James Hardie Industries - Q4 2016
May 18, 2016
Transcript
Louis Gries (CEO)
Okay, thanks. Good morning, everybody. Appreciate you joining our results call today. We're gonna do this, I'm Louis Gries, obviously, and Matt Marsh is here, our CFO. And we're gonna do this like we do, pretty much every time. I give a very quick overview of the businesses, how they performed, then Matt will go in, into more detail. After Matt's done, we'll go to Q&A for investor analysts, and then, at the end, if we have any media, we'll go to media questions. So, sorry, I flipped through those early slides, which is the disclaimer. So, I'm on slide number six, I guess. I think you've had a chance to look at the results.
Basically, the quarter was flatter than you would have thought it was gonna be in the quarter from both net operating profit and EBIT. And that brought us in a little short where most of you were expecting for the full year on net operating profit. That's kind of a one-off. It's not a one-off from an accounting standpoint, but it was an isolated incident we had in one of our manufacturing plants in the U.S., so I'll go to that. That's where we came up short on the EBIT side. Overall, I think you know we finished a good year. The growth was flatter than what we're used to, and certainly that's our main focus as we move into fiscal year 2017.
We've talked about the last couple quarters. I think we do have some traction starting on the PDG again, and that'll be our main focus going forward. As far as the financials in the business in the US, they're strong. Asia Pac, pretty much right through the region, are strong. Europe had a bad year in fiscal year 2017, somewhat due to the FX change. I mean, that dampened financials, but in addition to that, we just didn't run the business as well as we normally do or should have. Cash generation was good, as you see on the slide. Go to the next slide, which drills down a little bit on North America.
The market's okay in the U.S., so we're staying in that, now getting to be a pretty normal pattern of each year. Housing's a little bit better than the previous year. And when I say a little bit, it's when you think of our addressable starts, it's less than 10% improvement year to year, and that's what we've been looking at, six or seven, for the most part. We kind of expect the same thing for fiscal year 2017, which again, most of you that know our business know that that's not bad for us. We like to focus on market share gains, and market share gains are actually. They're much, much easier to get a builder to switch in a market that's not red hot.
So, 10% up, if we got that next year, we'd be really happy with that. If it's more like six or seven, that's fine as well. We don't see any way that it falls back at all. So I talked about the one problem we had, higher production costs at one U.S. plant. We're not gonna dwell on this, but it was $7 million. So it's just short of $7 million, and that's kind of what impacted the financials. Well, that is what impacted the financials differently than I think most of you were expecting, and certainly we were planning for. Having said that, pretty much the rest of the business performed well. Like I said, we got a little bit more traction in PDG. Our other plants, outside of that one incident, performed well.
Input costs are okay, so no problem with the input costs. They'll be a little bit higher maybe next year, but nothing to be too concerned about. Our real. Again, these are North America and Europe. When you look at North America, obviously, the comps are stronger or the results are stronger. Instead of the, well, we'll go to the next slide. Instead of the slightly, you know, at the high end of our target, US is actually over the target, so they're running more like 26. And then that's being pulled down, as we talked about before, by our windows initiative, which is, you know, early stages of starting up a business. That initiative continues to track pretty well.
Got off to a shaky start first part of the year and got some things worked out on the operations side about halfway into the year, and since then, we've had good momentum. And when I say good momentum, you know, relative to our plan for what we're trying to do with that start-up business through the rest of the year. So that, but that does drag down the EBIT margin some. And then Europe, like I said, we didn't have a good year in Europe, and that dragged it down the rest of the way. And FX in Canada and Europe also affects our pricing that we publish for the US-Europe business, and obviously, that flows through to EBIT as well. But again, we're pretty happy with the year.
Everything is running well. We would have liked to grown at a higher rate. When we became aware that we were losing traction in our growth rate above market, you know, we kind of tuned up our programs, and we think we're on the right track there. So next slide shows you the price. Price is flat for the year, which was a little bit of a surprise. I think we went into the year, we said flat, maybe plus two. We didn't get to plus two. Part of that was the FX outside the U.S., and part of that was the mix didn't work out the way we originally forecasted it might, and some of that was positive.
So we had HardieBacker sales were strong again last year, so our growth rate on HardieBacker was very good. So that pulled down price a little bit because that product line sells at a lower average price than siding. And ColorPlus is kind of flat in our mix now, so we're not getting help from color on price, which we would have thought we would have gotten a little bit. So we got some work to do there as well. Now, you know we don't sell color in the same way every market. In some markets, it's our standard product, and in other markets, it's just for certain segments, certain applications. So the mix on color can be somewhat what we're doing, and then somewhat where the geographic mix is going in the country.
So more to the north, you're gonna get more color as a percentage of the total, and that's gonna give you your help on mix. We didn't have that last year. As far as next year go, most of you know, we didn't take a across-the-board market increase on price in March or April. We did the review and decided to leave the prices where they were and stay focused just on the growth side. We think, you know, we've kind of gone through the whole equation again. We're gonna be flat, maybe down a hair. So, and the down a hair will be more the mix.
Maybe a little bit of a change in a few rebates here and there, but the main thing would be, we're not seeing a lot of help from mix next year. So since we have no increase, you start out flat, and you know, if it's down 1%, it's probably down for mix. Go to the next slide, which gives you a little bit on Asia Pac. Asia Pac had a good year, except for their Carroll Park startup. They ran over budget on that by about five million. It's obviously disappointing, but you know, it's a good line. We're gonna get very good unit cost off the line. I visited the plant on Monday. You know, I think we're now in...
We're not at full utilization in the line, but we're now in steady state on the line, so the financial impact on the line shouldn't carry into fiscal year 2017 to any real degree. But we did absorb an extra $5 million, plus we had planned for about $3 million, so it cost us about $8 million to start the line, and we haven't started to get any of the benefit of the lower unit cost yet. Other than that, I think the market trends are good down here. I know the market, there's a lot of concern about the overall market coming off. We're aware of that. We still think it's gonna be a good enough market for us to perform well again next year.
Philippines, we're gonna add capacity because, we're basically out up there, so we'll be adding capacity in the next year or so. In the meantime, there'll be some exports into some other markets in order to kind of meet our commitments to the customers in that, so that wouldn't be at a great margin when you're coming out of either Australia or, I think it'll be out of Australia. But again, it's not something that's gonna be negatively impacting our absolute results, but it might, from a margin standpoint, doesn't contribute much. So before I hand it over to Matt, summaries, kind of all good. I definitely think Europe will. Europe's small.
You all know it's small, but it had a bad enough year to where you could see the impact of a poor year. We'll get that back on track. The Windows business, I think, will do, you know, from an expense standpoint, a negative dollar perspective. We think it's about half of what it was this year, so that'll be an improved result financially. But more importantly, I think we're starting to prove out the business model there. It's still very early days, but we're kind of liking where we're at. US business good, better traction in the last two quarters. You can't measure PDG quarter to quarter, so we're always cautious. You really should let it run four rolling quarters, so I don't think we'll know for sure exactly where we're at on PDG until the November announcement.
But certainly in the business, we feel like we got some traction. I think the plants in the US will run well. They're a little tight right now on supply of all products. We're commissioning the Plant City line we built, you know, a year or so ago. That'll probably cost us maybe $2 million this quarter and maybe $2 million next quarter. But the capacity is needed to service demand in the South. You know, we haven't been that happy with our last two startups, so we're very focused on Plant City delivering a better startup result. Again, traction on PDG. We think all the plants will run well.
Freight's likely to be a little bit higher, somewhat due to inefficiencies and somewhat due to the market being a little tighter on basic trucking, flatbed trucking, but all in all, we see more of the same, some growth in the market, some growth against the market, and EBIT margins either in or in the high end or above our range. Okay, Matt, thanks.
Matt Marsh (CFO)
Morning. Thanks, Lewis. So for the group, fourth quarter group results, net sales were up 6%. As Lew said, we had higher volumes in both segments.
... higher price in Asia Pacific. Price was down a little bit in the fourth quarter in the North America and Europe segment. For the group overall, we had some headwind with the strong US dollar. You can see, gross profit was up about forty basis points. Overall, that's a combination of the isolated production issue that Lou talked about in the US, combined with the tail end of the Carroll Park startup costs, as well as the continued strong US dollar and the adverse effect that that's got on the pulp purchases for Asia Pacific. Adjusted net operating profit was up four. If you take out the impact of FX, it'd be up ten.
We don't talk about foreign exchange too much because we don't control it, and we don't think it matters. But you'll see in a couple of slides, in aggregate for the year, it had a relatively big impact. Adjusted EBIT was up 4%. Again, excluding FX, it'd be up 7%. Interest expense was up, obviously, as the debt level was higher year over year. So we had net operating profit in the quarter at 288. For the full year, we had net sales of $1.728 billion, up 4%. You know, a similar story, higher volumes in both segments, good price traction in Asia Pacific, flat price in the North America, Europe segment. Excluding the effect of foreign exchange, net sales would have been up 8%.
You can see gross profit margins are up 170 basis points. As we've said in each of the last three quarters, the U.S. plants had a good year overall, and the production efficiencies that we've seen there over the last 12 to 18 months, that really helped contribute to the gross margin expansion. That, combined with, we had a lot of the input prices going in the right direction in fiscal 2017, almost across the board. SG&A expenses were up. Here, you can see 4%. A little bit of FX helped offset that, so underlying SG&A was up closer to 6%. But you know, more, I'd say BAU, we're investing business as usual.
We're investing in, in the businesses, mainly in growth programs, marketing programs, and, and putting more feet on the street. So, that's what's driving the SG&A. Adjusted net operating profits at 244 for the year, on a reported basis, and on an adjusted basis at 243, compared to 221 a year ago. You'll see about a $7 million swing in, in other income. About three of that is foreign exchange. About two of that is interest rate swaps, and then almost two of it is a, a small gain that we took in the first quarter on the sale of the pipes business. Here's the foreign exchange slide, we've been showing for quite some time.
Down in the lower right-hand corner, if you're looking at the screen, you can see the impact for the year. So about a four-point adverse effect, if you will, on sales growth on a reported basis, and almost a five-point impact on the growth rate for adjusted net operating profit. So again, we don't think that it's material to the, you know, the overall value of the company or certainly anything that we're trying to manage on a day-to-day basis. But in the context of foreign exchange, the dollar was really strong this year and across the board on our major currencies, the euro, the pound, and the Aussie dollar, that had an adverse effect. US input costs, pulp, decreased by about 7% year over year. Cement prices were up last year.
We think they're gonna be up again, this year. The cement, overall, as a marketplace in the US, is, has got a lot of demand, more than supply, so prices continue to rise. You can see the utilities are down, so gas was down a lot, as you'd expect, as fracking dried up and, oil production stayed high. On both the industrial usage and the residential usage, gas prices, were low, quite a bit lower. We're not expecting that kind of reduction in 2017. Electricity prices were also down. Freight last year was down from pretty high levels the year before. That was largely driven by, fuel two years ago. Last year, a lot of the fuel prices came down, as many of you know, and so that brought freight prices down.
A little more detail on the segments for the fourth quarter. So you can see the North America and Europe segment for the quarter and the full year was up 4% and 19% for EBIT. As Lou said, the US only was over the 20%-25% EBIT margin range. It was at 26%. When you combine in the impact that Windows had, and FX and Europe, that drags it down to 24%, 24.5%. So it gets you into the upper end of the range for the segment, but the US business operating above the range. A lot of the dynamics in the North America business are very similar in the fourth quarter as they were to the first three quarters.
Freight was favorable, the plants performed well, with that one exception. Lower unit costs, volumes were good. A little bit of headwind with the SG&A, investments that we're making. In Asia Pacific, in local currency for the quarter and the full year, EBIT was up 10% and 8% compared to the prior year, mainly as a result of higher volumes and average selling price. Production costs, as I've said, were up, a combination of the US dollar impact on the pulp purchases, as well as to a lesser extent, in the fourth quarter, the Carroll Park startup.
But for the year, Carroll Park, as Louis mentioned, ran over what we had initially forecasted, and caused some year-over-year headwind for us. On R&D, I'd say very consistent in the fourth quarter as the prior three quarters. So for the year, we're happy where the R&D is. You know, very much on strategy. It continues to be in the range that we try to keep it in, as a percent of sales. On general corporate costs for the full year, more or less flat. The increase, any increase would have been as a result of higher stock comp. Adjusted effective tax rate for the year of 25.8%, so fairly close to where we had forecasted it to be.
Adjusted income tax expenses for the full year increased, primarily because of the mix, the geographic mix of earnings. We had income taxes, you know, were paid and payable in Ireland, the U.S., and New Zealand, as well as the Philippines, and in both Europe and Australia, income taxes aren't paid, and that's been, again, fairly consistent with prior quarters, due to, in Australia, primarily the losses associated with the deduction relating to the annual contribution we make to the fund. Cash flow was strong for the year, so operating cash flow is up 45%. Really three things. The underlying operating cash from the businesses was up almost 15%, so that was good.
There was a difference in the annual contribution, you know, in every other year, one year is higher than the other, and so there just happened to be a difference this year. It'll go the other way for this coming year. And then in working capital, we had some timing variances. You'll see, you'll see year over year some headwind, if you will, or some cash use in receivables and payables. Nothing to read into that. It just happens to be with the way the timing of the quarters closed year over year, and we fully expect that that cash will provide some nice headwind for us, or sorry, some nice tailwind for us for fiscal 2017.
Inventory bank came down quite a bit year over year, so that was a total source of cash by almost $55 million. We had built up some inventory two years ago, bled that down and inventory levels, as Lou mentioned, you know, the network's running tight at the moment, and so as a result, inventory levels are down a little bit. Excuse me. Lower CapEx, as you'd expect, year on year. Most of the CapEx that you see here and on the next page is maintenance CapEx. A little bit of the final fine-tuning that we did in Cleburne and the Plant City investments are reflected in the CapEx numbers, but that obviously was down on a year-over-year basis, and then you can see lower financing activities as well.
So here's some more on CapEx. For the full year, we spent $73 million. That's down from over $200 million the year before. You can see the mix. The green bar is maintenance, and the gray bar is capacity. The capacity related is primarily the Plant City and the Cleburne new sheet machines. So those are more or less completed. We are in the process of commissioning the Plant City machine and expect to start that up in fiscal 2017. The capacity expansion in Carroll Park, as you know, is done, and that line is up and running. You know, similarly on financial, the financial management framework, no real change to the framework. You know, it. We continue to start with overall strong financial management.
You may have seen we got upgraded in the fourth quarter from S&P. We're currently being reviewed as part of the annual process by Moody's, and you know, we'll see, we'll see how that discussion goes. No real change in that comes both a combination of all the programs in the business, research and development, sales and marketing, funding all the operating costs, maintaining the ordinary dividend, you know, so we are at the higher end of our dividend payout range for fiscal 2016, but you know, we very much remain committed to paying within that range, and then maintaining flexibility for sort of everything else.
So whether that's being strategic on the acquisition side or making sure we've got plenty of headroom, given market volatility and cycles, as well as additional returns when that's appropriate. If you see on the next page, no real change overall to the liquidity profile of the company. The facilities, you know, remain in place. We've got the revolving credit facility now for $500 million. We've continued to have the senior secured note of $325 million over 8 years. Balance sheet, I think, is in good shape. We had $170 million of cash at the end of the year. Four hundred and almost $6 million dollars in net debt.
Plenty of liquidity and access, given the accord in the event that we needed it, and we're certainly at the low end or the very bottom end of our targeted net debt to EBITDA range. You probably will note that we'll move around within that one to two times x range at various points in the year. There tends to be quite a bit of cash outflow in the first quarter of a fiscal year, related to the payment to the trust, primarily, so while we're at the low end, we'd expect to certainly for that to come back up here over the next 60 to 90 days. Couple slides on asbestos.
KPMG and AICF completed their annual actuarial review, and the report is available now on the website, so that's been completed for March thirty-one. The undiscounted and uninflated central estimate decreased this year, so down to AUD 1.434 billion, down from a year ago of about AUD 1.566 billion. The 8% decrease in the net present value was really three main things. The estimated future number of non-mesothelioma claims decreased, the lower average claim size, which I'll go through in a moment, as well as a lower projection on defense costs. Those were partially offset a little bit by Slater and Gordon regulatory change in the year.
You'll see a little bit of commentary in the report this year, where gratuitous services, those costs in the state of Victoria can be included in future claims. Overall, that impact wasn't, you know, was AUD 56 million for Slater and Gordon, but overall, the net present value down for the year. Last year, we made a contribution of AUD 62.8 million. We've made a total of 799 million since the trust was established, and in this July, we expect to make a US dollar payment of about $91 million to the trust. A little bit more detail on claims. So for fiscal 2016, claims received at AICF were 12% below the actuarial estimate and 13% lower than the prior year.
Claims reporting for mesothelioma were 4% lower than the prior year and just about on the actuarial estimate. So that's, I think that's a you know a good piece of news. They trended up from the actuarial estimate the prior two years, and so, being back on the actuarial curve, is a positive outcome for AICF. Reporting for non-mesothelioma claims were all down pretty significantly. You know, you can see down 31% from the prior year, 33% from the actuarial estimate, and that's across almost all the other claim categories other than meso. And then overall, good trends on average claim settlement size. So, across almost all disease types, the average settlement size is lower.
Nil settlement rates tracked below expectations, and large claims also tracked below expectations. So all that is positive. AICF's gross cash flow for the year was about $20 million, more favorable than it was originally projected to be. So, that's good. I think the AICF and the claims process seems to be in good shape. For fiscal 2017, Louis mentioned a number of these already. You know, we expect the U.S. housing market to be a lot like it was last year. So fiscal 2017, we're expecting it to be kind of moderate growth, below 10%, kind of 6, 8, 10%, somewhere in there. And most of the forecasts seem to be hovering around that.
So we've planned on US residential starts of about 1.2 million-1.3 million is kind of our planning assumption. That's off of a total North America, meaning US and Canada, res and non-res headline number, about 1.4 million. You know, we expect the EBIT margins in North America to be at the high end of the range for the year. You can see for Australia, we've got detached starts forecasted to be around 100,000. Obviously, that's a segment we play in more favorably than in high density. Then we expect New Zealand and the Philippines to also have a good, healthy market. So to wrap up, you know, overall, 2016, we think was a good year.
We had about a 10% increase in adjusted net operating profits, really strong operating cash flow for the year, up almost 45%. We’ve done a total of about $269 million of shareholder returns in the year, a combination of the dividends that we declared last year and then the dividend we declared in the first half of this year, plus the little bit of share buyback activity that we did. We did announce today our intention to do a $100 million share buyback as part of the fiscal 2017 program. With that, we’ll open it up for questions.
Emily Smith (Research Analyst)
Good morning, Lou. Good morning, Matt. Just a couple of questions from me, Emily Smith from Deutsche Bank. Just looking at your volume growth numbers, 11% looks like a pretty good number to me. I wondered if you could sort of clarify what that might have been on a like-for-like basis without the pull forward in the previous corresponding period. So wondering what the sort of real volume growth might be. And I guess bearing that in mind, looking into the Q1, you're obviously, while it was a tough comp this quarter, obviously a bit of an easier comp in the next quarter. Just wondering if you can give us a little bit of help there. And looking at your utilization, your plants, you obviously mentioned Plant City.
Where is your utilization sitting at the moment? And just finally, on PDG, you said November's probably when you'll know if you've been successful, but is it, would it be fair to say that the early signs are looking pretty positive, that you guys feel comfortable that you're back on track on that, in that PDG sense?
Matt Marsh (CFO)
Yeah. Okay, thanks, Emily. So the first question is kind of an order file question. We did have a price increase that had some pull-forward volume last year, so we felt the first quarter or the fourth quarter comp was gonna be a more difficult quarter to comp against in the first quarter coming up. And all that does remain the same. So we definitely had a stronger volume quarter in the fourth quarter than we were expecting, and our order file right now looks pretty good. So we would expect to comp well against first quarter numbers. What that means when you put them together and you know kind of figure out, well, put them together, then you don't have to worry about the price increase and all that.
That's what I said, you know, we're pretty happy with the number. The market, we have different views on the market, even internally. I think it's just a little bit better than it was, and then others think it's pretty much the same as it was. So if you put all that together, that's why I say we kind of aren't declaring that we're back on the PDG curve we wanna be on, but we do believe we have traction, so the market might be growing a little bit better. If it is, obviously, we're getting that benefit, but we definitely feel we're getting some benefit and traction on the PDG side.
Utilization, the way we calculate our utilization on a gross hours basis, so we still have some plants that don't run twenty-four/seven, and we have some lines that don't run twenty-four/seven. So the number's not, the overall number's not-
Louis Gries (CEO)
... not really the issue right now, it's certain product categories getting a little bit tight. And one, probably the most significant one is Plant City, I mean, HLD, which is our Hardie line in the US South, and that's why we need the Plant City line up. Now, when the Plant City line comes up, it'll produce products other than the HLD, or we'll get more capacity beyond just the HLD. But that's why we're tighter now from a product standpoint than we are from an overall capacity. Our overall capacity is probably still in the seventies, so we're not bumping up against an overall capacity issue. And I guess I covered the PDG. Yeah, you really want four quarter rolling. I think it's definitely too early now, but we're feeling better.
You know, probably by August, we'll either confirm. Yeah, we were right in feeling better, and we don't know what the exact number is gonna be. But it's gonna be, you know, up from what we had this year, which was only a couple points on the exterior products. Okay. Yep.
Andrew Johnston (Director)
Thanks. Andrew Johnston, CLSA. Just a couple of questions around geography, Lou, if I could, around the US. What trends are you seeing across different parts of the US? And then secondly, on those US margins, I think you mentioned that it would have been 26% without the Europe issue, without the FX issue, and is that also without the $7 million plant issue as well?
Louis Gries (CEO)
Yeah, that was with the seven mil.
Andrew Johnston (Director)
With seven, okay.
Louis Gries (CEO)
Yeah, we ran twenty-six, and we could have run a little bit more than that in the U.S. if we didn't have that production issue. As far as geography, I know you're specifically interested in Texas, and Texas is fine. Houston, a little bit off, Dallas, real good shape. Most other markets in South Texas are in good shape. Our volume in Texas is up year over year, so we sold more in fiscal year 2016 than we did 2015. And some of that's PDG, but even our market index is slightly up in Texas. I don't know how the Texas market has held up to the oil price reduction as well as it has, but it's done pretty well.
As far as other parts of the country, you know, I think everyone's back in a growth, you know, position, you know, Midwest, Northeast, South, you know, Southeast, Mid-Atlantic, Pacific Northwest, California, and obviously, some are hotter than the others, but when you go. We did do this earlier when we were working on our PDG analysis. It really balances out to almost being meaningless for our company. We're participating in all the markets, and the variance between markets isn't great enough to really impact our growth rate. The U.S. housing market, although it's low by historical standards, has been good from a year-to-year improvement.
Andrew Johnston (Director)
And then how about the Northeast? Because you were particularly targeting vinyl and the Northeast, and we saw some ridiculously high numbers for vinyl volumes in the first quarter.
Louis Gries (CEO)
Yeah, I think we had some ridiculous numbers up there as well, and that was just a monthly variance thing. I don't know why at the same time we had a bit of a spike, they had a bit of a spike. But again, we track the VSI number. We do look at, I mean, we look at the public companies, the ones that give us the information. You know, we were able to correlate pretty closely with our reduction in PDG, pretty well timed to a slowing of the rate of decline in vinyl siding. And right now, if you bring that forward six months and say, "Okay, you think your PDG is better? Do you think vinyl is doing worse?" You really can't declare that either.
They have an okay trend. They went through a softening, and then they kinda have an okay trend right now. Believe me, if you're investing in Hardie, you're investing on the basis that vinyl is gonna continue to decline, and we're certainly of that belief. We think we're seeing it, but you can't look at short-term numbers and always pull it out exactly. Especially monthly numbers, you just can't do. Again, whether it's Hardie sidings, vinyl, we always look at everything four-quarter rolling. You know, when we were talking to you in August, we didn't like, or even in November, we didn't like the four-quarter rolling.
We like the four quarter rolling better for the three categories than we did either in November or August.
Andrew Johnston (Director)
Great, thanks.
Peter Steyn (Division Director and Managing Director)
Thanks, Louis. So Peter Steyn, Macquarie. Could you perhaps just give us a bit more of a sense and a background on the issue with the plant?
Louis Gries (CEO)
Yeah, yeah, I can. I mean, we're not gonna give you all the details, and we've decided to not tell you which facility, just to embarrass the facility any further. But yeah, it was just a management mistake. It was a breakdown in the management system. We made product that shouldn't have been made, and we had to rectify the situation, and it cost us about $7 million.
Peter Steyn (Division Director and Managing Director)
That's obviously at the EBIT line?
Louis Gries (CEO)
Pardon me?
Peter Steyn (Division Director and Managing Director)
That's at the EBIT line.
Louis Gries (CEO)
Yes. Cost of goods sold, it's in, right? Yeah.
Peter Steyn (Division Director and Managing Director)
Then perhaps just the second question around costs. How are you seeing the cost environment, specifically in the broader pulp context, over the next period?
Emily Smith (Research Analyst)
... some views on that?
Louis Gries (CEO)
Yeah, I do have views, but Matt's would be more informed. His guys work on the numbers, so I'll have Matt run through that for you.
Matt Marsh (CFO)
Yeah, so for, like we said, for last year, obviously, pulp was down compared to the prior year. We think for fiscal 2017, we don't necessarily know if the forecasts are right, meaning the external forecasts. I think a lot of them are calling for it to come back up. We're not seeing that yet. We continue to sort of see it down to flattening, so if it goes back up, you know, it'll sort of go back up or flatten back out, so we're expecting pulp for the next year to be pretty similar to the pricing that we're seeing now, and then we'll just sort of see how it plays out. Obviously, that's on the U.S. dollar side.
For as long as the U.S. dollar stays strong, that'll continue to have an adverse effect on how we purchase it in Asia Pacific.
Andrew Scott (Financial Advisor)
Matt, Andrew Scott from RBC. Just, Lewis mentioned the possibility of adding capacity in the Philippines. I think that market's bumping up against utilization. Can you just give us some guidance on what the spend might be and the timeframe on that?
Matt Marsh (CFO)
Yeah, we're just starting to, you know, to go through the approval process. We've gone through the approval process, so we're just starting to go through the projects process. I think it'll be in the, you know, $20 million range, is what that line and incremental, you know, facility costs will end up being. We'll do most of the construction work over the next 12 to 18 months, and then start to move into a commissioning, you know, phase right after that.
Andrew Scott (Financial Advisor)
Is that plant with a view to purely servicing the Philippines market, or do you look either broader afield, maybe within Asia or specific product categories that maybe come down here?
Matt Marsh (CFO)
Yeah, it's primarily the Philippines. I mean, they also service. They do some export business, and we've constrained that business, the Philippines business, on the export side. Particularly this year, we took a little bit of their capacity out of exports in order to fund the internal market. That's just a, you know, that's a higher return sale for us, obviously. And it was a way for us to manage the capacity of that plant and maximize the returns while we were in until we get the new capacity on board. As the new line comes on over, you know, let's call it 18 months from now, we would obviously allow them to start to ramp back up the export sales.
But the main reason for doing the capacity expansion is because the Philippines market's quite good, and that team's getting good traction there, and that business is getting good traction in the market on its equivalent of PDG.
Andrew Scott (Financial Advisor)
Thank you.
Louis Gries (CEO)
Any questions on the phone?
Operator (participant)
Your next question comes from John Hind of Merrill Lynch. Please go ahead.
John Hind (Non-Executive Director)
Good morning, Lewis and Matt. Congratulations on a good result. Just a quick one, a couple of quick ones from me. Perhaps if we could talk about the strategy around the buyback program, please. Obviously, you didn't get through much at the last one, and the share prices weren't at $19 then. So, I mean, what is the thinking around that? How should we think about, I mean, how should we be thinking about it?
Matt Marsh (CFO)
Yeah, you probably won't believe me until we actually do it, I don't think is probably what you're really thinking. So, I mean, obviously, we changed a couple things last year. You know, one, I was trying to shift away from special dividends. I think we've done that. I think there doesn't seem to be an expectation at the moment on the special, and I think that's a good thing. That's in line with what we're trying to do on the balance sheet and from an overall capital allocation standpoint. Two, historically, it's the last several years, we've announced up to 5% of issued capital as the share buyback program, and obviously, that'd be a very large number.
This year, what we're trying to do is announce a number that we're actually gonna go do. That's the reason that we've announced the $100 million. The other thing I'd say is, you know, we intend to actually go do it. It was a strategy all along, a year ago, when we moved away from specials to go to share buyback. Step one of that was to get away from specials, and then step two is get to a quantum and then actually go execute on the quantum, and I think now we'll go do that.
So, I'm hoping over the next three to six months that we'll execute on the share buyback, and either the next time that we're talking or certainly next time that I'm here, you know, we won't be talking about whether or not we're doing share buyback.
John Hind (Non-Executive Director)
Okay, thanks. And, Lewis, I think you mentioned some PDG program tune-ups, this quarter. Can you perhaps give us some color on what was involved there? I mean, are they, are they ongoing, and, what do you think the, I guess, the net impact can be, please?
Louis Gries (CEO)
Yeah. You know, I think on our PDG, if you look at the story over the last year, I think as we started to focus on doing some other things right in the business that either had financial returns or the HardieBacker growth, the concerns about LP trying to grab a me-too position in our category, all that work kind of distracted us from the main PDG work of, you know, positioning Hardie against vinyl, you know, kind of with our market development models that we've developed over the last 10 years. So, I think it's just really reemphasizing the need to be running the vinyl as well as we do these other things that are also important to the business. And, you know, I think Ryan and his team in North America have definitely made that shift.
And, you know, market development, you know, isn't like sales development, where you walk into the door, you talk to a customer, and you walk out maybe with a few extra orders. Market development is, you know, it's changing behaviors in the market you're participating in, so it takes a little time to see the results. We get some early indications. Obviously, we see commitments and conversions before we see volume, so our early indicators are definitely ticking up for us, so we're pretty happy. Now that's all about everything I said there was mainly about new construction in vinyl markets. Our programs in R&R are, have been performing well. They probably softened a bit as far as the conversion rate in R&R for a while. We really didn't have to do much to kind of reemphasize that.
There was a little bit of analysis required on the new construction side, not so much on the R&R side. We've got the people. We've added people into the business. We've structured it a little bit differently to where we get the right amount of attention on the exterior products and vinyl, in particular, and still get a good result in interior. They're now running as separate organizations, which I think is helpful. It's just kind of that stuff. It's just tuning up your organization, resource allocation, you know, just all the normal stuff you're supposed to do. You know, we just lost a little traction, and we're trying to get it back.
John Hind (Non-Executive Director)
Thanks. Just one more on, I guess, the new and R&R split. Was there much of a change this quarter, and how's it gonna look, how do you think it's gonna look in FY seventeen?
Louis Gries (CEO)
Sorry, I missed the first part of the question.
John Hind (Non-Executive Director)
Sorry, the your traditional split between R&R and new volumes are, you know, normally it's sort of your forty, sixty.
Louis Gries (CEO)
Yeah, sorry about that. We're growing in both segments, so it probably won't change radically until there's a change in market demand. Meaning when next time we run into a housing recession. Right now, we're growing in both segments. R&R is, you know, bigger than new construction, especially now, because, you know, even though housing starts have improved for several years in a row, they're still not at the, at the, what the quote normal level is. But yeah, we're doing well, and we're doing well in both segments. I'm pretty satisfied where we're at. Now, new construction, we talked a little bit about mix.
As new construction grows faster than R&R, which it does, say, R&R is growing four to five now, and, say, new construction grew six to eight, maybe last year, I don't know. What happens is we sell more CemPlank because, in the South, our new construction brand for big builders is CemPlank, which does have a different price point than our Hardie brand. So that was one of the mix things I was talking about. If we get another year, we believe, where new construction grows faster than R&R, and that just naturally kind of pulls your average price down a little bit. Forget-
John Hind (Non-Executive Director)
Great. Thank you very much, Lou.
Louis Gries (CEO)
To tack it on to that question. Okay.
Operator (participant)
Your next question comes from Andrew Peros of Credit Suisse. Please go ahead.
Andrew Peros (Director)
Good morning. Thank you. Just a question around windows and the European business. Obviously, still having a negative impact on margins. Just wondering, how long do you think that will continue for before it starts to have a positive impact on the margins there?
Louis Gries (CEO)
Yeah. So, with windows, we're looking for a new, you know, a new product line for Hardie. It's, you know, obviously not fiber cement. It does touch our fiber cement model in that it has a similar, customer and value proposition in the R&R market. But it's spinning for a large return down the road, okay? So going into the initiative, we knew we were gonna lose x million dollars for the first... and the answer to your question is the first three years, we think it's gonna run negative EBIT.
Those negative EBITs will reduce significantly this year, and then in fiscal year 2018, the way we've got it drawn up right now is they'd reduce again or possibly go away, or by, by sure, the following year would be somewhat positive. So it's all expensed. There's, you know, so you're seeing everything. You're not seeing a bunch of capital spending and everything behind the scenes on windows. All you're seeing is expense. It's not super big dollars for what we're trying to do. I think I don't know if you guys know that that runs under Mark Fisher. As Mark Fisher has international, and he has non-fiber cement, so that runs under his non-fiber cement responsibility. That team is separate from the U.S. business.
We did that specifically, so we wouldn't be paying an opportunity cost in the U.S. business as we tried to start up a windows business, and like I said, we had a little bumpy start. A few things were harder than we thought they were gonna be. Took us three, four months to sort out some of that stuff, but over the last six months, we feel like it's a well-controlled initiative that's kind of giving us what we want to see in the market, and it's also kind of giving us the contribution margin at the unit level that we're looking for, but that contribution right now does not cover the fixed cost in the business, so that's how you end up with your loss.
But we are a positive contribution on the, on the windows we're producing and selling at this point.
Andrew Peros (Director)
Okay, can I ask a question around US volumes slightly differently, and I appreciate it, it might be a little bit hard to answer, but just wondering how much of the volume improvement that you saw was attributed to possibly the mild winter months that you saw over you know the last quarter. Yeah, just kind of get some thoughts around that.
Louis Gries (CEO)
Oh, mild weather? Yeah, the weather's not bad. The weather's not bad. We don't talk about weather, and I guess we're only the exception when it's bad. We don't talk about it, but we don't talk about it when it's good either. But yeah, I wouldn't have a way of guessing. I think you'd see it in starts, completions. I think you can pull that out of the U.S. data. Obviously, we don't think it's driving our numbers. So it's not like the northern markets are on fire because everyone's, you know, built through January and February when. Yeah, we just haven't seen it. But you can get it from the, you know, U.S. builders. You can get it from the data on completions.
But I don't have any specific information, like a couple % came from that or whatever. But the weather's been okay this summer. It hasn't been one of the bad ones up north, so. Sorry?
Andrew Peros (Director)
Okay, thanks.
Operator (participant)
Your next question comes from Keith Chau of JP Morgan. Please go ahead.
Keith Chau (Executive Director)
Oh, good morning, Lou and Matt. A couple of questions from my end. The first one, Lou, just revisiting the mix impact in the coming year. I was just wondering, you know, there are a few of your larger customers being the larger home builders or the end customers, suggesting that first home buyer activity is actually coming back into the market, and a few of the larger guys are shifting their mix of product from move-up into the entry-level buyer. Is that likely to have a further effect on mix in the years ahead, or do you think, you know, the shift from the move-up buyer to the entry-level buyer isn't gonna have too much of an impact on price?
Louis Gries (CEO)
Yeah, no, it's a good question. So when we weren't, we clearly weren't happy with our PDG, we tried to kind of go through all the arithmetic. I already mentioned we went through the geographic mix, but we also went through the housing mix as well. And just to remind everyone, when we're selling against vinyl, we're gonna be much more biased to the top. So in the Midwest, Mid-Atlantic, Northeast Canada, we're gonna be biased toward the top, and that's where our market development programs are basically run. When we're selling against hard siding, then we're gonna go all the way through the market. We're gonna go multifamily, starter home, first move, second move, semi and custom. So it doesn't affect us nationally when one, say, the top is better than bottom or vice versa.
It doesn't affect us nationally, but it does affect us in the northern markets. Having said that, it's not enough to worry about. It's not enough for us to change what we wanna do, and I don't think it's enough for investors to think, you know, this is gonna be better than I thought, or this isn't gonna be as good as I thought. 'Cause I think in the end, you know, it's gonna level out at some point where, you know, either the country continues to spend more on housing or less on housing, and it'll settle in at a basic terminal opportunity of whatever it be, X or Y, and then we're gonna... Our 35% against that is gonna give you a big number. It's still gonna give you a big number, whether it's X or Y.
And as you go through the business cycle, it changes, and we don't adjust much. So we don't. Most of you know, when we went into the downturn, we definitely moved resources off of new construction and put them on R&R. So that kind of a big shift we would make if we had a similar situation. But we wouldn't say there was a forecast out that starter homes were gonna lag the market for the next seven years. We wouldn't pull resources off starter homes because our position in each of those categories is, you know, kind of what adds up to being our value in the end. And there's always gonna be enough starter homes, you know, first move, second move, customs. There are always gonna be enough that we're gonna wanna target it with our resources, so.
So I wouldn't worry about it. I can't remember what the trend is right now. I've heard, you know, over the years, I always hear these trends. And I'll be honest with you, when we sit down and talk every month or so about how the month went, it's never the wrong houses are being built. It's we did the wrong things, okay? So we didn't do things as well as we wanted to. Okay?
Keith Chau (Executive Director)
Okay. Thanks, Lou. And just a follow-up question, you know, perhaps on some of the issues that you have gone wrong or that you've mentioned. You know, on the cost side, there've been a couple of issues on the manufacturing front, some, you know, a bit more systematic, you know, being the manufacturing issues over the past kind of year or two that have now been resolved, some more sporadic, like the management system issue that you've just had. Are there any internal issues, or sorry, internal processes that you put in place in order to prevent or, I guess, a risk mitigation strategy to prevent these issues from occurring? Because it seems as though, you know, for each year, there's a cost issue, you know, at some point during the year.
Louis Gries (CEO)
That's not a bad comment. I don't know if we just tell you about our issues or other people don't have issues like we have every eighteen months, twenty-four months. It seems like, you know, we're gonna lose a ball mill in one place, and then this thing wasn't so much equipment related, and then we lose a ball mill in another place. And so, so I'll have to admit, as good at manufacturers as we are, it's kind of irritating. Having said that, whenever we get in a situation like that, we do the root cause, and we try and shore up our programs, both at the plant level and the oversight level. So we've certainly done that with the most recent event. Will it never happen again? I doubt. I think we'll have some bumps in the road.
I mean, the manufacturing story's pretty interesting. Matt kind of alluded to it. When you look at the level of manufacturing efficiencies we're getting in the US business, and to some extent, prior to the startup at Carroll Park in the Australian business as well, we're on a steady improvement curve on manufacturing efficiencies, unit cost, waste generation, machine utilization, you know, delay time, time between runs. All that stuff's good. And then you have these bumps, you know, where all of a sudden, you know, you have an episode you shouldn't have had, and it costs you a fair amount, enough money to where you gotta explain it, or I think you gotta explain it.
Yeah, I can't guarantee you we wouldn't have another one next year, but I do believe that our organization is kind of learning the lesson that, you know, you can aim. We like to say step change. You know, when you bring a plant from running, say, three hundred million feet a year, and, you know, that same plant, three or four years later is running four hundred and fifty million feet, you know, that's step change. Okay? But you can't just do that. You gotta do the incremental continuous improvement and have all the systems in place that make sure you don't have the bad events. A ball mill blows up on you. They don't literally blow up. They just stop working.
Ball mill goes out on you, or the type of situation we had recently. So we just gotta build it in. It's gotta be a tighter management system on the manufacturing side, and that's both at the plant level and the oversight level. So I think, you know, Ryan, who has US responsibility, and Mark, who has Asia Pac responsibility, are committed to kind of making sure we get that in place. But, you know, it's like Matt says about his buybacks. Coming off a bad event, I'm not gonna tell you we're never gonna have another one, you know? So you're gonna have to track us for a year, two years, and then say, "Okay, I haven't seen any of that stupid stuff happen. Maybe they got it right." Mm. Okay, what else?
Keith Chau (Executive Director)
Thanks very much, Lou. Very helpful.
Operator (participant)
Your next question comes from James Rutledge of Morgan Stanley. Please go ahead.
James Rutledge (Research Analyst)
Thanks, and good morning. I just guess firstly, just circling back to your earlier comments about backer board being a drag on average price mix. I guess you're implying there that backer board's growing faster than your overall volumes. I assume that's market share shift, given you're also saying that new construction is growing faster than R&R?
Louis Gries (CEO)
Yeah, new construction is growing faster than R&R. Backer board, actually, as it turned out for the year, it was ahead of exteriors most of the year, and then I think it pulled pretty even with a good exteriors quarter in the fourth quarter. So what you used to see year on year is exteriors outgrowing backer, so we'd get some price improvement because of the exteriors outgrowing backer. Last year, as it turned out, they grew almost the same, so you got no benefit of that mix difference. It basically stayed even. But, yeah, CemPlank would be up in the South because, not because of the percent of CemPlank, but because of the segment was bigger relative to the R&R segment.
I already covered a big pull-up from ColorPlus, because you basically produce no more board, and you put a lot of value add on with the paint, and we didn't get that last year, so that was another situation. Some of that is, like I said, geography, but some of that, meaning we didn't grow as well in the North as we wanted to. If we did, we would've gotten a price improvement through mix. But you know, some of it's just, even in the North, we're not growing color as a percentage of the total as well as we'd like. So that's one of the areas Ryan and his guys are working on.
James Rutledge (Research Analyst)
Okay. That's great, thanks. Where would your market share be currently at backer board?
Louis Gries (CEO)
Was it market share? Is that what the question?
James Rutledge (Research Analyst)
Yeah.
Louis Gries (CEO)
We'd be, I don't know if we get that shown. I don't know if we get it. He says no. We'd be the biggest producer of backer boards in the U.S. So you have basically three types of backer boards. You have fiber cement, which we would have 99 point something. You have glass mesh boards. When you add them all together, the glass mesh boards would have a higher market share than fiber cement still, and we still, like last year, we would have taken some market share from fiberglass mesh boards. And then you have some gypsum kind of knockoff boards that don't have a lot of share.
And then I guess you have DensShield with the glass mesh, which is, category that's probably growing because the patent came off, so now several manufacturers have that technology, not just one. So the long story is we have a very good position. It's by far the largest in the industry, but we also see, fiberglass mesh cement boards are and should give up share in the future, and we think we're the natural taker of that share. So we think we'll grow it more, even though we're currently the biggest.
James Rutledge (Research Analyst)
And given that you, you're seeing good growth rates return after, I think it was two years ago, where you took the large price increase, do you have any plans for price increases, more modest price increases over the next twelve months in that product?
Louis Gries (CEO)
Yeah, 12 months, you're probably getting in a window we'd look at again. So, as far as this year, there may be a little tune-ups of pricing, you know, product lines, specific markets. But, we wouldn't take an across the market price increase. You know, and I don't think we'll look at it until. I'm talking exteriors here, you know, maybe December, January for implementation, and maybe February, March, but I'm not saying we take it, okay? This is, you know, as investors and managers in a company, sometimes you aren't 100% aligned on every little point, and this is an area that management doesn't feel the same anxiety about as some of our investors do.
We think we need to price based on long-term penetration of our product. We're not necessarily annual takers of price, okay? We like our margins. We like our market position. What we really want to do is grow. Now, a lot of times, obviously, you can take price and grow. That's an ideal situation, and we just felt like this year we'd be giving up some of the growth to get the price, and we didn't think that was a good trade-off, so I'm not saying we'll raise our price in 12 months, but I am saying we'll certainly look at it, as we do every year, and then consider whether we should take price or not.
And it'll depend a lot on our growth rate and the competition within the hard siding category.
James Rutledge (Research Analyst)
Okay, that's great. I just have one other question around SG&A. It looks like you've increased in the U.S., specifically within the March quarter, by about $5 million, which is quite a ramp-up compared to the other quarters. Do you think you've hit most of the kind of current run rate of investment in SG&A, or do you think there's further to go there?
Louis Gries (CEO)
Yeah, I think Matt might be closer to that than me, so.
Matt Marsh (CFO)
Yeah, we definitely stepped up the level of investment in the fourth quarter. Most of that was in labor costs, and most of that was in sales labor. We've got additional market and product programs that we started to ramp up in the second half of the year, and I'd expect that to continue, you know, through at least the early part of fiscal 2017. Most of the investment's going directly into commercial-facing, you know, programs and sales and marketing and product and segment-oriented program and personnel that all should, that we believe all should drive growth in the future. So, I think you saw a good-sized bump in the fourth quarter, and you should expect that it'll continue to grow a bit.
and it certainly won't flatten out in at least the first half of fiscal 2017.
James Rutledge (Research Analyst)
Okay. Thanks, guys.
Operator (participant)
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Matthew McNee of Goldman Sachs. Please go ahead.
Matthew McNee (Managing Director)
Thanks, guys. Just a couple of follow-up questions. Louis, just firstly on Carroll Park, you said it had an $8 million impact. So all things being equal, you know, heading into 2017, you know, you should get $8 million higher impact there?
Louis Gries (CEO)
I think that's a, that's a fair assumption. That would be my assumption, but I haven't, I haven't specifically talked to the Australian business about, about that, but I'm sure that's their assumption as well. So we, we-
Matthew McNee (Managing Director)
And that's before, obviously, you've got the actual benefit of the, having the plant as well.
Louis Gries (CEO)
Yeah, no, we'll start getting that benefit this year. I don't think that benefit will kick in for the full year. So, you know, we'll start seeing lower unit costs and lower freight costs as we bring more products up to the new line. But, you know, like you said, on account benefit, if we spend $8 million on a startup and we don't have a startup this year, we should start with that $8 million. So you and I see it the same way.
Matthew McNee (Managing Director)
Yeah. And just on the windows loss, is it 10 million thereabout, or is it closer to 10 and 5 for the full year?
Louis Gries (CEO)
Is it closer to 10 and five?
Matthew McNee (Managing Director)
Yeah.
Louis Gries (CEO)
It's a game show, or?
Matthew McNee (Managing Director)
No, well, just trying to get a bit more info on that magnitude, because I think you said it was-
Louis Gries (CEO)
It's. You, that's not a bad guess. So it's between those numbers, and I think we'll have it again this year.
Matthew McNee (Managing Director)
Closer to that one.
Louis Gries (CEO)
So you can see if between those numbers and we have it this year, then it's becoming not such an issue for U.S. business results.
Matthew McNee (Managing Director)
I say, sorry, just to clarify, so it'll be similar loss this year in 2017, maybe half in 2018, because I thought you said before that you thought it'd be close to breakeven in 2018, positive in 2019.
Louis Gries (CEO)
Yep.
Matthew McNee (Managing Director)
The loss would maybe halve this year.
Louis Gries (CEO)
I think you're trying to confuse me with all these years, but-
Matthew McNee (Managing Director)
Yeah, sorry. So this year.
Louis Gries (CEO)
2016, we just figured, and, you know, you win the prize because you picked two points that we were in between. And then my guess is we're gonna have our EBIT loss and run the business the way we want to, so we're gonna do all the market work we want and have our EBIT loss. And then the following year, I think, you're either getting very close to breakeven or you're at breakeven by the end of the year.
Matthew McNee (Managing Director)
Okay, that's a lot-
Louis Gries (CEO)
Just to give you an idea of what goes with that, it's kind of doubling up of units. Okay?
Matthew McNee (Managing Director)
Okay.
Louis Gries (CEO)
So we did X number of units, and we're looking to double that this year, and we're looking to double again. So I think it's a good plan, but believe me, we're learning that part of the market. We wouldn't be good at it yet. We're good at a few things. And we have to build a capability. But again, you guys know how Hardie thinks about this stuff. We if we're gonna have another big category, like backer boards or exterior in the US, you know, we want it to be a category that's gonna generate good profitability. So you can't go buy a $500 million revenue business and get that. They just don't exist in the US market. So we're gonna try and grow one.
In order to grow one, you basically start with zero capability. We bought, you know, we bought a parts manufacturer, and we bought a windows assemblers, both very small. And we're now into the early stages of what we were, you know, like U.S., in the early 1990s, when we were trying to figure out how to make and market fiber cement in the U.S. market. And, you know, you go up a capability curve, and we're going up that capability curve in windows. It still looks like a good opportunity to us. Our assumptions entering, you know, or launching the initiatives are mainly being proved out. We don't have any that are like showstoppers, oh, we didn't think about that.
Some of you guys know that we were in fiber cement pipes for a while in the U.S. That's a good example. We hit a showstopper a couple of years into that initiative, and we saw, man, we didn't. We should have known that a couple of years ago, but we didn't. Well, we're not quite a couple of years in the windows, but almost of our assumptions have proven out. Now, there's no guarantee that we're gonna be a big window producer. There's no guarantee that we're gonna be as successful with the initiative, but we're doing a good job kind of exploring how you build a business model around fiberglass windows and generate, you know, returns that are well above our WACC, so our investors will be happy with it, and the scale is there in the end.
So, um-
Matthew McNee (Managing Director)
You're more confident than you were 12 months ago?
Louis Gries (CEO)
Yeah, I mean, just because of time, you know... In other words, you know, like I said, a lot happens in that first year, and nothing really bad happened. We didn't stumble on anything that said, "Hey, we had this thing wrong, we can't do it that way." So, so far, so good.
Matthew McNee (Managing Director)
One final question from me, Louis. Last year in the U.S., you talked about your manufacturing efficiency program and talked about getting about 10% more products from the, you know, same number of plant hours. Putting aside what happened in the fourth quarter in that one plant, can you give us a bit of an update on, you know, how progressed you are through that 10% target? Are you halfway there? Are you pretty much seeing all the benefits?
Louis Gries (CEO)
Yeah. I mean, when you see Ryan, I think you're gonna see Ryan tomorrow in Melbourne, I'll be with him, but, you know, he'll tell you, he's probably almost all the way through the 10%, and now he's looking for more. So, we're you know, Matt kind of covered it. We're on a good trend line in manufacturing. We've definitely figured some things out that it kinda unlocked some of the potential of our, you know, the approach we take to high throughput, low cost, fiber cement manufacturing, and of course, the value add piece with color and a few other things now.
Matthew McNee (Managing Director)
So again, putting aside all the, you know, uncontrollables like pulp prices and cement, you know, like for like, would you expect to get lower manufacturing costs in 2017 than 2016 just because of that manufacturing improvement?
Louis Gries (CEO)
Yeah, if everything was normalized, we probably got a $4 million startup. So if all your input costs are normalized, you got a $4 million startup. Do I think we have $4 million worth of improvements? Yeah, I would say we do. Now, you may not see it, depending on product mix and plant sourcing and all the rest of it, but we'll definitely have that as my... Well, I shouldn't say definitely, I can't guarantee it, but that would certainly be our expectation.
Matthew McNee (Managing Director)
Okay, no worries. Thanks.
Louis Gries (CEO)
Yeah.
Operator (participant)
Your next question comes from Kathryn Alexander of Citi. Please go ahead.
Kathryn Alexander (Director)
Hi, guys. Just a couple of questions for you. Firstly, on primary demand growth, I know in the past you've articulated a short-term target of 5%-7%. I'm just wondering, can you confirm, is this still the case? And approximately how long do you think it is before you could realistically end up in this range?
Louis Gries (CEO)
Yeah, our target's six to eight, and I think we'd be able to tell you if we're in that range in November.
Kathryn Alexander (Director)
Okay, great. And just a last one, probably one for you, Matt. Can you just provide some CapEx guidance for 2017?
Matt Marsh (CFO)
Yeah, I think for the next couple of years, and not just fiscal 2017, but probably for 2018 as well, you know, we'll primarily be focused on maintenance CapEx. We've obviously got the Plant City line that we're commissioning this quarter. We've got a Cleburne line that we're just about finished construction on, and we'll commission that. So we've got the capacity and the network in the US, so we don't see over the next couple of years, the need for a brownfield, greenfield per se. Obviously, that's all subject to market demand and market penetration.
We'll have the capacity expansion in the Philippines, which we've talked about, and with the Carroll Park facility in Australia, we feel like we've got adequate capacity taken care of for Australia, the Australian market. So I think you should think about fiscal seventeen primarily being a maintenance CapEx type year, with levels that look similar to fiscal sixteen levels, you know, again, kind of plus or minus. So if we are around that $70-$75 million mark, you know, and you put a small range around that, that's probably the level that you should expect for fiscal seventeen.
Kathryn Alexander (Director)
Okay, great. Thanks so much.
Operator (participant)
There are no further questions at this time. I'll now hand back to Mr. Gries for closing remarks.
Louis Gries (CEO)
All right. Thank you. Appreciate everyone joining our results call. Appreciate it. Bye.