Earnings Call Transcript - JHX Q2 2020

Jack Truong, CEO

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 8 weeks, I had 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 and also served currently as a member of James Hardie Board of Directors. Anne has done an excellent job running and jumping right in as an addition to our executive team, as well as to the global finance organization. I'm pleased to have this transition progressing, and we're actively recruiting. 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're on a commercial transformation journey to be a more customer-focused company by continuing to invest significantly in demand creation without end users, the builders, the installers, the R&R contractors, while building a robust account management capability to serve our customers much better, which includes the dealers, the lumber yards, the distributors and the retailers. This is aimed at driving a sustainable growth above market of PDG in a 6% range for the long-term sustainability. 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. Hence, we will continue to deliver growth in our market, even in a contracting market that we currently have in Australia, while also achieving strong returns. In Europe, it's focused on 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 delivered 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're pleased with this continued positive momentum in executing our global strategic plan. Now let's turn to Page 8, our 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. However, it is a continuing 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%, exceeding 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 continues to execute well, delivering good fiber cement growth along with solid execution on the fiber gypsum business. The housing market in Western Europe has been softening this year, particularly in Germany and the U.K. 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 a very strong operational 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 this headwind, our APAC team delivered net sales growth of 2% in local currency with flat volume. EBIT grew 5% in the quarter and the EBIT margin is at 24%, which is at the top end of our long-term target range. The APAC team continued to execute well with price mix, and lean manufacturing is gaining momentum across our APAC plants. Finally, on Page 11, following our updated key assumption for fiscal year 2020, we predict modest growth in the U.S. housing markets, roughly about 1% to 2%. The first half was quite challenging for new construction home starts in North America, but what we see right now is improving. The U.S. residential housing start forecast is still between 1.2 million and 1.3 million units. We're raising our exterior volume growth from 3% to 5% to a range of 4% to 6% PDG for the whole year of fiscal year 2020. We also raised our EBIT margin for fiscal year 2020 from the top end of 20% to 25% to a range of 25% to 27% in North America. In Europe, the housing market is down slightly across the addressable market, particularly in Germany and the U.K. The key for us in Europe will be to continue introducing new fiber cement products that are developed and made for the European markets and continue to replicate the lean manufacturing processes and systems from North America to Europe. This way, we'll deliver EBIT margin accretion for the fiscal year of 2020. For Asia Pacific, the addressable housing markets in Australia are contracting to the tune of about 8% to 10% in our assumption for the year. APAC volume will deliver 3% to 5% growth above markets. Our EBIT margin in Asia Pacific would fall within 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 a range between $340 million and $370 million. With that, I would like to have Jason come up and share more details about the financial results of our quarter. Jason?

Jason Miele, Head of Investor Relations

Thank you, Jack, and 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. At 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 and volume for all three of our segments—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 at 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. A pretty simple story there, driven by the strong performance of all three segments in the operating cash they’re generating. Moving on to North America, as Jack said, a strong top line result in sales volume, up 5% for the quarter and up 4% for the six months, driven by strong exterior volumes. PDG is on track. Exterior volumes were up 6% for the quarter and 5% for the first half. As Jack mentioned, that’s on an underlying market for our six-month period of relatively flat. With that, we raised our PDG target for the fiscal year 2020 from 3% to 5% and now to a range of 4% to 6% for the full year. Also gaining momentum is our interiors business, with flat volumes on the quarter as well as negative 2% for the first half—a marked improvement versus the last two fiscal years. Prices are up 1% for both periods, compared to the same periods last year, favorably impacted, obviously, by our strategic price increase on the 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, $124.7 million in the quarter, is the 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. 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 driven by the top line result of volume and sales, or sorry, of volume and price, and 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 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 is starting to look a little nicer than it has over the past few years. We'll start with pulp. Pulp was down 15% for the three months ended September 30 compared to the same period last year. I want to remind everyone that these are market prices that we show on the slide. The sources are down there in the right-hand corner. That's important with pulp, as you're aware, the market prices we see with pulp lag by about one-quarter into our P&L. 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 is similarly down 16%. A 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 both the quarter and the first half. Something to note on freight: the first half of FY '19, the freight market in the U.S. was quite high and elevated, 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 is up 3%, very similar to the first quarter result. Gas prices are flat, which is an improvement compared to what we reported three months ago. Electric prices are down 7%, 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 underlying market in the Philippines. Net sales increased by 2%, AUD 164.2 million. There's an impact on currency translation there where that number comes through in US dollars at a lower rate, but with good price as well. The price was up 3% in both periods compared to the prior year. In Australian dollars, an EBIT margin result of AUD 39.5 million was up 5% in the quarter on flat volume—a good result for the team there. And AUD 74.9 million for the six months was flat year-on-year. EBIT margin of 24% for the quarter and 23.5% for the half-year continues to be in the top half of our long-term range of 20% to 25%, which is what we projected for the full year, and we're on track to hit that target. You see the U.S. dollar EBIT result being down year-on-year; that's just the impact of the foreign exchange translation. Europe continued strong. Net sales results for Europe were up 5% for the quarter and up 6% for the half-year. The fiber cement for the half-year was up 30%, and fiber gypsum in euros increased by 3% consistent with Q1. At the EBIT level, EBIT excluding EUR 7.8 million is up 7% for the quarter, and EUR 17.0 million for the half-year is up 1%. The EBIT increases are driven by the gross margin performance and partially offset by higher SG&A as we stood up the corporate function there and exited the TSAs. Last thing is on EBIT margin, excluding 9.9% for the quarter, it was up 20 basis points, and 10.3% for the half-year is down slightly from 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, I've spent about EUR 4.7 million on integration costs over the six months and approximately EUR 3 million left to spend in euros over the last two quarters of FY '20 as we wrap up the integration. Moving to the remaining segments, other businesses segments: You'll recall we exited our Windows business last fiscal year. The majority of those charges were taken in the second quarter, so you're seeing the large $17.6 million charge there in the prior year. In the current year, all operations ceased in the first quarter, and we're winding up the rest of that business. So we'd expect very minimal activity in the last two quarters within that segment. Research and development: We continue to be committed to R&D investments. As Jack has talked about in our September Investor Tour, as well as today, this will be an area of focus and investment for us going forward. You see the numbers 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. That's driven by higher stock compensation expenses, which is primarily due to the increasing 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%, which is very much in line with what we reported three months ago at Q1 when we reported 18.2%. There’s no real change in anything around our income tax, and we'd expect our full-year ETR to be 17.9%. Moving on to 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. Last is remaining flexible for cyclical market volatility, accretive and organic strategic inorganic opportunities, as well as further shareholder returns. You’ll note in our media release this morning, we announced a 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 that we acquired Fermacell in the first half of last year—the first quarter of last year, and the large transactions associated with that in the prior period are driving that fluctuation. On to our liquidity profile: As of 30 September 2019, there was really no significant change from 30 June. The same debt instruments remain in place, USD 800 million notes, EUR 400 million notes, and a USD 500 million revolving credit facility; those all remain in place. We remain on track to get back within our 1x to 2x leverage range. Last quarter, we said, "We’re four quarters away," and we're still on track with that. We’re currently at 2.3x in our long-term range 1x to 2x. Moving on to capital expenditures: $123.4 million for the six months, down from the prior year, down $16 million. We mentioned in the last few quarters an 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 startup of our Tacoma 2 greenfield expansion. We continue construction in Alabama on our Prattville facility and remain on track to open that in the first half of FY '21. We continue our brownfield expansion at Carole Park. Lastly, you’ve seen the 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 and our key assumptions, 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 a range of 4% to 6% PDG for fiscal year '20. Similarly, with EBIT margin, last quarter, we've had an assumption around the top end of our long-term range of 20% to 25%. We've narrowed that and added some specificity to 25% to 27% EBIT margin for fiscal year 2020. I want to point out that this does not change the long-term value creation range of 20% to 25%. In Europe, there was one change: As Jack had mentioned earlier, three months ago, we expected a slight increase in our underlying housing market. Today, as we look across all the countries we operate in and their segments, commercial and new construction, R&R, we see a slightly decreasing addressable market. It’s not a massive change, but certainly something has changed in our outlook for the fiscal year. No changes to our assumptions around Asia PAC for fiscal year 2020. Finally, adjusted net operating profit guidance, which we provided last quarter, 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, CEO

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 about nine months ago. Just to remind you that we, for this, here are the key metrics of our long-term value creation. For North America, it's about having the 35/90 goal with strong returns, which is roughly 6% PDG and an EBIT return of 20% to 25%. In Europe, it's all about creating the €1 billion business, with a 20% plus EBIT margin in about 10 years. For APAC, it's to deliver growth of our market with strong returns, aiming for a 20% to 25% EBIT margin. Here are the key strategic priorities that we've set out as goals for our organization and global teams around the world. In North America, we aim to accelerate exterior growth, which means we will develop, market, and sell the full Hardie solution for exteriors, including HardiePlanks, HardiePanels, HardieSoffit, HardieTrim, and HardieShingles—everything about fiber cement that provides a total exterior wrap for home construction and R&R. Second, leverage our status as the world's largest fiber cement producer. In North America, we have significant scale, and it's now about having all our 10 plants run the same Hardie Manufacturing Operating System to really take advantage of our scale and capability. Third, make our interior business a growth business again. These are the three strategic priorities driving our key plans and execution for our business in North America. In Europe, it’s all about gaining market traction for fiber cement, leveraging R&D capability and new product commercialization within the company to develop relevant new products for the European market based on European demands. This will help us grow our fiber cement business in Europe significantly. While we’re doing that, it's also important that we continue to drive fiber gypsum growth to enhance market penetration, making this a profitable business that we will continue to invest in. Additionally, we’re leveraging lean manufacturing systems that we have in Asia Pacific and North America to unlock manufacturing capacity in Europe to help drive EBIT margin growth for our business in Europe in both the short and long term. Asia Pacific is focused on continuing to drive growth above market. In Australia, it's really about gaining share against brick; in New Zealand, it's gaining share against timber; and in the Philippines, it's gaining share against plywood. We'll continue to drive lean manufacturing across all of our four plants in Asia Pacific to achieve strong returns as we grow. To provide a quick update on our commercial transformation in North America: we are moving from a pull approach to push-pull. James Hardie in North America has always been very strong in creating demand for our products with builders and contractors. As we convert homes and jobs into fiber cement, those conversions must then be converted with our customers for sales. However, we have not paid much attention in the past to managing our customers, specifically distributors, dealers, and retailers. A significant focus during this year and going forward is to invest significantly more in the pull side to drive demand creation—this is what we know how to do best. But as we create a stronger demand, we need to ensure we also manage our customers effectively, allowing them to make money and improve their working capital. This means building capability with our customers based on analytics to integrate our supply chain capabilities to deliver the right product to the right end user—builders and contractors. We're also investing in our systems to ensure that we are easier to do business with. It’s all about having a win-win approach with our customers. So far, we've had early traction in this area. The shift from pull to push-pull is proceeding well, and we're on track now to deliver 4% to 6% PDG for the fiscal year 2020. As we continue to gain profits and growth in our business, we will allocate more of that cash to invest in both market creation and account management to provide long-term value creation towards the 35/90. Another key element for our long-term success with the 35/90 is to drive market-driven innovation—innovation that truly matters to the market, as opposed to being technology push. This is a key transformation within our company, focusing more on understanding key trends in the marketplace: labor shortage, affordable housing, and urbanization. Based on these trends, we’re working closely with our customers and end users to develop insights on their unmet needs. These insights are turned into action for our R&D teams to develop the right products and commercialize them quickly in the marketplace, making a significant difference. This is one of the key four pillars for our global strategy going forward, not only to help the North American business march toward the 35/90 objective but also as a key driver for us to grow into the €1 billion business in Europe, as well as in Asia Pacific. Having these key strategies is great, but without the right team, skills, culture, and people to execute, we won’t achieve these goals. We are making significant progress in moving from being a 'big small company' to a 'small big company.' This is about moving from top-down management to empowering and holding our teams accountable deeper within the organization. This cultural shift is crucial for our success with our lean transformation in our plants, where the operators are the center of our operations instead of top-down management. Previously, we worked primarily in different teams and functions without strong connections; now, we are working cross-functionally with clear alignments toward delivering results for the entire company instead of just suboptimizing per function. With the acquisition of Fermacell, we are now creating a new business within Europe. We are truly a global building materials company with significant operations in North America, Asia Pacific, and Europe. We are leveraging our best practices and innovations across each region of the world; for example, we took the early lean manufacturing approach in Asia Pacific and replicated that in North America, improved upon it, and are now replicating it in Europe—with some key advancements expected to be transferred back to Asia Pacific. Moving from being reactive to a problem to having a clear plan for the future means knowing where the opportunities are and where the pitfalls lie, allowing us to plan accordingly and drive results. We are not anticipating big barriers in front of us. This cultural transformation is incredibly important as we continue to grow; our teams and employees worldwide are becoming increasingly energized to execute our plan and deliver.

Peter Steyn, Analyst

Jack, just came to get a bit of an understanding of what happened in North America, 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 to get an understanding of what's cyclical and what's potentially structural.

Jack Truong, CEO

So we've, if you look at our operational performance, we have lean savings, freight savings, and those will offset the overall raw material headwinds in the quarter. So we take all three together; I would say about 50% of that is due to lean, about 40% is due to freight, and then the rest are materials. I apologize for any confusion; I meant to say 50%, 30%, 20%.

Peter Steyn, Analyst

Perfect. And then perhaps, just a shout-out on Asia PAC—a really strong performance, particularly from a volume perspective. You've pointed to the Philippines doing reasonably well. But from an underlying point of view, what’s driving the very strong performance from an execution perspective in volume, in particular, in that business?

Jack Truong, CEO

It's really driven primarily by very strong volume performance in the Philippines. We also have good growth above markets in Australia. Despite the contraction in the Australian business of 8% to 10%, our business in Australia has performed much better than that. Now, with a focus on the Hardie Manufacturing Operating System replicated back into Asia Pacific, that has also enhanced the financial performance of our plants there. It's a combination of volume growth and significantly improved operational performance in our plants.

Peter Steyn, 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. So, sorry, one last one for me. Just on cash performance, working capital is notably strong. There have been a couple of movements there, but really trying to understand whether something fundamentally is improving your inventory position. It's only up 7%. If you think about price movements, 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 a supply chain point of view over the last 12 months coming to bear?

Jack Truong, CEO

Absolutely. We discussed this back in February: lean with the Hardie Manufacturing Operating System is about driving more predictability in our output and a reduction in variability. Now, we're able to produce more volume per hour within our plants. As we continue to improve with lean, we can manage our inventory better than before. This is a continual improvement process.

Sophie Spartalis, Analyst

Jack and Jason, just two questions from me. First of all, your exceptional performance in Q2. You've hesitated from changing any long-term targets. Can you explain why the hesitation today when 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, CEO

Sophie, that's a good question. I think there are three factors. One is that the housing market is still quite variable. Two is that we also need to ensure we invest back into our business, particularly in innovation, and particularly into managing our key accounts, our customers. This means there will be more investments in systems and other resources. So it's essential to have the right investments in place for tomorrow to sustain this level of performance. The third, which is very important, is that we want to establish a good track record of delivering sustainable growth consistently before we consider changing our guidance.

Sophie Spartalis, Analyst

Okay. And then just in terms of North America: prices were up 1%. Your key competitor was talking about rebates. Can you update us on why that pricing increase was likely a bit lower than expectations? Have you had to pull the rebate levers?

Jack Truong, CEO

If you remember the first half of last year, our price was relatively large—around 4% to 5% price growth compared to the same time period last year. So we're confident against a higher number. We don't have to focus too much on price and how we approach the market. It’s more about growing into segments like multifamily, which tend to have lower margins compared to other segments like single-family new construction. So now, it’s about managing the product and customer mix effectively. Yes, we did have a price increase in our invoices, but that was offset by the mix of customers and products.

Peter Wilson, Analyst

Just following up on the relative performance: you've noted strong volume growth which seems to point to a strong market today. LP also printed a very strong growth—above market growth today. Do you think there’s a sense that maybe the market was stronger than you expected, or are you both just reaping share from vinyl?

Jack Truong, CEO

Well, first of all, I want to highlight that for James Hardie, we’re focusing on driving demand. Our sales are really based on getting our products on the wall. Once they’re installed, that translates into sales back to our dealers. Our business correlates more with actual housing starts and R&R contracting, rather than pushing products into the distribution channel. LP might be pushing more aggressively, focusing on the distribution side without the same pull through from contractors. That’s why our respective results may differ.

Peter Wilson, Analyst

Okay. I know that sales go through distributors. Are they winning distributors off or volume off clients? Are they winning off you or someone else?

Jack Truong, CEO

No, it's a push. It’s really not about that. We don’t get sales until our products have actually been installed on the walls of new constructions or R&R projects. Therefore, our sales are more closely tied to actual housing trends and demands.

Peter Wilson, Analyst

Okay. And then regarding interiors: is there tangible improvement in product placement? For example, should we expect that momentum to continue?

Jack Truong, CEO

Yes, Peter. That’s a very good question. The interior business needs improved placement, which our team has begun to achieve. That will continue to improve. We need better promotional strategies to ensure our products are better positioned on retail shelves and prominently communicate the benefits to end users and contractors. We just launched HydroDefense, the first waterproof backer board in the marketplace. This innovation will help gain traction in the market.

Peter Wilson, Analyst

Okay. And then North American margins: you attributed 90 basis points of the gross margin increase to lower start-up costs. Should we assume that benefit continues for the rest of the financial year or could it actually reverse next year with Prattville coming online?

Jack Truong, CEO

Yes. Just keep in mind that this year, we’re also confronted with the startup of Tacoma 2. It's essential to remember that we have a long history of investing in growth capacity. Our cost structure is highly variable, and when we commission the Prattville facility, it will just be part of our normal management processes.

Lee Power, Analyst

Jack, just on plant performance: you haven't increased the lean target. Is it coming through quicker than you expected?

Jack Truong, CEO

Yes, Lee, that's a good question. We are ahead of our plan to date. Key foundations for our Hardie Manufacturing Operating System are driving employee and operator engagement. We've targeted delivery performance, and I see this foundational change yielding significant improvements in our results to date.

Lee Power, Analyst

And in terms of the amount that you're reinvesting into growth: did you put more down to the bottom line than you expected? Or was it the same percentage flowing back into growth?

Jack Truong, CEO

Investment in innovation takes time to develop and then significantly fund. So it’s about planning correctly before committing the money. Most of our investment for this phase will begin in the second half of the fiscal year. So most of the lean savings we saw in the first half have dropped to the bottom line.

Lee Power, Analyst

And can you talk to that FY '20 target; how much higher you think that will be with lean being delivered early?

Jack Truong, CEO

Well, Lee, I think once we obtain a more accurate forecast, I would love to share that with you.

Lee Power, Analyst

Fair enough. And then just on interiors, you talked about know-how coming across from Europe. Can you give some examples? Is that on new product development, merchandising? Where is that actually?

Jack Truong, CEO

Yes, the primary focus has been on merchandising—making sure we have the right brand placement. We want our category to be a destination category, making it easy for contractors to find our products and understand why they need to pay a higher price. We recently hired a Vice President for Interior Sales who previously managed the Home Depot account for 3M—someone who understands the dynamics of big box retailers and knows how to drive consumer pull.

Jason Miele, Head of Investor Relations

We can take questions from the phone.

Operator, Operator

Multiple questions on our phone. The first question is from Simon Thackray from Jefferies.

Simon Thackray, Analyst

Just a couple of really quick ones; some of mine have already been answered. But I just want to go to Europe for a second. Jack, I'm trying to understand how fiber cement can grow 30-plus percent while fiber gypsum only goes 3%, and the margins go backward year-on-year when fiber cement was always meant to be a higher margin product. Maybe I'm missing something. Can you walk me through how margins go backward in Europe on that kind of mix?

Jack Truong, CEO

Yes. Simon, I think that this is Simon, right? It’s just normal variations in the business and the timing of some investments. As the year goes on, we should see some improvement. We still expect EBIT margins for the year to be accretive, as that is our expectation for growth in Europe as reflected in our plan.

Simon Thackray, Analyst

So is it just that the fiber cement is growing on such a small base that the number looks impressive but doesn’t make much difference to the overall result? Is that the better way to think about it?

Jack Truong, CEO

No. It’s more about the investment that we’ve put into the business to drive growth.

Simon Thackray, Analyst

Would that investment continue in this current half, or will it likely slow down? I’m trying to understand how the margin can return to reflecting what should be growing margins aggressively with that kind of higher volume growth.

Jack Truong, CEO

Think of it this way: Our four factories, particularly our fiber gypsum factory in Europe is now gaining more momentum for running the factory more efficiently. As we ramp that volume of fiber gypsum sales closer to where the plant is, we will experience a margin accretion effect, which will drive EBIT growth. We anticipate that alongside our growing fiber cement sales will also contribute positively to our EBIT margins.

Simon Thackray, Analyst

Okay. That's helpful. A small one: Jack, when do you think you will finally turn around New Zealand? You've noted performance burden there in the past. It seems to be a perennial issue with New Zealand. What’s your plan for New Zealand?

Jack Truong, CEO

The New Zealand plant has seen improvements over the past two months and should continue to improve. We are implementing a new culture within our company, focusing on a global mindset and sharing best practices in management and resources. We’ve also assigned a leader from our Waxahachie plant to the New Zealand plant, effective this month. Therefore, we expect improvement in our New Zealand operations to continue.

Jason Miele, Head of Investor Relations

Just one more question on the cash flow management. Can you provide insights into your current cash management structure? Is there any expected changes in your capital allocation plan moving forward?

Jack Truong, CEO

Thank you very much for your questions and your interest. We are at James Hardie a global team. We’re pleased with the results in Q2. All three of our regions delivered positive growth in sales and EBIT, allowing us to raise our PDG target for fiscal year 2020 from 3% to 5% to a range of 4% to 6% in North America. We also raised our EBIT margin in North America slightly from the top end of our range from 20% to 25% to 25% to 27%. Strong performances in Asia Pacific and Europe also supported raising our full-year adjusted net operating profit guidance to between $340 million and $370 million.

Jason Miele, Head of Investor Relations

Thank you.