James Hardie Industries - Q4 2019

Transcript

Jack Truong (CEO)

Good morning, everyone. Welcome to our Q4 fiscal year 2019 earnings call. Thank you for joining us today. I'm Jack Truong, the CEO of James Hardie Group, and with me here today is Matt Marsh, Group CFO. And both of us will share with you the results for fiscal year 2019, and then we're gonna share with you where we're going with our strategy and the status of our strategy. So, firstly, on the agenda, we'll have. So I would briefly go over the operating review of the company in the fiscal year 2019, and Matt will come up and share with you in more detail on the financial results of the quarter and also the year.

And I'll get back up and really share with you the progress of the three-year strategy that we shared with you three months ago, where we are relative to the execution along that three-year horizon. And then we'll end with the Q&A. Now, let's move on to our group result of fiscal year 2019. I'm very pleased to announce that this is the first year that we, as the group of James Hardie, crossed the $2.5 billion mark. And what is even more significant is that we now operate in three major regions around the world, North America, Asia Pacific, and Europe.

And the discussion today will be a lot more in-depth about those results in our three regions for the whole fiscal year 2019, because this is the first year that Fermacell results are in our results for the whole fiscal year. So if you look at our year in review, North America delivered improved PDG, although it's below expectations. So if you look at our PDG for fiscal year 2019, we were north of 1% relative to a PDG of -2.5%, a year before.

And, our interior business is still a challenge, and it is something that we'll be discussing with you some more on what are the key strategy that we are taking to really fundamentally revert the course of the interior business. Now moving on to Asia Pacific. Australia and the Philippines continue to lead the way in gaining market share, both in market share and category share. So at the end, we continue to deliver growth above market. That continued also into Q4 of fiscal year 2019. Our European business. This really met our expectations. This is a full year of Fermacell being part of James Hardie Group. The team really performed well, delivered the financial that met our expectations.

But equally important is that the team has really done a nice job of integration into James Hardie. And during the course of the past twelve months, together with James Hardie teams from Asia Pacific and North America, the team in Europe has really done a nice job of really understand what are some of the unmet opportunities in Europe for where we can then use our fiber cement technologies to come up with those fiber cement products, specific for the European market, for the European channel and end users. And I'm gonna share a little bit more about the update on that in the strategy section.

We for fiscal year '19 we continue to be challenged with the input costs continuing to go up, particularly in the third and fourth quarter. This is always important for us as a company that we focus on lean manufacturing to mitigate the effects of rising raw material costs. Again, I'll share with you the status of where we are with that journey. Through just like in the past, we continue to be very disciplined in our capital allocation focused primarily in organic growth. That's where we provide the right capacity for our continued growth toward the Thirty-Five/Ninety in North America, as well as growth of our markets in Asia Pacific.

And of course, just to make sure that we continue to focus on our core business and get our business back on track on the growth of our markets, we also decided to exit the windows business. Now, let's move on to North America. You can see that the housing market demand was soft in the second half of the fiscal year 2019. Despite that, you know, our exterior business grew above the market, showing improvements from the prior year. As mentioned before, our volume was up 4.7% in the fiscal year 2019 for the exterior business.

That's been a little bit offset by the soft performance in the interior business, where our volume was down by 4.4% in fiscal year 2019. Of course, the mix of exterior business is a lot bigger than interior in our North American business. Our EBIT margin really came in to around 23%, which is really within the target range. Really, despite the inflationary trends across key input costs, it is really about our ability to be able to pass on price as well as manage our costs and performance in the plants.

and to make sure that we continue to gain momentum, the Commercial Transformation and Lean Transformation are really underway and is beginning to gain traction in our business. Now let's move on to the Asia Pacific results. Now we continue to deliver excellent top line results on the softening market across the region. As we look at fiscal year 2019 for the region, our volume grew 10%, and that translated to about 11% in revenue growth for the year. And so our growth is really driven primarily through Australia and the Philippines throughout the whole year.

And that's really driven by the fact that we have been really focusing a lot on primary demand at the end user, the builders and contractors, while at the same time, we were also enhancing the James Hardie value through our channel partners to ensure that we have the right go-to-market strategy to drive demand and then be able to convert into sales in a more sustainable way. And again, we have mentioned that we continue to gain market share of fiber cement against brick and also against wood and plywood within the region. And within the fiber cement category, during this past fiscal year, our business in Australia, as well as in the Philippines, that we continue to gain share against other fiber cement producers.

Our EBIT and EBIT margin was significantly impacted by input cost inflation within Asia Pacific. So we had quite a bit of inflation in raw materials, as well as the fact that, within the region, we pay our fiber as well, a key raw material in U.S. dollars, and with the devaluation of the Australian dollars, that's added some headwinds in our business in Asia Pacific. Now let's move on to Europe. Again, for the total year, the team really did a nice job of delivering top-line growth of 7% in euro, and that translate to a pro forma EBIT growth of 36% for the year, and it's really about growth of the core business of Fermacell.

That's the fiber gypsum across Western Europe, particularly in Scandinavia and the U.K., and also in Switzerland and Benelux. And also, the team has spent a lot of time during this past year to really done a lot of very good market research to understand those unmet needs and really come up with the right product portfolio that will continue to develop for the European market. And I will share with you one of those products in the strategy section a little bit later. Our EBIT margin is really not so came in with expectation for the whole year. The team delivered a 10.6% margin, which is what we had discussed with you about a year ago.

So with that, I would like to hand over to Matt, who will go into more details about our financials in the Q4 and fiscal year 2019, and I'll come back up and discuss the strategy. Matt?

Matt Marsh (CFO)

Thanks, Jack. All right. Good morning, everybody.

Jack Truong (CEO)

Good morning.

Matt Marsh (CFO)

Okay, so I'll take everybody through the financials for FY nineteen in the fourth quarter. Overall, a good financial performance last year, especially considering the significant inflationary environment that we were in on most of our raw materials and freight costs. As Jack already talked about, our North America business continued to see momentum on the exterior side, on growing above our addressable market. Asia Pacific had a really good year, on both market share gains and category share, across the Asia Pacific business. Overall, we are very pleased with the Fermacell result in year one, with the pro forma results that we should- Jack shared with you earlier, and I'll take you through in a bit, and the integration very much remains on, right on track.

So we're very pleased with where we are a year into that business. And then, we've fully exited the windows business, which I'll take everybody through, where we stand on those transactions. For the year, we are reporting adjusted NOPAT of $300.5 million. We had capital expenditures last year of $301 million, primarily consisting of the capacity projects that everyone's already aware of, but I'll give everybody an update on those later in the presentation. We declared a second-half dividend of $0.26 per share.

We had talked throughout the year about being in the lower end of our 50%-70% dividend payout range for as long as we're above our leverage target, or above our leverage target, I think, as many of you know, as a result of the Fermacell acquisition. So we've, you know, correspondingly, come down a bit in the range. The range hasn't changed at all. It remains 50%-70% of Adjusted NOPAT. We're just down in that range in comparison to a year ago... as a result of being above the leverage target, and when I get to the capital allocation framework and the financial management policy, I'll talk more about that. Okay, so four key results.

For the group, net sales were up 19%, largely because of the Fermacell acquisition. That business has been in the result for the whole fiscal year, so of the $99 million of increased sales, almost $90 million of that is a result of Fermacell. In North America, we had both higher volume and net price, higher volumes strictly in the exterior business, and price across the segment, and then higher volumes in the Asia Pacific business, which I'll take everybody through when we get into the business results. Gross profits were up 10%. Gross margin rates were down almost 260 basis points.

What you're really seeing there, for the most part, is the inflationary cost pressure, mainly pulp and freight, that we experienced in Asia Pacific and North America. Adjusted net operating profit was down 9%, largely due to the North American and Asia Pacific segments, which were down 8% and 22%, respectively, and we'll get into those dynamics. Those were largely input cost and freight related. For the full year, net sales were up 22%, very similar dynamic as what I talked about in the fourth quarter, so of the $452 million increase year over year in net sales, $332 million of that was a result of Fermacell. North America, same story in the full year as the fourth quarter. Both price and volume were up year on year.

Asia Pacific had very good volume growth year on year. Gross profits were up 14% for the full year. Margins were down 230 basis points. So what you can see in the fourth quarter is the margin compression a little bit more than the full year. As Jack mentioned, the input costs were greater from an inflationary perspective in the second half of the year than the first half of the year, and you're seeing that in the margin compression. When I talk about input costs later, we'll talk about kind of where we see those now and what that may mean for the upcoming year. Adjusted net operating profit increased about $9 million. It's a combination of Europe Building Products, our Europe business, and our North America segment both increased for the year.

Okay, so for North America, a slight improvement in PDG, as Jack indicated. We think we're, we were above about 1% PDG on a market that we think was a 3%-4% type growth market, in terms of our index. So an exterior volume for the quarter of about 3.5% growth. For the full year, almost 5% growth, 4.7%. The interiors business was down nearly 10%, for the quarter and down about 4.4% for the full year. Price was, you know, was right about where we thought it would be for the year. You can see that it's up 3%, for the full year.

I think that's right around where we had been talking about for most of the year. That was largely a result of our strategic list prices changes that we do annually every April. You know, I'd say tactical pricing is very much kind of on track and where we expected it to be. Full year EBIT of $382.5, which was flat compared to a year ago. Really, the dynamics there are higher volume and average net sales price, offset by input costs, largely, and freight. Here's a chart I think that everyone knows fairly well. The red dotted line indicates our stated margin range of 20%-25%. You can see throughout the year, we remained right inside that range.

The 23% was right in the middle of our range, largely in the middle of the range at this part of the cycle because of the inflationary environment that we were in last year, and the significant headwinds that both pulp and freight, as well as some of the other input costs, but those were the large two drivers, resulted in being in the middle of the range. Okay, speaking of input costs, you know, pulp was really the story last year. It remained at a very elevated level. I think it peaked sometime around October, November. It is down in comparison to October, November, so where we saw pricing in March and where we see pricing today, it's definitely down 3-4%, but still up year on year.

So it still remains at a very elevated level. We're starting to see the gap widen again in the spot market, and in the contract market, which is an encouraging sign. Those two markets had basically closed to being, you know, the equivalent pricing, so the spot market had basically evaporated. We largely buy off of a US-based index versus the China-based index. So for those of you that follow pulp, you know that the Chinese spot market has definitely come down quicker than the US market, and the US market is declining. But last year, pulp, for the market, prices were up almost 12% year on year. We buy better than the 12%, so we didn't, you know, experience 12% cost increase in pulp.

But nonetheless, pulp prices were up pretty significantly for us. Gas, cement, were up for the year, as well. You can see electricity was about flat. Freight prices came down in the fourth quarter, which is encouraging. They were very elevated in the first half of the year. I think when we spoke in February, I had indicated we were starting to see some good signs in the market, that the freight market was coming back, and you know, three months later, we're continuing to see that. So it certainly looks like the freight market is returning to a more reliable supply-demand equation. Asia Pacific very strong volume.

You know, volume sales volumes were up 10% for the year, 7% in the quarter, so a great result for the Asia Pacific business. Both in Australia and the Philippines, the APAC business overall had good market penetration, gaining category share and market share last year. So, even though the underlying addressable market was softening throughout the year, the overall growth and market penetration remained quite strong. You can see that, their EBIT growth was adversely impacted on a US dollar basis by the strengthening US dollar. On a local currency basis, it was down 2%. The difference between, kind of the de-leveraging, if you will, between sales growth and EBIT growth is really two dynamics. There's input costs.

We buy much of our pulp in Asia Pacific, in US dollars, so you get kind of a double impact. You get the strengthening US dollar on top of the rising cost of the contract and spot rates in the marketplace. And that was the primary driver. And then as we had talked about, I think, throughout the year, last year, New Zealand manufacturing continued to underperform, and that showed up in the result to some extent. When you go through the three main businesses in Asia Pacific, Australia, a great growth story, market penetration and category gains in that business. We talked about EBIT already. In New Zealand, very good growth for both the quarter and for the full year.

In addition to the input costs, we had manufacturing that was operating at the lower end of its operating band for most of last year. That performance is starting to stabilize now, although throughout the year, it showed up in the result. In the Philippines, good volume increase driven by market share gains, so overall good market penetration. Higher input costs, and we did have some non-recurring items in that business, as well as we started up the new manufacturing line, and those results show up in the full fiscal year. Okay, so for the Europe segment, the overall increase is obviously driven by Fermacell. The price you can see year on year looks is on a reported basis, down.

I'll just remind everybody that fiber gypsum sells at a significantly lower price than fiber cement. And as a result of the mix towards a business that's largely fiber gypsum on a year-on-year basis, the pricing metric reports down. Net sales in euros were up 7% for the quarter and the full year on a pro forma basis. And the margin rates, excluding the non-recurring costs, were right in line with where we expected them, 10% and 10.6% for the full year and a little over 11% for the fourth quarter. We had $3.5 million of integration costs in the fourth quarter and $18 million of integration costs for the full year. In addition to that, we had $6.2 million of inventory fair value adjustments that were reported during the fiscal year.

And we included those results, obviously, in the segment, and then provide transparency in the EBIT excluding line. The other business was our windows business. We made that decision and announced that, I think, at the November discussion. The execution of the exit of that business has gone pretty well. Last year, we had $30.9 million of EBIT losses in that segment. That included about $6 million of operating losses and $24 million related to the discontinuation of the business. We think all those charges are fully run through the P&L at this stage. The Beechworth business was wound down, and the our pultrusion business we went through a selling process, and that business was successfully sold in April of our fiscal 2020.

So you'll note that it's still in the results in the March 31st period, but you'll see that that sale transaction got completed in April. So both the Razor and the Beechworth assets are largely, you know, fully off the balance sheet at this point. We're gonna do some liquidation of some of the remaining assets in Beechworth, but the book values is basically zero on those. So here's a summary of the product line discontinuation. In addition to windows last year, we discontinued the MCT business, which was one of our trim lines. You can see all of that activity on MCT and the discontinuation of certain ColorPlus SKUs as a result of our Win with Color strategy.

Those charges were all in the second quarter of last year, and then the windows business came in in kind of three separate quarters. The bulk of that we took in the second quarter of last year. We did additional write-downs in the third quarter, and then as we went through the selling process on both of those businesses and the outcomes were more clear, we finished things up in the fourth quarter. Research and development, we reported $29 million of costs associated with research and development last year, roughly flat to where it was a year ago and roughly in line with our 2-3% as a % of sales.

Our general corporate costs for the year were roughly in line and flat to where they were a year ago, so $57.3. You see a little bit of variation quarter to quarter, as we had some legal items related to New Zealand weathertightness that created some quarter-to-quarter variation. Year on year, I'll just remind everybody that we had a non-recurring gain a year ago, included in the fiscal 2018 result of $3.4 million, that was associated with a building that we had in our Fontana, California, manufacturing location that we sold. And then I'd say the normal, you know, variation and volatility that you get in stock comp gets reflected on a quarter-to-quarter basis.

But overall, as a general corporate cost, we're right in line with where we thought they would be, and roughly flat to about a year ago. Income tax, we reported 14.8% adjusted effective tax rate for the full year. That's pretty in line with what we had talked to in the last result about, and at the half year result. The decrease in the adjusted income tax expense is driven by an adjustment that we made related to ongoing accounting treatment for amortization of intangibles. That's very consistent, no change with the last couple times that we talked on that. And as a reminder, our income taxes aren't currently payable or paid in Australia due to the losses associated with AICF and our contributions to it.

We reported cash flow from operations for fiscal year 2019 at $288.4 million, down 2%. I'd say the decrease in other assets and liabilities and working capital was, I'd say, normal quarter-to-quarter variation, so nothing of a concern there. The net cash outflow due to working capital, again, was just quarter-to-quarter variation, no real consumption of working capital that we expect to be a feature of the result. The higher investing activities was obviously as a result of Fermacell and closing that acquisition and funding it in Europe, on top of the capacity expansion related CapEx within the year that I'll provide more on the next slide on.

So we spent a total of $301.1 million on CapEx last year. That was up about $97 million in comparison to a year ago. The projects, I think most of you are well aware of, there are three main projects in North America: the Tacoma greenfield, which we expect to have completed the startup of that in the early part of our fiscal 2021. Sorry, in early part of our fiscal 2020. The continued construction of our Prattville manufacturing location that we expect to complete and commission in the early part of fiscal 2021, so next year, next fiscal year. And then the continued expansion of our ColorPlus product line. We were opportunistic and bought a piece of land and some buildings in Massachusetts during the year.

At some point in the future, we'll also put some ColorPlus manufacturing capability there. And so those are the three main projects that drove the spend in North America. Asia Pacific had two main projects. We completed the capacity expansion in the Philippines, and we're in the middle of the Carroll Park brownfield expansion project. Both those projects are very much on track. Within our financial management framework, the overall framework hasn't changed. You know, we obviously start the framework with wanting to make sure our businesses are performing at expectations. We're an organic growth company, and so we're looking to grow top-line results above our market index on volume and be modest price takers, overall having good margin rates in the business.

With those in place, and we're working hard to get the strategy to you know, to continue to produce results that are more in line with both our and your expectations. Our top capital allocation priorities remain the same, so no change on that. We fund all the organic growth opportunities first. Those largely come in the form of R&D and capacity expansion, as well as funding sales and marketing OpEx. That remains our number one priority. The ordinary dividend remains our number two priority. That is very consistent. We're committed to the 50%-70% payout ratio. We obviously operate within that ratio based on where we are with the balance sheet. We were opportunistic last year and bought a very good business with Fermacell.

That put us above our target debt range of one to two times Adjusted EBITDA for a period of time that we think at the time was roughly eight to ten quarters. We're about halfway through that period now. We're right on track with our balance sheet and overall capital management. So we like where we are. We think in about a year and a half we'll be back under the two times ceiling again. And as a result you can expect that we would then start to come back into the range where and over time back to where we were in that range. But we're still very you know very much in the range. We're committed to that range.

I'd say our balance sheet strategy is very much on track. As I mentioned earlier, we closed the year with about $79 million of cash, $1.3 billion in net debt, and about $340 million of available credit facilities in our revolving credit facility. No change in the corporate debt structure. We reported 2.4 times net debt at the end of the year, and that's right where we expected it to be and right on track to get below two in about another 4-5 quarters. As many of you know, the fourth quarter result also includes the annual update of the KPMG actuarial study that AICF commissions KPMG to do annually.

So that was updated as of 31 March and is reflected in our result. The undiscounted, uninflated estimate decreased to $1.4 billion from $1.443 billion in the prior year. That was a combination of the net cash outflows of AUD 142.8 million and a slight increase in the actuarial estimate for the year. Total contributions in our fiscal 2019 results were AUD 138.4 million or $103 million in the US.

Since the time that we established the AICF back in 2007, the company's contributed approximately $1.2 billion into the fund, and we anticipate that we'll make a $100.9 million contribution this July as part of our annual funding commitment. The $100.9 million represents the 35% of our free cash flows for fiscal year 2019. A little bit on the claims. For the full year, claims received into AICF were 8% below the actuarial estimate. They were approximately 1% higher compared to the prior year. So overall, a good outcome there. Claims reporting during the full year for mesothelioma were 4% lower than the estimate, 5% lower than the prior corresponding period.

So also a good data point in a claims trend. Average claim settlement for the year were 24% below the actuarial estimate. It was largely attributable to the lower average claim settlements for non-mesothelioma claims. In summary, for the financial section, so a good financial performance given the dynamic environment that we were in on the input cost and inflationary side. Higher net sales in North America and in Asia Pacific. Both of those segments grew the top line market penetration and category share gains, and a really good top-line outcome and business outcome for the Asia Pacific segment. A really positive first year for JH Europe.

We like where we are a year into that result, and we remain committed to our capital allocation priorities and working within our financial management framework, so with that, I'll hand it over to Jack, who will take everybody through a strategy update.

Jack Truong (CEO)

Thanks. I better read that.

Matt Marsh (CFO)

Okay.

Jack Truong (CEO)

Thanks, Matt. Okay, so let's go to the next slide. So we confirm that our long-term value creation for James Hardie Group is about in North America, 35/90 is our North Star. It and it's really about driving growth above markets with strong returns. 20%-25% EBIT margin, and that's our North Star. Europe is really about creating a EUR 1 billion business with a good Hardie-like return for the long term. And for APAC, it's really about making a good business to continue to be better, and that's about deliver growth above markets with strong returns in a 20%-25% EBIT margin. So that's...

With that being the strategy, we're really about. That's about the objective. So what we really want to talk about now is what is our key strategic priorities that as a company globally that we need to focus on to ensure that we fulfill that long-term objectives? And so this is the three-year strategic priority that we shared with you three months ago, and I'd just like to give you an update on where we are. And so in North America, it's all about accelerate exterior growth. It's really all about making sure that our marketing and sales team drive the penetration of the total exterior solution that James Hardie has in the marketplace.

And that is about driving the panels, planks, the Hardie panels, Hardie plank, Hardie trim, Hardie Soffit, to really provide that total exterior solution that allows homeowners to have the low maintenance and the durable with flexibility in designs. And I'm gonna show you a little bit later on how we bring that to life through the Win with Color program to drive category share growth. Second, in North America, it's really about how do we continue to transform ourselves to deliver continually lower and lower unit costs and better quality?

And that is about transforming us from being a world-best fiber cement producer into a world-class manufacturer through lean transformation, and I'll give you some updates on where we are with that. Third, which is an area that we will begin to have a lot more focus on, and that is to make the interior business a growth business again. And that is gonna be a key focus for us going forward. For Europe, it's really about, you know, we acquire Fermacell, it's really to give us that strong footprint in Europe, with strong channel access, as well as closer to the markets with the builders specifiers, so that we can build a more meaningful and profitable fiber cement business for the long term.

We're gonna continue to gain traction in our current fiber cement products, as well as continue to develop and launch fiber cement products for the European market. But on top of that, we gotta continue to drive growth in our base business, which is the fiber gypsum business. With the James Hardie manufacturing know-how, this is where we'd like to apply a lot more of the capability to our European plant fiber gypsum, to continue to unlock more capacity and drive more of the unit costs reduction, so that we can enhance our EBIT margin for our European business, as well as provide additional cash to invest in the market development.

Asia Pacific is really about continue to improve on our playbook that's been successful. And that is about investing at the end users, as well as through the channel to provide the push-pull effect that's been effective for us, and take lean transformation to the next level and continue to learn and then share the best practices with what's going on in North America. Now let's move on to give you an update on lean transformation in North America. It is off to a very strong start. It is that we are...

We confirm the targets that we have shared with you three months ago, and that is to deliver $100 million in cost out savings over a three-year period from the fiscal year 2020 to fiscal year 2022, and the implementation of the lean concept is really beginning to take a strong hold across all of our plants in North America. Our employee engagement is very, very high, particularly in plants where we executed the we call it the Hardie Manufacturing Operating System. This is really the way that we run our plant, based on lean.

So wherever that we roll out to our plants, which is in Waxahachie, in Peru, into Pulaski, in the past three months, our employee engagement in those plants have been very high. The consistency of production has been very, very good, as well as the variability in how we produce our products, and throughput has really been reduced significantly. And through this whole process, you know, we have built a central organization of lean manufacturing experts, as well as appoint key manufacturing team members within our plants that become lean change agents. So through that organizational capability that we begin to drive a lean culture through the network of plants across North America.

Our goal is to have, by the end of the year, fiscal year, that all of our manufacturing plant employees in North America are completely trained in lean. So that we can begin to drive a lean culture throughout manufacturing organization. I'd like to share with you this chart on the bottom right of the page here. So this is the actual cost, the unit cost per standard feet across the network of plants in North America. And this is without taking out the depreciation, tax, and insurance, and freight. So really, the real manufacturing cost of producing our products. If you look at the highest point here, that is the unit costs of our products in December of last year.

That was about the time that we really started the lean journey within North America. You can see that since March of last year to December, our unit costs have been going up. A lot of that is really in the raw material cost increases, but also there's some of the lack of plant performance in the lead-up to December. Our team started to drive and really build an execution of lean manufacturing through our plants. You can see that we start to have the lower unit costs in a more consistent way during the past four months.

And if you look at our April actual unit cost, it's about in the same range as May of last year. So it's really good to see that it's not only that employee engagement is high, but it also produce the result that we intend to do with lean. But again, lean is a continuous process. It's a continuous improvement that is a never-ending journey. It is an area that at least we know that we're making the right decision, the right focus the organization in the right direction, and now we gotta continue to drive that improvement across our network of plants.

Now, let's move on to our North American acceleration of exterior growth. So for us to get to 35/90 for short, mid, and long term is all about first that we have to convert vinyl homes into fiber cement. And really, what it takes to make that happen is about to Win with Color. It's about our ability to deliver fiber cement in many different type of colors that would allow the developers, as well as the builders, to build homes with different aesthetics and different designs that would differentiate them from other builders and developers, but at the same time provide a low maintenance and durability to the homeowners.

Just to give you reference here, this is the development in the Nashville, Tennessee, that we were able to convert this development from vinyl into fiber cement. And you can see also here, this is about a $300,000-$400,000 per home development. To the left side is what we call the statement color, which is really the core groups of colors that we produce every day that the market can buy from us. And then on the right-hand side are these part of the more than 700 different colors that people can order from us. We call that the Dream Collection.

And you can see that by doing that, together with having our HardiePlank, HardiePanel, HardieTrim, and HardieSoffit, that we're able to provide that complete exterior look that looks very, very nice and allow the builder to differentiate their development versus others. And on the right, bottom right is this a development in the outside of Boston, Massachusetts. And it's a roughly $700,000-$800,000 home area that and then we're able to convert from vinyl to our Win with Color program with the HardiePlanks, HardieTrim, and Hardie panels.

So this is really about the what, is really what we would use to continue to develop our business against vinyl, to really drive that category expansion, a market expansion. And really, that's the what, and this is really the how. The how is really about the commercial transformation that we shared with you back in February. That is, traditionally, in North America, we have been focusing a lot more on to continue to convert new builders, but we haven't really put a lot of focus on the channel and how to create more value with the channel while we create demand. So that's what we call the push-pull effect.

This is really the transformation, our commercial organization that need to happen to make sure that we can have a more repeatable, more sustainable capability to drive growth above market. So as we create demand, and that need to translate into sales for us through the channel. And then the key part of that is really about, for us, we gotta be easier to do business with. And it's important for us to set up the organization within the channel that has the capability of really be able to to show and demonstrate that our channel really make more money by selling our products versus others. So our sales team structure has been in place.

Our key sales leaders have been hired, and so is the team, the talents have been continually filled within the organization. So the commercial organization, it is a little bit tougher than the lean transformation because it's not within 100% of our control, and we have to convince our customers, as well as we also have competition that we have to deal with. But certainly, we're on the right track. Now, let's move on to give you an update on our European business going forward.

One of the key synergy that we saw with the Fermacell business is really about. Fermacell has the fiber gypsum boards, and that is the high-performance board to be for the interior use that is really one board of fiber gypsum can replace two of gypsum board or a board of gypsum and OSB. Because it has a multiple properties within one board, that is a fire-resistant, water-resistant, and acoustic reduction. And then, so with fiber cement, it is about the exterior. So our team at Fermacell, the former Fermacell, James Hardie in Europe, already have access to the specifier, the architects, and designer.

And this is the case where our team was able to that they have already had the penetration contact with the specifier to build this kindergarten in Brittany, France, which is in the northwest coast of France, which is where the temperature is on the extreme, next to the Atlantic Ocean. So it's a very, very good value proposition for our fiber cement, which is then. So you can see that this is a team who was able to build this new kindergarten with the James Hardie fiber cement panels and planks in the exterior, and then with the Fermacell interior wall for the inside. So that's a total solution.

And I'd also like to share with you the very, very exciting things really about for our growth with Europe to march to that EUR 1 billion for the long term. It's really about, yes, we gotta continue to grow fiber gypsum, but on top of that, we have to really build, develop new fiber cement product for the European market. This is really an exciting case because it's really leverage on our global capability. There is an unmet need in Europe about really about we call it the weather protection systems that for in Scandinavia and in the U.K. by the coast.

That in the construction, new construction or remodeling of homes or commercial buildings, that there is, there's that need to have a temporary sheath that that we attach to the frame, and it be before they need to put the cladding at a later date. And a lot of times, that can be up to twelve months. And so this was a need that really exists as a market opportunity for our teams in Scandinavia. And so they happened to have a meeting with our team in New Zealand, and there was a similar type of concept of product in New Zealand.

Then the team from Europe took that product and market tested it in Europe and showed that was pretty close to what the needs are, but they need to have a few other key requirements that we have to modify to meet the European market, and that is to have the fire resistance and also they have to survive up to twelve months in the elements, and have to be easy to affix to the structure, so that you can use staples or nails. So the team then passed on this product concept to our R&D center in California, and then the team worked to really develop the formulation, tested it, and then finally worked with the end users in Europe.

And then it was manufactured in our Pulaski plant in Virginia, and then finally shipped to Europe for sale. And that's it, it's start selling beginning this week, actually. So it's really a very good case of how we can leverage our capability at James Hardie around the world. And now that we have market access in Europe, to be able to grow our business in Europe with fiber cement developed for the European markets. And then fit for use for the European markets. And so this is really what are some of the key assumption that we have for our fiscal year twenty, and our market outlook.

In North America, we continue to affirm that there can be modest growth in the US housing. In fiscal year 2020, the residential housing starts will. Our assumption will be between 1.2 and 1.3 million homes. EBIT margin will be in the top half of 20-25%. Exterior volume will be at 3-5% PDG. Europe, slight housing market growth across our addressable market in Western Europe. We'll be introducing new fiber cement product for Europe this year, and so we expect to see EBIT margin accretion for our European business. Asia Pacific, the addressable housing market in Australia decreases this year. In fact, it's already happened.

APAC volumes will be 3-5% growth of our market. And, with the continued focus on the lean transformation in APAC, we also expect to see that our EBIT margin will be in the top half of our stated range of 20-25%. So with that, we'll close right here, and we'll open up for Q&A.

Peter Steyn (Division Director)

Thanks, Jack. Peter Steyn from Macquarie. Just a quick hone in on the commercial transformation aspects, and particularly your intent to be easier to do business with. You know, we've obviously seen a couple of movements in the channel just more recently, but could you give us a bit of a sense of where you're going in terms of or how you're going in terms of traction with further important channel partners, as well as the internal realignment of some of your sales plans and intent and people?

Jack Truong (CEO)

Yes. Peter, that's a very good question. You know, traditionally, James Hardie in North America, we have been focusing so much onto the pull side, which is at the builders and contractors level. And we haven't really made the strong effort to really engage with our channel partners in terms of how do we make it more easy for them to receive our products, to have the right pricing with our- with us, and how to be able to navigate within James Hardie company in a way that will get the right information for them to run their business with our products a lot more simple.

And that would center around the supply chain, synchronization between us and then, our channel partners, to be able to deliver our product to the markets in the right way. So it is an area that is a key foundational focus for us. As part of the Commercial Transformation, is really about adding that capability, what we call the key account management. And that is not just about the job of the salesperson. The salesperson is a quarterback, or the coordinator of James Hardie to the account. To where we would have the mirror image relationship between the top management of our big channel partners with us.

With same side from myself and then with Sean Gadd, and then our new head of sales, all the way down and then across the different functions, from sales, marketing, products, supply chain, and finance. So that is the structure that we're building right now to allow us to to serve our channel partners a lot better, and in a more significant way, so that allow us to continue to penetrate the markets.

Peter Steyn (Division Director)

And then perhaps just a quick follow-up on that. The disruptive aspects of that reorganization, has that been worse or better than what you have expected?

Jack Truong (CEO)

I think I think the I would say that the level of engagements of us with our channel partners in North America is has a lot of room to improve. I think it's more than I had expected. And so that's why it's important for us to really put a strong focus on the key account management. And that is a very and that is It take a different skill set, and it take a different focus to make sure that we manage that part correctly, while we gotta make sure that we continue to invest and deploy the right skill sets of the market development folks and the business development folks, to go and create new demand-...

for fiber cement, to the conversion against vinyl and wood and so on. So those are the two separate focus, but then management have to align those, the demand and then, and then the channel management together to ensure that we have create the sales from the demand that we just created.

Peter Steyn (Division Director)

And sorry, if I may, just a quick question then on lean. You've indicated that you've had throughput yield improvements and net available hours up, yet some cost per sq ft still stable. Presumably, that's largely a consequence of pulp prices, I assume. But can you give us a bit of a sense of what's happened at Waxahachie, Pulaski, and Peru in terms of unit costs, perhaps at a more granular level? Have you actually seen reductions there?

Jack Truong (CEO)

See, yes. So in the plant, particularly in Waxahachie and Pulaski, we actually have a really quite a step change in improvement in our unit costs in a very substantial way. In Peru, it's improved, but it's not improved at the level that compared to the other two plants yet.

Andrew Scott (Equity Research Analyst)

It's Andrew Scott from Morgan Stanley. Excuse me. Probably one for Matt, but Jack, happy for you to chime in. Just your guidance for particularly North America, top half of the 20%-25% range. I note that in the comments there, one of the assumptions is increasing input costs and input cost inflation. As you mentioned, freight's come away. It looks like pulp's turned the corner now. Is that just conservatism at the start of the year, or is there something you're seeing that we're not aware of, that's gonna suggest that we're still gonna see input cost inflation throughout the year?

Jack Truong (CEO)

Yeah. Yeah, let me add back to one component is that, it is, it's really more about, you can see that we have we launching the Win with Color program, and you see that we are we've, we're also launching our, our commercial transformation, which is gonna take, some, some of the investment to make, make sure that we're able to drive traction, to drive, to, to recreate the, the sustainable PDG. So that's, that's just why we are... That this, this point is a, is, is the savings that will allow us afford us the capability to drive, more, more sales growth or more PDG growth. Go ahead, Matt.

Matt Marsh (CFO)

Yeah, on input costs, before I get to your question, Andrew, I think I mistakenly said that pulp was up 12% for the year. Just as a correction, it was up 12% in the quarter, but for the year, pulp was up closer to 19% for the year, so sorry for that. On your question, pulp's definitely looked like it's coming off, but it's still pretty elevated, so on a year-on-year basis, it's still up. You know, if you looked at April-to-April pricing as an example, or May year-to-date pricing compared to May year-to-date pricing a year ago, it's still up. It's off of where it was a year ago, or sorry, it's off of where it was last month. It's off of where it was at the peak, but it's still pretty elevated.

But pulp's still trading on the RISI index at, like, thirteen hundred, which is still very, very elevated. So that result will sort of continue. There's an assumption that we will see a trend down in pulp, but I think I said that in February, and I think I said that in November, too. So I think, you know, I'm fairly cautious on the pulp market's ability to kind of forecast itself. We are seeing good trends, I'd say, over the last six to 12 weeks, but it's still pretty elevated. So that comment is much more around, does the trend follow, or does it stabilize at a really high level? And that would obviously have an effect where we would be in that upper end of the range.

But even, even when taking that into account, we still feel pretty comfortable saying that we'll be in the top half of our range for next year.

Andrew Scott (Equity Research Analyst)

Thanks, Matt. If I extend that to Australia, and I assume it's the same assumption, where are we gonna get the help in margin there, where we're coming right from, in this quarter at least, bang on the bottom end of the range to the top half of the range there, 'cause it is a meaningful step up?

Matt Marsh (CFO)

Yeah, on a year-on-year basis, New Zealand manufacturing will no doubt go from being, you know, a headwind in the result to a contributor to the result. That'll be significant. Keep in mind, we did have in the second quarter of our fiscal 2019, that one-off item in the Philippines. You take those two items, and you go for... You know, that has a pretty significant impact just with those two items. And then we're not forecasting anything on foreign currency, obviously, and we've got the same assumption, you know, for pulp, so that we have in North America.

Andrew Scott (Equity Research Analyst)

Matt, as we sit here today, obviously, we've had Fermacell integration roll through. We've had the business closures. As we look into 2020, are there any items you expect to take effectively below the line? And in particular, I assume you'll expense the strategic costs of delivering the strategic initiatives, et cetera. Is there anything we need to think about going forward?

Matt Marsh (CFO)

Nothing really below the line. We've got some additional Fermacell, you know, integration costs to go. I think those will be in the $5 million-$7 million range for this year. It's primarily associated with completing the stand-up in the back office. As you remember, Fermacell was owned by a private equity company, and we've had to completely stand up both the personnel and the IT infrastructure associated with the back office functions, and so we're probably about two-thirds of the way done with that, and there's some additional costs in fiscal 2020 associated with that. Nothing else. I mean, we think we're through the product line review and the portfolio review, so we're not expecting additional product line discontinuation costs.

I'm not expecting other items below the line in fiscal 2021 and fiscal 2020.

Simon Thackray (Managing Partner)

Thanks. Simon Thackray from CLSA. Jack, can we just start with the interiors market? Down 10% in the quarter. That looks like it's still moving away from you. Can we talk about the drivers of that? I mean, we've probably all gone through and seen the luxury vinyl tile taking some share, et cetera, and how much of this problem is a Hardie problem versus a market problem?

Jack Truong (CEO)

So good question, Simon. You know, it's in our interior business. I would say you know 80% of our market access is through the retail channel. And you know, if we're really about the fundamental in retail is really about position, placement, pricing, and promotion and products. So you know so essentially, let's talk about products. We have essentially two SKUs in the channel for a long time. And for us to grow in this category, we gotta have critical mass. And so really, it's important for us to really come out with new products and then continue to refresh our category, to make us as a destination within the retail channel for the contractors.

So that's the first thing. That's the one area for innovation that we're gonna focus intensely on. Second is more of the short term, and that is about placement. You know, our product today with the two SKUs that we have, we're not fully in the building material section of those two key retailers. We end up primarily in the tile section, where you have less traffic, and then you don't have the traffic or those heavy user contractor walk through there. So we have to fix that then, the placement. And then third is really about the positioning.

It's really about to make sure that our products are well positioned in the store, so that the contractors, that we can attract new contractors and be able to use our product in different applications. So, in summary, it's, you know, it's really about. I would say 75% of that is really within us, within our control, and 25% is really about the markets.

And of course, when you have a new product, like new category, like LVT coming in, it's really incumbent for a manufacturer to say, "Okay, if that's the case, what are we gonna do differently to make sure that we can continue to grow?" So those are the three key strategic actions that our teams are working on right now, and so that we can fundamentally improve the position for the interior business.

Simon Thackray (Managing Partner)

You've launched a new product, or at least at the trade level, the Aqua or Hydra, whatever it is. I can't remember.

Jack Truong (CEO)

Yes, HydroDefense.

Simon Thackray (Managing Partner)

Yeah, HydroDefense.

Jack Truong (CEO)

Yes.

Simon Thackray (Managing Partner)

So is that now, is that being rolled out?

Jack Truong (CEO)

Yes. So it is the product that we just roll out to the pro channel. Yes, as you know, that in the retail channel, it's really to cut into the planogram is do that once a year. Or, and so it's a. So we have to wait until the time that they change the planogram within retail to be able to launch that into retail. And, but that's just the first step. The other step is really about letting make sure now that we can come out with the new interior products that would resonate well with those unmet needs in the market here.

I think I mentioned at the last earnings call is that, our business, you know, 85% of our business in Europe is through interior business today, and 35% of our business in APAC is interior business. So there's a lot of know-how, a lot of the new product concept and opportunity that we can really now to bring together as a global team, to come up with those new products. So I'm optimistic about that capability.

Simon Thackray (Managing Partner)

Great. That's very helpful. Thanks, Jack. Matt, just a quick one on the asbestos, just a refresher. It's been a while. You're paying it 35% of operating cash flow. There was always an opportunity within the agreement for there to be step downs to 30%, to 25% over time. What are the requirements to get to that? Is that feasible to get a step down in the payment?

Matt Marsh (CFO)

Yeah.

Simon Thackray (Managing Partner)

Just saying, you've forked out $1.2 billion now, and you've made an acquisition, so the EBITDA's presumably gone up, and the free cash flow presumably goes up.

Matt Marsh (CFO)

Yeah. Over time, at some point, there'll probably be an opportunity for that to step down. The requirement in the AFA is that when the cash outflow from the fund is less than the annual contribution and cash inflow to the fund. When that occurs over a period of time, then we can start to take a step down in the contribution rate. So that it's a formulaic approach. I think it'll be some time still before, you know, that occurs. Certainly, the last couple of years are more positive trends, I'd say, with respect to cash flow, and last year was certainly a very good trend. But I think we're still a bit away before we see that.

Brooke Cameron Crawford (Financial Advisor)

Thanks. Brook Campbell-Crawford from JPMorgan. Just on the 3% volume growth in the fourth quarter, can you talk about how that progressed through the quarter, and if it continued into April? Also, how the order file is looking? Thanks.

Jack Truong (CEO)

Order file. The famous order file. You know, as you know, as we discussed last quarter, you know, it's really about... We look at our commercial transformation, it's gonna take some time. And we said back then, it would take us about six to seven months into a new fiscal year to gain traction. So at this point, I wouldn't expect our exterior growth to be materially different from what you see in the fourth quarter until around six months from now.

Lee Power (Equity Research Analyst)

... Lee Power, Deutsche Bank. Jack, can you just talk a little bit about pricing in FY 2020? I know there's a comment in the presentation you're satisfied about price positioning. What price increases, if any, have you got coming through?

You wanna take that, Matt?

Matt Marsh (CFO)

Yeah. Yeah, we think price in fiscal 2020 will be around 2%. So pretty similar to fiscal 2019, I think it was at 3%. You know, we didn't. We haven't changed our approach on the way we do strategic pricing. Same process, we're still value pricers. So that 2% naturally, we do through a series of product and region reviews, where we're evaluating our price position versus our commercial objectives. So there's a range, if you were to look at our product portfolio and our region portfolio, you'd see a range around that 2%. Last year, that weighted average ended up being closer to 3%. This year, the weighted average or fiscal 2020's weighted average will be closer to 2%.

So we're still pretty satisfied overall with where we are on strategic pricing. No, no real change on the tactical, you know, side. That 2% obviously includes a combination of the strategic price, plus what we think we're gonna do in tactical this year. And we're obviously trying to align both the strategic and tactical pricing to the commercial transformation that we're doing. But we're pretty happy overall with where price is, and we think it'll be around 2% for fiscal 2020 for North America.

Lee Power (Equity Research Analyst)

Thanks. And then just, following on from Peter's question around this, the changing approach to PDG in North America. Can you give an idea of, like, sales force turnover, if anything, and how that's been against your expectations as you've pushed this new approach into your sales force?

Jack Truong (CEO)

You know, probably the biggest part of the transformation we had was in the interior business. And, you know, we usually have roughly 80 sales professionals who support the interior business. The majority of them, of our team, is to actually call on to these stores across the country. And, you know, the business model has really changed with the big boxes. Really, those decisions to promote and to place products within them is already done in Atlanta or in Charlotte. So, what we did there is that we had to have over half of those folks so that we can reposition the business at the headquarters to really drive the account management.

And then, with the headcounts that we have, then we use that to really hire more of the market development and business development professionals who really go into to convert new business from vinyl into fiber cement. So that, that is the shift that we did to make sure that we can drive the demand, and then be able to drive the channel growth at the right points.

Lee Power (Equity Research Analyst)

Okay. Thank you.

Sophie Spartalis (Senior Research Equities Analyst)

Thank you. Good morning, Sophie Spartalis from Bank of America Merrill Lynch. Just following on from both of the questions on the sales force. You talked about key roles being filled. At last quarter, we heard about these hunters and gatherers. Can you just talk about 'cause that involved, I think, placement of people in different towns, and it was quite a cultural shift. Can you just talk through how that is going and how much of that process is complete?

Jack Truong (CEO)

Yeah. So, yeah, so just to be clear, is that the pull side, which is really the market demand that Hardie has always been very strong at in terms of create the demand for fiber cement over vinyl. And that is an area we actually reinforce with more capability and more resources so that we can drive that demand. So that's, that doesn't change. Not only it doesn't change, we just add more resources to it. And we also add more resources into the R&D. And that is an area that is a growth opportunity for us from the demand generation perspective. Where we enhance the capability of sales team is really create a focus on the account management, the key account management.

That is where we need the sales professional who really understand how to manage our customers in terms of how to provide the services and capability of James Hardie to our channel partners, so that they can make more money selling our products. That is the skill set that we continue to add into the company. I think I mentioned three at the last earnings call that we just hire a new head of sales for North America, and he report into Sean Gadd, who is the Chief Commercial Officer. And he's Johnny Cope is his name, and he's the one that now run the total sales organization in North America, with a strong focus on account management as well as in the market development.

And then we, within this organization, built the new organization called sales operations. This is really about the analytics. This is really about the sales training, to make sure that we have the right training across. This is about customers, the inside sales, price management, and so on and so forth. And that is the new capability that we also build within the sales organization.

Sophie Spartalis (Senior Research Equities Analyst)

Okay. So just in terms of that process, it seems to be still ongoing. Can you give us some timeframe as to when all that will be bedded down, and your sales function will be complete to the market?

Jack Truong (CEO)

So we'd anticipate within three to six months.

Sophie Spartalis (Senior Research Equities Analyst)

... Okay. And then just a quick follow-up question, just in regards to Asia Pac. You mentioned in your commentary that the market has peaked. You've got your guidance there decreasing in FY 2020. Can you maybe just talk through how much clarity you've got in terms of your order book here in Australia and Philippines, given they're your key markets?

Jack Truong (CEO)

We don't have the big visibility out into the order book as we would like, but in terms of how our teams are. We have a team that's very focused on the primary demand in the marketplace, so they really know what's in demand. And also, we have a very strong team that works with our channel, which is quite concentrated in Australia, quite well. So they do have a good sense of how the market is moving, and more about how do we continue to create more demand of our product through the channel and also at the builders and contractors. So it's a...

It's not a science yet, but it certainly, there's a good feel for how we are performing against the market. As you can see in the fourth quarters, our business in Asia Pacific continued to perform well at 7% growth in volume, and they couldn't get there without the growth in Australia.

James Brennan-Chong (Equity Research Analyst)

Thanks. James Brennan-Chong from UBS. Three months ago, when we sat here last, we talked about customer perception issues and customer retention problems that you were having. I think at the time, you talked about that was costing about three percentage points of PDG. Three months on, just interested to know, how has customer perceptions changed and where you are tracking against that, against your expectations? Thank you.

Jack Truong (CEO)

Right. I think back then I said that we probably have about 2%-3% erosion of our sales because we're not really managing that, our current customers. I think during the past few months, our teams from the top of the company all the way down that we have reached out to our customers from the CEO level down and met with them. And I think that was to be able to meet as top to top and mirror image as a team together. That really helped to reinforce to our customers that we at James Hardie would like to engage in a different level than we had in the past.

That helped, but of course, just with any customer relationship and management, we have to demonstrate it every day. Demonstrate with actions every day, until our customer would really believe that we are, we really made a change from being a lot more customer focused now, so it is a journey. It's not going to be something that you can change people's mind overnight. It is an area, as a company, that we have to change to be able to get there.

James Brennan-Chong (Equity Research Analyst)

Right. So I guess the target for three to five percentage points of PDG doesn't really assume that you get any more traction in terms of retaining those lost customers. There's no improvement that's upside, is it? Or is there actually some improvement?

Jack Truong (CEO)

I think first and foremost is that at least to start that would help minimize some of the erosion. And the next step is really about growth beyond that. That's a two-step process.

Matt Marsh (CFO)

Anything on the phone?

Operator (participant)

There are questions on the phone. Now we have a question from Peter Wilson from Credit Suisse. Please ask.

Peter Wilson (Managing Director and Co-Head of Equities Research)

Thank you. Morning, James. Just on North America, if I could first just clarify one of your answers to questions earlier, that you said it'll take six to seven months for some of the initiatives to gain traction, and hence you wouldn't expect growth to be above fourth quarter. That would seem to imply that in order to achieve your 3%-5% PDG target, that you're gonna have to be right at the top end of that range for the second half, right?

Jack Truong (CEO)

Yes. So we would anticipate that once we get our Commercial Transformation start to run, that we would see a stronger traction, yes.

Peter Wilson (Managing Director and Co-Head of Equities Research)

So that would be the next range, right at the top end of the range?

Jack Truong (CEO)

In the second half.

Peter Wilson (Managing Director and Co-Head of Equities Research)

Okay. And the last time we spoke, or the last time you reported, you sketched out, you know, illustrative ten-year plan to achieve that share growth. And a big part of that in the early years was to come from engineered wood. I appreciate in the early days that, you know, the numbers that you're reporting and that you've skewed this reporting don't really seem to illustrate that. So I'm just wondering, kind of how confident are you on that, and if there's any tangible progress you can point to there?

Jack Truong (CEO)

Can you repeat that?

Matt Marsh (CFO)

Yeah. It's Peter, just make sure I've got your question right. You're asking if our... The commercial transformation that we talked about in February, which showed a gain over the next ten years, along our thirty-five, ninety strategy, against both vinyl and wood-look alternatives, required kind of early gains by substituting LP, and your question is: the reported result for LP looks pretty similar to our reported results, so how does that statement compare to the most recent results? That's the essence of your question?

Peter Wilson (Managing Director and Co-Head of Equities Research)

Yeah, and apologies, I think the first part of your answer got cut off there. But I guess my question is, I mean, LP SmartSide Strand reported 8% volume growth in the third quarter, sorry, in the March quarter, and on a twelve-month basis, was well ahead of the numbers that you've printed as well. So it just doesn't, I guess, suggest that there's any progress, you know, in taking share off engineered wood.

Jack Truong (CEO)

I think, you know, if you look at the last twelve months, our growth rate between us and LP is about the same, I think about 5%. So, with that having said that, you know, it is for us to continue to march around thirty-five ninety. It is important for us to be able to take more share from LP. You know, it is a good competitor. LP is a good competitor. So, it is gonna be about execution of our plan and then to continue to adjust as necessary to make sure that we achieve our long-term objectives.

Peter Wilson (Managing Director and Co-Head of Equities Research)

Okay. And Jack, at what point would you start to become worried if those relative numbers don't improve in your direction?

Jack Truong (CEO)

Peter, I think it's just too early to tell yet.

Peter Wilson (Managing Director and Co-Head of Equities Research)

Okay. And one last one. The Win with Color is a big part of achieving that, and you outlined, say, you know, an expanded range of colors. Am I wrong in saying that at the U.S. Investor Day last year, you outlined a plan to rationalize the number of colors that you were doing in order to improve your supply chain efficiency?

Jack Truong (CEO)

That's correct. So we did rationalize quite a bit, and then what we offer, what we call the statement line, which are the core products that our customer can order, made to stock. And that's just about roughly fifteen SKUs. And then the other is about over seven hundred different colors that our customer can order, but that's really about the make to order. And so that's that kind of give our customers the capability and the ability to design any type of development that they would like. But it's really about us focused primarily on the fifteen SKUs that we sell day in and day out to the markets.

And that is where the rationalization and standardization that would improve our manufacturing efficiency and then translate to cost reduction.

Peter Wilson (Managing Director and Co-Head of Equities Research)

Okay, understood. Perfect. That's all from me. Thank you.

Jack Truong (CEO)

Mm-hmm.

Operator (participant)

We have another question from Daniel Kang from Citigroup. Please ask your question.

Daniel Kang (Equity Research Analyst)

Good morning, everyone. Just a quick one. Just in terms of the PDG growth rate, you mentioned that 1% for the full year. Are you able to estimate the exit rate for fourth quarter? And while we're talking about competitive landscape, did notice that the import levels were quite strong into the March quarter. Are you seeing much impact from the increased import levels?

Jack Truong (CEO)

Yeah, I think our fourth quarter exterior volume growth is about 3-3.5%. And so comparing to the third quarter, about 1%. So we say it's. We don't want to look at really PDG on a quarterly basis because it's not really that exact science, so we kind of look at it from the rolling twelve months. But if you look at the rolling twelve months for fiscal year 2019, it's more than 1%, +1%, versus -2.5% a year ago. And then there is that momentum a little bit coming out of the fourth quarter.

So we say that's, but you know, but in terms of any appreciable step change, it is not gonna be materializing until we execute our commercial transformation to the fullest. And then relative to your question on the fiber cement. Go ahead, Daniel.

Daniel Kang (Equity Research Analyst)

Sorry, I can't, I can't actually hear you. I think you have the line off. Still open? No, I'm not actually picking up any of the feedback.

Matt Marsh (CFO)

Yeah, no, sorry, no one's speaking. Jack had asked if you had a follow-up question.

Daniel Kang (Equity Research Analyst)

Oh, yeah. The follow-up question was just in terms of the increase in imports that we've seen in the March quarter. Are you seeing much of an impact there?

Jack Truong (CEO)

Do you want to answer that one?

Matt Marsh (CFO)

On input costs?

Jack Truong (CEO)

Yeah.

Matt Marsh (CFO)

Imports of FC? Yeah, I mean, we noted the same, you know, but no, we're not seeing any sort of significant change in the marketplace. The percent on, I think the headline number, the percent growth is a big number. It was like almost 30-something%. But keep in mind, I'd say the comp that they're comping that off of is actually quite low, you know, from a year ago. So if you look at the import volume over a longer period of time, if you look at kind of where it's been on a quarterly basis over the last three years, it's still at a relatively low volume on a volume basis.

It's at a low point in comparison to where some of the other quarters have gotten reported. So, no, we're not seeing sort of anything unusual in the marketplace or anything that's concerning us or anything that we think has gotten us off strategy or off target.

Very good. Very good. Just last one, in terms of expectations for, I think the tax rate and how they can do it eventually?

You can in August. Yeah, I mean, I'm not gonna guide on ETR for fiscal 2020. Once we get a good sense of kind of how the year is gonna play out, you know, we'll talk about that in August. I'd-- I'm not expecting material change, okay? So it's not like the item, the 14.9 number that we reported this quarter is gonna change materially. It'll move up and down, obviously, based on earnings and where those earnings occur, but that's not an artificially high or low number. We think that's a feature of the result going forward.

And I'd say similarly, on guidance for fiscal 2020, you know, we'll talk about that as we normally do, as part of the August result.

Got it. Thanks, Matt.

Oh, yeah, for CapEx, there's no change in prior guidance on CapEx for fiscal 2020, so we expect that we'll spend somewhere around $200 million for fiscal 2020. And then we'd think the next two years after that, fiscal 2021 and 2022, will be a step down from that, probably closer to $150 million. We've largely gotten through our greenfield and brownfield capacity projects. We think, you know, across the globe, obviously there's other opportunities that we'll explore, you know, particularly in Europe at some point, we'll add capacity both for fiber gypsum and as the fiber cement business grows. None of those are sort of included in that medium-term outlook, 'cause we don't expect them to occur in that medium-term outlook.

$200 million of CapEx in fiscal 2020, and then 2021 and 2022 is a step down from that, probably around $150 million per year for each of those two years.

Perfect. Thank you.

Operator (participant)

All right. There's no further questions at this time. I'd like to hand the call back to the speakers for any closing remarks. Please continue.

Jack Truong (CEO)

Thank you all for coming. I think our fiscal year 2019 was a solid result from global business. We're going through a transformation in North America, commercial, and our lean manufacturing, which we should expect to see the results throughout the year in fiscal year 2020. Thank you.