributors and dealers in that channel?
Jack Truong (CEO)
We discuss that includes distributors, dealers.
Simon Thackray (Analyst)
Installers
Jack Truong (CEO)
... builders, the customer that we already have businesses with.
Simon Thackray (Analyst)
Got it. Got it. Okay, that, that makes sense. So you're in a period of implementation to this ramp up, I understand. So if I'm reading that correctly, I'm assuming then that the fourth quarter PDG, to hit your numbers, to get moved from $90 million to $110 million EBIT, is market driven. It relies more on the market to deliver those numbers than it does on PDG ramping up.
Jack Truong (CEO)
It's gonna be a combination of both, Simon. I think since December, when we made this transformation, and before, and at that point, our team started to focus more on what we just talked about. And of course, you know, it is a journey, it's a change management as well. You know, we start to begin to see some of the effects of those changes. And what's very encouraging is that you know, and that was one of the key decisions for us to create a commercial organization led by one leader, Sean Gadd, to make sure that we always have these great ideas, great new strategic products and program.
But somehow, it's just when they go and execute into the field, they get diluted, and it just does not create that critical mass. It does not create the force multiplier that really move the needle in driving growth. So by having aligned under one leader, then allow us to align, and with clarity of direction and with clarity of role and responsibility, and put the right skill set in place, and that's the formula and we just announced this morning that we have a new sales leader that will join the company next week, who will report to Sean Gadd.
This person is an industry leader coming from Electrolux, and he has demonstrated that he was able to drive a lot of growth through becoming more customer, creating customer value, and gain share, as well as with existing customers, as well as gaining new customers.
Peter Wilson (Analyst)
Peter Wilson, Credit Suisse. Just to go back onto that base business erosion, can you elaborate on exactly what's happening there? And, like, who is it that's coming back and stealing the share off you? Is it, you know, engineered wood? Is it vinyl? You know, what exactly is actually going on there with the base business erosion?
Jack Truong (CEO)
Well, you know, it's a base business that's very large now. And then as we get to a certain market share, that you know everybody will be going after everyone's business. So when we have business with you know a lot of dealers, customers, dealers, distributors and builders out there, if we don't focus on them, then someone can go behind us once we convert into the business, and they can just take that away from us. So the first will be the close alternatives. That would be the one that can go after us, to take our share away from our existing business, our customers.
It's very, very important that we pay very close attention to the customer we currently have, and make sure that we continue to create value with them. But show them how they can grow the business, make more money by selling more of our products. And that mean that we have to engage with those customers on a more regular basis and proactively deliver the value to help them grow. And that take a different mindset, it take a different capability from what traditionally been the modus operandi for the commercial side of James Hardie, that is, just go out and convert more and more new accounts, and then just assume that the rest will continue to be with us.
Peter Wilson (Analyst)
Okay. When you look at it, how long has this been going on? Is this just been a drag on growth for the last twelve to twenty-four months, or is it something that you, you've recognized has been happening for a much longer period?
Jack Truong (CEO)
I think it's hard to say how long it has been, but certainly through some of the analysis of data that we have gone through now, through the strategic planning process, certainly, that's probably been happening at least for the last two years.
Peter Wilson (Analyst)
Do you get a feeling for, like, how many points it's been taking off your growth over that period?
Jack Truong (CEO)
I mean, it's early to tell, but certainly when the base business is so large, for every point of erosion, it can take a lot of new business growth to compensate for that erosion. But the converse is true, is that if for the big now that we have a big business with those big customers that we already have, if 1% share growth with those customer that we already have, they can accelerate because it's a lot more easy and not more, but it's more easy and less expensive to grow with existing customers rather than go out and gain new customers.
Peter Wilson (Analyst)
Okay. And the cost out in the North America business, the $100 million, where will that come through? Is it going to be, you know, freight, labor, waste? And what do you intend to do with it? So I assume it's not going to translate to a lower selling price or, you know, a step change to margin. So what do you intend to reinvest that back in?
Jack Truong (CEO)
It's a lean transformation is really, really about making sure that you know, so let me take it one step back. We have 10 plants in North America. All plants make fiber cement, all make use of the same equipment, nearly the same raw materials. Today, most of those plants, they operate very differently. There's no standardized processes that allow those plants to run to the same standard consistently day in and day out, so lean transformation is really about having the standard work that allow the operators and the supervisor on those production lines to run to the standards every day, so that we have a consistent way to manufacture across our network.
And the same thing that we have a leader standard work for the managers and the plant managers, and the management team to manage the plant accordingly, so that we have a more predictable result coming out and more, and then reduce the variability. So that would allow us then to go after the waste reduction. And waste reduction here is that the amount of boards that leave our factory, our plants, after going through all the production steps, should have a higher yield. And as you probably would know, is that a high percentage of our manufacturing cost is in raw materials.
So if, particularly in the years, like, we have the inflation time with raw material like this, having a reduction in the waste or improving the yield coming out of each plant is a quite substantial savings. And the second part is really about being able to drive the more production output through our sheet machine, which is a high intensive capital asset. That would allow us to produce more of boards with the existing and current cost structure. And so by doing that is where we will get savings. And the third point, please keep in mind, lean transformation is the idea behind this is continuous improvements.
That is, every day, every week, our operation will continue to improve, therefore, we would lock in the gains, as each day and each week and each year. So the saving is cumulative throughout the years. So that's where the $100 million saving will come from in the next three years in North America.
Peter Wilson (Analyst)
Okay. And the second part of that question, what do you intend to do with that hundred million?
Jack Truong (CEO)
I think it's very, very important that first, as you see, our North Star is to drive growth of our market at a high performance level. And that mean that we have to invest into market developments and a lot more in terms of creating awareness with our homeowners, the consumers, and the builders. It's a lot more marketing dollars that we need to invest in. And also, for us to get to that 35/90, we need to invest in innovation, into a customer-inspired innovation, and that would take resources and funds to do that.
So as we gain those savings, of course, some of that will go into the investment for the future and some will go into our bottom line.
Lee Power (Analyst)
... Lee Power, Deutsche Bank. So, Jack, just talking about how much you're putting back into the business, how much to the bottom line of that hundred million. Is there any... can you give me any idea of... Is it, like, 50% back into the business, 50% at the bottom line?
Jack Truong (CEO)
Well, Lee, I think it's hard to say because it really depends on, as we look to drive investment for the future, then we make those investments depend on the year, so it's hard to.
Lee Power (Analyst)
Okay, and then-
Maybe in terms of the $100 million over three years, how should we think about it? Is it, what, $30 million a year, or is it ramping up?
Jack Truong (CEO)
No, because it should ramp up because it's a continuous improvements. That means that the savings that we have, say, for example, we deliver savings in fiscal year 2020, we should expect that savings to continue into the next two or three years. On top of that, we will have additional savings, so it will build as time goes on.
Lee Power (Analyst)
Okay, so should we consider it a $100 million target at the end of the third year?
Jack Truong (CEO)
Yes, it is a cumulative target.
Lee Power (Analyst)
Okay.
Jack Truong (CEO)
Yes.
Lee Power (Analyst)
Excellent. Thank you. And then, maybe just touching on PDG again. So do you think the lack of PDG is purely an internal thing? Is it just an execution thing, or is there something broader going on in the market?
Jack Truong (CEO)
You know, so really, I mean, if I were to look at the pure definition of PDG is really what did we do in volume the last 12 months? What we can do and how are we gonna deliver our volume, and what we deliver in our volume in this next 12 months? The difference, and then we will subtract that against what the market growth is, and that's really PDG and... Or the growth above markets. Now, for us, yes, to get to that second baseline, we need to build a new account, new business, but at the same time, the base that we currently have, we also can grow through the current customer that we have.
So when you have a much bigger base, it doesn't take a lot of percentage growth to really deliver a significant, more significant amount of standard feet of board. So it's really about making sure that we can protect and grow the share we currently have in our existing customers while we invest for the future. So we have to do both.
Lee Power (Analyst)
Okay, but you think it's internally Hardie's slipping-
Jack Truong (CEO)
Yes
Lee Power (Analyst)
... rather than LP or some other competitor-
Jack Truong (CEO)
That's right. That's right
Lee Power (Analyst)
-having a better-
Jack Truong (CEO)
Because we have been focused a lot more on going out and getting new customers and new businesses and not really managing and proactively managing this big base of business that we currently have.
Lee Power (Analyst)
Okay, and then just a final question: Do you think it's a different skill set, going out and winning work versus-
Jack Truong (CEO)
Absolutely
Lee Power (Analyst)
-managing your-
Jack Truong (CEO)
Absolutely.
Lee Power (Analyst)
How are you going to transition?
Jack Truong (CEO)
Because the mindset for an account management is really about the first question you're going to ask is that, how am I, as a representative or sales representative for James Hardie, can create more value, show more value that this account can be make more money by really pushing the James Hardie product better than the close alternatives? And that is, take a different mindset to be able to network within the customer that we currently have, from the CEO, from the owners, all the way through supply chain, designers and so on and so forth, to make that happen. So manage we currently have, whereas the other, where you got to go after the vinyl. And on this side, the results can come pretty quickly. All right?
So whereas in the, say, the vinyl development is, it take the skill set, what we call the hunter, or they're motivated by just go now and know where the likely target that could, that will have the most chance for the, for that, for the salesperson to convert. And then really use the different skill set to be able to win that business away from vinyl. And that's a mentality that the folks that are used to said no and energized by the fact that they can convert big deals. So it's really two different mindset, two different type of time horizon of when they see the results. So for the hunter, is that they can work for...
They can go out and trying to convert for many months, but they don't see things develop until many months later, and that's a different mindset and different way for us to compensate and motivate those type of sales professional, versus someone who manage the bigger account, bigger size of sales, but it take a different approach to create growth. Whereas the hunter on this side, we have to motivate and reward those sales hunters in a different way, because the result may not come for six months or twelve months. But when they come, we come in a avalanche of businesses.
Lee Power (Analyst)
Okay, thank you.
Sophie Spartalis (Analyst)
Good morning, Jack. Sophie Spartalis from Merrill Lynch. Just in terms of the presentation today, you've put a lot of, I guess, longer-term, aspirational targets out there, how confident are you in terms of the macro assumptions holding up in order for you to achieve, you know, what you've put out there today? I know you, you've spoken a lot about what you need to do internally, but obviously, it's also dependent on external factors. So can you just maybe talk through the visibility and the confidence you have in terms of both in Europe and also in the US, in terms of the housing situation?
Jack Truong (CEO)
Sophie, good question. You know, the way that, first of all, the way that we approach our planning is really about what we can do within our control to drive business growth, because our business model is about taking share away from other categories in the marketplace. So just wanna make sure that. And that's what we're built to do. So, if the market grow or market drop, it's just something that we just have to navigate through. So relative to the North American markets, we are. Yes, I think right now, as we look at the market as we see today, it looks somewhat choppy, and it's a little bit scary.
Looking forward to what are some of the macro underlying macro conditions, we're cautiously optimistic about the North American markets. Look, I mean, we get. Yes, last year the Fed raised rate four times, but the rates after four times that they raised it is still a lot lower than what it was right before the global financial crisis in two thousand and eight, and just two weeks ago they announced that they're not gonna raise any rates in two thousand and nineteen, and then, you know, unemployment in the U.S. right now is still at an all-time low.
And I think the reality of the new baseline have set in, that most consumers think that you know the rate, yes, they raised four times, but it's still low compared to what it was. And we're cautiously optimistic that the market will come back for in North America. On the other hand, when we move over to Australia, we do see a slowdown, and in fact we see that in calendar year twenty nineteen, that the blended market forecast can be down to between 3% and 5%. And then also we see in Europe the housing markets is also. Roughly a year ago, it was about 2.5%.
Today, based on the latest data that we see, the forecast in next year is about 1.3%-1.4%. But regardless of what the market is, what our teams and within our company is really driving for, is how do we continue to grow above the market?
Sophie Spartalis (Analyst)
And then, okay. And then just a quick follow-up question, just in terms of that $100 million target, what are the costs associated with achieving that target?
Jack Truong (CEO)
The costs?
Sophie Spartalis (Analyst)
Yeah, so you talked about having to re-motivate the troops, no doubt, invest in the sales force. Are there any costs associated with that that are gonna offset that $100 million?
Jack Truong (CEO)
Those $100 million-dollar cost savings are net numbers.
Sophie Spartalis (Analyst)
Thank you.
Andrew Martin (Analyst)
Andrew Martin from Peak Investment Partners. Just wondering, with you focusing on rebuilding the interior business, have you got any other innovative products on the drawing board that we're going to see soon?
Jack Truong (CEO)
Absolutely. Can I have your name, please?
Andrew Martin (Analyst)
Andrew Martin.
Jack Truong (CEO)
Andrew. Absolutely. You know, I during the past two months, I have had the chance now to to meet with a lot of our R&D folks around the company, not only in the U.S., but also in Australia. You know, we have a lot of very creative R&D folks within the company. There's a lot of very good ideas, a lot of different technologies that they have been working on, and so you know, so there's not a lack of new and great ideas coming from James Hardie. So what we did during the past really is about six to eight weeks, during our strategic planning process, is that we put a process in place.
So how do we then be able to filter through those different ideas and distill them into the potential technology that we should focus on, the critical few that we should focus on, and fast-track that to the marketplace, to help deliver on our two growth pillars, and that would be the full exterior, and then to make and reestablish the interior business as a growth business. So as I mentioned, the Weatherproof is really the industry's first and only weatherproof board. And then you should expect, you know, with the full exterior, that we're gonna put a lot more focus on how to deliver trim products that would work throughout the country, including the Pacific Northwest and also the Northeast.
So that's an area that we can put a lot more focus, resources, to, to fast-track and to accelerate, because that's a key part of our full exterior strategy. And also at the top end of our markets, in terms of going after wood with our Aspyre line. We will be launching a new product, too, at the International Builders' Show, this coming month, is the Artisan brand shingles. And it is, it's a wood-like shingles, and that have the fiber cement properties that really help deliver the full house, the full exterior value for the homeowners and the builders.
So, there, you should expect more and more relevant, customer-focused, and inspired innovations coming from James Hardie.
Matt Peterson (Analyst)
Morning, Jack. Matt Peterson from Macquarie. Just delving into the cost out very briefly again, Jack, just curious whether this comes on top of the potential benefits of mega plants and some of the work that you've obviously done around the plants from a color point of view, so getting yourself ready for that. So presumably, this $100 million is on top of those benefits, those potential benefits in the medium term?
Jack Truong (CEO)
Peter, it's a good question. This is the lean costs are separate, and savings are separate. What the Win with Color program is really about allow us to be able to have a better on-the-wall cost in the marketplace that would allow us to penetrate deeper within the market. That is, allow us to go, for example, in the vinyl market, just allow us to compete in the lower price points of those homes.
Matt Peterson (Analyst)
Obviously, on top of mega plant benefits from a unit cost point of view in the longer term as well. Leading from that and some of the previous conversation around the reinvestment of the $100 million, what I'm curious about is whether you start thinking about product strategy in the medium to longer term, and actually more aggressively driving price points that just change the dynamics of the competitive landscape from your perspective. You know, whether that be alternatives in the vinyl world other than color or, you know, perhaps something completely new. How are you guys thinking about that?
Jack Truong (CEO)
That's an excellent question. It's a way for us now to really, as we continue to invest more into our marketing capability, it will allow us to understand, so what it takes, really about the four Ps. What does it take besides products? And how are we gonna promote? And what kind of price points? And where we should focus the effort. And so that will be one of the key areas that we'll be focusing in to drive more growth. And certainly, with the cost savings, we can invest that in terms of the marketing to create more awareness.
Certainly, we will be willing to do some tactical pricing for some strategic opportunities that would enhance and sustain our long-term growth.
Matt Peterson (Analyst)
Sorry, and then I'm gonna just go very quickly into some detail on some of the comments you made. Tactical pricing, should we read that as your pricing power is under pressure, or you're just being very, very specific, and you'd essentially still be targeting sort of circa 3% sort of headline price growth on a go-forward basis?
Jack Truong (CEO)
I'll start with that, and then Matt will come jump in. It's more surgical in terms of where, because really the four Ps is that placement, where do we wanna grow more our share, to what level and what margin for the long term? And so it's very surgical. It's not on a broad base.
Matt Marsh (CFO)
Yeah, and there's no change in the full year guidance on 3% for price. We were a little bit higher than that. I think we were, like, 5% at the half. And you know, the quarter was a little bit softer, but some normal variations, a little bit of surgical tactical pricing. We like 3% for the year. Next year, we're gonna do another price increase. We announced it in January, goes into effect in April. We'll be around 2% next year. And you know, we're pretty happy with overall where we're at with pricing.
Matt Peterson (Analyst)
Perfect. And then a very quick one on costs, labor costs. Matt, do we have to worry about that, or you called it out probably for one of the first times in a while, but how are you guys thinking about labor costs?
Matt Marsh (CFO)
Yeah, no, I'd say nothing to kind of worry about. You know, there's no doubt labor is more expensive in the US. We tend to take our labor costs up, you know, in line with the market rates every year. So I'd say the year-on-year pressure for labor costs isn't significant. I don't think it'll really be a feature of what we're gonna talk about in the future.
Jack Truong (CEO)
But Peter, I think one thing I'd like to add on to what Matt was saying, too, is that going forward, our... As we drive more of our cultural behavior, is that going from silo to cross-functional, and really about leveraging on the resources that we have, is that our rate of growth in terms of headcount is always gonna be around half of the growth rate of our sales growth.
So that will be kind of the key modus operandi that Matt and I, as well as our executive leadership teams, have really been driving to make sure that we drive the cross-functional behavior, the cross-functional work, to increase the productivity and results, and at the same time, not adding a lot of costs that are not driving the value added.
Andrew Scott (Analyst)
It's Andrew Scott from Morgan Stanley. Jack, just appreciate the color you gave us on the strategic slides there. I just wanna understand, to what extent are these aspirational targets? So you have put time frames there. Are they targets that you're happy to sort of stand up in three years and be judged on? Or are they aspirational targets that we should be thinking about directionally, that's where we're working towards?
Jack Truong (CEO)
Now, look, I mean, we're about four months into the beginning of the strategic plan, and then we just execute on the key part of the strategic plan, and then we start to put the right organization in Asia together with the right skill set and build the capability. Right now, what I would say is that it is something that we believe that is within the capability of James Hardie assets.
But in terms of when, how much we, I would say that, you know, at the next annual investors' meeting in September, that we can provide a lot more color, a lot more guidance, for the three years that we show up here.
Andrew Scott (Analyst)
Okay, thanks. And sort of expanding on that, one of the things you mentioned was 8-12% top line growth in Europe. And I think in your comments, you mentioned fiber gypsum, you look for sort of 5-7%, so that's implying fiber cement itself coming through quite strongly. Can you talk about where we're at understanding the market, what the product is gonna be there that wins, and how far advanced that is?
Jack Truong (CEO)
Yes, I mean, our play for the European growth is really a lot more about PDG. Right now, frankly, Andrew, I would not be able to share with you in full detail yet, because we're in the process of really coming out with some of the introduction for the next twelve months. But really, our growth is really about taking advantage of the trend in Europe, Western Europe today, and that is, one, there's a lack of affordable housing. Two, there's a lack of skilled labor.
Three, and there is a big need to shift from traditional masonry type of construction to more lightweight, which really play into our the strength. And by taking advantage of the fact that a lot of the products, the current product that we have here in Australia, is very relevant and fit more into the European markets. And we. Based on that, our team have been doing a very good job at market understanding, and really put that. Based on the market understanding, they have built into a series of product concepts that we can modify some of our existing product that we.
And be able to come up with new product that will meet those unmet needs in the marketplace today. It is, and it's quite exciting, but it's not something that we're ready to share with that yet. But in time, that will happen.
Andrew Scott (Analyst)
Thank you.
Jack Truong (CEO)
It looks like we're done with questions in the room. Are there any questions on the phone?
Operator (participant)
... Question comes from Brook Campbell-Crawford with J.P. Morgan.
Jack Truong (CEO)
JP Morgan.
Brook Campbell-Crawford (Analyst)
If you're able to quantify the savings achieved to date in APAC from these initiatives?
Matt Marsh (CFO)
Hey, Brook, I think there was a little bit of a technical issue. Would you mind repeating your question? We only caught the last four or five words.
Brook Campbell-Crawford (Analyst)
Yeah, sure, Matt. So I was just asking around lean manufacturing in APAC. I understand these initiatives have been underway for some time. Are you able to quantify the savings achieved to date from lean manufacturing in Australia?
Matt Marsh (CFO)
You want to answer that?
Yeah. Yeah, we have, and, you know, I'd say they're proportional to the size of the network in Asia Pacific, compared to the North America network. And there's a phasing in aspect to the savings as well. So the lean approach in Asia Pacific was really initiated in our Rose Hill manufacturing facility several years back. And those savings and that approach then translated more recently to our Carroll Park facility. And we're in the middle of now rolling that out. We have rolled that out, kind of, to our other two facilities in Caboolture and in Penrose, our Auckland facility.
So, much like we're gonna do in North America, where it was a phased, you know, a phased-in rollout, in Asia Pacific, we'll also have a phased-in rollout in North America. We'll start with some subset of the plants. We're in the process of determining the exact number. We think it'll be less than, you know, half, more than a third of the plant, something like that. Three, four plants will go in phase one, and then we'll have a phase two that follow. It's important that the site is ready for lean. So it requires both a leadership approach and a level of resourcing with the right types of resources on site in order to realize those benefits.
And then there's obviously a pretty intensive training and reorientation for the management team on how we're asking them to run the day-to-day operation and measure the day-to-day operation differently. So that phasing approach that we took in Asia Pacific will translate into, you know, into the US. But to answer your question, yes, we, you know, we do have kind of sort of measurable savings in the Rose Hill plant, Carroll Park, and Asia Pacific in fiscal 2019 and targets for fiscal 2020. I'd say they're proportional to the targets that we've set for the rollout and the implementation in the US.
Brook Campbell-Crawford (Analyst)
Thanks for the detail, Matt. Just a question on North America. I gather there's been an adjustment to staffing levels at a plant in the US. Just interested to understand the decision underpinning or the driver of that decision, really, for the plant in the US?
Jack Truong (CEO)
Yeah. Yeah, so, Lee, if I understood your question to say that once we execute lean, does that mean that we can delay the launching of new plants? Is that your question?
Brook Campbell-Crawford (Analyst)
No, sorry, Jack. I was just asking around in the Pulaski facility. I gather there's been changes to some of the staffing levels at that facility. Just keen to understand really the driver of that decision.
Jack Truong (CEO)
Yeah. You know, like, like we have a continuous process in the company where we're always evaluating our production hours and our volume requirements based on inventory levels and demand levels. And we did do some adjustments in the fourth quarter at various sites, one of which was Pulaski, that impacted the employee population there. I'd say, you know, that's very much in line with kind of normal adjustments that we would be making based on supply and demand, and nothing kind of outside of that. So the reference that you're making for the action that we took in December was just in line with our normal production planning cycles.
Brook Campbell-Crawford (Analyst)
Okay, thanks.
Operator (participant)
Your next question comes from Rochelle Pivec with Evans and Partners.
Rochelle Pivec (Analyst)
Hi, Jack and Matt, thanks for taking my question. Just a quick question regarding the forward order book. Just building on some recent commentary from U.S. home builders, suggesting the March 2019 quarter may be a little bit soft from a demand perspective. Just wondering if that's reflected in your forward order book at this stage, given you've now seen the January trading data?
Matt Marsh (CFO)
Yeah, we, you know, we certainly think we've got a good line of sight to our-- what's our fourth quarter or the March ending period quarter. You know, market conditions and volume. So one of the reasons that, you know, we've we changed and tightened our guidance range this quarter was, you know, it certainly looks like from the last couple of months that the way December and January have played out are slightly more positive than what we had as indicators when we were sitting here in November for how the trends in the market would look.
While we don't think it's going to be a robust market, we certainly think the pause that we saw in our third quarter doesn't continue into the fourth quarter, and our fourth quarter guidance range and full year guidance range kind of accounts for that.
Rochelle Pivec (Analyst)
Okay, great. Thanks for that. I know Hardie's doesn't like to talk about the impact of weather, but just again, given commentaries from some of their competitors in the region, was there any impact from weather in the third quarter?
Matt Marsh (CFO)
No.
Rochelle Pivec (Analyst)
Okay, perfect. And sorry, just to be explicitly clear on a question that was asked earlier, just the calculation of the market index. I mean, previously, we'd used a three-month lag to the US using US housing data, but now it appears that you're using a nine- or twelve-month rolling index. Is that right?
Jack Truong (CEO)
That's correct.
Rochelle Pivec (Analyst)
Perfect. Thank you very much.
Operator (participant)
We are showing no further questions on the phone.
Right on time.
Jack Truong (CEO)
Thank you all very much.
Matt Marsh (CFO)
Thanks, everybody.