James Hardie Industries PLC (JHX) 2005 Q4 法說會逐字稿

Good morning and welcome to our full year results presentation. It will follow the typical agenda I think. I'll take care of the overview and operating review. Russell Chenu will come up and take care of the financial review and an update on voluntary asbestos compensation funding proposal and we'll finish up with questions and answers hopefully.

Anyway we did have an exceptional quarter in the fourth quarter. Sales growth up very strong. EBIT improvement very good.

Capacity utilization was really the best we've had in the business recently with the new Reno facility starting up very strongly and existing capacity being utilized at a higher percentage.

We are exceeding our business targets and we're making progress on the Principal Agreement.

So the full year result was very satisfactory. The bottom line was impacted obviously significantly by the SCI related costs and it was an unusual result in that it was a disappointing second and a phenomenal fourth quarter. It kind of all came out alright.

If we look at the fourth quarter comp there and you can see basically everything was up strongly. Net sales, gross profit, EBIT, operating profit.

Now on the full year we got good net sales growth and gross profit. EBIT 14%, but again has the SCI related costs in there and the same with operating profit and net operating profit.

And the highlights in the fourth quarter was probably it was just right across the board. On the EBIT line the US was up 79%. Australia and New Zealand 46%, although that was against any easy comp.

The Philippines had a very good quarter.

Chile and Hardie Pipe as well. Hardie Pipe coming -- approaching breakeven on an EBIT basis.

The full year result was also pretty broad based. The US up 24% and EBIT, ANZ up 20% and again the other businesses you see the Philippines had a very good EBIT year. Chile had a solid year and Hardie Pipe saw significantly reduced losses we've incurred in the past.

So again even with the SCI related costs we exceeded our targets for the Corporation. Revenue growth of 23%, EBIT to sales of 16% and ROA of 23%.

To go through the operations a bit. You can see a couple of photographs there. The house on the upper left is basically that we like to see a little bit of stone on the chimney and everything else Hardies. That's what we're after.

Anyway, the fourth quarter you know you just don't see a quarter like this. I don't think we've ever had one. Net sales up almost a third. A little over a third actually. Sales volume 23%, average price up 8%, EBIT up 79% and EBIT margin also spiked to 31.2% in the quarter.

So full year results. Like I said I think it was good. Grew the business to $940m in the US. 27% growth. Sales volume up 22%, average price 4%, EBIT 24%. The EBIT margin did finish like our revenue growth we're above our target there. We are above our target on EBIT margin by a bit.

The trading conditions in the US in the fourth quarter were favorable. Low interest rates continue. There has been a lot of appreciation in house prices and basically consumers and builders both feel pretty good about the market. So there is a lot of activity.

The key points out of the US, obviously continued growth in the Fiber Cement primary demand. We had very strong sales growth across all of our segments.

We couldn't post these kind of numbers if 1 of the segments was dragging back. We didn't have that. They were all going in the right direction.

ColorPlus strategy, which is key to our initiatives in the Northern markets, is progressing very well both on a capacity and the demand side.

Obviously we realized higher prices, margin expansion and we did ramp up Reno better than we've ever ramped up a plan in the first 10 weeks of operation.

The outlook in the US is for continued growth. The housing market looks like it's going to stay where it's at. We don't think it's going to grow any. Forecast there for flat to slightly down. But obviously we'll still grow in primary demand against alternative materials. We expect good EBITs and good sales growth going forward.

These are sales, our top line chart. Shows building starts obviously have been very good. Almost the whole time we've been in the business in the US been trading up. So really over the last since about fiscal year '01 or something have been helping us a lot.

We expect that to flatten. But like I said, our revenue line, which is the yellow line, is obviously a much steeper slope in housing starts and therefore is driven by more demand growth.

Average selling price continues to trend up. I don't think we have any issues there. We get product mix benefits. You know not all of our higher good products are higher average price than our average products, but most of them are. The exception there would be Hardiebacker which is growing faster than the average business. But it dampens out a little bit. But obviously the trend has been there for a lot of years and we expect it to maintain.

And here's the dreaded EBIT margin chart. I think the first question I got out in the lobby was "when are you going to change your range"? You know that's a good long-term range. When you're running a business like Hardie built strictly around organic growth the top line is a lot harder to get than optimizing the bottom line.

I think a good way of looking at it, you know we talk about our target range for revenue being 15.5%. If you just take 20%, that means you double your business basically every 3 plus a little years.

So we've been in business 15 years. We've got $940m in revenue. In the next 3 years we've got to find another $940m in revenue.

So that's the really challenging thing at Hardies and you don't want to be restricted on market initiatives trying to hit a higher EBIT margin. So we're very comfortable with the 20.5%. But obviously as you can see since fiscal year '03, we're very comfortable being over that range when it happens. So that's kind of where we're at.

Again, a reminder on the strategy in the US. It has been place for a real long time. I know most of you guys know about it. But number 1 is growing demand for Fiber Cement. Number 2 is making sure that stays with Hardie and number 3, the way we do it is differentiated product strategy.

Go onto Asia Pac. A couple of pictures of some projects down here. Fourth quarter result was flat on the top line and good on the EBIT line. But again, that was an easy comp for this business. So it wasn't up as much as it shows right there.

The more important number I think is that 21.1% EBIT margin because that's a pretty good EBIT margin for this business in Australia and New Zealand and Philippines.

And the full year result on the EBIT margin wasn't much different - nearing 20%. Considering everything this business went through this year, to grow at 7% although they get some currency help there. 7%, 4% on volume, 25% on the EBIT and an up about 19.8% on the EBIT margin I think was a very good result.

Now this strategy looks very similar to the US because that's what we set out to do about 2 years ago was to turn this business into a growth business. Not so much a high growth like the US business, but certainly something that can grow in primary demand by 5 to 7% a year.

So it is the same. Grow the demand for Fiber Cement. Basically that means less bricks down here, more fiber cement which is as all you guys know living in brick homes, it's very challenging. And then protect that. It's a little more challenging down here because we have a couple of meetings out there. So when we created demand we've got to make sure it's in a differentiated product line or else it just gets split up 3 ways. And your investment in market development doesn't really pay off that well. So we will do it through differentiated products.

Now the fourth point, I believe this is the last time that that will be on this slide because we have made significant progress with Australian manufacturing. And that's pretty much a given at this point. Now that will get better. But it doesn't have to be a primary focus for us any more. They have the capability in place.

So again, the key points in Australia and New Zealand. Well the Australian market, as you know, has been soft recently and then we had the issues around asbestos with bans and boycotts. So net sales and volumes in ANZ specifically were down 6% and again that fourth quarter EBIT was up nicely.

The outlook is we do expect Australia to be fairly soft, but we will be going into the market with some product initiatives. So we're hoping to -- we're hoping to offset that quite a bit, if not completely.

New Zealand is it a really good level, but we don't expect it to grow. It's kind of like the US is right now I think.

And then the boycotts and bans have been progressively lifted, but there are still a few in place. But once we sign the Principal Agreement we think that is going to go away.

And then like I said, I don't think it needs to be a primary focus, but we will continue to get manufacturing gains out of Asia Pac.

Run around the small business real quick. The Philippines had a very nice year. Net sales up 40%. Good EBIT. The plant is running extremely well. This business you know was difficult for us in a lot of years and it knows what it's doing now. It doesn't need much help to produce its results. So they're doing a good job up there.

The Chilean business isn't much different except it's smaller yet and that's probably the only negative you could say about the Chilean business. Smaller and the affordability in the country is not as high. So it doesn't work out to be a great business for us, but the guys in that business know how to operate the business and they've been doing a good job generating EBIT improvements on a regular basis along with the top line.

In Hardie Pipe, still has been a struggle. This won't hit anywhere close to right and we are getting close to EBIT breakeven which isn't exactly right. But it's a long way from where we came and the fundamentals you know, the market not sufficiently priced in the market in order to prove the product are getting in place. This has been a big learning curve there. So when we scaled this thing up from Australia to the US we got some things wrong and we're starting to get them right.

But I don't expect reinvest in this business in the next couple of years just because you know we're just EBIT breakeven and we haven't figured out yet how to make financial return on the business. But hopefully we will in the future.

Europe Fiber Cement, our market development initiative over in Western Europe it's pretty much going like we planned. Sales are building. We've got a lot of people in the market over there and we know how to do business in Western Europe. So it's just a matter of finding that market position that has enough scale for Hardie to go after.

And then Artisan Roofing, the smallest of the bunch. We did launch a product I guess in the first quarter. We're in the very early days of market development, establishing demand for our test products and you know it's going to be a flat S curve. You know like all S curves are. That's why they're S's I guess.

But you know on the technology side, we manufactured. So we're going through similar learning curves. So obviously we didn't invest in Artisan for this plan. We invested in Artisan to see if we could participate in a very large roofing market in the US. So it's very early and really too early to call.

Our research and development. Just kind of reminder. You guys see this slide all the time. We do run a differentiated product strategy. We are the 1 company that deals feels that our fiber cement is a growth business. Most of them look at it as a declining business and no one else is out there doing fiber cement R&D. So Hardie is 1 out there. Because we have the high category shares in our geography we can make it pay for us and obviously that's the final point - sustainable competitive advantage. Because we're doing and others aren't we're creating a bigger gap basically year-to-year or quarter-to-quarter.

The outlook in North America is good. But don't pencil in another FY05 because on the top line because we won't get the help in the market. We got about 7% we estimate help from the market last year on the top line. We think it's going to be flat this year, but obviously we think we're going to grow our primary demand. So we still think it's going to be a good year.

And then SCI related costs, as we flagged previously, we think will continue through at least the next 2 quarters.

So with that I'll hand it over to Russell Chenu for the financial review.

Thanks Lou and good morning ladies and gentlemen. Before I continue with the review I would just like to highlight that we sent the binders that you have to print yesterday and there have been a couple of minor changes to note within which is the disclosure relating to the asbestos compensation proposal in the financial statement. And I would just draw your attention to those very briefly and I guess highlight that if you are looking at Note 13, it may be best to go to the website or the ASX for the final version that was lodged with the ASX this morning.

In the second paragraph at the start of Note 13 on F24 the end of that paragraph there is reference to the Company having no economic exposure to the MRCFM Amaba. That has been amended to no commitment or economic interest in the Foundation Amaca or Amaba.

And on page F30 we've added a little bit to the third sentence relating to the Baryugil asbestos mines offer to compensate. To note that we do so including for the period after the former subsidiary was sold by James Hardie.

Don't think any -- either of those are material, but in the interest of transparency we just alert you to that. And our apologies to everybody for that is 1 of those things. I don't think too many other companies have 8 page notes dealing with a single issue in their financial statements. In fact I've never seen 1 that size before.

Moving on to the review. It's a pleasure to report on the strong financial position of James Hardie in this financial year. Cash flow generation was up 35% in '04 to $220m. So it's not as so it was coming off a low base. It was already coming off a high base and improved performance and better working capital management in part assisted by the buoyancy of the US residential market. We made a very significant increase in cash flow.

As a consequence of that the net debt was down by 56%, or more than half to $46m. And the Board resolved that in view of the outlook we would declare at $0.06 a share final dividend. You may recall that we omitted an interim dividend at the half on the basis that the asbestos compensation issues were at that stage a bit in the ether. Subsequent to the half year we've resolved the heads of agreement and we're moving forward with the Principal Agreement and as a consequence, the Directors felt confident in declaring a final dividend of $0.06 per share.

Looking at the results for Q4. Net sales were up 26% to $316m. As Lou has said, a very pleasing result.

Gross profit was up 35% to $121m. SG&A expenditure and research and development were down a little.

SCI costs were $20.7m in the quarter, which is a bit of a downturn on the trend that had been established in the first 3 quarters and that was very pleasing.

Other operating expenses showed $5.4m for the quarter and that is the result of taking into account what's called a settlement loss under US GAAP in relation to a defined benefit plan. That plan is in Australia. It's no longer on offer to employees. But we've had a significant change in the composition of -- in the fund as a result of a number of people departing from the Company under retirement or other arrangements. And as a consequence, it has crystallized the recognition of a loss in the accounts. That may not recur depending on what happens with the membership of that fund. But it has certainly been a bit of a setback in the quarter.

The EBIT, notwithstanding those non-recurring items, was $64.6m and up 86%.

The income tax expenses was $17.9m and the operating profit was $46.3m, or up 48%.

For the full year, net sales were over $1.2b and up 23%.

Gross profit was $426, up 19%.

SG&A and R&D again had some small movements.

The full year cost of SCI and related expenses was $28.1m.

Other operating expense $6m, including that $5.3m charge for the settlement loss on the fund.

EBIT $196.2m, up 14%.

Income tax expenses was $61.9m, up 53% and operating profit was pretty much in line with last year at $127.9m but that was after the SCI costs.

If you exclude the SCI and related costs, the profit would have been $150.2m for the full year and that would have been a 20% increase.

Looking at net sales in Q4, the aggregate was up 26%. That included a 34% increase in US Fiber Cement. [line ball] in Asia Pacific and a 53% increase in Fiber Cement with Chile Roofing, Europe and US Pipes comprising that category or that segment.

For the full year, the US Fiber Cement business was up 27%, Asia Pacific up 7% and other Fiber Cement up 49% to give an overall increase $21.2b, or 23%.

Turning now to the EBIT by segment. US Fiber Cement had a 79% increase for the quarter on a 34% increase in sales. Asia Pac up 48%, other Fiber Cement up 59% and R&D pretty much in line with last quarter of '04. And the general corporate showed an increase to $17m. That obviously includes SCI and related expenses and also the $5.3m charge in relation to the Australian defined benefit plan.

So if you strip those out, the increase is pretty much in line with expectations and running at about $7m per quarter.

The segment EBIT for the full year. US Fiber Cement was up 24%, Asia Pacific Fiber Cement up 25%, Other up 26% and the general corporate was up to $62.8m. Most of that increase accounted for by the SCI costs and a smaller amount attributable to the defined benefit plan settlement loss.

So the total EBIT at $196.2m as indicated before up 14%.

Corporate costs. This slide 39 just contains a bit more of a breakdown and I won't dwell on that. I think I've explained the contribution of the SCI costs and the retirement plan settlement loss contributed to that.

Net interest expenses on the subsequent slide 40. We've had a very low interest expense for the quarter and during the year. This accounting for it probably is a little misleading in that it's not the disclosure relating to net interest paid under US GAAP. We are required to capitalize interest expense in relation to major projects and with the types of things going on in James Hardie with capacity expansion in Trim and ColorPlus and the Reno manufacturing plant, that's been a very significant level of spending. And about half of the interest paid was in fact capitalized during the period. So this somewhat exaggerates the net improvement as a consequence of that.

Income tax expense. As you can see here we've had a decline in the rate in this last quarter of '05 to 27.9%. I think a number of people in the market have commented on the higher rate. I think it was at 34% year-to-date Q3. It has come down in Q4 and as a consequence, the rate on a full year basis is at 32.6%.

In terms of the go forward, we anticipate that the effective tax rate will run at about 30%. It is very sensitive to a number of factors. Most particularly the level of deductibility in relation to SCI costs, which may continue for a short while going forward. And more particularly to the geographic mix of earnings. As most of you will be aware, the US tax rate at 40% is higher than our average and higher than the tax rate for elsewhere where James Hardie does business. As a consequence, if we had an increasing proportion as well as an increasing growth in US earnings, then that leads to a higher effective tax rate. And that's been a significant factor in the past 12 months.

The EBITDA in Q4 $74.2m. Next slide which is a composition. I won't dwell too much on the individual numbers. But USA Fiber Cement up 79% in EBIT and the others there are pretty apparent.

The depreciation charge did not show any significant increase in the last 12 months and that's because those major expenditure items of Reno, the ColorPlus capacity and Trim are all still construction in progress at the end of March '05 and will be transferred into the active asset category within the next few months. And that will lead to an increase in the D&A going forward, inclusive in the '06 year.

Likewise for the full year. Total EBITDA at $232.5m is very similar to the cash flow which was $220m which shows a pretty good reconciliation between the EBITDA and the operating cash flow.

Capital expenditure for the year was $153.2m. As you can see, most of that is in US Fiber Cement. Almost all of it we would categorize as capacity expansion, specifically the Reno plant, the Trim manufacturing capacity and ColorPlus. And there was minimal investment in Asia Pacific Fiber Cement and Other. Really just sustaining CapEx in those areas of the business.

And probably a very significant increase in CapEx spend on the prior year. And with the number of initiatives we have going, particularly the Virginia plant which will be the biggest fiber cement plant constructed at nearly $100m and a number of other capacity expansions for ColorPlus. We will see a sustaining level of CapEx spending through '06.

Turning now to key ratios. I think most of these are pretty apparent to people. 1 that I would like to comment on is the, or 2. The return on shareholders' funds and the return on capital employed.

The return on shareholders' funds as you can see has declined in the last 2 years. The '03 number includes some of the proceeds from the sale of the Gypsum business, or earnings contribution thereon.

And the return on capital employed in the same period has increased.

Part of that decline in return on shareholders' funds and return on capital employed is actually a result of the financing mix of the business where we've had reduced reliance on debt and increased reliance on equity. That's clearly not good for some indicators, or for the weighted average cost of capital and we do have extraordinarily low debt at the moment. That will, in all likelihood, be remedied when we enter into the asbestos compensation arrangements because we'll have an initial funding payment to make and then an ongoing contribution on an annual basis. So we would expect to see some of this swinging around after that comes into effect.

I would also highlight the low gearing of 6.8% at the end of March. I've never been convinced that gearing is a great financial indicator of health and I think more important is net interest expense cover. And related in here net interest paid cover as well on the basis that the capitalization of some of the interest expense in whatever is just paid in the past 12 months and also net debt payback. I think interest cover and net payback are much better indicators of debt service capacity than gearing. And you can see how extraordinarily strong this Company is with interest cover or even interest paid at almost 18 times and net debt payback of only 2.5 months based on year-end debt.

So that's the presentation relating to the financials. Turning to the asbestos funding proposal. We have, in the time since the Heads of Agreement was signed at the end of December, spent a considerable amount of effort on the Principal Agreement. We've made quite steady progress. Not startling progress, but steady progress. There have been no significant departures from the Heads of Agreement which we announced on December 21. We have updated a completion estimate which on March 31 which was an announcement made by the State government and our simultaneous announcements by the State government and James Hardie which you would have seen the EGM - sorry - for shareholders to consider the proposal. We are still working towards that, but it is appearing a little ambitious given the complexity of some of the issues that we're dealing with.

James Hardie is, as you all know, operates in 3 jurisdictions. The major part of the business in the US, we're incorporated in The Netherlands and the asbestos compensation arises in Australia. That is creating lots of challenges for the legal profession.

And I think it's fair to say that everybody who is involved in this is a stakeholder while recognizing the complexity also acknowledges that this is a very, very long-term commitment. We have to get it right and as a consequence, we have to make sure that it's sustainable. And so you can imagine that everybody is testing every little change.

That's the status on the Principal Agreement. In relation to the actuarial assessment, those of you who have been able to this morning might have noticed that we launched with the ASX updated assessment prepared by KPMG at March 31. That assessment came at AUD1.685b. I'd very quickly like to highlight that that number does not include any accounting for the cost review initiative announced by the State government on asbestos diseases. Sorry dust diseases compensation arrangements in New South Wales.

While the review itself is largely complete, some of the regulations and legislation to give effect to that have not yet been completed. Or to the extent that they have been completed were not able to be factored in by KPMG. Subsequently, we will be doing a reassessment taking into account KPMG's assessment of the impact of those reforms and we are likely to see, as a consequence of that alone, some reduction in the numbers relating to the estimated liability.

If you go back in time, the expected assessment at March 31, '05 based on KPMG's estimate of June '04 was AUD1.57b. That's the basis of comparison because it is not right to compare just 1 period with another. More technically correct is to actually take account of those payments that would have been made in that period and that's what this estimate does. It looks at a difference of AUD115m. In other words an increase in the actuarial assessment. Half, or more than half of that increase of AUD115m is a result of a change in the discount rate and related matters including timing of payments. That's AUD59.6m.

The discount rate that you use is the 10 year Commonwealth bond rate in Australia. And in the period 9 months from June '04 to March '05 that discount rate has moved from about 6.1% to 5.8%. So the reduction in the discount rate increase is -- and PV of the liability.

There has been a change that was resulting from change in expected claims experienced. A AUD7.2m increase due to change in insurance recovery and a AUD12.5m increase as a result of an additional allowance for Baryugil or asbestos mines.

This is the proposal that we put forward. Or the offer we put forward to bring asbestos mines within the special purpose fund. Notwithstanding that it was sold by James Hardie 30 years ago and not all the estimates was not 1 of the liable entities that was subject to the rearrangement in 2001. So there is an additional allowance for that.

A couple of things to highlight within the KPMG report were an increase in mesothelioma claim notifications from Victoria in Queensland in particular. And in relation to Queensland they highlighted that the Workcover Queensland State government entity had lodged a number of claims, some of which related, or many which related to past years. And a catch up for settlements made a number of years ago.

KPMG appears to have taken a very conservative position on that and assumed that some of that will roll forward on a continuing basis.

To try and keep this in some sort of perspective, rather than looking at the roll forward basis which the earlier slide does, we thought it would it be useful just to take a snapshot of the 2 most recent actuarial assessments by KPMG. 1 in June 2004 and the other 1 just released this morning at March 31, 2005. The central estimate that has been provided, the discounted 1 is AUD150m increase from AUD1.536 to AUD1.685b.

Interestingly, the central estimate on an undiscounted basis has hardly moved. It's gone up by AUD18m from AUD3.586 to AUD3.604b. The import of that is that the volatility around the undiscounted estimate is much less and it's of course the undiscounted amount that we pay out. It's the NPV amount that I guess people relate to relatively easily in terms of valuation. But it isn't terribly relevant to the amounts that James Hardie paid up.

And if we look at the undiscounted range which is all about KPMG confidence level of the accuracy of their estimates in 2004 it was AUD2b to AUD5.7b. At March it's AUD2.0b to AUD5.9b. So there is not been any significant change in that either.

Dealing fairly quickly with accounting issues arising from the asbestos liability and this is largely to assist people who are working with models and valuations. We under US GAAP satisfied in particular elected not to take a provision to the proposed liability at March '05 on the basis that the circumstances and events at that time and subsequently don't put us into the probable and estimable territory which is the critical determination. And as a consequence, we've made disclosure -- relevant disclosure by way of Note 13, which I referred to earlier. But it's not on the face of the balance sheet. Or the provision, there isn't a provision on the face of the balance sheet.

The go forward position is that at the appropriate time, which will be driven by events and circumstances, should we complete the proposal with the State government, we will be required to take up a provision. And this slide just deals with some of those particularly relevant issues such as the fact that it will be based on the undiscounted central estimate as calculated by KPMG. In other words, it won't be the discounted or NPV value. It will be calculated for the entire term through to 2071 based on KPMG's current assessment. It will exclude the impacts of inflation and superimposed inflation.

Superimposed inflation being changes in the Heads of Damage or Claim and any other factors that other than general inflation.

All components will be treated on a gross basis. That includes insurance recoveries, taxes and gross payments to claimants and where future income tax benefit subject to the normal sorts of accounting credits relating to virtual certainty of earnings in the future against which to recover the payments that are made.

The annual payment to the SPF will be charged against the provision. The provision will be adjusted annually to align with the March 31 annual actuarial assessment. And any movement in the provision will be taken through the income statement as an expense.

So what does all that mean? If we had accounted for it on the face of the balance sheet at March 31, the provision would have been AUD1.667m, being that undiscounted value excluding inflation and superimposed inflation. This is a very shortfall reconciliation to the net present value liability of AUD1.685m.

People here shouldn't be surprised. The future inflation allowance and the discounting allowance virtually offset each other.

In summary, we've had a very strong growth in the operating and financial performance of the Company in the last 12 months. We have been assisted by a buoyant US residential housing market. But we have, in addition, outperformed the US housing market growth in North America.

The SCI and related matters cost a significant sum of money $28m. That was a cost burden, a cost drag on the Company. But notwithstanding that, it's in a very strong financial position.

Strong cash flows, very low net debt and we are expanding our capacity in the US in view of our confidence in the growth prospects of the US and of the Company.

At that point I would like to hand it back to Lou very briefly before we deal with Q&A.

Thanks Russell. I just had a couple of summary comments before we move to questions. Clearly, this was the most difficult year for our Company in the history.

The asbestos related issues came as a major blow to all James Hardie stakeholders, including our employees.

The business fell a bit in the second quarter. But we are back on track now.

We signed the Heads of Agreement in December. We're working hard with the other parties and putting the Principal Agreement in place. And I think it is clear that the long-term business strategy remains solid and we're executing that fairly well.

I am very proud of what we've accomplished in the last 6 months and very confident that we'll continue to move forward in a positive manner for all the stakeholders.

With that we'll open up for questions. So--.

I just wonder if you could comment both on the like-for-like price growth in the fourth quarter and the prospects for that I guess? And I've noticed that the operating expenses in the United States square feet seemed to have dropped right back to the long-term average. So I guess you got over all the cost issues that might have been there earlier in the year?

Yes. So first on price. I was talking to a couple of guys in the lobby. In terms of the strong quarter, volumes were very strong, much stronger than we anticipated. When I looked at the numbers yesterday with Russell and gee I told him it looks like winter has gone away in the US because it felt more like a spring or summer quarter.

But anyway that resulted in the old board being used up quicker and reordering of the higher priced board earlier than what we had thought.

But I think the way the increase worked out, price increase in the fourth quarter, was roughly 2% due to mix and 6% due to market increases.

On the plant side, we had a very good manufacturing result in the fourth quarter both with the Reno ramp up which we had forecasted you know normal levels of start up expenses that we didn't use. And then the rest of our plants ran in much higher utilization and much higher level of efficiency than we have in the past. So very good.

Maybe just another question on price. How have the March price rises, how are they trending? And just maybe a feel for the [indiscernible], do you sort of expect a similar 2% mix, 6% top cost increase?

Yes. So it's your typical mix question on the product mix. It has some regional. It has some product mix in it. So we don't sell at national prices in the US. We sell at regional prices and not all of our growth products are actually higher priced than the average product. I think I commented earlier Backer is the best example I think.

The interior business grows at a faster pace than the exterior business. But it's a lower average price. So you know netting all that stuff out - regional product mix - isn't as easy as it sounds. It's easy after the fact. But it's pretty hard to predict.

But you know I personally think we'll get more than 2% on the product mix this year, but I can't guarantee that. It really depends on which products grow faster in the overall business.

On the March increase, we do a market price. Like I said we do it around long-term price position based on where we're at with the penetration curve. So as you said, question asked a lot. Well I get a question asked a lot did the price increase stick and the reality is we don't pull back price increases. We don't -- we're not overly aggressive with them to where we think there are risk. A big risk to killing demand. But once we go with them we don't pull back either. So the full price increase on the products we announced is in place in the market currently.

Jim Ackrim from Enquirer. I've got actually 3 questions if you don't mind? Is there a possibility of some small tax affecting obviously on the SCI costs? Is there a chance that some of those can be further tax affected going forward? So a clawback I guess.

My second question is each time we get to this really high EBIT to sales margin and until we start plugging it in we start seeing a much bigger increase in selling costs as you start piling people on. So is there an expectation that you need to put a lot more sales people on, or those sort of people coming on apart from obviously people to start the plant?

Finally, just back on the asbestos part. In relation to -- Mr. Jackson talked about $170m odd worth of insurance recoveries. I'm just -- is there potential long-term insurance recoveries? I'm wondering whether those numbers get factored into the sort of numbers you're showing me?

Okay I'm going to answer the second question and leave the first and third to Russell. So on the second question which was about EBIT margin and what's the outlook for it in the future. It really goes back to what I said earlier about organic growth strategies. You start spending a lot of money about 3 years before you see much revenue on a major growth initiative and some times that comes in the form of people and sometimes it's in the form of marketing, or some times it's in the form of R&D of product development.

So that's what I said. I'm not comfortable saying that we're going to try and grow this business another $900m in just over 3 years and also saying we're going to operate at above 25% EBIT margins. Because to me the more value creating piece is the revenue growth. So we're not in EBIT optimization mode at Hardie.

So that's kind of answered that 1 and Russell on the tax and the asbestos.

Thanks Lou. I think some of you might remember that the second quarter or half year announcement we had incurred I think about $16m of costs on SCI related matters as a result of Lou and being very new in our roles. We elected not to actually tax effect any of that $16m of expenditure because we just couldn't get our hands around it. It goes to the point where we dissatisfied. We publicly reported.

Subsequent to that we've done a lot of work in relation to the $28.1m that we've reported to date on SCI and related costs. There is only about $6m of that which we haven't tax effected. Most of the expenditure has been tax effected and most of it has been tax effected in relation to The Netherlands where we get a fairly low tax rate.

So that's the status of the expenditure to date. In relation to future costs, I think it's a bit of a moot point. Some of it will be tax deductible, but I can't say until we know exactly what the breakup is, what proportion of it will be tax deductible.

Does that answer that question? In relation to the actuarial estimate, all of the estimates that have been done by KPMG are net of insurance recoveries and net of third party recoveries. Other third party recoveries. So that's the reason I highlighted that gross accounting we will actually see some sort of additional disclosure about that under US GAAP.

That is in the KPMG report if anybody wants to read it. So the $1.6b NPV and all the other numbers includes gross payments to claimants and insurance recoveries, third party recoveries and netted off and then there is an allowance for costs. And just an interesting little statistic that came up in research. When we were doing the costs review there is only about 20% of the claims in New South Wales involving MRCF that actually deal with a single defendant and about another 20% have 5 or more defendants. So you can see how complex this area is in terms of co-defendants in the way in which the cases are dealt with in dust diseases that could cause having a very good look at the delay in which we administrate in this State.

Just 1 more quick question on asbestos and costs and that's just to deal with most of the income Hardies earned in the United States and the asbestos costs in Australia. I just wondered about the long-term having enough taxable income in Australia to actually get a value for the deductions over there?

David, that is an issue but we are satisfied. I think that there will be sufficient tax point covering Australia against which to claim at least the expenditure that we can see on the horizon in the near term.

No more hands up in the room. Any one on the phone or not.

Thank you sir. A question from Matthew McNee of Goldman Sachs JB Were.

I've just a question for Russell. Just the legal cost savings. When are we expecting some sort of -- you know more information on that? I know KPMG is going to do a report looking at what they may be and trying to quantify that. What's the sort of time you're looking at the moment?

Matt I think at the latest that information would be included in the explanatory memorandum that is to be dispatched to shareholders 1 month ahead of whenever the shareholder meeting is convened. Rather than state a particular time, I think it's better to state you know what events will drive it.

And will -- are you also including the tax status, or the likely deductibility?

Yes. It will be as you would expect a very, very complete document in terms of a total description of the proposal.

And Russell, I think you mentioned that the likely date for [wage] lies looking like it might slip. I think your Annual Shareholder Meeting in Sydney is on August 19 this year. Is that the sort of date we should be looking at for a meeting?

Matt I didn't think I said that it was slipping. I thought I said that it was looking ambitious.

Oh sorry.

Maybe being a bit pedantic, but we can't announce those sorts of things laterally. We are as all stakeholders are still shooting for the sort of timetable that we announced on March 31.

Thank you.

Actually we have another question from Tim King of Deutsche Bank.

Hi Russell. You commented on [Inaudible - technical fault].

Tim that was breaking up so we couldn't understand the question.

Can you hear me better there Russell?

Yes that seems to be better.

Yes okay. I was just -- you noted the financial strength of the Company and I was just interested in your thoughts on capital management going forward?

Yes well you know capital management is something that James Hardie has very much on its agenda and has been fairly active in it prior to the asbestos issues being revisited in 2003/2004. And I suggest that once we're through the proposal as contemplated we'll be having a very close look at active capital management again. I'm not foreshadowing anything in particular, but I think you know it would be silly of us to take that off the agenda once the compensation proposal is in place.

Any other questions?

There are no further questions on the phones.

Okay. Thank you very much. Appreciate your coming this morning and thanks for your support.