James Hardie Industries PLC (JHX) 2006 Q3 法說會逐字稿

Anyway, we’ll just started. I think most of you have seen the results. We had a very strong quarter. We'll do it like we've had in the past where I'll take care of basically the overview and the operating overview and then Russell will take care of finance and the asbestos compensation. And then we're opening up for questions.

Obviously the numbers on top are very strong, but they're a bit confusing because of SCI comping against SCI. SCI was lower this quarter than same quarter last year. So you look at the ones excluding SCI, we still had very strong performance on the bottom line with both operating profit and EBIT up in the low 40s.

You know, I'm interested to see what your questions are going to be because I can't find too much wrong with this result, but I'm sure we'll get some questions nonetheless. Very good top line 20% on the -- 22% in the U.S. and in the volume.

We're incurring higher input costs just like most companies in the building-materials, area and I guess other industries as well. But our cement's up and freight’s up, fuel’s are up, power’s up, you know, natural gas, everything that you hear about.

We're on track to meet the targets for the year. Cash flow is obviously has been very strong, rock solid on the balance sheet. We're continuing to work forward with the SPF. The next hurdle is the new [daily test dectability] and for that reason, since we don't have the clarity necessary to provide, we have not provided in this quarter.

I think a lot you that have been here before -- I don't like looking at the quarters so much because they’re just too short periods of time, they -- well there's a lot of variance. So if you look at the nine-month numbers obviously – everything’s pretty strong. Sales up 23, gross profit more than that, EBIT looks scary it's up so much, but if you down more around SCI you can see it’s up 56% -- 55% -- which is still, been doing great.

In the third quarter we did have a pretty strong top line and gross profit --. US Fibre Cement up 35%, which is huge, and then you have US Fibre Cement EBIT up 52%.

And of course we continue to put up some targets, that we've been putting up for the last several years and continue to perform well against those targets.

Let's see the operating overview. So this is the picture. This is actually a development in Illinois. It's almost exclusive Hardie the on siding and -- I mean it's always a good shot. Get them all aligned here and see all the bricks, compared to a neighborhood like that. So that's one of the reasons we keep taking primary demand. Over the past years, that would have not been fiber cement. In fact in past years that architecture probably would have been very different than what it is. Because our product actually enables an architect to go to that type of architecture where you have the front porches and, you know, you basically wouldn't want to put vinyl siding on a front porch because you get close to it and you can see it’s not that great of a product.

But anyway, we have these types of development right through the U.S. We've put out a book called ‘Streetscapes’, which I think some of you might have actually gotten through our -- U.S., in December. It shows all those different types of developments.

So in the U.S., net sales 35%, volumes 22%, which is probably the -- well I can tell just on the outside corridor there, probably the biggest surprise. It is a very strong volume performance. Price up 11%, no new increases are reflected in that number. It's just a little bit richer product mix that we've gotten out of our somewhat tight capacity in the summer. We're freeing up from the capacity for the higher [inaudible] products.

EBIT margin at this time of the year at 26.8% is extremely good. When I say this time of the year it just means winter months in the U.S., where you tend to see some slow-down in our start-up initiatives.

The U.S. market is holding up pretty well. Interest rates have creeped up, but it hasn't killed demand. And in addition to that environment, you’ll see costs are up right through the industry. Now most of the industry is making very good returns because of the high-demand situation we are in. So most of the industry is covering their cost increases, not the panel industries, but most of them.

Key points from the U.S. I mean, the key point on the U.S. is really they continue to perform as expected. You can go right through. Emerging markets, which is positioned against vinyl, is growing. The established market which is positioning against wood and stucco is growing. Interior products are growing. Plants are running well. ColorPlus is working. We're in capacity for color. Currently, we have capacity in Illinois. We're in the process of starting up one in Pennsylvania. Just completing construction and we will be completing construction of the color capacity in Pulaski, Virginia, and Reno, Nevada. And then in -- we're incurring the high cost of inputs.

You guys see the forecast for housing, so I'm just trying to educate you on that. You know, basically I'm saying the same thing at the quarter. I see it being maybe flat to slightly down. I don’t think anyone sees a big fall off. We’ll perform very well in a slightly flat to down market. The [inaudible] model is fairly good, money is still fairly cheap, so that's driving a lot of that investment.

Obviously we're above market share gains against alternative materials. Expect the input costs to be relatively high until the market comes up enough where you get that supply-and-demand thing back into a little bit of balance. And obviously we expect to continue to grow the business both on the top line and on the bottom line.

This is our --it's the famous graph we like to show. And the only message on this graph or the main messages. Housing starts have been increasing since 2001, or whatever that is. The slope of that line it is very much less than the slope of the revenue growth line which is yellow for only the grey-shade area, which is [indiscernible] growth.

The average selling price, pretty steady slope up until fiscal year '06 this year, when we did take market increases which tends to slow our market increases for the coming year. We'll take and have taken a few fuel increases -- some increases in some products, some markets, to varying degrees but we will not have enough across the board increase, or at least it's not planned.

EBIT margin, we're above the 25, as we said we thought we would be. Although we didn't think -- we thought we'd be above it every quarter. It looks like, well I mean, for this quarter anyway. Normally the winter quarters, third and fourth, are harder to hit that EBIT margin because we have the seasonal slowdown and we've increased in capacity start-ups. But we had a very good quarter in the third quarter. So it has stepped down. We had a huge fourth quarter last year, and then we have been during each first quarter, and then the second was the more normal and the third was again a good result.

Just based on some of those numbers and of course we look out a little bit, we see no reason to change our strategy. And basically we're good at developing demand for fibre cement, there's a lot of upside. We've been very good at doing it through differentiating technology, so we're a little bit hard to copy. But we haven't gotten a lot of ‘me too’ problems in the U.S. And so we don't deal with direct price competition as much as most building materials companies.

On Asia Pacific, this is actually a house in Queensland where they are using our Linea product. We launched Linea in Australia. It's going to be a very good product here just like it has been in New Zealand. This is an attempt for us to start growing our primary demand in this country, basically having builders chose fibre cement over brick to build their homes.

We didn't have a good bottom-line result in Australia, and that's what drove the Asia Pac decline. It's a couple of million dollars. A little more than half of it was startup we undertook at the Rosehill factory, which we expensed all our start-ups, capitalising. The rest of it was -- a good part of the rest of it was related to the work stoppages in the Queensland area.

Net sales are fine, when you consider the market’s not very good. We actually got a little bit of a market share gain here and hold up our top line.

Strategy is unchanged. It's just now getting some traction in Australia where our business is focused on primary demand, like we have been in the U.S., and Linea will be the big product to mount in that effort over the next couple of years.

So the housing down here is not good, to me it’s not terrible, but it's not good, fairly flat I guess. And New Zealand is coming off, it's pretty good levels of housing, well we felt that a bit, but the New Zealand business actually performed very well. Of course, we've had a problem with Australia and to a lesser extent on the Philippines.

As I said, we increased market share a little bit in Australia. EBIT and EBIT margin were the main issues.

The outlook, it's kind of more of the same. It seems like you guys have things in your paper, I know you did this morning, about where's housing at. Again, we're not great forecasters, so we just figure it’s going to be flat. If it’s up a little bit, it doesn't bother us too much.

Now we do see a decline in New Zealand and that’s a little bit more clear to us, but again we're well positioned in that business. And its grown primary demand, Linea's been a very good product over there. We think we might even be able to grow through a downturn, through primary demand gains.

The organization down, in this region, is getting better and better at manufacturing, so their costs continue to come out, although they had a bit of a blip last quarter, they are getting more unit costs through efficiencies.

Philippines is a pretty small business, but it's gotten to be a little bit of a headache for us. Not because there's anything wrong with it, it's just the conditions in the country, you know, remain pretty unstable. And we have lost some of our market share as we get higher prices against plywood in that country, in the domestic play in that country.

They're good exporters into Australia. They're a low-cost producer into a few of the markets in Australia. But their EBIT was down for the quarter, and I think we'll have some down quarters in the Philippines. I don’t have high confidence in that. It’s still running at EBIT positive. It’s not a huge problem for us. It’s just not going as well as it has been.

Hardie Pipe, as you guys know, this is a difficult business for us. We're getting better at it, but you wouldn’t have seen it in our result. I think we indicated we had a lower volume than in the same quarter last year. And this is really around trying to establish the value of fibre cement pipe in mid-diameter sizes versus [RCP] plastic.

So early on I think we were a little bit too volume-motivating and we got our price off. Over the last probably six quarters we've been trying to fix that, which I think we have fixed the price. But we haven't gotten the demand back to where we need it.

Manufacturing in that business has improved substantially, so that's good news. And we've got some approvals to sell pipe in Texas, which isn't a big play for us, but we think that maybe it may help us in the business because we have excess capacity in Florida and we can ship into Texas fairly efficiently. But we don't see ourselves being a big player in Texas, but we do see ourselves participating in that market somewhere.

Europe continues to grow as planned, which means is still a very small business, but it gets bigger every quarter. We haven't found the big play in Europe that makes us want to charge in there with investment. But the margin development work has been done reasonably well, and they’re making progress. We just haven't found anything that really excites us about Europe yet.

Murphy Roofing is still early days. We get another quarter under our belts and we're further ahead today than we were last quarter, but we're still a long way away from understanding how valuable an investment Murphy can be for us in the U.S.

The overall outlook, I guess more of the same, right. We expect the market to be at a good level even if it's not growing. We expect ourselves to grow because of our market share growth, our primary demand initiative. And we expect our EBIT to continue to track at least as big as our top line growth.

SCI-related costs, we still see it the same. There will be a lag when we do that deal. Get it to shareholders, get it approved and then we'll work our ways out of the SCI costs. Now what's hard to tell is when we'll get it in front of shareholders. But that's the trigger, once we get shareholder approval we can start working our way out of SCI costs.

Turn it over to Russell.

Thank you, Louis, and good morning ladies and gentlemen. As Louis has explained the U.S. business continued to grow. Had significant earnings growth for us in both the quarter and also in the nine months. The Company continued to generate very strong operating cash flows. In the nine months it was $217m which was up 43% and that further strengthened the balance sheet.

They're now actually in a net cash position of $27.3m compared with net debt of $45.8m at the end of March, so nine months ago. So that's a fairly significant turnaround in a short period of time when we've had significant capital expenditure as well.

Looking at the Group results via a summary of earnings statement for quarter three, net sales was up 26% to $363m, gross profit up 33% to $129m. SG&A expenses up 23% to $51.2m.

R&D up a little bit to $8m and SCI costs down pleasingly compared with the corresponding quarter of last year. Last year's third quarter had some pretty lumpy items in it which fortunately has not been recurring.

And so the EBIT was up 93%, and it's always pleasing to see that things like SG&A are progressing at a slower rate than sales and all of the earnings levels, the growth rate is higher than the sales increase.

Net interest has moved from a modest expense to a modest income, reflecting the change in the Group's cash position. And income tax expense was up 86% to $24m for the quarter, and that produced an operating profit from continuing operations of just on $41m, which was more than double what it was for the prior corresponding period.

That result is obviously impacted by different levels of SCI costs, and it’s probably more indicative to look at the levels excluding SCI costs. And the EBIT was up 41%, the operating costs about 43% to $45m, if you exclude the SCI costs.

On the nine-month basis, net sales were up 23% to almost $1,100m, gross profit up 35% to $411m. SG&A up 11% to $146m, R&D up, again, by about 30% to $22m. SCI costs at $14.7m running at about $5m per quarter. This was down significantly on the $24.9m for the nine-months-to-date last year.

EBIT up 73% to $228m, and income tax expense up 88% to $83m, reflecting both geographic mix and also the differential treatment on SCI costs. And so income tax, unfortunately, showing a bigger increase than earnings and by quite significant margin in some cases.

The EBIT, excluding SCI, up 55% to $242m, and the operating costs about 56% to $158.3m.

Turning quickly to sales revenue, in quarter three, by segment you can see that USA Fibre Cement up 35% in the quarter to $298m. Asian Pac Fibre Cement basically flat. And ‘Other’, reflecting the sale of Chile and slightly softer position in the Philippines, was down 37% to leave us with a 26% increase in total sales for quarter three versus the corresponding quarter of last year.

Looking at the nine-month sales revenue numbers, USA Fibre Cement up 29%, Asia Pacific Fibre Cement up only 4%, and the ‘Other’ down 12%, again reflecting Chile, which we exited in July of last year, and softer Philippines. The total was up 23% to almost $1,100m.

Statement EBIT for Q3, US Fibre Cement up 52%, Asia Pacific down 22% on fairly low numbers, reflecting the factors that Louis referred to before. The start-up of some equipment at Rosehill and also the industrial issues that we've had in Queensland. R&D up 18% to $4.6m of expense. Other losses $3.2m, which were up 23%. And general corporate expenses down, reflecting some of that SCI lumpiness. The EBIT, excluding SCI, up 41% for the quarter.

For the nine-month period, US Fibre Cement up 58% at the EBIT level to $260m, Asia Pacific Fibre Cement down 6% to $32.4m for the reasons as in the quarter, R&D. Other and general corporate showing only slow movements. And the EBIT for the nine-month period up 73% to $228m on a reported basis, but on exclusion of SCI, showing a 55% increase to $242m.

Turning now to corporate costs, splitting this into Q3 and also the nine months, you can see the impact of SCI, which we've already talked about. Stock compensation expense has shown an increase both for the quarter and for the year-to-date; that's based on a movement in the Company's share price. And the other costs are also showing modest increase relative to last year. And that is the result of a couple of particular spending initiatives, particularly in the United States, but also in The Netherlands. And it also reflects the fact that we now have more staff in the Netherlands and to some extent that does reflect the duplication as well as an increase in the Company's level of activity. That's a by-product of a thing in The Netherlands and complying with the US/ Netherlands protocol, which was implemented in the beginning of 2006. We had to prepare for that during the last nine months or so.

Net interest expense reflecting a very low level of debt, and it’s not really worth dwelling on the small numbers in that slide, but it does show for the record the extent to which we have zero debt and are now actually earning interest on cash invested.

Income tax, for the quarter, and on this slide we've expanded in this quarter, tried to help readers get a bit of track on what’s causing any movements in the effective tax rates. The effective income tax rate on the top line of 37.6% for Q3 is obviously based on reported earnings. And if you move through the extent to which we incur SCI expense and significantly -- and most of that is not tax deductible, but if you adjust for that it produces an effective tax rate of 35.6% for the quarter and a similar rate for the same period last year.

Same presentation for the nine-month period, and you can see here the effective income tax rate on recorded result of 36.4% for the nine months of '06 adjusts after SCI to 34.5%, which is an increase on the similar sort of number for last year, or comparable number of 32.1% for '05.

EBITDA for Q3 shows US Fibre Cement up 52%, and the others jumping around a bit, including a reduction in general corporate expense due to lower SCI costs. And comparing that with the D&A expense, which is up in most regions other than in the Other segments, which reflects the movement of Chile out of the business. And the EBITDA was up 77% to $74.5m, and then we've added back the SCI impact to show that the increase in EBITDA, excluding SCI, was up 37% to $79m.

For the nine months, the EBIT in the U.S. is up 58% to $260m. The other movements there are quite small, but D&A expense obviously showing some increase, particularly reflecting the commissioning of new equipment in the United States, both the plant at Reno and also the -- which has been commissioned now for the full year, as this period, and also some new assets in existing plants. So that's had quite a material impact.

And the addition of -- or the exclusion of the SCI costs shows a 51% increase in EBITDA. And the net cash produced provided by the operating activities, as I highlighted earlier, up 43% to $217m.

Turning now to capital expenditure for the nine months, and you can see that it's running at very, very similar level to the same period of last year, particularly in the US, $118m. That’s reflecting two significant things one is the progress we're making in Pulaski, Virginia. That’s the new plant with two lines, the first line expected to be commissioned within the next month or so. And that constitutes a very large part of the total U.S. capital expenditure.

The other factor there is the commissioning of -- or the construction -- of new ColorPlus, the Philippines. So whereas we've been limited in the past to Peru or Illinois, they're now constructing ColorPlus lines in some other plants and that's obviously adding to the capital expenditure. The other business is Asia Pac and Other segments have very modest levels of CapEx, and that's expected to remain that way going forward.

Turning to key ratios, the key ones here showing improvement across the board, I think. EPS up significantly on the same period of '05 and '04. Dividend paid per share reflecting both the final dividend from last year as well as the interim dividend paid at the half year. Return on shareholder's funds and capital employed, and the EBIT sales margin all showing significant improvement over the prior year.

And the debt service capacity indicators of gearing and net interest expense, net debt pay-back, actually less relevant, but they put them there for the sake of the record, showing the debt capacity that is unutilized.

So in terms of financials, a continuing strong performance, very high growth, particularly in the United States. High cash flow, particularly for a growth company, and financial indicators largely heading upwards on a fairly strong trend.

Turning to Asbestos funding arrangements, the position on Asbestos funding remains that we, having signed the final funding agreement, are moving forward to implement the conditions precedent as best we can. We've been working on those since the beginning of December after the signing of the agreement. Tax deductibility is probably the largest of the milestones that we have to knock over in the conditions precedent. The legislation on amending the Blackhole expenditure deductions, as they’re known in the Income Tax Act, were submitted to Parliament about ten days ago. Parliament meets this week, and then takes a few week break and convenes again at the end of March for another week. We're not sure when the introduced legislation will be debated, but we're hoping that it will be soon, and we do understand that it will be in the autumn session.

And following passing of that legislation we will then submit an application for a private ruling to the Australian Tax Office. And we’re obviously continuing to have discussions with the ATO, as well with the Federal Treasury. And we'd be hopeful that the ATO might indeed expedite a ruling, given the facts and circumstances relating to our situation haven't changed, and since last year they did issue a ruling in December of last year in relation to the existing legislation. So we're hoping that it might be an expedited ruling.

And then that will leave us in a position where we at least have some certainty. We didn't book a provision at the Court hearing in December on the basis that we still fall outside of the thresholds probable and estimatible categories in U.S. GAAP FAS 5. And that's largely on the basis that, although we'd signed an agreement, we still don't have conditions precedent satisfied, and we are in an uncertain position.

With respect to the shareholder meeting, Lou indicated earlier that we are not able to indicate when the shareholder meetings to consider the proposal might be convened, and that's largely because the factors that trigger the obligation, that is the conditions precedent, are really beyond our control. As I said, tax is the main one, and I think once we get through tax then we'll be in a better position to actually be able to indicate the timetable to the market. So at point I'd like to ask Lou to close off this piece on a summary. Lou?

Thanks, Russell. The summary is obviously a very good quarter, but again we talk about every quarter. It’s just a quarter, a short period of time. So we outperformed in a few areas, but I think if you look at the full nine months, the year-to-date nine months, we're tracking very well with the business this year. And we think we'll hit our year-end target as forecasted for.

So we'll open it up for questions.

We'll have a question from Tom Gallagher from Credit Suisse.

Good morning gentlemen. Just two quick questions.

[Technical problem - cut off by questions off the floor]

Emily Smith from Deutsche Bank. Louis, on January last year you implemented a 10% increase on about 60% of your products. Just wondering if you can give us a bit more of an indication as to the pricing, for instance, that you implemented on January 1 this year? And if given the cost increases if there are any other likely price increases later in the year?

And secondly the 22% running rate is obviously a very strong number. Just wondering if you can give us a bit of an indication as to where that [running] growth is coming from?

Okay yes thanks. First on the price increases last -- last year we gave you a bit of guidance. We took 10% on 60% that you're on six. This year we didn't take an across the board increase on siding. We do it very much market by market, product by product. I actually don't have a good estimate for you. I haven't specifically done two [inaudible] but I would guess it would be less than 5% across the whole business.

The second thing, the 22%, we had a very good quarter. The [initiative] is holding up and I think our position with primary demand growth is good. But I always guard against these quarterly comps because you've got what happened this quarter and then you've got what happened last year in some quarter. And I know coming into the fourth quarter we just had an absolute unbelievable quarter last year, second quarter, so we will not be up 22% in the fourth quarter I can guarantee you.

But having said that I do think that 22 is strong -- is stronger than what we'd expected. Maybe a little bit having to do with the comp or maybe it's just finding the jobs I'm not sure. But it was -- it's stronger than year-end four basically and obviously a little bit better than expected. Yes?

Maybe just following on from that volume question, can you give us a feel for ColorPlus maybe, has that contributed somewhat or is it just really based the products in the south that have really driven that volume growth?

No, the volume was up across the board. It was up established markets, emerging markets. ColorPlus was up more than other volumes and Interiors was up. So there's no one thing driving it, but ColorPlus is up more than the rest but it's still the smaller part of what we saw in emerging markets.

And just on your costs, clearly 22% volumes, 11% prices, costs obviously played a pretty big role in delivering a 22% margin. But could you maybe comment the energy of those three drivers what's the outlook for Q4 because the guidance at the moment sort of implies that Q4 is going to be maybe a soft [issue] or maybe you've got something, costings those you already know about?

Well -- well Q4 is not going to comp as well as Q3 does. But as far as, I mean obviously we looked at the forecast and figured out where we're at. And again, we feel very comfortable with the guidance. That doesn't mean, as your suggestion, whether we're on a high side on the biz or on a low side. We actually think it's probably good guidance.

So, yes what we do have coming up in the fourth quarter is the [JHI NV] start up so that's a pretty huge start up. We started branded Color this quarter as well. And that's where we're at, you know, we've got two pretty good things going on but overall we deal with the [Sun trial] and I think the fourth quarter is going to end up being a good quarter. But comping against last year and I'm comfortable with the third quarter again.

And just finally [introducing] markets right now we're seeing any sort of major changes or is it still business as usual with regards to the demand in your end markets?

Yes it is. The housing industry is holding up well so we haven't -- we haven't felt any softening overall on [EBIT], markets starts and stops, whether it be weather or just general activity. But like most building materials firms in the U.S. we have no complaints about where the market is at. It's very strong. Any more questions in the room? [Shane]?

Yes thanks, this is sort of – I did anyway, just a quick question on Australia. As you're coming to know that marketing costs and [inaudible] I know that you commented about Rosehill and the Queensland factory negotiations but if you comment that market share increase still lost out and what were the marketing costs that we’re talking about?

Yes I always, in fact I stumbled on this last quarter so I won't comment on other people's business. So we do measure our market share through Pulp imports so we know what our market share is quarter to quarter. And I think the reality is every shift and more differentiated products that the other two domestic manufacturers can produce we’re going to get market share gains.

And just a second question with the -- again on ColorPlus, you’ve got sort of an upside on the roll out, the [Skye] roll out with supply chain changes, the distributor reactions?

Yes, we talked about this in December in our tour around the U.S. And ColorPlus is really a fairly complex strategy for the building materials industry and yes it does require basically compression in the supply chain. And, you know, we -- we naturally expect resistance. Basically we're kind of used to that. We're a company that likes to grow at 20% a year and the industry that likes to grow at 3 or 4% a year. So we're always trying to push our supply chain for the most part faster than they want to go.

Specifically with ColorPlus we had it pretty well laid out. It's played out within a range exactly pretty much how we planned. Some markets are growing quicker than we thought they would. And some markets are driving them but -- but the whole thing -- the whole thing is kind of working. When you put it all together our capacity, our strategy about how we deal with our [packs], the job sites, pricing policies, our -- keeping up with certain distributors that can work with the scale that we need to be successful, the value to the builder, the value to the consumer, the value to Hardie it's all kind of -- you know we're sure hoping on a gain of probably a third of the way through implementation and strategy but no -- no real -- [inaudible] price.

Yes, Louis?

Yes.

Hi, just a couple of questions, maybe on average price. You said sort of 5% may be across the board, what do you sort of also expect thinking about -- given if -- if your market is flattish to down slightly as you see it, what kind of average price growth for mix change? Could you give us an idea of total price increase?

You guys -- you guys like the crystal ball and I don't like the crystal ball. So as always I will hedge a bit. The big news about Hardie in a softwood market is we compete outside of our category for the most part. So we compete on an installed cost basis rather than on a material price basis. So again another quick example I use quite a bit, so vinyl would be $1.50 installed say, and say markets that were $3.00 installed, and so brick is $7.00 installed.

If the Vinyl people start fighting on price they're -- their $1.50 installed might go to $1.47 -- sorry $1.47 installed. It fundamentally doesn't put any pressure on us to move our number to try and get our $3.00 number closer to vinyl. So I think we're going to hold our prices nicely even if the downturn is a little bit more than anyone's projected. So that's the good news.

Our high products are -- a couple of our high growth products, ColorPlus and XLD are much higher priced per on the shelf products. So they're going to drive up the average -- average price. But we do have a couple of products that are high growth that are actually lower than our average, [D2] backerboard is growing very fast and that's a lower average price than the overall product mix.

And [Sunprint] is growing faster than the overall business and that's a lower average price. So that's what I think, the crystal ball, I'm not sure how they're all going to play out next year but I do think we'll get product mix improvements, but I don't know if it will be 2% or 4% or 5% to be quite honest with you. It just depends on how the growth on those key products builds over the next year.

I guess on that point I guess you are saying for the plus 5% could be a [tangle] on average price this year.

I -- I think it, yes could be, that's a good word.

And maybe just a couple of other questions for Russell, corporate cost beginning to begin opening in the last couple of quarters. Should we be now be putting in 8m per quarter now that the Netherlands obviously are more staffed? And maybe also just a comment on tax, obviously 37.5%, I guess what sort of number should we be looking at? It’s been creeping up for maybe a quarter now.

Well I'll take the second one first on tax rates. The reason we put that expanded slide is on -- in on tax is to try and help you by stripping out the SCI. But it's actually reasonably stable although it has -- it has moved up I take it over the last year, year and a half. But I think the guidance would be mid-30s as the effective tax rate excluding SCI costs. The SCI costs will continue to bounce around, and that obviously has a material impact.

In relation to corporate costs some elements of that uptick are permanent particularly the bits relating to the extra expense we incur as a result of the higher establishment in the Netherlands than we've had before. And some of it's temporary so I hesitate to give guidance on that but it is going to be higher than the $6m or so that we've had over a number of years in that arena. But I still think that it will be declining as a percentage of the group's revenue.

Thanks.

It's, actually Russell it's [Ken Kagerer] from UBS, just a quick one for you while you're up there. I thought of the -- the ruling you're looking for on the tax issue with the SCI costs. Is there any chance of a write back because you're not getting much deduction on the cost of gearing, carrying at the moment? Would there be any chance of a -- clawing some of that back if you got a favorable ruling on -- on the tax deductibility and payments?

Then you're referring to the SCI and related costs that we've already incurred?

Yes.

No, that won't cover that type of expense.

Okay.

Unfortunately tax legislation is rarely retrospective.

Fair enough. And then I've just got one for -- for Lou. Just on the guidance sustained a 25% growth – it’s at the top line. You know one quarter the guidance, it's still a wide -- a wide range, and my thinking, we should be thinking you'll give this kind of thing on next year. But definitely still you're speaking for that for this year?

Yes I think -- yes I think it's going through the height of spend range within the same range next year. You know that doesn't mean we will but I'd be disappointed if we don't. But clearly the market, we don't have a lot of control over our trend and demand initiatives. We have very little control over housing starts. And we're going to be driven not one-to-one by housing starts but we will be -- we're much more a new construction company than we are a renovation company.

So we'll feel -- feel the impact of a slowdown especially from -- if it's in our key markets. But as we've really pulling it out maybe -- maybe we can add 5% on price and maybe 10% on volume. I mean if the market is up 5% and maybe 15% on primary demand those are numbers that really don't scare us too much. I'm not saying we automatically deliver them but they're certainly viable targets.

Thanks very much, Dan?

Sorry, just back on the cost side, I'm just trying to get my head around for this quarter the key ones, cement and energy, maybe could you comment on those and just would -- do you have a feel for what the impact of that was in a dollar sense for the quarter and --?

So we used to give a little bit of guidance on that and purposely have asked the guys not to give so much guidance in that area. You know everything is up and all these things are fairly well-published indexes so you can figure we buy at some discount to the overall market due to our scale but if the market goes up 12 we're likely to go 12, but it will depend on the timing of our contracts. So none of that, we know where we're at on Cement because our cement contracts are first-of-the-year contracts so we know where we're at on Cement. So it goes up, probably it's been higher than we like it but it's been okay year to year comping.

Natural gas spiked and it's come back off some so we should get some help on natural gas. And the big one is freight. Freight's -- freight's up and refusing to come down, I believe when the [Ministry] comes off a little bit freight rates come back down. But until then I think, I don't know if you guys follow freight companies in the U.S. but I think the freight companies in the U.S. are probably making pretty good returns right now because they [sold out] industry. So I don't have a dollar number for you.

And just because I know how much quarterly reporting is down, as ColorPlus continues to increase in the north, as the quarterly numbers start to get a bit more [wiggly] particularly around the winter months in the U.S. given weather-related issues?

Well I think as -- as Hardie becomes the bigger and bigger player in cold markets our seasonal impacts can be something you see -- you can see more and more. So yes, I mean ColorPlus I mean current price, our terminal environment, our current share in the -- in the established markets it's much higher than the north right now so when we get the seasonal downturns in the U.S. we're not nearly as impacted as other businesses. But once we balance out shares between the north and the south we will -- we will have more downturns in the winter months.

Anyway this business, the growth rate its okay if you've propped up the numbers but you shouldn’t measure it quarter to quarter. We definitely don't. There's a big lag between what we do and what we report meaning the activity on the business, generating the results, there's a big lag. And then the last thing we want is our people trying to hit quarterly numbers because it's counter productive when you're trying to -- maybe we want to triple the size of this business. What does it matter if we're up 22 or up 20.25, it just really doesn't matter as far as end game goes. Anybody else? On the telephone?

Yes we have a question from Roland [Gallagher] from Credit Suisse.

Good morning. Good morning, gentlemen. Two quick questions that have partly been covered. First of all the penetration policy and regarding pricing, Lou, could you just go back to 1 January 2005 and what was the key drivers, the mentality to change that? Are there -- is there a possibility for that to occur in the foreseeable future?

Secondly, a question for Russell in regards to tax. We're now seeing James Hardie’s effective tax rate approximately [Brinker] at 35.5%. That's despite the Dutch structure. You're now starting to see duplicated corporate costs coming through because of that structure. Is there any opportunity to adjust that with or without the asbestos situation?

Okay Roland I don't know if I've got your whole first question right but it reminds me I missed part of Emily's question. We -- we did not take a January 1 increase in 2006. That's actually an April 1 increase and we've done it in a way that no business would be pulled between the quarters, okay? So we just gave them a -- we gave our customers a fixed allocation based on their buying history of how much forward they can buy at the lower price, and it really doesn't matter when they buy that forward. But it's no motivation to try and pre-buy price increase forward.

So Roland is your question, would we consider price increase again like we did in 2005 because there was something in the industry that made us feel like that was a good time for an increase?

Yes where I'm coming from is that I recognize you're running this business for the long term and so you, as you previously commented, regarding quarterly it's more the case of what was the driver in 1 January 2005 when you put across the board up 10% and would that occur given underlying markets going forward?

Again, yes I can answer that. Normally we like the price like we did this year, we like to look at each market, each product group and try figure out where we're at on that penetration curve and -- and shear that, whatever price that doesn't dampen demand. So price taken early in a penetration curve has a much greater tendency to dampen demand than price taken late on a penetration curve. So that's how we did it this year.

Last year it was just almost like hyper in the U.S. market where everyone is taking increases. Everyone is taking increases and we're sitting there not doing anything, okay. And basically the market is wondering why isn't Hardie taking an increase so we fell asleep at the wheel I guess is the way to put it.

So, but still you have to manage it because Hardie takes an increase and that then becomes all of you avoid our long-term value price is for a product. Okay? If you have a gypsum board producer or a vinyl siding producer or sheeting producer, whatever, and they take an increase, they take an increase because their capacity puts -- supply/demand relationship allows them to take an increase and they realize that we're not changing, they give the increase back. So it's basic commodity pricing.

Hardie never has and it never wants to get in the game of commodity pricing. So that's why January 2005 is pretty unique where we get almost across the board price increase on siding. It was just because the market was just ready for an increase from Hardie, and we didn't think we'd ever have to give it back so we took the increase and I think it's played out that way. I do not anticipate the same scenario playing out anytime in the near future. I actually expect prices to start coming off in the U.S. as the market -- market either flattens out or starts to climbing a bit. But I think gypsum and insulation and sheeting and roofing and you'll see guys start giving price back on those commodities.

Okay.

Any other -- any other questions on the phone? You had a question for Russell on tax. Hang on.

Roland, I can't comment on Brinker's tax rate, because I don't understand -- know their business well enough. But a couple of things that are relevant to James Hardie relating to geographic mix of earnings is pretty significant. One is that as the proportion of James Hardie's earnings in the U.S. increases so does our tax rate because the corporate tax rate in the U.S. is 40% and that's the highest rate that we experience anywhere in the world. Australia is at 30% is pretty attractive relative to that in the U.S. and, of course, we had an upturn in U.S. earnings and a downturn in Australian earnings in recent -- in this latest quarter.

The other thing is that low tax jurisdictions like that which we enjoy in the Netherlands, because of the special arrangement we have with the Netherlands' government, is very attractive when you've got a lot of income. They're not so attractive when you've got increasing expense and we've got increasing expense with no change in income in the Netherlands so the end result is that it's just not -- not as attractive as it might have been.

It's still very attractive but the fact that we are incurring extra expense in the Netherlands and attracting a pretty -- pretty low tax rate doesn't give you much of a deduction, and that's impacting the effective tax rate for the group. So I hope that answers your question.

Okay any other questions then [Fran]?

Yes we have Jonathan Snipe from Citigroup.

Yes thanks a question -- a question if I can Russell and I'm sorry to harp on about this but on a -- on ColorPlus I know you've mentioned the volume growth was above I guess what you thought the trend was for the rest of the business. Now if I go back to the presentation you gave in December I think you were doing another phase that -- the whole strategy there where you were going to launch about 112-odd SKUs of product in December. Was there any benefit in terms of I guess trade loading or putting those new products through the trade that we'd notice would have contributed to this quarter's volume growth number?

No I wouldn't think there'd be anything that would have affected the 22%. I think extending our color range what that does is allows builders that are working on future developments they use ColorPlus because it's not -- we've got 20 colors available instead of 12. So I -- I don't think it would have impacted volume. In fact I think it wouldn't have impacted volume at all.

Now what we have seen in some builds in those new colors but a lot of times it will be coming off your other colors, and that's the short term impact. But the longer term impact is someone who is going to have something coming out of the ground in June has more likely -- has a better opportunity with this ColorPlus because now instead of having 12 colors he's got 20 and assuming he's missing a couple he wanted he might go with build the price on color.

Thanks.

Okay we also have a question from David [Blake] from JP Morgan.

Okay.

Thanks, hi guys. Just a quick question for Russell on the asbestos. I'm always worried about the amount of cash available in the foundation and I just wondered as the longer this goes on without getting to an agreement -- what, can you comment on the situation there?

David we don't have full transparency on the cash position or asset position of the foundation. But on the basis of what we do know we understand that they -- that the current rate of claims they have sufficient assets and cash to get them through well to the end of this year and possibly even into calendar 2007. So we're not expecting their asset position to result in any pressure on us vis-à-vis the current proposal.

Thank you and then just another general quick question on operating costs in the U.S. which seem -- seem to have jumped up in the December quarter versus the two quarters sequentially preceding that, at an annualized rate of about a 20% cost growth. I just wonder if you know are costs really accelerating in the U.S. at the moment or is that just one of those quarterly things?

I mean the operating costs are you including or excluding SG&A?

I'm just looking at the U.S. Fibre Cement EBITDA versus the revenue, if you like, and taking the difference between the two.

Okay so we do have -- we do have higher input costs as we talked about. We have our plants running pretty well so they're not contributing at all to higher costs. We have some activity around the Pulaski start up contributing to that and we do have several initiatives. I've seen SG&A price market initiatives but have developed a little bit higher SG&A. And then finally we have all the different Color capacity being knocked up so a typical ramp up scenario where first -- first maybe you're thinking mostly that Pulaski has got a very high cost but about 4m feet later you're on -- you're on your long-terms costs. So we've ramped up two Color lines recently and we're going to have three more ramping up in the next three or four months.

So I do believe the cost in the business will be a bit higher as we get right into the middle of the ColorPlus strategy and we're still dealing with the high input costs, but again I like -- I like our ability to grow both top line and bottom line despite that situation.

I don't think anyone is complaining about the growth. Thanks.

Thanks David. Anything else?

There's no further questions from this end.

Okay and thank you very much. I appreciate it.