Earnings Call Transcript - JHX Q1 2020

Operator, Operator

Ladies and Gentlemen, thank you for joining us for the James Hardie Q1 FY20 results briefing conference call. Currently, all participants are in a listen-only mode. Following the presentations from the speakers, there will be an opportunity for questions and answers. Please note that today’s conference is being recorded. I will now turn the call over to our first speaker, Dr. Jack Truong, Chief Executive Officer of James Hardie. Thank you, please proceed.

Jack Truong, CEO

Good morning, and good afternoon, everyone. Thank you for joining us. I will start with key business and operational highlights on our first-quarter performance. Then, Matt Marsh, our CFO, will cover the financial details of the quarter. Finally, I will come back and update you on where we are with our three-year strategic plan. Let me begin by putting our first-quarter results in the context of our three-year strategic plan. We are an organic growth company. We're built to drive growth above market, our PDG growth in all regions of the world that we operate in, and with good returns. In North America, we are on a commercial transformation journey, to be more focused on customer by continuing to invest significantly in demand creation, where our end users, the builders, installers, and remodel/repair contractors. We are building a more robust account management capability to serve our customers, the builders, lumber yards, and distributors much better. This is aimed at driving sustainable growth above market in the 6% range for the long term. We also drive lean manufacturing across all 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 a three-year period due to lean. In Asia-Pacific, our goal is to make a good business better, hence, to continue to deliver growth above market, even in the contracted market that we currently have in Australia, and at good 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 group results. I'm pleased to note that we delivered very good performance in all three regions that we operate in. North America had a 5% volume growth in exterior while EBIT margin was at the top of the EBIT range, 25.1%. Europe continued to deliver strong revenue growth, 7% in Euros and expected EBIT margin. APAC delivers solid financial results, despite weakening of Australian housing markets. Now, let's turn to page 8, on North American results. Our exterior volume grew 5%, showing a continuous improvement in primary demand growth, quarter-on-quarter, and in sequential quarter. It is the result of our talented team executing on demand creation and account management strategy better each day. Our interior volume declined 3%, which is an improvement over negative 10% in the previous quarter. It's also a marked improvement over the previous four quarters. With increased volume, better price mix, and lean savings, we deliver an EBIT increase of 6%, despite continued raw material inflation in the quarter. Our EBIT margin in the quarter was again, 25.1%. Now, let's turn to page 9 for the European results. Our EU team delivered very good revenue growth, up 7% in Euros. This is driven by 37% growth in fiber cement. It is a good growth momentum for a fiber cement business, over Q4 of fiscal year '19, which was 22%. The team also delivered positive price mix growth in the quarter. EBIT margin was 10.7%, which was in line with our internal target. Now, let's turn to page 10 for APAC results. Our APAC team delivered a solid quarter, despite a significant softening of housing markets in Australia. The team managed well through the choppy market dynamics. The team was able to manage price mix well, to deliver revenue at the same level as Q1 of fiscal year '19. We also had a strong volume growth in the Philippines. EBIT and EBIT margin continue to be impacted by input cost inflation and higher freight. It was offset with lean savings and cost controls. Our APAC team delivered an EBIT margin of 23% in the quarter, which is an improvement over quarter four of fiscal year '19, which was 20.3%. Finally, on page 11, the following are our updated key assumptions for fiscal year 2020. We see modest growth in the U.S. housing market. It's about 1%ish, and with the U.S. residential housing starts between $1.2 and $1.3 million. And we now see our EBIT margin for the year to be at the top of our range, which is 20 to 25%, and we affirm the exterior PDG growth of 3 to 5% for the year in North America. In Europe, we see a slight housing market growth across our addressable markets, and the introduction of new fiber cement products in Europe will be a key focus for our team to continue to create value within our European business. And we also see EBIT margin accretion through better management of price mix and better improvements in our network of plants in Europe. In our Asia Pacific business, the addressable housing market in Australia is contracted, and we are estimating between an 8 and 10% decline for the market in Australia. APAC volume will be 3 to 5% growth above markets, and EBIT margin will be in the top half of our stated range, 20 to 25%. Now, I'd like to hand over to Matt Marsh, our CFO, to go into the quarter into more financial details.

Matt Marsh, CFO

Thank you, Jack. Good morning, and good afternoon to everybody. Thank you for joining the call. I'm going to take you through the financial results at a deeper level, as we would typically do. So, on page 13, results for the first quarter for the group, we had net sales increased up 1%, which, in the context of the markets and the market conditions, both in North America and in Australia, we think is a good performance. The exteriors growth above the market at 5% in North America, fiber cement represents an improvement from the previous quarter. The Asia Pacific fiber cement business was impacted by the continued softening of the Australian market, so we've seen that now for several quarters, and our adjustable markets in Australia are definitely contracting. In Europe, as Jack mentioned, we had higher net sales, largely driven by the fiber cement business, driving a 37% increase in revenue. Gross profits were up 5%, net sales up 1%. Gross margins increased 150 basis points. Adjusted net operating profit for the quarter was $90.2 million, up 13%. We had a 6% increase in EBIT in North America, a 272% increase in our European buildings segment, and Asia Pacific in U.S. dollars was down 12%. On page 14, we'll go into the North America results a bit more. We reported net sales in North America of $452.3 million. They were up 4%. On volume, exteriors was up 5%, compared to a year ago, and interiors was down 3%, an improvement from the fourth-quarter performance. Price of 1% in the quarter. We're on track for our 2% price increase for the year. We implemented our annual change in strategic pricing on April 1st, as we expected we would, and there was a little bit of mix and some tactical pricing in the quarter that brought that down slightly, but overall, we're on track with pricing in North America. EBIT up 6%, on sales up 4%. That leverage was driven by an improvement in manufacturing, despite continuing to see higher input costs. I'll talk more about that in a moment. We are starting to see the beginning, positive effects of lean with our plant performance in the quarter, and our SG&A as soon as a percent of revenue has gone down, as we continue to focus on optimizing our cost and continuing to invest in growth and lean. On page 15, our first-quarter EBIT margins were up 40 basis points, compared to a year ago, to 25.1%, and those are at the top end of our target range. And, as Jack said in our assumptions in for the year, we believe will be at the top end of our 20 to 25% target range for the full year of fiscal 20. On page 16, we'll talk for a moment about input costs. A bit more of a mixed story, which is a nice change from what we had discussed with you in May and the previous several quarters, where we had headwinds, kind of across the commodity groups. Pricing on pulp is starting to come down, although, in comparison to a year ago, you can see it's only down slightly. In comparison to the fourth quarter of fiscal '19, which represented the peak of the market, we're down close to 6%. So, you see we're on a good deflationary trend, but quarter-on-quarter impact was slightly down, 1%. Freight prices, on the other hand, are down fairly significantly, down 15%, compared to a year ago. Cement and gas are both up, 3% and 22%, respectively, as the cement market continues to have a high level of demand. And electricity prices were down, so a bit more of a mixed story, an inflationary story in totality, for North America, first quarter of fiscal '20 in comparison to '19, but certainly a bit of a reprieve from the significant inflationary headwinds that we experienced most of fiscal '19. Go to page 17. In Asia Pacific, we reported net sales of A$154.4, which was flat to the prior corresponding period. We think we had growth above the market in Australia, despite a very soft market in the housing market, down 8 to 10%. Strong sales volume growth in the Philippines. You'll see that on an upcoming slide. EBIT was impacted by higher input costs and unfavorable New Zealand plant performance. We're continuing to work on getting the manufacturing plant in New Zealand operating to the standard expectation that we have. That was partially offset by higher average net sales price in Australian dollars, and, as you can see on EBIT, while down 12% on a U.S. dollar basis, it was down 6% on an Australian dollar basis, so the second result in U.S. dollars were unfavorably impacted by the change in foreign exchange rate movements for the period. On page 18, a quick look at the by-country. As we've said now a couple of times, Australia, we believe had a good volume result, given the market conditions. We think we gain market penetration, despite the soft market. The EBIT decrease was primarily driven by the lowered net sales. We think the team is doing a good job of navigating a declining market. In New Zealand, you can see overall higher input costs and unfavorable plant performance is impacting that country's results. And a very good quarter in the Philippines, with volume up, driven by market penetration, and EBIT was unfavorably impacted by higher input costs. On page 19, the European building products segment. Net sales up 7% in Euros, driven by fiber cement net sales in Euros up 37%. On an EBIT basis, excluding the one-time transaction costs, you can see we had an EBIT margin rate at 10.7%, and an EBIT of 9.1 million Euro, which is driven by higher gross margins. We're continuing to invest SG&A into that business as we build out the corporate functions and we exit the service agreements. We're very much still on track for the overall budget that we had established for integration costs. We incurred $2 million of integration costs in the quarter we expect that there are some additional costs for the year, that'll be incurred for the remaining three quarters. We expect total-year integration cost to be in the $5 to $6 million range. EBIT margin excluding those one-time costs of $10.7, very much in line with our internal targets, and we think the European businesses is on track. Page 20, our other segments. So, the other businesses, if you're familiar with, used to be our windows segment, you can see there is a $400,000 gain in the quarter, which was a half a million-dollar gain on sale of fiberglass protrusion business, which we completed early in the quarter. And prior to that, we had some legacy sales of that fiberglass protrusion business, and there was a little bit of losses associated with that. So, overall a $400,000 gain for that. We continue to remain committed to R&D investments and you can see we're within a normal band of variation on our R&D investments. General corporate cost for the quarter unfavorable, largely due to foreign exchange and higher stock compensation expenses. The underlying core SG&A or general corporate costs, excluding those two items was up slightly, but in a very normal range. On page 21, income tax, we are estimating an 18.2% adjusted effective tax rate for the year and reported in the quarter. As a reminder, income taxes are not currently paid or payable in Australia due to the tax losses associated with our annual deductions relating to the contribution to AICF. On page 22, our financial management framework remains unchanged. We continue to stay focused on having strong financial management that starts with strong margins and strong cash flow. We believe strongly in and having good governance and being transparent and, you know, we continue to operate the company as an investment-grade financial credit. Our capital allocation priorities remain consistent with the last several quarters, with our top priority being investing in R&D and capacity expansion to support our organic growth strategy. We remain committed to the ordinary dividend, and the remaining is flexibility for cyclicality in our market cycle. On the liquidity and funding side, you know, we have come into the one to two times adjusted EBITDA leverage target. We continue to be temporarily above that target, and have a good line of sight to getting that back below that the one to two times range, within the time frame that we talked about, that we've been talking about, so another four quarters. So, very much financial management-consistent, with investment-grade credit, and we think we've got a strong financial position to be able to withstand cycles and unanticipated events. On page 23, we reported $161.1 million of operating cash flows, up 22% from the prior year. Those were largely determined by working capital and increases in income in each of the business, adjusted for non-cash items. Lower investing activities, obviously, with the acquisition and closure of Fermacell in fiscal year '19, in the first quarter, you'd expect variance. And those were partially offset, as we continue to invest in CapEx, you can see, was slightly lower in the first quarter of this year, in comparison to a year ago. On slide 24, a brief look at our liquidity profile, very consistent with prior quarters. We have $1.2 billion of net debt at the end of the period, nearly US$421 of available revolving credit. The structure of our corporate debt structure remains consistent with our prior quarter discussions. our 2.2 net debt to adjusted EBITDA leverage at the end of the first quarter is very much on track with the strategy that we laid out when we bought the Fermacell business, and we believe we've got line of sight to being back below that 2 times leverage, the high end of that leverage range, by next year this time, so, another four quarters. So, we remain on track and remain committed to returning to our one to two times leverage target rate. On page 25, a CapEx spend of $63.3 million for the quarter, down slightly compared to a year ago. No new capacity projects. We continue to start up our Tacoma greenfield expansion. We're continuing the construction of our Prattville, Alabama facility, and that remains on track. We continue to expand our ColorPlus product lines in two of our plants in North America, and we're nearing the end of construction and will be starting up the Carole Park brownfield expansion later this year, and we remain on track to start selling board off of that line early next year, early next fiscal year. On page 26, just to reiterate the key assumptions and talk a little bit about guidance. So, we continue to think that the U.S. housing market will have modest growth this year in, the 1-ish% range. We are assuming 1.2 to 1.3 million U.S. residential housing starts. As we've said a number of times already on the call, we think we'll be at the top end. We have good line of sight to being at the top end of our EBIT margin range for the year, and our assumption is that we will deliver 3% to 5% primary demand growth in North America. For Europe, slight housing market growth, across our adjustable markets. We also believe we'll introduce new products this year, new fiber cement products for Europe, in Europe this year. And that EBIT margin will be accretive, year-over-year. Asia Pacific, we think the housing market will be down, in the high single-digit range year-on-year, and contracting. APAC volume, despite that market condition, we believe will be 3% to 5% growth above that market index, so continue to drive market penetration. And EBIT margins will be in the top half of our 20% to 25% range for Asia Pacific. So, we believe our full-year adjusted operating profit will be between $325 million and $365 million. So just to wrap up, on page 27. So, we think good and disciplined financial performance in all three of our businesses. Our North America fiber cement business delivered a marked improvement in primary demand growth while generating an EBIT margin at the top of a target range. Asia Pacific fiber cement margins were in the middle of our target range and drove market penetration in a soft market. In Europe, building products segment delivered strong revenue growth in Euros. Our adjusted EBIT of $124.4 was up 16%. Our adjusted net operating profit after tax was up 13%, at $90.2 million, and we will fund $108.9 million to AICS during the second quarter of fiscal year 2020, as provided under the AFFA. So, with that, I'll hand it back over to Jack to go through strategy.

Jack Truong, CEO

Thank you, Matt. Six months ago, I outlined the strategic plan that our global team is currently implementing. This plan focuses on creating value by ensuring our North American business generates growth with strong returns, targeting a 20%-25% EBIT margin over the long term. In Europe, we aim to establish a €1 billion business with Hardie-like returns and around a 20% EBIT margin. For the Asia Pacific region, our goal is to achieve growth that exceeds the market average while maintaining strong returns in the 20% to 25% EBIT range. Moving to our strategic priorities for fiscal years 2020 and 2022, in North America, we will accelerate growth in our exterior business, providing a complete James Hardie solution for home exteriors, which is central to our commercial transformation process. We are also committed to driving lean transformation across all ten of our plants, maximizing our capabilities as the premier fiber cement producer, which will elevate U.S. manufacturing to world-class standards. Additionally, we aim to revitalize our interior segment as a growth driver both in North America and globally. In Europe, our focus will be on increasing market share with existing fiber cement products and developing new offerings for that market. We will also continue expanding our fiber gypsum product line and unlock existing manufacturing capacity across our five European plants. In Asia Pacific, our priority remains driving growth above market levels while implementing lean manufacturing improvements in our four facilities. I want to provide an update on our lean transformation efforts across all three regions. In North America, we have rolled out our Hardie Manufacturing Operating System across five plants and plan to implement it in two more by the end of the second quarter of fiscal year 2020. We are on pace to achieve cumulative cost savings of $100 million over the next three years, with forecasted savings of $15 million to $20 million in fiscal 2020, an additional $30 million to $40 million the following year, and $40 million to $55 million in the third year. This is evolving into a global transformation, as our European business will begin adopting the Hardie Manufacturing Operating System. Our plant management team from Europe, who visited our North American facilities in July, will apply their key learnings in the upcoming implementation phase across Europe. Furthermore, our Asia Pacific team embodies the spirit of continuous improvement, as we will share enhancements from North America in our Asia Pacific facilities. These plant teams will be meeting with their North American counterparts in the third quarter of fiscal year 2020 to gather insights for replication in Asia. Now, regarding Europe, we are continuing to leverage sales synergies between fiber cement exterior products and fiber gypsum interiors. This involves utilizing our channel access and end-user connections gained from the Fermacell acquisition to expand our fiber cement product reach. We see opportunities for increased returns by enhancing the manufacturing capabilities in our five European plants. Our objective is consistent EBIT improvement quarter-on-quarter and year-on-year in Europe. Moving to Australia, despite a challenging contracting housing market characterized by labor shortages and smaller lot sizes, we are positioned well since these trends favor our fiber cement products, allowing us to replace traditional bricks. The flexibility our products offer enables builders to create diverse home styles and configurations, speeding up construction, optimizing home sizes, and enhancing affordability in a cooling market. That wraps up my update on our strategic plan, and I'm now ready for questions.

Operator, Operator

Ladies and gentlemen, we will now begin the question and answer session. Your first question today comes from the line of Peter Stein from Macquarie. Please go ahead.

Peter Stein, Analyst

Good afternoon, Jack and Matt. Thanks very much for the time. I was curious to get a little bit more flesh around the performance from a volume perspective in North America. Could you give us a bit of a sense of the difference to outcomes in the quarter, given what one's seen around the macro-environment? You know, is it regional performance or channel penetration? What's happened in interiors, and early impact on ColorPlus? Sorry, I'm giving you a few bullet points there, but I'm just curious about those perspectives.

Jack Truong, CEO

Okay, well, good morning, Peter. So, let me address, first, the growth in exterior, and then we'll move into interior, and then we'll talk about the status of the color. So, with the exteriors, as we discussed during the past two conference calls, we are traditionally, and this is where Hardie's strength is all about creating demand in the marketplace with our end users, with the builders, with the contractor installers. And so, we have significantly increased the resource toward creating those demands while at the same time, we have put a much bigger focus, in terms of manage our customers, the lumber yards and the dealers out there. And so, the execution of our team, from demand creation, connecting with our customers, that certainly helped increase our growth in the marketplace. And we also saw a lot of growth coming from our traditionally strong markets, which is the high-end segment. We also saw very good growth in the low-end segment, particularly in the northeast and mid-Atlantic. And now, moving on to the interior business. This is what we also have shared with you in the last conference call, that is that we have shifted our focus from being calling on a lot of different stores about retailers, to really put more focus on calling in with our key customers at the headquarters, and then be a lot more proactively manage the business with our key retailers so we can plan out the right promotion placement. And also, at the same time, we start to launch the James Hardie HydroDefense interior boards, and that's continued to gain traction, that we are pleased with the progress of that. And then, relative to our color programs, it is, right now, just the beginning of that launch, and we expect the momentum will build in the beginning of this quarter, and then will grow from here onward.

Matt Marsh, CFO

Yeah, thanks, Peter. The CapEx guidance for the next three years remains consistent with the last couple of quarterly results, so we expect to spend $200 million in CapEx this year, which includes both the completion of the existing capacity projects that we've talked about in Tacoma, Prattville, and the ColorPlus product lines, and Carole Park, as well as kind of normal maintenance CapEx. And then, for fiscal '21 and for fiscal '22, $150 million in each of those two years. So, $200, $150, $150 is kind of the CapEx guidance that we are reaffirming. Regarding working capital, it was strong, as you note, as the result indicates. Keep in mind, it was a bit weaker in the fourth quarter, and we indicated that we felt pretty strongly that was the way some of the payables and receivables had come in at the end of March, in comparison to early April. So, we were sort of expecting the result that we got in April, and that carried forward into the year. So, we do expect some working capital improvement in the year. We don't think it'll be at the rate that you saw in the first quarter result. We are expecting strong cash flows overall, though, for the year.

Brooke Campbell-Crawford, Analyst

Yeah, good morning, thanks for taking my question, Jack and Matt. Just on the input costs for pulp, I guess, given the lags that should be there between list prices and your actual cost of goods sold line, I would have thought that it would be a headwind still in the first quarter. I guess, is that correct, and if so, what was the impact to North America EBIT from that higher pulp?

Jack Truong, CEO

Yeah, Brook, we actually had a headwind of raw materials within the quarter, and so, it is the lean savings that mitigates some of those. But we still have the headwinds of raw material in the first quarter. We expect that to ease, going forward, but we still see it within the quarter.

Brooke Campbell-Crawford, Analyst

Yeah, no, that's fair. And I guess, given margins at 25% in the quarter despite those headwinds, which should abate as the year progresses, and you should get lean benefits building margins, I guess the outlook there is pretty promising. And so, you're telling us here that you're going to reinvest quite a bit in SG&A to get that top line down.

Matt Marsh, CFO

Yeah, I think it's just normal tactical pricing variation. You know, we had guided to a 2% price increase for the year. We implemented that 2% for the year, and any given quarter, we'll have pricing, or sorry, mix and tactical pricing. Sometimes they offset, sometimes they both go one way. In this quarter, they happen to be a little bit stronger than the prior quarter, but very much the way we expected it to be. So, we've got line of sight to 2% for the year. We thought we'd kind of get off to a 1% first-quarter start that would build in the second and the third and the fourth quarter. Keep in mind, we're also coming off of a 5% pricing comp from a year ago. At that time, we also didn't overemphasize the 5% last year. We said that it was a combination of the price increase combined with mix and tactical pricing kind of going in a particular direction for that quarter. So, we like where we are on pricing. We think our strategic pricing is in a good place. We think our tactical pricing is appropriate. There's nothing sort of abnormal in the quarter. We just happened to see one in the quarter, which is very much in line with how we planned and what we saw, and we're still guiding to the 2% plus for the year.

Keith Chau, Analyst

Morning, Jack and Matt. Just a few quick questions. The first one is just on your distribution base. Quite clearly, the volume growth comp was strong, relative to peers, in particular. So, I'm just wondering if you can perhaps characterize how many distributors you've added, perhaps over the last six months, and whether there was a stocking benefit to those new distributors within this current result phase.

Jack Truong, CEO

Hi, Keith. Remember, we are a PDG growth company, and our growth is the execution of the push-pull that our team have been embarking on. And we really didn't add any new distributors. This is really about us creating the demand and then connecting that with our customers to really drive better sales conversion. So, that's really what happened.

Andrew Scott, Analyst

Good morning, guys. Thanks for your time. Just a quick question, thanks for the data you provided on, I guess, the multi-year sort of timing of lean. Matt, I wonder if you can let us know what you delivered in this quarter, and how the sort of shape of that delivery of the $15 to $20 million this year comes through, please.

Matt Marsh, CFO

Yeah, so the way we've been describing lean over a three-year period, you can sort of think about that same cumulative framework within a 12-month period as well. So, lean is about getting 1% better every day, and that 1% improvement over a 90-day period, you know, obviously builds, then, for a 180-day period and a 270-day period, and the full year. So, you could expect, if we're guiding to kind of a $15 million to $20 million benefit in fiscal '20, that that would build in a very similar kind of cumulative profile, where the first quarter would be the lowest, building on the second, building up to the third, and then building up to the fourth, for that total $15 million to $20 million. And then, that profile would sort of very much continue into the fiscal '21 and fiscal '22 targets. So, we've really got to lock in the month-one and the quarter-one savings, in order to deliver on the year-to-date savings target that we've put in place for each of the plants for the first half, and the first half we've got to deliver in order to get to those targets for the year. So, it's very much kind of about each week, each month, and each quarter that builds to the year. So, hopefully, that gives you at least, sort of a framework maybe, to think about the $15 to $20 million. We're not going to provide specific numbers by quarter, but we're trying to provide a way of sort of thinking about it and continue to be transparent with how we're packing on that $15 to $20 million on the half-year results.

Peter Wilson, Analyst

Thank you, morning. Another question on the North American volume results. So, a very strong result. Is there anything that you'd call out that maybe is not a reference point, so any short-term factors which might have inflated sales this quarter, such as a strategic price increase or anything like that which would mean that we shouldn't use it as a reference point for the rest of this year?

Matt Marsh, CFO

No, there's nothing sort of artificial in there. We're still guiding to kind of a 3% to 5% PDG for the full year. We think the market in the first quarter was roughly flat and will be up just slightly for the full year, that's got new construction down slightly, and repair and remodel, we think, will be up about 3%. So, there's going to be some normal quarter-to-quarter variation, the 5%, as you said, is a good result for the quarter, but we're still kind of thinking that it's a 3% to 5% kind of primary demand growth year. So, we've tried not to stay very focused, in the last several quarters, on the quarter, and we think it's much more about a rolling 12 months, and the results for the year, and we still think we're in this 3% to 5%. That obviously implies that, with a 5% coming out of the first quarter, that you could have some normal variation within the 3% to 5% and still be within that range for the year. So, we certainly are pleased with the result in the first quarter, but I would just reaffirm the 3% to 5% is the assumption that is the one that we want you to hear, primary demand growth for the full year.

Jack Truong, CEO

Well, Peter, I think, you know, it is now that we get to this critical mass of the size now that every day, every week, we have to execute our game plan correctly, and we have to earn that business every day. So, it's not something that we have a good first quarter and think that the rest will be like that. So, it is a daily execution in our business now, so that we can earn that business.

Peter Wilson, Analyst

Okay, and lastly, your comments in regards to your farmers strategy is still at the beginning of that. In the one-quarter result, can you give us an estimate of how much base business erosion you lost during the quarter?

Jack Truong, CEO

It is roughly, it's less than what we used to. But in terms of the exact percentage, we will make that as confidential in our company.

Operator, Operator

Your next question comes from the line of Grant Slade from Morningstar. Please go ahead.

Grant Slade, Analyst

Good Morning, Jack and Matt, and thanks for taking the question. I just had one follow-up on the PDG performance in North America. You increased sales resources and focused on lumberyards. Do you have a sense of whether that's driving mostly fiber cement category share gains, or are you taking greater market share?

Jack Truong, CEO

Grant, good question. It is a combination of both.

Andrew Scott, Analyst

Good morning everyone. Jack, I just wanted to get your thoughts on the marketplace. I guess in terms of overall U.S. market, clearly a tough quarter for the start. But your guidance for the full year of slightly up suggests improvements through the course of the year. Are you seeing much evidence as we move into the second quarter, at this point?

Jack Truong, CEO

Let me answer the question on the markets. Certainly, everyone saw the data, certainly, in the first six months of the calendar year have been quite choppy. Depends on where the source you use, can be anywhere from down 4% to 6%. We see slight improvements in this quarter, and then a little bit for the rest of the year. But we're still, for the whole year, still pretty much flat for the red residential starts. And then, like Matt said, our R&R is roughly about 3% growth, for the market.

Matt Marsh, CFO

Yeah, and on the pulp question, we're seeing kind of double-digit decrease in parts of the pulp market, but overall, we see that the pulp market's down closer to six, in comparison to the fourth quarter peak. And just, we sort of look at the contract market and the spot rate market as different markets. We also look at the U.S. and China markets as different markets. So, there are parts of those four markets that are down more than others, and in total, we think it's down about six. You're correct that we will, and we are expecting to see, as the year goes on, the pulp headwind on a year-on-year basis decrease. But for the total year, we still have pulp and commodities in totality, out input costs still going up slightly.

Jack Truong, CEO

I mean, I'd just like to reinforce that we are a PDG growth company, and our focus so really about how do we create more value, at the end-user and for our customers, so that we can really gain more and more share to the category to the market. So, that's really our key focus, and that will continue to be our focus going forward.

Operator, Operator

Your next question comes from the line of James Brennan-Chong from UBS. Please go ahead.

James Brennan-Chong, Analyst

Hi, Jack, hi, Matt. Congratulations on a very strong result. Just articulating a little bit more the PDG and the volumes. Are you able to split out where you're getting that PDG in terms of whether it's again, new housing or R&R? Are you winning more, say, into one category, compared to the other? Thank you.

Jack Truong, CEO

It's really difficult to say, James, but I think, based on these graphic spreads, we tend to have more of the road to new construction, through the south and southeast, and south-central mid-Atlantic. And we also saw a lot of growth in the northeast, which is primarily an R&R market for us.

Matt Marsh, CFO

We won't talk about rain, but we'll talk about drought.

Jack Truong, CEO

So really, we're pleased with the good execution of our strategic plan for all of our employees around the world. We saw more at the beginning of the journey, rather than at the end. We still have a lot of work to do to accomplish our long-term goals, but we're encouraged that we're on the right path. Thank you all very much for dialing in, and have a good morning and good night.

Operator, Operator

Ladies and Gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.