James Hardie Industries PLC (JHX) 2004 Q4 法說會逐字稿

Good morning, it's Peter Macdonald. Welcome to our full year results announcement to all of you on teleconference. We departed from our normal face-to-face briefing this morning because of the Commission of Inquiry underway in New South Wales, which means we could not be sure of timings and availabilities and teleconference is a more flexible mechanism. So, the program for this morning, I'll provide an overview of the performance, Phil Morley will cover the financials in some detail, and then I'll come back and review our operating performance. There'll be a plenty of time for question and answers at the end.

The fourth quarter completed the year a very strong performance. All key indicators grew strongly and operating profit was up 50% over the full year. Turning to the business units, all showed good results in the quarter. The US was impacted by increased pulp cost and higher SG&A, but nonetheless delivered sales up 27% and EBIT up 14%. In Australia and New Zealand Fibre Cement, EBIT was up 57%. It was again somewhat easier comparable. Philippines and Chile were also positive. And for the full year, we have a similar picture. All business improved strongly. The US sales up 23% and EBIT up 26%, and Australia and New Zealand up 5% in local currency.

Turning now to our long-term targets. We've produced another year in which we materially exceeded all of our key business wide long-term targets. Revenue growth 25%, EBIT to sales 18%, and return on assets 23%.

Turning to dividend and capital management, we've increased our final dividend by half a cent or 20% to $0.03 a share. We are committed to efficient capital management and continue to target to be at the aggressive end of that range. Our cash flows are exceeding our capital requirements. Our gearing ratio is below our long-term target of 40% and in fact was 17% at year-end. Interest cover is 17 times. Further capital returns from the Gypsum proceeds sale are less advantage now as the Dutch withholding tax of 10% would apply on future distributions from that pool. We have deferred a decision on the return mechanism for future capital during the laws of the New South Wales Commission of Inquiry. We continue to explore the optimum capital management mechanism and expect to make an announcement later this year.

I'll now pass over to Phil Morley for what will be his final result presentation as CFO, as you know Phil will be retiring from the company; however, he will be staying on for a time. However, Phil will be replaced by Peter Shafron who will be taking over CFO from around the month end. Thank you Phil.

Thanks Peter. Okay, just going to quarter four results. Another strong quarter. Sales up 29%, EBIT up 25%, and the bottom line up 35% for the quarter. That's being repeated into the full year numbers. Now I'm on slide 10 with sales up 25%, EBIT up 34%, and operating profit up 50%. There are couple items that I want to point out, other operating expense and other income net for US GAAP disclosure requirements, they are shown separately, but basically comprise three items, certain cost provisions in Australia and New Zealand, a New Zealand property gain of $4.5m, and the Dutch capital duty of $3.2m that was paid at athe end of the first quarter.

Okay next slide, slide 11, segment net sales. Trying to point out there that the Asia Pacific fibre cement change in local currency is 3%, and for the full year

fibre cement was 2% in local currency otherwise consistent growth across all the businesses. Now on segment EBIT, Peter will cover this in more detail in his presentation, but USA for the quarter impacted by increased pulp cost and SG&A expenses as we added more people to facilitate future growth. Asia Pacific in local currency was 48% still a strong turnaround from the comparable quarter the previous year. Other fibre cement includes Europe pipes roofing in Chile and Chile was profitable in the quarter again. And R&D continues to ramp up as we focus on these areas. For the full year pretty much the same story. Once again as I said Chile profitable for the full year. Europe pipes and roofing and the other and continued spending on R&D.

And looking at our corporate cost, pretty much in line with guidance, and there were some expenses in the quarter for the commission, but going forward, we're looking and tracking it around about $1m a month for the cost of while we're at the commission. Industry expense, slide 16 is pretty much flat year-on-year even though we're spending on capital expenditure, we've got surplus cash on deposit. Tax expense, we came in slightly below the 25% range but really I mean 0.6 not much to talk about. Going forward, we still expect to be in the range 25% to 30% for FY05.

Slide 18, and this our proxy for cash flow and continuing strong performance. You'll know note that USA fibre cement depreciation is up on the previous comparable quarter. That's really the new launch coming on stream this quarter booking the depreciation. Slide 19 for the full year, it's been a fairly consistent pattern across the year and you can see there about a 34% in EBITDA, which represents strong cash flow.

Going now to our couple of expenditure slides for the full year, slide 20, the major projects in the US were as follows. About 70% of the CAPEX spend was on growth projects. We had the pre-finishing and trim line in Peru, $10.3m. The Blandon upgrade at $13.7m. The new factory in Reno, Nevada, we spent $5.1m on that in the quarter. We've got some land repurchase, we are going to put that plant in Elk Grove in California, that's $4m, and Waxahachie line 2 was $4.8m.

For Asia Pacific, the major spending item was the

upgrade of $3.2m and that's now finished, and in the other segments, the major spend was the roofing plant in California, $7.9m, and there is about $1m spent on a pipeline in England for our European business. Slide 21, key ratios slide. I think, what I want to say about this, it's a good summary of strong financial performance of the business and the sound financial condition of the company, and all these ratios remain very strong. So, I'll hand over to Peter for the operating review.

Thanks Phil, and turning now to the USA. There are some great product shots of products in use in the United States. In the left hand side of the slide is a shot of highly trim and a siding product showing a very attractive comfortable and secure the US home, which is part of our positioning. On the top right hand corner, there is good shot of siding and Hardie shingle. And in the bottom right hand corner is a short of our easy grid Hardie backer, the product, which is growing very strongly and has a very strong differentiated position. The quarter in the US was one of very strong topline growth supported by excellent volume growth. I'll comment later on some of the key factors. At the topline, growth was really strong across the board and slightly above our target range and I think that's really the key highlight for the US business. The full-year numbers are also very strong. They are all up a considerable degree and the EBIT margin for the full year, the $195.6m, it was impacted by pulp charges, which were up around $8m year-on-year.

Turning to the trading conditions that we enjoyed, we really couldn't complain. Conditions were very good for the quarter on all fronts. The housing construction activity remains very buoyant. Builder friends are all running to the banks with record profits, and repair and remodel activities remain very healthy. Some key points to look at here: there was continued strong growth and demand for fibre cement. As you know, we try and differentiate between the growth, which occurs because of market movements and the growth that occurs via penetration. Over the course of the year, it looks like we grew around 250m standard feet and around 155m of that was via penetration through continued growth. Strong South performance: We are growing well ahead of construction activity. Lower price products such as Hardie backer did grow at aright about the other products in our business. Our interior product line has good pricing and good margins, but it just happens to be a fairly basic product and that means its average selling price is in fact below our average selling price of the business as a whole. As you know, I still mentioned we did commence construction on the Reno plant.

Looking at the margins for the business, we had a good performance. Our processing strategy remains unchanged. We value price our products for long-term penetrations and we don't move it up and down for short-term supply demand business. We did suffer higher cost. I mentioned pulp before, it was up around 3m in the quarter on the prior year. Pulp costs, we are currently tracking it around $650 a ton. We are working on strategies to bring that down, but the costs that we are subjected today is around $650 a ton. The lower costs incurred in the rampup is primarily Blandon and Waxahachie and some costs of the Peru ColorPlus line. We did see higher freight costs, the energy cost led to few surcharges, which did have an impact. And we did continue to invest in the infrastructure to support further growth adding 58 further staff in the quarter, 267 over the year with a strong bias in those numbers for sales and marketing. In this area of expenditure, we are building a foundation for growth for the future. Most of the benefits of that expenditure has not yet been seen. I think there is some benefits in Q4, but the expenditure is really necessary to fuel our growth in the future and continue to drive penetration over the longer term.

Turning now to the chart that shows volume revenue growth compared to overall housing growth. I am just running to you through the analysis about end-market growth rates. We saw new housing in the three months in December '03 as up around 18% over the three months in December '02, and we saw a minor change in house size, I think on the average stats, it was down slightly. We saw repair remodel growing at around 1.5% in real term. The net impact for us on our end markets is that our end market growth should have been around 11% and we grew at around 29%. So, there was around an 18% growth we would say over this past quarter that was achieved via penetration.

Turning now to average selling price. The solid performance over the full year, up 3% on the prior year. The number for the quarter was up for couple of percent impacted as I mentioned earlier by some mixed effects with high interior sales. There was full-year volume rebates, which given very strong growth, had an impact. The highest price products continue to grow very well. I think it's just a question of they were outgrown by very strong performance with interiors. Our longer-term expectation continues to be for modest average selling price improvement with higher price products grow at a faster rate the normal basic longer saving product. Turning now to the EBIT and EBIT margins slide: This is really a great slide showing now a six-year performance, with very strong EBIT performance improvement in the stock balance and showing that EBIT to sales margin continues to be moving around in that range well above that 20% long-term target.

Turning to our business strategy, that's unchanged, it is a very successful strategy. It's achieving strong growth and strong returns for the company and we've moved forward with it. Turning now to the outlook, and as we are now half way through Q1 of '05, I can report continued strong growth is being achieved. There are no signs of a slow down. Some of the year-end margin impacts like volume rebates are not recurring now, having flushed through systems and margins have lifted a little from the year-end levels. Q1 is off to a great start and should be a very solid outcome. This continued strong end-market demand; the housing market is showing no signs of weakness. We are continuing to grow our position in the market. Our pulp costs are here and are at the level that I described earlier. We are continuing to work to mitigate them, but we will see an impact from that. But overall, the outlook for the quarter coming, and for the full year is for good growth and good EBIT performance improvement. Turning now to Asia Pacific, and we've again got some good attractive pictures of our products. The top left hand corner is perhaps a little surprisingly a Philippines shot of HardiePlank Weatherboards in a residential development in the Tagaytay highlands around two hours from Manila. On the right hand side of the slide, you can see a D3-ComTex Facade System. It's the white feature walls in this development, and that's the development that was completed in Zetland and Sydney. And in the bottom left hand corner of the slide, you can see Linea Weatherboards that were used to virtually reconstruct a historic home in Canterbury, New Zealand and tolled around 6 km of lineal product or 3.75 miles for the Americans was used in this development. Turning to the overall Asia Pacific performance: It was a very solid result. Net sales were up 3% in local currency for the quarter, up 33% when translated to the US dollars. Volumes were up 10%, and EBIT was up strongly in Australian dollars.

Turning now to the full year numbers: again a very solid performance. Net sales up 2% in Australian dollars and 23% in the US dollars, Volumes up 9%, EBIT was up 12%. Overall a very solid performance.

Our strategy in Asia Pacific remains intact. It is delivering for us a solid performance and growth in markets which haven't been as strong as their market has been. The key points for us is that we have enjoyed when translating Australia, New Zealand results back to the US, a significant positive exchange rate impact. We did see Australian new housing is being weaker, but the repair and renovations market in commercial activity remain quite buoyant. In New Zealand, housing was quite healthy. Net sales were up 4% in local currency. Volumes were up 1%. However, it's worth noting that domestic volumes were up 5%, and there was a significant reduction in export volumes out of ANZ. A significant proportion of that reduction was picked up by the Philippines, which took on further products, which it in turn exported throughout the region. The average selling processes up 3%, and as I said, EBIT was up very strongly up 57% in Australian dollars. There was an impact, I guess the benefit of some redundancy cost which have exited in the prior comparable period.

Turning now to the outlook for Australia and New Zealand: I guess it's a pretty obvious point on the front, positive exchange rate impact may not continue. We do expect Australia to soften further in new housing, but R&R and commercial is staying relatively healthy. And in New Zealand we are looking for a continuation of relatively buoyant conditions. We are seeing good sales increases in local dollars into Q1 of FY '05 so far in IMZ. We expect further new products to be launched. We do expect manufacturing cost savings to continue to be derived. The Roseville plant is now performing at an improved level, and we expect to see further improvements through the year. and overall, we are looking for EBIT improvement and IMZ. Now, the Philippines business continued to perform and improve. Sales were up 29%, average sales price was lower, that's due to mix effects, again domestic prices are not typically as high as our export business. There were manufacturing cost savings and the business was in positive EBIT for the quarter and the full year. The outlook for the Philippines is that building and construction activity will improve. We will improve our volumes, and we will reduce our costs, and improving EBIT overall.

Turning now to Chile, really strong performance out of Chile of what is still a relatively small business for us, but net sales were up 44% in local currency. The domestic construction activity lifted, and we penetrated strongly into that market. There were lower average selling prices in local currency and that's primarily a mix effect. As we drive the local business growth and improve those volumes, the average selling prices domestically are in fact a little lower than the price we get on the export business where we export Shingleside into the US. Again, another positive EBIT for the quarter, and a full year EBIT positive result for Chile. The Chilean outlook is that we are entering a seasonal slow down period, the winter period. Domestic construction activity will nonetheless improve. We expect to continue to penetrate the market and grow our share. There may be some continued mix effects in terms of price as we do that. Domestic competition will remain intense.

Looking at our US Hardie Pipe business, sales grew very strongly, up 70%, really as we continue to penetrate in the Southeast market, primarily Florida, as customers continue to choose our fiber cement pipes over competing products. We have continued to improve the cost performance in the plant, but it is still not at the level that we would like to see. Average selling prices did improve, they are slightly over the third quarter but they are still low, and we would still very much like to see further price improvements. April in the pipe business was a very strong, in fact a record month, in both volume and prices.

That then leads into the outlook, and we expect to continue to show growth, obviously of that sort of start to the quarter. We do expect to drive the plant into a more efficient operating mode. Competitive pressures are intense, and floor

deposits are still well below the national average, but we are seeking price improvement and are hopeful that that will be achieved. We are targeting cash breakeven in this business, but that's quite frankly very much a stretched target for the business. I hope it can be achieved, but it's by no means certain that we can.

Turning now to the Europe business. This is a fledgling business, it's just completed its first year since a zero startup. It is growing quite well, and we are quite happy with the topline trends in this business, and FX effect to the weaker US dollar are aiding our import costs, which means the cost of establishing the business are certainly in line with what we hoped for.

The Artisan Roofing business is making good progress in shaking down the manufacturing process and getting ready to ramp up production. We are expecting sales during this quarter, and the end market interest in the product remains very strong.

R&D, this is really one of the key investments we make in our business. It is the key driver of long-term growth and sustainable competitive advantage. We continue to make good progress. Every dollar we spend in R&D, I think, gives us the highest return that we get from any other discretionary expenditure. Over the year, we spent $14.1m in our core R&D. We spent $8.5m in product development, and then there is an allocation for R&D out of SG&A, which is around $3.5m, takes the total for the year to around $26.1m, that was around a 25% increase on last year's expenditure in R&D.

Turning now to the New South Wales Special Commission of Inquiry, the company does not believe that it is liable to meet the shortfall claims by the Medical Research and Compensation Foundation. We expect to have completed our aural evidence to the inquiry by the end of May. Until that evidence is completed, we are severely limited in what we can discuss outside of the inquiry hearings. We intend to make a comprehensive submission to the Inquiry in which we will address the allegations that have made against the company. The company is cooperating fully with the Inquiry. Literally hundreds of folders of material have been provided covering all the company's activities from the mid 1990s through to the present day. There is nothing which is not or will not be subjected to extensive review in this process. The Commissioner has not signaled that yet any intent to extend the inquiry past its current reporting deadline of June 30, and the New South Wales Government will consider the Commission's recommendations after the report has been finalized.

In making a decision to delay any announcement about capital management, the company is mindful of the Commission of Inquiry and to the establishment of the Foundation. The company believes that it will be inappropriate to proceed with the return of capital to the shareholders during the inquiry. Consequently, we have deferred our decision on future capital management initiatives until later this year.

Turning now to the outlook for the business as a whole, we have got excellent growth momentum into the first quarter. Another good year for the company is certainly in prospect. We expect to continue to deliver strong cash flow.

That now ends the formal presentation. A couple of slides required by the SEC and other regulators, and now Phil and I are happy to take your questions. I'll turn first to questions on teleconf.

Thank you. We do have a question from Mr. Jonathan

of Citigroup.

Hi, just a couple of questions here on the pricing in the US. I guess, first we took the average prices were down 2%, was driven by sort of a backup, being low margin or a low price point in some of the rebates. Can you just give me an idea on, I guess, the split between what the backup contributed, what the rebates contributed in terms of that average price coming down? And I guess, then just following on from that, I am just trying to get an idea to my head and maybe and what your planning, you have seen that, when does that sales trend start to change? When do you see the growth from those higher margin products that you were talking about in terms of the high price point start to sort of overshadow the lower price points that you seeing in some of that - that back of stuff?

Thanks Jonathan. The situation is that over the full year, we delivered 3% growth and that's right in line with what we expect moving forward. I don't think you should over analyze any particular quarter, particularly this year-end where there were some rebate impacts. We don't get into the detail of splitting up product and segment sales and margins, so I won't break down the split up between backer and volume rebates. But obviously when you have a very strong volume quarter, you do have an increase in rebates, which are set over the whole year targets. I think I have answered your second question in terms of what we see about the future. We do see, over the long haul, we look at our business plans going out for some years, whether our higher priced products will inexorably grow at higher rates than our established products, and that will drive average price improvements of the orders of magnitude that we have seen historically.

Maybe just a follow up on that. For the last two quarters, the average prices have come off about 2% in both comps you called a lot at these volume rebates as part of the reason in that season, so it's really become an issue. I am just trying to get my head around about how much is, I guess, those last two quarters has actually been driven by volume rebates and how much has been driven by the product mix?

Look, it's split between the two and I won't be able to give explicit - in fact I don't have it with me here Jonathan, but I don't think I would give it you if I had it because it then gets down into individual product segment growth and such, which we don't want to disclose. We are not perturbed by the numbers that we are seeing. They are physically in line with their long-term guidance, and if I were to look at the figures for this quarter just completed, we have seen average price increase, margin increase and volume and revenue increases in that quarter-to-date.

Thanks.

Thank you. Next question is from Peter Harris from Comsec.

Thank you. Next question is from Peter Harris from CommSec.

Hi Peter. Just you broke down your -- the housing growth versus penetration, which was great. Can you just talk a little bit about vinyl and whether or not vinyl's market share has actually fallen particularly in the south and the west markets?

Thanks Peter, that's an excellent question and obviously a key question for the company because over the longer term, to achieve our target shares in the siding market in US, we do need to take a good slab from vinyl. I think, on our analysis and on the Vinyl Siding Institute's figures, you can see vinyl siding share declines across the country as a whole. It is difficult to measure share by region, by product because you are really into survey work and polling and other such mechanisms to do that because producers don't publish numbers in that way but sufficed to say that we are growing strongly in both established markets across the south of the country and their emerging markets in the north. We do see ourselves taking share from vinyl, we do see the Vinyl Siding Institutes on figures demonstrating share reduction for vinyl and we are pretty comfortable with our position there.

Just a quick follow-up, the average selling price of vinyl, your selling price is trending up, any idea about what's happening with vinyl?

I think, again if you go to the same Vinyl Siding Institute, Web site, you can troll through that and have a look, I think, it does show average vinyl selling price is trending up. Vinyl is different to fiber cement. It has a much higher cost component related to raw materials, petrochemicals and so to a certain extent, I think, it gets caught, having to increase prices in times such as we have today. I think, vinyl is also trying, as part of its defensive strategies against fiber cement, to migrate upmarket with more developed products. We don't see that being a successful strategy but I really couldn't dissect in movements in vinyl pricing between forced impacts of cost and mixed changes that the vinyl guys might be trying to achieve.

Thank you very much.

Thank you. Next question is from Matthew McNee from Goldman Sachs JBWere.

Hi, Peter, just a couple of quick questions, just a follow-on from some of the previous ones. Just in terms of looking at that margin and average pricing mix and they fix the same there, you just -- I suppose firstly, we haven't seen any material change either up or down in underlying selling prices in any of the products?

I really don't think so, Matt. We announced, I think, in the first quarter of the year just gone of FY04 that we did take some price increases and I don't think, we could point to any price increases since that time. Obviously rebates translate as a, sort of across the board, price reduction, if you will, and we obviously work hard to grow our share, which means large builders taken on board and they typically have, I think, as we have disclosed, overall rebates for purchases from the company but like for like, lining up products across the board, we are not dragging our selling prices down, and I think, in fact, as I just mentioned, so far into Q1 of '05 we have seen average selling prices increase, which makes me feel pretty solid in saying that the long term trend is as we expect it to be.

So, essentially, we can't conclude that in anyway is that margin pressure because of pricing pressure, it's purely just a combination of higher pulp prices, your investment in new business growth, and it also just the mix effect again with some of these lower margin products, obviously, sorry, lower price products, obviously also having slightly lower margins?

Exactly Matt. I think if it was price pressure we would have to disclose that. We put out the reasons why the margin went down and as I've indicated, there were already signs of bounce back. It's always an issue when you are analyzing a 12-week period, events that occur in that 12-week period can move it up and down. We don't focus over the sales on quarterly performance, we are really looking at driving annual and long-term performance and we are happy with that position.

Just one other question if I could, I think it's probably for Phil. Phil, you mentioned in your presentation there was, I think, a $6.9m other income in the last quarter and you said that some of that related to a property gain in New Zealand, I think, the number you said was $4.5m, is that correct, that was all in the fourth quarter?

All in the fourth quarter, Matt, yes.

And the rest was a $2m of other things, was it?

That's right, yes.

All right, thanks.

Thanks Matt and next question.

Thank you. Next question is from Simon Shields from Colonial First State.

Look, I actually thought to cancel my question, it's been, I think, was down the issue of prices and margin rebates as far as I want to go up at the moment, but thanks anyway.

Thanks Simon.

Thank you very much. Next question is from Tim King from Deutsche Bank.

Hi Peter, three questions from me. The first question is, any comment in your Asia Pacific strategy that your strategy is to vigorously

and grow our share, that comment just sounds a little bit ominous to me and I was wondering if you could talk around that a little bit.

Sure. I mean, Tim, it wasn't a new -- it is not a new strategy, it is a well-established strategy for us. The US strategy says aggressively grow market for fiber cement and we actually run aggressive business strategies for our business.

Somewhat that remains surprising in this market, Peter?

Well, you can see some price declines, some of that is driven is, I think I've mentioned in prior results by mix changes but we are confident that our strategy is the right one. We have a leading position in the markets in Australia and New Zealand and that position is certainly being defended.

And the second question is just on locking in pulp pricing, can you talk a little bit more detail of the strategy around that and potential timing?

Tim, we really are in negotiations right now in that matter, so it would be not the right thing commercially from a -- to provide detail but pricing is higher than the long-term average at present, so that it does lead to potentials to -- if you like, try it off the near term, for longer term security and we are looking at moves we might makes there and if we are able to make a move there, we would certainly disclose it.

Okay, thanks.

Thank you. Next question is from David Leitch of JP Morgan.

Hi Peter. I just wanted to ask again about the capital return. I think, you stated two reasons for not proceeding with one and I personally had anticipated, I must say, one was this withholding tax and the other one is that you suspended it for the life of the inquiry, I guess, my question is what's the relevance of the inquiry to the capital return?

Thanks David. I didn't intend to signal with the -- we made an announcement about the Dutch pool of capital, which had been established with sale of gypsum and that is that the Dutch regulators have confirmed that it would be subject to a 10% withholding tax charge if further distributions were made from it. So that stands alone, that's an update for the markets. So really the decision on timing is related to the Commission of Inquiry. We are mindful of the Commission of Inquiry that is underway at present and we just think it would be inappropriate to proceed while the inquiry is actively underway and so we just have differed that decision until the inquiry is over.

So, if we exclude that, you wouldn't suggest that the existence of the withholding tax would prevent capital returns?

There's nothing to prevent capital returns, David, but the analysis you would do at any time that you were contemplating a capital return to shareholders would be for the most efficient mechanism for shareholders taking into account all of the relevant factors at the time and that would include tax efficiency in shareholder's hands, share price at the time, and all other relevant factors, the capital needs of the business. So obviously, we would want to preserve all options and when we are in a position to make that decision, we would make that decision bearing in mind those factors and release that at that time.

It does seem to me that with the business going so well but the share price not been as high as it was a year ago, that, you know, giving dividends or capital to shareholders was a great way to reward them for the great operating performance.

No, David.

Thank you. Next question is from Andrew

of ABN Amro.

Peter, I was just ringing to ask a question in regards to mix and given that we are seeing the mix, sort of shift towards lower priced products for the quarter and given a housing strength we've seen over the past quarter, is there any sort of thing we should look for and say, if you were to say housing come off a little bit off the remainder of the year, would you see any move in the mix or any other products, I guess, so that it's sensitive to different housing, underlying housing growth rates, or I guess, maybe just a bit of a feel for whether backer is a product that typically sells higher in high growing markets, or is it really just a coincidence in the first quarter?

That was an excellent question, Andrew, and we have analyzed this before and I can give orders of magnitude numbers here. So, when we look at that business as a whole, roughly its 75% to 80% of the business is exterior and 25% to 20% of the business is interior. And interiors, as we define, is essentially the backer product that's EziGrid, Hardibacker, which is the quarter inch product that goes on the floor and Hardibacker 500, which is half the six products, which goes on the wall. So, roughly 25% to 20% of the business is interior and then you breakdown the 75% to 80%, I'm sorry, most of that, the vast majority of that product is going out through repair and remodel. It is sold into new housing but a very significant proportion of it is also sold out through Home Depot and Lowe's and other channels like that as an underlying with the tiles and as we just see it in the Tile

as the major distributors and tiles is predominantly for our product than in our application. So, then in terms of the remaining 75% to 80% of the business that's exterior so that's our siding products, our trim products, etcetera. Now that is sold roughly again, 75% to 80% into new housing and 25% to 20% into repair and remodel. So, with those factors put out like that, you can see that if there was a housing decline of any material amount, you may well see the proportion of the interior product hold up a little better and grow a little more. Actually I shouldn't have expressed it that way because we will continue to grow under almost any decline you could reasonably see in housing, in fact, if I was to that analysis of penetration and growth, I think, we can say that given the current levels of growth we are seeing in the business over the past year, continuation of growth at that level would cause us to be able to offset perhaps an 18% to 20% decline in housing and still be mutual.

Right.

But the net point is, with lower rates of growth in new housing, interiors might become at the margin slightly larger, which might mean slightly higher proportion of

sales without a large base.

So, when we talk about your increase in penetration for the first quarter, it might be fair to say that given new housing has been so strong that a lot of that increase might have come in from the renovation repair segment, of course backer did so well?

Yes, it is something -- somewhat anomalous that we grew very strongly off the strengths of the new housing market but obviously R&R and the growth of backer was also very, very good. Now the backer growth is primarily penetration growth in terms of the product. The end market for R&R only grew in real terms by around 1.5% for the quarter, so really our backer products are really -- it's going extremely well against the competing product.

And just finally in terms of your market penetration, is it sort of, are you seeing that coming through more in the North or given your success in the South, is sort of the -- is the strategy of entering into the sort of vinyl

paying off?

Yes, again we don't break it down in too much details, it's commercially quite sensitive but we do have growth targets in the South between 5% and 17% and double that in the north. So we are looking for 15% to 30% growth rates in the north and those growth rates are generally being achieved and that has continued. So, it's really very positive for the company. In the markets where we have been the longest, where we have got our highest share, we are continuing to grow at very solid rates and in the North, where we're penetrating against vinyl and of course, still seeking to eliminate other wood-based products, we are growing at a much higher rate.

Okay, thanks very much for that.

Thank you. Next question is from Rohan Gallagher from Credit Suisse First Boston.

Hello Peter. Good morning. Just a couple of quick questions for yourself and Phil. Firstly for yourself, just in regards to your comment regarding the mix, you are saying, you got 18%, the underlying housing

was 18% and you are saying the overall underlying market was 11%, can you just clarify that given the expectations of an 80/20 split? Secondly, in regards to the Australian price decline of 6.5%, can we see any sort of change with respect to that going forward? And two quick questions for Phil. Just in regards to the, what would be the estimated Q4 growth costs associated with the US fiber cement business and the full year currency benefit please?

I'll make a start on the first two. You might have to come back and repeat for him

No problem.

When we analyze the US housing market, we look at the quarter, prior to the quarter in which we are reporting because there's a lag of roughly three months between a house start and us delivering product into the site. So, for the three months in December '02, we saw single family starts at $319,000 and for the three months in December '03, we saw the starts at $376,000 so that's roughly an 18% increase. There is a minor adjustment for the fact that, I think, between '02 and '03, we detected a slight decline in the average house size, which bought back, if you like, new housing end market growth rate to around 17% and then the R&R market, we saw growing at real terms at 1.5%. Now when you flow through, actual proportions of sales into new and R&R across the mix that I analyzed that roughly before, we saw a net impact that our end markets grew at 11.3% in the quarter over the prior comparable quarter and we grew at 29%, hence 18% growth while penetrations for Hardie, so it might have been confusing when I use two 18%, but they are completely unrelated, just an outcome of the calculation that we saw ourselves growing at 18%, 18% of the 29% growth, we would say, was via penetration and I couldn't say this is a precise analysis, obviously using national statistics and other things to try and figure this out and we are not uniformly represented across the country.

I still can't work that out, if you have an 80% housing exposure and you take the weighted average of 18%, that's 14% alone?

No, we don't have an 80% housing exposure, Rohan. If you take our total business, it's split 75/25 in the range, 75/25 exterior/interior, or 18/20 exterior/interior, in that range, we can't work it out precisely.

Okay.

And then, of that 75% to 80% which is exterior, 75% to 80% of that is into new housing. So, the math actually works out but it's around about 59% or 60%, roughly 60% of that sales are going into new housing.

Alright okay. Yes, that will be fine.

And when you back that

it remained up close to where we are. This is quite consistent with how we've explained this in the past.

Okay.

Rohan, I think I got your question, I missed part of the first one or the second one on FX but you wanted to know what the SG&A impact was for the quarter in the US because of the additional paper we put on, it was up about 9.5% over the prior year, over the prior couple of quarter and the question on currency I didn't quite get that one.

Just your full year currency benefit, obviously you would have been benefiting from a translated the US dollar base for the Australian, New Zealand business?

Okay, yes. It's really back on slide 14, the full year, in local currency, Asia Pacific 5% to 10%, went up 12%, whereas in US dollars it's up 38. So, I just have to do the math and you can get the currency benefit.

And Peter, just finally the Australian price decline, any comments in regards to any turnaround with respect to that or is that just a function of price mix in a more aggressive market?

It's primarily a mix, and we are seeking to drive growth with particular products. I think, I've described previously that we launched new products in Australia, which happened to have lower price points, but certainly very satisfactory margins, and we are running the same business strategy that we have always been running. Where we seek to use our differentiated products to drive growth. I have to say, Rohan, I'm very pleased with the turnaround we have achieved in our Australian business, and we are certainly looking for that turnaround to continue.

Thank you.

Thank you. Next question is from Karen

of IBC

.

Hello. Just wanting to touch again on the Inquiry stuff. I know that it is difficult in terms of legally, but given that it seems to be doing some damage out there in the community just PR wise, is there any thought to just settling it, just throwing some money at it and settling it without any admission of liability?

This is -- an Inquiry underway at present. I stated it upfront the company's position on the Inquiry. I do think it is important that the Inquiry run its course and that the company puts its position clearly and fully to the Inquiry, and then I think it is a matter of seeing what the Inquiry recommends to the Government. It would be -- I think that's really all I can say on that matter.

But do you consider this damaging for you publicly?

I am not happy with the allegations that have been made against the company, and they certainly impact the company's corporate reputation, and I am not happy with that either. But there's an inquiry

, it will run its course irrespective of what I might say and so I think it is important that we wait for the outcome of the Inquiry before we move ahead.

Thank you.

Thank you, next question is from Richard Pullin of Reuters.

Hi. Just on the potential for capital return, I was just wondering how much is left of the surface capital from Gypsum's

? What sort of alternatives you might be looking at for any potential capital return?

Thanks Richard. I think the pool that's available from the capital return is round about $200m, and I make that point that it's a balance sheet reserve, it's not cash sitting in a bank account waiting or anything like that. The options we have for returns of capital to shareholders, we analyze regularly. Obviously, there are returns of capital, and previously we have been able to make those free tax advantage to shareholders because they have been able to -- not be subject to withholding tax and therefore they are tax free in the hands of shareholders and only eventually taxed on the sale of their shares. That's a highly advantage form of return. I also discussed earlier, potential share buybacks as an option that the company always keeps that in mind and in making a return of capital to shareholders, you would look at the current share price in addition to the tax effectiveness and impacts on shareholders to make that decision. And finally, I think and these are probably orders of merit as well, we would look at dividend because the company makes nearly all its income overseas, it doesn't generate franking credits in Australia. That means that dividend returns to Australian shareholders are pretty much fully taxed, that makes dividends comparatively less attractive than the other two forms of capital return. And obviously, there are variations in between the two or combinations of the three that could be considered, and the company does actively consider those and will make an announcement when it is reached termination.

Thanks very much.

Thank you. Next question is from Kevin

of the Scott Bank

Again, going back to the Inquiry, you made a point of saying you are waiting for it to run its course before you reply to these allegations. The major points that have come out recently have been from your General Counsel, Peter Shafron, a mission that's the early public exposure of plannings issued from you saw from asbestos plans, but New South Wales government brought the scheme, the decision to dismantle the arrangement to ensure and creditors couldn't get access to your money, I mean, these are aren't actual allegations that are coming out from general public, it's coming from your own General Counsel, again following Karen's report, how damaging is it -- don't you feel a need now to reply to these allegations, they are already in the public domain. It's not as if these aren't - these statements are in public knowledge.

Kevin, much as I would like to respond to these matters, Mr. Shafron is on the witness stand at present he will be completely inappropriate for me to comment on the dividends when he is actually hearing the full commission. I'll just say upfront what the company's view is in that matter. The company's positions have not changed. I really can't say more at this time.

Can you put into public tolerance, doesn't this

on the company, I mean you are coming out as looking rather shabby, I mean as Karen said, isn't the obvious thing to do now is to settle out or go without a mission and just walk away from this problem?

Kevin, the company has not yet made its submission to the Inquiry. Key witnesses for the company have not yet given evidence. We are not able to - it is inappropriate for us to comment hearings as they occur. The company's position is as I stated upfront. That's all I can say on the matter at this point in time.

Okay, thank you.

Thank you. Next question is from Elizabeth Knight, Sydney Morning Herald.

Hi. Just going back to your capital return or your capital management, you said you don't want to sort of commit to anything until the Inquiry is over, now previously you have said quite explicitly that you have no further liability whatsoever. So, my question to take from that, the fact that you wont commit to any form of capital management now is more of a sort of a public relations thing, like while the Inquiry is over it just wouldn't look good to start giving returns to shareholders or bonus dividends or anything like that or do you not see a potential liability there that previously didn't exist?

We have stated what the company's position is on the liability and I have stated why we have delayed the capital management announcement, and I really can't say any more than that.

Can you restate what your position is on the liability?

The company does not believe that it is liable to meet the shortfall claims by the Foundation.

Alright. I don't really think you stated that clearly why you wanted to -- you stated clearly that you weren't going to say anything till the Inquiry was over, but you didn't really state the correlation as to why that was so?

What I can say is that we are very much mindful that the Commission is under way at present and that we think it would be inappropriate to say during the Inquiry, I really can't say any more than that.

Thank you.

Next question is from Ruthen

from IIP.

I just didn't quite catch what you said before when you were saying how much of the pool you have that is available for capital management defined as you'll get out of it there?

When the company sold its gypsum asset a couple of years ago in North America, they resolved for a combined total of around $395m. When the company moderated to the Netherlands, the Dutch authorities gave us -- ruling at that time that those proceeds could be returned via a withholding tax free return of capital to shareholders, so if you like that was a balance sheet position, the company did not have the cash, if you like, the wherewithal return all of that money at that time, in fact the sale was staged over time and the final proceeds of the sale were from the sale of the land, which was completed just over a year ago. So, the company has in the intervening two years or so, returned I think it is $187m odd of capital from that pool, and so you could do the math, I think it is around $200m left from that pool. The company can of course, make decisions to distribute capital in a range of way around through those alternatives earlier and we will consider this and review those options and we will make a decision in a relatively near term.

Can I just ask also, it appears that the market is slowly disappointed today that you haven't been able to make this sort of capital management decision. Are you disappointed about that as well?

It could have been my preference to be able to

capital return at present. As I said before, we are very much mindful of the Commission and we do believe it will be an appropriate decision.

Thank you.

Thank you. Sir, that was the final question.

Thank you very much.