James Hardie Industries PLC (JHX) 2005 Q1 法說會逐字稿

Good morning. Welcome to the James Hardie Q1 '05 results presentation. I'm, Peter Macdonald, CEO of James Hardie, and I'd like to welcome those participating on the teleconference and webcast. The program for today is that I'll provide a brief overview, I'll then pass to Peter Shafron, the CFO, for our financial review. I will come back to talk about the operations of the Company, I'll then talk briefly about the Commission of Inquiry, and we've extended the length of this presentation to around 12:15 to allow extra time for questions. Turning to the results, the quarter was very strong for the Company, and all key indicators improved. And, turning to the next slide, all areas of the business improved. The US Fibre Cement business was up 17%; Australia and New Zealand were up 31%, although that was 18% in local currency. The Philippines and Chile were both in positive EBIT. The Hardie Pipe business significantly improved its operating performance, and Artisan roofing business completed production trials and commissioning work. I will now pass over to Peter Shafron for a review of the financials.

Thanks Peter, and good morning everyone. Well, the story of the quarter is strong sales and EBIT growth with higher expenses, sales are $306m, or up 27% on the same quarter last year, EBIT of $58.3m was up 21%. This quarter, we had two expense items as shown above -- shown in the slide, not connecting with the operations, first on the other operating expense, which is inquiry costs and the other one being the higher income tax expense. I'll come back to those items shortly.

the inquiry costs, EBIT was up 27% at the Q1 '04, in proportion that sounds good. In terms of '03 operating segments, all reported stronger sales in US dollars. US Fibre Cement reported 29% increase to $240m largely through volume improvements. Asia Pacific was up 14%, $57.3m, although that increase was assisted by a stronger Aussie and New Zealand dollar relative to the US dollar to the prior period. In local currency, the increase was 3%. On our Fibre Cement segment, which includes our US Pipes business, Chile, Europe; and Roofing also saw an encouraging increase in sales although

small base. Segment EBIT for Q1, in EBIT terms, all segments improved over Q1 '04. The EBIT results for all segments was affected by higher raw material and other costs, pulp was around 15% higher than Q1 '04. US also saw a higher freight and insurance costs. In terms of insurance, we just came up with a three-year deal put in place prior to September 11, and they set those experiences post to September 11 insurance rates. Also for US turning phase is in SG&A spend to support our US growth initiative. The EBIT margin for the US was still 26%. Australia had improved manufacturing performance, but more than offset the increases. In local currencies, Asia Pac EBIT was up 28% over Q1 '04.

The R&D spend was $4.1m for the quarter, product development is separate, and that spending was $2.1m, making the total expenditure on new development $6.2m for the quarter, and corporate costs are broken down on the next slide. So, corporate costs for the first quarter were obviously up to manage legal fees and associated cost of the New South Wales Inquiry, those costs were around $2.9m, those costs will continue into the second quarter, and we expect them to be substantially higher, possibly twice what they were for the first quarter. You can see, stock related compensation expense there was down over the prior quarter are especially due lower charge for our shadow share plan, which is driven directly off the stock price, which is being down. General corporate costs were up and in line with business units support services, and higher insurance premiums and some other license allocated to corporate. In terms of corporate costs, outside of inquiry costs, and outside of stock option expense, I'd expect going forward for the year they'll fall between $6m and $7m. Interest in tax expense, interest was relatively steady at $2.5m, our borrowing didn't change for the good materially from the Q1 '04. Our income tax expense was higher due to higher US profit, US is the highest tax jurisdiction, so then it always increase at the tax rate, and also due to creation of one-off tax contingency or a tax reserve. We expect for the full year the tax rate, should still fall within our range, our expected range of 25% to 30%, but towards the upper end of that range.

EBITDA, you can see on the next slide, you can see higher depreciation charges due to the increase in capital base of the Company, primarily through investment in the US. Almost all of that is plant depreciations. There is very little goodwill, amortization, we only have about $3m in terms of goodwill on the balance sheet. So, EBITDA increased by 21% to $67.3m. CapEx, as more

capital was spent in the US. You can see the capital spend there, $28.5m for the US, $1m for Asia Pacific, and bit less than $m1 for other fibre cement. Most of that spend went to the new Reno plant, $14.6m for the quarter and $8.2m was spent on the new Peru, Illinois trim line which we've announced. Together those three projects will account for about a $100m worth of capital spend for this fiscal year. A bulk of the remainder of the spend for the quarter was primarily improvement rather maintenance-related. Asia Pacific fibre spend typically is maintenance-related type capital and CapEx for Asia Pacific, you can see, was less than half of depreciation. Finally, our key ratios, earnings per share was $0.081 for the quarter. Our published targets of 15% revenue growth, 15% EBIT sales and 15% return on capital employed, were all comfortably exceeded. Gearing, which we calculate as net debt plus equity, 10.8% and I need say our net interest cover at 23.3 times is very strong.

Thank you, Peter. Turning now to the US fibre cement business, three illustrations on the opening slide. The first slide is a shot from our R&D center in Fontana, California. The shot on the lower left-hand corner is a tradesman fixing our Ezi-Grid Tilebacker onto a floor. And the shot from the right-hand side shows Hardieplank siding on a typical US new residential construction project.

Turning now to the overall result from the US. It was a strong first quarter. Net sales were up 29%, sales volume up 27% and average price up 2% on the prior comparable period and also up 2% on Q4 '04. The volume growth of 27% is very encouraging. When we analyze the end-markets, it looks to us as though our end-markets in new housing based on starts and average size movements were up 15% and the repair and remodel markets were comparatively flat. So overall, we would say that our market opportunity grew by 10% and we grew by an additional by 17% through penetration. EBIT was up strongly and the EBIT margin while down 2.8 points to 26.2% on the prior comparable period, was up sequentially on Q4 '04 from 23.3, up by 2.9%.

Turning now to the market conditions in which we operated, the housing construction market remained generally quite buoyant as I said before, up around 15%, very strong for us. We do have low interest rates although they have been increasing through the year. They have not yet materially dampened demand. House process remains strong and generally the environment and consumer confidence are positive for housing, and as I said before, the repair and remodel market also remained positive for us.

So then turning to the business performance for us. We saw continued strong demand for fibre cement, we saw increased sales performance, penetration in both established and emerging markets and within our interior products and growth with our differentiated higher- priced products. So really across the board we saw improvement. We also saw margin improvement despite higher costs and costs were up very significantly. If we looked at the combined impact of pulp, cement, freight and energy from the prior year, then volume adjusted, we would have seen nearly $9m in cost increase. We have announced a price increase. It took effect from late July and through August and onward, we would expect to see between 2% to 4% improvement in our average selling price.

Turning now to the slide showing our growth and contrasting it with the movement in housing, you can see that our topline growth, our revenue growth continues to outstrip our volume growth and that the business as a whole is still continuing to significantly outperform the underlying growth in the end-markets and we really see no significant sign of that growth declining. Turning now to average selling price, you can see that over quite some years now, our average selling price has continued to improve. Nearly all of that growth is through mix changes, as we sell more of our higher-priced, more-differentiated products, although, as I just commented, into Q2 we will expect to see some improvement as a result of the price increase we've just announced.

Turning now to the slide that shows in the spec bars the EBIT in US dollar millions per quarter, showing a very consistence in strong trend, well supported by the quarter that we are now reporting. And then with the line across the page, you can see our EBIT to sales margin and is lifted to, as you can see, above 25% and is typically well above our long-term target of 20% EBIT to sales. So, again another very pleasing chart for the business.

Turning now to the strategy in North America. This is a long-held strategy that we've been implementing. It is delivering the performance that we seek and therefore it remains in place. The outlook for our North American business is positive. We expect to see continued strong demand for fibre cement and the short-term outlook for housing remains positive. We do expect further increases in interest rates, but there is sufficient demand and the new house builders have been sufficiently conservative in terms of building stock that reduce a continued strong demand through most of this coming year. In that environment our sales growth, we think will continue to be strong. And as I said before, we have implemented a price increase, which will lift the topline a little further beyond volume. We do expect to see higher pulp and energy costs through the balance of the year, but nonetheless we expect to see good EBIT performance improvement over the full year, from the US.

Turning now to Asia Pacific, again there are some illustrations from the business. In the top left-hand corner, there is a nice picture of our new Linea weatherboard under development in New Zealand. In the lower middle there is a shot of Eclipsa. This is the new prepainted eaves lining which is being launched across Australia today and in the top right-hand corner is a shot from the Philippines of their HardiSenepa fascia board. You'll notice some very obvious rotting wood on the right-hand side and then the strong performance of the fibre cement on the left. So, turning now to the overall performance in Asia Pacific, these numbers are a blend of the Australia, New Zealand and Philippines business combined. Sales were up 14% in US dollars but around 3%, or just under 3% in local currency; volumes up by 8%; EBIT was up 40% in US dollars and a 28% in local currency and the EBIT margin as a whole for the region is now above 20%. Our regional strategy is as shown. It is being effective and we are continuing to implement that strategy.

For Australia and New Zealand, the key points were that the Australian housing market improved and the renovation and commercial activity remained strong. New Zealand housing was robust. As a consequence, sales were up 6% in Australian dollars and the volumes were up 5%. So, there was a modest increase in average selling price of 1%. EBIT was up 31% in US dollars or 18% in Australian dollars, roughly one-third of that came from the volume improvements and around two-thirds of it from manufacturing and other cost improvements. The outlook for Australia, New Zealand is positive. We do think new housing activity in Australia will soften, but repairs and renovations and commercial activity looks to be reasonably healthy. New Zealand housing and renovations is remaining buoyant. We are making and continue to make further gains in our manufacturing performance and overall that should deliver further EBIT improvement, and certainly that is targeted. However, it is possible that inquiry-related negative sentiment could have an impact in the future on our Australian sales.

In the Philippines, all key indicators improved except for average price. The price decline was due to mix changes. The plant exports heavily and exports fluctuate more than domestic volume and exports have different pricing than domestic business, so that leads to the sort of effects you see, but nonetheless a very positive performance in the Philippines. You will note in the MD&A that for the Philippines there is a restatement of some historic volume numbers. These changes are not material beyond the Philippines, so they don't quote a re-statement beyond that. The outlook for the Philippines is quite positive and we are targeting further cost savings and EBIT improvements from the business. Turning now Chile. This business also performed well, but as for the Philippines, exports and material proportion of its output. Reduction in exports caused average selling price reductions, however, the business continued to improve and grow based more heavily on domestic demand. The outlook for Chile is for further improvement in the markets we address, further penetration into the markets and manufacturing improvements, but I would say, the local market is intensely competitive. Turning now to the Pipe business. US pipe business continues to show strong improvement in both the marketplace and in manufacturing performance. Although, the business is not yet profitable, we have improved prices and we are performing at around cash breakeven level today. Looking forward, we see competition remaining intense in the Florida market in pipe, but nonetheless Hardie Pipe is continuing to win customers and we still have large improvements that we know we can make in manufacturing.

This should enable further gains to be made, as we continue to prove up in our basic pipe business model in North America. In Europe, it's still very early days, we've been operating for less than -- just over a year now. Demand continues to grow, sales are building steadily, and we have continued to add distribution outlets primarily in the UK and France, but our entry into Europe is part of a very long-term development project, and we don't expect to see dramatic change in that business, we'll just steadily improve it over time. The Artisan roofing business and our pilot roofing plant has continued its development; we've further improved the plant and have progressed the product in terms of its refinement and product certification. We expect sales will ramp-up over the balance of the year. Interest in the markets remains strong in this product. Research and Development is the most important area of investment for the Company, it sustains our competitive advantage and builds it into the long-term, and we continue to invest significantly in R&D, and most encouragingly gains continue to be made in R&D and several key developments are progressing well. As Peter mentioned earlier, we spent around $2.9m in the core part of R&D, which is up on the prior year, around $2.1m in product development, which is consistent with the level of spending in the prior year, and then in intellectual property and other SG&A aspects of R&D we spent another $1.1m. So, the total spend for the quarter was $6.1m.

Turning now to the outlook for the James Hardie business as a whole, we expect that the strong growth momentum of the first quarter will continue into the second quarter. And the end markets are supportive and prospects remain encouraging for the remainder of the year. We expect continued EBIT growth over the full year. Turning now to the Special Commission of Inquiry, the official commission is still in progress and you'll appreciate that I have to be mindful of this in responding to inquiry related questions. The Company does understand the depth of feeling in the community about the issues that have come up before the inquiry. There have been many claims and allegations made before the commission and we have focused our responses to these allegations within the commission process rather than through the media. James Hardie has made a vigorous defense of its position and its submissions have been filed with the commission and are available on our website.

We are deeply concerned that asbestos related claims are now projected to be far in excess of amounts anticipated at the time of the establishment of the MRCF. The Board has said that it will recommend that shareholders approve the provision of additional funding to enable an effective statuary scheme to be established to provide speedy, fair, and equitable compensation for all existing and future payments for asbestos-relative injuries caused by former James Hardie subsidiary Companies. The Board has also created a special committee to overview the further progress of the special commission and the committee will await the release of the commissioner's report before making any recommendations to the Board. There are a number of misconceptions in relation to the Company and the enquiry and this is also very concerning. An important point to note is that, as far as James Hardie is aware, no person who is entitled to compensation from the MRCF has failed to receive it. We certainly hope that with our proposal, that this will also be the case in the future. As I said earlier, the commission is still in process and questions about it can only be answered being mindful of this. With this clarification, I will now open up the teleconference for questions.

Thank you. The first question is from Simon Archer of Merrill Lynch.

Yes, hi guys. Just a few questions. I thought that maybe Shafron. Could you give us a little more color on the estimated tax contingency that boosted the effective tax rate?

Yes, Simon. Every quarter, we look at our contingency, it's not just in tax area but otherwise and there were a couple of items which we decided to take a conservative position on and so that is the reason for the increase in that line. We don't expect to kind of appear in the next quarter and as I mentioned, we expect to see tax rate should fall an expected 25% to 30%, but towards the upper end of the range.

You can't actually tell us what the contingencies are?

No, it is really in the nature of these contingencies that, because they are contingencies you don't, I really want to say too much about that. But no, I don't

it anymore.

All right and I might have just some questions for Peter Mac. Could you just give some clarity on the price increases that you announced and I guess what products, what regions and then also on height. It does look like that business is improving and there is a smaller EBIT loss now. Any sort of ballpark as when you think it will be EBIT breakeven?

Thanks Simon. In terms of the price increase, it is quite commercially sensitive as to which product and which region and which proportion they have increased. But I will say, we haven't moved away from our long-term positioning of pricing our products for continued growth and penetration and what happened was that really, the competing products moved up very, very strongly in price. The vital products are related to petrochemicals and they've gone up significantly and wood-based products also improved, or lifted their process very materially. So we could more than retain our relative price competitiveness and still take some modest increase. I just thought that was an important point. We haven't changed our strategy in terms of our price positioning against other products. The weighted impact of these, the weighted average impact of these price increases are probably around about 3%, maybe a here more. So, we said between 2% to 4% and we won't really know what the full impact is until we see the August and September results and all products, I think is coming through with the new process, Simon. In terms of the pipe business, it is quite encouraging to see the business continue to improve. Volumes, I think are over double. Prices are continuing to improve and those things take us very close to being EBIT positive. I wouldn't like to predict when we'll run through that point, but we are clearly very close to breaking through that point now.

That is great. Maybe just one last question on the penetration in the North. Clearly, volume growth in the last two quarters has been between $0.27 and $0.29. Given the -- I'll get your, your high market shares in the South, it probably leads me to believe that yes, the North is doing pretty well. Could you just give some clarity on the sort of -- what's happening up there?

Sure. We are pleased with our growth in all of our segments including the North. Simon, you know the market well than many others do. Also it is not a market we were going to have dramatic shifts from quarter-to-quarter, we have to grind our way through improvements. We have to grind our way into the markets. But we are continuing to promote our Color Plus product as the right solution against Vinyl in the North. And that is being successful. And so, generally it is just a continuation of good strong growth. I would say that we wouldn't shift our guidance from expecting volume growth in the North American business over time to be in that 15% to 25% target range and obviously we are above that target range now, partially I think because the end markets are still growing at rates that quite frankly we didn't expect and they are probably not sustainable. I think the housing markets in the US are clearly toppy and while I don't expect there to be any sort of collapse, I don't think these levels of growth can continue. I'll be very pleasantly surprised if they do.

That is great, Don.

Thank you. Next question is from Mark

for Corey

.

Hi guys. My questions relates to the prospects of getting. The competitive -- Missed a couple. Can you hear me? So, let me try it this way.

Is it better?

Much better.

That's much better, Mark.

So, the 2% to 4% price increases you've announced, will they complete the cost recoveries? So, would you get full cost of recovery if they are implemented in terms of the inputs that you have in place? My second question in relation to the SCI cost of $2.9m. Can you tell us how much of that relates to a payment to KPMG for the actuarial work and also can we get a feel for what the tax -- if there's a treatment that we would apply to that number? And finally, in relation to Pipes, the manufacturing gains that you have outlined that are yet to be put in place, will they actually get you to breakeven EBIT?

Thanks Matt, some very good question there. In terms of the price increase, it wasn't done for cost recovery purposes as I explained earlier and as I know you understand, it is really done about positioning against other products and having opportunity to increase price against those other products. If it was -- let's just say -- was 3% in the middle and we're selling, say little over $200m, we're going to get about $6m a quarter, then, based on the increase that we just saw it wouldn't quite recover those costs, but that -- your mark list, just a calculation we'd have to do each quarter and we could perhaps answer it. We do communicate the -- these impact of cost increases, so, it's quite easy for you do that calculation because we also what the price increases are. In terms of the special commission, the cost was $2.9m would be inappropriate to detailed individual advices; bills to us, but certainly the actuarial cost are a material proportion of the total costs. In terms of the tax treatment, I believe, it's deductible. I understand that it's a deductible expense of the business, but I couldn't certainly confirm that to you. In terms of the Pipes business, it is very close to breakeven. So, we wouldn't need to make material increases in operating efficiency to be at breakeven. At the same time, we're also continuing to see price improvements, so that's a part of the reason for a confidence market of the business. We will continue to improve and in effect I guess we're starting to feel that the business model is in fact proving up more than we could have said a year ago.

Thank you.

Thank you. Next question from Kin King of Deutsche Bank.

Questions to Peter Macdonald. Peter, last quarter, you mentioned that you are looking at the possibility of hedging the pulp price. I'm just wondering where you at in that process?

We haven't been able to hedge the pulp price thing, we've looked at it, and we certainly have people who have been prepared to offer us hedging arrangements, but was not found those offers to look attractive to us, given that pulp for now appears to be getting close to the peak of the cycle, and the sort of offers we've been giving have best on the current pricing, and we anticipate that though -- it will, but will go up in the next quarter, I think, it's our view that it is probably close to the peak and due to decline. So, the short answers would be, no we haven't, and the explanation really explained why.

Great, thank you.

Thank you. The next question is from Andrew Dale of ABN Amro.

Good okay, there are just, a question -- a number of questions. The first in North American volumes, you sort of stated the market share growth of that 27 was -- probably seven times and related to your un-penetration. Just wondering whether you might be able to give us a feel -- I think, last quarter, we looked at sort of rebates thing and a factoring the penetration, maybe, can you give us a bit of a feel for whether real labors of have been to -- obviously achieve that very good results?

Certainly, Andrew the I would say that from the Q4 announcements about rebate, I don't think they had any impact in fact on the penetration, but they did have an impact on the average selling price. The rebate accumulate through the year and then, if you don't get it right or you don't accumulate properly, you'll take some hits towards the end of the year when you square off, particularly if the last quarter is a strong quarter, then you end up with people breaking through and getting rebate that which you haven't provided for, but I don't think the rebates themselves drive the volume in the quarter. All that match although certainly someone is just short of a rebate target who can buy a little more and get over it, that could happen. In terms of the performance this quarter, look, I just think it's a solid across the board performance from the business. People are doing the right things. Our products are attractive to customers and the strategy is being implemented across a broad range of products and business segments.

And, in terms of the marketing expense, it's not a huge number or the scheme of things, it looks like it's further up, up over 100%. Can you, maybe give us a bit of a feel as to, is there a lot of that been directed into North America? Or are there any efforts made, given some of the issues domestically within Australia, or just sort of direct a bit of marketing towards the Aussie product?

No, we have not altered our business processes in Australia, in fact it's probably inverses what you would have said. I am not sure it's appropriate for the company to be adopting a high profile in the marketplace here with it's products and while the inquiry is underway. In North America, we continue to invest for the long-term growth of the business. We continue to add employees and to invest in market development and product development and I see no decline in continuing to do that. That business strategy, that investment in the future is continuing to deliver very strong growth. So, I think it's entirely appropriate and will continue.

Okay, and just finally, can you maybe give us a comment on how trim is progressing in North America?

The trim product continues to grow well. We do need the trim capacity from the line in Peru. We have been a little tight on trim product. And as always with their emerging products, it's always a battle to get market demand and new production facility ramp up completely coordinated. So, we have the woulds out. And the guys in Peru, Illinois, are going hard to try and get that line up by the end of the year and we lead the line.

Okay, thanks very much.

Thank you, our next question is from Alex

of Morgan Stanley.

Yes, thank you. Hi Peter, just a couple of questions. First I want to finish up on, I was just wondering what the tax rate would look like? X, these contingencies that you are talking about this year and I suppose what I am getting out there is, are we still expecting a more medium turn level towards lower end of the 25% to 30% range? Or is that now guided towards the upper end? Not just for this EBIT medium term. Second question, in terms of the Pipe business, we are not far away from positive EBIT there, and I was just wondering whether or how the planning of the expansion of that business is looking? And then lastly, just wondering, it sounds like the driver of the 2% average price increases, probably more as a result of ColorPlus expansion or higher sales there that it wasn't from higher sales in trim? Just wondering if that's a correct assumption?

Alex, the first one was around the tax rate, absent the contingency. I have it in the piece of paper in front of me. But, my memory is that it would have been around 26% or 27%. Your next part of the question was what do we expect longer-term? Really, I don't want to go beyond the guidance. I think the comment is already given for the full year, which is the 25% to 30% range, and we expect to be towards the upper end of that range.

Thanks Peter, and then Alex, in terms of the Pipe's expansion, what we've said is that we are determined to basically prove up the business model with this first plant before we launch often to further plants across the country. Obviously, every quarter that the business improves, we get closer to making that decision. But that decision isn't imminent. We do need to ensure that we have the manufacturing model really worked out before we go and start investing in further plants across the country and that's the area I guess I could say where I see the most potential. So, the logic goes, why would you go and build another plant, configured like this one is, when you can look at that plant and you got R&D guys working out and they can see they could make really large gains. So, any decision on the further expansion of the Pipe's plant, I think is probably sort help the Pipe's plant. But the Pipe business geographically across the country I would say was at least a year away if not more. In terms of the average price increase, now look, I don't think it's fair to say that ColorPlus drove that. It would have had an impact because it has grown. But, Color is still such a relatively small part of the whole that other products relatively would've contributed. One of the things is that we had suppressed average price growth. Over the last couple of quarters, it had been with the backer products, the interior products. We've actually had great margins, but lower average selling prices, had been on a bit of tear. They still grew strongly but in this last quarter, our exterior products grew relatively more strongly than the interior products. And I think that's probably a better explanation than the ColorPlus had given us average price increase.

Right, thanks.

Thank you. Next question is from Rowan

of Credit Suisse First Boston.

Good morning, Peter. Just a round at all of the broker questions. Just in regards to your market penetration, in the last two quarters you've averaged 17% to 18% above the underlying market growth.

take on your average price announcement increase on board, but relative to your competitors, is there possibilities of further price increases there in terms of a risk reward trade-off than further capacity announcements required over the next 12 months or so?

Rowan, we wouldn't be good managers of shareholders' interest if we didn't always look to price at the highest level we can, commensurate with the long-term growth profile of the Company. But we don't price to suppress demand to avoid capital expenditure, I guess, it is the other way of putting it and I think quite rightly US analysts would say that's a pretty poor option. Obviously, with this level of volume growth, we are now actively looking at our next announcement in terms of capacity. We expect to have the Reno plant up and running for next summer, but if this level of growth continues, then we will have to really get our skates on and get to the next level of capacity up. So, just -- there might be on refinement in what you see, the net might be, if there was very short-term squeeze where clearly you couldn't make any more product in the interim and you could take a little bit of price improvement just holding the demand until you

came on. Then we would obviously look at minor chin-ups like that and typically that would have -- and not of a general price increase but perhaps rebate targets may be altered or rebate percentages maybe changed. That's sort of changing just to help returns a little. But we wouldn't want to move away from our long-term growth profile and suppress demand in any material way over any material length of time.

And on that premise, just to follow up from that, is there any particular regions where your capacity is constrained at the moment similar to the situation, which brought on the Reno capacity expansion?

But well, it's tight, we are in our mid-summer peak right now, and we built significant stocks before this summer and those have drawn down significantly, but we do operate our production plans as a national production grid and ship products around. So I am not saying we are out of capacity, we are not. We have sufficient to meet the current demand, but it wouldn't -- even if were

it wouldn't mean that we are short at a particular geographic market. We would just spend a little more on freight, and freight is up very materially in this quarter that we are at right now. And that's not only because of the energy cost, it is also because we are spending a little more on freight, shipping it a little further than we otherwise would, if we didn't have some tightness in supply.

Thank you.

Thank you. The next question is from Jonathan

of CitiGroup. Go ahead, thank you.

Hi. Yes, thanks. Just a quick question on the price increase. Can you actually tell me when you announced that price increase rather than when it was pushed through?

Sure Jonathan, I can't give you the precise date, but I believe it was announced in June and that orders had to be placed before -- for delivery before the beginning of July, but we weren't able to deliver all the product before the beginning of July, so product -- some products supply at old prices continued through into July. So, as I said earlier, we have got some increase towards the latter part of July.

Did you notice any sort of pick up, I guess in trade orders in that June month or is there any evidence that there is some trade loading towards the end of the month,

cost increase?

Okay, look -- excellent questioned, did we pull some demand into June out of July, I guess is meaning what you're saying with the price increase. We may have been some impact there, but I now have the July results, and they certainly held up strongly with similar levels to June. So, it's not apparent that if -- it's not apparent that there was a material impact there, but certainly Kenny traders around the month end, if I could bye an extra week or two's product, may rather try to do that to get more business. In fact we put a constraint on the market, that the maximum anyone could buy, ahead of the prior strives with 110% of, I think their previous three months average purchases, and there's not much point in announcing a price increase and having people buy up in the future, so that you can't in effect get the impact.

Maybe just one other question on the roof

. Where there any commercial sales in the quarter we have had?

Yes, there were sales, but I wouldn't want to give you a false impression Jonathan, the sales of stores are very low level. They are not at a all high volume sales, and the focus is really still in the plant and in the approval process, and quite frankly it's not as fast as we would have liked. But it's still

satisfactory, and as you know when we announced the plant, it's a product plant and it's got lot's to do to prove out the production process, and I think the good news is, it's knocking all those issues off, and it is now at a stage which we believe it can now ramp it's production up recently significantly.

Thanks.

Thank you. Next question is from John

of the Australian Financial Review.

Hi, three questions. First, can I just take the $2.9m in enquiry costs, where does that bring the total so far please?

John, I don't believe I have that figure in the top of my head, but this would be the -- by far the largest quarter that we have announced. Because this is really the, April, May, June periods and the enquiry effectively for us, started in April though we would have incurred some cost in preparation, but not lot before that.

Correct.

This would be the majority of the of the cost to date.

What are you thinking the total cost might be?

Well I think Peter Shafron mentioned that we think, this current quarter we are in now will be significantly above the quarter just gone perhaps potentially as much as double, and the enquiries due to finish during the month of August. So, that gives you a reasonable indication of where it might be. Obviously, it depends if there are follow up issues from the enquiry, there may be further related cost to go on into the future, but that would be a very rough guideline to what the cost might be directly to the Company.

Right, another quick one. You -- somewhere you mentioned that insurance cost -- I think could fall on

in the US.

No, I think Peter Shafron probably mentioned that insurance cost were up a little bit, I'll let him answer that.

The point on the insurance was just that the Company came up a three-year deal with the insurance, which was put in place prior to September 11th, and so the pricing of our insurance policies went up and we only saw that in the first quarter.

So, what was the effect of that increase?

It was large, but --.

Okay.

John, just -- orders of magnitude in low single figures of million though, it's not a --.

Okay and just finally Peter, if you had your time again, do you think the Company would have made the same decisions it did last year in relation to the foundation?

John, I don't think we could have. It's already become apparent before the commission that the actuarial estimates -- and we have said before that

we think will appropriate to make a finding, with the actuarial estimates we're not reasonable, and it's a matter of really significant concern to the Company that the amount of money set aside, which was based on the actuarial estimates is not going to be sufficient, if we have had an actuarial estimate at the sort of levels that some of the submissions to the enquiry from that we say they should have been. Clearly we could have not done what we did. We would have, have to do something differently to find more funding or not progress the foundation, so obviously the whole process was is one that causes me personally extreme pain and causes the Company enormous cause for concern, and it wouldn't and couldn't have been as it was, with the information we have today.

Right, so the main problem was that the actuarial estimates were

The actuarial estimates were the key foundation stone on which the funding for the foundation and a decision to establish the foundation were taken. There are obviously a range of other issues that have been raised before the inquiry, John, and I wouldn't minimize those, but say that we need to wait for the outcome of the inquiry to determine those. I wouldn't say that actuarial estimates were the sole reason why things haven't worked out, but clearly I think it was the foundation stone on which the whole premise was based.

Right. Just finally, in your annual report, you are saying,`the Company will work hard to ensure the safety of our workers. Try and develop our next generation of managers and manage the Company with honesty and integrity.` Are you satisfied that you have done all those?

There are issues before the inquiry, which do cause concern with that, but I can tell you, John, that is certainly been my aim, my aspiration and what I've tried to do at all times, that I've been with the Company.

I mean some people are concerned that you haven't shown lot of remorse during this process?

Well, John, the Company has said, at several points during the inquiry, that it is deeply concerned about a number of matters to do with the inquiry and that it will wait for the outcome of the inquiry before considering what its position should be. And I don't want to preempt that and I don't want to say that the Company may not make statements recognizing the issues that you raise; I just don't want to preempt it.

Great, thank you.

Thank you, next question is from Sera

of General

.

Peter Macdonald, you seem to be putting the blame squarely at the hands of the actuaries, but you knew perfectly well in 2001 that the Trowbridge report was not a reliable means of establishing an amount of money for the fund.

That's a statement, Sera, with which I don't agree, and the materials before the inquiry refute that, I believe, completely.

So you are saying you had perfect confidence in the Trowbridge report to establish a figure that would cover your asbestos cost liability to the future?

No, Sera, I couldn't say that. It's not possible to have perfect confidence in an actuarial estimate, it is by definition an estimate. But I believe as the submissions to the inquiry demonstrate that the Company had good reason, and had proper purpose in using the actuarial estimates as the basis for establishing the foundation and I really shouldn't go into too much more detail about that, because these are matters which are under active consideration before the inquiry.

However you did make a clear representation, that at the time the MRCF was fully funded when you knew you were in a position to know that, that statement was not backed up by the findings of the Trowbridge report.

I believe the statements of the Company made at that time were a clear and true statement of the Company's belief at that time, Sera. Now other information has emerged and clearly, with hindsight, that is not the case. I think you need to refer to our submissions to make very detailed comments about all of that.

Let me just ask you this then, if you believe this to be true then why is it that Trowbridge weren't given access to the most recent data?

No, Sera, I think you need to read the submissions, that's not at all something on which there is agreement in the submissions before the inquiry.

Let me ask you this then, why should the board of James Hardie retain any confidence in you, you've engulfed James Hardie in the biggest scandal in Australian corporate history.

Well I am sitting here doing my job in the best interest of the Company, I am committed to the Company and seeing its performance continue to improve. The decision about my tenure is one that the board has in its complete discretion, the ability to make.

You are now proposing a statutory scheme. Are you still proposing to put caps on the payouts to the victims of your products?

Well we've never proposed that, Sera, I don't know where you got that from.

So you are not accepting any responsibility for the use of the actuarial advice in setting a limited amount of money for the fund in 2001?

I am sorry, Sera, I don't know that I understand your question. The actuarial advice we had at that time was used as a foundation for determining the level of funding for the foundation. The actual level of funding was determined by the Company in its discretion, building models based on the actuarial material.

But, given James Hardie's own knowledge of its asbestos line

. You were in a position to judge the advice coming from Trowbridge, weren't you?

No, that's a nonsense. We rely on the actuaries to do that sort of work, and the Company doesn't have actuaries who work within it, who are capable of doing that sort of calculation in making that determination, that's why you hire expert independent, external actuaries so that you can get the proper view of the position, and not form a view on your own internal and I may say non-independent review.

Do you accept the view of council assisting that you treated the victims of asbestos with reckless indifference?

I think you need to read our submissions there on that.

Did you treat them with reckless indifference?

You need to read our submissions on that. We do not accept that contention. I'd like to point the contention of council assisting.

Okay. Are you happy with the way that you represented Hardie's case to the Supreme Court in relation to its move to Holland?

You need to read our submissions on that Sarah, and our submissions state that the Company did do the proper thing in its submission to the Supreme Court.

Did you always plan to cancel the partly paid shares?

You need read our submission on that Sarah, but at the time of the submissions to the Supreme Court to create the James Hardie Industries in the Netherlands, the Company did not have an intent to cancel the partly paid shares.

So, at that time you always intended to the partly paid shares to remain in place?

I think you need to read our submissions on that Sarah.

But you must know what your intention was in relation to the partly paid shares?

I've already said at the time of the Supreme Court hearing, there was no intention to cancel the partly paid shares.

Do you think that looking back now that were wrong to cancel the partly paid shares.

The partly paid shares were established for ABN 60, the former JHIL, and an appropriate decision, I believe was made to cancel then. The submissions to the enquiry made quite clear the basis on which that was carried out. I do believe we should wait for the filings of the commission before making a determination on that other than the Company's views, which are presented before the commission.

And did you mislead the incoming direct to the MRCF about the nature of the fund and its capacity to cover the future expenses -- the future liabilities of your victims?

That's a contended matter before the enquiry, and I think you should read the submissions and I think we should wait for the outcomes of the enquiry on that matter. I don't believe that we did mislead the incoming directors. Next question.

Thank you. Next question is from Richard Wendell of Scott

.

Peter Macdonald, in terms of your proposal, it appears that your looking to catch future

at least provide certainty for shareholders and for stakeholders. The ICTU and the victims support group are rejecting given the uncertainty around future liabilities. Do you foresee any solution where there isn't a cap or certainty to shareholders?

You need to read our submissions to the inquiry Richard, which provides some detail, but it is not possible for us to describe at this point in time what any future scheme might be and how it might be configured, that really is a matter for further negotiation in the future, and that requires, of course, that the Commissioner considers the possibility of the scheme and recommends it as a first step.

So you're leading this right into a -- an arrangement where future liabilities may not be capped and there is only 70% shareholders there?

Well James Hardie hasn't and can't prescribe what the details of the scheme might be, that's a matter for the future and for government to consider, if it determines that it is interested in bringing forward a scheme.

In terms of your own jobs, it seems that -- from the common situation and the shareholders of the upcoming AGM may look quite like your job and in fact the role of the Board. Why should you continue, given that you have sent James Hardie down it's path and at one point $1.1b have been lost in shareholder value and the huge brand damage done to it here in Australia?

Well, I'm committed to serving the Company and serving its shareholders, and driving the Company's future performance, and the position of my ten years of matter that is open to the Board to consider at anytime.

Thank you Don.

Thank you. Next question is from Barbara Adam of Bloomberg News.

Hi. I have got a question for Peter Macdonald. Earlier, you said it might be appropriate to adopt a low profile in Australia while the enquiry is underway. What's the likelihood that James Hardie would perhaps no longer have a presence in Australia because of that publicity from this inquiry?

Excuse me. That's not in the Company's contemplation at all. Business in Australia is a very important business to the Company, and it makes very important products for the building sector. They are very good products, well performing products, and so this is a very part of the Company.

What would be your impact on sales if the Union and Council bans on James Hardie's building product were enforced?

Look. I really couldn't estimate what that might be. Obviously, it's most concerning to us that people would consider impacting the operations of our business. I don't believe if that in the interests of anyone, I do understand that different communities are concerned about these matters but boycotts and bans, I think are unhelpful and they are potentially damaging to the Company and it's workforce. But I don't see how they'll affect the Company's already stated commitment to fund an effective strategy scheme to compensate future claimants. I just don't see the relationship between the two.

Okay. Thank you.

Thank you. Next question is from David

of Southern

.

Good morning, Peter. Just let me inside the

scandal in corporate history for a second and turning back to the operations. Just I've got four questions on, do you want me talk them all at once or one at a time.

What ever suites you, David.

Okay. Just on Chile, are you expecting exports to fall back further, and what are the implications I guess to profitability or could Chile go back into losses?

It's always possible, it's an emerging business and a very intensely competitive market. But the exports from Chile, I think a lot of analysts understand, are in fact exports to our North American business, and they are very important to us in North America, and given the growth of the North American business, I think it's likely in fact that the export business to North America will increase, rather than decline, which would in fact be a net positive for the business because the export products are higher priced, higher margin products than typically the domestic businesses.

Okay. And with Pipes, I you are concerned that the housing market is peaking or looks toppy in your words. Are you being overly optimistic about raise in price increase is holding or is that price trend continuing?

For Pipes, well I guess there have been some short-term impacts, I think on competing pipe products. Obviously the steel re-inforced concrete pipe, people have seen some fairly steep increases in steel prices. I'm not sure that there's a great co-relation between Pipe prices and Housing Starts. A very significant proportion of concrete pipe products goes into infrastructure, into highway spend and more infrastructure development type, and some of that does go into housing, but typically housing consumes smaller diameter, more plastic pipes other than just the general roading and infrastructure areas with land development. So Pipes are supported in fact by the TEA-21 and other Federal government and State government schemes, which is supporting basically the refurbishment of the highway and other infrastructures in North America. And it's performance is tended to be related to more to the extent of Federal governments funding than the housing markets.

Okay. And on R&D, you said that R&D excluding intellectual property was flat year-on-year. Is that your expectation for the rest of this year?

I think it was up

. But as you say it was on the up a little. I think it will probably be up a little this year, is my expectation. But R&D spend of its very nature can be quite lumpy, David. So we are not that great of predicting exactly where it will end up at year-end. But I think we continue to be very committed to building the business, and spending in R&D, and ultimately it's for the long term it generates sustainable competitive advantage and I was asked to continue to not only grow, but preserve the margins that we make through differentiated products. So it's very important to us.

Okay. In the straight forward exchanges lastly, I got the impression that you haven't yet seen any negative impact from -- negative publicity surrounding inquiry, either in the June quarter or the current quarter.

Well certainly, if you look at the June quarter performance that we're just announcing now, those are very strong results. And if there is an impact from the inquiry-related matters, it's certainly very hard to see. I think, as I said earlier on the call, we are critically aware of the depth of feelings about this matter in Australia, and so I just thought it was appropriate that we raise a flag about those concerns, and the fact that they could, in the future, impact on the business. There hasn't been an impact to date, David, but I am concerned that there could be an impact in the future primarily because I think it would be mis-placed. The Company has said it does want to make sure, through contributions to an appropriate scheme, that future payments need to be made, and I do think its important that the Company continue to perform well to ensure that it can support those sort of statements. And, I really don't see how attacking production facility in Australia and perhaps threatening the workers who operate that in terms of their livelihood is helpful to the longer-term process of putting an appropriate solution in place.

Okay. Thanks very much.

Thank you. Next question is from Rothland

of IIP.

Yes, good morning. Just further on the issue about the possible union ban, I was wondering just how concerned you are in terms of whether or not that would have a material impact on the Company or whether in the overall Company's operations, any sort of impact which just quite marginal?

Well obviously, the vast majority of our operations are outside of Australia, and the North American business is continuing to grow at very high levels. So, that enables you to appreciate, I think, the proportion of the effect of damage to the Australian business on the Company as a whole. The fact that, that proportion may not be all that large doesn't mean that it is not extremely concerning for the Company, not the least because, it is indicative of community feeling and attitude towards the Company, which is undoubtedly extremely negative. I think more than the dollar impact, for me the question is one of, us appropriately demonstrating our concern and taking appropriate action for the future.

Thank you very much.

Thank you. Next question is from Moreck

of Dow Jones.

Hi Peter. I am mindful of the fact that you can't comment too much about the inquiry, but two quick questions. The shortfall and the scheme is -- this funding you put the shareholders, has the Company looked at ways that they can fund that, either in capital raising, debt et cetera. And the second question I have is with the federal government becoming involved in making comments about the parent company in the Netherlands, what's your negotiations being with them? Have you been negotiating between the government and the parent about what might happen in the future or what is your opinion?

Thanks Moreck. So to the first question about scheme funding, and as our submission say, it's not really possible to determine exactly what levels of scheme funding might be required until an appropriate scheme, hopefully, is developed in the future. About in terms of affordability, I would make the point that current claimants having any -- and the foundation does have funding for the next few years. And the issue is really about funding a very long-term cost at a very many years, 40 to 50 years. So the annual cost of meeting claimants' needs is what you need to look at when determining if it's possible to be funded. The federal government involvement, I can tell you that the Company is not in negotiations with government. We've said all along that the right thing to do is to wait for the completion of the Inquiry and then hopefully we can move ahead in putting in place an appropriate resolution.

Thanks.

Thank you. We have a question from Matthew

of Goldman Sachs JB Were.

I think most of the operational questions have been covered off, but I just have a general question in relation to your time, and how much time you've spent in Australia in the last six months, obviously dealing with some of these issues which were -- that we're aware of and I know that the

of -- the

above us are very good, but how much do you think, or has there been any impact on decision making processes, the growth options and things like that, just because of the amount of time you've had to dedicate to these issues in Australia?

Thank Matt. Clearly as you acknowledge, we have absolutely excellent operating people who are capable of ensuring that the operations of the Company perform extremely well day-to-day, and that's reflected in the performance that you see here and in fact it hasn't gone completely without notice that it's my involvement in the commission who's coincided with very good performance of the Company. However, you are quite right. There has been enormous involvement, not just of myself, really a lot of the corporate functions of the Company have been heavily involved, we've kept it pretty much separated from the operating performance of the Company and I think that's probably reached, something of a peak, over the last few weeks and now with the hearings in their last week, we expect that to decline. The Company has appointed a special committee, tasked with reviewing the outcomes from the inquiry and recommending to the full Board what should be done with those outcomes and then hopefully guiding the Company towards some form of resolution and Meredith Hellicar is Chair of that special committee. A part of that process is designed to enable me to spend less time in Australia than I have had, to ensure that the operations of the Company do continue to perform at a very high level in the interest of all stakeholders.

Thanks.

Thank you. Next question is from Scott Rochfort of the Sydney Morning Herald.

Hi there. I was just curious about the -- your having your annual information meeting on September 15, and I was just wondering if you purposely timed it before the findings were handed down?

Scott, no look I -- I have to say -- I think when we announced that timing -- I think the commission is -- to the best of my knowledge the commission who was aiming to produce a report some months before that, and I think the -- on any expectation, when we set that timing we would have expected that the commission would have reported. You may recall it was initially considered that the commission would report at the end June, and it's really only been over the last month or two that I think it's now down that he would report on -- I think the current target is before September 21.

Sure, Would there be are be any plans to have a special information meeting after the findings were handed down?

Scott, anything is possible. I think the Company has said that it will wait for the outcomes of the inquiry, and then determine what an appropriate response or what appropriate responses there should be to the outcome of the inquiry, and I wouldn't preclude

anything from that. The Company I'm sure would keep an open mind about what the appropriate response would be, once it saw the report.

Sure, and how are you all enjoying your job at the moment?

I love my job Scott. I'm awfully dedicated to James Hardie, and the future performance of the Company, but I'd be kidding you if I said -- I've had more enjoyable years I have to say.

All right, thanks.

Thank you. Next question from, Christine Lacy of the Sydney Morning Herald.

Hello. On you Board is Donald McGauchie your new Chairman of Telstra. He's also a member of this special Board committee formed to consider the commission. Have you had any indication from him as to his intension to remain a director of James Hardie, given that he's indicated he will be withdrawing from some of this directorship?

I'll say that Donald McGauchie has given me and the Board no indication of being -- other than an extremely important and dedicated director on the James Hardie Board.

Thank you.

Thank you. Next question is from Stephen Long of the ABC.

Is it fair for you to say that the cost is going to be on the estimates we have at the moment, about $16m a year ongoing? If we take it as you suggest, on an annual basis to James Hardie. If you are either forced or a scheme is established to allow you to contribute to future asbestos liabilities and clients?

Stephen, I'm not sure that it's possible to determine what costs might be without consideration of an appropriate scheme. I understand that the MRCF is -- it is currently spending around about $5m a month, which would approximate near to $60m a year. There are aspects of an appropriate scheme that the Company has said it would like to see material reductions in costs, which are not payments to claim and that may well impact on what future funding requirements might be. But it would be premature -- way too premature, because the Commissioner has even made his determination to start talking in any detail about what an appropriate scheme might be.

Are you confident that you will remain in the job after the enquiry report is handed down on September 21?

Well, Stephen, CEO jobs by their nature are pretty volatile and you say that at the discretion I guess of the Board. I'm dedicated to the Company and I'm dedicated to continuing this growth, and I'm certainly hopeful that I'll have an opportunity to continue to lead the Company and continue to ensure it's future performance.

Some people are saying that it's extraordinary that you're still in the position now when your own Chairman seem to concede an evidence that as recently as February this year, you issued a May-day release which did go to the stock exchange, which was misleading?

Well, I do think you need to look at our submissions on that matter, Stephen. The Company has responded to the various assertions and allegations that have been made before the enquiry and I think on that particular matter there is a strong response.

Well, Mr. McGregor said in evidence, under question from council assisting the commission who asked, `Focus carefully Mr. McGregor, when this May-day statement was published in February 2004, you had not belief that any expert had advised that the Foundation's assets was sufficient for it to meet all future legitimate claims, did you?` He answered that it was correct He went on to say in answer to the question, `So, you agree with me, do you not, that this statement attributed to Mr. MacDonald creates a quite misleading impression that the assessment that the Foundation's assets was sufficient accorded with the advice of experts?` At that time, your Chairman answered, yes. Now, doesn't that suggest that essentially that's a confession that you misled investors and misled the stock exchange?

Well, that's an extensive quote from transcripts of the Commission. I think, if you're going to refer to the week out before the Commission, you need to read our submission and you need to read affirmation and you need to look at our submissions in reply and our response on the matter of that press release.

And what - compared to the profit as it stands annually at the moment, what proportional fall would you expect the liabilities to make, say if we took it at that $60m figure?

Look Stephen, just -- I'm not sure I understand the question, but the Company's published annual profit after tax last year was round about a $125m. So, you could compare that to any other number that you might like to generate and that would give you some comparison, but the Company is also continuing to grow strongly. I will make the point that the Company is probably close to double-digit size since the establishment of the foundation. But when I say size, I mean in terms of annual earnings and the growth of the Company and the performance of the Company is a very, very important aspect of it now being able to consider the offer that has been made to fund the suitable statutory scheme, and the question has already been asked on this call, `What would have happened if there had been actuarial reports that multiply the numbers back in 2001, and the fact that the Company in 2001 had much smaller -- has much lower levels of earnings and would not have been in a position to do what has been talked about today.

And did that have any bearing on your decisions?

I am sorry, Steven, I am not --?

Well the fact that the profits were smaller, so that's just that you didn't have as much capacity to meet future clients as you'll now understand them. Did that impact at all on your decision making?

No, Steven, I think you need to look at the submissions at the time and I think I've already discussed, the submissions at the time were based on actuarial estimates and the Company was able to afford at the time what the actuarial estimates showed was required.

The basis of the actuarial inquiry just seems to have been patiently observed --

No, Steven, I really think you need to read the submissions before the inquiry. I don't think the actuaries or the Company or any one in the Commission has used the word that you are using on this call.

Okay, thanks very much.

Thank you. And due to time constraints that will be the last question. I'd like hand the call back to you, sir.

Thank you very much. I very much appreciate your participation on this call. I do understand the interest the people have in the Company at this time and hope that you appreciate that we've put time aside to answer questions. We will be looking forward to presenting to you again with our half-year results and we will have our information meeting as mentioned in September. Thank you very much.