James Hardie Industries - Q3 2020
February 11, 2020
Transcript
Jack Truong (CEO)
All right, good morning, everyone. Thank you for joining us in our Q3 fiscal year 2020 earnings call. I will begin by discussing key business results and operational highlights of the third quarter, and for the first nine months. Jason Miele will then cover the financial details, and finally, I will come back with an update on our global strategy. I'm very pleased with the progress that our entire James Hardie team has achieved during the first nine months. We are executing our strategy that generated strong financial results in each of the last three quarters. It's a very good start to the transformation that our company embarked on a year ago. I would like to take a few minutes now to highlight the key transformational changes that we are making, to put some context to the results that we report today.
We're currently driving a fundamental transformation in our company. This is not about returning to the Hardie of old. What we're executing is much more significant than that. We're executing our plan to go from being a big, small company to being a small, big company. This is about building capabilities and processes that connect the core strengths of our company to generate critical mass, to deliver, deliver profitable growth while creating a culture of being a customer-centric company. We're driving a fundamental transformation across our company. Our goal as a small, big company is to deliver sustainable and profitable growth. However, if you look at our results through the past 10 years, we have not met that mark. Let's use North America as an example.
When you look at the past ten years, we have had some good PDG years, and we have had some good EBIT margin years, but we have not accomplished both together. This year, however, we have delivered both. Through nine months, we delivered PDG of about 6%, with EBIT margin of 26%. This is a good step in the right direction of where we want the new Hardie to be. Delivering growth above market and strong EBIT margin consistently is hard to do, but that is our goal across all of our business segments. We believe we're now on the right track, but a fundamental transformation is not easy. There's still a lot of work left to do, and there are several key areas we need to focus on and invest in.
We need to continue to connect our businesses together, and then focus on critical few opportunities to create value to earn our customers' business every day, via increased demand of our products with the builders and our contractors. We're having more efficient supply chain to serve our customers better, more enabling tool that make it easy for our customers to sell our products, and with high impact innovation that expand market opportunities of our customers. When we're able to deliver on all of those objectives, we will truly be a global company that can deliver sustainable and profitable growth. I'm excited by our progress to date, as I believe we're on the right track to get there. Let's now move into the business and operational highlights. Now turning to page seven, on group results.
From the group perspective, we had another quarter of strong, profitable growth, led by outstanding performance in our North America segments, and a very good performance in our Australian business. For the group, volume was up 6% in the quarter, and 4% for the nine months year to date. Net sales were up 5% for the quarter, and 3% for the nine months year to date, and adjusted EBIT was up 18% for the quarter, and 20% for the nine months year to date. Adjusted net operating profit for the group grew 17% in the quarter and in the first nine months of the fiscal year. Globally, our team are executing our strategic plan, resulting in strong financial results in each of the last three quarters. Let's turn to page eight on North America results. Our exterior business delivered exceptional results.
Volume grew 13% in the quarter, and 8% in the nine months, as our commercial transformation is gaining momentum. We estimated our addressable market growth for the full fiscal year, 2020, to be between 1%-2%, and we're confident that we'll deliver a 6%+ PDG or growth above market for fiscal year 2020. Additionally, our interior business returned to growth, posting a 3% volume growth for the quarter. We're now on track to deliver a full year expectation of flat to slight volume growth for the interior business. Now, with more volume of fiber cement flowing through our network of more efficient fiber cement manufacturing plants, driven by lean, we deliver an increase of 30% in EBIT dollars.
Our EBIT margin was 26.1%, a 380 basis points improvement over quarter three a year ago. Our EBIT margins for both the quarter and for the first nine months exceed the top end of our long-term target range. Our commercial transformation is gaining momentum, supported by continued traction in our lean transformation. Continuous success in both of these initiatives is critical to delivering sustainable and profitable growth. We are pleased with the nine-month results of 6%+ PDG and 26% EBIT margin. Let's now turn to page nine for European results. Fiber Cement growth momentum continues, with net sales up 27% for the first nine months. Fiber Gypsum net sales were soft and below our expectations.
A large contributing factor was certainly the softening housing markets in Western Europe, particularly in Germany, France, and the U.K., but we also experienced a dip in our commercial execution during the past three to four months, and as you know from our global strategy, one of the key disciplines in our company is the continuous improvement mindset of PDCA: plan, do, check, and adjust. We believe that we have done the right checks and recently made the right adjustment relative to our plan to ensure we deliver improved fiber gypsum growth going forward. Now, our EBIT margin was 9.6% for the nine months year to date. Our European strategy is on track, and we're excited about introducing innovative fiber cement products into this market. Now, let's turn to page 10 for APAC results.
Our Australian business was a standout in APAC, driving growth of our markets in a contracting housing market and delivering strong EBIT dollars growth. Overall, APAC saw a moderate EBIT growth for the quarter of 5%, and EBIT margin remained in the top half of our long-term target range. Similar to my comments on Europe, the business is on strategy, but we are adjusting as necessary to ensure our New Zealand business execute at the same level as Australia. Now, finally, on page 11, our updated key assumptions for fiscal year 2020. In North America, we see modest growth in U.S. housing markets. We expect our addressable market to be up 1%-2%, closer to the 2% range. U.S. residential housing start will be approximately 1.3 million.
As we continue to gain traction in our commercial and lean transformation and executions in North America, we are now raising our full year PDG 2020 target from 4%-6% to 6% plus, and we're reaffirming our EBIT margin range of 25%-27%. In Europe, we continue to expect the addressable housing markets to be slightly down for the full year. We continue to introduce new fiber cement products, and the one change in our European assumptions for the year is that we now expect EBIT margin to be flat year on year rather than increasing. The primary driver in the change in our EBIT margin expectations is the soft fiber gypsum sales growth I discussed on the European slide. In APAC, there's no changes to our assumptions. We expect the addressable housing market in Australia to be down mid to single digit.
APAC is expected to deliver volume growth above markets of 3%-5% and EBIT margin in the top half of the range. Finally, we raised our guidance on adjusted net operating profit to be between $350 million and $370 million. Overall, I'm very pleased with the progress the team has achieved in the first nine months of this year, especially in North America and Australia. We have posted three consecutive quarters of strong financial results. Our teams are executing against our strategic plan, and our results to date have demonstrated that. I will now hand over to Jason to take you through the financial review and highlights. Jason?
Jason Miele (CFO)
Thank you, Jack. Good morning, everyone. We will start on slide 13, on the group results. As Jack mentioned, a strong financial performance across the group. Starting with our top-line results, you'll see sales volume up 6% for the quarter and up 4% for the nine-month period. Net sales up 5% and 3%, respectively. The top-line strength is driven by the outstanding performance Jack discussed in our North American business. On the profit metrics, you see gross profit increased 15% for the third quarter and 12% for the nine months. It's being driven by the improvements in lean globally across our businesses, as well as the strong top-line performance.
You also see the lean performance coming through in our gross margin percentage, with the nine months up 290 basis points. Finally, EBIT or adjusted EBIT is up 18% for the quarter, and 20% for the nine-month period, and net operating profit is up 17% for both periods, driven by the strong adjusted EBIT growth and also partially offset by higher tax expense and higher general corporate costs. Moving on to the North America results. As Jack mentioned, PDG is very much on track. We've raised our target to 6%+ for FY 2020. Exteriors volumes were up 13% for the quarter and 8% for the nine-month period.
The momentum of our commercial transformation continues in our exteriors business, and we're also starting to see the acceleration of our interiors volumes continuing to improve. You'll remember in FY 2018 and FY 2019, our interiors volumes were down both of those years. Last February, we would have signaled that we expected FY 2020 to be flat year on year, and we're very much on track to deliver that target in FY 2020. Price was favorably impacted by our price increase on April first to start the year, partially offset slightly by mix, with both periods being up 1%. The EBIT metrics were quite strong.
EBIT dollars excluding were up 30% for the quarter and up 20% for the nine-month period, with both periods being at 26.1% EBIT margin, which continues to be above our long-term range. EBIT results were driven by the higher net sales, lean savings, as well as lower freight costs, and the quarter, in particular, was also helped by lower pulp costs. The next slide on page 15 is our long-term six-year view by quarter of EBIT dollars and EBIT margin. You'll see the three bars there on the far right represent our Q1, Q2, and Q3 FY 2020 EBIT dollar performance. You'll note that those are the three highest quarters we've achieved over that six-year period, while also delivering a margin above our, the top of our range.
As Jack mentioned, we reiterated our target for FY 25 of 25 to 27%, for our North American business. Moving on to input costs. This continues to be a more positive story than it was last year. Pulp is down 22% for the quarter, so that is the three-month period, ended December thirty-first, two thousand and nineteen, versus the same three months in the prior year. I'll remind everyone that, that is, those are market prices and a market metric. That, that kind of activity helps us kind of on a one-quarter lag. Freight was also down 12% quarter-over-quarter. Sorry, to be specific, for the December quarter versus the December quarter. That is starting to narrow a bit from what we saw in the first half of the year, but still a very good trend.
And lastly, cement prices were up, were up slightly. Gas prices were down 29%, and electric prices were up 6%. Moving on to Asia Pac. As Jack discussed, certainly the top-line metrics are being impacted by a softening, continued softening in the Australian housing market. Sales volumes down 4% for the quarter and 2% for the nine-month period, and sales down 3% and flat, respectively. Australia was the standout for the segment, driving strong growth above market, and delivering those top-line results. Price was strong throughout the region at +3% for both periods. EBIT in Australian dollars was up five points, 5% for the third quarter and 1% for the nine-month period.
Those results are being driven by the higher average net sales price across the region, lean savings, particularly in our Australian plants, lower pulp costs, offset partially by higher freight. As a reminder, our U.S. dollar results, when translated, are being negatively impacted by unfavorable FX rates for both periods. Moving on to Europe on page 18. So as Jack mentioned, the third quarter result in Europe is certainly softer than we wanted. Strategy is on track, but that third quarter is impacting, obviously, also the nine-month period. The third quarter results were primarily a result of the softer fiber gypsum volume growth that you see also impacting the profit metrics. For the nine-month period, sales were up 4% with average price up 1%.
We had fiber cement net sales up 27% for the nine months ended, and fiber gypsum net sales up 2%. Higher SG&A costs are driving EBIT down year on year, as well as, EBIT margin excluding of 9.6% for the nine-month period is seventy basis points off of last year. And as Jack stated, we've lowered our expectations to have a flat full year, FY 2020 versus FY 2019 for EBIT margin, adjusted EBIT margin in Europe. Last thing would be on integration costs. We did have higher than anticipated integration costs, certainly higher than we signaled to start the year. I believe we started the year with a range of EUR 4 million-EUR 7 million.
We are now at EUR 8.6 million through nine months and EUR 3.9 million in the third quarter. We'd anticipate to have roughly EUR 2million-EUR 3 million EUR more left to go in FY 2020. In FY 2021, we will not be recording integration costs. Moving on to these other segments and income tax. The other business on the top left there, as you know, we announced the exiting of our windows business in North America last year in FY 2019, so those are the charges you see being taken in FY 2019, and we wrapped up that process and completely ceased that business early this year. So you're seeing essentially no activity for the full year, for the nine months, and zero now in Q3. That will continue at zero.
Research and development, down slightly for both periods. We are continuing committed to R&D investments. As Jack's mentioned in our September investor tour and earlier, we are committed to innovation, and we'd anticipate continued investment in our R&D segment. General corporate costs are driven higher due to, primarily due to higher stock compensation expenses for both periods. I'll talk about that in a bit more detail on the next slide, we get to. Finally, on this slide, adjusted ETR is right in line with our expectations and what we've been signaling all year. Three months ago, we estimated 17.9%, and now our view is it's 17.8% for the full year. As mentioned, diving a bit deeper into the general corporate cost line, we've presented here a few things, a trend line.
We have the FY 2019 quarterly average of general corporate costs, along with the three quarters from this year. Noting in the current quarter, the $24.3 million of general corporate costs includes an unusual item of $3.5 million related to the acceleration in the timing of accounting for expenses associated with a retired executive. As the effective service term for that executive has shortened, we are required to accelerate the accounting for these expenses over the remaining service life, which is now the end of March 2020. Thus, these expenses, from an accounting perspective, have been accelerated into the third quarter as well as the fourth quarter. If you look at general corporate costs, excluding that amount, we're at $20.8 million for the quarter.
The increase versus the prior several quarters is primarily driven by higher stock comp expense, as mentioned, which is driven by not only a higher share price, but an increasing share price during the period from the first balance sheet date to the last balance sheet date of the period. We've also increased investments in our corporate capabilities, which we had signaled last quarter we'd be increasing investments throughout our business, and that's also part of the increase you're seeing here. Finally, page 21. This combines two of our slides we used to present separately, cash flows and capital expenditures. On the left, cash flows is very straightforward, a very good result with cash flow from operations up $84 million period over period, or 27% at $393 million.
A very strong result, which has been driven by the increased profitability and cash generation of our business units. Year over year, you also see significant changes in investing activities and financing activities, which is primarily driven by the Fermacell acquisition in the prior year, and no repeating of an acquisition in the current year. On the right-hand side, capital expenditures, $161 million through the nine months, right on track to be right, right around what we signaled of $200 million to start the year. In North America, we continue the construction of our Prattville, Alabama facility, and in Asia Pac, we've completed the construction of our brownfield construction at Carole Park, and we now anticipate we'd commission that in Q1 of FY 2022 as we monitor demand. Moving on to the liquidity profile.
No, no change from the past several quarters. We have the same instruments in place, $800 million of U.S. notes, EUR 400 million of notes, and $500 million revolver. That's remained the same for several quarters now. Our leverage is, continues to remain on track. We're at 2.1x xnet debt to adjusted EBITDA, remains slightly above our range, which is 1-2x, but is down from 2.3 in the prior period or as of September 30th, 2019, and we continue to anticipate to have that with, firmly within our range in the next two to three quarters, which is on track with what we said, to you three months ago. Finally, a repeat of a slide in Jack's deck, the FY 2020 key assumptions and market outlook.
I'll just reiterate the items that have changed. So in North America, we've refined our estimate of around U.S. residential housing from a range of 1.2 million-1.3 million, sorry, to be approximately 1.3 as the data comes in. And also raised our PDG guidance for our exteriors volume to +6% from 4%-6% last quarter. In Europe, we have the third bullet there. We've lowered our expectations on EBIT margin. We had originally anticipated EBIT margin accretion, FY 2020 versus FY 2019. We are now signaling that to be flat year-on-year. No changes in Asia Pac. And finally, we've raised our adjusted net operating profit guidance from $340 million-$370 million to $350 million-$370 million.
With that, I will hand it back over to Jack to go through a strategic update.
Jack Truong (CEO)
Thanks, Jason. Now the fun part. Now let's turn to page twenty-five for an update on our strategy, and starting with the fundamental transformation that we're undertaking. Now, we're moving from being a big, small company to a small, big company with a keen focus on delivering the most value to our customers and earn the business every day. So what does that mean by being a small, big company? It really means about connecting different functions together, connecting different businesses together as one, global James Hardie team, and focus on the critical few opportunities and drive for those results.
As we continue to connect different pieces of our company together, leverage on those core strengths and focus on the right priorities, that is when we're gonna get the momentum and the growth, the profitable growth that we would expect for being a small, big company. So it's really important for us is about, for all of us, about the priorities to be a customer-centric company, and it start with commercial. This is where we went from being a pull company that was focused primarily on demand creation with the builders and contractors, to one that is not only focused on demand creation with the builder and the contractor, but also focused on adding significantly more value to our customers.
We're upping our game on demand creation to pull, while we engage with our customer push, to make it easier for our customers to make more money selling our products than our competition. Then really, from the operations side, as we create more and more demand, it's important for us then, as we flow that demand through our plants, that those plants also operate as one. Traditionally, each and every one of our fiber cement plants across North America and Asia Pacific used to run independently, but through Hardie Manufacturing Operating System, based on lean principles, all of our fiber cement plants are now running as one interconnected network to produce consistently good quality products with more predictable service to our customers while reducing waste.
And market-driven innovations, it's also that transformations. This is all about delivering the high impact innovations, the critical fuel that our customers need, instead of what our R&D engineers want. And to really support these three critical transformation, our culture need to also change to enable those connections. For example, where we used to be more top-down within our company, now it's more the empowerment. It's really about making sure that the decision-making process is really driven deeper within the organization, and also the accountability that come with it. And that has really energized our employees across the company and around the world. And rather than work in silos and decision-makings are made separately, we now work together as one cross-functional team that would allow us to make better decision, more holistic decision for the better good of the total company or the total business.
Also, we went from being a regional-based company to now a more globally connected company with the mindset of learning. That is, what's could be old in one part of the world can also be new in a different part of the world. It's really about the culture of really learning from each other and really trying to maximize and raise the standard of our company across the globe. So it's moving from being just reactive to the situation to being more proactive, to really think ahead, what's around the corner, and then prioritize as a total company and really address those issues before it become a bigger issue. Most important to our company is about being that 1% improvement a day. It's really that continuous improvement mindset.
How do we take the total company interconnected, connected together, and make the improvement 1% a day? That is really the transformation our company's going through from the cultural perspective as well as from the business perspective. That really what we strive and aspire to do going forward, and we have started on this journey a year ago. Now, just to give you some example, on page 26, I want to share with you here, really what the customer focus strategy and really in action at the International Builders' Show that we just had recently in Las Vegas last month.
Over three days at the show, our leadership team, along with our cross-functional team members, met with similar teams of our top 25 customers, where we took the time to discuss, learn, and share our plan together to further align our partnerships, and then we reiterated our commitment to our customers, that we want to earn and win their businesses each and every day with the values that we create in our company for them, specifically for them, each and every one of them, and it was a very successful show, and you can see the engagement that we have had with our customers throughout the show with the engaged employees that we have at the show from a cross-functional perspective, and we look forward to building on this momentum to help deliver our sustainable profitable growth going forward.
This is just an example then in action. Now on to page 27, this will provide you an update on our progress with lean transformation. Now, we have now deployed a Hardie Manufacturing Operating System in all of our facilities in North America and have recently started our European deployment. In fact, I was in Orejo, Spain, last week to participate in the first HMOS deployment in our fiber gypsum plant in Europe. We plan to deploy HMOS in all of our European sites within the next 12 months. As you can see, this is a continuous improvement mindset.
We started the lean journey in Asia Pacific during the past few years, and we took those learnings and then replicate to North America and improve on it, and which then become the Hardie Manufacturing Operating System, which we deploy across North American plants. Now we take the HMOS in North America, replicate to Europe and improve on it based on the European capabilities, and then we also will replicate this back to Asia Pacific, to really drive the improvements as expected. What we would expect in a year from now is that the HMOS implemented, deployed in Europe now within, replicate back to North America with those learnings.
That is the continuous improvement mindset and the strategy that we are deploying within our company, using the lean principles to really drive toward producing our products with consistent quality, with predictable service, and, of course, to really take the unnecessary costs out of our manufacturing and supply chain system. Then we're currently on track to deliver against our lean costs out for each of the regions. In North America, our lean cost target is $100 million cumulative through fiscal year 2022. And so we have now deployed HMOS in 100% of our existing facilities in North America. Our teams are solely focused on continuous improvements on quality, cost, and predictable delivery of our products. And also very pleased with how engaged our employees are in embracing and executing our lean principles, and our results show.
Year to date, after three quarters, we have already reached the target that we have set for the year, and which is really faster than any one of us had expected it. In Europe, our target cost out is $20 million, and recently, we launched off at our first facility in Orejo, Spain, and Europe will be incorporating and replicating key learnings from North America, and we expect all plants to be transformed to lean by the end of fiscal year 2021. In Asia Pacific, our cumulative target to fiscal year 2022 is $19 million, which focus on continuous improvements while replicating learnings from North American deployments. Our teams are sharing best practice and are becoming more globally connected every day.
Our focus on lean transformation is a key initiative to support our goal of sustainable and profitable growth. Now, let's turn to page 28 and discuss another core pillar of our corporate strategy, market-driven innovation. Our approach is to translate the mega trends, integrate these with customer insights to develop winning product concepts, and ultimately bring these to markets that the customers and the market really want. As a company, we're committed to increase investments in and usage of our dedicated global R&D team to deliver innovations that address our customers' needs and support our long-term growth expectations. Today, I would like to speak about three of these innovations in more detail, our Hardie Windbreaker, ExoTec Vero, and EasyTex products. First, if you look at the Hardie Windbreaker, which is a critical innovation for our European and Australian businesses.
In Europe, we launched the product in May of 2019, and we market the product as Hardie Windbreaker Sheathing product. And then that innovation is then replicated back to Australia, where we launched an improved product for the Australian markets in November of this past year as an RAB board. This product get installed beneath external cladding or rain screen, and it deliver superior water resistance, long-term climate durability, and superior strength. We're targeting these products to our residential segment, including single and multifamily housing, and we are excited about it, and specifically how it addresses a definite market and customer pain points. And we look forward to supporting its growth in future periods. Now, moving on to slide 30, we also just launched our ExoTec Vero facade panel.
This product was launched in Australia this past November, and offer a pre-finished concrete look facade panel that's non-combustible and offer a look that this market is asking for. It's targeted to our commercial segment. Certainly, with this used as a test site as well, the learning from this will also allow us to replicate in other markets around the world. And lastly, on page 31, we launched our EasyTex cladding innovation in Australia just this past month. This product is a fiber cement panel used as external cladding with an embedded fine render texture, which eliminate the need for render or wet trades, and really simplify the way render has been put on the exteriors of homes. It's also featuring interlocking mechanism for faster construction. This product is targeted at our single-family new construction segment.
Now, these three new products are just a few of our ongoing innovations, and above all else, our philosophy is about delivering the products that our customers want and need while addressing market trends, easy and fast to install, low maintenance with high durability, and I'm excited about what the future holds as we identify new market-driven innovations and continue to address our customers' needs each and every day. In closing, I would like to reiterate that we are focused on becoming the leading global building material company that delivers sustainable and profitable growth. I believe that we are on this path and that the last nine months have been a strong start. I would also like to take the opportunity to thank all five thousand employees, global employees across the James Hardie company, for excellent work and very good execution during the past nine months. Thank you.
Jason Miele (CFO)
We're open for Q&A.
Operator (participant)
Thank you, ladies and gentlemen. We will now begin that question and answer session. If you wish to ask a question, just please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request at any time, just please press the pound or the hash key. Once again, that's star one on your telephone. And your first question today comes from Simon Thackray from Jefferies. Please ask your question, Simon.
Simon Thackray (Managing Director and Senior Equities Analyst)
Thanks very much. Good morning, Jack. Good morning, guys, and thanks for taking my questions. I've only got a couple of quick ones. Just in terms of North America, an impressive performance year on year from a volume perspective, exteriors up 13. You've turned around interiors. We had pulp down 20%. You've got lean benefits running ahead of schedule. It was, like, in fairness, a very easy comp. You had low growth last year and weather effects and all sorts of stuff. Yet with the EBIT margin of 26.1, with no disrespect, the gross margin sequentially for the group was down 60 basis points, and the EBIT margin for North America was down 100 basis points with all those tailwinds blowing. I'm trying to understand that consequence from all of those tailwinds being reflected in that margin.
Albeit it's a good one versus the PCP, it's down sequentially in a quarter that looks really, really favorable for you. Can you just help me understand that?
Jason Miele (CFO)
Yeah. Yeah.
Thanks for that question. To summarize, I think it's essentially 27% last quarter, dropping to 26.1% this quarter. Why? I think we had similar questions last quarter as looking forward, and I think what I would have said last quarter remains the same. So third quarter is our lowest volume quarter, so I think that's the number one driver, when you're talking about margin. We've talked about freight narrowing a bit, in the back half of the year. Certainly, to your point, pulp was a tailwind, Q3 versus the same period last year. But versus Q2, not as it was a tailwind, but not as significant as that was ramping down, over time. But again, lastly, we signaled we would continue to invest, and we have.
And so I think those things combined, you end up at 26.1%, which is a great outcome. 26.1% for the nine months, while delivering a PDG for the full year at 6%+. We're quite pleased with how the quarter turned out.
Simon Thackray (Managing Director and Senior Equities Analyst)
Yeah. No, as I said from the outset, I'm not criticizing the EBIT margin. I'm just looking at the extraordinary volume growth you got, that notwithstanding, you know, third quarter is weaker, one would have expected there to be more leverage in that volume to the cost inputs, et cetera. So what I would-
Jason Miele (CFO)
Yeah, so, if I think about... So you asked the question a couple ways. Q3 versus Q3, we did expand margins significantly, over 300 basis points.
Simon Thackray (Managing Director and Senior Equities Analyst)
I see.
Jason Miele (CFO)
Q3 versus Q2, I don't have the number off the top of my head, but volume would certainly be down Q3 versus Q2 due to seasonality.
Simon Thackray (Managing Director and Senior Equities Analyst)
Yeah, the seasonality of the volume, but by the same token, the growth margin is normally better in Q3 than any other quarter as well, so I can look at that sequentially and look at better growth margins Q-on-Q. What I would like to ask you is the following: It's a very strong PDG number with upgraded guidance to PDG, which is excellent. If in a hypothetical situation we've seen permits accelerating in the U.S., which is great, you are now delivering positive comps on interiors, I suspect, going forward.
If we were to see U.S. housing starts, let's say, up 7% or 8% in FY 2021, and you can post positive interiors growth and sort of low to mid-single digits, and RNR, you know, ticks along at sort of a mid-single digit level, are you still able in that environment, with that change in mix, to achieve the kind of PDG targets that we're looking at? Because that would be sort of another low double-digit volume.
Jack Truong (CEO)
I didn't understand what he's talking about.
Jason Miele (CFO)
Yeah. So sorry, sorry, Simon. It's quite, quite hard to hear you. I think, I think you're doing a lot of math there, but you're saying, if the underlying market, housing market grows 7%-8%, RNR is still at about 2%-3%, can we still drive-
Simon Thackray (Managing Director and Senior Equities Analyst)
Yeah.
Jason Miele (CFO)
Can we still-
Simon Thackray (Managing Director and Senior Equities Analyst)
Four percent.
Jason Miele (CFO)
Okay. Can we still drive PDG results similar to this year?
Simon Thackray (Managing Director and Senior Equities Analyst)
Yes.
Jason Miele (CFO)
Is that your question?
Simon Thackray (Managing Director and Senior Equities Analyst)
I'm trying to understand if the mix in interiors and new housing would have an impact on PDG. Just to understand.
Jason Miele (CFO)
Yeah. So let's cover off on that part first. So interiors is not part of our PDG calculation. PDG is a calculation associated strictly to our exteriors volumes.
Simon Thackray (Managing Director and Senior Equities Analyst)
Exteriors? Yep.
Jason Miele (CFO)
So then within exteriors, you have new construction and RNR.
Simon Thackray (Managing Director and Senior Equities Analyst)
Yep.
Jason Miele (CFO)
Do you want to cover off whether you believe we can drive the PDG results in an accelerated market of 8% new construction growth and 3% RNR growth?
Jack Truong (CEO)
Yes, Simon, just a couple things to remember as we head into the next, this coming year, is that the first six months of twenty nineteen was a very soft new construction in North America because of all type of weather. The polar vortex, big rain, and so on, I think was like, was down for the first six months, new construction was down, like, minus 6%-7%. So as you look into the comp, just purely look at the comp for the next six months, you're gonna see a higher comp, but in reality, the actual new construction unit is still the same as we have in this last quarter. So it's just about. So we have to keep that as a fundamental level set.
And then the second part is that, as I mentioned before, is that we're now becoming a small, big company now, that we have a much bigger critical mass. And it's important for us that every day that we execute well as a team cross-functionally to focus on the critical few parameters to really drive the results, expected results. That we have to earn that business every day. So with the strategy we have and how we've been executing, I'm confident that we can do that. But at the same time, it's something that we have to earn that every day. It's not a guarantee.
Simon Thackray (Managing Director and Senior Equities Analyst)
Sure, sure. I appreciate that, Jack. I'm just sort of trying to understand if there is any mix shift. I mean, historically, we've said 65 RNR, 35%, new housing, 75% or so on volume, 25% interiors. You know, how did that mix, how did the mix shift, if at all, change, you know, targets for the PDG? That's all I was trying to understand.
Jack Truong (CEO)
Okay.
Simon Thackray (Managing Director and Senior Equities Analyst)
In a sort of, from a hypothetical perspective, and whether that's obviously changed marginally.
Jason Miele (CFO)
We're getting a ton of feedback off this call. Can we move to the next question?
Simon Thackray (Managing Director and Senior Equities Analyst)
Sorry?
Jason Miele (CFO)
Sorry, Simon. We're getting a ton of feedback in the room off your line, so we're gonna have to move on to the next question in the room.
Simon Thackray (Managing Director and Senior Equities Analyst)
Uh, right.
Jason Miele (CFO)
Peter Wilson.
Peter Wilson (Analyst)
Peter Wilson, Credit Suisse. So the North America segment result, very strong volume. Can you just give us some more color on where you won that business? So which geographies, product, you know, which customers? Where did it actually come from?
Jack Truong (CEO)
Yeah. You know, so, you know, as we started this journey a year ago, from pull to push-pull, and so we have reallocated and put the resources on the pull, the true pull, where we have the hunters go out and really get our business on the wall. So and then while we invest in the key account to manage with our customers a lot better. So it's really a... Now, it's really come to a dynamic that those two are working together. That the hunters have been able to gain some really good conversion against other categories and competitors, and be able to then to translate that into sales with our customers.
And so we have very, very strong growth in South Central, over the Texas area, the South, Southeast, the Mid-South area. And also we've been gaining a lot of momentum in the Northeast. So certainly the area that we have focused on as part of our strategy to continue to gain market share.
Peter Wilson (Analyst)
Okay. And the Q4 results, would you be happy for the market to extrapolate that forward, or is there anything unusual about the quarter? You know, i.e., was there any, you know, end of year volume pull forward or something of that nature?
Jack Truong (CEO)
No, we didn't raise our price until this quarter, so it's really that, just so the result from this past quarter is just pure push, pull, normal driving the business that our company has been on.
Peter Wilson (Analyst)
Okay. And on price, so, I mean, a slightly soft result, 1%, which you've put down to mix. Can I understand, what's the margin impact of that? If there's a mix on price, is there a comparable mix shift on cost of goods sold, or is there actually a negative margin impact to the softer price?
Jack Truong (CEO)
Yeah, I think the couple of things to remember now, Peter, is that we're now moving into HMOS. We're in a lean transformation, so our network of plants become more and more efficient every day. So the key for us is really about having the degree of freedom to manage volume, price, mix, to ensure that we have the maximum amount of volume, fiber cement flowing through our now more efficient plants. So as we do that, we will generate a significant leverage to drive more EBIT dollars. So when it comes to price mix, what we want to do too is that the mix that we are also beginning to go into is that we see opportunities.
So we currently have low penetration in multifamily, and so we are putting a focus to gain more penetration in that area. And of course, products in the multifamily has a lower price point because it's different type of products. But as they're also fiber cement, and they also flow throughout the same network of plants, that we, by doing that, we still generate a lot more EBIT dollars. And so that was the mix that we talk about. And the other is on price, is that a big part of our price growth that we planned in this year is really about the increased penetration of our Win with Color program.
We had a soft start, a rough start to the launch of this program a year ago. That's kind of not meeting the plan that we have put in. We expect going forward our color program will become a growth generator as well as the price generator in our business in North America.
Sophie Spartalis (Analyst)
Good morning, Sophie Spartalis from Bank of America. Just in terms of seasonality, I recall at the Investor Day, you talked around the internal initiatives being able to smooth out the seasonality that we generally see Q-on-Q. We did see a bit of seasonality this quarter. Can you just talk about how long that'll take to, to flush through the accounts?
Jack Truong (CEO)
I think the new construction was stronger in the last three, four months than in the previous year. So you probably saw the construction activities picked up. And so it's just as we are at the end of the day. We're a pull company. We're a demand creation company. So as the builders start to build and as the owner contractors want to remodel homes, we are supplying that. So that's just that phenomenon that you see that we track pretty well with that as well.
Sophie Spartalis (Analyst)
Okay, so we should expect to see that continued seasonality going forward. You don't have any internal, I guess, pull factors to smooth that out?
Jack Truong (CEO)
No, because we're the demand generator company.
Sophie Spartalis (Analyst)
Okay. And then just in terms of Europe, the differential between fiber cement and fiber gypsum, you talked around a softer European market in some of the markets there. Can you just maybe talk through a little bit more around, you know, why fiber gypsum sort of had that shortfall?
Jack Truong (CEO)
Yeah, you know, it is a transformational journey for our company globally. You know, here in North America, up until a year ago, we were primarily a pull company. We didn't really focus a lot on push, which is really manage our customers better. And the same thing with our European business, and also to a large extent our business in Australia is that our business with fiber gypsum in Europe was primarily a pull business. That mean that most of our sales team have been focused on going to the architects, going to design, and going to specify and specified in fiber gypsum as a technical product on the wall, and we didn't focus a lot on the customer side.
So with the whole global strategy now to drive bigger growth, it's important that we become the push/pull, and that transition was taking a lot longer for our European team than we had expected it. But as of last week, we spent a lot of time together, and I believe that the team really got it now, not only at the leadership level, it's really deeper down within the organization, and I would expect that big adjustment will happen pretty quickly. It's similar to what you see in North America going forward. But that's what happened. It's really been a pull company, and our key competitors are pretty much in the channel in Europe.
Lee Power (Research Analyst)
Lee Powell, CLSA. Jack, just when you talked a bit about achieving high margin and high PDG at the same time, is there any... And that's kind of come with very little lean reinvestment. Is there any change in thinking about the level of lean that needs to be reinvested to maintain 6% PDG over the longer term?
Jack Truong (CEO)
First of all, I just wanna, if you look back at our historical result in North America, and it's in our annual report, look at the last 10 years. Our average PDG during the last 10 years, excluding this year, is about 3.8%, and then our EBIT margin was 22.7%. And most of the PDG, that's more than 6%, really happened during the first three, four years after the global financial crisis. And after that, it's been kind of below the range and so on.
So it's really the business model that we have to change now is really driven from being running many different plants independently into one network as one plant, pretty much like one super-sized plant, if you will. And that is the one that allow us to be able to be at the new baseline of performance. And for us to really the new business model that we're on, and we just need to execute that game plan more consistently for us to be able to be more predictable on what that should be and how much investment we should put in, as we need to go into the future.
But as of right now, it's a little bit more about ad hoc as we see how things are developing, because we're still in doing this transformation.
Lee Power (Research Analyst)
Then, just following on from Peter's question, you talked about the Hardies doing really well. I mean, in the past, we've talked about base erosion. Is that still occurring? And how, and then maybe how you reconcile that with LP's results, which is also-
Jack Truong (CEO)
Yeah, so remember, we are traditionally been a pull company. We haven't really put a lot of into push. Now as we put together push/pull, it's really demand creation that drive our sales. With now a lot more, our total company now more customer focused or customer centric, we don't have a lot of erosion, as much erosion as we used to have in the past. That is really what we see as a result of our company that with the consistent result that we have been delivering during the past three quarters. Also keep in mind, though, what we strive to do here is to grow, but grow at a profitable growth.
...So it's not just about getting the volume.
Lee Power (Research Analyst)
Yeah, thanks.
Peter Steyn (Division Director and Managing Director)
Morning, Jack, Jason. Peter Steyn from Macquarie. Jack, with the EasyTex slides behind you, and ExoTec as well, just curious, how are you thinking about the possibility of the application of some of these products, particularly in the stucco market in the U.S., and how that could alter your addressable market over time?
Jack Truong (CEO)
Yeah, so really, the key part of the innovation process is really about for us to understand those unmet needs, particularly in this case, the stucco markets in the U.S. or the render market in Western Europe. It is really about understanding those unmet needs. And what we have right now is just a product, the EasyTex. And so based on our knowledge now of what's going on with the unmet needs in the North American markets and Europe, then would allow us to have the right products that we can use our technology to really develop. And that is really where we're going. So the EasyTex is just the beginning of a platform that would allow us to really innovate.
Peter Steyn (Division Director and Managing Director)
Great, thanks. And then, just following on the lean conversation, could you give us a sense of where you are from an annualized run rate point of view in the realization of the gains that you've envisaged?
Jason Miele (CFO)
We'll give you more definitive numbers in May when we come back here to give you guidance for fiscal year 2021. But as of right now, I mean, certainly you can see that in our EBIT results. But what I can also say is that the first three quarters of Lean execution, we pretty much nearly the same as what we had anticipated for the whole year. So we're ahead of the plan.
Peter Steyn (Division Director and Managing Director)
Okay, perfect, and I just wanted to pick up on a small item or smaller item, not to discount the New Zealand business, but sales down 18% in New Zealand. Obviously, there'd be a bit of currency impact there as well. But just curious to get your sense of some of the challenges in getting that business back on its feet again.
Jack Truong (CEO)
I think this is also a case of what I mentioned at the beginning of the strategy section, is that the move into the small big company. We gotta integrate the functions together and really focus on the right priority, the critical few priorities, and make better decision holistically. And that is the area that we've been lacking in our New Zealand business at the leadership level. And so we're working to address that. We have Lee Ploy, one of our best manufacturing leaders in our North American plant to become the new plant manager of our fiber cement plant in New Zealand, for example.
So we start to really strengthen the bench strength in New Zealand to really address that issue, because this needs to be addressed.
Peter Steyn (Division Director and Managing Director)
Perfect. I'll leave it there. Thanks.
Jason Miele (CFO)
If there are no more questions from Peter, we can go to the questions on the phone. Please, operator?
Operator (participant)
Thank you. Your next question comes from Keith Chau from MST Marquee. Please ask your question, Keith.
Keith Chau (Equity Research)
Good morning, Jack and Jason. A few questions on my end. Just firstly, circling back on price, just wondering if you can give us a sense of what the like-to-like price increase was, in the period, and also what the expectation going forward is, recognizing that I think price increases have been announced, effective first April.
Jason Miele (CFO)
Yeah, we said, you know, we announced our price increase this quarter. It's between 2% and 3%. It really depends on the region.
Keith Chau (Equity Research)
Mm-hmm. And just on a like-to-like basis, Jack?
Jack Truong (CEO)
What do you mean by that, Keith?
Keith Chau (Equity Research)
So excluding-
Jason Miele (CFO)
Prices up-
Keith Chau (Equity Research)
So, excluding the mix impact in the quarter, what would the like-for-like price increase have been?
Jason Miele (CFO)
At the beginning of the year, we signaled we expected a 2% price increase to flow through the financials. And so the mix is what's driving that down to 1%. So it's a difference in what you're selling, whether you're selling more multifamily, more interiors as a percent of the total period over period. So we achieved our price increases. The price increases we took in the market, we got. The team did a great job of that. And now it's just as the periods roll by, we are getting different mixes than what we necessarily expected when we said we'll deliver to.
Jack Truong (CEO)
Keith, you know, just something to think about, too, is that the-
Keith Chau (Equity Research)
Mm-hmm.
Jack Truong (CEO)
Like for like, if you look at the first nine months this year versus last, that's what we had expected a Win with Color program to be more penetrated, but it didn't meet the expectation. And then the second is that we made a conscious decision to really grow more into the multifamily segment. So that's really the mix, the two key mix, that really drove the price that we have today.
Keith Chau (Equity Research)
... Okay, thanks, Jack. And then secondly, just circling back on lean. So tracking ahead of expectations, I think the expectation for this year was a range of 15 million-20 million. But just wondering if you can give us a sense of where within that range we're sitting at for nine months this year? And also, is it at all possible that lean benefits get reinvested at a faster pace in delivery, either in the fourth quarter of this year or into FY 2021?
Jason Miele (CFO)
Right. So yeah, Keith, I think as Jack said earlier, regarding the 15 million-20 million target, through nine months, we're there. So we're running kind of one quarter ahead of schedule. As far as reinvestment outpacing Lean, no, that probably would not occur. If you look over the next three years, we've set out targets of, you know, 15-20, and then escalating up to 100 in year three.
Keith Chau (Equity Research)
Mm-hmm.
Jason Miele (CFO)
The investment wouldn't exceed that.
Keith Chau (Equity Research)
Okay, thanks, Jason.
Jason Miele (CFO)
Cumulative, yeah, so.
Keith Chau (Equity Research)
On plant performance, I think you noted in the pack that plant performance did improve relative to last year. I think, you know, previously in the slides that we had on the U.S. September slide, so on a quarter-on-quarter basis, the plant performance had continued to improve. So notwithstanding, you know, some of the movements we've seen in gross profit margin, are you satisfied that plant performance is continuing to improve on a quarter-on-quarter basis?
Jason Miele (CFO)
Just to clarify your question, Keith, obviously most of what
Keith Chau (Equity Research)
Yep.
Jason Miele (CFO)
We present is this fiscal year versus last fiscal year. Or you're asking, has the plant performance improved Q3 FY 2020 versus Q2 FY 2020?
Keith Chau (Equity Research)
Yeah, that's right. Yep.
Jason Miele (CFO)
Yes. We continue to lean. Lean continues to accelerate. So similar to how you, you know, we laid out at the investor tour and in previous presentations, the three-year targets for Lean, and you can kind of see that increasing over time. You can think about the quarters in a similar way to FY, for FY 2020.
Keith Chau (Equity Research)
Okay.
Jack Truong (CEO)
Just to add on to what Jason says, too, is that, you know, for Lean, it's really about us continuously improve every month, and of course, then every quarter. That is the premise for us to be able to deliver on that $100 million cumulative savings.
Keith Chau (Equity Research)
Okay, thanks, Jack. On the interiors business, Jason, I think you mentioned the target for this year was to get back to a flat outcome. I think for the first three quarters of the year, you're at flat already. So is the implication that for the fourth quarter, you're expecting volumes to be flat, or should we be thinking, you know, volumes are gonna maintain or the volume momentum that we've seen in interiors continue through into the fourth quarter and also a positive comp in FY 2021?
Jason Miele (CFO)
Yeah. I think my comment was, we're on track to achieve the goal we stated last February.
Keith Chau (Equity Research)
Mm-hmm.
Jason Miele (CFO)
We'll provide guidance specific to FY 2021 in May. But I think if you go back and look at some of the things we've talked about the interiors business, including on prior calls and our September tour, you know, it's about retail fundamentals currently, and we said we believe that could get us back to flat or slightly positive. And then into the future, to really make it a significant growth business, it was about innovation and delivering new products into the retail channel. So we're right on track with where we want to be, Keith, and we'll provide FY 2021 guidance in May.
Keith Chau (Equity Research)
Okay, excellent. And just lastly from me, on corporate costs, just wondering if you can give us some guidance on what would be a reasonable assumption, for 4Q 2020, or at least what's embedded within the guidance range. And also, if it is at all possible, to give us a bit of a steer into FY 2021, please.
Jason Miele (CFO)
Yes, I think I'd say, you know, obviously, the normalized number I talked about on slide 20, 20.8, is at the December thirty-first share price, and it is excluding the one-off, or the unusual item I talked about. So that could probably be a starting point for your analysis. And then, you know, in my comments, I was quite clear that that acceleration will also occur into Q4. So you should consider that in your fourth quarter number.
Keith Chau (Equity Research)
Mm-hmm. And then into FY twenty-one, or is that something that we should hang tight on until the full year results?
Jason Miele (CFO)
Certainly, when we provide our NOPAT guidance for FY 2021, we'll include our range for general corporate costs. But I think my comment a second ago, around 20.8, that is our result excluding the abnormal item. So I think that could be, you know. You could look at that in prior quarters to, you know, forecast and develop your model for FY 2021.
Keith Chau (Equity Research)
Okay. Thanks very much, Jack and Jason.
Jason Miele (CFO)
Thanks, Keith.
Operator (participant)
I will now hand the conference back to your presenters. Please continue.
Jack Truong (CEO)
Thank you all very much for attending our conference call. We are very excited about the results that we have delivered within the first nine months. Our strategy is on track. We still have much work to do, but we're excited about it. Thank you.