James Hardie Industries PLC (JHX) 2005 Q3 法說會逐字稿

Good morning. We'll get started today, I'm Louis Gries. Thanks for coming to the third quarter results announcement. There's going be a -- at the end there will follow -- I'll give a real quick overview of the results. Russell will come up and give a more detailed overview of the actual financial results. I'll follow him and do the same on operations, and he'll finish up that part of our presentation for us, with an update on the developments around the Special Commission of Inquiry. And of course we'll finish up with questions and answers; Russ and I will be available for that.

A real quick overview for the quarter. There was very strong top line growth, driven largely out of the U.S. In addition to that, we had good progress to just bounce right back to acceptable manufacturing performance, after a pretty poor second quarter in that area. Unfortunately, the bottom line is seriously impacted by the costs related to the SCI.

You can see the numbers here. This is all-inclusive. I guess the top line's good. Gross profit okay, and then everything else negative, due to the impact of the SCI costs. Without the SCI costs, the results look quite a bit different, obviously. Still a good top line, but the bottom line, especially at the EBIT level, is pretty strong as well.

This is a real quick overview before I hand over to Russell. U.S. Fibre Cement had a very good quarter. Asia Pac was down, partly due to [all the starts] in Australia, but also the product ban and boycott are still impacting this business. Philippines business did fine and the other small businesses performed well.

So with that, I'll hand it over to Russell Chenu, James Hardie's CFO.

Thank you Louis, and good morning ladies and gentlemen. Looking firstly at the results for the third quarter. Net sales revenue was up 21% to $287m. Gross profit was up 11% to $96.7m. The reason for the lower growth in gross profit than in revenue is attributable to some cost factors, which we'll go into later on. But that resulted in us not being able to maintain some margins.

SCI and related costs for the quarter were $15.9m and I'll speak more to that later. And the result was that EBIT was down 19% to $33.3m. Income tax expense, notwithstanding the lower profits, was up 32% to $13.2m, largely as a consequence of the fact that a high proportion of the SCI-related costs are non-deductible. And the operating profit was down 30% to $19.8m. Absent the SCI costs, the third quarter profit would have been $31.5m, which is an increase of 11%.

Turning now to the results for the year to date. The net sales were up 22% to $894m, a very strong top line growth, as Louis indicated. Gross profit up 13%, to $305m. Again, the SCI and related expenses were pretty heavy at $24.4m and severely impacted earnings, to the tune that EBIT, earnings before interest and tax, were down 4% year to date to $131.6m. Income tax expense, for the same reason that the SCI and related costs are largely non-deductible, was up 35% on a higher profit. And the operating profit was down 13% to $81.6m. Absent the SCI and related expenses, the 9 months profit would have been almost $102m, which is an increase of 8%.

Turning now to the adjustments for the non-recurring items. We have SCI and related costs, after tax, for the quarter of $11.7m and $20.3m for the year to date. There are a few smaller items there in other operating income expenses and other income expenses, net. And then adjusting for the operating profit, as reported, which was $19.8m for this current quarter Q3, and $81.6m for the year to date. Q3 recurring earnings $31m in the case of Q3 '05, versus $28.4m for Q3 '04 - it's an increase of 9% after adjusting for those non-recurring items. And in the case of the year to date, $97.4m in '04 increased to $104m in '05. That is an increase of 7% for the 9-month period.

Turning now to segment sales revenue. You can see on this slide that the USA Fibre Cement business had a very strong quarter, up 26% to $220.3m. Asia Pacific Fibre Cement had a much more modest increase; it's a more mature business and it has been impacted in Australia by the product boycotts and bans, was up 4%. And Other Fibre Cement, which includes Chile, Europe, pipes and roofing, was up 37% above quite a low base. And that gave us a 21% increase for the quarter to US$287m.

Continuing the sales revenue and turning to the 9 months to the end of December '04, the USA Fibre Cement business had an increase of 25% in top line growth to $692m. Asia Pacific up 11% and Other Fibre Cement up 48%, again from quite a low base, giving us a 22% increase for the total business.

The next slide shows EBIT by activity. And firstly for the third quarter, USA Fibre Cement is up 17% to $52.3m. Asia Pacific Fibre Cement was down 10%, largely as a consequence of the impact of the product bans and boycotts. Other Fibre Cement was 32% better, which meant a lower loss, and that's a small but growing business. R&D expenditure was down 15%. General corporate expense was up very significantly but $15.9m of the $22.7m in Q3 was SCI-related.

If we now look at the same type of segment analysis for the year to date or the 9 months, you can see that USA Fibre Cement EBIT is up 8%, Asia Pacific Fibre Cement up 18%, Other Fibre Cement up 14% and R&D expenditure is down 5%, to give a total segment EBIT up 12% before general corporate costs. And of the $45.8m of general corporate costs, $24.4m or more than half is related to the SCI and other matters. So the total EBIT was down 4% for the 9 months year to date.

Looking now in more detail at the corporate costs. You can see that there were some small items related to stock options expense, the SCI and related costs and then the residual item of corporate costs gives us the underlying expenditure. It was up from $5.1m to $6m for the quarter, and up from $15.9m to $19.9m for the full year to date. And that's a result of the business growing but it's actually falling as a percentage of sales, and has been doing so for some time. And that's the measure that we largely look at, and we would expect it to continue to fall. So the total costs of $22.7m for Q3 and $45.8m for the year to date significantly impacted by the SCI costs.

Just looking in more detail at the SCI and related expenditure. No expenditure on the SCI itself, given that it concluded at the end of September, but it has cost us US$6.3m year to date. The internal investigation conducted in accordance with SEC regulatory requirements produced costs in the quarter of $3.3m. That's now concluded and I wouldn't expect any further costs to come through.

The ASIC investigation commenced in the quarter, and we've to date incurred $1m on that. Resolution advisory services refers to the cost of conducting the negotiations and other matters related to the asbestos compensation. There was $6m of severance payments incurred in the quarter and year to date and various other items, giving a total of $15.9m for the quarter and $24.4m year to date.

The next slide analyzes interest expense, and I won't spend too long on this because it's a very minor item. There are 2 factors that have led to a reduction in the Group's net interest expense, this year relative to last year. And the first is that there is reduced net debt as a consequence of the strength of cash flows. And the second one is that there's increased capitalization of interest expense, as we've been spending money on significant construction projects in the Group. And under U.S. accounting standards we have no choice but to capitalize interest expenses attributable to capital expenditure or major capital expenditure, it's somewhat different from Australia.

Looking at income tax expense. The rate for the quarter is higher than the guidance given previously. We'd indicated about 30% or 25 to 30% in prior periods, but if you back out the non-deductible SCI-related costs, then the rate is approximately 30%, and the same applies for the 9 months year to date. A significant part of those expenses are non-deductible. That's an item that we're still seeking clarification on, to see if we can get a deduction in any one of the 3 jurisdictions in which the Group has major operations, and we will finalize that by the end of the financial year.

There's been a slight increase in the estimated income tax contingencies. That's a result of the fact that we operate in 3 major jurisdictions, where we have ongoing tax reviews and we've taken a slightly more prudent position in some respects. And as I said, excluding those above items, the tax rate for the year to date is running at 29%, which is within the guidance previously given.

Some of you, I think, will be aware that there's been an amendment to the tax treaty between the U.S. and The Netherlands. We flagged this at the last quarter. The Protocol has been ratified by the U.S. Senate. It takes effect in January 2006 and we've got, therefore, a little over 9 months in which to arrange our affairs to comply with the treaty. We are working on that and we are very confident of being in a position to comply with the new Protocol.

Turning now to EBITDA. I don't wish to say a lot on this, I think it's a fairly self-explanatory slide. We've dealt with the EBIT line. Depreciation and amortization line, the reduction there is in USA Fibre Cement from $7.1m in the prior corresponding period to $5.4m. This is largely a result of the fact that the previous year we took an impairment charge on some assets, that followed an acquisition a couple of years previously relating to a couple of the plants. The more normal level of depreciation and amortization is around the $5m to $6m level. And the total EBITDA is down 18%, largely as a consequence of the SCI-related costs, which have been booked in the general corporate arena.

On a year-to-date basis, a similar story. The EBIT we've looked at before. The D&A in U.S.A. impacted by the one-off charges 1 year ago and the total EBITDA is down 3% again. That would have been an improvement but for the extent of the SCI charges in general corporate costs.

Capital expenditure. For the year to date we've had capital expenditure of $125.9m, most of that in the U.S., obviously, $119.6m. And that's to prepare the Company for the continuing expansion of the U.S. Fibre Cement market. In fact, of that $120m year to date, capital expenditure in USA Fibre Cement, $95m of that is on the new plants, firstly at Reno and then the expansion of the Peru Illinois facility. And we can speak a bit more about those a little later.

Key ratios. EPS obviously impacted by the SCI and related costs. The dividend for the year to date '05, that $0.03 is not an interim dividend. We omitted an interim dividend; that reflects the cash payment that was made out of the '04 earnings. Return on shareholders' funds and capital employed has been sustained but at a somewhat lower level. EBIT to sales impacted a little by the SCI-related costs. And the gearing ratio and the net interest cover continue to show a very highly capitalized company.

There have been some comments, I think, coming out of Australia in recent weeks, that James Hardie should or may contemplate an equity issue related to the asbestos compensation. Today we've announced that there is an expansion of the -- by virtue of a new plant to be built in Virginia, which will cost $98m. But in my view, neither of those will trigger a need for any equity raising. This Group's net debt is well below US$100m. We have very strong debt pay back, very high interest cover, significant debt capacity and we're well within capability of funding all the continuing business activities and the expansion and the asbestos compensation initial funding arrangements, without the need for any equity or hybrid capital [layer].

So it's been a very strong quarter in terms of operations. Financial strength is still coming through, but obviously the earnings have been impacted by the continuing SCI-related expenditure.

At that point, I'd like to hand over to Louis to undertake the operating review.

Okay. We'll --

We seem to have lost audio.

Again, we go over the third quarter in the U.S., it was a very strong quarter. 3 months ago we were talking about problems in manufacturing. At the time, I indicated those were launches behind us and the quarter proved that out. But our net sales up 26%, it's very strong. And again, I indicated in November that we would get a little bit of help in the third quarter. Still had good [indiscernible] from the second quarter; we did get that little bit of help. But we got strong primary demand growth besides.

Average price was up 4%, which is good. EBIT up 17% and we'll go over that. But we're still facing the higher input costs as compared to a year ago, and we did start up the Reno facility largely in the third quarter, although it continues on in the fourth quarter. EBIT margin is down a bit compared to last year but it was at the upper end of our target, which is 20 to 25%. That's a very good performance for a winter quarter - winter in the U.S., obviously.

The U.S. market remains very strong for housing. I think it's still being driven largely by interest rates. Affordability index at the moment is very good right now. So we are helped by a very good market that has increased regularly over the last 3 or 4 years.

I guess the key points coming out of the U.S. is -- the first 3 to discover, basically we have a growth model to run to get business in the U.S. and we're very successful with it. It's built around differentiated products. So not only do we go to primary demand for fibre cement but we have the lion's share of the category as well.

Plant performance, as I said, has bounced back nicely. We do face higher pulp and freight costs than we did a year ago. They're higher than normal but they're not sky high. So they're much higher than last year and they're above the norm, but they're very manageable as well. And we did implement an increase January 1, which went across part of our product line. And because of the notice you give to builders, who are already committed to projects, it does seem that increase impacted our results latter part of the fourth quarter, we're looking for it to start impacting our results in March.

The higher costs I mentioned. Actually, you'll see that raw material costs per quarter apparently is down from the 2 previous quarters, and that's because we did get a temporary dip in pulp costs, which we enjoyed doing the third quarter. It -- again, it just dipped compared to where it was early in the year, but they're still higher than they were a year ago.

Freight costs are still high, some of that's driven by fuel. And some of it is driven by the length of haul we have experienced in the U.S., as we've been a little bit down on capacity this year. And SG&A costs, which is really driven by our growth initiatives, are still running higher than last year but not to the same degree as they were earlier quarters.

As I mentioned, we've had a very favorable housing market for, it looks like, over 3 years now. But as you can see, Hardie has penetrated the market much quicker than the housing starts. We'll have to change this slide in the future to show housing starts have impacted our revenue line. Sorry, it's a bit confusing but it's really meant to just show the difference in the growth rate curves. And obviously, revenue's grown faster than volume because of our price increases.

Which brings us to this slide, our price increase since the year '99 has been pretty steady. We have taken some market increases during that period of time, but a lot of it is being driven off of our differentiated strategy. And as I commented earlier, I believe we got a nice bounce back in the EBIT margin from the second quarter. We're now running more near the top of our range. We're well aware that a lot of the market got used to us being above our range. So we're not above our range, but we are near the top of our range.

Expected expansion, as Russell mentioned, is a pretty big one for Hardie. 1 commission is looking at the biggest fibre cement plant in our system. It's right on the East Coast, taking care of mid-Atlantic growth, which we've been experiencing. When it's fully ramped up it'll be 600mmsf capacity, costing us just a little less than $100m to build, and we will have product coming out of that facility fourth quarter next year.

Just a restatement of the U.S. Fibre Cement business strategy, which I think has been consistent for several years now - 5, 6, 7, I'm not sure exactly. It is basically what we do everyday. We do a lot of market fulfillment work to build a category for fibre cement. And we ensure that once we create the demand for fibre cement that business comes to Hardie, through our differentiated offering and basically, at a certain point that's all underpinned by our capabilities in R&D.

The outlook in the U.S. remains good. Housing is expected to come up a bit earlier than they had forecasted, anywhere up to 8%. Most of the forecasts are now in the 3/5% area. I think mostly manufacturers and builders are a little bit more optimistic than that. But no one expects us to face a big downturn in 2005.

Obviously there is a continued demand for fibre cement, as we grow demand with the builders. We expect market share gains right across our segments, which are basically emerging markets, established markets and material products. We will be ramping up Reno over the next year. It takes about 2 years to fully ramp up a plant, but the most expensive part of the ramp up is early in the curve. We'll start ramping up [True Trim] later this quarter. So we do have a couple of significant manufacturing ramp ups we'll be facing.

Moving on to Asia Pac. A couple of photos here. The first one's Hardie PrimeLine in Australia to the left. Top right is the linear product in New Zealand, which we've since launched in Australia. And then bottom right is a promotion out of our Philippines business.

The Asia Pac region did not experience a growth quarter. Although net sales were up 4%, that was more -- that was due to exchange rate. So it was actually down a couple of percent without the exchange rate. Sales volumes were down 2%, and this is largely being driven by Australia, both the housing starts decline and the product bans and boycotts impact. EBIT was down 10% and a bit more -- about 10%. The EBIT margin declined as well.

The strategy for Asia Pac or especially Australia and New Zealand has actually come very close to the U.S. strategy over the last couple of years, and that's grow the market for fibre cement. Which is something that hasn't been done for several years in the States, but -- I mean Australia, but our differentiated products that have been developed for the U.S. market can be profitable in this market.

As we do that, obviously there's 2 other players in Australia, and we'll have to work hard to protect our category share, basically grow the market for ourselves not for others. And it will be underpinned by product leadership and technology advantages.

Then I'll take the fourth point, we'll probably drop off of our strategy in Australia in the next year or two, and that's around manufacturing. And I fully expect to make the gains in Australian manufacturing in the next year or two, to where we'll benchmark [indiscernible] other plants in the system, and then have manufacturing point in Australia drop off. And then basically, you'll just have the Hardie fibre cement strategy, which is a pretty good system globally.

Australia and New Zealand, the key points. As I said, starts down a bit in Australia, bans and boycotts. Our -- this year prices there pretty global. Pulp is really global and cement seems to go up and down globally, although you'll have some hot spots or some soft spots. But we are facing higher raw material costs right through the business, all the businesses.

New Zealand is kind of like the U.S. on housing starts. It's at a very strong level but it's not expected to grow next year, but maintain where it's at. Like I said, in Australian dollars our sales were down; the volume is down in Australia and New Zealand more than Asia Pac, indicating the Philippines picked up volume and EBIT and EBIT margin. EBIT was down and EBIT margin was 17.6%.

What's the outlook for this business down here? Australia will be a tougher market from just a volume standpoint, but probably we'll benefit as far as growing primary demand. Normally in a hot market it's hard to get builders to make changes in their designs. In a softer market they're looking for a little bit more of an edge, whether it be cost or marketing, so they're more receptive. So it will fit in well with our initiatives around growth and category share, or market share for fibre cement.

And New Zealand, as I said, should remain pretty good. And we will have to work out of these bans and boycotts over the next, hopefully 6 to 8 months, and get back to business as usual with our customer base.

Mostly small businesses. I consider Philippines one of our small businesses, performed well. Philippines no exception. They've done a nice job really fixing up and building more robustness in that business over the last couple of years, and they basically continue to do it quarter-to-quarter. So it's been a pretty good story.

Chilean Fibre Cement, which is a very small business, has performed well. But the scale just isn't there to make it very important to either ourselves or our investors, unless we find a growth opportunity in South America, which at this point we are limited [by the] Chilean market.

USA Hardie Pipe did show some progress. For those of you that follow the Company pretty closely, you'll know this has been an initiative that has been under-performing for us. And over the last year we have gotten quarter-to-quarter gains, but more gains are more necessary before it's considered a good business for us.

Europe Fibre Cement and Roofing really [indiscernible] in our market development category. Europe Fibre Cement is a market development initiative we launched about 21 months ago. Sales are growing; we're starting to build a foundation. We've established a capability to do business in the region. Most things are going well in Europe, it's just very small at this point.

Artisan Roofing, we do have a plant up, our product developed, all improvements in place, and we just now started to do our market development work in California. That'll be typical market development type work, which will be an S-curve, which will be flat early on and hopefully turn out better at a later date. So you won't see any big gains on roofing on the next year or two, but I think you will see steady progress on re-establishing the market for fibre cement [roofing products].

And we never finish a presentation without reminding everybody that our commitment to R&D is there and strong, and it's really what underpins our product leadership strategy. So that continues as planned.

So overall, I think we will hit our target range. We're very confident of that for this year, but the SCI-related costs continue to affect the bottom line. And we look forward to getting that deal in place and leaving those costs behind, but at this point we're going to still face it for at least a couple or several quarters to come. This brings us back to Russell.

Thanks Louis. Just a couple of things or points relating to the Asbestos compensation arrangements and related matters.

In late September, following the release of the Jackson Commission of Inquiry Report, ASIC announced an investigation into the creation of MRCF. The investigation has commenced, the Company is cooperating with ASIC, and as far we are aware, so are all other parties who were involved.

In late November, ABN 60 paid $88.5m to the Medical Research and Compensation Foundation. And on November 18, the New South Wales Government announced a review of legal and administrative costs in asbestos compensation claims in New South Wales. That followed some discussions and negotiations held during the asbestos compensation discussions with the ACTU, the State Government and other parties. That review has received submissions from a number of interested parties on January 14, and the review is expected to report to the Government in early March 2005, as far as we're aware, and I would imagine that it will be 2 or 3 weeks after that, that the Government announces its response to the recommendations that have been made by the review.

On December 21 last year, we signed a Heads of Agreement, together with a number of other parties, including the State Government and the ACTU, to establish a Special Purpose Fund to provide funding on a long-term basis for proving asbestos claims against Amaca and Amaba, the former subsidiaries of James Hardie. The Head is expected to form the basis of a proposed principal agreement between the Company and the New South Wales Government. Negotiations are underway in relation to that principal agreement. We will require to have shareholder and lender approval, and we're hopeful of signing that in March or April, but it won't be signed before we know the outcome of the costs review that's currently being undertaken by the State.

The structure of the Special Purpose Fund is under consideration. You will note that we made no provision for asbestos-related liabilities in the quarterly accounts released this morning. The reason for that is that the value of any provision is still neither probable nor estimable under FAS5, which is the accounting standard in the United States that governs such accounting.

The estimated timing, as I indicated, the cost review is expected to be completed in March. We're hopeful of signing the Principal Agreement in March or April of this year. There will follow that the -- an explanatory memorandum, including an independent experts' report sent to James Hardie shareholders. And at that point, of course, there's the commencement of the EGM notice period and we're expecting that that explanatory memorandum, on this timetable, will be dispatched in May 2005 for a shareholder meeting and subsequent enactment of any state amending legislation in June 2005.

Now we'd emphasize that that is a best case timetable. It does require all the pieces in the jigsaw, including the outcome of the costs review, to fall into place in the best possible timeframe.

A couple of other things I'd like to say. One is that the fund is being established for Australian personal injury claimants, proven claimants. It's not established for any other purpose. James Hardie did have domestic operations in Malaysia and Indonesia in the past. Relations with those companies ceased 20 years ago, or James Hardie's involvement with them ceased 20 years ago. The Company still operates operations in New Zealand. We did have small export activity to the United States, which ceased many, many years ago, and I stress that the export activity to the U.S. was on a very modest scale.

James Hardie USA was established in 1988, which was subsequently James Hardie extracting itself from any involvement with asbestos process or product. And as a consequence, James Hardie USA has no asbestos involvement now or in its past.

So on that note of clarification, I'll hand back to Louis to conduct questions and answers.

Before we move to questions and answers, just a couple of summary comments. Which is just repetitious, I apologize, but the U.S. growth business model is clearly performing as expected. And although we're feeling impacts of external factors in Australia, we're still reaching good results on that business and I expect that to continue. So overall, I think it's pretty good from an operations standpoint. Unfortunately, the SCI-related costs are just chewing into our profits, but like I said, we're optimistic that we can put those behind us in the near and medium term.

So we will move to questions and answers. I'm not sure who's operating the microphones but if we can switch to a table mike, that would be good. Then Russell and I won't have to jump up and down. And the reason we might have to jump up and down is I'm going to handle pretty much all questions about the business operations and the strategic direction, any of those type of questions. I've been with Hardie 14 years, and that's been my area of expertise up until I've taken on this new role. Of course, as CFO, Russell's right across the numbers. In addition to that, he's been leading our initiative around the asbestos agreement, so will probably answer most of those questions for you.

I have to warn you in advance [indiscernible]. So if I screw it up, you guys just need to be patient. I think we'll get to the questions you guys want to get to but if I miss a couple here and there, I will take care of that. So do I have table mikes ready to go? Okay. So the first question.

Good morning it's [Rowan Galagher], CSFB. I've got 1 operational question and 1 financial question. Operationally, it's early days in the price increase, but could you give us a flavor in terms of the performance to date, and within that how much of the volume impact in the first quarter may have been attributable to [a company price war]?

And the financial question for Russell, just with regards to any changes to the IFRS. Is there any impact on your accounts going forward? And in particular, with the expected distribution. Could you just give a comment [inaudible].

Our annual price increase we announced in December for January 1 implementation, we allowed the channels to pre order up to 2 times their normal volume, but nothing shifted December on the pre order. So we started shipping the pre orders in January. The reason for the pre order period is to allow projects in our [indiscernible] fixed prices on materials [indiscernible] we picked up projects before they sell on price increases.

So summary, no volume put forward in the third quarter and because of the pre order period, you'll start to see the results of the price increase in our results in March. It [indiscernible] on about 60% of our product mix and it averaged about 10% on net 50. We need to be careful between reaching customer mix and product mix and [inaudible] still multiply [inaudible] could be 6%, it could be a little bit more.

Rowan, there's no impact from transition to IFRS in our normal published accounts, because we report under U.S. GAAP and U.S. is not transitioning to IFRS. It's a stand out country, does not adopt IFRS. Having said that, we do have an obligation to publish accounts and lodge them in the Netherlands, because we're a Netherlands based company. But as it happens, IFRS and U.S. standards are pretty close in relation to this accounting treatment. So we're not expecting any significant difference between our IFRS and U.S. GAAP accounts, as a consequence of the asbestos compensation [inaudible].

[Indiscernible]. [Egan Long] from the Australian Broadcasting Corporation. You mentioned that you anticipate signing a principal agreement on asbestos compensation in March or April, but you won't do so until you know the outcome of the New South Wales Government inquiry and legal costs in the asbestos compensation system. Is there a prospect then that you would not sign, if the outcome of that inquiry was unsatisfactory from your point of view?

I think we are anticipating that there will be a significant change in the cost base. The reason that we are holding off signing any principal agreement until that cost review is completed is largely because we can't take anything to shareholders until we know what the boundaries are in relation to costs. So following the receipt of the Government review and the Government announcement of what recommendations, if any, it intends to adopt, we'll need to rerun our actuarial assessment of the compensation -- the future compensation payments. So we're quite confident that there will be substantial reforms coming out of the review and that that will enable us to take forward a proposal to shareholders.

In the event, though, that the reforms didn't go as far as you would like, and they weren't substantial reforms that would reduce costs, would you still definitely be in a position to go ahead with the principal agreement?

That's a very hypothetical question and I'll just restate, we expect that there will be sufficient reforms coming from the review to enable us to take something forward to shareholders.

Could you just break down what's involved in the costs of responding to the Australian Securities Investment Commissions Inquiry?

Sorry, I thought we had broken that down. It was $1m, including the [indiscernible].

Does that involve paying the [indiscernible] increases too?

No. There's no costs associated with [inaudible].

Is Mr. MacDonald(ph) still on a retainer for consulting for the Company at the present time?

Yes.

[Inaudible]. The original agreement with Mr. MacDonald was for an initial period of 3 to 6 months and then for a longer tail to help us with the transition. The first period did end after 3 months, so now he's on the longer tail part of the contract, which is US$10,000 a month.

And do you think it is justified and can it be justified continuing to have him on that basis, earning that sort of money, and still with a relationship with the Company, when he is the subject of a criminal investigation by the Securities [indiscernible]?

We signed a contract in the interests of the business, to ensure that we didn't drop any balls during the transition. And based on that, I just think it's [indiscernible]. Probably time we moved onto the next question, I think [it's that gentleman].

Yes, Lewis Promanade (ph) from Merrill Lynch. I want to go back on the operations. You [had] 21% volume growth in the quarter. Can you give us any idea what the shortfall was in terms of the delay in the second quarter from the operational issues, in terms of the [indiscernible]? And also on the [indiscernible] can you give us an idea of what your views of the underlying market were, a combination of [North/South] view, alterations and additions, versus the growth you reported.

The delay was less than [3%]. So, as you can [inaudible]. As far as the underlying demand [indiscernible] formula that this [indiscernible] in the past, it would just breakout to be [about 13] [indiscernible] the housing market. Next question.

[Inaudible question - microphone inaccessible].

I'm sorry - what was your name?

[Inaudible]

The Heads of Agreement. Do you say that this R&D [indiscernible] regard to the present and future liability of Amaca and Amaba, and also it does mention that this covers the actual product that you [indiscernible] in Australia. So does that mean that even if, as you say, they may be minimal, that you expect that you would have to pay any liabilities from American victims of a product exported from Australia to the United States?

The Heads of Agreement is very clear, that the compensation which is referred to in the Heads of Agreement is limited to personal injury claimants, to include an association with James Hardie products and processes. That doesn't cover overseas activities.

But what about the Australian [inaudible] that these were -- these products were manufactured in Australia [indiscernible].

Let me just repeat. Australian personal injury claimants.

Also, Mr. Gries, the [prospects] which [indiscernible] got last year for consulting was a very competitive tender or competitive [if you'd done it] before that contract was awarded?

I was not involved with that agreement. [Indiscernible] I can assure you [indiscernible].

[Inaudible question - microphone inaccessible].

The tax position of the Group, we're subject to review and audit in the different jurisdictions by both state and national and federal authorities, and we've undertaken a bit of a review, which frankly was well underway when I joined the organization [inaudible]. It's not material and I think it will continue to be updated in the light of relevant circumstances.

[Inaudible question - microphone inaccessible].

On the SCI costs, at the half year, Q2, we had $8.9m and we took zero tax deductions to do with it at that point, on the basis that we were just unsure rather than sure of the position, because I'd only been involved with it for 3 or 4 weeks. So the tax that we've taken in this quarter actually relates to the $24.4m of expenditure year to date, rather than just to the [$10m] or so in the current quarter. Does that answer your question?

And the product [indiscernible]. We'll have to give you [indiscernible] plant. We will produce Hardie [Bekker] 250 and Hardie [Bekker] 500 [indiscernible] higher priced products. Especially that was produced at our [indiscernible] line and we gave [indiscernible] price reduction [indiscernible].

[Indiscernible] the Heads of Agreement [albeit] that the Heads of Agreement is not legally enforceable, but I would expect that to be incorporated into the principal agreement, which will be legally binding [inaudible]. And indeed, a lot of them have already started to be [administered councils], state governments and [inaudible].

So obviously our business is [less strong in] that area but we are trying to be constructive. So assuming the reconstruction market has given pretty much a part of [indiscernible] interest rates. So if the margin goes down, our opportunity and existing business goes down [inaudible] favorable. The U.S. is the same. I think the U.S. market is being helped by low interest rates. [Indiscernible] we'll see the [offset] existing business is not fully exposed to reconstruction but the real strength in the U.S. business is about getting [through our] primary demand much faster than [inaudible]. We believe we'll maintain our growth in the U.S. and [it most] attract the growth a little bit in Australia, where we've experienced downturn here. And like I said, we have more to do on primary demand in Australia [inaudible].

I'll take the next question, on price reduction. The situation is very difficult, you understand, that businesses have evolved in an attempt to [indiscernible] the market, which gives [indiscernible] guidance [indiscernible]. So all the volumes in our business are thickness adjusted, so what you see is price of a standard [indiscernible]. Our price premium per thickness is greater on most of our new products, our growth products, but in some cases the price premium for thickness is actually a discount for thickness. Something like G2. And G2 is actually one of our fastest growth [indiscernible] at this point. G2 contributes quite nicely, but actually it has an impact of around [indiscernible]. So I think the answer on the third quarter is about 3% and 1%, and a lot of that was impacted by very good growth in [indiscernible].

Please understand it, we're not [indiscernible] all of the details of this because the arrangements are actually between MRCF, the Medical Research and Compensation Foundation, which doesn't involve James Hardie in any management or administration. We have very few more details than those published, but we understand a settlement has been reached on 1 case in the United States.

First of all, our primary demand growth has been across every segment. Some segments have been running stronger in the fourth [indiscernible]. Emerging markets in particular, that program is proceeding well and as most of you know, we are integrating [indiscernible] shares and primary demand shares in [the North]. Probably the biggest change in [inaudible] but we see that as being a much higher value strategy long term, even if it would have [indiscernible] some primary demand short term.

Hardie never [indiscernible] market share gains, so we don't participate against companies who are doing the same thing. So whenever we launch a new initiative, it's usually around [inaudible] and that will be the case and I expect the market development to be [inaudible] market sector and that, at first, to be more successful with it because it could turn out that [inaudible] opportunity for us. I think it's our primary [inaudible]. At which stage, you can the results in our results, but it'll be a while. In the scale of the U.S. business, it's pretty large, to start a business like that. Even when it's very successful and it [inaudible] as a long-term strategy [inaudible] start developing [and you change] the results [inaudible].

Well, we -- the result of being in the Netherlands is that we experience a very low level of withholding tax, inflation [indiscernible] in transferals of dividends from the United States business, which is obviously James Hardie major activities. It's a very significant proportion of the total activities across [the Group]. And we estimate that the benefit of being in The Netherlands is approximately US$20m per annum based on our current [inaudible].

I wouldn't have thought so [indiscernible] because the scale of the activity exporting from Australia to the U.S. was very, very small.

[Inaudible question - microphone inaccessible].

Yes, sure. The -- As you know -- as you can see if you read the announcement, I've worked for 2 [building materials] companies this year [indiscernible] [USD] and Hardie. At [USD] I worked [indiscernible] researched the quality into [inaudible] 2 different platforms. And at the end of the day, after 13 years, it's [indiscernible]. So that's how it ended there, and I walked down the road to Hardie and that was a pretty good move for me.

Any other questions?

[Inaudible question - microphone inaccessible].

A large plant has some cost efficiencies, the scale of our business has changed so we can afford to put in a very large plant, all at once, rather than coming back in a couple of years later with a second line. Could add some cost efficiencies, it has to be managed [by efficiencies] as well, and we have [only used] 1 construction crew, basically. Those were the main drivers.

As far as the companies that deal in our business, it's really driven off the size of the client, first, and then the size of the facility. So I think we'll continue to see investment in large scale [flat sheet] but this plant being [indiscernible] because that depends on the shipping [inaudible]. So, it's a typical thing, right? So I didn't think [indiscernible].

We talked about [indiscernible] severance agreement, which had a confidentiality agreement attached to it [inaudible]. Any other questions?

Okay. Thank you very much, I appreciate you coming.