James Hardie Industries PLC (JHX) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the James Hardie analyst briefing conference call. Today's call is being recorded. At this time, for opening remarks, I would like to turn the conference over to your moderator for today, Mr. Louis Gries. Please go ahead.

Thank you very much. Thanks, everyone, for joining today. Electronic hookup today, instead of the normal person-to-person, and that just came about mainly because we moved our AIM to September and we moved our announcement date. I guess we were conflicting with some other companies. So we will do it electronically, but we will follow the same format we have been. I will cover the overview and operating review. Russell will cover the financial review and update on the final funding agreement. Then we will come back for questions and answers.

So slide two shows the brief agenda there. Move on to slide three, which is some overview comments. We had a very strong quarter, driven exclusively pretty much by the U.S. business result. Additionally, we had the bottom line affected by the foreign exchange charge related to the asbestos provision. This is something we're going to have to get used to. It will basically swing around every quarter. It's not so much an indication of what's happening on a cash basis. It's just a matter of what's happening with the U.S. dollar relative to the Australian dollar. Excluding the foreign exchange charge, operating profit up 12% to $62.7 million.

Moving to slide four, a few comments on the businesses. Obviously, U.S. strong sales and good EBIT. Asia-Pac, volumes were okay. Revenue was pretty flat, and it's in a fairly weak market. EBIT was down, and we'll cover a bit of that later. Philippines was fine, kind of tracking where that business has been tracking, EBIT positive.

First bit of good news on Hardie Pipe. We did post quarterly positive EBIT in Hardie Pipe, and then just overall, the Company generated strong cash flow again.

Moving on to slide five, another overview slide. You see some of the comps to last year's same quarter, had sales up 16%, gross profit up 9%. The EBIT, when you take out the foreign exchange and the SGI, up 7%. Similar on operating profit, but we had a make-whole payment in there related to the refinancing that was triggered by the asbestos provision; that was up 16%.

Next slide gives you a title. No big deal there. Next slide after that, I think we have a picture slide in there of a development in Denver, which I'm sure every quarter, those of you that come to all our announcements, they are all starting to look the same. Kind of neotraditional, and it's really been spreading throughout the country. It's one of those architectural shifts that our product actually enabled -- I mean, it's about front porches and rear-loaded garages and that. And why I say our product enables that kind of a shift, because you have a good siding product, you don't mind being on the porch, and you basically have that not only curb appeal, but you have that porch appeal that you can get with our product and you can't get with a product like vinyl siding.

So anyway, I guess that was slide seven. We will go to slide eight, which is U.S. fiber cement in a little more detail. Net sales were very strong, up 21%, 16% of it on the volume side and 5% on price. EBIT up 10%, which was okay considering, obviously lagging the top line. But the quarter, we are comping again last year was kind of like stronger on the bottom line and weaker on the top line, and now this one is the flip-flop, and some of that -- that's to do with just the way the comp works out, and some of it has to do with the higher input costs that we're facing in the business and continue to face. EBIT margin down 3 points, but still very healthy at almost 30%.

Slide number nine, market conditions -- so this is about the U.S. housing market, these comments. We haven't really felt this yet. I mean, our first quarter was living off of fourth quarter and third quarter last fiscal year type housing activity. But the market is now finally starting to change quite a bit. The builders are facing basically buyers walking away from deposits, basically canceling contracts. They are seeing higher inventories, which -- a lot of that stuff is just pretty public. You can go figure that out. But inventories are going up.

Permits are lower, and certainly from the comments the builders have been making with their quarterly announcements, their confidence is way down. Some of them are very bearish. Even the forecasters are starting to move off their soft landing. They are starting to hedge that bet a little bit.

Repair and remodel, actually the forecasts around repair and remodel are still pretty strong. As I've said many times before, at Hardie, we don't consider ourselves good forecasters on industry activity, but we do kind of plan around where we think the market is going to be based on the different forecasts. So repair and remodel is a good example. It is actually projected to be up pretty strong, but our plan is more around repair and remodel being good, meaning stable, maybe up a bit.

So move on to slide 10. U.S. fiber cement key points -- basically, all three divisions are growing -- exterior, emerging exterior, established markets and interiors. They are all continuing to grow and take share. Obviously, in emerging markets, it's mainly against vinyl and interiors, it's against the gypsum and also the other cement boards. In established markets, we just continue to get more fiber cement on the house. So we're taking a little bit against wood and a little bit against vinyl in those markets.

ColorPlus is continuing to the progress well on a comp basis. It was up 80% over last year's same quarter. We are starting to push out into some other markets outside of just traditional vinyl markets. We are starting to push into some traditional wood markets, now fiber cement markets, looking at implementing the color model there. So we've got that going on.

Unit costs -- the sales are up. They were up pretty significantly in the quarter. Some of that had to do with the comps, the way the quarters comp, but the reality is we are facing higher input costs still. In fact, even recently, pulp continues to increase almost month-to-month, and we had a recent spike in natural gas around the heat wave we experienced in the U.S. So we haven't gotten any help on the input side. Same goes for freight. Fuel costs are still high, very high. So that is driving a fairly high freight number, especially relative to last year.

Go to slide number 11, just kind of review that again as far as what's going to happen to Hardie in a downturn. Obviously, most building materials and all building stocks have been downgraded for the expected downturn in the market, which is a reality now. It's no longer forecast.

What drives our sales? Well, we are impacted by the level of housing construction activity. There's no two ways about it. We are also impacted by the level of repair and remodel, and that's about a 70/30 for Hardie. We are 70% tied to new construction, and that's a little bit higher on the siding and lower on the backer, and then about 30% or so repair and remodel.

The real key for us is our market development program, so our market share in siding is whatever it is right now -- it's probably in the 14% or 15% range. We haven't officially updated it. So that means 85% [of the wall] is not James Hardie. So there is plenty of upside there. And of course, we have a higher share in new construction, but still there's still plenty of market beyond our share, which is in low, creeping up to the mid-20's, maybe.

So how well run our programs is the key for us. That's the thing that we can control, and that's the thing that we're pretty focused on.

Price improvement is the fourth contributor, and in a down market, you're not going to get across-the-board price increases. So we are going to get less help on market increases, but we'll continue to get help from just a richer product mix with price improvement.

So that bottom bullet point I already covered, the second from the last, but the bottom bullet point, just kind of a reminder, and maybe something people that follow the business -- just recently -- we shoot for about a 15% to 25% growth rate on the revenue side, and that's really if you assume the housing market is flat. So that's going to assume that you've got some market-share gains, which are easiest to measure in volume growth. Then you've got some price improvement as well, which again, in a down market probably is all going to be around product mix, not much around market increases.

Flip another slide, to slide 12. Obviously, like anything else, there's nothing national in the States, so the markets are very regional. Some are off a lot and some are off a little. Again, that information is fairly easy to come by. There's a few companies that basically publish that kind of information.

Just as a reminder, where we are, we are strongest in the South Central, which is basically Texas; Southeast, which is Florida, Georgia, Carolinas; and then the Pacific Northwest, which is mainly Oregon and Washington. Again, you guys can sort out where those markets are. But Texas has been good so far, but I think it's starting to come off a little bit. Southeast has been pretty good, off a little bit, but still pretty good. Pacific Northwest maybe off a little bit more, but still pretty -- we don't have any disasters in those three, but we don't have any markets we expect to grow in those three regions, either.

So what's it's going to change? How are we going to manage the business differently? Well, obviously, the timing of capacity expansions -- we are fortunate in that we can bring on capacity in about 12 months, which is very quick for our industry. So we just brought on Pulaski 1. We have Pulaski 2 ready to start up when needed. So some of our capacity expansions beyond that will basically be brought to a point where we can pull the trigger on them fast when we need to, but we won't be bringing them on early until we see the market -- until we see a market need, obviously we're not going to pull the trigger on new capacity.

You always worry about cost containment, but the thing is, if we ramp down a little bit from where we had planned, costs don't just ramp up or down linear, so you have got to make sure that if we take some shifts off a certain higher cost-plant, that we get the full benefit of taking be shifts off that the overall cost structure in those facilities go down. Then, obviously, we always work toward efficiency improvements, and those probably become a lot more important to deliver bottom-line growth over the next couple of years than it has been. So we'll make sure we've got our our eye on the ball there.

We will not be killing long-term growth initiatives. So I think our investors are invested in a growth business, and we're not going to trade one off for a short-term result. So we make very good returns in this business. We don't know where the housing market is going to end up, but this is going to be -- we're not going to have a financial problem running through this downturn. So we will not kill initiatives that are important for future growth.

13, U.S. fiber cement outlook -- again, this is a bit repetitious, but new construction, the reality is it's down. We're starting to feel it this quarter. Repair and remodel is, in our minds, stable, and that's how we're looking at it. Again, further market penetration is the biggest upside for us, modest price growth, because we don't anticipate market price increases in a down market, and then we will be facing higher pulp costs, possibly higher natural gas costs. We'll see how that settles down after the recent spike. Then, we don't expect any real help on the cement, energy or freight side, at least from an input cost standpoint.

Move on to slide 14, which is a graph of basically the history of the U.S. business. It gets a bit old, because it's a 12-month-lagging type graph. So right now, it looks like housing starts to flatten out, which certainly they have, but if you actually forecasts out through the end of the year and pick a number, you can actually see they start coming off, and your start seeing in the graph, because of the lagging nature of the graph.

But again, we will continue to outgrow this market. When the market gets soft, starts moving down, which it will, we will still outperform the market. I don't think that's really an issue for us.

Move on to slide 15, which is your average selling price, and probably the most interesting thing about this slide is it looks like our fiscal year 2007 first-quarter slope, at least, looks very similar to the years prior to 2006. Again, 2006, we took some market increases that changed the slope of the line, but other than that, we've been on a pretty steady slope of price improvement, some market increases, but also the richer product mix. I think in the future, again, repeating myself, it's going to be more about the richer product mix.

Moving on to slide 16, which is our EBIT margin slide, you can see we -- let's see, two, four, six quarters now, we have been up above our range, which has been consistent with a bit of direction we have given you. We think we've told you starting about a year or so ago, we though we would be above the range, but we think it's a good range, so there's no reason to just change the range.

Going forward, down market, seasonal quarters, as you can see as you move into the winter, your EBIT margin is a bit harder to hold. But having said that, we think we're going to be at the top end of that range, and even possibly above it in the short to medium term as well.

So the big thing there is we don't know exactly how the market ends up. So it's a bit hard to give as clear direction as we were giving four or five quarters ago.

Moving on to slide 17, which shows a picture of a home done in Boomerang Beach, which I've never been too, but it looks like a nice area. This is our Linea project, which is actually going very well in Australia, and I think it's a real key for that Australian business. This is a highly differentiated product that gives home builders really an ability to create a different look, and does not expose us to direct competition from the other domestic players down there.

So the launch has been very successful. It has been a high-growth product for us in New Zealand for a couple of years now, and it looks at it's going to go the same in Australia. It's off to a very good start.

Moving to slide 18, Asia-Pac fiber cement, sales down 4% in U.S. dollars; I think it was more like 2% in local currencies. And then volume flat, a little bit of price deterioration, as direct competitors and the products that we all make start fighting on price a little bit more to hold their volumes together. So that's a pretty normal deal. Again, they don't make everything we make, and we've got other advantages, so price competition is not right across our business, but there are pockets where the price fighting has escalated a bit.

EBITDA's down 17%, which is it fairly significant. Then the EBIT margin is down 2.7 points.

Moving to slide 19, I think we got some of the points around that -- market in Australia and New Zealand, are both -- yes, Philippines, I guess, through them all in there. They were all relatively weak. I mean, they're not terrible markets, but they've come off very good markets, and they are still bumping around, maybe coming off a bit more.

Talked about the price in the ANZ, and it's mainly an Australian issue rather than New Zealand, and the raw materials are felt -- the cost of goods sold issue is right across the business. Pulp is basically a global material, and energy is up around the world, and cement is pretty much expensive around the world as well. So they have the problem where they've got higher input costs, but they don't have the top-line growth to help them offset a lot of it.

So they took a pretty hard hit on the EBIT line, and obviously we want to shore that up a bit. But that's the reality of it. The U.S. business can use the topline to help offset some of the pressures on the bottom line, whereas Australia, until we get it to a little bit better growth rate, doesn't have that opportunity.

Again, Philippines was EBIT positive, which is pretty much what we aimed for in that business. It's not a huge contributor, but it's not a bad business and it does contribute some EBIT dollars.

Slide 20, the outlook -- again, we don't expect any real rebound in the market, so we feel like this is the environment we're going to be doing business in. We've got to focus on the growth initiatives we have down there, with both Linea and wet area boards, which are differentiated products, help us not only [grow to ply] for fiber cement, but also grow our category share. We do need to -- if we do grow our category share, manufacturing efficiency gains will be important. We have been doing fairly well on that, and we will have to continue to do that. Philippines, we're not looking for increased changes in that market or in the business.

Slide 21, Hardie Pipe -- got a good result out of Hardie Pipe. As we have been indicating, it has been coming up around -- I don't know what it's been, five or six quarters now. Some of that has to do with the market's fine. The market's been good for pipes, basically. But in addition to that, and I think a lot more importantly, we are starting to understand the business -- understand the industry better. We're starting to prove out our capabilities in the business a little better. So we're not struggling internally with this business as much as we had in the past.

But it is still very early days. We still have to continue to build our capability. Like everyone else, they are seeing higher input costs, meaning all the other James Hardie businesses, and specifically pulp, which we feel, which most building materials firms don't, is something that they need to look at or need to worry about, because they feel it more than their competitors. Now, their competitors on the plastics side obviously felt the fuel worse than us, so it's not all bad.

Then again, it was EBIT positive, which is a good accomplishment for that management team running that business now. It's been a long time to get there from a company's perspective, but the management team in place has accomplished that over about a six-quarter period.

On slide 22, which is the other, which is Europe fiber cement, not a lot to report there. The business continues to grow the volumes. Our focus remains France and the UK, although we do do some business outside of those two countries. It is too small to worry about now, but the reality is we haven't, at this point, identified the big opportunity for Hardie in Western Europe, and that is really the goal and the market development effort there. So we need to continue (technical difficulty) on that.

Slide 23, which is our outlook slide, kind of repetitious, but number one, the market is going to be off. Number two, we're going to outperform it. Repair and remodel looks like it's going to be fine. Asia-Pac, I believe, is fine. I think that business will perform well. I think the 17% EBIT was a bit of a kind of a shock to the system down there, rather than something we would expect quarter to quarter. So I think they'll perform well in the future.

We still are burdened by the SCI and related expenses. Really, it's more around asbestos than FFA expenses, and until we get that deal finalized and in place, we're still going to have those costs.

Then, the big thing is everyone is going to have to be motivated to look through the headline numbers to see how we're performing, because the foreign exchange whipping back and forth every quarter will make it just a little bit harder to understand what Hardie is doing. So we just need people to understand they're going to have to look through the headline number and find out what we're really doing from a cash generation standpoint, and even a basic profitability standpoint.

At this point, we'll hand it over to Russell Chenu for the financial review and the update on asbestos.

Thanks very much, Louis, and good afternoon to everybody in the Asia-Pacific region and hello elsewhere. Thank you very much for taking the time to join us now.

Obviously, if we just look at slide 25, obviously the quarter was a very strong one for us. But our net operating profit was affected significantly and adversely by the $27.2 million foreign exchange charge taken on the asbestos provision that we made at 31 March, 2006. That was the result of strengthening of the Australian dollar against the U.S. dollar during the quarter, and it is a non-cash cost, so it has no economic impact upon us in the short term.

we retired fixed-rate debt of $122 million U.S. in May, and in so doing, we incurred a make-whole charge of $6 million U.S., payable to the noteholders. As a consequence of that, we are now more dependent on short-term debt than we would like to be, but that is something that we will change after we have got the asbestos arrangements completed.

I should say that the retirement of that fixed-rate debt was triggered by the booking of the provision at the 31st of March. That was something that would have put us in breach on the notes, and as a consequence of that, we took a voluntary prepayment option just prior to announcing the results for the full year, FY 2006.

The balance sheet of the group remains very strong. Excluding the asbestos provision, our net equity excluding asbestos is now in excess of $850 million U.S., net cash at $38 million at the end of June and cash and unused term facilities amounted to $393 million or almost $400 million. That, I should say, was after payment of $189 million Australian to the Australian tax office. That obviously occurred in July, so it's not reflected in the Q1 results. That payment related to the 1999 financial year, where the ATO decided to issue [RCI Proprietary Limited] with an amended assessment in late March. We had some issues settling that, largely as a result of some legal complications, which ultimately were resolved at the end of June, with the passing of some legislation by the Federal Parliament. We paid half of the assessed amount to the Australian tax office early in July. I'll have a bit more to say about that in a subsequent slide.

On slide 26, the financial effect on the asbestos provision arising from foreign exchange -- we flagged, at the year-end presentation in mid-May, the possible future impact on the asbestos provision of changes going forward. Firstly, annual changes resulting from the annual actuarial assessment that would be undertaken at year-end each period, which we book in the year-end results, and on a quarterly basis, a restatement for any foreign currency movements or foreign exchange movements during a year.

We're seeing the first of that in this Q1, and it has been quite material. We don't shy away from the fact that these will continue in the future. Sometimes they will be adverse; sometimes they will be positive. But this one has been pretty material. But it is worth highlighting, I think, that it does not have a current-period cash impact or even a near-term cash impact. It would only impact us in the event that the foreign exchange rate that prevailed at any quarter end was sustained for a long period of time.

Just to show you the details of that, on the bottom of slide 26, there's a table that shows that at the 31st of March, when we booked this provision of $1 billion Australian net of tax, we did so at an exchange rate of $1.3975 Australian per U.S. dollar, or $0.7155 U.S. per Aussie dollar. The provision was booked was $715.6 million U.S.

During the quarter, the Australian dollar appreciated by about 3.8%, and finished up at $0.7428 U.S. As a consequence of that, the provision that was bookable or translated at the 30th of June was $742.8 million U.S., and that meant we took a hit of $27.2 million against the quarter's profit. That's both before and after tax, that impact, because the provision had already been netted for tax effect when it was booked at the 31st of March.

On slide 27, a bit of an update on related matters to the asbestos arrangements. On the 23rd of June, the Australian Tax Office advised us that it had declined to endorse the special-purpose fund or proposed special-purpose fund as a tax concession charity in accordance with the Tax Act. The satisfaction of that status was a condition precedent to the final funding agreement. So that remains an outstanding issue to implementation of the agreement.

A few days later, on the 29th of June, the ATO ruled that contributions which James Hardie will make to the special-purpose fund would be deductible to James Hardie over the life of the fund, in accordance with blackhole expenditure legislation passed in April of this year. That would give us a deduction in relation to any contribution made over a five-year period in equal amounts.

Subsequently, there has been a fair bit of commentary from a number of people at the state and federal level and from a number of our stakeholders, in relation to these asbestos arrangements. The Prime Minister has encouraged James Hardie to discuss outstanding tax issues with the Australian Tax Office. We have been continuing to do that with the ATO, and also with the New South Wales government, with a view to satisfying a remaining condition precedent in relation to the tax charitable status of the proposed SPF.

Moving on to slide 28, a bit more detail in relation to that is that we still consider the tax status of the SPF to be a critical item for affordability, as well as the long-term viability of the proposed long-term funding arrangement. James Hardie's commitment to the long-term voluntary compensation arrangement is unchanged by this position that the ATO has adopted. All proven claims continue to be paid by the MRCF. Although its funds are obviously being depleted, they are expected to last until late this year, or more probably early next calendar year.

We're not in a position to indicate exactly when a shareholder meeting might be convened to consider the proposal, although we can say, I think, that it is likely to be approximately 10 to 12 weeks after the resolution of the tax position on the SPF for the asbestos arrangements.

Turning to slide 29, a brief look at the results for Q1. In 2007, our net sales for Q1 were $415 million, which was up 16%. Gross profit up 9% to $157 million. Obviously, the gross profit line not sharing the same growth as the top line, because of the cost increases that Louis mentioned, particularly in relation to input costs but also freight.

In relation to SG&A, a charge of $52 million was up 14%. That is reflecting a number of new initiatives. It is not reflecting inflationary outcomes, although clearly that has had some impact, but the biggest contribution to that increase is around a number of new initiatives we have going. As Louis said, we're not shying away from new initiatives just because we see a slightly less advantageous outlook in terms of U.S. housing activity.

R&D expense was up $1 million or so, by 19% to $7.5 million. SCI costs halved to about $2.4 million. The foreign exchange loss was a very material item of $27.2 million, and that produced earnings before interest and tax of $68.9 million, which on a report basis was down 21%. The biggest single item there, obviously, in terms of the change was the effect of the foreign exchange charge arising from the asbestos.

Net interest expense was up a bit, but that $3 million was after the $6 million charge in relation to the prepayment on the notes, so the impact had about $4 million of interest income excluding that. The income tax expense was up just a little bit on an increased profit, and the net operating profit was $35.5 million, down 36% compared with the $55.9 million in Q1 2006.

Moving on to slide 30, and this slide is intended to take you through -- from the reported results to what we consider to be the recurring results. There were three items that we would consider of a nonrecurring nature impacting this first quarter's results, the first one being the foreign exchange charge of $27.2 million; the SCI and other related expenses, which we've adjusted for both Q1 2006 and Q1 2007; and the make-whole payment of $5.6 million net of tax in this quarter, with no comparable amount in the prior year. So the net effect of all of that is that what was a 36% downturn in operating profit at the reported line actually is a 16% increase to $70.5 million if we exclude those nonrecurring items.

On slide 31, looking at segment net sales, a very healthy 21% increase in U.S.A. fiber cement. Slight downturn in Asia-Pac in relation to sales in that segment was about 2% down in local currency, and as indicated in Austrian dollars, a larger downturn in U.S. dollars.

Other, which is now only pipes in the U.S. and James Hardie Europe, fiber cement operations were down by 27%. That is reflecting the fact that in the prior corresponding period, there was a little bit of Chile and also Artisan Roofing. So in fact, the downturn there is masking what is a real increase in the two continuing businesses.

On slide 32, the earnings before interest and tax in Q1, U.S. fiber cement up 10%; Asia-Pac fiber cement down 17%, for the reasons that Louis highlighted; an actual improvement in other, again highlighting that that's reflecting improved performance in pipes U.S. and in James Hardie Europe; R&D up 44% to $4.6 million, to give total segment EBIT up 7% to $106 million. General corporate, including SCI, showing some improvement, a 21% downturn. The total EBIT, excluding the effect of foreign exchange, up 9% to $96 million. The effect of foreign exchange on the asbestos provision turned the total EBIT to $68.9 million, which was down 21%.

On slide 33, looking at corporate costs, some reasonably good news here. Stock option expense showing a minor increase year on year, but SCI and other related expenses down by about 50%. Other costs down a bit, compared with the prior year as well. That $6 million or so or a bit higher, we think, is now a fairly stable level of expenditure for corporate costs on a continuing basis. Net interest expense, highlighted on page 34, is very modest, but that probably will increase as we go forward, as the level of debt in the organization increases.

On slide 35, income tax reflecting the slight uptick of 7% to $32.3 million on an increased operating result, excluding the asbestos provision. The asbestos provision had already been netted for tax, but if you look at the effective rate on a reported basis, it is a very high and unusual 48.3% versus 35.2% last year. But if you add back the asbestos provision impact of the foreign exchange, you'll see that it is more normalized at 34.3% versus 35.2% last year for the same quarter.

Slide 36, a bit of an update on the amended assessment. I just remind you that this was outside of the Q1 result. The payment occurred early in July. We paid half of the assessment, as agreed with the Australian Tax Office, and we paid $149 million U.S. or the U.S. equivalent of $189 million Australian. The liability for this amended assessment will not be recorded, because the Company believes that we have not satisfied the definition of probable under FAS 5 of U.S. GAAP. We continue to strongly dispute the assessment. We are in the midst of finalizing a notice of objection, which will be the commencement process for future litigation. We believe that our position will ultimately prevail.

The cash deposit, as a consequence of that view, will be treated as a receivable in future accounting periods. We will be making payments of interest on the unpaid balance of $189 million Australian. At current interest rate, that runs out at about $12 million per annum. We will be making those payments on a quarterly basis, so about $3 million per quarter at current interest rates. The interest on that unpaid balance will also be recorded as a receivable, in light of the view that we expect our position will ultimately prevail. We are unable to determine whether any amount will ultimately be paid to the Australian Tax Office.

Turning on to slide 37 and a summary of EBITDA for the quarter, shows that after adding depreciation and amortization back to our EBIT, we come up with a total EBITDA of $79.9 million in Q1 2007 versus $96.3 million in Q1 2006, which was a 17% decline. That is obviously impacted by the $27.2 million FX charge. If you add back for that, the Q1 2007 EBITDA was in fact $107.1 million, and that's an 11% increase on last year's comparable number.

Cash flow from operations ran at $60.7 million, which was compared with $76.6 million, so it is down. We did have an increase in inventory during the quarter. That reflected an increase in capacity this year, as we've brought online new plants, particularly Pulaski in Virginia. The inventory position was extremely low all through fiscal year 2006. So although we have had an increase in inventory, we are not overly concerned about it. In fact, it was so low last year, and the improvement we've had in this quarter has enabled us to improve our service position. It will be something that we'll be watching closely, along with accounts receivable, as we move into and feel the effects of the anticipated downturn. But we're not unduly concerned about either inventory or accounts receivable as they impact working capital.

On slide 38, just a brief summary of capital expenditure. You can see that it is very, very similar to last year. U.S.A. fiber cement of %32.9 million, reflecting capacity expansion in ColorPlus lines, as well as continuing expenditure on the new plant in Virginia. That won't go on for a whole lot longer, but we can anticipate that over the next couple of quarters, there will continue to be reasonably heavy capital expenditure, but at least declining as we go forward.

On slide 39, the key ratios, the numbers that you have on your screen in front of you will reflect some minor changes from those published this morning. We had a couple of inaccuracies in there. I don't want to dwell too much on any of these, because they are numbers just for the first quarter of 2007, but return on shareholders' funds was 29.3% on an annualized basis. Return on capital employed, 38.2% -- obviously, both very good numbers -- and the EBITDA to sales margin also showing some improvement. Debt service capacity indicators continue to be not so significant, because of the low level of our debt and some [rather odd] interest numbers continuing through there. But I think it has been a very good start to the FY 07 fiscal year for us, in what we have reported in Q1, and as indicated on slide 40, in fact, a very strong overall operating performance.

Our financial position remains strong. We expect it to remain strong. We continue to discuss the [tax expanding] of the special-purpose fund, with both the ATO and the New South Wales government, with a view to satisfying that remaining condition precedent. We do also anticipate that SCI and other related expenses will continue until FFA is finalized, and our results will also be subject to fluctuations in the Australian dollar/U.S. dollar exchange rate for the foreseeable future, as they impact the asbestos provision.

So that concludes my comments, and I would like to hand back to the moderator for management of Q&A.

(AUDIO DOES NOT INCLUDE Q&A PORTION OF THE CALL)