James Hardie Industries PLC (JHX) 2006 Q4 法說會逐字稿

[Technical difficulty] performance was outstanding but I am sure with this morning's announcement, also on a special side, I think we have done pretty well on getting the final funding agreement in place and the provision that we have taken in the case, we think we are near the end of that process.

But I am sure we have given you plenty of things to think about in our results and you guys can give us questions a little bit later and we will try and clarify some of it. But first we will run through our normal presentation. I'll take care of the physical review and the operating stuff and then Russell will take care of financial and specialist and we will finish up with questions and answers.

So I guess the first bullet point was covered right up front in the announcement as well. $715m provision for the proposed asbestos settlement. And then you get -- start stepping down to figure out what the business did so if you just look at it without the asbestos it comes up at fourth quarter operating profit up 40% and in the full year 63%. And you step it further because we did have the closure of the ripping plant, we had a reversal of U.S. tax provision. Anyway you bring that down and it's operating profit up 13% which lagged the top line quite a bit and the full year up 42% which is ahead of the top line.

So we will get into that a little bit later. Dividend of $0.04 for a full year; $0.08 dividend.

The fourth quarter was an extremely good quarter on the top line. U.S. Fiber Cement, we got some help from the market. The weather was very favorable so jobs were tracking as fast as they could go. But we did run in to a fairly flat EBIT, only up 7 in the U.S. and then elsewhere down a bit but we did continue to generate good cash.

Overall obviously that's the way we prefer to look at it because with the quarterly results as you know you get a lot of variance and in this case on the fourth quarter we had spikes last year against a bit of a dampening effect this year and it gives you a comp that's hard to understand but if you look at the full year we did have higher costs this year like probably almost every business like ourselves did but despite that we've generated significant growth top line, good growth bottom line and good cash flow.

So the numbers themselves which I guess you have seen. For the corporation net sales up 23%, gross profit up 29% for the year and 15% for the quarter. And then you start pulling the things out and like I said the bottom line you are up 13% on the operating profit and 42% for the year, 13% in the quarter.

23% as I said, the U.S. Fiber Cement up 32% which was ahead of our forecast, we had very strong demand during the quarter.

Again the full year, go down to the U.S. I think that's a significant bullet point. The U.S. where the growth business is, 30% on the revenue line and 42% on the EBIT line which exceeds our targets in both those areas and we got significant capacity on both color and flat sheet capacity and of course we have bought out proved trim EXCEL B facility up early in the year.

The targets that were established for the corporation several years ago continue to be exceeded. The last year was no exception. On the operating staff this is now getting to be the typical picture, we give you a Hardie neighborhood from a different city every quarter. It seems like this one happens to be in Indianapolis which is significant because Indianapolis is not your highest end market in the U.S. and so this traditional development obviously chose Hardie over the alternatives which in Indianapolis could have been brick but would have been more likely to be vinyl.

U.S. fourth quarter we have talked about the top line up 32%, volume very strong up 22%. Price I guess tracking around where it's been at 8% up, EBIT only 7%, we will get into that a bit later. And then EBIT margin even with the depressed comp growth at only 7% we are still above our range of 20 to 25% and it's largely indicating that in last year we had that spike, it was in the 30s, I cannot remember if it was 31, 32, or 33, somewhere in there which we are comping against and so that creates some of the confusion.

Trading conditions like I said they are good, we are still waiting for the downturn which mortgages are getting more expensive so you have to assume the downturn is coming which is probably what I have said in the last two or three quarters. But it has not shown up yet although inventories are up. And like I said any projects that were ongoing, they weren't held up at all by weather so they continue to get built out at probably the fastest rate possible.

So again key points on U.S. business everything continues to grow. Emerging markets with the ColorPlus strategy against vinyl continues to do well. Established markets even in markets that we have very high market share continue to grow. And our interiors business last year had a very good year, they continue to grow at a very high rate.

That's what we are doing, we are doing market development, primary demand basically creation against alternative materials. We are seeing more and more of our products towards the differentiated position whether it be on color or trim or post-production processes like [inaudible], T2, stuff like that.

We just completed recently our first paint line in Blandon, Pennsylvania, that goes along with the paint lines we have in Prunel, Illinois and we're currently finishing up some paint lines in Pulaski, Virginia and Reno, Nevada.

The EBIT for the quarter was impacted by a bunch of things but cost of sales was up, freight was up, SG&A were up and some of that was one-off [stuff].

So costs of sales up 14%, that's on a per unit basis so it's obviously up a lot more than that because the volume was up along with it. Materials, basic commodities are still in short supplies due to the somewhat overheated U.S. market over the last couple of years. Obviously energy costs is a big issue and even though we are not big users of gas the degree that gas prices went up did materially impact our costs of good sold.

The plants are running well, we did have efficiency gains that offset some of those costs but basically the plants are running well and we don't have any real issues in our manufacturing network currently.

SG&A is up 74% and that's a combination of it being a low quarter the last year this time and a much higher quarter this year. Some of those are one-offs, so some of the one-offs were around initiatives and the other one-off that hit us was a catch-up on bonus accruals for the U.S. and largely one of the U.S. [inaudible]. So largely the U.S. business and that was triggered, we just didn't have clarity of how well we were going to finish up the year in the U.S., so it triggered higher payments now on our incentive program we accrue it in the year it is earned, but like this year for instance only 45% gets paid out and the rest is at risk if future targets are not hit. So if next year's targets are not hit or the year after that are not hit then the money we already accrued will be reverse accrued. So it's actually a bigger impact in the accounts than is actually the case from a cash standpoint.

And then freight continues to be higher and that's driven mainly -- we've actually got our length of haul down a bit so it's being driven mainly by oil price.

So what's the outlook? I've said before we are not forecasting into the market so we just use forecast in order to communicate and they're projecting a soft landing or cooling down as that slide shows. Which officially I think is in a 5 to 7% range. Personally I think it might be a little off a little bit more than that but you have got to remember we are in May so I think for the annual number probably won't be off even that much but for the fiscal number year for Hardie it might be. And whether it's fair or a little bit more we are well positioned to go through it. Demand growth has been going very well. So we expect to grow both the top and the bottom line even in a down market basically in the range they're forecasting it may be down.

We will continue to move more towards color, more towards trim, but we'll also move more towards some of our differentiated products that aren't quite as high a price like T2. And we have taken April 1 increases to some products, some markets, not across the board. And I think the reality is the across the board increases by commodity type producers in the U.S. are just about over. So I think some products will be coming off of their prices, we don't anticipate any coming off of our prices.

And then we do expect that for at least a period of time cement, energy and freight to be up. Of course I'm not going to predict energy but I do think some of the basic commodities like cement, pulp will come down as the market comes down a bit because I think they are a little bit overheated right now and there will probably be a lag effect. I don't expect a big help later this year.

And freight is largely driven by oil prices. But with the Virginia plant coming into the mix now hopefully we can shorten our length of haul a little bit and put some of that back up.

Here is a graph from the start of the business. You can see that yellow line, which is the revenue line, continues to go because we scale it that way, continues to go straight up but the volume looks alright too. And the blue line which is housing starts doesn't show the downturn yet but I think you'll start seeing that flat and coming off in future quarters. But the slope of our revenue line may change a bit but I certainly expect it to be a very positive trend going forward.

(indiscernible) average selling prices we have got to pick up this year and I think that tells a story about where the U.S. market has been so we are on a steady slope for five years, or six years and then we picked it up and that's more around the material increases that were taken in the U.S. market at the same time that competitive materials were going up two or three times a year. So we did take market increases last year that exceeded our traditional. And we did well with them; we didn't dampen demand or anything, so it worked out pretty well.

Here's our EBIT margin chart. So you can see last year same quarter I guess we got over 30 and then first quarter fiscal year '06 we bumped up to I think 32 or something. And at that time we talked about the rest of the year wasn't going to look like that and we're correct but we also talked about the fact that we felt we'd stay above the 25. Now we just barely stayed above the 25, it wasn't hard to stay above the 25, it wasn't something that we worried about, it's just where the numbers came in. But I do think we will continue to ride above that 25 for the next several quarters unless something dramatically changes in the market which obviously we are not expecting.

So the strategy in the U.S. you know basic growth primary demand and keep the category largely to yourself continues to play out well in both exterior and interior products. [inaudible] back a bit, that's actually one of our, not our new linear products but one of the other paint products, machine products down there. It's a development somewhere in Australia, I forget where.

The [Asia-Pac] quarter was --- it's an OK quarter in a down market but just an acceptable quarter. Nothing that we were excited about. Sales and volume kind of flat, EBIT down significantly, basically showing that this business because we can't grow the primary demand and go through its [cost parameters] like the U.S. business, we may get a hit with the higher prices, we see it on the bottom line a lot quicker and we did have a plant upgrade in there that had a bit of a write-off attached to it that affected the EBIT line some.

But the general story is this business has to ride it out a little bit more with the market rather than drive it straight through the market like we expect to in the U.S. EBIT margin was down a couple of points but again the market conditions were far from favorable.

We're not moving off our strategy, we've been tested a little bit I think. It's a little bit harder to run the differentiated strategy in Australia and so I think down here you have got to realize you've got to be a lot more careful about when you're going to be paid back for your development costs because in the U.S. we are satisfied to wait three, four, five years where in a business like Australia with key competitors out there trying to mimic your market position and using discounting, it's not quite as easy an equation.

But it is a good strategy and I think that's basically Hardie's global strategy. We want to do things other people can't and then when we do them we want to get paid for them. So we're not moving but like I say we just need to be careful that we get that last piece right and get paid for what we do down here.

The markets aren't good here, Australia, I mean New Zealand is getting soft around a pretty good base and Australia is getting soft around a pretty average base. The business has gained back some markets here, I think you guys pretty much know how we measure that so we've gained that back.

Net sales up a bit, EBIT down 18%, higher manufacturing and freight. So it's all the same stuff, it's going to be cement, it's going to be power, it's going to be gas. And then full year sales up 4% and EBIT down 8%. Which like I say, it's an acceptable result, it's a good returning business for us, it's not like a disaster but you know we will be aiming for a bit more even in a down market in the future.

What do we expect in the market going forward down here? We do expect a softer market but not dramatically softer, but definitely you'll have to earn your business down here because you get less and less people to sell to from a new housing standpoint over the short term. And we will go for, continue our trend increase in market share and we need to do a little bit more of what we've done in the States and find ways to offset the raw material and energy import increases through better manufacturing efficiencies.

The Philippines has been -- that part of the Asia Pacific numbers so they impacted a bit. They still run positive EBIT but it's been a challenging year, the stability in that country is not what it should be in my opinion. But anyway it's a tough environment, we have a highly differentiated position there but it's tough to get paid for if there is not a lot of wealth in the company -- in the country. So we decided to hold our products at a certain price level and that's dampened demand for the product quite a bit, I shouldn't say quite a bit, you can see the price elasticity for some customers we've -- we've definitely found that point.

But anyway they continue to run positive EBITs, they are an important material source, they are a low cost supplier in some Australian markets so we still use them to bring product into Australia. But basically it's been a difficult year, there's been a lot of balls in the air we had to keep an eye on this year and the guys who run the business did okay with it but again hopefully we can perform a little bit better going forward than we did last year.

The outlook in outline is not going to change a lot. So we just got to get good at doing business in that country and forget the fact that it's not as stable as the other countries that we do business in.

Hardie Pipe, Hardie Pipe has had an interesting year. It's basically a reset year for that business and I think it was a bit of a do or die year to be honest with you because we were on a track that didn't show us how we were ever going to make a return, a good return on the business, economic profit basically.

So again we took a position on pricing, we had a differentiated position and we weren't getting paid for it so we decided to test whether we could get paid for it. So our prices have come up quite a bit because market prices are up as well. So we get the benefit of our price position improving at the same time as the market prices improve so we get a lot of price up in the business. But in order to get to that position we did give up volume. So basically saying our targeting wasn't right on our customers. So I think we've re-established the type of customer we should sell and re-established value pricing for our products.

Having said all that they are still just below EBIT positive and we need to get that business EBIT positive. It's been in the Company too long to be still messing around with negative EBITs. It is cash positive, it contributed on a cash basis but not on an EBIT basis last year.

European market developments, kind of going as planned. But at this point we don't have any clear strategy for doing the scale we would need in Europe to treat it as anything other than an export market. That doesn't mean that we've given up on it because the first two years of that project was more about setting up a business capability in the region which we've done successfully.

But the emphasis is shifting more now to market/product development for products other than what we sell in Australia or the U.S.

Artisan as you know from our release earlier, we did close that business. It was a product plant basically but we had a market development effort attached to the pilot plant and we got about 18 months into that market development and decided the opportunity wasn't significant enough for us to continue to invest. So we did close the plant and took the write-off.

R&D, not a lot has changed in R&D, as you know the differentiated strategy requires a basic technology capability and that's basically what enables the differentiated approach to Fiber Cement that we run in most other companies and find a way to do that.

And our R&D spending, it bumps along around the same level depending on projects where we are at and in those projects what spending level we are at. But we had the same R&D strategy it's been five or six years now, we think investing in new platforms which can result in new products is a way of extending the U.S. model and the U.S. model has been proven to be a very good model for financial returns, business model for financial returns. So that hasn't changed.

Our capabilities continue to increase in that area.

Overall I guess I covered a bit of this in my comments and the first part the U.S. market there is no doubt is getting closer and closer to that point where they actually build a few houses less.

Inventories are up, mortgage rates are up, prices are coming off a bit, so I think we are getting those early indications that it's just a matter of time now but we are not seeing any early indications that it's going to be more dramatic than was forecasted.

In Asia Pacific we are not expecting any help from the market so it's just going to be how well we position our business in the market to see what our results look like down here.

I think we can build on what we've done over the last couple of years and do a little bit better but I don't think it's going to be dramatically different because I think the market conditions will restrict our performance a bit.

And then the SCI costs which are lower this year than last will continue at some level until we have the shareholder approval and final funding and the SPF are in place and at some point after that the SCI costs stop.

Alright I'll hand it over to Russell.

Thanks very much Louis and good morning ladies and gentlemen. Thank you very much for joining us.

As Louis pointed out in this latest quarter and year end we've booked the asbestos provision, that's been something that's been under review for five or six quarters now and finally we think we've come to the point where we qualify as being in probable and estimable territory under U.S. accounting standards and that's triggered the making of the provision at the end of March. I'll have more to say about that a little later on.

Notwithstanding that the balance sheet remains very strong. We had a net cash position of $12m at the end of March which is a $57 or $58m turnaround from one year earlier and we had cash and unused term facilities at the end of March of $489m although that has been reduced a little bit since then.

We also continue to generate substantial operating cash flow, $240m in the year. And notwithstanding that we booked the asbestos provision we have continued to declare a dividend. I think there was some concern in the market that at the time we booked the provision and thereafter we may be constrained in our dividend paying capacity because of the impact of that on retained earnings.

We have come up with a structure which enables us to isolate or quarantine the asbestos provision from the Parent Company and of course it's the Parent Company that pays dividends. Yes on a consolidated basis you will see the effect of the asbestos provision but if you look in the accounts of the Parent Company you can see that it in fact doesn't impact the retained earnings and therefore doesn't impact the dividend paying capacity of the Parent.

So at the end of the year we declared a final dividend of $0.04 per share and the full year dividend was $0.08 as a consequence of that and that's up $0.02 or 33%.

Since balance date we've retired some fixed rate debt amounting to $122m with a make hold payment to the noteholders of $6m and we are currently arranging replacement facilities following that pre-payment.

Turning now to the accounting for asbestos. I think most of you will be aware that in the May 2005 budget one year ago the Federal Government announced an intention to review 'Blackhole expenditure' and the legislation for that was somewhat delayed following a lengthy review and it came into force on April 6, 2006, so just a little over a month ago.

That has been the catalyst for us deciding that we should book the provision. It's our view that it captures the situation of James Hardie in terms of making payments for asbestos compensation which don't attach to the existing corporations in the Group. That's obviously something that's to be confirmed by the Australian Tax Office but on the basis of our interpretation we are captured and as a consequence we've moved into the probable and estimable territory under SFAS No 5 U.S. GAAP.

The net provision that we've booked is after tax and the amount of the provision is $715m recorded with a corresponding entry to asbestos expense in the income statement which is what gave rise to the very material loss for the year.

The tax decisions relating to deductibility and also the tax exempt status of the proposed special purpose fund are subject to ongoing applications at the Australian Tax Office. And we are awaiting a response from the Australian Tax Office on those two important issues.

The provision has been recorded on a net basis and you will see just one entry in the balance sheet at March 31, 2006. After shareholder approval is granted, assuming that occurs, the provision would be recorded on a gross basis with all its elements grossed up. So that would relate to tax, to insurance recoveries, to costs as well as to compensation or projected compensation claims. So there will be some change to the accounting but it won't affect the net impact of itself. There may be changes arising from other things but the change to gross accounting rather than net accounting under U.S. GAAP of itself won't lead to a change in the net amount.

The amount of the provision that's been booked is primarily based on KPMG actuaries' assessment of March 31, 2006. So it's based on projected cash flows, undiscounted and uninflated. It's been booked net of Australian tax. That is that we've assumed that the compensation payments will attract deductibility to the extent of James Hardie's contributions to the special purpose fund. That's an assumption that's been made, it's not at this point in time a matter of fact.

You might also notice if you delve into this that the actuarial estimate prepared by KPMG and the provision are not identical. There are two or three reasons for that.

Firstly as I said the actuarial estimate used for accounting purposes is undiscounted and uninflated whereas the central estimate that's used in the KPMG estimate is typically a central estimate at a net present value basis. So from the cash flow projections of KPMG on an undiscounted, uninflated basis, we are going to make further adjustments particularly in relation to the assessed assets or net assets of the medical research and compensation fund because James Hardie has effectively already paid for that in 2001 for us to pick up KPMG's estimate, without adjusting for MRCF or MRCF's asset position at March 31 will effectively be double-counting. So we reduced their estimate for the remaining assets of MRCF and then we also add on forecast management and admin costs of the SPF on a go-forward basis.

So those are the two material things, there are a few other changes but the end result is that the amount that we've booked in Australian dollars is a little bit less than the central estimate of KPMG's MPV.

The amount of net present value is about -- a little over AUD$1.5b. The amount we've booked in the accounts on an undiscounted basis is AUD$1.4b, AUD$1.43b. We tax effect that at 30% reduces it to almost exactly AUD$1b and then convert it at the exchange rate at the March 31 to give rise to a provision of $715m.

I'd like to highlight that the fact that we've booked the provision does not mean that the final funding agreement will proceed or that it is being implemented, we see it as just a logical step on the road along with all the other things that we're doing. What it means is that we've assessed, together with auditors, that we have moved into the probable and estimable territory, i.e. that it's more than likely that the liability will be incurred. So it's moved from being contingent to on the face of the balance sheet and there's a very full explanation of all the things connected with that in note 12 on page 25 of the financial statements.

I'd also highlight of course that the fact that we've made a provision does not imply that we have made or will make cash payments in the very near term. Obviously that's subject to all the remaining conditions precedent being fulfilled.

Like the ongoing accounting related to the asbestos provision, the annual payment to the special purpose fund will be charged against the provision and the provision will be adjusted annually to align with the annual actuarial assessment as at 31 March based on projected cash flows which are uninflated and undiscounted.

The asbestos provision in the income statement will reflect movements in actuarial estimate and also foreign exchange movements, and obviously the actuarial assessment will be an annual change. The foreign exchange variation may arise quarterly depending on movements in the U.S. dollar / Australian dollar exchange rate.

The liability obviously being Australian dollar liability and James Hardie accounting in U.S. dollars under U.S. GAAP. The outcome of that is if the Australian dollar weakens the U.S. dollar value of the provision will fall and if the Australian dollar strengthens the U.S. dollar value of the provision will increase.

We've included with these results and will include with future quarterly releases, a pro forma template of consolidated balance sheet, income statement and cash flow statement attached to the management analysis of results or the MD&A. We've put quite a lot of effort into developing this because we think that it will help readers of our announcements to disentangle the reported results including asbestos from the asbestos transactions that give rise to change and then also, most importantly, to focus on how the performance of the core business is going.

That's already in the statements released this morning in relation to the making of the provision. Three pages at the back of the MD&A, pages 18 to 20. We'd certainly appreciate your feedback. We've done what we think is a reasonable job of providing some transparency or visibility around those different measures, but if you have other ideas we'd certainly welcome you providing them to us.

An update on where we are with the funding proposal. We're continuing to focus on satisfying the conditions precedent in the final funding agreement. It's now about six months -- five or six months since we signed that agreement, so we're well down the track and the Blackhole legislation came into force on the 6th of April.

We continue to engage in discussions with the Australian Tax Office and we've had numerous exchanges of correspondence in the submissions. We'd very much like to say that we hope that things happen sooner rather than later to lead to a conclusion but frankly it's not our agenda, it's theirs and we really have those items on the critical path. For that reason we're not in a position to forecast or indicate when the shareholder meeting might be convened for the proposal to be considered.

What we can say is that all the other preparations that are related to that shareholder meeting are well in train and the drafting of the explanatory memorandum is very well advanced and we're well engaged with lenders on their approval processes and we've also -- we also understand that the independent experts' report is well advanced and most of those things are just awaiting the final pieces in the jigsaw, most of which are the two tax rulings.

Our best guess is that a shareholder meeting will be convened two to three months after we hear from the Australian Tax Office in relation to favorable rulings on deductibility and the tax exempt status of the fund.

The final [slide] on asbestos provisioning is just a bit of a walk through on the KPMG actuarial estimate. If they look forward from the estimate KPMG prepared at June 30, 2005, they've predicted that the estimate at March 31 would be AUD$1.66b. There's been a change in the discount rate, which has led to an amendment there, a slight reduction to give AUD$1.6b as their adjusted number for discount at this point in time and then there are the numerous changes.

There's been a reduction in the assumed average cost per claim, based on evidence during the last 12 months and emerging claims experience which is really related to the number of claims, insurance recoveries have increased, a few other minor changes and claims inflation of AUD$44m, that's really heads of damage movement.

Fewer nil cost claims giving rise to a AUD$36m increase and all of those movements excluding the discount rate change giving rise to a net liability change of AUD$19.7m. Then KPMG has had another look at legal cost savings in New South Wales and concluded that they will save AUD$75m, relative to the position at June 30, 2005, to give a net liability on a central estimate MPV basis of just over AUD$1.5b.

The final piece in the -- looking at the actuarial estimate, and I think this is a slide that is actually worth tracking over time, or at least the measures are worth tracking over time. You can see there the movement in the discounted central estimate from June '04 through to March '06 with four indications, coming down to 1.517, which was the number on the previous slide.

The undiscounted estimate likewise moving down and the range narrowing slightly at this point in time. I think the one, and I've indicated this before, but for those who may not have heard it, I think the one that's really worth tracking is the undiscounted central estimate, that's the number in the middle, 3.079. That's not impacted by the discount rate.

It ought to be impacted by dollars paid out over time, so one would expect that whenever this is reported one hopes that it's showing a decline from the previous indications. If it's not there's obviously been some change in the environment, which has caused KPMG to review. But you can see there, it hasn't always been a downward path but the last three from March '05 through to June '05 to March '06 has actually led to some pretty material change in the undiscounted central estimate, over half a billion dollars.

The KPMG report that -- on which we base the provision, at March 31 was released this morning to the ASX. It's been put up on our website, it's about 200 pages long, a very complete analysis and includes some detail on the final funding agreement, at least more than has been released previously. And I think that's probably about enough on asbestos for the time being and let's move forward to some more positive [technical difficulty] to do with the results.

For quarter four the net sales up 23% as Lou indicated before, gross profit up 15%, SG&A expense up 50% reflecting a number of one-off items. R&D up 35% to $7m. We had a decline, a slight decline in SCI and related expenses for the quarter and then some non-recurring items of the impairment of the roofing plant which was -- resulted from the closure or write-off of those physical assets of $13.4m and the asbestos provision of $715. That led to an EBIT loss of $662m for the quarter.

We had an income tax benefit which arose as a result of the completion of a tax audit in the U.S. in respect of one year and a write-back in a provision that we had made and there were some other minor year end adjustments in tax that were brought to account in the quarter as well.

That led to an EBIT excluding asbestos provision, SCI and other related expenses and an impairment charge being flat, at about $69m and the operating profit from continuing operations excluding those non-recurring items being an increase of 13% to $54m.

On the same basis for the full year, net sales up 23% to almost $1.5b. Gross profit up 29% to $550m. SG&A expense up 20% to $210m, but pleasingly a slight reduction in the SG&A to sales revenue, that down about 0.3%. And the other items I think are fairly much repeating the quarter and we finished up with an EBIT loss after the asbestos provision of $435m and income tax expense was $71.6m, giving rise to an operating loss from continuing operations of $507m.

So that's obviously not a good result but if you look at it excluding those recurring items EBIT was up 39% to $311m and operating profit up 36% to $213m. So it was a fantastic year for the business. I think the U.S. business in particular had a phenomenal 12 months.

Looking at net sales in Q4 U.S.A. Fiber Cement up 32%, Asia Pac Fiber Cement down 2% in Q4, but it was up in its local currencies, but because of the stronger U.S. dollar against which we were comparing, it was down slightly in U.S. dollar terms in this period.

Other down 36% which was the effect of the sale of Chile which occurred at the end of the fiscal year last year and includes also a slight downturn in sales in pipes for the full year. But the total sales revenue up 23% for the quarter and for the full year, similarly in aggregate terms up 23% to just under $1.5b, but U.S. Fiber Cement was up 30%, Asia Pac Fiber Cement flat and Other down 19%.

Turning now to earnings, the segment EBIT. U.S.A. Fiber Cement for Q4 up only 7% which is a disappointing headline number relative to the sales revenue and volume growth of greater than 20% but the underlying performance I think was better than this number suggests and it was adversely impacted by some one-off costs as well as cost increases and we'll have a look at those impacts a little later on.

Asia Pac Fiber Cement was down 24%. R&D expense up 36%, Europe and pipes in the Other category showed a loss of $3.8m which was double the prior quarter or prior corresponding quarter. And then we had the roofing plant impairment and the asbestos provision, and if we add all of that back it was a $69.1m EBIT versus $68.3m so fairly flat, adjusted for the non-recurring items.

For the full year, a 42% increase in U.S.A. Fiber Cement which was a remarkable improvement. The other businesses had slight downturns. Asia Pac and Other, Other improved so had an increase of 11% on its loss. General Corporate including SCI costs was flat and then we had the non-recurring items giving rise to an EBIT loss of $435m. But if we exclude those non-recurrings it's up 39% to $311m as indicated previously.

In terms of corporate costs, SCI costs were down relative to the prior period for both the quarter and the year. Stock compensation expense is higher and that's reflecting an increase in James Hardie's share price and that flows through into the P&L as a consequence of that.

Earnings related bonuses were substantially higher than prior year and also hit heavily in the last quarter. Other costs, which is the underlying cost level, is actually comping pretty well against the prior year given that we had foreshadowed that there might be some increase, particularly resulting from the number of increased activities in the Netherlands.

Given the impact of the bonus expense in the final quarter, I'd just like to spend a few moments explaining how James Hardie's variable or at risk incentives operate.

The earnings related bonus is designed to support the objective of creating long-term value and rewards consistent with value creation. It's based on year-on-year increases in economic profits so it's after capital charge. It's targeted -- or it's based on targeted annual increase in economic profit, or EP as it's known within the Company, which is set by the Board Remuneration Committee with the assistance of external advisors, and it targets increases every year in a three-year cycle and we've just come to the end of one three-year cycle.

The amount that exceeds the target is taken into account in the bonus calculation and this year the EP bonus target was exceeded. As a consequence of that, 45% of the bonus expense is paid in year one, so although we've accrued about $20m at the end of the 2006 fiscal year, it doesn't mean that that $20m is necessarily to be paid out, as Lou highlighted before. It does mean that about 45% of it will be paid out, but 55% is put into a notional bank and the notional bank is only paid out in years two and three if the economic profit targets continue to be met.

A couple of comments that might help to understand this. One is that there are some positive factors this year, for example the tax provision write-back where that was negative in the prior years as we created that provision, so it's just evening out over time. The U.S. employment market typically operates with higher at risk rewards than we are accustomed to in Australia, and the James Hardie bonus plan I think truly aligns employee interests with shareholder interests, because it's based on economic profit over a medium term period after applying a cost of capital charge and it requires year-on-year increases in performance on the basis of that economic profit.

It's not all expensed in any year because it needs to be earned on a continuing basis and it doesn't therefore mean that it gets paid out. It can turn negative and people can lose what's in their bank. There are about 144 people who participate in the bonus scheme, so it's quite broadly based and it's not all U.S. employees. Managers throughout the Group participate in the plan.

Net interest expense. I think this slide is really just there for the record. We don't have significant income or expense at the moment because we're in a very flat position relating to debt and cash.

Turning to income tax. Some note here to assist people with their reconciliation, particularly given the asbestos provisioning at the year end. The operating profit before tax excluding the asbestos provision was $53m and there's a tax benefit of $11m in the quarter and the U.S. based write-back of tax provision of $20m gave rise to a tax charge excluding that write-back of $9.7m, which meant the effective rate was 18.3% for the quarter.

We don't get too preoccupied with quarterly movements but that 18.3% also included about a $5m adjustment at year end relating to the Netherlands position. We take a conservative view on the Netherlands position which is quite a complex tax calculation, during the year and then we balance it up at year end and it resulted in a $5m tax benefit. So if you adjust for that the rate actually finished up, or would have finished up at about 30%.

For the full year, the effective rate was 32.9%, adjusting for all of those calculations, which was very similar to the 32.6% effective tax rate that we had in 2005.

I'd be very pleased for this to be the last slide on tax, but unfortunately that's not the case. During March we received an amended assessment from the ATO for RCI Proprietary Limited, which is a wholly owned subsidiary. The amended assessment was for AUD$412m for the year ending March 31, 1999. It related to a restructure ahead of a proposed IPO in late 1999, which did not proceed. It was withdrawn at the last minute. The intention was to float the -- what was then James Hardie NV, which was largely the U.S. businesses.

The ATO amended the assessment or further amended the assessment and reduced it to AUD$378m during April due to remission of interest charges and they also deferred the date payable to June 30, 2006. We strongly dispute the assessment and we're pursuing all avenues of objection and appeal and we believe that our position will ultimately prevail. And we note that the ATO itself has determined that we have a reasonably arguable position and in ATO parlance, that means that we're as likely as not to succeed and that our position will prevail and as a result of that they've halved the penalty from 50% to 25% that usually applies in Part 4A cases.

We have decided not to record the liability at March 31, 2006. We went through exactly the same sort of process that we've been going through on asbestos for the past 18 months, relating to [phase five] whether it's probable and estimable under U.S. GAAP. And as a consequence of the legal advice that we have, we have decided, in consultation with auditors, not to record that provision. We'll obviously keep that under review on a quarterly basis.

The earnings analysis for Q4, I won't spend too much time on this, I think the Other of $17.2m in the third line there for Q4 '06 reflects the impairment on the Artisan roofing assets. And I'd also note that the U.S.A. Fiber Cement depreciation and amortization for the quarter is up 34%. That's obviously reflecting the capital expenditure on increased production capacity now commissioned. So it's including the Reno asset, Reno plant as well as the various -- or some of the various ColorPlus lines that have been added in the last year or two.

The EBITDA excluding the asbestos provision was $80.6m, which is up 3% for the quarter on the prior corresponding period.

Looking at the full year. Again the $26.5m loss in Other pipes and Europe and Artisan reflects the impairment of the assets of Artisan roofing and the U.S.A. Fiber Cement depreciation and amortization reflecting that increased level of capital which is employed in the business now going forward and I think that will continue to increase in the next year or two.

The net cash provided by operating activities was up 9% from $220m to $240m. It may surprise you that the increase in the cash flow wasn't greater than that given the improvement in earnings and the growth of the business, and you'd be right. The thing that has happened in the last 12 months is that we've had a very significant increase in tax paid in both Australia and in the U.S. and to a lesser extent in the Netherlands, about a six-fold increase from $15.7m to $93.4m.

If you add back for the tax paid, the operating cash flow excluding tax paid was in fact up 42% from $235m to $334m. So a very pleasing improvement if you exclude those tax paid numbers, and more consistent with the underlying performance of the Company.

In terms of capital expenditure, it was another big year, $155m of CapEx as we completed, or maybe not completed but made very big strides in the completion of Pulaski which has now started production. It's into commercial production from April, at least on line one and that was the major part of the $155m but it also included some ColorPlus capability as well which was well spread around the nation as Lou highlighted before. Asia Pac Fiber Cement had an increase and the total spend of $163m for the year, was a little bit above that for last year.

Looking at some of the key ratios, and I'll skip over this fairly quickly because I think the numbers are largely self-evident. A very significant improvement in EPS adjusted for non-recurring items, almost $0.25. Dividend paid per share, I'll just highlight that on your slide I think you've got $0.08 but after printing we made an amendment to that. On a cash basis, the dividend paid was $0.10 and that's what was announced to the market this morning. $0.06 final for last year and a $0.04 interim this year, gave rise to a $0.10 cash dividend during the year.

The return on shareholders funds, a very significant increase there of 29.6%. Return on capital employed 32% and EBIT to sales margin of almost 21%, all showed significant improvement and I think given the Company's debt position, the debt capacity indicated there really, fairly redundant to the '06 year, but relevant for '04 and '05.

So we had a very strong business performance for the 12 months. The Company's financial position remains strong. The tax treatment of the payments to the SPF is a key issue for us for affordability. So that's both tax deductibility and tax exempt status, and the SCI and other related expenses continue to be material.

I think there's some issues in this year-end report. We've tried to highlight the very strong business performance separate from the other items, the non-recurring items, so there's been a lot of moving parts during the year but particularly in the fourth quarter.

I hope that we've managed to get across to you the distinction and made it clear and through some visible positions, the performance of the business. But if we haven't succeeded I'm very happy to take some questions when Lou starts chairing it. In the interim I shall just hand over to him for some concluding comments.

Thanks Russell. We do need to get to questions because there's a bit more to communicate this time, so we've taken a little more time. We -- obviously the summary is the business units had a great year. We've made good progress on asbestos compensation and the fourth quarter results are a little bit harder to read than we would like. So we'll go to questions.