James Hardie Industries PLC (JHX) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. It's Meredith Hellicar speaking, Chairman of James Hardie. Welcome to our financial year '05 second-quarter and half-year results presentation.

I would like to introduce our interim CEO, Louis Gries, who actually needs no introduction to our analysts and investors. I know he's very well-known to you by -- (technical difficulty) -- previous presentations in Australia and also from your visits to the operations in the U.S. Nevertheless, this is the first time he appears before you as interim -- (technical difficulty).

Secondly, to introduce to you Russell Chenu, our interim CFO, who is also well-known to a number of you from previous CFO roles in -- (technical difficulty). On slide two, we've got an outline of -- (technical difficulty) -- (indiscernible) results presentation, and so the overwhelming majority of our time will be spent on the results business -- (technical difficulty) -- following format Louis will cover and overview, Russell will give us a financial review, and then Louis will go into a more detailed operating review of -- (technical difficulty).

I will cover at the end, Special Commission -- (technical difficulty) -- and other developments -- (technical difficulty) -- Chairman of the special committee of the Board, overseeing those issues. At that point, we will -- (technical difficulty) -- questions and answers, and we will take questions firstly from analysts -- (technical difficulty) -- investors, then from -- (technical difficulty).

I'll now hand over to Louis for the overview of the results.

Thank you, Meredith. Good morning, everyone.

On slide number three, you may already be aware we're announcing -- (technical difficulty) -- results. The shortfall is mainly due to substandard manufacturing performance -- (technical difficulty) -- high input -- (technical difficulty) -- cost of goods -- (technical difficulty) -- costs, growth initiatives -- (technical difficulty) -- higher corporate costs. Importantly, we want to -- want you to know that the business -- (technical difficulty) -- is on track to -- (technical difficulty) -- target. I will be covering all of these -- (technical difficulty).

A quick glance on slide four, -- (technical difficulty) -- that topline performance was -- (technical difficulty) -- bottom line was not. The bottom line was impacted by higher costs -- (technical difficulty) -- relative costs associated with the Special Commission of Inquiry.

On slide five, again you see that sales were good in the Fibre Cement U.S. business -- (technical difficulty) -- down 9 percent due to cost issues -- (technical difficulty).

In Asia-Pac, we had a very strong performance -- (technical difficulty) -- picked up in both businesses -- (technical difficulty) -- Austria ,New Zealand and the Philippines. Other Fibre Cement businesses performed pretty much as planned. Chile Fibre Cement, small positive EBIT -- (technical difficulty) -- continues to show positive trends on both manufacturing and market positioning, (indiscernible) Fibre Cement sales growth proceeding as planned, and then the Artisan working business we're now producing and shipping product to the market.

At this time, I'd like to hand it over to Russell Chenu, interim CFO, for the financial review.

Thanks very much, Louis, and good morning, all.

On slide seven, there's an analysis of the results for the second quarter. There are four points which I would like to highlight on this slide. The first one is the significant topline growth of 20 percent in net sales, producing revenue of $300.9 million for the second quarter.

The second point I'd like to address is the increase in SG&A costs, which were up 17 (ph) percent to $45.5 million, and (indiscernible) of (indiscernible) percent being below the growth in net sales, it was an improvement in SG&A to sales ratio from 15.5 (ph) percent for the prior corresponding period to 15.1 percent at this latest quarter.

The third point to highlight is the $5.6 million of SCI and related expenses, a material amount which we don't expect to continue, at least in the long-term. I will come back to that more a little later.

Income tax expense was up $9.4 million to $12.1 million, and I will give more detail of the changing tax rate in the later part of the presentation.

Turning now to slide seven, which shows similar data for the first half of the year, the net sales were up 23 percent to $607 million, gross profit up 15 percent to $208 million, and SG&A in the first half showing a similar trend to that in the second quarter, i.e. a decline in the percentage of SG&A through sales, 15.2 percent last year to 14.9 percent this year. A further point was the $8.5 million amounts of SCI and related expenses, which obviously has no comparable expense in the prior period. Income tax expense up 37 percent to $30.8 million, and an operating profit which was down 6 percent to $61.8 million.

Turning now to slide nine, which is intended to highlight the impact of nonrecurring items on the results for the quarter and the half, and this reconciles the reported with underlying recurring earnings for both periods. As you can see, the major impact from nonrecurring items was the SCI and related costs of $5.6 million in the quarter, the $8.5 million for the half. There was a small $.7 million operating expense on the loss of sale of land in Sacramento, and then some net other expenses of $1.9 million at quarter and a half. This relates to a long-standing investment by James Hardie; it's not something that is recent. It relates to activities from about ten years ago. $3.3 million in the '04 period was a capital duty payable in the Netherlands, and that didn't recur in this latest year.

The operating profit, on a recurring basis, i.e. stripping out the nonrecurring items, shows a downturn in the quarter of just under 10 percent, compared with the 25 percent downturn in the operating profit as reported and for the half-year period -- (technical difficulty) -- growth in the recurring profit to 5.6 percent to $72.9 million, compared with a reported profit downturn of 6 percent to $61.8 million. So, there's still (indiscernible) better performance in the recurring items, but -- in the recurring numbers than in the reported profits.

On slide ten, the segmented net sales, I'm showing a 21 percent increase in U.S.A. Fibre Cement, a 14 percent increase in Asia-Pacific Fibre Cement helped by exchange rate improvements in the strengthening of the Australian dollar relative to the prior period, and other Fibre Cement was an increase of 37 percent off a very small base with a total increase in revenue of 20 percent.

Slide 11 shows a similar analysis of segmented net sales for the half-year period, U.S.A. Fibre Cement up 25 percent, Asia-Pacific Fibre Cement up 14 percent, other Fibre Cement up 55 percent to give a total increase of 23 percent.

On slide 12, there is the segmented (indiscernible) analysis, U.S.A. Fibre Cement with a downturn of 9 percent as a result of the factors that Louis referred to earlier and which he will speak to in more detail later on; Asia-Pacific Fibre Cement up a strong 31 percent, again partly performance and partly exchange-rate-related. The other thing to highlight here is the slightly greater than doubling of the general corporate expenses to $13.7 million for the quarter, which is obviously impacted by SCI and related costs of $5.6 million, so most of that increase resulting from the Special Commission of Inquiry and things arising therefrom.

On slide 13, similar segmented EBIT for the half year showing continuing strong growth in Asia-Pacific Fibre Cement and the impact in a general corporate expenses amounting to $23.1 million for the current half, which includes $8.5 million of cost arising from the Commission of Inquiry and related matters.

On slide 14, a breakdown of the elements of corporate costs for the quarter -- a total of $13.7 million, 5.6 million of that being inquiry-related costs, and a higher-than-expected level of general corporate costs of $7.6 million that largely arose from an increase in consulting and advisory fees. We anticipate that that won't be ongoing, and we've previously given guidance of corporate costs on a quarterly basis of about $6 million; that's where we anticipate that it will settle going forward.

On slide 15, we had interest expense. This is not a big item in James Hardie's results, given the low net debt level. Net debt was down period-on-period, (indiscernible) for quarter and for half, but the decrease in the net interest expense in both periods is largely attributable to the capitalization of interest expense on construction projects, particularly the construction of the Reno plant, the new (indiscernible) plant -- (technical difficulty) -- and also some expansion of the facilities at -- (technical difficulty) -- and that capitalization of interest expense is as required by U.S. GAAP -- (technical difficulty) -- we don't encourage in Australia; it is actually mandatory in the United States.

On slide 16, a brief look at income tax expense -- I'm sure those of you who have had an opportunity to read the announcement that was made earlier this morning will have detected that there's been an increase in the effective tax rate both the quarter and for the half. That's largely attributable to the fact that we have, at this point in time, taken the costs related to the Commission of Inquiry and matters arising therefrom as nondeductible expenditure, a conservative position which we will make clarification of in the very near term. But if you take out the nondeductible SCI expenditure, you'll see that the effective tax is actually running just a shade below 30 (ph) percent for both periods. That is the guidance that we will be giving in the future. I think last year's 22.3 percent for the quarter and 25 percent for the half unusually low and going forward, we would anticipate that the effective income tax rate, net of any nondeductible expenditure, will be of the order of 30 (ph) percent.

Staying with tax for the moment, on slide 17, a number of people are aware that there has been a new protocol being negotiated between the Netherlands and the U.S. authorities. The treaty protocol significantly tightens the requirements. There's a limitation of benefits provision which is new, and this protocol was approved by the U.S. Senate only last Friday and is now awaiting ratification, which is likely to occur in the balance of this month. If that occurs, then it will take place or take effect in January, 2006. We have a work stream going on which is evaluating the implications and options available to the Company, but we are of the view that, with some reorganization, we will be able to satisfy the limitation of benefits provisions in the new protocol and therefore continue to attract the benefits that we do as a result of having our domicile in the Netherlands.

On slide 18, there's a breakdown of EBITDA by segment for the second quarter and also a schedule relating to depreciation and amortization. This is seen by us as somewhat of a surrogate for cash flow. The EBITDA for the quarter was $49 million, as shown on the bottom of the slide, which is down 14 percent. On the subsequent slide, 19, the EBITDA is $116.2 million, which is an increase of 3 percent on the prior corresponding half. I would just highlight that the operating cash flow for the period is $136.9 million, so that's a little more than $20 million above EBITDA. The reason for the difference is the fact that, as the Company is capacity-constrained, we did draw down on inventories of finished goods during the period; that was about $10 million. We also had an increase in Accounts Payable as a result of growth of the business and increase in the prices of raw materials. Cash flow actually stronger than EBIT growth for this half year.

On slide 20, there is some detail relating to capital expenditures for the half year and also depreciation. Just on the capital expenditure, which is up significantly on the '04 numbers, U.S.A. Fibre Cement has had CapEx in the six months of $77 million. $60 million of that is explained by the installation of the new trimlines at the Peru, Illinois plant and also the development of the new facility at Reno. Those numbers were $23 million on the Peru trimline and $37 million on Reno this half-year period, so $60 million of the $77 million of CapEx in the U.S. was related to these new growth initiatives. Each of those is expected to be completed within this financial year.

The second-half CapEx is likely to be less than that in the first half. Construction at Reno is nearing completion and as a consequence, we would be expecting that the second-half number is unlikely to be anywhere near repeating the $80 million or so of total CapEx for the first half.

The final slide in the financial section looks at a number of key ratios. We have EPS changes there -- (indiscernible) change in capital, so that's largely in line with the profitability of the Company. As you will have noted if you read the releases this morning, the Company has decided, at this stage, to omit an interim dividend pending the outcome of negotiations on asbestos compensation. I.e., we wish to understand what the financial implications of any settlement of asbestos compensation mean for the Company. That is a prudent and conservative position, based on the view that we should, at this point in time, conserve the financial resources of the Company. That matter will be kept under review during the balance of this year and whatever time it takes us to achieve a settlement on the asbestos compensation issues.

The other items on this slide I think are largely self-explanatory -- continued, strong return on shareholders' funds and return on capital employed, EBIT to sales similarly, and the improvements or (indiscernible) level of gearing and increased net interest cover reflecting the Company's -- (technical difficulty) -- conservative debt profile at this point in time and also the low level of U.S. dollar interest rates.

In summary, I think one would describe the second quarter as a very challenging one for James Hardie. We expect the second half to be better. The financial strength of James Hardie is probably best illustrated by the strong net operating cash flow of $136 million for the half, which was a 50 percent increase on that from the prior corresponding period.

(technical difficulty) -- concluding comment, I would like to handover to Louis so that he take us through the operating review.

Thank you, Russell.

To start my review of operations, I want to talk first about the management structure. On slide 23, basically this lays out the new roles of different individuals in the organization. As some of you would already know, I have been directly responsible for the businesses around the world for almost two years now, but the main change with me taking on corporate responsibility was to go to a (indiscernible) structure in the U.S. So again, a lot of you already know Don and Dave Merkley; they've been members of the senior management team now for several years. They remain -- (technical difficulty).

Jamie Chilcoff was made Vice President-International as of August, and he will be responsible or is responsible for all business outside of the -- (technical difficulty). Then within the U.S., we split the business into three areas which actually coincide exactly with our previous divisional, but Robert Russell will now have full GM (ph) responsibility for the established markets. Basically with this change, the main thing Robert picks up is the five manufacturing plants in his division.

Nigel Rigby likewise takes on full GM (ph) responsibility for emerging markets. He will pick up manufacturing responsibility for his three manufacturing plants plus the Cohen (ph) operations in his division.

Finally, Mark Fisher takes on GM (ph) responsibility for the specialty products division, which includes the older interiors division plus pikes and XLD (ph) trim.

I have utmost confidence in these individuals. They have all been with Hardie for several years now, proven track records, fully committed to driving future growth.

The integrated senior management team will also include the EVP of Austria, Russell Chenu, plus a yet to be named CFO, (indiscernible) VP of HR.

Looking at the next slide, number 24, it shows some photos of U.S. -- for the U.S. business base of our products. The first one on the left is an installer scoring our easy grid product prior to use. The second one in the middle shows a detail of our trim products, XLD trim (indiscernible) and then the house on your right used a variety of -- (technical difficulty).

(technical difficulty) -- on slide 25, again we are very happy with topline growth. It fell right in the 15 to 25 percent target range that we look for. Average price was up 3 percent, and if we weren't slightly constrained on construction, it probably would have been up a bit more. Normally, what we do, when we get a little tight on construction is we strip the production of the higher value products -- (technical difficulty) -- as they use more capacity generally than the core products that the builders depend on to finish their homes. That was the case in the second quarter. We did have a price increase that took us back during the quarter, and 3 percent is a combination of some growth with the high value and some of it factoring back to the price increase.

As we said, the EBIT margin, our EBIT itself was down relative to the same quarter last year, and we will go into that later. The EBIT margin did fall in our 20 to 25 percent target range, but near the bottom. We will talk about that some more later as well.

Slide 26 -- I guess as everyone would probably know, trading conditions in the U.S. remain strong. We don't see that changing in the short term.

Slide number 27 -- the first three points really come back to all segments are going strongly -- (technical difficulty) -- at all, but is exactly what we want from both the emerging and the -- (technical difficulty) -- established as well as the -- (technical difficulty). The growth and differentiated products I already mentioned -- we did get some growth but it was somewhat constrained.

The operating issues at the plant and higher manufacturing costs are covered in the next slide -- (technical difficulty) -- (indiscernible) very common (indiscernible). We did successfully implement that increase with no dampening effect on the -- (technical difficulty).

Slide 28 covers the plant performance issues, and I guess this is really the major slide -- (technical difficulty) -- presentation. We had significant problems at the plant in Pennsylvania, Summerville, South Carolina and Waxahachie, Texas plants. The plants in Summerville were acquired as part of the Cemplank acquisition. Again, as most of you probably know, our technology is well beyond (indiscernible) technology in both -- in high throughput and low unit cost production -- (technical difficulty) -- technology. What we attempted to do with the (indiscernible) plants was retrofit our technology into these plants rather than the approach we took in Waxahachie when we acquired that plant, we basically got -- (technical difficulty).

Anyway, we made these changes over the last couple of years. In early this calendar year, we felt we were in a position to push throughput (indiscernible) these facilities can meet seasonal demand. This resulted -- (technical difficulty) -- ramping up costs at the facilities. Unfortunately, we do not get the related increases in production.

The current situation at both of these sites is that we had turned a corner at Summerville recently but that we still face problems with (indiscernible). Summerville is now producing product at acceptable production rates and cost. Brandon, however, may take another 6 to 12 months before we fully resolve the issues. We have reduced shifts at this site to contain costs in future quarters until the issues are resolved.

The problems at the Waxahachie plant were around both ramping up new technology, which was related to the specialty line that we constructed there, and site-management issues. Both of these issues have been addressed and the plant is performing at a much higher level currently.

The EBIT results negatively impacted in the quarter by approximately US$8 million due to the manufacturing unit cost issues. The biggest part of the 8 million was in labor and maintenance costs. Additionally, capacity was somewhat constrained, which affected freight costs and restricted shipment of high-value products.

Moving on to slide 29, you'll see that, in addition to these (indiscernible) efficiency-related costs, we did have higher material prices for our inputs. We had higher freight, and part of that was due to the capacity constraints we talked about in some of -- (technical difficulty) -- cost increases as well. Then SG&A around growth initiatives, mainly the (indiscernible) initiative and the repair and remodel segment initiatives also increased versus last year.

Despite all of these increases in costs, we did operate within the target EBIT margin -- (technical difficulty).

Going on to slide 30, it gives you a history of the top-line growth of the business. Obviously, it has tracked -- we have enjoyed very good housing starts since 2001. The growth is -- (technical difficulty) -- but obviously we've grown volume capacity and starts and we've grown steadily faster than -- (technical difficulty) -- volume.

This slide indicates why the revenue has grown faster than volume. Our pricing has increased consistently over the last several years. This is largely due to our higher-value mix rather than price increases (indiscernible) core products.

Slide number 32 gives you a similar history on the EBIT and EBIT margin. Again, our target for EBIT margin is 20 to 25 and we try and balance that against our target for top-line growth of 15 to 25. We haven't been below the 20 percent bottom range since fiscal year '01 -- (technical difficulty) quarter there. We have been above the range several times -- (technical difficulty) -- each of the quarters.

Moving on to slide 33, having gone through all of the U.S. numbers, this slide brings us back to the state of U.S. strategy. This strategy has been successful and unchanged for over five years now. It continues to be our (indiscernible) strategy going forward.

Slide 34 gives you a bit of the outlook on the U.S. business. We do expect continued strong demand for Fibre Cement. Housing construction is at a very good level for us. Sales will continue to grow in all markets -- (technical difficulty) -- (indiscernible) and interiors.

(indiscernible) on the manufacturing, and we will get improvement in manufacturing not only this quarter but several quarters to come on a very good trend there. We will see declining pulp prices over the rest of this year; they have already started and we do have several plant start-ups in the second half of this year, which we will cover a bit later.

Moving on to Asia-Pacific, we've given you three photos from that segment as well. The top left is the Philippines installation -- (technical difficulty) -- interior application. The bottom left is our Linea product that we launched in New Zealand a couple of years ago. We've now brought it over to the Australian market and that's an example of that product in Australia. Then on the right there, is an example of a New Zealand house using -- (technical difficulty).

Moving on to slide 36, as we said earlier, Asia-Pac had a strong result. Sales were up; volume is up; EBIT was up. EBIT margin was very good.

The strategy we state for Asia-Pac now is very similar to the U.S. strategy; it's consistent with our thinking over the last couple of years, that our basic U.S. strategy is executable in other geographies. Although Australia doesn't have the same upside growth potential as the U.S., we do feel there's an opportunity to grow. We have reallocated a lot of our resource towards primary demand creation in Australia and New Zealand. In addition to that, we will protect our category share in Fibre Cement and would underpin both of these businesses -- (technical difficulty) -- believed (inaudible) capability around technology and differentiated products.

Slide 38 gives you a few key points on Australia and New Zealand. The first two we will talk about a bit in the next slide -- (technical difficulty) -- New Zealand housing has been at a very high level. Again, most of the indicators were up financially.

Asia-Pac Fibre Cement, if we take the middle point first, it has been at a high-level -- (technical difficulty) -- starts - (technical difficulty) -- and we benefited from the good market. But we've also penetrated the market at the same time, so that has been a double win for us.

In Australia, the housing market is softening somewhat and additionally, the boycotts and negative -- (technical difficulty) -- the boycotts and the counsel bans actually is where most of our dampening of demand is recently in the Australian market. Customers have been pretty loyal to the product. It's a good product and it has a good market position, but we've been (indiscernible) in the last couple of months with the -- (technical difficulty).

Elsewhere in Asia-Pac, the Philippines business has performed as planned. It's improved its domestic market position and it's improved its manufacturing capability again this quarter.

Moving onto the Philippines, I just commented on. Moving on to Chile, we are a slide behind here, by the way. Chile Fibre Cement was similar to the Philippines, actually. It's a small business but it continues to perform as planned. It again increased its market position in the domestic market and improved its manufacturing capability.

Moving on to slide 42, Hardie Pipe, we had four hurricanes go through Florida during the quarter, which was very unique, even for Florida. That did impact that business somewhat but the underlying performance improvements in the business continued in both manufacturing and market position.

Slide 43, Euro Fibre Cement -- most of you would be aware we have a market development program going in Europe that focuses mainly on the UK and France, and we are about 18 months into the program; it continues to track well. We are making progress in -- (technical difficulty) -- sales and distribution product and specification of product, all three. So that initiative is going as planned.

The Artisan roofing business, slide 44 -- we did start selling product in October and we expect sales to ramp up slowly, which is pretty typical of penetration (indiscernible) but we're in the market promoting the product in California at this point.

45, on R&D, obviously are commitment to R&D is unquestioned. We continue to track well on the key projects and it truly does underpin our differentiated product strategy around the world.

Slide 34, we have an outlook slide. Top-line growth has continued the momentum in the third quarter. As I commented several times, our manufacturing performance in North America has improved. We do face several start-ups that will be expensed in the second half; that would be the Reno Fibre Cement plant, the (indiscernible) XLD (indiscernible) plant, and the Peru color-plus (indiscernible). And our respected operating profit for the year has been priced to 135 to 145, excluding SCI and associated costs.

Our summary is we all understand that there a is lower-than-expected quarterly result for all of you, I would guess, but we ask you not to dwell on quarterly results as much as look behind it and see that the business is still on track (indiscernible) business targets.

This concludes my comment on the operations. I will now pass it over to Meredith to cover an update on SCI and other associated developments.

As you all know, the Special Commission of Inquiry handed down its report on the 21st of September and in substance found that the establishment of the foundation and the ABN 60 foundations were legally effective, and that there was no legal liability against James Hardie for the MRCF funding shortfall. That also found that James Hardie's proposal for funding future claims was an appropriate starting point for negotiations. Nevertheless, the New South Wales government stated that it wouldn't consider any proposal that wasn't agreed to by the ACTU and we commenced formal negotiations with them and New South Wales Labour Council ad representatives of asbestos victims on the 1 of October.

Turning to slide 49, as you are all aware, we are currently in discussions with the various stakeholders and much progress has been made on the structure of a special-purpose fund and the payment process based on maintaining James Hardie's ability to finance its future growth, increase the profits and retain the support of (indiscernible) and equity markets.

As you are no doubt aware, last week, the New South Wales government announced that it would review ways to cut unnecessary legal and administrative costs in the current compensation system. We strongly welcome this review, and its results will be significant for the sustainability of this long-term solution, given the very high percentage of legal costs overall expected -- (technical difficulty).

Separately, on the 22nd of September, ASIC announced its investigation into the creation of the MRCF and James Hardie is, as you would expect, cooperating fully with this investigation.

As Louis and Russell have mentioned, we have incurred substantial costs on the Special Commission of Inquiry and other associated developments and we do expect further costs to be incurred in this context. Most recently added to that list of course is the New South Wales government review announced last week. As mentioned, we have expended $8.5 million so far, of which 6.3 million was specifically for the Special Commission of Inquiry.

Turning to ABN 60 and the MRCF, you all know that the Special Commission of Inquiry, whilst finding that the foundation was underfunded for the long term, it did find that the MRCF had sufficient funding to last until early 2007. However, its directors appear to be concerned about current cash flows as against funding for -- (technical difficulty) -- 2007, and whilst we believe the (indiscernible) all have sufficient cash to meet all claims until the long-term funding agreement is reached, given the publicly stated position of the MRCF directors and to ensure claimants aren't (indiscernible) by this, last week, James Hardie offered an indemnity to the directors of ABN 60 to facilitate the release by ABN 60 of $85 million to the MRCF. We also announced that we would provide interim funding for up to six months if the MRCF fund was exhausted during that period while the long-term funding agreement is completed.

On a separate issue that is still associated with the Special Commission of Inquiry, you might recall that, on the 10th of September, we announced that we would conduct a commission of the conduct of an internal investigation by independent lawyers consistent with the SEC regulations. That investigation has now been concluded and -- (technical difficulty) -- impact on our financial statements, although we have expanded the notes to those financial statements. As a result, our Form 20-F (ph), which is the annual report for the year ended March, 2004, will the lodged with the SEC and the ASIC on Monday, the 22nd of November, U.S. time, so it will actually be tomorrow, Australia.

Turning to slide 50, just to update you, you might recall that James Hardie commissioned a report from KPMG which was submitted to the Special Commission of Inquiry and released to the stock exchange by KPMG to estimate the MRCF liabilities. This report that was submitted to the Inquiry was based on 2003 data. We did ask KPMG to update this estimate to (indiscernible) of June, 2004. You might recall we were waiting on data from the MRCF to enable this to happen. As that data was received, KPMG got on with that work and has now provided us with an update, which actually takes into account the claims experience up until the end of September by the Foundation. That report is being released or has been released today to the stock exchange, as it is market-sensitive. It finds the potential estimate of the MRCF liabilities is, at 30th of June, 1.536 billion; that's Australian dollars. That's to be compared with the figure of 1.574 billion as at 30th of June, 2003, which was the figure -- (technical difficulty) -- inquiry. That figure is discounted at 6.1 percent, and when you read the notes to our accounts, you'll see that we've reflected a range of sensitivities and assumptions in order to produce lower and higher numbers and also provided an undiscounted central estimate -- (technical difficulty).

The interesting feature of this update from KPMG is that it shows an underlying -- despite the lower number, it shows an underlying increase in liabilities of 5 percent. It's too soon to know if this is a sustained trend or an aberration because, for the first ten months of the year, from 30 June '03 to 30 June '04, there was actually a decline in claims. Then in the significant months of the inquiry, in May and then again in September, there were some strong outlier months of noticeable increase in claims and these came from Victoria in Western Australia. So, the significance -- (technical difficulty) -- these, as I say, as a trend or an aberration, needs to be brought through.

In summary on these issues, James Hardie is focused on achieving a long-term funding agreement. We strongly welcome the New South Wales government's announcement of a review of the efficiency of current asbestos compensation procedures. We are seeking (indiscernible) of agreement as soon as possible, and there is and it's acknowledged by all parties to the negotiations -- (technical difficulty) -- substantial common ground between all parties. (technical difficulty).