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Edited Transcript of JHX.AX earnings conference call or presentation 11-Feb-20 10:00pm GMT

Q3 2020 James Hardie Industries PLC Earnings Call

DUBLIN Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of James Hardie Industries PLC earnings conference call or presentation Tuesday, February 11, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jack G. Truong

James Hardie Industries plc - CEO & Director

* Jason Miele

James Hardie Industries plc - VP of Investor & Media Relations

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Conference Call Participants

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* Keith Chau

MST Marquee - Building Materials & Packaging Analyst

* Lee Power

CLSA Limited, Research Division - Research Analyst

* Peter Wilson

Crédit Suisse AG, Research Division - Associate

* Peter Steyn

Macquarie Research - Analyst

* Simon Thackray

Jefferies LLC, Research Division - Equity Analyst

* Sophie Spartalis

BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst

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Presentation

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Jack G. Truong, James Hardie Industries plc - CEO & Director [1]

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All right. Good morning, everyone. Thank you for joining us in our Q3 fiscal year 2020 earnings call. I will begin by discussing the key business results and operational highlights of the third quarter and for the first 9 months. Jason Miele will then cover the financial details. And finally, I will come back with an update on our global strategy.

I'm very pleased with the progress that our entire James Hardie team has achieved during the first 9 months. We are executing our strategy that generated strong financial results in each of the last 3 quarters. It's a very good start to the transformation that our company embarked on a year ago.

I would like to take a few minutes now to highlight the key transformational changes that we are making to put some context to the results that we'll report today. We're currently driving a fundamental transformation in our company. This is not about returning to the Hardie of old. What we're executing is much more significant than that. We're executing on our plan to go from being a big-small company to being a small-big company. This is about building capabilities and processes that connect the core strengths of our company to generate critical mass to deliver a profitable growth while creating a culture of being a customer-centric company. We're driving a fundamental transformation across our company.

Our goal as a small-big company is to deliver a sustainable and profitable growth. However, if you look at our results during the past 10 years, we have not met that bar. Let's use North America as an example. When you look at the past 10 years, we have had some good PDG years and we have had some good EBIT margin years, but we have not accomplished both together. This year, however, we have delivered both. Through 9 months, we delivered PG (sic) [PDG] of about 6-plus percent with EBIT margin of 26-plus percent. This is a good step in the right direction of where we want the new Hardie to be. Delivering growth above market and strong EBIT margin consistently is hard to do, but that is our goal across all of our business segments. We believe we're now on the right track where the fundamental transformation is not easy. They see a lot of work left to do and there are several key areas we need to focus on and invest in. We need to continue to conduct our businesses together and then focus on critical few opportunities to create value to earn our customers' business every day via increased demand of our products with the builders and our contractors. We're having more efficient supply chain to serve our customers better, more enabling tool that make it easy for our customers to sell our products and with high-impact innovation that expand market opportunities for our customers. When we're able to deliver on all of those objectives, we would truly be a global company that can deliver sustainable and profitable growth. I'm excited by our progress to date, as I believe we are on the right track to get there.

Let's now move into the business and operational highlights. Now turning to Page 7, on group results. From the group perspective, we had another quarter of strong profitable growth, led by outstanding performance in our North America segment and a very good performance in our Australian business. For the group, volume was up 6% in the quarter and 4% for 9 months year-to-date. Net sales were up 5% for the quarter and 3% for the 9 months year-to-date. And adjusted EBIT was up 18% for the quarter and 20% for the 9 months year-to-date. Adjusted net operating profit for the group grew 17% in the quarter and in the first 9 months of the fiscal year. Globally, our team will execute in our strategic plan, resulting in strong financial results in each of the last 3 quarters.

Let's turn to Page 8, our North America results. Our exterior business delivered exceptional results. Volume grew 13% in the quarter and 8% in the 9 months, as our commercial transformation is gaining momentum. We're estimating our addressable market growth for the full fiscal year 2020 to be between the 1% to 2% and we're confident that we'll deliver a 6-plus percent PDG, a growth above market for fiscal year 2020.

Additionally, our interior business returned to growth, posting a 3% volume growth for the quarter. We're now on track to deliver our full year expectation of flat to slight volume growth for the interior business. Now with more volume of fiber cement flowing through our network of more efficient fiber cement manufacturing plants driven by lean, we delivered an increase of 30% in EBIT dollars. And our EBIT margin was 26.1%, a 380-basis-point improvement over quarter 3 a year ago. Our EBIT margins for both the quarter and for the first 9 months exceeded top end of our long-term target range.

Our commercial transformation is gaining momentum, supported by continued traction in our lean transformation. Continued success in both of these initiatives is critical to delivering sustainable and profitable growth. We are pleased with the 9-month results of 6-plus percent PDG and 26% EBIT margin.

Let's now turn to Page 9 for European results. Fiber cement growth momentum continues with net sales up 27% for the first 9 months. Fiber gypsum net sales was soft and below our expectations. The large contributing factor was certainly the softening in housing markets in Western Europe, particularly in Germany, France and the U.K., but we also experienced a dip in our commercial execution during the past 3 to 4 months. And as you know from our global strategy, one of the key disciplines in our company is the continuous improvement mindset to PDCA; Plan, Do, Check and Adjust. We believe that we have done the right checks and recently, made the right adjustment relative to our plan to ensure we deliver improved fiber gypsum growth going forward.

Our EBIT margin was 9.6% for the 9 months year-to-date. Our European strategy is on track and we're excited about introducing innovative fiber cement products into this market.

Now let's turn to Page 10 for APAC results. Our Australian business with a standout in APAC, driving growth above markets in a contracting housing market and delivering strong EBIT dollars growth. Overall, APAC saw moderate EBIT growth for the quarter of 5% and EBIT margin remained in the top half of our long-term target range. Similar to my comments on Europe, the business is on strategy, but we are adjusting as necessary to ensure our New Zealand business execute at the same level as Australia.

Now finally, on Page 11, our updated key assumptions for fiscal year 2020. In North America, we see modest growth in U.S. housing markets. We expect our addressable market to be up 1% to 2%, closer to the 2% range. U.S. residential housing start will be approximately 1.3 million. As we continue to gain traction in our commercial lean transformation and executions in North America, we are now raising our full year PDG 2020 target from 4% to 6% to 6-plus percent, and we're reaffirming our EBIT margin range of 25% to 27%.

In Europe, we continue to expect the addressable housing markets to be slightly down for the full year. We continue to introduce new fiber cement products and the one change in our European assumptions for the year is that we now expect EBIT margin to be flat year-on-year rather than increasing. The primary driver in the change in our EBIT margin expectations is the soft fiber gypsum sales growth I discussed on the European slide. In APAC, there's no changes to our assumptions. We expect the addressable housing markets in Australia to be down mid-to-single digit. APAC is expected to deliver volume growth of our markets of 3% to 5% and EBIT margin in the top half of the range. Finally, we raised our guidance on adjusted net operating profit to be between $350 million and $370 million.

Overall, I'm very pleased with the progress the team has achieved in the first 9 months of this year, especially in North America and Australia. We have posted 3 consecutive quarters of strong financial results, our teams are executing against our strategic plan and our results to date have demonstrated that.

I will now hand it over to Jason to take you through the financial review and highlights. Jason?

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [2]

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Thank you, Jack. Good morning, everyone. We will start on Slide 13, on the group results. As Jack mentioned, a strong financial performance across the group starting with our top line results. You'll see sales volume up 6% for the quarter and up 4% for the 9-month period. The net sales up 5% and 3%, respectively. The top line strength is driven by the outstanding performance Jack discussed in our North American business. On the profit metrics, you see gross profit increased 15% for the third quarter and 12% for the 9 months. It's being driven by the improvements in lean globally across our businesses as well as the strong top line performance. You also see the lean performance coming through in our gross margin percentage with the 9 months up 290 basis points. Finally, EBIT -- our EBIT -- adjusted EBIT is up 18% for the quarter and 20% for the 9-month period. And net operating profit is up 17% for both periods driven by the strong adjusted EBIT growth and also partially offset by higher tax expense and higher general corporate costs.

Moving on to the North America results. As Jack mentioned, PDG is very much on track. We've raised our target to plus-6 percent for FY '20. Exteriors volumes were up 13% for the quarter and 8% for the 9-month period. The momentum of our commercial transformation continues in our exteriors business and we're also starting to see the acceleration of our interiors volumes continuing to improve. You'll remember in FY '18 and FY '19, our interiors volumes were down both of those years. Last February, we would have signaled that we expected FY '20 to be flat year-on-year and we're very much on track to deliver that target in FY '20.

Price was favorably impacted by our price increase on April 1 to start the year, partially offset slightly by mix with both periods being up 1%. The EBIT metrics were quite strong. EBIT dollars excluding, we're up 30% for the quarter and up 20% for the 9-month period, with both periods being at 26.1% EBIT margin, which continues to be above our long-term range. EBIT results were driven by the higher net sales, lean savings as well as lower freight costs and the quarter, in particular, was also helped by lower pulp costs.

The next slide on Page 15 is our long-term 6-year view by quarter of EBIT dollars and EBIT margin. You'll see the 3 bars there on the far right represent our Q1, Q2 and Q3 FY '20 EBIT dollar performance. You'll note that those are the 3 highest quarters we've achieved over that 6-year period while also delivering a margin above or at the top of our range. And as Jack mentioned, we've reiterated our target for FY '20 of 25% to 27% for our North American business.

Moving on to input costs. This continues to be a more positive story than it was last year. Pulp is down 22% for the quarter. So that is the 3-month period ended December 31, 2019 versus the same 3 months in the prior year. I'll remind everyone that that is -- those are market prices and a market metric that that kind of activity helps us kind of on a one quarter lag.

Freight was also down 12% quarter-over-quarter -- sorry to be specific, but the December quarter versus the December quarter. That is starting to narrow a bit from what we saw in the first half of the year, but still a very good trend. And lastly, cement prices were up slightly, gas prices were down 29% and electric prices were up 6%.

Moving on to Asia-Pac. As Jack discussed, certainly, the top line metrics are being impacted by a softening -- continued softening in the Australian housing markets. Sales volume is down 4% for the quarter and 2% for the 9-month period. And sales down 3% and flat, respectively. Australia was the standout for the segment driving strong growth above market and delivering those top line results. Price was strong throughout the region at plus 3% for both periods.

EBIT in Australian dollars was up 5% for the third quarter and 1% for the 9-month period. Those results are being driven by the higher average net sales price across the region; lean savings, particularly in our Australian plants; lower pulp costs offset partially by higher freight. As a reminder, our U.S. dollar results, when translated, are being negatively impacted by unfavorable FX rates for both periods.

Moving on to Europe on Page 18. So as Jack mentioned, the third quarter result in Europe is certainly softer than we wanted. Strategy is on track, but that third quarter is impacting, obviously, also the 9-month period. The third quarter results are primarily a result of the softer fiber gypsum volume growth that you see also impacting the profit metrics.

For the 9-month period, sales were up 4% with average price up 1%. We had fiber cement net sales up 27% for the 9 months ended and fiber gypsum net sales up 2%. Higher SG&A costs are driving EBIT down year-on-year as well as EBIT margin excluding of 9.6% for the 9-month period is 70 basis points off of last year. And as Jack stated, we've lowered our expectations to have a flat full year FY '20 versus FY '19 for EBIT margin -- adjusted EBIT margin in Europe. And that was -- oh, sorry, last thing would be on integration costs. We did have higher-than-anticipated integration costs, certainly higher than we signaled to start the year. I believe we started the year with a range of EUR 4 million to EUR 7 million. We are now at EUR 8.6 million through 9 months and EUR 3.9 million in the third quarter. We'd anticipate to have roughly EUR 2 million to EUR 3 million more left to go in FY '20. In FY '21, we will not be recording integration costs.

Moving on to these other segments and income tax. The other business on the top left there, as you know, we announced the exiting of our Windows business in North America last year in FY '19. So those are the charges you see being taken in FY '19 and we wrapped up that process and completely ceased that business early this year. So you're seeing essentially no activity for the full year -- for the 9 months and 0 now in Q3 that will continue at 0.

Research and development, down slightly for both periods. We are continuing -- committed to R&D investments as Jack's mentioned, in our September investor tour and earlier, we are committed to innovation, and we'd anticipate continued investment in our R&D segment. General corporate costs are driven higher due to -- primarily due to higher stock compensation expenses for both periods. I'll talk about that in a bit more detail on the next slide we get to.

Finally, on this slide, adjusted ETR is right in line with our expectations and what we've been signaling all year. Three months ago, we estimated 17.9% and now we -- our view is at 17.8% for the full year.

As mentioned, diving a bit deeper into the general corporate cost line, we've presented here a few things, a trend line. So we have the FY '19 quarterly average of general corporate costs, along with the 3 quarters from this year. And also noting in the current quarter, the $24.3 million of general corporate costs includes an unusual item of $3.5 million related to the acceleration in the timing of accounting for expenses associated with a retired executive as the effective service term for that executive has shortened, we are required to accelerate the accounting for these expenses over their remaining service life, which is now the end of March 2020. Thus, these expenses from an accounting perspective, have been accelerated into the third quarter as well as the fourth quarter.

If you look at general corporate costs excluding that amount, we're at $20.8 million for the quarter. The increase versus the prior several quarters is primarily driven by higher stock comp expense, as mentioned, which has been by not only a higher share price, but an increasing share price during the period from the first balance sheet date to the last balance sheet date of the period. We've also increased investments in our corporate capabilities, which we had signaled last quarter, we'd be increasing investment throughout our business and that's also part of the increase you're seeing here.

Finally, Page 21, this combines 2 of our slides we used to present separately, cash flows and capital expenditures. On the left, cash flow is very straightforward, very good results with cash flow from operations, up $84 million period-over-period or 27% at $393 million, a very strong result, which has been driven by the increased profitability and cash generation of our business units. Year-over-year, you'll also see significant changes in investing activities and financing activities, which is primarily driven by the Fermacell acquisition in the prior year and no repeating of acquisition in the current year.

On the right-hand side, capital expenditures $161 million through the 9 months, right on track to be -- right around what we signaled of $200 million to start the year. In North America, we continue the construction of our Prattville, Alabama facility. And in Asia-Pac, we've completed the construction of -- our brownfield construction at Carole Park and we now anticipate we'd commission that in Q1 of FY '22 as we monitor demand.

Moving on to liquidity profile. No change from the past several quarters. We have the same instruments in place, $800 million of U.S. notes, EUR 400 million of notes and $500 million revolver. That's remained the same for several quarters now. Our leverages continues to remain on track. We're at 2.1x net debt to adjusted EBITDA remains slightly above our range, which is 1 to 2x, but it's down from 2.3 in the prior period or at -- as of September 30, 2019 and we continue to anticipate to have that with -- firmly within our range in the next 2 to 3 quarters, which is on track with what we said to you 3 months ago.

Finally, a repeat of a slide in Jack's deck. The FY '20 key assumptions and market outlook. I'll just reiterate the items that have changed. So in North America, we've refined our estimate around U.S. residential housing from a range of $1.23 million -- sorry, $1.2 million to $1.3 million to be approximately $1.3 million as the data comes in and also raised our PDG guidance for our exteriors volume to plus 6% from 4% to 6% last quarter.

In Europe, we have the third bullet there. We've lowered our expectations on EBIT margin. We had originally anticipated EBIT margin accretion FY '20 versus FY '19. We're now signaling that to be flat year-on-year. No changes in Asia-Pac. And finally, we've raised our adjusted net operating profit guidance from $340 million to $370 million to $350 million to $370 million.

With that, I will hand it back over to Jack to go through a strategic update.

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Jack G. Truong, James Hardie Industries plc - CEO & Director [3]

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Thanks, Jason. Now the fun part. Now let's turn to Page 25 for an update on our strategy. And starting with the fundamental transformation that were undertaken. Now we're moving from being a big-small company to a small-big company with a keen focus on delivering the most value to our customers and earn the business every day. So what does that mean by being a small-big company? It really means about connecting different functions together, connecting different businesses together as one, as one global James Hardie team. And focus on the critical few opportunities and drive for those results. And as we continue to connect different pieces of our company together, leverage from those core strengths and focus on the right priorities that is when we're going to get the momentum and the growth -- the profitable growth that we would expect for being a small-big company. So it's really -- really important for us is about -- all of us about the priorities to be a customer-centric company and it start with commercial. And this is where we went from being the pull company that was focused primarily on-demand creation with the builders and contractors to one that is not only focused on demand creation with the builder and the contractor, but also focused on adding significantly more value to our customers. And we're up in our game on demand creation to pull while we engage for our customer push to make it easier for our customers to make more money selling our products in our competition.

And then, really, from the operations side is that as we create more and more demand, it's important for us then as we flow those demands through our plants that those plants also operate as one. So traditionally, each and every one of our fiber cement plants across North America and Asia Pacific used to run independently with through Hardie manufacturing and operating system based on lean principles, all of our fiber cement plants are now running as one interconnected network to produce consistently good quality products with more predictable service of our customers while reducing waste.

And market-driven innovations, it's also that transformation, this is all about delivering the high-impact innovations. The critical feel that our customers need instead of what our R&D engineers want. And to really support these 3 critical transformation of culture need to also change to enable those connections. For example, where we used to be more top-down within our company now is more the empowerment. It's really about making sure that the decision-making process has really driven deeper within the organization and also the accountability that comes with it. And that has really energized our employees across the company and around the world. And rather than work in silos and decision makings are made separately, we now work together as one cross-functional team that would allow us to make better decision, more holistic decision for the better good of the total company or the total business.

And also we went from being a regional-based company to now a more globally connected company with the mindset of learning, that is what could be all-in-one part of the world can also be new in a different part of the world. So it's really about the culture of very learning from each other and really trying to maximize and raise the standard of our company across the globe. And it's moving from being just reactive to the situation to be more proactive, to really think ahead works around the corner. And then prioritize as a total company and really address those issues before it become a bigger issue. And the most important to our company is about being that 1% improvement a day. It's really that continuous improvement in mindset, how do we take the total company interconnected, connected together and make the improvement 1% a day.

And that's really the transformation our company is going through from the cultural perspective as well as from the business perspective, that really what we strive and aspire to do going forward and we have started on this journey a year ago.

Now just to give you some example, on Page 26, I want to share with you here, really, what the customer-focused strategy and really in action that the international builder show that we just had recently in Las Vegas last month. Over 3 days at the show, our leadership team, along with our cross-functional team members met with similar teams of our top 25 customers, where we took the time to discuss, learn and share our plan together to further align our partnerships. And then we've reiterated our commitment to our customers that we want to earn and win the businesses each and every day with the values that we create in our company for them, specifically for them, each and every one of them. And it was a very successful show. And you can see the engagement that we have had with our customer throughout the show with the engaged employees that we have at the show from the cross-functional perspective. And we look forward to building on this momentum to help deliver our sustainable profitable growth going forward. This is just an example of that in action.

Now on to Page 27, we will provide you an update on our progress with lean transformation. We have now deployed our Hardie manufacturing operating system in all of our facilities in North America and have recently started our European deployment. In fact, I was in Orejo, Spain last week to participate in the first HMOS deployment in our fiber gypsum plant in Europe and we planned to deploy HMOS in all of our European sites within the next 12 months. And you can see, this is the continuous improvement in mindset. So we started the lean journey in Asia Pacific during the past few years. And we took those learnings and then replicate to the North American and improve on it and which then become the Hardie manufacturing operating system, which we deploy across North American plants. Now we take the HMOS in North America, now replicate to Europe and improve on it based on the European capabilities and then we also will replicate this back to Asia Pacific to really drive the improvements as expected. And what we would expect in a year from now is that the HMOS implemented, deployed in Europe now will then replicate back to North America with those learnings. So that is the continuous improvement mindset and the strategy that we were deploying within our company using the lean principles to really drive towards producing our products with consistent quality, with predictable service and, of course, to really take the unnecessary costs out of our manufacturing and supply chain system.

And we're currently on track to deliver against our lean cost out for each of the regions. In North America, our lean cost target is $100 million cumulative through fiscal year '22. And so we have now deployed HMOS in 100% of our existing facilities in North America. Our teams are solely focused on continuous improvements on quality, cost and predictable delivery of our products. I'm also very pleased with how engaged our employees are in embracing and executing our lean principles and our result show. Year -- year-to-date after 3 quarters, we have already to reach the target that we have set for the year, which is really faster than anyone of us had expected it.

In Europe, our target cost out is $20 million. And recently, we launched our -- at our first facility in Orejo, Spain and Europe will be incorporating and replicating key learnings from North America and we expect all plants to be transformed to lean by the end of fiscal year '21. In Asia Pacific, our cumulative target of fiscal year '22 is $19 million, with focus on continuous improvements while replicating learnings from North American deployments. Our teams are sharing best practices and are becoming more globally connected every day. And our focus on lean transformation is a key initiative to support our goal of sustainable and profitable growth.

Now let's turn to Page 28 and discuss another core pillar of our corporate strategy, market-driven innovation. Our approach is to translate the megatrends, integrate these with customer insights to develop winning products concept and ultimately bring these to markets that the customers and the market really want. And as a company, we're committed to increased investments in and usage of our dedicated global R&D team to deliver innovations that address our customers' needs and support our long-term growth expectations. And today, I would like to speak about 3 of these innovations in more detail of HardieWindbreaker, ExoTec Vero and EasyTex products.

First, if you look at the HardieWindbreaker, which is a critical innovation of our European and Australian businesses. In Europe, we launched the product in May of 2019 and we market the product at HardieWindbreaker Sheathing products. And then that innovation is then replicated back to Australia, how we launched and improved product for the Australian markets in November of this past year as an RAB board. This product get installed beneath external cladding or rain screen and it deliver superior water resistance, long-term climate durability and superior strength. We're targeting these products to our residential segment, including single and multifamily housing and we are excited about it. And specifically how it addresses a definite market and customer pain points. And we look forward to supporting its growth in future periods.

Now moving on to Slide 30. We also just launched our ExoTec Vero Façade Panel. This product was launched in Australia this past November and offered a prefinished Concrete Look Façade Panel that's noncombustible and offer a look that this market is asking for. It's targeted to our commercial segment. Certainly, with this use as a test site as well, the learning from this will also allow us to replicate in other markets around the world.

And lastly, on Page 31, we launched our EasyTex cladding innovation in Australia just this past month. This product is a fiber cement panel used as external cladding with an embedded fine render texture, which eliminates the need for render or wet trades and really simplify the way render has been put on the exteriors of homes. It's also featuring interlocking mechanism for faster construction. This product is targeted at our single-family new construction segment. Now these 3 new products are based on few of our ongoing innovations and above all else, our philosophy is about delivering the products that our customers want and need while addressing market trends, easy and fast to install, low maintenance with high durability. And I'm excited about what the future holds as we identify new market-driven innovations and continue to address our customers' needs each and every day.

In closing, I would like to reiterate that we are focused on becoming the leading global building material company that deliver a sustainable and profitable growth. I believe that we are on this path and that the last 9 months have been the strong start. And I'd also like to take the opportunity to thank all 5,000 employees -- global employees across the James Hardie company for excellent work and really good execution during the past 9 months. Thank you. We'll open for Q&A now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question today comes from Simon Thackray from Jefferies.

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [2]

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I really got a couple of quick ones. Just in terms of North America, an impressive performance year-on-year from a volume perspective, exterior is at 13%, you turned around interiors. We had pulp down 20%. You've got lean benefits running ahead of schedule. It was, like you're saying, it's a very easy pulp. You had low growth last year and weather effect and all sorts of stuff. Yes, with the EBIT margin of 26.1%, with no disrespect, the gross margin sequentially for the group was down 60 basis points and the EBIT margin for North America was down 100 basis points with all those tailwinds slowing. I'm trying to understand that consequence from all of those tailwinds being reflected in that margin, albeit it's a good one versus the PCP, it's down sequentially in a quarter that looked really, really favorable for you. Can you just help me understand that?

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [3]

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Thanks for the question. To summarize, I think it's essentially 27% last quarter, dropping to 26.1% this quarter. Why? I think we had similar questions last quarter as looking forward. And I think the -- what I would have said last quarter remains the same. So third quarter is our lowest volume quarter. So I think that's the #1 driver when you're talking about margin. We've talked about freight narrowing a bit in the back half of the year. Certainly, to your point, pulp was a tailwind Q3 versus the same period last year, but versus Q2, not as it was a tailwind, but not as significant as that was ramping down over time. But again, the -- and lastly, we signaled we would continue to invest and we have. And so I think those things combined. You end up at 26.1%, which is a great outcome, 26.1% for the 9 months, while delivering a PDG for the full year at 6-plus percent. We're quite pleased with how the quarter turned out.

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [4]

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Yes, yes. No, I typically ask it. I'm not criticizing the EBIT margin, I'm just looking at the extraordinary volume growth you got that notwithstanding whether the quarter is weaker, one was expected there to be more leveraged in that volume to the cost input, et cetera. So what I would...

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Jack G. Truong, James Hardie Industries plc - CEO & Director [5]

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So if I think about -- so you've asked the question in a couple of ways, Q3 versus Q3, we did expand margins significantly over 300 basis points. Q3 versus Q2, I don't have the number of the top of my head, but volume would certainly be down Q3 versus Q2 due to seasonality.

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [6]

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Yes, that's the seasonality of the volumes. But by the same token, the gross margin is normally better in Q3 than any other quarter as well. So I can look at that sequentially, look at better gross margin Q-on-Q. What I would like to ask is the following. It's a very strong PDG with upgraded guidance specifically, which is excellent. This is a hypothetic situation particularly, this is accelerating in the U.S., which is great. We are now delivering positive comps on the period, I can say, going forward. If we were to see U.S. housing starts, let's say, up 7% or 8% in FY '21 and you can post positive interior's growth and sort of low to mid-single digits and R&R picked the longer sort of mid- single-digit level, are you still able in that environment with that change in mix to achieve the kind of PDG targets that we're looking at because that would be sort of another low double-digit volume?

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [7]

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I can't understand what he's talking about. Sorry, Simon, It's quite hard to hear you. I think a lot of math there, but you're saying if the underlying market -- housing market grows 7%, 8%; R&R is still at about 2% to 3%, can we still drive...

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [8]

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No. No....

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [9]

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Okay. Can we still drive PDG results similar to this year. Is that your question?

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [10]

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I'm trying to understand if the mix in interiors and new housing would have an impact on PDG? Just to understand.

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [11]

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Yes. So let's cover up on that part first. So interiors is not part of our PDG calculation. PDG is a calculation associated strictly to our exteriors volumes. So then within exteriors, you have new construction in R&R. If you want to cover up whether you believe we can drive the PDG results in an accelerated market of 8% new construction growth and 3% R&R growth.

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Jack G. Truong, James Hardie Industries plc - CEO & Director [12]

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Yes, Simon, just a couple of things to remember as we head into the next -- this coming year, is that the first 6 months of 2019 was a very soft new construction in North America because of all type of weather, the polar vortex bickering and so on, and we think, it was like was down for the first 6 months for the new construction were down like minus 6%, 7%. So as you look into the comp -- just purely look at the comp for the next 6 months, you're going to see a higher comp. But in reality, the actual new construction unit is still the same as we have in this past quarter. So it's just about -- so we have to keep that as a fundamental level set. And then the second part is, as I mentioned before, is that we're now becoming a small-big company now that we have a much bigger critical mass. And it's important for us that every day that we execute well as the team cross functionally to focus on the critical few parameters to really drive the results -- expected results, then we have to earn that business every day. So with the strategy we have and how we've been executing, I'm confident that we can do that. But at the same time, it's something that we have to earn that every day. It's not a guarantee.

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [13]

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Sure, sure. Appreciate that. Jack, I'm just sort of trying to understand here is that if there is any mix shift? I mean, historically, was at 65% R&R, 35% new housing, over 75%-or-so volume, 25% interiors, how does that mix shift, if at all, change the target of PDG? That's all I was trying to understand in this sort of a hypothetical perspective and whether that obviously change the...

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [14]

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We're getting a ton of feedback of this call. Can we move to the next question?

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Simon Thackray, Jefferies LLC, Research Division - Equity Analyst [15]

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Sorry?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [16]

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Sorry, Simon, we're getting a ton of feedback in room of your line. So we're going to have to move on to the next question in the room.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [17]

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Peter Wilson, Crédit Suisse. The North America exteriors is all very strong volume. Can you just give us some more color on where you won that business? So which geographies, products, which customers? Where did it actually come from?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [18]

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Yes. So as we started this journey a year ago from pull to push-pull and so we have reallocated and put the resources on the pull with the true pull where we have the hunters go out and really get our business on the wall. So -- and then while we invest in the key account to manage with our customers a lot better. So it's really a -- now it's really come to a dynamic of those 2 are working together. That's the hunters have been able to gain a really good conversion against other categories and competitors and be able to then to translate that into sales with our customers. And so we have very, very strong growth in South, Central -- the Texas area, the South Southeast, the Mid South area. And also, we've been gaining a lot of momentum in the Northeast. So certainly, the area that we have focused on as part of our strategy to continue to gain market share.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [19]

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Okay. And the Q4 results, would you be happy for the market to drive that forward? Or is there anything unusual about the quarter, i.e., was there any end-of-view volume pull forward or something of that nature?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [20]

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No. We didn't raise a price into this quarter. So it's really that -- so the result from this past quarter is pure push-pull, no more driving the business that our company has been on.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [21]

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Okay. And on price, I mean slightly soft result, 1%, which you put down to mix. Can I understand what's the margin impact of that? Is there a mix on price? Is there a comparable mix shift on cost of goods sold? Or is there actually a negative margin impact about the softer price?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [22]

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Yes, I think it's a couple of things to remember now, Peter, is that we're now moving into HMOS for a lean transformation. So our network of plant become more and more efficient every day. So the key for us is really about having the degree of freedom to manage volume price mix to ensure that we have the maximum amount of volume, fiber cement flowing through now more efficient plants. So as we do that, we will generate a significant leverage to drive more EBIT dollars. So when I come to price mix, what we want to do, too, is that the mix that we are also beginning to go into is that we see opportunities. So we currently have low penetration in multifamily. And so we are putting a focus to gain more penetration in that area. And of course, products in the multifamily has a lower price point because it's a different type of products, but as there are also fiber cement, and they are going to flow throughout the same network of plants that we -- by doing that, we still generate a lot more EBIT dollars. And so that was the mix that we talk about. And the other is on price, is that a big part of our price growth that we planned this year is really about the increased penetration of our Win With Color program. And so we had a soft start -- a rough start to the launch of this program a year ago. And that's kind of not meeting the plan that we have put in, but we expect, going forward, the Color program will become a growth generator as well as the price generator in our business in North America.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [23]

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Sophie Spartalis from Bank of America. Just in terms of seasonality, I recall at the Investor Day, you talked around the internal initiatives being able to smooth out the seasonality that we generally see Q-on-Q. We did see a bit of seasonality this quarter, can you just talk about how long that will take to flush through the accounts?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [24]

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Well, I think if -- I think it's the new construction was stronger in the last 3, 4 months than in the previous year. So you always saw the construction activities have picked up. And so it's just as we are -- at the end of the day, we're a pull company, we're a demand creation company. So as the builders start to build and as the R&R contractors want to remodel homes, we are supplying that. So it's -- so that's that phenomenon that you see that we track pretty well with that as well.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [25]

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Okay. So we should expect to say that continued seasonality going forward. You don't have any internal, I guess, pool factors to smooth that out?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [26]

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No, because it's really worthy demand-generated company.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [27]

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Okay. And then just in terms of Europe, the differential between fiber cement and fiber gypsum, you talked around a softer European market in some of the markets there. Can you just maybe talk through a little bit more around why fiber gypsum sort of had that shortfall?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [28]

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Yes. It is a transformational journey for our company globally. Now here in North America, up until a year ago, we were primarily a pull company. We didn't really focus a lot on push, which has really managed our customers better. And the same thing with our European business. And also, to a large extent, our business in Australia is that our business with fiber gypsum in Europe, which was primarily a pull business. That means that most of our sales team have been focused on going to the architects, going to designer, going to specified and specified in fiber gypsum as a technical product on the wall and we didn't focus a lot on the customer side. And so with the whole global strategy now to drive bigger growth, it's important that we become the push-pull, and that transition was -- take a lot longer for our European team than we had expected it. But as of last week, we spent a lot of time together and I believe that the team's really got it now, not only at the leadership level is really deeper down within the organization. And I would expect that big adjustment will happen pretty quickly. The same -- similar to what you see in North America and going forward. But that's what happened has really been a pull company and our key competitors are pretty much in the channel in Europe.

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Lee Power, CLSA Limited, Research Division - Research Analyst [29]

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Lee Power, CLSA. Jack, just -- I mean, you talked a bit about achieving a high margin and high PDG at the same time, is there any -- and that's kind of come with very little lean reinvestment, is there any change in thinking about the level of lean that needs to be reinvested to maintain 6% PDG over the longer term?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [30]

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Well. So first of all, I just want to -- if you look back at our historical results in North America and in our annual report, look at the last 10 years. Our average PDG during the last 10 years, excluding this year, is about 3.8%. And then our EBIT margin was 22.7%. And most of the PDG, there's more than 6% really happened during the first 3, 4 years after the global financial crisis. And after that, what's been kind of below the range and so on. So it's -- so really the business model that we have to change now is really driven from being running many different plants independently into one network, as one plant, pretty much like one super-size plant, if you will. And that is the one that allows us to be able to be at the new baseline of performance. And for us to really the new business model that we are on and we just need to execute that game plan more consistently for us to be able to be more predictable in what that should be and how much investment we should put in as we need to go into the future. But as of right now, it's a little bit more about ad hoc as we see how things are developing because we're still in during this transformation.

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Lee Power, CLSA Limited, Research Division - Research Analyst [31]

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And then just following on from Peter's question. You talked about the Hunter is doing really well. I mean in the past, you've talked about base erosion. Is that still occurring? And how -- and then maybe how you reconcile that with LP's results, which is also significant.

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Jack G. Truong, James Hardie Industries plc - CEO & Director [32]

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Yes. So remember, we are a push -- we have traditionally been a pull company. We haven't really put a lot of into push. So -- and now as we put together a push-pull is really demand creation that drive our sales. And with now a lot more -- our total company now is more customer-focused or customer-centric. We don't have a lot of erosion -- as much erosion that we used to have in the past. And that is really what we see as a result of our company that with the consistent result that we have been delivering in the past 3 quarters. And also keep in mind, though, is what we strive to do here is to grow, but grow at a profitable growth. So it's not just about, again, the volume.

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Peter Steyn, Macquarie Research - Analyst [33]

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Peter Steyn from Macquarie. Jack, with the EasyTex slides behind you and ExoTec as well, just curious how you're thinking about the possibility of the application of some of these products, particularly in the stucco market in the U.S. and how that could alter your addressable market over time?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [34]

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Yes. So really the key part of the innovation process is really about for us to understand those unmet needs, particularly in this case, the stucco markets in the U.S. or the render market in Western Europe is really about to understand those unmet needs. And what we have right now, it just is a product, EasyTex. And so based on our knowledge now of what's going on with the unmet needs in the North American markets in Europe, then would allow us then to have the right -- really define the right products that we can use our technology to really develop. And that is really where we're going. So it's the EasyTex. It's just the beginning of a platform that would allow us to really innovate.

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Peter Steyn, Macquarie Research - Analyst [35]

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Right. And then just following on, on the lean conversation, could you give us a sense of where you are from an annualized run rate point of view and the realization of the gains that you've envisaged?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [36]

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Well, we'll give you more definitive numbers in May when we come back here to give you guidance for fiscal year '21. But as of right now, I mean, certainly, you can see that in our EBIT results, but what I can also say is that the first 3 quarters of lean execution, we pretty much nearly the same as what we had anticipated for the whole year. So we're ahead of the plan.

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Peter Steyn, Macquarie Research - Analyst [37]

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Okay. Perfect. And then just wanted to pick up on a small item or smaller item not to discount the New Zealand business, but sales down 18% in New Zealand. Obviously, there'd be a bit of currency impact there as well, but I'm just curious to get your sense of some of the challenges in getting that business back on its feet again?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [38]

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Well, I think this is some sort of case of what I've mentioned at the beginning of the strategy section is that to move into the small-big company, we've got integrated functions together and really focus on the right priority, critical few priorities and make better decision holistically. And that is the area that we've been lacking in our New Zealand business at the leadership level. And so we're looking to address that. We -- from -- we have deployed one of our best manufacturing leaders in our North American plant to become a new plant manager of our fiber cement plants into New Zealand, for example. So we start to really strengthen the bench strength in New Zealand to really address that issue because this needs to be addressed.

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [39]

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There's no more question from the room. We can go to the questions on the phone. Please, operator?

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Operator [40]

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Your next question comes from Keith Chau from MST Marquee.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [41]

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Few questions on mine. Just firstly, circling back on the price, just wondering if you can give us a sense of what the like-for-like price increase was in the period. And also what the expectation going forward, recognizing that I think price increases have been announced, I think, are stable.

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Jack G. Truong, James Hardie Industries plc - CEO & Director [42]

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Yes. We see no changes. We announced our price increase this quarter. It's between 2% and 3%. It really depends on the region.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [43]

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And then just on a like-for-like basis, Jack?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [44]

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Like for -- what do you mean by that Keith? Prices up...

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [45]

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Excluding the mix impact in the quarter, what would the like-for-like price increase has been?

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [46]

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So at the beginning of the year, we signaled we expected a 2% price increase to flow through the financials. And so the mix is what's driving that down to 1%. So the difference in what you're selling, whether you're selling more multifamily, more interiors as a percent of the total period-over-period. So we achieved our price increases. The price increases we took in the market, we got. The team did a great job of that. And now it's just as the periods roll by, we are getting different mixes than what we necessarily expected when we said we'll deliver to.

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Jack G. Truong, James Hardie Industries plc - CEO & Director [47]

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Yes. Keith, just something to think about too is that the like-for-like, if you look at the first 9 months this year versus last is that we had expected a Win With Color program to be more penetrated, but it didn't meet the expectation.

And then the second is that we made a conscious decision to really grow more into the multifamily segment. So that's really the mix, the 2 key mix that really drove the price that we have today.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [48]

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Okay. And then secondly, just going back on lean. So tracking ahead of expectations, I think the expectation for this year was in range of $15 million to $20 million. So I'm just wondering if you can give us a sense of where within that range we're sitting at for 9 months of this year. And also, is it at all possible that lean benefits get reinvested at a faster pace in delivery, either in the fourth quarter of this year or into FY '21?

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Jack G. Truong, James Hardie Industries plc - CEO & Director [49]

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Will you answer that?

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [50]

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Yes. Keith, so I think, as Jack said earlier, regarding the $15 million to $20 million target through 9 months, we're there. So we're running kind of one quarter ahead of schedule. As far as reinvestment outpacing leans, that probably would not occur. If you look over the next 3 years, we've set out targets of $15 million to $20 million and then escalating up to $100 million in year 3. So the investment wouldn't exceed that.

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Jack G. Truong, James Hardie Industries plc - CEO & Director [51]

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It's cumulative.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [52]

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Okay. On price performance, I think you noted in the pack, that plant performance did improve relative to last year. I think, previously in the slide that we had on the U.S. timber side to -- on a quarter-on-quarter basis, the plant performance has continued to improve. So notwithstanding, some of the movements we've seen in gross profit margin, are you satisfied that plant performance is continuing to improve on a quarter-on-quarter basis.

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [53]

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Just to clarify your question. Keith, obviously, most of what we present is this fiscal year versus last fiscal year or you're asking, has the plant performance improved Q3 FY '20 versus Q2 FY '20?

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [54]

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Yes, that's right.

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [55]

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Yes. We continue to lean, continues to accelerate. So similar to how you -- we laid out at the investor tour and in previous presentations, the 3-year targets for lean, and you can kind of see that increasing over time. You can think about the quarters in a similar way to FY -- for FY '20.

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Jack G. Truong, James Hardie Industries plc - CEO & Director [56]

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And just to add on to what Jason says too is that for lean, it's really about us continuously improve every month. And of course, then every quarter and that is the premise for us to be able to deliver on that $100 million cumulative savings.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [57]

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Okay. On the interiors business, Jason, I think you mentioned the target for this year was to get back to a flat outcome. I think for the first 3 quarters of the year, you're at flat already. So is the implication that for the fourth quarter, you're expecting volumes to be flat? Or should we be thinking volumes are going to -- or the volume momentum that we've seen in interiors continued through into the fourth quarter and also a positive comp in FY '21?

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [58]

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I think my comment was we're on track to achieve the goal we stated last February. We'll provide guidance specific to FY '21 in May. But I think if you go back and look at some of the things we've talked about the interiors business, including on prior calls and our September tour, it's about retail fundamentals currently and where we said we believe that could get us back to flat or slightly positive. And then into the future to really make it a significant growth business, it was about innovation and delivering new products into the retail channel. So we're right on track with where we want to be, Keith, and we'll provide FY '21 guidance in May.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [59]

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Okay, excellent. And just lastly for me, on corporate cost. Just wondering if you can give us some guidance on what would be a reasonable assumption for 4Q '20 or at least what's embedded within the guidance range. And also if it is at all possible to give us a bit of a steer into FY '21, please?

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [60]

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Yes. So I think I'd say, obviously, the normalized number I talked about on Slide 20, 20.8 is at the December 31 share price and it is excluding the one-off are the unusual item I talked about. So that could probably be a starting point for your analysis. And then in my comments, it was quite clear that the -- that acceleration will also occur into Q4. So you should consider that in your fourth quarter number.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [61]

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And then into FY '21, or is that something that we should hang tight on until the full year results?

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Jason Miele, James Hardie Industries plc - VP of Investor & Media Relations [62]

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Certainly, when we provide our NOPAT guidance for FY '21, we'll include our range for general corporate cost, but I think my comment a second ago around 20.8, that is our result, excluding the abnormal item. So I think that could be, you can look at that in prior quarters to forecast and develop your model for FY '21.

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Operator [63]

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I will now hand the conference back to your presenters. Please continue.

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Jack G. Truong, James Hardie Industries plc - CEO & Director [64]

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Well, thank you all very much for attending our conference call. We're very excited about the results that we have delivered within the first 9 months. Our strategy is on track. We still have much work to do, but we're excited about it. Thank you.