James Hardie Industries PLC (JHX) 2006 Q2 法說會逐字稿

I’m not just satisfied with the 22 volume, but you’ve got other questions.

We’ll go through the presentation as we normally do, and then we’ll answer your questions in the back half. It’s the same way we’ve been doing it before; no big surprise there.

Okay. It was a strong result the second quarter. We’re very happy with it. Very strong top line growth, both on the volume and the price. Of course, everyone probably knows we had an easy second quarter last year to comp against, but even without an easy quarter, we comped pretty well when we took the adjustments we thought we should have had last year and comped again. We’re still looking good. We’re on track to meet our results targets. Very strong cash flow generation, strengthening the balance sheet, obviously, as a result of that. We have made progress in Principle D, and we’ll cover that in some detail.

Here’s the numbers for you. A lot of you probably already looked at them. I’m not so worried about the quarter, although it shows up better than the half year. Basically, if you look at the half year, it gives you a little better comp. Sales up 21; EBIT up to 66, and net operating profit up to 69. So, we just continue to generate some pretty unbelievable financial results out of the business, and it’s largely driven by the U.S. You can see EBIT up 76 in the U.S. and then flat in Australia and New Zealand. In fact, they’ve got some help from foreign exchange, or else they were a bit down - not much, but a bit. The Philippines were down quite a bit. They’re still EBIT positive. I’ll cover that later. Hardie Pipe reduces the EBIT loss, but it still was running basically negative EBIT. [Off mic.] On the targets we established for the corporation several years ago, we continue to come in above them. Half year looks very good against those targets, obviously.

Let’s talk about the operations a bit. This is actually a great use of our product. We normally show you houses. This is a baseball park in Frisco, Texas. If you’re ever visiting Dallas and you want to see a good application of a Hardie product, this baseball field just has a ton of our product all over it. It really came out looking extremely good. The reason we like it is-- For those of you that have traveled to Dallas, Dallas is a big brick area. So, this is a good showcase for our product where a lot of people see it.

Okay. The second quarter results. U.S. up 33% on the top line, volume giving us about two-thirds of that, and price giving us the other third. EBIT 76 and EBIT margin 28 above our established range. But, we kind of indicated we would be above that range in the short term.

Treating conditions. This is where a lot of the discussion, I’m sure, will be today - what’s going to happen to the U.S. housing market? We’ve been kind of waiting for it to settle down for at least a couple of years now. In fact, the last couple of years, we actually went in with plans where we thought the market would be flat to slightly down, and it’s ended up flat to up. But, you would have seen yesterday-- At least one of the U.S. builders came out and said they were going to be off a bit. But, anyway, it’s just a really strong market. We’ve been on top for a long time. We think it’s going to settle down a bit. We don’t think it’s going to fundamentally change what Hardie delivers financially or what Hardie does day to day as far executing our market strategy. But, as the interest rates come up, we definitely see it tapering off a bit.

The hurricanes that hit the Gulf Coast affected us somewhat, but, again, it’s a small part of our business, Louisiana and Mississippi. It didn’t have a material impact on us. What has hit us pretty hard is cost increases, not only raw material and energy cost increased, but freight is way up, driven by a shortage of trucks from all the trucks going into the hurricane area and, obviously, the fuel costs as well.

Key points in the U.S. Pretty much a lot of the same ones. We put up very strong sales. We continue to penetrate the market and bring new builders on off of alternative materials. The ColorPlus strategy is going very well, both from a market side and a production side. We’re in the process of building three more lines right now. We’re growing in all three divisions, Interiors, Exterior Established and Exterior Merge. Everything’s growing. Nothing’s going the wrong way. As I said, we have incurred higher costs, and you’ll see in the outlook, we expect that to continue for a while.

The outlook slide for the U.S. Again, we expect it to come off some, but we don’t expect it to dramatically change what we do. Repair and remodeling activity has been good, and we expect that to remain good, actually. We do expect to continue [unintelligible] primary demand for fibre cement-- No surprise there-- which yields the market share gains. Again, cement, energy and freight up. We’ll have good sales growth and view and performance.

Here’s our history of the U.S. business slide. Again, I guess the think to take in here always is the slope of our line is much greater than the slope of the housing starts line over the last three years. We’ve been enjoying market growth in the industry, but we’ve also been enjoying much greater market share gains. You can see the white between the yellow and the gray, indicating that we’re getting a lot more price. We’re getting a lot more revenue growth than volume in the form of price, and some of that-- You can see on this slide that some of that is due to our product mix, and some of it’s due to market increases. But, it’s pretty interesting to see the difference in the slope of that line in the last half year ’06 to fiscal year ’05 because that is when we took some market increases just because the market-- Basically, everybody in the market was taking their increases, so we went with a couple of increases that have helped very well, obviously. So, again, we kind of took a step up on price this year. But, over the last six years, obviously, we’ve been steadily increasing.

Okay. The EBIT margin. For those of you that were here last time and have a good medium-term memory, we told you don’t expect 30s. Here you go with a 28. We’re very comfortable with the 28. Our business model is designed to run long term in the 20 to 25. EBIT margin is always secondary to us to top line growth. We had some cost inefficiencies in this quarter. I think I commented last quarter; other than the volume from an operating standpoint last quarter, we had kind of the perfect storm. Everything went right, and that’s what created the spike at the 31. We had a good quarter this quarter, but from our operating standpoint, we’re ramping up Color lines. We’re ramping up a huge trim line in Peru, Illinois. We’re still ramping up Reno. And, then, we have a few other things going on. Basically, we didn’t have a recurrence of the perfect storm; we just had a pretty solid result.

Again, for those of you that know our business, this is our strategy. It’s been in place for a long time. It continues to work, and we continue to move forward with it without too much looking back.

Asia Pac fibre cement. Asia Pac includes Australia and New Zealand and the Philippines, domestically, and then we do some exporting in Asia. This is actually a picture of Linea siding, which is a new product that was launched recently in Australia, and it’s going very well. In fact, we’re now investing in production capacity for Linea at the Rosehill plant in Sydney because currently we’re importing it from New Zealand, and we think the demand we’re going to get in Australia is going to leave us short on capacity. So, we’ll get some cost benefits. But, also, we just need the capacity. So, we’re adding that in the Sydney plant. Like I said, they got some foreign exchange help. I think as soft as the market has been, I think the business has performed well. On a U.S. dollar basis, you can see things are up. That’s sales volume that’s down 9%. That’s almost all the Philippines, and I’ll talk about that a little bit later. EBIT margin down a bit and a bit more in local currency. Holding on to a good EBIT margin now at 18.9. We kind of have a target of 20 - a range of 15 to 20 in this business. They’ve done a good job inching it up toward the 20. As a lot of you know, we shifted more to a U.S. strategy.

We believe that we can substitute, again, alternative materials in Asia Pac just like we do in the U.S. The big difference here is we’ve got the two guys in the business as direct competitors in Australia where they kind of follow us around and like to try and do the same thing we do, at least in our core products. That makes it a little trickier for a guy. Of course, the exporting into Asia gets to be pretty much of a price gain, so we de-emphasize that a bit. We’re kind of going with the U.S. strategy. First, you create demand. Second, you make sure it’s a differentiated situation where you keep it for Hardie rather than just spread it through the industry. Really, the only way you can do that is through our technology advantage and turn it into a product advantage that creates customer value. So, anyway, the markets here are not terrible in my mind, but they’re not as good as they had been. They are fairly soft by recent standards, I guess.

We have had some new product bans and boycotts. It basically started in August again. It’s not affecting the flat-sheet business much, but it does affect our pipes business in Australia. Again, net sales are up a bit here, but they get the currency advantage. We do have an industrial dispute going on in Queensland. We have two plants in Queensland. One is called [Neanda], which is a pipes plant, and the other is our Carol Park building products plant. We are trying to split the agreements with the unions, so they’re plant specific. The pipes business is actually a very marginal business, and there’s three or four things that we need to do to get that business back on solid footing. One of them is we need to regain the flexibility to run that plant in an efficient manner rather than a lot of stops and starts. That’s kind of where we’re at with that. We’re very hopeful that we’ll be successful not only with that but the three or four other initiatives that we think are necessary to get that business back into profitability. It’s actually making a little money, but it’s not making a financial return.

Did I slide behind on that? Okay. The outlook for Australia and New Zealand. I think it’s more of the same. As you know-- Well, actually, New Zealand has been performing very well in a down market, so more of the same in New Zealand. We’re trying to grow a market share in Australia, mainly through the launch of the Linea product, as well as protecting current business. But, the growth initiative on top of the base business. In the Philippines, which I’ve got on the next slide, we’ll talk about that. We do expect the bans and boycotts to remain in place until we get this thing fully behind us as far as the special purpose fund.

Okay. Philippines. The country is a bit of a problem. I think probably a lot of you are aware of that. Demand is just generally down. But, what we did with this business we had actually done in several of our businesses - several of our lesser performing businesses, Chile, Philippines and U.S. pipes. We just decided that there’s no way to make a financial return under $300 a ton, so we wouldn’t sell any product under $300 a ton. Philippines historically had sold for lower than that. We brought them up to $300 a ton through some price initiatives over the last 18 months or so. What’s happened is the economy down there has really softened. Everything’s gotten a lot more price competitive. Hardie has held its position at the $300 top level. So, we have seen a dampening in the demand. Now, having said that, we basically substitute for plywood in that market, and we’re a highly differentiated, very much a value-added product. I think we’ll be able to reestablish our demand at the higher price, but in the last quarter we got kind of a knee-jerk reaction and lost a little bit of our demand. It seems to be coming back now, so that’s the good news. But, it is still EBIT positive, and the business is running okay in very difficult circumstances in the country.

Let’s go on to Hardie pipe. The market’s good. There’s nothing wrong with that. This is another business that we used to sell under $300 a ton, and we brought the price up. We’re selling actually a bit above $300 a ton over the last couple of quarters. When I say a bit above, it’s a bit more than a bit. But, it has softened demand for our product. But, again, I think the challenge for Hardie is it’s no good to have differentiated technology and differentiated products unless you can get paid for the incremental customer value you create. We just didn’t do a good enough job with that in this business early on. We’re trying to establish that position now. So, it has resulted in lower losses of EBIT, but it’s still not an acceptable situation for us long term.

Europe fibre cement. There’s not much to say there. It’s a market initiative. We started up over two years ago, and it’s actually tracking pretty much where we thought it would. The guys that have set up that business have done a good job. But, we haven’t found the big hit over there yet either. So, we’re still fairly small volumes.

Artisan roofing. Again, we launched that product last year and have really been in the early days of market development in a couple of target markets. We’re hopeful we’ll get-- You saw that U.S. chart where we were on the flat part of that chart for about three years. Hopefully, we won’t be that long on the flat part of this chart on the roofing business. But, currently, we are. We have to work hard to get our orders with Artisan roofing because we’re the new guy on the street, and no one knows they need the new guy yet. So, we’re in that market development phase of establishing demand for the product.

Overall outlook. Like I said, housing-- One of the guys said, “Well, I can’t ask you what housing will be next year because you don’t know.” I agree with that. You get a lot of different opinions. I’ve been probably more bearish than most on what I think the U.S. market will do. I only see it coming down a bit. I think there has been a fundamental shift in the underlying demand for housing. It used to be 1.6. Now, I think-- I think, not that that matters much, but I think it’s probably more like 1.8 now. But, we’ve been running at 2 million starts. We’re coming off 2 million is my personal opinion. But, again, it doesn’t dramatically affect Hardie as a company in my mind. We’ll deliver good financials, and we’ll be able to execute our business strategy. In fact, I think if we do get any kind of downturn in the U.S., I think it’s a real opportunity for Hardie to really show that it doesn’t have the same type of business model as the normal building materials company that’s so dependent on the building cycle. We’ll see.

Again, we’re not expecting much help in Asia Pac from the market. SCI related costs-- We changed the wording in this bullet point, it seems like every quarter, because we know the costs will continue until the SPF is set up after the shareholders’ meeting. So, we still have some work to do there, and the costs will lag a bit.

All right. At that point, I’m going to hand it over to Russell Chenu. Thank you.

Thanks, Louis, and good morning, ladies and gentlemen. We’ll go quickly with an overview, and then we’ll get into a little more detail on the financials for the second quarter and the first half of the year.

We continue to generate strong operating cash flow during the quarter. Very good result coming through there. And, our financial position has been further strengthened. We’ve had a $69 million turnaround from a net debt position to a net cash position from September last year to September this year. $69 million. That’s roughly averaging about $20 million per quarter. We’ve also declared an interim dividend of $0.04 for the half year. Last year you may recall we omitted an interim div on the basis that we weren’t quite sure where the asbestos compensation arrangements were going at that time. There was some possibility of us taking a provision early on in the period. We resolved that. We still haven’t accounted for a provision, but we are more confident of the outlook. As a consequence of that, we’ve reinstated an interim dividend for this half year. That will be payable on the 16th of December to shareholders who are registered on the 29th of November.

Looking in more detail at the financial that Louis hit the highlights on. Net sales for the second quarter were up 25% to $376 million. There was a 41% increase in gross profit and a 9% increase in SG&A expenses. Those SG&A expenses-- the increase occurred largely in corporate as well as in the U.S. building products business. R&D expenses were up 34% to $7 million. SCI and related expenses were down just a little bit on a high number last year. Other operating income was very modest at 0.6. EBIT was $76.4 million on a 91% increase. Interest expense is very low and, in fact, was down 23% compared with the same period last year. Other expenses - we had none in this quarter, but a $1.9 million impairment charge this time last year. Income tax expense is up by 130% to $28 million. That’s the result of both a geographic mix of earnings where the U.S. business continues to account for an increasing proportion of the total earnings and has a higher marginal tax rate at 40%. That lifts the average, and the overall effective tax rate increases as a consequence. The other factor that contributed is the SCI and other related expenses. We continue to struggle to get significant tax deduction for that. Any expense where we can get a tax deduction in this period was actually taken in the Netherlands, and that’s at a very low tax deduction for us. The operating profit from continuing operations was $47.6 million, which was a 93% increase.

For the half year, looking at similar measures, net sales are up 21% to $736 million. Gross profit is up 36% to $292 million. There was a 5% increase in SG&A expenses to $95 million and a 30% increase in research and development. SCI and related expenses were fairly flat, and EBIT was up 66% to $163 million, which is a very substantial improvement year on year. Net interest expense was down 55% as a result of the stronger cash position and lower debt position. And, income tax expense was again up more than profitability by 89% for the reasons that I mentioned in relation to the quarter. The operating profit from continuing operations was $103.5 million, which was up 67%.

In terms of segment net sales for the quarter, U.S.A. fibre cement was up 33%, a very flat result in Asia Pac fibre cement, and other was impacted by the sale of the Chile business right on the cusp of the end of the third quarter and early into the second quarter. As a result, there’s a 23% reduction in the sales from other fibre cement, which is Artisan roofing-- it included Chile in the prior periods and U.S. pipes and Europe.

For the half year, net sales in U.S. fibre cement were up 26% to nearly $600 million. Asia Pac fibre cement, again, showing a very flat result, and other fibre cement was also very flat with some increases occurring in Europe to offset some of the reduction as a result of Chile.

Turning to the segment EBIT, for the second quarter. A 76% increase in U.S. fibre cement to $86 million. Again, Asia Pac fibre cement not showing much movement. Other fibre cement showing some improvement as the European operations and the pipes business and Artisan all show modest improvement, obviously very low numbers there, but it’s at least a good sign in terms of the trend. The total EBIT for the quarter before corporate costs was $91.5 million, which is up 70%. We had a 10% increase in corporate costs and a total EBIT increase of 91% to $76 million.

In terms of the half year, fibre cement in the U.S. was up 61%. Asia Pac was flat. Other fibre cement at a 19% improvement with a $6.1 million negative result. The total segment EBIT was up 56% to $191 million. General corporate costs had a 21% increase, and the total EBIT, as I said before, was up 66% to $163.3 million.

Looking very quickly at corporate costs. You can see here the breakdown into stock compensation expense, which was adversely impacted by a rather strange result in terms of stronger share price. It means a higher expense, and that gets revised at each quarter. The SCI and other related expenses are reasonably flat compared with the same periods last year for both the quarter and the first half. Other costs have shown some increase in the latest quarter. Some of that is specifically project related, but it’s also the outcome of the fact that we’re in transition and shifting some of our functions to the Netherlands in order to comply with the new protocol between the U.S. and the Netherlands, which takes effect from the 1st of February next year. We’ve faced some transition costs as well as some duplication during that transition. We’ve had a slight increase there.

Looking at net interest expense. I won’t dwell too long on this because the numbers are absolutely immaterial. You can see that there has been continuing reduction in net interest expense, which is consistent with a reduction in debt and an increase in the Company’s cash position.

Income tax expense. Not quite the same story as with interest. It has increased, and the increase is higher than the overall profit increase for the reasons that I gave before. As we increase the expense base in the Netherlands as a result of moving more functions there, it has a slightly adverse outcome for us, which is a lower deduction because of the low tax rate applicable for us in the Netherlands. This geographic mix of earnings and the fact that we’re not getting a significant deduction for SCI and related expenses-- all those factors increase the effective tax rate.

In terms of EBITDA, the quarter two and the EBIT numbers there I just summarized from the previous slides. Then, we have the depreciation and amortization. There’s been a significant uplift in depreciation and amortization for the U.S. fibre cement business, as you can see there, from $5.8 to $10.2 million for the quarter. That’s in part the result-- That $10.2 is in part the result of the fact that we’ve made an adjustment in this period for some D&A that should have applied in the first quarter. About $1.5 million of that increase was the result of that. But, we have as a consequence of the high capital expenditure in new plants and expansion of existing plants in the introduction of Color and Trim, we are increasing the capital base. As we commission that new equipment, it is leading to a higher depreciation charge. That I would expect will continue for some quarters to come because we see continuation of the high level of capital expenditures. You’ll see shortly on the capital slide. The total EBITDA - $89.5, showing an 83% increase for the quarter, on quarter. Net cash provided by operating activities is continuing to grow, but I just highlighted that net cash from operating activities is actually after interest and tax. So, it is a lower number than the total EBITDA would imply.

For similar measures for the half year. U.S. fibre cement EBIT up 61%, and the other numbers are not quite as significant. Again, an increase in U.S. fibre cement depreciation and amortization. The other areas of the business in Asia Pac and the other are fairly flat. Total EBITDA was up 60% to $185.8, the net cash provided by operating activity showing a more modest increase because of increased tax payments for that period. The capital expenditure for the half year continues at a high level, particularly in the U.S. fibre cement business. $71.4 million, which is roughly the same as we had in the same half a year ago. 90% of that $71.4 was growth capital, and about 10% was stay in business expenditure. Of the 90% in growth, substantially more than half of that was associated with the new plant in Pulaski, Virginia, and the development of that plant continues on pretty well. We’re now about halfway through the expense expected to be associated with the completion of that facility. Asia Pacific fibre cement was very flat at $2.8 million and similarly with other. The total CapEx for the half is $75 million versus $81 a year ago. Depreciation, on the right-hand side of the slide, you can see there the impact that that has had as well.

Looking at some key indicators. The EPS for the half - $0.233, which is comparable with the full year last year of $0.277 and for ’04 a full-year result of $0.272. So, in the half, the improved earnings have actually managed to put us well on the road to achieving a much improved result in EPS for the full year. Dividend paid of $0.06 in the half year was the final dividend declared for the ’05 financial year.

Moving to some annualized numbers, returns on shareholders’ funds, return on capital employed and the EBIT to sales margin, all showing significant improvement over prior period on an annualized basis. The gearing ratio is now on the basis of the Company being net cash, and obviously the net interest expense cover the interest paid cover and the net debt payback all showing very favorable results. In fact, what can only be determined as a fairly [unintelligible] balance sheet, pending the outcomes on the asbestos compensation.

Turning now to the voluntary compensation proposal. We have continued to negotiate with the state. We’ve made some progress on points of difference in the principal deed. We’ll be turning draft 12 to the state in the next few days. I should say that in the last three weeks or so, maybe three to four weeks, we’ve actually made, I think, some much better progress than we were making prior to that. We continue to discuss tax deductibility of the payments to the special purpose fund with the Australian tax office and the federal treasury. We’re getting access to very senior people in both organizations. We’ve provided a substantial amount of information to the ATOM treasury in the relation to the proposed arrangements. It’s not possible for us to reliably estimate the dates for either the signing of the principal deed or the shareholder meeting, which will be convened to consider the proposed arrangements. I think you’re all aware that we were setting dates earlier in the year in consultation with the new [unintelligible] government. We filed those targets, and as a result of the very complex negotiations and the very complex issues that are faced in the three jurisdictions, being Australia, the U.S. and the Netherlands, which are the principal areas involved, we just didn’t see any point in setting dates that were arbitrary and therefore not likely to be satisfied. We’d like to think that we won’t have a whole lot longer to go, but we don’t have any particular dates in mind. As a consequence of the status at the end of September, we continued not to make a provision for any liability in the accounts. That’s in accordance with the U.S. accounting standard 5, which determines that if there is to be a provision, it must be both probable and estimable, and we’re not at that point at this time. That’s the status of asbestos compensation funding.

At this point, I’d like to hand back to Louis for a summary and then questions. Thank you very much.

I think we have just one wrap-up slide, and then we’ll move on to questions. So, again, obviously, a strong operating performance and a strong balance sheet. We are making progress on the negotiations for principal deed. That’s good news. We still have to gain tax deductibility once the principal deed is signed before we go to shareholders. So, we’ve worked with the ATO and the treasury up to this point on that, and we need to continue that. Again, we expect the SCI costs to continue until we get the fund in place and operating.

Okay. Sam’s trying to tell me that we can start questions before we get the mics, if you want. Yes?.

[Inaudible question - microphone inaccessible]

We don’t have one plan, but what we do have is a plan to evaluate where we’re at on price for January 1, which is what we normally do every year. I think the price increase will depend on market conditions. If everyone’s going down, Hardie’s not going up. But, if everyone’s going down, Hardie’s not going down. So, we, again, don’t use commodity pricing. When we make a price move, it’s basically-- We try and tie it back to the long term demands for fibre cement and where we see ourselves on the penetration curve. So, there is a possibility, but we don’t have any plan at this point.

Financially, Russell, could you comment, one, regarding the dividend policy going forward, given a net cash position; and, secondly, in your guidance, could you just run through your assumptions regarding your corporate charges, which have improved and also your effective tax rate, please?

Sure. With regard to the guidance that we gave, we’ve assumed that the corporate costs remain pretty much at the level that they were in Q2. And, the tax rate we see as being in the mid 30s, and that’s adjusting for SCI costs, which we’ll as we move forward probably continue to be both fairly lumpy and maybe a little bit volatile as we move towards the end of the arrangement negotiations. That’s it.

Oh, dividend policy. Sorry. I probably tried to skip over that because that’s really a board issue. I think the dividend policy is something that we probably are being a little conservative on at the moment until we just see where all of the asbestos issues wash up. Then, I would imagine that it’s something that we will take back to the board longer term. Clearly, we’re throwing off a lot of cash. The earnings are continuing to increase. The Company’s in an incredibly robust financial position. Shareholders would be expecting to see participation in that. But, at this stage, we’re being fairly cautious.

I’m just asking a question a U.S. housing, Lou. In regards to-- I remember we previously talked about James Hardie being able to achieve pretty good earnings growth if housing was at 1.6 million starts. Now, we’re looking at housing perhaps underlying being 1.8. Can we imply that--? Has the business sort of moved on since the 1.6 statement, or what can we imply from that in the sense of board growth?

I think when Peter was talking about 1.6, he wasn’t looking at the kind of returns we’re getting now. He never thought we’d be at 2 million starts, probably. No one did at the time. I think that’s part of our problem with tax as well. We’re making more money in the U.S. than we ever thought we’d make in the U.S. at this period of time. I think 1.8 is a great housing start level in the U.S. A lot of businesses will do well at 1.8, but I certainly think we’ll be one of them.

With the U.S. market, can you sort of talk through whether right now your customers or anyone is waiting for something - that we’re all sort of holding--?

No. There’s some down markets in the U.S.; there’s no doubt. The west coast if fairly down. California is not that good, and Phoenix has come off its big-- It is-- Some of the east coast markets are still on fire. It is spotty, as you would expect with a country the size of the U.S. But, overall, since it’s driven by affordability, I think everything’s doing reasonably well.

Just one last one for Russell. Maybe can you remind me why we’re in the Netherlands or the Company is in the Netherlands and tax is now up? It’s a bit before my time, but I’m a little bit confused what’s going on.

I can probably handle that for you. Russell might get into too much detail. The reality is-- The forecast for the business when we went to the Netherlands was different than what we’ve actually achieved. We’ve been much more successful in the U.S. relative to the rest of the Company than we had actually forecasted. We’re starting to see the benefit of the Netherlands domicile diminish a bit on effective tax rate.

Just following onto that, can I ask the basis for that arrangement? Is it the concessional interest rate that’s available on money lent from the Netherlands to the U.S.A? I’m just wondering if you’re in a position as the U.S. business grows to increase the amount of that facility.

That actually is a Russell question.

We have done that, David. As we’ve been investing in new plant in the U.S., whether it’s new facilities or expansion of existing facilities, that has been debt financed out of the Netherlands. We’re still getting that benefit. It’s just that it’s blunted, if you like, in an overall sense because of the profitability of the business in the States. The marginal earnings in the U.S. were 40%.

Can you just remind me what the limit is to the amount of that benefit? Why can’t you just [unintelligible] with the U.S.? Is it the same cap rules in the U.S. that would stop you borrowing? Many of the U.S. businesses [inaudible]?

Well, I don’t want to go into all the details. But, it’s-- Clearly, there is a limit to how much we can lend in to the U.S. You’ve got to recognize that interest rates at the moment are also very low. You don’t get the same leverage with that sort of structure. But, it still works for us. There’s still a benefit. Last year, as this was reported, it was about $80 million [inaudible]. It’s quite significant.

We’re continuing on the asbestos. Since it is taking a lot longer to sign the deed than was originally anticipated, can you just--? Are you in a position to comment on the position of the charitable trust, which I think you’ve provided some funding to in the past, and whether you see any possibility that you may have to provide more funding [inaudible]?

When you refer to a charitable trust, I assume you’re referring to the [unintelligible]. We don’t have intimate knowledge of the state of the [unintelligible]. But, on the knowledge that we do have, its net asset at the moment, I think are about 100 million Australian dollars. On that basis, it would provide it with capacity well into 2006 and maybe into early 2007. So, we don’t see any call on James Hardie for funding of the foundation in advance of the settlement of principal deed.

Just recognizing returns in the U.S. are so good for the business, maybe you’d comment on whether you’re seeing anyone buying off the fibre cement market? [Unintelligible] continue to look pretty disappointing. But, at some point, are you seeing anything in that respect?

We haven’t-- There’s nothing new. You always get a rumor now and then that someone’s trying to buy equipment and that. But, in New Zealand, we chase the rumors down at dusk. We’re not aware of anything.

The estimations of a $1.5 billion requirement for us as a liability - recently [inaudible] $4.5 billion. What’s the strength of this?

Number one, the $1.5 billion is discounted, and it’s a central estimate. I’m not sure if the press has been indicating the undiscounted amount or maybe high end estimate. I’m not sure exactly. But, actually, the central estimate has been staying very steady in our minds. It’s been right in the same spot since we had the first actuarial report done.

Note that the financial statements, both for this half year but more particularly for the full year in the annual report, very extensive on the status of the asbestos issue, generally and not just in relation to the negotiation. But, it does contain a lot of actuarial information, which gives the discounted values and the undiscounted values and the different ranges of probability. You might take time to read that if you’re interested.

Any other questions? All right. Sorry. You’re pretty close; I can hear you.

[Inaudible question - microphone inaccessible]

Why don’t I have Russell handle that since he’s been leading that effort.

I guess the issue is not necessarily absolutely straightforward under existing tax legislation. As you may be aware, the ATO is really only involved in relation to existing legislation. If there’s any changes required, then any representations in that respect are done through the federal treasury. Then, the treasury takes [inaudible] on any amending legislation on the ATO.

[Inaudible question - microphone inaccessible]

It’s not possible to say that at this stage. We’re still going between the two different organizations. We’re pretty happy with the attention we’re getting and the progress that’s been made on it.

[Inaudible question - microphone inaccessible]

It’s a good question. We wish we knew the answer. Our suspicion is that during 2004, in particular, but maybe also in late 2003, there was a rush of claims as the plaintiff lawyers in particular started bleating up a bit about the fund likely to run out of funds. That was exacerbated by the sort of publicity that MRCF itself was attracting by [unintelligible] to courts. That rush has now sort of slowed down. Also, during the early part of this year, we saw the catch up on claims, particularly out of Queensland, which was not individual related or plaintiff lawyer related. It was the work capital authority. They were dealing with past years, many years past, in fact. We think that’s what’s happened in the last few months is actually just a reversion to the sort of 2002 and 2003 period. But, the trend will only become obvious over a longer period of time.

Any calls on the line?

Thank you. The question comes from Jonathan Snipe of CitiGroup. Please go ahead, Jonathan.

Yes. Thanks. A couple of questions, if I can, guys. First of all, just on the volume growth. 21% is pretty impressive for the quarter. Can you give us any sort of handle on where you’re seeing it largely come from? Is it skewed towards your established markets? Is it coming from your emerging markets? I’m just trying to get an idea on how you’re doing on that whole northern strategy? Secondly-- I think I ask this every quarter. Just on the [unintelligible] sales in commercial sales-- are you seeing any come through in this last quarter? I guess, lastly, I just want to get an idea on your sales force. Are you starting to ramp that up; obviously, ahead of some of the commissionings? Or would some of the commissionings [unintelligible]? I’m just trying to get an idea there on your labor costs.

Okay, Jonathan. First, you were asking if the growth in the U.S. was pretty balanced between the divisions. I think you’re aware we have different target ranges for each division. Everyone’s running in their target, with the possible exception of interiors running a little bit higher than their target. The ColorPlus strategy specifically-- We are getting more and more penetration with Color, so they would be running a bigger gap between their revenue growth and their volume growth in the other two divisions. I couldn’t quite hear you. Was the second question about Artisan?

Yes. Have you been getting any commercial sales coming through yet?

We are getting some commercial sales, but you wouldn’t need an accountant to count them all. It’s still very small. Did you have a third question there? Oh, as far as--

Sales force - if you’re ramping up the sales force or have any plans to in the near term?

That’s the overall sales force?

Yes.

Yes. I think our SG&A build is going to run about-- Don’t take this to the bank. Our SG&A build will run about half the rate of our volume growth. So, if we grew the business 15% on volume, which isn’t the best measure to use, but you’re probably going to see somewhere between 7% and 10% in SG&A. A lot of that is field-related personnel. We have increased it regularly throughout the years.

Thanks.

Any other telephone questions?

Our next question comes from Matthew McNee of Goldman Sachs JB. Please go ahead, Matthew.

Thanks. Most of my questions have been answered. Just one for Russell. Russell, going back to the asbestos issue again. Since July, obviously, we’re not operating out of the new DDT [unintelligible]. Is it too early to tell, or have you seen any evidence of a big drop off in legal costs under the new system? I think, also, have you seen any evidence of the drop off in claims? I think one of your main competitors had indicated that they’ve seen very few, if any, claims since July in Australia.

Our experience in relation to claims numbers, from what we can gather from the actuarial work, has been a reduction in claims. Again, I think it would be a bit premature to interpret that as being a permanent state. The new system in use [unintelligible] was introduced following a cost review and was effective on the 1st of July. It had some very radical changes compared with the previous procedures. It wasn’t available to the plaintiffs’ lawyers until late May or early June, so they didn’t have a lot of time to prepare for it. Now, the suspicion is that it’s just taking everybody a little while to get used to it. So, it may not reflect a drop in the number of people who are being diagnosed with disease and then reporting to plaintiffs’ lawyers. It’s more likely to be just a bit of a hiatus while the administrative staff within plaintiffs’ legal firms adapt to the new procedures.

What about the legal cost savings on the claims that you have seen?

Legal costs savings-- We don’t have any reliable data on that. Again, our guess would be that it’s going to take a little time. Most of the legal costs that would have been incurred in the last quarter would have related to cases prior to the introduction of the new systems, and it will take some time for all that to flow through. I think everybody-- maybe not everybody-- is aware-- Part of the new system actually requires lawyers when they’re settling individual cases to report into the state through the dust diseases board. That data will go into a database. The individual cases won’t be known, but the aggregate costs will. On the basis of the costs of the number of cases, then there will be new averages available. That will take a little time to come through. My guess would be that they need at least another six months to see how effective that is.

Finally, when can we expect the update KPMG report?

Well, we have a draft KPMG report, but it can’t be finalized until the principal deed is completed. There’s a fair bit of logic in that, obviously. The provisions of the principal deed are likely to impact KPMG’s work. So, we can’t finalize the KPMG report until the principal deed has been completed. Again, we’re just not sure when that’s going to be. Let’s hope it’s not too far off.

Thank you.

Anybody else?

The next question comes from Emily Smith of Deutsche. Please go ahead, Emily.

A couple of questions, if I may. Firstly, Louis, sometimes you give us an indication as to the split in the price increase between the baseboard increase and the differentiated products. Secondly, I was wondering if you could give us some indication as to the level of cost increases in the quarter in the U.S. You talked about cement, energy and freight. I guess the fact that the increased freight costs are largely hurricane related, if you could sort of give us some indication there?

On the prices-- I looked at the numbers before I came over. It’s probably 80/20 this quarter or right around there. 8% on market price and 2% on product mix. One of the things that’s dragging down the product mix a little bit is one of our highest growth products, Hardiebacker 500 G2 is growing faster than most things in the business. It’s actually one of the reasons the interior business is a little bit above their target growth range.

On the costs, we have not quantified the costs. Basically, we seem to be in a situation over the last couple of years where costs jump around a lot. Input costs jump around a lot. They’re feeling less like exceptions and more like the rule that they’ll be up and down whenever they feel like it. We’re not quantifying that. But, we would expect freight to come back in line, not only because truck availability should be better in the winter but also our available capacity will be higher in the winter, so we can freight optimize better. Cement costs-- I think someone was saying before the meeting that there’s been a couple of increases by some of the big players. It’s looking to me like the cement industry is really enjoying good pricing power. As an industry, they’ve been obviously getting a lot of increases. And, on the fuel, I guess, the external forecast would be a lot better than mine on that. Just for internal purposes, we’re expecting fuel costs to stay high. Natural gas has come off the all-time-- the peak. But, again, we expect that to stay high as well.

Thank you.

Thank you. There are no further questions from the phone.

Okay. Thank you very much. I appreciate you coming, and I appreciate your interest in the Company. Thanks.