James Hardie Industries PLC (JHX) 2008 Q1 法說會逐字稿

Good morning. We'll get started. We appreciate everyone coming this morning. It's a little early to start, I know. I apologize for that. Some of you look confused by the results, so we'll try and clarify a few points as we go through. I'll follow the same format. I'll go through the operating bit, and then Russell will take care of financials, and I'll come back up for questions.

I think most of you have seen the results. But, basically, we got a 10% bump, or 9% when you look at the line (inaudible) asbestos, which was a very good result in the market that's still declining in the U.S.

The [Kennedy] overview is that the U.S. business performed extremely well. Asia Pac also had an extremely good quarter. So we put the two together and comp it against last quarter-- Last year's same quarter, we got a very strong result, and cash flows were very strong as well.

Our normal picture of one of our houses. I guess this is "Coastal Living." It's a magazine we advertise in the U.S., and they do a series of homes around the U.S. they call idea homes. So they featured our product on the home that's done. We're flat on our top line, down 1% officially. But, basically, we got there through declining 5% in volume and a bump 5% in price. EBIT up 11%, and EBIT margin very high at 33.1%.

The market conditions in the first quarter. It's hard to tell from our results, but, basically the market is still coming off, obviously, in the U.S. Now, what we enjoyed was we enjoyed a stronger order file, starting in March. And I think the industry was getting ready for the normal seasonal bump, which I think for the most part they didn't get. But we did get the orders. So that would have been-- order file was good in March, April, and May; very strong relative to what we expected. And then, in June, it started to come off. And, in July, it's come off some more. And August looks pretty much like July. So, obviously, the danger of our result is you don't want to multiply this thing by four and figure that's where we might end up, because it's definitely a bit of a spike on the demand side in the market that's coming off.

Obviously, the driver, as you guys all know, on the declining housing starts is mainly around financing. Somewhat around the cost of financing and much more around the availability of financing. Inventories are still high and, I think, still increasing as far as housing stock. You would have seen some of the builders are reeling, and most of the builders are very worried.

I guess Home Depot released yesterday as well, so you would have seen the R&R segment also is running below last year-- and not near like new construction, but R&R is not helping. It's pulling it down a little bit as well.

So (inaudible)-- one of the ways we get the stronger than expected result in the first quarter was this first bullet point. It was the seasonal build. We did spike kind of on market penetration, but I think that's more arithmetic than it is reality. So we presented that slide a little bit differently to give you an indication of what it looks like. And then we did get the higher price to buffer some of the loss in volume.

We actually were up in the Western division, which, again, is, I think, more of a timing issue than a regional demand opportunity. But we were up in the Western division and down in Southern and North.

Exterior products that we're featuring as our growth products are still growing - XLD and ColorPlus, even in the down market. Interiors now was pretty flat this quarter. That had been-- Interiors had been growing-- you know, growing in the downturn. It came in flat this quarter, and I think that reflects the R&R coming off. We are still facing higher raw material prices, which is kind of counterintuitive to me. But, of course, that's not really correlated very much to building material, so that's not a problem. But it is running on us. And then cement was a little bit more expensive this quarter than same quarter last year. And, obviously, we got the margin improvement.

So, the outlook-- I guess I say it every quarter. We're not the experts on what's going to happen in housing. We kind of plan our business around the number, and we've actually-- It's been not quite a year, but about a year ago, we planned at around 1.3 million starts. And last year-- Last quarter, I indicated we weren't adjusting that. Even this quarter, I'm still not adjusting that. We're staying on the 1.3 million.

Now, I think the likelihood of it falling below 1.3 million is a lot greater now than it looked like last quarter. The reason we're not adjusting is with the strong first quarter, our inventory position's much lower than we had anticipated currently. So we have some inventory build to put back in the system, so we have the luxury of waiting and kind of seeing what's happening before we have to make any adjustments, if we do.

The fourth point is a really good point, because, with that kind of an EBIT margin, I guess there would be some concern that we're cutting costs to get the number. Really, obviously, we have looked at the business and made sure we addressed the costs inefficiencies we could find. But we're still supporting the growth initiatives. No money taken out of our growth initiative spend.

That's the chart that shows the history of the U.S. business. You can see the black line coming off strongly. (Inaudible) housing starts - the gray, shaded area, a little better slope against volume. And then the blue line, which is revenue, doesn't slope yet.

The chart I referred to-- what we did is we turned it into a moving-- four-quarter moving average chart that takes some of the quarter to quarter variation out. But I think it definitely tells the story nicely. You can see the big spike in first quarter, after a pretty serious drop in the fourth quarter last year. But, when you look at the rolling average, you're seeing that we're definitely running thinner on primary demand growth than we were when the market was good. And that is our main focus in the business right now is trying to tweak our equation where we get the primary demand growth back at the level we like to see that. I think we've kind of stopped the decline in primary demand growth, but we won't know for another quarter or two, because, if this market comes on sharply, it just encourages more and more builders to worry about their actual bottom line rather than kind of the longer term or medium term view of their business models.

Selling price. Most of that improvement in the first quarter was actually-- had to do with product mix. So what we have going on in product mix is we have a couple things pulling up and a couple things pulling down. The ones pulling up are the ColorPlus and the XLD. The ones pulling down-- the interior business is actually performing on a comp basis better than the exterior business. And the interior business is a lower average price than the exterior, so that pulls it down a bit. And we do see some increase in demand for our Cemplank product. So that's, again, a lower price than our average product.

So, basically,the product mix-- we're probably getting a little bit on product mix but not what we were getting before. But, still, I think a very strong result when we're in the kind of down market we are, where most building materials are losing big chunks of price. Obviously, we're still in the positive territory.

I think most people in the room know our strategy. Basically, it started out as Hardie's U.S. strategy, and it's really run across the business now, meaning New Zealand and Australia. The strategy, it's really to sum it up, we're a differentiated product strategy in an industry that has a bunch of commodity point strategies. So what's key to it is to, number one, grow the demand for fibre cement because we are category share. We get most of that demand, so when it turns into actual demand, we get it. So we can afford to invest in the market development. Two, make sure that we hold our category share for that reason. And then, three, we do it through the product differentiation approach.

EBIT margin was very strong at 33.1%. Here's our chart. Basically, you see, I think, this year will play out just like the last four years. The first quarter will be the peak. The last four years, the first quarter has been the peak on EBIT margin. It's kind of just the nature of the business. You come out of the winter months where your demand was lower, and you're pretty much ready to go. And you get the bump in demand, and that comes in in incremental contribution margins. So we don't anticipate the 33% will be maintained, but we do still feel that we'll hold the EBIT margin above our target range in the short to medium term.

Asia Pac business, this picture is actually pretty encouraging. But I think I covered before that the Australian business is moving as quickly as possible toward a much more differentiated product line against the other fibre cement producers in Australia. The basic strategy in Australia is less bricks and more Hardie. So seeing these types of homes is really encouraging.

Like I said, they had a very good first quarter result. Of course, they got FX advantage on this slide, with the volume up 7% and EBIT up strongly. EBIT margin flat. Like I said, that's basically the Hardie strategy now. They describe it in a four-point strategy in Australia. We use a [three-point] in the U.S., but it's the same basic strategy. We want to produce products that customers want that others can't produce. So that's kind of a summation.

I have quite a few bullet points here about the business. The market's not great. Philippines is the exception to that. Philippines is a little bit stronger, but the Philippines is the least important part of the Asia Pac business. So it's not going to give us a lot of help. You can see the results without the foreign exchange benefit, and it's still good. Volume up 7%, and revenue up 8%.

The new product line, Scyon, is performing very well. It's an umbrella brand, where they've got several new differentiated products under an umbrella.

New Zealand continues-- New Zealand is basically a U.S. business in a small market. It continues to perform just like the U.S. Highly differentiated business and growing their market share against alternative materials. And the Philippines continues to perform as expected. No issues in the Philippines.

So the outlook down here is that the market's not going to help us but that we will continue to grow the demand for fibre cement, and we'll get more than our share of that demand because a lot of the demand will be in new, differentiated products.

We have our quarterly comment about more manufacturing efficiencies. I think there are gains. The Australian plants continue to move toward the type of efficiencies we aim for in the U.S., and I'm sure it will get there. And then, the Philippines - no issues there, like I said.

Hardie Pipe had a positive EBIT last year. It was a small EBIT. And they're tracking slightly negative through the first quarter. I think I indicated in the last update - we were overweight in residential segment with our pipe business, which is creating the issue. Actually, the business, as far as manufacturing price and basic operation of the business is fine. It's running probably better from that respect every quarter. But the demand is down because we're overweight on residential, unfortunately.

U.S. Fibre Cement - kind of status quo. It still grows. We haven't found that big opportunity. We haven't really turned up on that S curve, but we are still getting gains in volume.

We have some further weakness. Like I said, we get a late look at the market. So you guys that cover other building materials, which I think a lot of you do, the cement guys would know a lot better than us how many slabs are growing in the ground. We actually see the project four or five months later. So we don't have a good window to future demand. So whatever you read is the same stuff we read. Quite honestly, we don't obsess on it much because our job stays the same. And our job is market share growth.

We do expect to continue to perform well, even if the market comes off more. Asia Pac-- I think the Australian management team has a better window to the market than we do in the U.S. But, having said that, I still think their job is the same, regardless where the market is, and that's primary demand growth for fibre cement and make sure they get that differentiated product line to the customers and start penetrating with that.

At this point, I'll hand it over to Russell for the financial overview.

Thank you, Louis, and good morning, ladies and gentlemen. As this presentation has showed, we didn't get much assistance from macro factors in this quarter in any of our markets. Notwithstanding that, we had a very good operating performance and a very good profit all around.

The profit was obviously impacted by asbestos. There was a $30.1 million adverse impact from asbestos adjustments, mostly due to foreign exchange movements with the A-dollar appreciating against the U.S. dollar significantly during the quarter.

Our balance sheet continues to be strong, and we also have a very substantial debt capacity, which we're now beginning to utilize. We're likely to begin to utilize with the announcement of the share buyback this morning. And we've got a substantial unutilized debt position.

During the quarter, we were due to assess whether or not there was a payment due to the asbestos injuries compensation fund, the new voluntary compensation arrangement that was set up in February of this year following shareholder approval.

As a result of some negative operating cash flow, not from business but from payment to the Australian tax office last year and also to the initial contribution to the fund, which was taken into account in the calculation of the amount that was liable to be paid to the AICF. There was, in fact, no contribution on July 1. So there will be a retest of that in 2008, with the next assessment being a payment which may arise on July 1, 2008.

Nevertheless, the AICF does have a substantial cash position, running around A$170 to A$180 million. And it was designed to, in fact, be able to manage through those periods when James Hardie may not be able to pay from one year to the next. And that was the reason that the cash buffer exists.

Moving on to the share buyback. An on-market buyback program was announced this morning for up to 10% of issued capital, which will be 46.8 million shares. We clearly have got a very strong cash generation at the moment. We've got low debt. And this share buyback is intended to improve our capital structure somewhat. The shares will be purchased opportunistically, subject to market conditions and also to the operating environment, and a number of other factors will be taken into account in our decisions relating to the possibility of share purchases. We will, if necessary, arrange additional funding facilities; 10% of the market cap currently works out to be about A$350 million. But, if need be, we can we believe readily arrange additional facilities. And we haven't set a period of time for the buyback. But it will run for a minimum of 12 months.

Looking at the results for the quarter, and I shall not dwell too much on this because I think it's very transparent from the slides. Net sales were up 2%, so a very small increase as a result of the macro conditions. However, EBIT was up 9%, which we thought was a pretty good result, given that sales performance. The net operating profit on a reported basis was $39.1 million, which was a 10% increase on last year.

And, on slide 27, we look at the results with asbestos-related items removed. And, starting with the reported net operating profit from the previous slide of $39.1 million, going through the asbestos adjustments of $30.1 million and then a couple of other small items gives rise to a net operating profit, excluding asbestos of $68.6 million, which is a 9% increase. So a result that we thought was pretty satisfactory in all of the circumstances.

On slide 28, looking at segment sales, U.S. Fibre Cement, as Lou highlighted, was 1% a decline in sales [volume]. Asia Pac up 20%, largely driven by Australia. There was an 8% increase in Australian dollar terms and the balance was due to appreciation of the Australian dollar against the U.S. dollar. The total increase in sales was 2%, as highlighted previously.

On the next slide, we look at the segment EBIT. And you can see here that we have a segment EBIT of $121.4 million, which was up 14%; an increase in general corporate, which I'll deal with in a subsequent slide. And the net amount in terms of EBIT was $75 million, being a 9% increase.

On slide 30, we have corporate costs. This slide has got a lot more detail in it than we've had in the past as a result of the sort of items that we're taking into account. You note that we have dropped the SCI-related expenses. I think we foreshadowed that at the yearend '07. But we do intend to disclose on this slide each quarter the cost of the ASIC proceedings.

In this quarter, the cost to the Company was $1.2 million. But we are taking it into general SG&A costs each period and won't draw it out in the way we did with the SCI-related costs. You can see on the last line there the other costs at $8.1 million were very steady with the prior corresponding period so that we've got an underlying level which is pretty well in control, even though the headline numbers of $16.3 million there shows a fairly material increase on the prior period.

The $4 million amount on the non-U.S. warranty provision relates to prior activity. And we've made an adjustment in relation to that provision and taken it into corporate costs as a result of the fact that it's relating to prior activity.

In terms of net interest expense, we won't dwell too much on this slide because it's immaterial. But it is impacted this quarter by the interest income of AICF. It was $1.6 million. And we will be consolidating that in our results each period. And it will actually impact the reported net interest expense.

In terms of income tax expense, this slide is designed to show the underlying effective tax rate and how it was derived. I won't deal with the numbers at the top. But the effective tax rate, excluding asbestos, as shown on the last line, of 34.4% is very much in line with the corresponding quarter of last year. And, clearly, asbestos results impact that pretty heavily, as illustrated in this slide.

Slide 33, showing the EBITDA, with the EBIT numbers at the top as previously shown. There is a change in depreciation and amortization here of some magnitude, particularly in the U.S. That's not necessarily a reflection of the underlying number on a continuing basis. The $10.8 million does actually include some adjustments relating to a new IT platform, which we've rolled out in the U.S. There's a catch up there, and I don't think it will be running at $10.8 million on a continuing basis for each quarter. But it won't be materially below that. But the overall D&A is certainly higher. And the total EBITDA showing a 12% increase there to $89.2 million.

Cash flow. I think this is probably one of the highlights of the quarter. With our cash flow from operations doubling to $140 million in this quarter relative to the prior corresponding period. Net operating cash flow was also up very materially at $131.5 million. And you'll note in the purchases of property, plant, and equipment the much lower level of capital expenditure and also the fact that our net cash or net debt position at $153.9 million at March 31 has been reduced by about $100 million or more than $100 million in the quarter. So a very significant change in a short period of time. We did have some drawdown on net working capital which assisted that cash flow, and that may just be a one-off, because we may well be having a higher working capital-- a slightly higher working capital as we move forward.

Looking now at CapEx, you'll see the significant slowdown, particularly in the U.S. - a large reduction there relative to the prior period. We don't have any major capital expenditure programs running in terms of new greenfields plant and that's the reason for the much reduced CapEx because in the prior period we had some final expenditure coming through on the Pulaski plant in West Virginia.

So the slide relating to key ratios. The EPS at $0.146 for the quarter excludes asbestos. There was no dividend paid in the quarter. That was just a quirk of dates. There was a dividend paid early in July of $0.15 but, obviously, outside the quarter. The return on shareholders' funds and capital employed reflect annualized numbers, and the increase is due to the improved result for this quarter on an annualized basis flowing through. EBIT to sales margin is up fairly materially. And, obviously, the debt service capacity indicator is showing the extent to which we have capacity to undertake further debt, which will be the case if we're able to buy shares on market.

So, in summary, a very strong quarter. A very good cash flow - perhaps one of the highlights for us, I think. We've got a strong financial position. And the share buyback, I think, is probably something that many people in the market have been waiting for a while. It's taken us a little while to manage to pull all that together. But it is intended to optimize our capital structure. Our results will continue to be subject to fluctuation in the A-dollar/U.S. dollar exchange rate around the asbestos provision.

And the final thing is I would draw your attention, as usual, to pages 14 to 16 of the MD&A release for visibility of the performance moving from the reported results through asbestos to the core business. This is the first quarter where we've actually had to report AICF on an operating basis. You remember that, in prior periods, we've had some fairly complex accounting issues to deal with. But this is the first quarter where you can actually pick what's happening with the performance of AICF itself, including the amount of cash paid for claims. And we would appreciate any feedback from you in relation to the way in which we've reported through that segmentation.

So, thank you very much for your attention, and I'll just hand it back to Lou for questions.

Okay. Thanks, Russell. We'll do questions the same - media at the end and microphones brought around the room.

Just two questions. One is on that market share penetration or growth. Can you sort of give us maybe one or two key sort of things you felt what were the major contributors for you only having 5% down versus perhaps 20%-odd for the market? And, also, (inaudible) for margins, what's the one or two things that you've been able to do to really squeeze the assets or whatever to get 33% margins out of the business in what appears to be a pretty tough market?

Okay. I think the answer is the same for both, to some degree, and that's it's quarterly variance. We obviously had a good quarter. It shows that way in market share growth. But we had kind of a-- we had a poor quarter last year, and I think-- I mean last quarter, last year was a poor one. But I think it's more of a timing issue. I don't think we've done anything significant in the business to pump up our primary demand growth. We are working on that. We've had a few recent hits last quarter, where builders were-- We got them off the obsessing about costs and got them to commit to ColorPlus, which is good. But I think we're just going to have to see how that plays out in the declining market. It's going to be difficult to make a big change there, I think.

On the margin side, I think one quarter last year-- I think it might have been the first quarter. I said, you know, we kind of had the perfect storm, meaning everything went right. And I think that's kind of how it went this year. We were planning for lower demand in the first quarter. So all the incremental demand came in incremental contributions, so that pulled the margin up. But the business model is set to run around 1.3 million, and demand was much higher than you would think out of a 1.3 million level. So that's probably the main thing on EBIT margin.

And just on the CapEx, clearly, the sort of plant network at the moment is probably in good shape, and there's no further greenfield or-- I don't know whether there's some brownfield plans. But it kind of looks like you've got limited options in terms of growth CapEx opportunities. I mean you're using some of the capital now, obviously, with a buyback. But what should we be thinking about in terms of the other growth options for the business through spending of funds?

The thing on CapEx is we're in real good shape on flat sheet capacity. So we don't anticipate a need for flat sheet capacity. We are launching the-- in Australia-- it's called Linea. We're launching that product in the U.S. market this month under the brand Artisan. And I expect that product to be very successful in the U.S. and to drive some CapEx over the next two to three years. Color is continuing to increase. We're ahead of the game on Color capacity, but I do expect more Color capacity coming in. So, basically, our CapEx is not going to be around flat sheet for the next couple of years. It will be more around the new products and-- basically, the new products - the growing products.

As far as other opportunities to use our strength of our balance sheet, we kicked up the dividends. We announced the buyback. If other opportunities come up, obviously we have the balance sheet to take advantage of them.

[Emily Van Keefe] from Deutsche Bank. Just a couple of questions. In terms of your market share in the North, I'm just wondering if you can make some comments on the penetration in those markets there. And, secondly, if you can comment on the competitive environment in the U.S. at the moment - if any of the CertainTeed or-- is starting to have a bit more of an impact on us.

Yes. The competitive situation has changed over the last three or four quarters. CertainTeed has definitely turned into more of a discounter. So they've positioned themselves more against our Cemplank brand than the Hardie brand that-- They had, I think, for the history of their business tried to present themselves more of a Hardie equivalent. I think their expectations have changed, because their pricing levels are more consistent with more of a generic fibre cement, like Cemplank.

What was the second part of your question?

I was just wondering if you could comment on your growth in the Northern markets.

Oh, yes. It was the first part. I don't think we commented on it specifically. But I'd say we're not setting the world on fire up in the North. Now we are getting extra Color penetration every quarter, which is very good. But some of those markets are down significantly more in the North than overall. And our premium in those markets against vinyl is pretty significant. So I think we're doing pretty much kind of business average there. Now this last quarter was very unique in that the orders spiked in the West. And, again, there's really no good explanation other than timing. So I would expect the West to settle down a bit in future quarters and the South and the North, which are running kind of right where we thought they'd be. I think they might lift up a little bit. So the Northern strategy's working; it's just not running away or anything like that. I don't want to mislead you.

And just quickly, could you remind us of the difference in price between the James Hardie and the Cemplank brand?

It differs market by market. But I think, if you roughly thought of it as around $100, you would be in the ballpark. Now, some markets, it will be less than that. In a few markets, it will be more than that.

One operational question and two financial questions, probably skewed towards Russell, if I may. You touched on it a little bit earlier. But in terms of for you to achieve your terminal share over the longer term in the U.S., you're really going to have to push on that penetration. Can you just run through what commitments you're making in that, conscious of the fact that you've clearly taken significant fixed costs out of the business recently as you resized it back to 1.3 million?

Sure. We actually haven't pulled any field resource out. So the primary demand chart-- Basically, we think of it, and I'm sure you think of it, as an S curve and (inaudible). If you look at our S curve we're currently running on, we won't hit our terminal share expectations. And the reason for that is we're going to need some bumps in that S curve to do with initiatives. Those initiatives would, really, run around new products. And we talked about launching Artisan this month. And it would run around different segment emphasis, and that would mean mainly around repair and remodel. We're much higher share in new construction than we are in repair and remodel. So we're actually investing fairly heavy in that area, and we'll probably increase our spending in that area over the next couple years.

And the other thing is we're very-- We have a very sound model against vinyl. But the West is driven by stucco. So the last bump in that curve to get to our terminal share is really developing and implementing a good market strategy against stucco.

And, financially, Russell, with the tax rate, are we anticipating the first quarter sort of effective tax rate, excluding asbestos, to be consistent for the full year? And with respect to corporate costs, are you anticipating any further one-offs during the course of the year, please?

On the tax rate run, we've previously given guidance in the mid 30s, and we wouldn't depart from that at this stage. I can't tell you it's going to be precisely 34.3%, but mid 30s.

And the other one-- Sorry. Can you just remind me?

Just in terms of the corporate costs (inaudible) one-offs.

There's no one-offs on the horizon. But there will continue to be ASIC proceedings costs and those sorts of issues that may arise. We are about to commence litigation against the ATO in relation to the assessment of last year, so those costs will be starting to come through. They'll probably be of a recurring nature than one-offs. So it will bump it up from period to period. (Inaudible).

Louis, just a question on-- I'm looking at the accounts page 105. There was a comment that concentration of risk in terms of customers. And you mentioned that 58% to 60% of the Company's trade receivables were with three customers. I understand that (inaudible). Could you give us some feel for what's been happening in terms of customer concentration and also sort of stresses that they may be feeling and whether there's some implication in terms of credit worthiness or (inaudible)?

Okay. That's a good question. Basically-- I'm not sure how much everyone understands our distribution model in the U.S. But, basically, we sell to kind of what we call traditional lumber dealers. But, in most cases, we don't invoice the dealer direct; it goes through a distributor. And that's where we get high concentrations. So we have-- Those top three customers where we have the high concentration, two of them are distributors. We do ship most of that-- I think it's most of that product that goes to the dealer as ship-direct, invoiced through a distributor.

We are currently reviewing whether we should be concerned about the credit risk with those two customers in current conditions. At this point, no issues. But, as you indicate, as the market turns down, that's one of the things you've got to pay closer attention to.

If we had to spread that risk out and broaden the customer base, it wouldn't be a major shock to our business. It would be-- Obviously, we'd have a bit of an issue with those two customers that we'd have to work through.

Dave Whittaker from Southern Cross. Are you sure a buyback's the best mechanism to more for capital management, given you've got quarterly results-- It's difficult to buy windows to buy stock. And you've got three or four major shareholders who may not necessarily be going anywhere. So is 10% realistic on a (inaudible). I mean [Linker] had a lot of trouble with their buyback - actually executing.

Yes. I think we'll see how it goes. We're up to 10%. We didn't commit to buying 10%. We committed to buying up to 10%. And, as you point out, we'll just move through it. And if we think it's a value creation opportunity, we'll proceed right through the buyback process. If it wasn't, we wouldn't. But we do need to address the laziness of the balance sheet. So we do have-- We do have an issue there that needs to be addressed.

Andrew Johnston from Citigroup. Louis, a couple of questions on the operations. The inventories you talked about-- Your inventories are clearly down. Do you have a feel for where market inventories are, simply because they might be a little higher? And what does that mean for the next couple of quarters?

On our product, I think your-- Are inventories on our products in the channel? Yes. I think everyone's trying to hold their inventories pretty thin. I think our inventories in the channel would have been pulled up a little bit in the first quarter; no doubt. Basically, left our plant and went into inventory and probably stayed in inventory longer than anticipated. And I think that's some of what we've seen in the softness of the order file in July. But there's no big mountain of fibre cement anyone's sitting on. So it's not to that degree.

And in terms of average price, can you break that down a little and talk about to what extent the various products ranges have had to discount? So, for example, are you having to discount Cemplank-- or the price changes by product group?

The only-- Obviously, it's a business with a lot of transactions. So, when I say the only, that means there might be a few one-offs here and there. But, basically, the only line that's discounted is Cemplank, and that's on a specific bid situation, whether it be multi-family or a key builder that one of the other players has gone into with a very low number. So we try and manage the gap, basically. So we do, with Cemplank, kind of react to where the other guys are going. Hardie we don't discount, and HardieBacker line we don't discount. Color we don't discount. And, when I say we don't, we don't, we don't, there would be a few exceptions in the business here and there. But just, as a general rule, we don't discount those lines.

And, finally, the guidance you've given, I assume, is based around 1.3 million starts. How much resilience is there in that guidance, if starts would actually go a bit lower than that?

Yes. No. Obviously, we get our demand down below the 1.3 million. You will see it tougher to hit the range that is out there. We make good margins. So losing another 10% of volumes, say, is obviously going to have a material impact on the bottom line. Now it won't affect our price. And we don't run a real high fixed cost business. So we don't have a huge issue with spreading issues if the volume comes off. But we do make very good returns on our products. So you take 10% off, you're going to lose contributions.

Thanks.

I'll just carry on with that for a little bit. You talked about the guidance-- the analysts' range of $187 to $233 million, excluding asbestos and, of course, the first quarter, excluding asbestos, was $68 million. And, even though it's a long time ago, when I multiply, say, $68 million by 4, I get a lot more than, like, $233 million. And then you've talked about the second quarter being weak. I wonder if you could just talk about it. I mean, it sounds like it's quite a lot weaker, Louis. I just wondered if you wanted to talk about that a little bit more. I mean, you say you're comfortable with the bottom range of that forecast, which kind of implies you're not necessarily all that comfortable with the top end of the range.

I mean, to get to the top end of that range, you would have to have a better market than anyone's anticipating. So the top end-- I wouldn't say it's off the table. But it would be surprising for everyone in the room, including me.

The bottom end of the range is-- it's definitely achievable, assuming the bottom doesn't fall out of housing starts. So second quarter-- it's quite a bit weaker on the order file. It's not going to be a major problem for us in any other area. But the order file is quite a bit weaker. So keep in mind what I said. I think when I came down at yearend, it was like-- the order file was very weak in December, January and February. It picked up March, April, and May. It started to come off in June. It's come off pretty strongly in July. August may be a little bit better than July or may look like July. So it's just too hard to predict what's going to happen with base demand. But we're not in panic mode even this quarter. We think we're going to deliver good financials this quarter, even though the-- given that the order file is going to be off, it's not going to look like the first quarter. So the demand's not there. But, like I say, the key to our business model is, when you compare it to other building materials-- when they lose demand, they lose price and volume. When we lose demand, we lose volume. Now, as I just indicated, we make good returns on our products. So losing volume is not a small thing. But at least you're not losing price as well.

Can I just follow on from that and just sort of--? Maybe can you talk about your customers? I mean, you're obviously talking to them. Homebuilders have been pounded share price wise and earnings wise. I mean, are they a bit gun shy about when they're going to start ratcheting up building again? Or do they have much clarity in the pipeline? Is it an '08 story for them?

I mean you've seen the guidance from some of the builders. They're pretty pessimistic. But I think we're going through the normal cycle here. When things were good, you had a lot of people thinking it was going to last forever. And now that things start coming off, it's like it's going to last forever as well. So I think the builders-- the builders were set to run at 2 million starts. And I think it's-- My understanding of the building business, meaning the homebuilders, and it's not very much, but my understanding is that it's hard to reset-- a lot harder to reset their model than it is for a company like us. We can reset our model pretty easily, which shifts. And how we operate our line shifts. And looking at the different programs we run-- They have more of a-- it's harder to pull out. I mean, when they're building out subdivisions and they'll slow down, they don't close down subdivisions, obviously. They continue to try and move the property and hopefully get to a point where they can start building houses. So I think they're building-- The building business model is just a little bit less flexible than that of a manufacturer. And, of course, they're like a commodity building materials player. When they lose demand, they lose demand, and they lose price. So they try and generate more demand through price. But if everyone in the market's doing that, then, obviously, the price comes down, and demand ends up being the same for any one builder. So there's a lot of doom and gloom at the builder level. They haven't figured out where the light at the end of the tunnel is yet.

It's [Michael Ward] from Morgan Stanley. Just quickly coming back to that comment you just made about price and volume, if I think that through-- correct me if I'm wrong. But if your competing products are losing demand as well as price, does that mean that the premium of your product increases over their product that we could point your market penetration would slope?

It does mean that, but you've got to look at the scale involved. So the material price is fairly small to the decision maker. The decision maker, in our case, is a builder. And, just as my standard example, if that builder's in a market where's he's paying $1.5 for vinyl per foot and he's paying $2.5 for Hardie-- let's make the arithmetic easier-- $3 a foot for Hardie, and the vinyl manufacturer cuts his price, basically, he has a price of around $0.35. So he cuts his price 10%. But he's down here at $0.31. That's a $0.04 reduction. Now, what the builder sees is he sees $1.5 go to $1.46. So he has been making a decision to pay a premium of $1.5 for Hardie. So now he has to decide, Well, is it worth $1.54? Well, actually, what you put on the side of the house is a pretty big decision, and $0.04 wouldn't change the equation, for the most part. So the reason-- In all oligopoly situations, everyone follows price increases down because it's material price against material price. With a business like ours, where we're a differentiated product, we sell-- we compete outside our category. So, now, it's not material price against material price; it's installed costs against installed costs. So that's where we get some of the protection on price.

Any questions on the phone?

Thank you. (OPERATOR INSTRUCTIONS). We'll now take our first question from Matthew McNee from Goldman Sachs. Please go ahead.

Just a quick question, just on the margins, because, obviously, that's the highest margin you've ever had in probably the weakest housing market in 20 years. I just want to get a bit of a feel for it. In the past, you essentially kept saying that ColorPlus-- the margins you're getting there aren't that much better than the basic products because of the additional costs with supply chain, etcetera. Is that--? Are you now starting to see the supply chain compression model starting to add significant margin to the ColorPlus business?

Also, on a related question, just on XLD trim, just wondering if you could give a bit of insight into how you're going on that product as well-- as well as whether that's higher margin or lower margin than the basic products.

Actually, Matt, you hit the two key products. We are getting much higher margins on ColorPlus now than we got last year, and that's more around the efficiency of the model rather than pricing situation. So we are getting better margin contribution on Color. At the same time, Color is growing as a percent of our sales.

So you're not doing as much of that duplication in terms of the supply channels that you were doing last year?

Yes. I mean our freight efficiency's up. Our manufacturing efficiency's up. And those are the two key contributors.

With XLD, you'd sort of had all the performance problems there. That product is performing as you'd like to?

We did launch an enhanced XLD around four or five months ago, I believe, which we haven't made an official market launch because it's just a product improvement; it's not a different product. But we have improved the handleability of the trim product. And we've also gotten efficiency gains - manufacturing efficiency gains - in XLD. That has increased the contribution of XLD on a per-unit basis. At the same time, again, that's a product that's growing much faster than the rest of the business.

And when you adjust for thickness, that product's getting, what, $100 or $150 more than the average product - the standard product?

You know, I'll be honest with you, Matt. I can't answer that because I don't look at XLD that way. I look at XLD on a contribution-- on a surface basis. I don't think thickness modified because it's not a (inaudible) product.

And just one final one, just on the XLD or just trim in general. Can you give us just a little bit of an idea of what proportion you're selling siding for that you're now also selling trim for, just to get an idea of how much upside there could be in that part of the business?

Yes. It's pretty small. I wouldn't have an exact number.

Maybe 10%, 20% or 30%?

No. It wouldn't be-- Well, yes. Sorry. XLD no. In some of the Southern markets, we would. But, generally, we don't penetrate as highly with trim as we do with siding. And when I say generally, a few markets will, but the rest of the country will be much lower on trim than siding.

And, ultimately, would you expect to get the majority of houses you sell siding for also in sales of trim, or not?

Well, the problem there, Matt, is that the durability promise of Hardie is stronger on siding than it is on trim. What I mean by that is, if you have a failed siding product, it's kind of a major problem to fix it, whereas, if you have a failed trim product, even a guy like you could probably pop that trim board off and replace it. So the value proposition is stronger for siding than trim.

Thanks.

(OPERATOR INSTRUCTIONS). We'll now move to our next question from Andrew Scott from JP Morgan. Please go ahead.

Just a question on Australia. Obviously, asbestos now behind you, just how do you see that brand reputation? And is that going to let you get the leverage when we do see this illusive housing turnaround?

Yes. You know, the brand reputation in Australia-- My perception is our customers were very loyal to us right through the whole asbestos issue. And there wasn't a lot of damage to the actual product brands. I think the trade partners we deal with in Australia have always seen our product as a very high quality product that provides the customer value they're looking for. I think, if there was brand damage through the asbestos, it was more at the corporate level. And it doesn't seem to impact our business much, which is good. Now, the key to the Australian business is, for the last two or three years, we've been kind of building a foundation for growth of differentiated products. And, over the last year, I think that foundation's been firmed up quite a bit. So it's like any other S curve. Now it's up to the guys - the people that run our Australia business to really make sure we drive the penetration of those differentiated products. And it looks like it's happening to me. We're very pleased with the way the Australian business is shaping up, even in a soft market.

Great. Thank you.

There appears to be no further questions at this time.

Okay. Thank you. Thanks, everyone for coming today. Appreciate it.