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James Hardie Industries plc  (NYSE:JHX)
Q2 2020 Earnings Call
Nov. 06, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Jack Truong -- Chief Executive Officer

Good morning, everyone, and thank you for joining us for the Q2 Fiscal Year 2020 Earnings Conference Call. I will start with key business and operational highlights on our second quarter performance; Jason Miele, our Head of Investor Relations, will then cover the financial details for the quarter. Afterwards I will come back to update you on where we are relative to the execution of our three-year global strategic plan.

As our Interim CFO, Anne Lloyd, has only been in role for about eight weeks, I have asked Jason to present with me today based on his extensive experience in Finance and Investor Relations at James Hardie. Regarding the CFO position, I will make a few comments now and will not be taking questions on this topic during Q&A. As you are aware, Anne Lloyd is currently functioning as our Interim CFO, and she will continue in role until we find a permanent CFO. She had served previously as a CFO of Martin Marietta. She also serves currently as a member of James Hardie Board of Directors. Anne has done an excellent job running and jumping right in and is adding value to our executive team as well as to the global finance organization. I'm pleased to how this transition is progressing, and we're actively recruiting, and I would anticipate we'll hire a permanent CFO in early next year.

Now let's talk about our results. The global James Hardie team executed well and delivered a very strong operational performance this past quarter. We delivered positive growth in both net sales and EBIT in all three regions that we operate in: North America, Asia Pacific, and Europe. I would like to put our second quarter results in the context of our three-year global strategic plan. We are an organic growth company. We've built to drive growth above market, which is PDG, in all regions of the world that we operate in and with strong returns.

In North America this means that we are on a commercial transformation journey to be a more customer-focused company by continuing to invest significantly in demand creation with our end users, the builders, the installers, the R&R contractors, while building a more robust account management capability to serve our customers much better, the dealers, the lumber yards, the distributors, and the retailers. This is aimed at driving a sustainable growth above market of PDG in the 6% range for the long-term sustainably [Phonetic]. We also drive Lean manufacturing across all of our plants in North America to take advantage of our scale, to reduce variability, and to improve productivity. We target to generate $100 million in cumulative savings over the three years due to Lean. In Asia Pacific, our goal is to make a good business better and hence to continue to deliver growth of our market even in a contracting market that we currently have in Australia and strong returns. In Europe, it's all about accelerating fiber cement growth based on a growing fiber gypsum business while improving our EBIT margin.

Now let's turn to Page 7 on the Group results. We deliver volume growth above market in all three regions. Our net sales in local currency grew in all three regions. North America grew 6% in the quarter and 5% in the first half. Europe grew 5% in the quarter and 6% in the first half. APAC grew 2% for the quarter and 1% in the first half. Our adjusted net operating profit for the Group grew 22% in the quarter, driven by strong operational performance in all three regions. We are pleased with this continued positive momentum in executing our global strategic plan.

Now let's turn to Page 8 on North American results. Our exterior volume grew 6% in the quarter and 5% in the first half. We estimated that the blended market growth in the first half of our fiscal year was essentially flat. Our interior volume grew at the same level as the previous quarter a year ago, which is flat, and it is however a continuous improvement versus the prior two years. With increased volume through our factory and with Lean savings, we delivered an EBIT increase of 25%, despite continued raw materials inflation, particularly pulp in the quarter. Our EBIT margin in the quarter was 27.1% and in the first half it was 26.1%, exceeded the top end of our long-term target range. Both commercial transformation and Lean manufacturing continue to gain traction and are now delivering improved financial results.

Now let's turn over to Page 9 for European results. Our EU team continued to execute well to deliver good fiber cement growth along with solid execution on fiber gypsum business. Housing market in Western Europe has been softened in this year, particularly in Germany and the UK. Fiber cement net sales grew 23% in the quarter and 30% in the first half in local currency. Fiber gypsum net sales grew in local currency 3% for both the quarter and the first half. EBIT margin was 10.3% in the first half, which is in line with our internal targets and we're on track to deliver full-year EBIT margin accretion.

Now let's turn over to Page 10 for APAC results. Our APAC business delivered a solid quarter, driven primarily by very strong operating performance coming from our Australian and Philippines businesses. As you're well aware, the Australian housing market continued to contract. Our addressable housing market in Australia declined 8% to 10% in the first half. Despite the headwind, our APAC team delivered net sales growth of 2% in local currency with flat volume. EBIT grew 5% in the quarter and EBIT margin is at 24%, which is at the top end of our long-term target range. The EBIT team -- the APAC team continued to execute well with price/mix and Lean manufacturing gaining momentum across our APAC plants.

Finally, on Page 11 following our updated key assumption for fiscal year 2020. That we see modest growth in the US housing markets which is roughly about 1%-ish. The first half was quite challenging for the new construction home starts in North America, but what we see right now is improvement. And US residential housing start forecast is still between 1.2 million units and 1.3 million units, and we're raising our exterior volume growth from 3% to 5% to 4% to 6% PDG for the whole year of fiscal year 2020. And we also raised our EBIT margin for fiscal year 2020 from the top end of 20% to 25% to 25% to 27% in North America. In Europe the housing market is down slightly across addressable market, particularly in Germany and UK. The key for us in Europe, we'll continue to introduce new fiber cement products that develop and made for the European markets and continue to replicate the Lean manufacturing processes and systems from North America to Europe, so that we will deliver the EBIT margin accretion for the whole fiscal year of 2020. For Asia Pacific, the addressable housing markets in Australia is contracting to the tune of about 8% to 10% in our assumption for the year, and APAC volume will deliver 3% to 5% growth above markets, and our EBIT margin in Asia Pacific will be in the top half of our stated range of 20% to 25%. With the continued improvement in our results, we are raising our full-year adjusted net operating profit to be between $340 million and $370 million.

And with that, I would like to have Jason to come up and share with you in more detail the financial results of our quarter. Jason?

Jason Miele -- Vice President-Investor and Media Relations

Thank you, Jack. Good morning, everyone. We will start with the Group results on Slide 13. You could see a strong financial performance for the quarter and the half year for the Group, the top line straight down through to the profit metrics. We'll start with the top line. Net sales were up 2% for the quarter as well as for the half year compared to the prior corresponding periods. That was really driven by two things growth above market in volume for all three of our segments, so North America, Asia Pac, and Europe delivering growth above their markets, as well as a higher net price in all three regions as well in local currency.

Moving down to the profit metrics. Gross profit was up 16% for the quarter and up 11% for the half year. Adjusted EBIT of $134.2 million was up 26% for the quarter, and it was up 21% for the half year. Finally, adjusted net operating profit of $98.6 million for the quarter. That's a record high for any quarter in James Hardie. For the Group, that was up 22% for the second quarter compared to the same period last year and a solid result for the half year as well, up 17%. Finally, operating cash flow is up 37% at $251.8 million. Pretty simple story there, driven by the strong performance of all three segments and the operating cash they are generating.

Moving on to North America. As Jack said, a strong top line result. Sales volume up 5% for the quarter and up 4% for the six months, driven by strong exterior volumes. PDG is on track. Exteriors volume plus 6% for the quarter and plus 5% for the first half. And as Jack mentioned, that's on a underlying market for our first six months of relatively flat. With that, we raised our PDG target for the fiscal year 2020 from 3% to 5% and now to 4% to 6% for the full year. Also gaining momentum is our interiors business. Flat volumes on the quarter as well as negative 2% for the first half, a marked improvement versus the last two fiscal years. Price is up 1% for both periods compared to the same periods last year, favorably impacted obviously by our strategic price increase on 1st of April 2019, partially offset by mix. That's a combination of customer mix as well as product mix.

Moving down to EBIT excluding. Another record for James Hardie, a $124.7 million in the quarter. It's our highest quarter to-date. That was up 25% compared to the same period last year and $238.2 million for the half year, up 15%. Jack talked about margins. 27.1% for the quarter and 26.1% for the half year, again both above our long-term value creation range. And as Jack mentioned, we raised our guidance on EBIT margin as well, and added some more specificity to a range of 25% to 27% for the fiscal year. The EBIT results were really driven by the top line result, volume and sales -- sorry, volume and price, improved plant performance driven by Lean as well as lower freight in both periods. This is a chart most of you would be familiar with. We plot EBIT dollars on the left axis and EBIT margins on the right axis. The gray bars represent the EBIT dollars and the green line is the EBIT margins by quarter with the red range there being our long-term value creation range of 20% to 25%, as we've previously mentioned 26.1% for the half year.

Input costs, this slide starting to look a little nicer than it has over the past few years. I'll start with pulp. Pulp was down 15% for the three months ended September 30th compared to the same period last year. I want to remind everyone these are market prices that we show on the slide. The sources are down there on the right-hand corner. That's important with pulp. As you're aware, the market prices we see with pulp lagged by about one quarter into our P&L and so for the quarter and the half year, as Jack mentioned, pulp was still a headwind for us. We'd expect to start seeing that favorability in the third quarter. Freight similarly down 16%. Different dynamic for us. Market price kind of flows through the P&L immediately. So we've been seeing the favorable impact in our P&L in the quarter as well as the first half. Something to note on freights. The first half of FY '19, the freight market in the US was quite high and elevated, and so we're seeing that favorability now, but certainly in the back half of this fiscal year, we'd expect that to narrow substantially. Cement up 3%, very similar to the first quarter result. Gas prices flat is an improvement compared to what we reported three months ago and electric prices down 7% is consistent with the first quarter.

Moving on to Asia Pacific. As Jack mentioned, a very strong result considering the Australian housing markets. Sales volumes were flat for the quarter and only down slightly 1% for the half year, really driven by growth above market in both Australia and the Philippines as well as a growing market -- underlying market in the Philippines. Net sales, plus 2%, AUD164.2 million. There is a impact on currency translation there where that number comes through in US dollars at a lower rate, but good price as well. Price was up 3% in both periods compared to the prior year. In Australian dollars, EBIT margin result of AUD39.5 million was up 5% on the quarter on flat volume, a good result by the team there and AUD74.9 million for the six months was flat year-on-year. EBIT margin of 24% for the quarter and 23.5% for the half year. Those are both in the top half of our long-term range of 20% to 25%, which is what we guided to for the full year, and we're on track to hit that target. You see the US dollar EBIT result there being down year-on-year. That's just impacted -- that's the impact of the foreign exchange translation.

Europe continued strong. Net sales results for Europe up 5% for the quarter and up 6% for the half year. Fiber cement for the half year was up 30% and fiber gypsum in euros increased 3%, consistent with Q1. At the EBIT level, EBIT excluding of EUR7.8 million is up 7% for the quarter and EUR17.0 [Phonetic] million for the half year is up 1%. The EBIT increases are being driven by the gross margin performance and partially offset by higher SG&A as we stood up the corporate function there and exit the TSAs. Last thing is on EBIT margin excluding at 9.9% for the quarter. It was up 20 basis points and 10.3% for the half year. It's down slightly from the six months in the same period last year, but that's on track with our internal targets and we're still on track to deliver EBIT margin accretion for the full year FY '20 versus FY '19. Lastly, we've spent about EUR4.7 million of integration costs through the six months and approximately EUR3 million left to spend over the last two quarters of FY '20 as we wrap up the integration.

Moving to the remaining segments. Other business segments, you'll recall we closed our -- we exited our windows business last fiscal year. The majority of those charges were taken in the second quarter. So you're seeing the largest, $17.6 million, charge there in the prior year and the current year where all operations ceased in the first quarter and we're winding up the rest of that business and there's small charges or gains or losses as we sell the remaining assets. So we'd expect very minimal activity the last two quarters within that segment. Research and development, we continue to be committed to R&D investment. As Jack has talked about in our September investor tour as well as today, that will be a area of focus and a area of investment for us going forward, and you see the numbers there are down slightly for the quarter and for the half year, but we'd expect R&D activity to increase over time. Lastly, with general corporate costs, in line with our expectations, are up a bit for the quarter and for the half year at $15.9 million and $31.9 million, respectively, but that's driven by the higher stock compensation expenses, which is being driven primarily by the increase in share price.

Moving on to income tax. Our current estimate for our adjusted effective tax rate for the full year FY '20 is 17.9%. That is very much in line with what we would have reported three months ago at Q1 when we reported 18.2%. There is no real change in anything around our income tax, and we expect our full-year ETR to be 17.9%.

Moving onto the balance sheet. Our financial management framework remains unchanged. Reminders around capital allocation, our first priority is our organic growth and investing in R&D and capacity expansion to drive that; second is to maintain the ordinary dividend; and lastly, remain flexibility for cyclical market volatility, accretive inorganic -- and strategic inorganic opportunities as well as further shareholder returns. You'll note in our media release this morning, we announced first half dividend of $0.10 per security.

Moving on to cash flow. Discussed this a little bit on the first slide. For the Group for the six months, operating cash flow is up significantly, 37% at $251.8 million, again primarily driven by the strong performance of all three business units. In the cash used for investing and financing, you'll see some large changes year-over-year. That's just driven by the fact we acquired Fermacell in the first half of last year -- first quarter of last year and the large transactions associated with that in the prior period are driving that fluctuation.

Onto our liquidity profile as of 30th September 2019. Really no significant change from 30 June. The same debt instruments remain in place, $800 million notes, EUR400 million notes, and a $500 million revolving credit facility. Those all remain in place. We remain on track to get back within our 1 times to 2 times leverage range. Last quarter we would have said we're four quarters away, and we're still on track with that. We're currently at 2.3 times and our long -- the range we want to operate in is 1 times to 2 times.

Moving on to capital expenditures. $123.4 million for the six months, down from the prior year, down $16 million. We would have talked the last few quarters about estimate of $200 million for fiscal year 2020. We're right on track with that. We expect to end up right around that number for the full year. In the first half, we completed the start-up of our Tacoma 2 greenfield expansion. We continued construction in Alabama on our Prattville facility and remain in a position to open that in the first half of FY '21 and we continue our brownfield expansion at Carole Park.

Lastly, you've seen this slide already. Jack went through it once. I'm just going to touch on the changes that we've made from last quarter to this quarter in our key assumptions and market outlook and guidance, starting with North America. We've changed our PDG assumption around exteriors for fiscal year '20, increasing that from 3% to 5% to 4% to 6% PDG for fiscal year '20. Similarly, with EBIT margin, last quarter, we have had an assumption around the top end of our long-term range of 20% to 25%. We've narrowed that and added some more specificity to 25% to 27% EBIT margin for fiscal year 2020. I want to point out that does not change the long-term value creation range of 20% to 25%. In Europe, one change, as Jack had mentioned earlier, three months ago we were expecting a slight increase in our underlying housing market and today as we look across all the countries we operate in, the segments, commercial, new construction, R&R, we see a slightly decreasing addressable market. It's not a massive change, but certainly something that has changed in our outlook for the fiscal year. No changes to our assumptions around Asia-Pac for the fiscal year 2020. And finally, adjusted net operating profit, our guidance at this point last quarter we provided was $325 million to $365 million. We have raised that to $340 million to $370 million.

With that, I'll turn it back over to Jack for a strategy update.

Jack Truong -- Chief Executive Officer

So now, I'd just like to give you a quick update on where we are relative to our three-year strategic plan that we shared with you back about nine months ago. Just to remind you that we -- here are the key metrics of long-term value creation. For North America it's about having the 35/90 goal with strong returns. And that's roughly 6% PDG and EBIT return of 20% to 25%. And in Europe it's about creating the EUR1 billion business with 20%-plus EBIT margin in about 10 years. And for APAC to deliver growth above market with strong returns, with 20% to 25% EBIT margin.

So here are the key strategic priorities that we set out as goal for our organization of global teams around the world. So how about in North America, we accelerate the exterior growth and what that means is that we're going to develop market and sell the full Hardie solution for exteriors, Hardie planks, Hardie panels, Hardie Soffit, Hardie Trim, and Hardie Shingles, everything about fiber cement that provide a total exterior wrap for home construction as well as R&R. And second is about leverage on the fact that we are the world's largest fiber cement producer and also in North America we have a very large scale and this is now about having all of our 10 plants running the same Hardie manufacturing and operating system to really take advantage of our scale and capability. And third is really about make interior business a growth business again.

And so these are the three strategic priorities that drive a lot of the key plan and the execution for our business in North America. Europe is really all about gaining market traction for fiber cement and that means that we are leveraging on the R&D capability and new product commercialization capability within the company to develop relevant new products for the European market based on European demand so that we can really start to grow our fiber cement business in Europe in a very meaningful way. While we're doing that, it's also important that we continue to drive fiber gypsum growth, to drive market penetration. This is also a profitable business for us that's also differentiated that we will continue to invest to grow in Europe. And really leveraging on the Lean manufacturing system that we have in Asia Pacific and North America to really unlock the manufacturing capacity in Europe to help drive EBIT margin growth for our business in Europe for the short and long term.

And Asia Pacific is really all about continue to drive growth above market and that means in Australia it's really about gaining share against brick, in New Zealand it's really about fiber cement gaining share against timber, and in the Philippines it's really about fiber cement gaining share against plywood. And continuing to drive Lean manufacturing across all of our four plants in Asia Pacific to really drive the strong returns as we grow.

So just a quick -- give you a quick update on where we are in the commercial transformation in North America. This is where we essentially moved from being a pull approach to push-pull. James Hardie in North America, we have always been very, very strong of creating demand of our products with the builders and contractors. So as we convert homes and jobs [Phonetic] into fiber cement. Those conversion must then be converted at our customer for sales and we have not paid a lot of attention in the past about how to manage our customer, which is really the distributors, the dealers, retailers, and really a big focus for us during this year and going forward is really about number one is that we will continue to invest significantly more and more in the pull side in terms of driving the demand creation. This is what we know how to do best. But as we create a lot more demand, we have to make sure that we also manage our customer, which are the distributors, dealers, and retailers in the way that as they sell more of the James Hardie products that they make more money and improve their working capital. And that means that for James Hardie is that we have to build the capability with our customers to be really based on the analytics of how do we integrate our supply chain capability in with our customers to deliver the right product to the right end user, which are the builders and the contractors. And this is where we also invest in our systems to ensure that we are a lot more easy to do business with and it's all about having the win-win approach with our customers. And so far it really is we have some early traction in this area. The shift from pull to push-pull is really proceeding well and we are on track now to deliver 4% to 6% PDG for the fiscal year 2020. And it is an area that as we continue to gain more profits growth in our business that we will have -- I'll look at more of those cash to invest in our market creation as well as the account management to ensure that we can deliver the long-term value creation through the 35/90.

And another key part of our long-term success through 35/90 is that we are -- we'll come out with more of, what we call, the market-driven innovation, the innovation that really matter most to the market as opposed to being technology push. And that is really -- one of the key transformation within our company is more about understand what are the key trends in the marketplace, the hyper-trends in the marketplace, which is labor shortage, the affordable housing, and then the move to cities. And based on trends and that we will be working closely to our customers and end users to have really the right insights in terms of what are those unmet needs. And based on those insights, and we turn those into action for our R&D team to really develop the right products and commercialize a quicker to the marketplace and make a big difference. It is one of the key four pillars for our global strategy going forward, not only to help North American business marching to that 35/90 objective, but also a key driver for us to grow to the EUR1 billion business in Europe as well as in Asia Pacific.

Well, having those key strategies is nice, but if we don't have the right team, the right skills, the right culture, and the people to execute, then we won't get there, and this is really a key area that really is moving quite well within our company as we move from being a big small company to now a small big company going forward. And that's really about moving from being managed in top down to really drive a lot more empowerment and accountability deeper within the organization. And this is one of the key drivers of success for our Lean transformation in our plants where we make the operator be in the center of our operations as opposed to being driven from the top. Working -- in the past, we were working primarily in different teams and different functions that is really not connected, that is now we really move from being working in silos to working a lot more cross-functionally with very clear alignments toward delivering result for the total company, total business as opposed to just optimizing for functions. And we're now, with the acquisition of Fermacell we're now creating new business within Europe, and we're truly now a global building material company with significant operations in North America, in Asia Pacific, and Europe, and it is an area that we'll really take advantage of that value. That is taking the best that we have in our businesses around each region of the world and replicate where applicable. For example, we took the preliminary -- the early Lean manufacturing approach in Asia Pacific and then to replicate that to North America improve on it, and then we took there and we replicate to Europe. And then now some of those key advancement now replicate back to Asia Pacific and another example is that our interiors business for our European business is very -- a lot more advanced than what we have in North America. And so there is a lot more of the interactions and know-how being transferred from Europe back to North America.

In terms of we're moving from being reactive to a to a problem to more -- to now about to having a clear plan going forward and know where the opportunities are and know where the pitfalls are and then to really plan it correctly, so that we can drive toward the results with not having a lot of big barriers in front of us and so this is a cultural transformation in our company today. That's very, very important as we continue to grow that our people, our teams, our employees around the world are really getting more and more energized to execute the plan to deliver.

So with that, that concludes our presentations. And Jason and I will be happy to address questions. Sophie? Oh, Peter?

Questions and Answers:

Peter Steyn -- Macquarie -- Analyst

Thanks, Jack. Peter Steyn from Macquarie. Jack, just keen to get a bit of an understanding of what happened in the North American, particularly the plant performance and essentially your input cost delta there, 270 basis points of improvement. Could you give us a sense of what freight contributed to that relative to plant performance? Just want to try and get an understanding of what's cyclical and what's potentially structural?

Jack Truong -- Chief Executive Officer

So if you're looking at the operational -- the operational performance, we -- so we have Lean savings, we have freight savings and those -- they were offset with the raw material headwinds in the quarter. So if you take all three together, I would say about 50% of that is due to Lean and about 40% is due to freight, and then the rest are raw materials. I'm sorry, 50%, 30%, 20%.

Peter Steyn -- Macquarie -- Analyst

Perfect, thanks. And then perhaps just a shout out on Asia-Pac, really strong performance, particularly from a volume perspective. You pointed to Philippines doing reasonably well, but what from an underlying point of view is driving the very strong performance from an execution perspective in volume, in particular, in that business?

Jack Truong -- Chief Executive Officer

It's really driven primarily with the, yes, we have very good volume performance in the Philippines, and we also have very good growth above markets in Australia and despite the contraction in the Australian business of 8% to 10%, our business in Australia has performed a lot better than that. And then given now that with the focus of Hardie manufacturing operating system that replicate back into Asia Pacific. That's also enhanced the performance, the financial performance of our plants in the Asia Pacific. So a combination of volume growth and also much improved operational performance in the plants.

Peter Steyn -- Macquarie -- Analyst

I guess it just sort of strikes me that they're potentially doing better than the 3% to 5% PDG guidance that you've given for the full year at this point in time. Sorry, one last one for me, just on the cash performance, working capital unlock [Phonetic] particularly strong. There's been a couple of movements there, but really trying to understand whether there is something fundamentally improving your inventory position. It's only up 7% and if you think about price movements and cost movements and underlying market growth, it seems like that's a pretty decent performance. Is that some of the restructuring you've done from supply chain point of view over the last 12 months coming to be there?

Jack Truong -- Chief Executive Officer

Absolutely. We discussed this back in February is that Lean with the Hardie manufacturing operating system is really about driving a lot more of the predictability of our output as well reduction in variability of our output. And at the same time, we would be able to produce more volume per hours within our plants. So, by now, as we continue to improve with Lean, we have -- of course, we can be more predictable with our output and that would then allow us to manage our inventory better than has been and of course, they're just continuous improvements.

Peter Steyn -- Macquarie -- Analyst

Thanks, Jack. I'll leave it there.

Sophie -- -- Analyst

Good morning, Jack and Jason. Just two questions from me. First of all, exceptional performance in 2Q. You've hesitated from changing any long-term targets I guess. Can you just explain why the hesitation today when -- if things are continuing to improve from where we sit today, given all the internal initiatives that you're driving, why you're sticking to the 20% to 25% EBIT margin?

Jack Truong -- Chief Executive Officer

Okay, Sophie [Phonetic] that's a good question. There is I think three factors. One is how housing market is still quite variable and then two is that the we're -- we also need to make sure that we invest back into our business, particularly in innovation, particularly in how we are going to be -- continue to do a better job -- much better job of managing our key accounts, our customers. And so that means there will be more investment in systems and so on. So, it is very, very important for us to make sure that we have the right investment in place for tomorrow and be able to continue with this type of sustainable performance. And I think the third which is very, very important is that we want to make sure that we establish a good track record of delivering sustainably and consistently to be able for us to make some decision on what that guidance -- if we need to change our guidance or not.

Sophie -- -- Analyst

Okay, thanks. And then just in terms of North America, prices are up 1%, your key competitor was talking around rebates. Can you just maybe update us in terms of why that pricing increase was probably a little bit lower than expectations? And have you had to pull the rebate levers?

Jack Truong -- Chief Executive Officer

Well, if you remember the first half of last year, our price was relatively large. I think we were about 4%, 5% price in the same time period last year. So we're confident getting to a higher number. No, we don't really have to focus too much on price and how we approach the market. And it's really now more about growing into more, what we call it the mix of customers and products. And with the Lean manufacturing approach now that allow us to have better operational performance that we now can afford to move into new -- expand into the segments like multifamily, which tend to be a lower margin than the new construction for single-family, for example. So it's now is really about allow us to grow into new segments. So it's really about the price/mix, so yes, we did have an increase in the invoice price, but then that's offset by the mix of customers and products.

Peter Wilson -- Credit Suisse -- Analyst

Thank you. Peter Wilson from Credit Suisse. Just following that -- up on that kind of the relative performance. So you've printed strong volume growth above market today. LP also printed very strong growth above market today. Do you think -- is there any sense that maybe the market was stronger than you think or are you both just ripping share from vinyl?

Jack Truong -- Chief Executive Officer

Well, I think, first of all, I think if you -- there's one thing I'd just like to reinforce is that for James Hardie we are focusing on driving demand. So our sales are really based on our product getting on the wall. And then as they get into the wall then that will flow back to our builders for really sale for our business. So it is more -- our business more relate back to the actual demand in the marketplace. Of course, LP will be more whatever call on the push side. So it tends to be more sales to the distribution and then and not so much on the pull side. So that's why you have the -- so when you compare the two, it can be quite different.

Peter Wilson -- Credit Suisse -- Analyst

Again on that push side, these sales go through distributors. Who are they winning distributors off or volume off? Are they winning off you or someone else?

Jack Truong -- Chief Executive Officer

No. Push is really -- you don't really -- first is that we don't really get sales until they've actually been used on the wall with the builders because that's why we're correlating more with the housing starts and R&R, because that is really more about how we build a business. It's about demand creation when a product get on the wall.

Peter Wilson -- Credit Suisse -- Analyst

Okay. And then interiors, so improving momentum. Has that -- I'm trying to sketch out I guess the past. Has that business actually turned the corner? Have you actually had some tangible improvement in product placement, for example, that explains that performance and should we expect that momentum to continue?

Jack Truong -- Chief Executive Officer

Yeah, I think, Peter, that's a really good question. It really come down to what we discussed in New York Investors Day. Therefore, interior business for the short term is that we have to get better placement, which we began -- our team began to get some of that and will continue to improve. Second is that we have to have better promotion. So better promotion here is our product have to be better positioned on the retail shelves that be able to tell the end users, contractors out there that this is James Hardie back. Here's our key benefits and so on and so forth. And third is really about new products. So the position -- in the promotions start to improve, and that will continue to improve. And then we just launched the HydroDefense, the first waterproof backer board in the marketplace. And so that should continue to gain traction in the marketplace. But it's just more about gain our position, hold our position, but growth really come when we start to improve our new products introduction, start to bring new product to the category that really give us that true sustainable growth for the long term.

Peter Wilson -- Credit Suisse -- Analyst

Okay. And then North America margins, you've attributed 90 basis points of the gross margin increase to lower start-up costs. Would it be right to assume that benefit continues for the rest of the financial year, but then next year as Prattville comes online for it to actually reverse and maybe even double, so actually a negative effect into next year?

Jack Truong -- Chief Executive Officer

Yeah. I think, it's -- as you know that this year, we -- don't forget that we also have a start-up with Tacoma 2. And so Tacoma 2 start-up, commission, and -- is really -- is also baked in the numbers. So for us, it's all about -- we have a long history of being able to invest into capacity for growth and our business is quite -- in terms of cost structure is very is highly variable. So we say as we move on to commission the Prattville facility, that would be just a normal course of how we would manage our business.

Lee Power -- CLSA -- Analyst

Lee Power, CLSA. Jack, just on plant performance, you haven't increased the Lean target. Is it coming through quicker than you expected?

Jack Truong -- Chief Executive Officer

Lee, good question. Yeah, I think we are ahead of our plan to date. It's really the key -- yes, it's better than expected, because a key foundation for our Hardie manufacturing operating system is really about driving the employee and operator engagement. And then we had thought that that probably would take a little bit longer time to get traction, but that really gained significant traction and that's how we were able to help us get better results to date.

Lee Power -- CLSA -- Analyst

Okay. And then in terms of the amount that you're reinvesting into growth, we heard Pete's questions around LP printing some pretty big numbers. Did you put more down to the bottom line than you expected or is it same as you went into the quarter when you delivered earlier than you expected. Did you deliver the same proportion back into growth or did you say we've delivered more early and will flow that to the bottom line?

Jack Truong -- Chief Executive Officer

To invest in innovation and then all the capability for account management for example is really take time to make sure that we develop the plant correctly before we put money behind it. So most of our investment will begin in the second half. So most of the Lean savings that we had in the first half really drop through to bottom line.

Lee Power -- CLSA -- Analyst

Okay. And then can you talk to that FY '20 target, how much higher you think that will be Lean being delivered earlier?

Jack Truong -- Chief Executive Officer

Lee, I think once you know that, I'd like to know that, too.

Lee Power -- CLSA -- Analyst

Fair enough. And then just on interiors. You talked about know-how coming across from Europe. Can you give some examples of that? Is that on new product development, merchandising, like where are they actually --?

Jack Truong -- Chief Executive Officer

Yeah, I think first and foremost is really about merchandising, make sure that we have the right brand placement, make sure that we make that into our category become a destination category. That is making easy for contractors to find, make it easy for new contractor who don't know about our value proposition to be able to see the product in retail and know why they need to pay higher price for our products. So those are the basic retail blocking and tackling that we have to do, which is really an area that we didn't have the expertise here in North America. So that's an area that we had beef up recently. I think at the last earnings call I shared with you that we just hired a Vice President of Interior Sales for the North American business. This is a leader that used to run the Home Depot accounts for 3M Company. So we know how the deal with the big box retailers at different levels and how to drive the push-pull effects to the big box, so that's will help now be the first step toward that direction.

Lee Power -- CLSA -- Analyst

Okay. Thanks.

Jason Miele -- Vice President-Investor and Media Relations

We can take questions from the phone.

Operator

Questions on our side. The first question is from Simon Thackray from Jefferies. Please ask your question Simon.

Simon Thackray -- Jefferies -- Analyst

Thanks very much. [Indecipherable]. Just a couple of really quick ones. Some of them have already been answered, but just want to go to Europe for a second, Jack. I'm trying to understand how fiber cement can grow 30%-plus and the fiber gypsum only grows 3%, and the margins go backwards year-on-year when fiber cement was always meant to be a higher margin product. Maybe I'm missing something, but can you step me through how margins go backwards in Europe on that kind of mix?

Jack Truong -- Chief Executive Officer

Yes. Simon, I think -- it's Simon, right. Simon. This is a -- it's just normal variations in the business and it's just a timing of some investments. But as the year go on, we should see that smoothing out and we still expect that for our EBIT margin for the year to be accretive. And that was our expectation for Europe as we set out in the plan.

Simon Thackray -- Jefferies -- Analyst

So, is it just that the fiber cement is growing off such a small base that the number looks impressive, but it didn't really make much difference to the overall result. Is that the better way to think about it, or am I --?

Jack Truong -- Chief Executive Officer

No, it's just a -- it's more investment that we put into the business to drive growth.

Simon Thackray -- Jefferies -- Analyst

And would that investment continue in this current half, or is it likely to slow down that rate of investment? I'm just trying to understand how the margin -- when the margin goes back to reflecting what should be growing margins, pretty aggressively growing margins on that kind of volume growth.

Jack Truong -- Chief Executive Officer

So the way to think about it Simon is that our four factories, fiber gypsum factory in Europe, is now gaining more momentum in terms of running the factory more efficiently and now we open up more capacity. So as we get a volume of fiber gypsum growing back to where the plan is and that's where we will get the force multiplier effects for margin accretion. That's why we'll see EBIT growth and then we still expect that as we grow more fiber cement sales and that fiber cement has higher margin fiber gypsum. So that will also be more accretive.

Simon Thackray -- Jefferies -- Analyst

Okay. That's helpful. A small one, Jack. When do you sort of weave your magic in New Zealand? You've called out plant performance yet again in New Zealand. It seems to be a perennial issue in New Zealand. What's the plan for New Zealand?

Jack Truong -- Chief Executive Officer

Yes. The New Zealand plant performance actually during the past two months has a step-change improvements and we should expect that to continue to improve going forward. This is a case of the new culture within our company now in terms of how we become more -- have a global mindset and really sharing best practices as well as resources. So the -- as we now implement the Lean manufacturer in North America and have really good success there and what we did is that we took really the number two leader in our Waxahachie plants and now made him the plant manager for our plant in New Zealand and effective this month. So we would expect that really that improvement in our New Zealand plant will continue to improve, if not continue to have a step-change improvements.

Simon Thackray -- Jefferies -- Analyst

So when you were in charge of International and that was under your rein [Phonetic] and you obviously demonstrated great success with Carole Park. Was it just a question that New Zealand just didn't get on the bus, didn't get on the journey when you were driving change through the region? Is that the right way to understand it? And now you're fixing that with the Waxahachie manager going there.

Jack Truong -- Chief Executive Officer

All right. It is -- it's also -- Simon that's a good question, because it is also part of the priority because Carole Park was -- it is our biggest plant in Asia Pacific and then the second one is Rosehill, third one is Cabuyao in the Philippines and Penrose is our smallest plant. And then just in terms of how we prioritize our resources to focus on the biggest opportunities, which we did and then now to all three plants, Cabuyao, Carole Park, and Rosehill performed at the exceptional level, which kind of contribute to the good performance that you see in Asia Pacific this past quarter. So now we can then reallocate the resources to and to really take Penrose to that next level

Simon Thackray -- Jefferies -- Analyst

Good stuff. All right. Thanks, Jack. Thanks, Jason.

Operator

Question is from Brook Campbell from JP Morgan. Please ask your question.

Brook Campbell -- JPMorgan -- Analyst

Yeah, morning, Jack and Jason. Thanks for taking my question. Just one on the SG&A line in North America. It looks like I guess the first half that SG&A expense lines were sort of 2% to 3%. And so your comments earlier on about costs ticking up in the second half was that just relating to R&D or should we see SG&A expense increase in the second half. And if you could then help us understand what sort of magnitude of increase we should be looking for?

Jason Miele -- Vice President-Investor and Media Relations

Yeah, Brook. Thanks for that question. We talked about three areas of spend, our investments going forward, demand creation, which is certainly would be -- most of that would be in SG&A space, customer management capabilities, as well as customer-led or customer-driven innovation. So how that impacts our P&L will be in a variety of places. So within the segments that may show up in SG&A. Depending on the program, it could show up in cost of goods sold and certainly in our R&D segment as well as our general corporate costs are all kind of the places it could show up. We're not in a position today where we're going to provide guidance on the increase in spend, but certainly investment is a focus going forward.

Jack Truong -- Chief Executive Officer

Hey, Brook, the way to think about that too is, for example with innovation, yes, we are going to need the additional funding to develop new products, but then as we develop those new innovative products, sometime we need to have a new -- certain manufacturing process to put in to make them in the lower cost environment and so on so forth. So the thing to think about is for innovation it cut across several different P&L lines.

Brook Campbell -- JPMorgan -- Analyst

That's really helpful. Thanks, Jack. And one more for you while you're there. Just interested to understand if the -- I guess the hiring in the senior management team is now done. Are there any sort of open roles I guess, apart from the CFO position, which we're not talking about today, that you're looking to fill at the moment or restructure going forward?

Jack Truong -- Chief Executive Officer

Yeah, I think, yes, we're looking to have a new CFO, as well as we're looking for a new Head of Manufacturing for North America.

Brook Campbell -- JPMorgan -- Analyst

Okay, thanks. And just one more for Jason, just on mix in North America. You talked about this already, but you've mentioned it's due to both customer and product mix. Just wondering if you can sort of dig into that a bit deeper, maybe provide some examples for us just to help understand really that mix drag in the period.

Jason Miele -- Vice President-Investor and Media Relations

Yeah. I don't know that I'll describe it as a drag. Obviously in the numbers, it comes through as a drag. We executed our price increase and that went into the market successfully. So the team did a good job with that. And then as you are aware, we sell across a variety of segments as well as to a variety of customers and a variety of products. So in any given year one may be growing faster than the other. I think the key is, is we're doing a good job across all of our segments and across all of our products, and the fact that that's coming out with a negative mix impact is not something we're concerned with. We're trying to grow across all those spaces and we're effectively doing that. Some examples that you guys would be familiar with for any period. I'm not going to be specific to this period but if you sold more multifamily than say new construction that would have an impact on mix, more Prime product than a ColorPlus product that has a product impact on mix, so it's all those types of dynamics that could impact that mix equation.

Jack Truong -- Chief Executive Officer

But the bottom line is that we're managing our business holistically now. Really the key is that -- the key is that we focus on, on driving growth of our markets at the target that we have and also we are driving our EBIT to the target that we have. So anything in between is what we do to manage our business to deliver those two outcomes that really drive the value creation.

Brook Campbell -- JPMorgan -- Analyst

Okay, understood. Thanks.

Operator

And our next question is from Daniel Kang from Citigroup. Please ask your question, Daniel.

Daniel Kang -- Citigroup -- Analyst

Good morning, everyone. Just firstly, can you just provide some color on underlying markets that you're seeing? I think I heard you say, Jason, that the addressable market was relatively flat in the period. Can you talk about the underlying drivers there? And what you're seeing in particular in the R&R market? I think you also mentioned that you're expecting that to be a drag for the year. That's my first question.

Jason Miele -- Vice President-Investor and Media Relations

Yeah. We wouldn't have R&R as a drag for the year. So underlying housing market in North America, Daniel, we assume -- we are assuming in the data we see would be R&R would be up 3% for the full year and we see that consistently through the full year. So our first half we'd be looking at our assumption is a 3% R&R increase in the underlying market. New construction is the space where it's a bit more -- a case of two halves. You can look at various sources externally, including US census data and through the six months ended June 30th, the market would have been down 4%, 5%, 6% looking at -- depend on which data source you look at. And I use June 30th because that kind of activity lags by about one quarter into our PDG calculation. If you look at the same data sources, you're now seeing 3% or 4% or 5% increase for the three months ended September, and so we'll see that's kind of housing market's underlying for new construction kind of impact us in our third quarter.

And so, Jack talked about it earlier when he went through the assumptions page. We are still assuming, which is what we were assuming last quarter, slight underlying housing market increase, and that's when you blend the 3% R&R increase along with something below zero, maybe negative 2%, negative 3% for new construction. You blend those two together and you end up at something right around, and Jack talked about a plus 1% for underlying market for FY '20. That's kind of where we're seeing it.

Daniel Kang -- Citigroup -- Analyst

That's great. Thank you for that. And just on margins, 27% margins in North America, clearly a strong performance. The lower pulp cost, we didn't really see much impact from that. So should we expect that 3Q given the favorable impact of that 3Q margins should actually be higher than 27%, or is it other factors that I should be taking into account?

Jason Miele -- Vice President-Investor and Media Relations

So we certainly are confident in EBIT margin. That's why we raised the guidance to 25% to 27%. I think your question is what are the puts and takes going into the back half of the year. As I flagged earlier, certainly the favorability we've been getting on freight in the first half of the year, we don't see that repeating, because the freight market started correcting in the back half of last fiscal year. So that comparison will tighten. Certainly pulp will be a tailwind for us in Q3, but then you've got to remember, we've talked about investment quite a bit today. So investments would be the other thing. It sounds like you're not considering as you talk about margin going forward.

Jack Truong -- Chief Executive Officer

Puts can be more continued Lean improvements.

Jason Miele -- Vice President-Investor and Media Relations

Yeah.

Daniel Kang -- Citigroup -- Analyst

And Jack, in terms of -- you spoke in the past in terms of base customer erosion that you're looking to narrow? Can you update us on the progress there? Has base business began to stabilize?

Jason Miele -- Vice President-Investor and Media Relations

He's asking about the base erosion.

Jack Truong -- Chief Executive Officer

Oh. Yeah, it is a -- really as we continue to focus more and more, expand our focus more into our customers, we'll begin to gain more trust and credibility with our customers and also as we are -- we also bring the demand to our customers and so it is -- we see that our customers tend to substitute less and less. So I think that's an improvements, and that's why you see some of the results that you see here is really due in part to that.

Daniel Kang -- Citigroup -- Analyst

Great. Thank you. I'll leave it there.

Operator

Our next telephone question is from Grant Slade from Morningstar. Please ask your question, Grant.

Grant Slade -- Morningstar -- Analyst

Hi, Jack and Jason. Look, thanks for taking the question. Just one for me on the Lean program in North America. I just wondered if you did have any sense as yet as to how much latent capacity in the North American manufacturing network will be ultimately unlocked by the Lean program? Thanks.

Jack Truong -- Chief Executive Officer

Yeah. We would estimate that that's probably would be the equivalent of about one additional sheet machine within the next 12 months capacity that we don't have to build.

Grant Slade -- Morningstar -- Analyst

Right. And how much is that in terms of a million square feet?

Jack Truong -- Chief Executive Officer

Roughly 200 million to 250 million standard feet.

Grant Slade -- Morningstar -- Analyst

Right, OK. And that's the total that you think -- that's the total amount of latent capacity you think you'll unlock?

Jack Truong -- Chief Executive Officer

Correct.

Grant Slade -- Morningstar -- Analyst

Thanks.

Jason Miele -- Vice President-Investor and Media Relations

Okay. Is there any more questions on the phone?

Operator

We have another question from Paul Quinn from RBC Capital. Please ask your question.

Paul Quinn -- RBC Capital -- Analyst

Yeah, thanks very much. Morning, guys, and congratulations on the results. Looks like you have pretty good short wind tailwinds here. Just trying to understand the longer-term picture in the 35/90. We saw LP put up almost 7.5% growth year-over-year. You guys were 5% on volumes. To be able to get to your 35/90, does LP's growth have to slower? Do they have to shrink?

Jack Truong -- Chief Executive Officer

Yeah, Paul, I think this is why I mentioned earlier, our growth is really coming from the demand on the marketplace for our fiber cement board to actually on the wall and that could be driven back to create our sales, whereas our competitor is more in terms of selling into the channel with not a lot of pull-through. So it's two different type of -- so when you look at those numbers, you have to -- you can't really compare them from period -- the same period. You got to look at it on the long-term view to make sure that you see there has been flow through to the market, because in our case it's really more about the flow through to the market and being on the wall.

Paul Quinn -- RBC Capital -- Analyst

I completely understand the difference in methodologies, but one LP posted a number of years -- and we can go back five years, and you can still see the same type of growth. The question still remains if they're growing at this pace, does that put in jeopardy the 35/90 goal? That's all.

Jack Truong -- Chief Executive Officer

No, I think it is -- first is that we were -- the key for us to continue to drive our game plan and that is about driving the from pull to push-pull and really drive the Lean transformation that would allow us to expand into new markets and create a lot more demand. And then the key to 35/90 for long term for us is innovations. And also, all of that have to deliver strong profit growth at strong margin. So that is our game plan. That's our long-term value creation which we are on the path, and that's what we are delivering. It's really about driving that growth of our markets with strong returns and consistently and sustainably, and that's our game plan.

Paul Quinn -- RBC Capital -- Analyst

Fair enough. Congratulations. Good results and good luck going forward.

Operator

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

Jack Truong -- Chief Executive Officer

So thank you all very much for your questions and your interest. I think we are James Hardie a global team. We're happy with the results that we have just delivered in Q2. And this is about all three of our regions delivered positive growth in sales and EBIT. And then it -- which allow us then to raise our PDG target for fiscal year 2020 from 3% to 5% to 4% to 6% in North America. We also raised our EBIT margin in North America from the top of 20% to 25% range to 25% to 27% range. And also with strong performance too in Asia Pacific and good performance in Europe then allow us then to also raise our full year guidance and our adjusted net operating profits to between $340 million and $370 million. Thank you.

Jason Miele -- Vice President-Investor and Media Relations

Thank you.

Duration: 72 minutes

Call participants:

Jack Truong -- Chief Executive Officer

Jason Miele -- Vice President-Investor and Media Relations

Peter Steyn -- Macquarie -- Analyst

Sophie -- -- Analyst

Peter Wilson -- Credit Suisse -- Analyst

Lee Power -- CLSA -- Analyst

Simon Thackray -- Jefferies -- Analyst

Brook Campbell -- JPMorgan -- Analyst

Daniel Kang -- Citigroup -- Analyst

Grant Slade -- Morningstar -- Analyst

Paul Quinn -- RBC Capital -- Analyst

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