James Hardie Industries PLC (JHX) 2008 Q3 法說會逐字稿

(OPERATOR INSTRUCTIONS).

Welcome to our third quarter results announcement. I appreciate everyone coming. We're going to follow the same format as always. I'll cover the business overview, and Russell will take care of the financial side of it. And then we'll do questions.

I guess a lot of you would have seen the result already. Basically, I think it's a good result in a very difficult market. The line we look at, again, is the net operating profit, excluding the asbestos adjustments and, in this case, the Blandon impairment which we talked about last quarter.

The U.S. market-- I mean the U.S. business continues to run extremely well. Basically, we're doing all the things we're trying to do. But our opportunity is going down, basically, every month or every quarter, however you want to look at it. So the market has not bottomed out. I'm sure we'll get into it in questions. We really don't know when it might bottom out, at what level, or how long it would last. But we have set up the business pretty well to pretty much stay ahead of the downturn and continue to deliver both good business results, meaning market share gains, good pricing, and product mix shift, but also good financial results as well.

Asia Pac is a very good story. The Asia Pac business had another good quarter and seems to be building on the momentum over the last four, five, or six quarters. So we had a good result, especially in Australia and New Zealand.

Nine months. There's really not that much. We just added a quarter onto the first half of the year. It was a very similar quarter, from my perspective, because the business ran well. Now, what is obviously happening is we started out the year with very good financial results because there was a little buy forward in the industry hoping for a little better seasonal upturn than actually happened. So we benefitted from that. And our quarterly results are kind of settling down quarter to quarter. Again, we lag the housing market, so that makes sense the way it's developed.

Probably one of the bigger changes, especially to some of the people have followed the Company for a while, is we have had two of our longer-service executives exit the business - Robert Russell and Jamie Chilcoff, both more than ten years with the Company. They came in very early on in the development of the U.S. business. And Jamie actually came down to Australia and ran the Asia Pac business for a couple of years and has been responsible for it since he's gotten back to the U.S.

So I just wanted to walk through the senior leadership team. Of course, Russell Chenu, [the CEO], and the GC-- and myself, from a corporate standpoint, we work out of Amsterdam.

So this is more the group that is either in the U.S. or in Australia. And we'll start with Mark Fisher. Mark's been in the Company-- He's another long-service guy that grew up in our business. He takes care of R&D. What he did is he picked up additional responsibility on the engineering and process development side when Robert left the business. He still has pipes responsibility and XLD trim responsibility.

Grant Gustafson, who's been with us, I think, over two years now. Grant has been running business development, and we've added marketing. So centralized marketing in the U.S. will now fall under Grant Gustafson, with Jamie's departure.

Nigel Rigby a lot of you know. He runs the North, Joel Rood runs the South, and Brian runs the West. So we have a GM structure for the divisions and then, obviously, the functional managers.

One of the bigger changes is Asia Pac will be run out of Sydney now. Like I said, basically, Jamie came down here; I think it's about five years ago. He ran the business in Sydney, and that's where we really started to try and reset the business more like a U.S. strategy. That's gone very well. In two and a half years, he came back to the U.S. He maintained responsibility for the international business but picked up U.S. marketing. So, with Jamie's departure, Peter Baker, who's our EVP Australia working out of our Pitt Street office-- He'll have responsibility now for the Asia Pac business.

And then you all know Steve. He obviously has Investor Relations, but he'll also pick up the Finance Media responsibility, which has been under Peter.

The other thing is-- The first bullet point under the chart is Interiors, which we, up until three or four months ago, we ran as a separate division, has been integrated into the three divisions. Everyone on the chart reports to me.

We'll go through the operating results. I think this is probably showing our Artisan product. I didn't look at it-- Artisan [lap], which we launched-- I think you know. We talked about it last time in Atlanta, Georgia. The product was originally launched in New Zealand under the brand Linea and then in Australia under the brand Linea. We made very few changes to it and launched it in the U.S. under the brand Artisan. And it's really a good product.

So, again, the third quarter result. You've probably seen the numbers, but sales down a lot less than the market. Sales down 9%; volume down 10%. Basically, price was flat, as we indicated it probably would be. EBIT was down more than the volume. It was down 16%. And that's a bit to do with the less volume and a bit to do with higher input costs, with pulp still increasing in price and cement being more expensive than it was this time last year. Cement actually has started to turn around, so that's a good sign for us going forward. EBIT margin did decline, but it's still-- We just kind of touched the top of our target range of 25% for the quarter.

The nine-month result. Like I said, the business has tracked behind the housing starts. So the first quarter is best, second, third. So the nine-month results are very strong relative to what has happened in the market. EBIT margin's still up there at 29%, and EBIT down only 5%, which is pretty amazing given market conditions.

So this is probably the slide that you guys are most interested in. Basically, we're not at the bottom of the market, and it's very hard to read right now. It just seems like the market's dead. No one knows what's happening, and hardly anyone has anything positive to say. But, obviously, our comps are pretty good against a market that was down 23% and 24% over the last couple of quarters. Everyone knows what the drivers are. Money's gotten cheap again, so affordability is a little bit better. But I think you have a lot of potential buyers either unaware if they can qualify or not or waiting for the market to hit bottom to make sure they don't pay more than they have to on a new purchase. And repair and remodel is much better than new construction, but it is down as well.

The U.S. business. Obviously we're down, but we're not down as much as the market. We have outperformed the market in all our divisions, the North, South, and West, and Interiors. ColorPlus continues to grow, so that's a real positive for us. HardieShingle also grew this quarter. And the higher costs which I referred to are now more around pulp than anything else. Cement had been running up for a couple of years. And it looks like that's plateaued, and it will probably start coming the other way. And we've held our price right through the downturn, so that's kind of one of the real keys to our financial result.

So what do we see in the near term? I do believe the market will come off more. I have no idea how much. And I have no idea how long it takes to get there. And I have no idea how long it lasts once it gets there. I don't think a manufacturer, whether it be Hardie or another manufacturer, is in a good position to call the market. We lag the market quite a bit, so we're seeing what happened back in September and October or November maybe. Obviously, we talk to our customers on a daily basis. We do have that advantage. A lot of our sales calls are to builders rather than to channel partners. But, quite honestly, they don't have real good intelligence about how things are going to go either.

We do continue to invest in our growth initiatives, which has been a real positive. We talked about the launch of Artisan. We've also recently launched a building paper, a branded Hardie wrap product. And we're actually launching a paint product for repainting fiber cement in some of our big markets, and that would be branded Hardie as well. We're doing a test market on commercial in the Seattle market. So some of the products that are successful down in Australia we're testing in the Seattle market. So all of the growth initiatives continue to be funded in the U.S.

We do, obviously-- What we're trying to do and what we continue to do is increase our market share of the overall siding market against alternative materials.

The cost pressures mentioned here. I think maybe we're getting close to the end. Like I said, I see cement coming off a bit, and pulp's slowing down as far as their increases. So there may be a little bit of help in the future. And, obviously, when you're in a situation like we're in where you're not sure where the market ends up, we have regular reviews, and we just finished a fairly major review of all our business activities - costs associated and benefit of. And we'll continue that right through. So, if the market keeps coming off, we'll be looking at what's appropriate as far as-- to spend in this type of market. Now, some things you can get more traction in a down market; other things you're kind of wasting your time. So that's kind of the process we go through trying to figure out which is which.

Here's a history of the U.S. business - same slide. You can see, if you go horizontal from our revenue line, which is the blue line, we're in the fiscal year '05 type revenue. In volume, we're in the fiscal year '05 type volume. But we haven't seen these housing starts since about '95. So the housing starts continue to come off pretty quickly, and we're buffering it with both volume and revenue.

This is a chart we started providing when the downturn started. It shows what we call primary demand growth, which is just, basically, market share gains against alternative materials. The reason we started providing it is, obviously, when the market turned down, it started to skinny up on us quite a bit. And, over the last couple of quarters, we're seeing it widen out a bit, even though the market's still in decline, which I consider a pretty positive sign at this point. Again, we believe, in a flat market, the builder becomes much more concerned about how to sell a house rather than how long it takes to build a house. So we think, in a flat market, wherever it flattens out, we're going to widen up that gap pretty good. And, in a declining market where they're looking at the cost of their production because they've having to reprice it, you get more into a purchasing mode, and that's what we've been in recently. So, clearly, you can see that our-- After a steady increase for three or four years and then a steeper curve as we took some market increases for fiscal year '06 and '07, we have flattened out in fiscal year '08, which most of the industry-- Most of the products in the industry have come off - severely come off with pricing. So we've held while the market's come down. So it's a pretty good effort, and it's pretty good verification that our value pricing that we practice in the business does work well.

Strategy hasn't changed, and, really, even coming off the top of the market where it's 2.2 million starts and, right now, I guess, we're at about 1 million starts, we have not changed our strategy at all. We still basically do the same things every day. Now, we have to pay more attention to where the market's at and where we should be putting our resources because you will have some differences geographically and some differences segment to segment and in certain markets. So, as part of that process, what we've done since the first of the year has been really looking at all the different product markets we address and the contributions we drive off of those and the strategic value we drive off of that and, really, trying to reallocate toward maybe higher contribution wins in a down market. So we have made a few changes there.

EBIT margin we talked about. We've been above that 25% for a long time, so this is the first time we've touched it on a quarterly basis. It's meant to be a long-term target. From a quarterly perspective, we've indicated we may fall [under] that target as the market continues to come off. If it comes off a lot more, we may actually operate in that range. But, right now, we're still pretty comfortable that, on an annual basis, we have a good chance of being at the top end or even above that range.

I just provided this. You guys see all the different charts on housing starts. But we thought we'd provide this one. I guess there's just a couple of unique things on the chart, and that's how long the build was from '91 to 2005 and how steep the decline has been since then. Now, you can draw your own conclusions about what the length of those previous downturns might be for us this time around. But it's just a good graphic of what we're dealing with from a market perspective.

This kind of summarizes it a bit. We're right now, I guess, in real time, down about 55% from the peak. Repair and remodels looks like it's down maybe 6% from the peak or maybe a little bit more than that. That's a lot harder number to come by. The big thing is, when we went into the downturn, we had indicated to the market this business model is going to work in a downturn, and it does. Obviously, our view is our job's the same. Our job is to get Hardie to terminal share for fiber cement in the U.S. and to maintain our position in the category in the U.S. And that's been going well.

Now, as part of reacting to the downturn, obviously, we're not just operating totally outside of market reality. So we have scaled back our production two different times pretty significantly. One of them involved the Blandon shutdown. And, now, what it looks like to me is-- You've gone from 2.2 million to 1 million-- the declines in the market will continue, but they won't be as dramatic as that big, sharp decline. So more likely now we'll be tweaking our production rather than making any big changes. We don't anticipate any plant closures. Basically, all the plants are positioned well within their shipping radius to where they can defend their shipping radius. So we don't see any plant closures at this point. It doesn't come up that way. Obviously, we would monitor it based on how the market went. If the market really went down in one geographic area, something like that could change that. But we don't see that happening.

We have reduced employee headcount by about 23%. That's both production employees and non-manufacturing employees.

We have proceeded with our product launches, as we talked. The key is we have maintained pricing in an industry that has lost pricing quickly. And, when I say an industry, I'm talking about the building materials industry.

EBIT margin's been held above 25%. It is (inaudible), obviously, and then strong cash flow, which Russell will cover off a bit.

So the current situation is-- I guess I'm kind of repeating myself. We've got an eye on the external market to make sure that we're in line with demand. Other than that, as far as how we load our plants, it's on a delivered cost basis. But, just like I said, since we make a fairly heavy product and freight's reasonably expensive, most plants can defend their regional markets. So we'll continue to monitor that and bring plants down as far as shifts or machines where needed.

We've been doing well on the receivables side. We haven't had any big shocks to the system on the receivables side. We're monitoring that, obviously, very closely. There's been a few changes as far as our exposure there - changes for the better, obviously.

And then, the inventory. We have built our inventory, and we're getting close to the top end of our target for inventory. We talked about it last fall - my fall, sorry-- in September or so about how we had a luxury because our inventories were below where they should be. So we could take a little bit of a wait-and-see on the market and build the inventories back. We just about completed that process. So, at this point now, it will be much-- Our monthly production will be much more closely aligned to shipments.

And then the three strategic objectives in the business-- Basically, that's at the center of the value creation for Hardie over time-- Primary demand growth, product mix shift, and zero to landfill are all things that are still fully funded and taking up a lot of our management attention.

Moving into the Asia Pacific business. It's kind of on the bottom I guess. This is New South Wales - one of the houses that incorporates several of our new products that have really started to shift this business from-- I won't say it was a commodity business five or six years ago, but it was heading that way. And it's becoming much more of a differentiated business now. And, over the last 18 months or so, you can really see a benefit of that in our financials.

So, like I said, the third quarter was very good on top of two good quarters preceding that. So this business is running well in Australia. It's running well in New Zealand. Philippines - we've hit a few bumps in the road this year, mainly internal. So that's detracted a bit from the result, but, overall, it's been a very good result. Asia Pac third quarter you can see volumes flat. Everything else is up. Of course, they get the currency benefit. But, even without the currency benefit, they're still up.

And nine months. It's a very good quarter and good timing that the Asia Pac business came in with a banner year at the same time U.S. is fighting the housing market a bit. So that's helped us level things out a bit overall.

This is the strategy I referred to. It's kind of the U.S. strategy that we incorporated in Australia about five years ago. And it's a little bit different. They sell more against bricks down here than we would in the U.S., but, again, it's the same concept. It's about growing our category and creating a differentiated position, so we hold our category position. And it's being well executed. In the past, I've made comments about our manufacturing capability in Australia not being as good as it should be. That's also been coming up as well. So that's helping the bottom line.

The key points in Asia Pac are probably things you guys know. The market's been mainly flat - a little bit down in New Zealand. They're getting the help from the exchange rate. But, even without the exchange rate, they're performing well on their comps. Much more differentiated position. They basically track what percentage of their sales are differentiated. What we mean by differentiated in this business is things that other fiber cement manufacturers don't make. As you know, we have two domestic competitors in Australia. So that's going up. And, as that's going up, our market share in Australia continues to go up.

The outlook for Australia, I'd say-- You can read the slide here. But I say it's more of the same. We're not sure what the market's going to be like. I guess it's not going to be a real downer story like the U.S. But we probably won't get a lot of help in the market. But the business model is moving forward, and I expect the business results in the Asia Pac business to continue to improve.

A couple of other small items. Hardie Pipe is still at an EBIT loss position. So, as a reminder, that business moved into positive EBITs just before the market fell off. We were overweight residential, and we got hurt pretty bad on the demand side. We're still in that position. We've corrected our weighting a bit, but it's still at an EBIT loss position. Our demand is down quite a bit. Again, we concentrate on the state of Florida, which is one of the worst-hit states in the U.S. as far as new construction.

Europe is kind of the same story. Quarter to quarter, the sales are getting better. They're at a very small EBIT loss now. So expect them to start breaking even at this point. But the market development has gone well on the products that we're marketing in Europe. We have a fairly limited geography, and we'll probably expand that. As we get to the EBIT breakeven, we'll be taken on more things, whether it be product opportunities or market opportunities.

So, again, this looks to me like a bit of a summary slide for the weakness in U.S. housing, obviously. And we continue to expect-- We expect to continue outperforming the market. And Asia Pac I already covered off as well.

So, at this point, I'll hand it over to Russell Chenu, and he'll go over the financials for you.

Thank you, Lou, and good morning, ladies and gentlemen. As you can see in this slide and also from what Louis said and presented, the Q3 result and the nine months' performances are both indicators of a pretty good performance in what are very weak market conditions for us, particularly in the U.S. So we're quite pleased with the way the business is running and the headwinds.

We had minor asbestos adjustments in Q3. That's an expression of the minimal movement in the Australian dollar against the U.S. dollar between the end of September and the end of December, only a $1.2 million favorable currency movement, which is something that's relatively new for us because we've had a lot of volatility in that in previous quarters.

We also had an impairment charge on the closure of the Blandon plant. That was $32.4 million before tax and $20 million after tax. That was as we'd foreshadowed when we presented the Q2 results. And, in addition to the write-down, we've also had some other costs amounting to $1.7 million for closure of that facility.

One pleasing thing, I think, particularly in the current circumstances, is that, about a week ago, we entered into some new credit facilities, $135 million in total. And that has, I think, diversified our refinancing risk considerably. We previously only had two periods of-- when we had to refinance. As a result of entering into these new facilities, our refinancing risk is spread between the end of this year and out to 2013. So it's over a five-year period, which is a good thing for us in current markets. Our total credit facilities at the end of February amounted to $490 million. And, as a result of entering into the new facilities, we've increased the weighted average term of debt facilities by 0.5 a year to 2.5 years.

Back in August, we announced the intention to commence a share buyback facility. That got underway in September for up to 10% of issued capital. We've already purchased 7.2% at a share price of an average of $5.86, and $196.3 million spent in acquiring those shares. We ceased the program temporarily on January 1, so we didn't buy any shares during January/February. Notwithstanding that, we estimate that the material benefits in a full year-- so this is not the 2008 fiscal year-- But, in a full year, on the basis of what we estimate and the volume that we've acquired, that amounts to about a 3% or a greater than 3% EPS accretion and 0.5% reduction in our weighted average cost of capital. We will resume buying, subject to opportunities and market conditions, after a reasonable settling-in period with these Q3 results.

As the results are pretty flat, I'm going to go through this so that we can move on to questions. We'll go through it pretty quickly.

You can see there the results for Q3 in a summary table. EBIT was up 31% on a reported basis to $25.2 million. Income tax expense was down on the prior corresponding period from $26 million to $8.9 million. And, as a result of that, the net operating profit was $17.1 million versus an $8 million loss in the prior corresponding period. Normalizing those results for the nonrecurring items produces a result of $34.1 million for Q3 '08, which was down 7% on the prior corresponding period. But the greatest factor in that is in fact the impairment of the Blandon facility, which was a $20 million write-down, net of tax. Obviously, we haven't had the same level of asbestos adjustments in the prior period, but it's still down a little bit, and it's, nevertheless, a good result in the circumstances.

In a similar analysis for the nine months, we've had a reduced level of asbestos adjustments, which you can see there just above the EBIT line - $57.8 million versus $119 million last year. That's the reflection, largely, of foreign exchange, but a few other small items go in and out of that. EBIT is up to $145 million, by 12%. We've had a change in interest income tax expense at a reasonably similar level in the net operating profit as a result of that. On a reported basis, it's $75.3 million year to date, which is up 55% on last year. On a normalized basis, the net result is down 11% to $149.2 million. And the big items in that are the asbestos adjustments and the impairment of Blandon. Nevertheless, the result, at least as far as management's concerned, is a pleasing one in the circumstances.

Turning now to sales, U.S. fiber cement for the quarter - down 9%. Asia Pac fiber cement - up 20%, driven largely by Australian dollar appreciation versus the U.S. dollar. And the total is-- for Q3, a downturn in sales of 4% to $341 million.

On a nine-month basis, the numbers are fairly similar - down in the U.S. and up in the Asia Pac region, largely because of appreciation and a very flat result at the gross level.

Turning to segment EBIT for Q3, U.S. fiber cement - down 16% to $65 million, and Asia Pac - up by 68%, so a very big increase based on performance and also on the movement in the A-dollar. And, in Other, an improvement there on very small numbers. But one of the things that I think is noteworthy is that our European business, which we started as a market development exercise about five years ago, for the first time has moved into an EBIT breakeven position after we've, actually, invested quite a lot of effort and money in that business. So we're pleased with that. The total segment EBIT is down 5% to $74 million. General corporate costs are up by 17%, and I'll have a little more to say about that in a subsequent slide, to give total EBIT, excluding asbestos and impairment, of $57 million, which is down 10%. And the total EBIT for the Q3 was up 31% to $25.2 million after the Blandon adjustment.

For the nine months, a similar sort of numbers, largely, but the total EBIT is up 12% there to $145 million, which is a good outcome.

Looking at a breakdown of the corporate costs, this year we have begun to incur reasonable expenses in relation to ASIC proceedings. That's, in some respects, substituted for the fact that, this time last year, we were incurring or continuing to incur expenses in relation to SCI and related expenses that were arising from the Jackson Commission. Obviously, we're not any longer continuing to incur those sorts of costs. Other costs, the real level of recurring expense, shows a significant increase of 31%. There's two reasons for that. One is that we've had some fairly heavy expenditure in recent times on project-related matters, particularly advisory costs. And we also have the impact of the depreciation of the U.S. dollar. We incur a number of our corporate costs in euro as a result of the Netherlands activities and also in Australian dollars. And, obviously, that flows through. So it's the obverse, if you like, of the gain we get in our Asia Pac business in corporate costs that actually works against us.

For the nine months, we've had, in addition to ASIC proceedings costs, a non-U.S. warranty provision of $4 million and those Other costs continuing to run above what they were for the prior corresponding period for the same sorts of reasons - currency-related as well as project-related advisory costs. So the net effect is a total increase in corporate costs of 27% on a year-to-date basis.

This is a slide more for the record. Our interest expense/interest income is quite challenging to follow because it's impacted by capitalization which is required under U.S. GAAP, to the extent that we're incurring significant capital projects, and also by interest income that AICF receives. So we provide this detail to remind you of something that's relatively recent. The numbers are relatively small, so I won't dwell on it. But it is there for the record.

Income tax expense. We have seen an increase in the effective tax rate, as evidenced in this slide - 38.7% for the Q3 result. That's an outcome of the geographic mix of earnings, especially the fact that we've got a reduced level of CapEx in the Group, especially in the United States. And the way in which that impacts tax is that we actually get what's called an exempt release under our Netherlands arrangements. And, with reduced capital expenditure, our exempt release is reduced, and we incur a higher tax cost and a higher tax rate in the Netherlands as a consequence of that. We've also got coming into that some restatement of our European tax liability as a result of the movement in the euro/U.S. dollar exchange rate, and that also had an adverse impact on the ETR.

For the nine months, it's a little closer to the norm, which is the mid 30s. 36.3% is the ETR for the year to date, and that's up a little bit on last year, reflecting some of those issues that I just mentioned.

EBITDA. You can see here there's some increase that we've started to experience in U.S. fiber cement in depreciation and amortization, so it's up nearly 30% to $12.5 million. That's the result of starting to have the assets move out of construction and progressing into the asset register. And, as a consequence, we start seeing depreciation or increased depreciation on things like the Pulaski plant and also our IT project, which we commissioned in July of this year. So that's something that we'll see coming through progressively over the next few quarters as well. And the total EBITDA was up 23% for the quarter to $39.6 million.

A similar sort of outcome for the nine months. D&A up, especially in the United States, and total EBITDA up 13% to $187 million.

The cash flow, which I think is something of a highlight because there are some quite material numbers here. You can see that we start off with the EBIT as reported and work through to cash generated from trading activities, which is up 26% for the year to $348 million. And then net operating cash flow is up very materially from $45 million to $279 million. That's partly a result of improved performance but also because of the $152 million U.S. dollars that we paid to the Australian tax office last year following an amended assessment. We obviously haven't had a recurrence of that this year. I think one thing to highlight in relation to the net operating cash flow is that, in Q3, even though it's a seasonal downturn for us in the United States business, we still generated an operating cash flow of almost $50 million for the quarter. So it was a very good outcome and shows that we're still monitoring our working capital very closely.

As you'll see here, there's been significant increase in dividends paid, from $19 million to $123 million for the year to date, and, also, the share buyback - $196 million paid for shares that we've done through the buyback. That represents about a $300 million return to shareholders through the increased dividend and also the share buyback in the year to date.

As a result of that, we've had an increase in net debt - $79 million between the end of March 2007 and the end of calendar 2007. We're now carrying net debt of just over $230 million. One of the reasons for undertaking the increased dividend and also the share buyback was actually to improve our capital structure to get the debt level up. So we see carrying $233 million in debt as one step forward in achieving that improved capital structure.

CapEx for the nine months. I guess people who have been following Hardie or investing in Hardie for some years will remember that periodically we report capital expenditure at this time of the year around $100 million to $125 million. We are down this year to less than $30 million in nine months, most of that in the U.S. fiber cement business. But the spend level is way down. It continues to be about 80% strategic investment and about 20% in business-as-usual capital.

Key ratios. I think these are largely self explanatory. Return on shareholders' funds is down a little bit because we've had an increase in shareholders' funds but also a reduction in our earnings, and that's played out in a reduction there. When I say reduction in shareholders' funds, it's a reduction in average shareholders' funds. Obviously, the buyback is impacting that, but we won't see the full impact of that come through until the average works its way though the calculations. Return on capital employed is still running strongly, EBIT to sales margin similarly, and, although we've increased our debt level, we're still with very significant debt service indicators. So debt payback, for example, even though we're running $230 million of debt, on a net basis is still less than one year payback, so a very good position to be in.

Louis talked about the challenging macro environment in which we're operating. Notwithstanding that, we've still had a very solid performance. Cash generation continues, in my view, to be a highlight. We had a significant impairment in relation to Blandon, but that was something we foreshadowed three months ago. I think a very good situation, having got away some additional new credit facilities. And our financial position obviously remains very strong. We, as I indicated, hope to recommence the share buyback in the very near term. And, finally, our results will remain subject to some variation of a result of exchange rates, particularly impacted by the A-dollar/U.S. dollar exchange rate working its way through our system with the asbestos liability being Australian-dollar denominated.

I would, in conclusion, just highlight to you the pages 19 to 21 of the MD&A, which is in your pack and was released to the ASX this morning. They are the pages that contain the cash flow, earnings, and statement of financial position, stripping back to the core business after excluding the asbestos impact.

So, at that point, I'd like to hand it back to Louis so that we can take questions.

Thanks, Russell. I'll finish up with a summary slide, which, I guess, you've seen all that. Basically, my summary is it's a good business in a bad market. So that's where we're standing today. And we'll take questions.

[Emily Van Keefe] from Deutsche Bank. Just a couple of questions, Louis, on your cost position. I'm just wondering, given the higher pulp costs, if there's any intention to pass some of that on to consumers. And just, now that you've closed down Blandon, I'm just wondering if you can give us a feel for your fixed cost position versus variable costs in the U.S.

On the pulp question, we disconnect pricing from costs. We always have, because we have good margins on our products. So we try and value price. So it's more about market demand, penetration curve, and decisions like that.

Having said that, there are a few manufacturers - building materials manufacturers - that have tried to go for a price increase recently. There's gypsum board and a few other commodity-type products. They've been unsuccessful. Price opportunity from a market standpoint-- There may be a few products and a few markets there would be some price opportunity, but, overall, there's no real justification for a price increase from the market perspective.

As far as Blandon goes, the fixed versus the variable, let me just comment on that concept, and I'll ask Emily to expand as far as Blandon goes.

We only look at depreciation, insurance, and tax as fixed costs in a facility. Everything else we treat as variable. So that's a fairly small percentage of a total facility's cost. So as the volume goes down-- I guess we went down 8% or 9% this quarter. Obviously, you absorb more of that through fixed. But we've been managing the variable portion, which is everything but that, pretty well.

As far as Blandon, Emily, specifically, did it shift our fixed? Is that what you're asking? Did it shift? It [didn't] shift. Blandon was set up very much like any other Hardie plant - about the same ratio of fixed to variable. But it wasn't as-- It hasn't been as reliable as the other facilities. So they had a higher variable component. So we are seeing some benefit from the lower cash costs into a market with Blandon closed down. But it's really-- From an overall business, it doesn't move the needle, but, in that region, it's beneficial.

Maybe just one follow-up question on pricing. In the current environment, do you expect to be able to continue to maintain prices?

We do. Again, we value price. We haven't moved our price on our Hardie line at all since we've gone into the downturn. We've had just typical movement in Cemplank, where it's either a competitive situation or it's a large job or you're bidding project. But we do believe that-- Like I said last quarter, we think pricing is basically flat - maybe up a couple points or down a couple points. And that mainly depends on product mix.

Without sort of stating the obvious, it looks like the fourth quarter's obviously going to be quite a bit down. If you look at the trend in quarters from Q1 through to Q4 of this year, what's the expectation going into the spring quarter and the feeling in the market and how that impacts the '09 year?

Like I said earlier, specifically around even the spring quarter, it's very hard to read. So our order file has not increased at all with the seasonal build you'd normally get. So that's why we're a little bit hesitant to give any firmer guidance than we've already given, because we really don't know how March is going to come out. It really is going to depend on March orders because we're not bringing a lot of orders into March where we know pretty much what our shipments will be. And the first quarter's just harder to read than March. So we just don't really have a feel for it. You've got a lot of different businesses kind of making adjustments for a down market. And, right now, we've got no clear sign that this thing's going to improve, even because of seasonality over the next two or three months.

And just in regards to the late indicators, you saw new housing sales sort of gap down again last time more than expected. As a business, are there any sort of key metrics you guys focus on to try and get a feel for where you think things are going to go?

We've explored that stuff. I was telling someone in the hallway we're trying to get through businesses that would be on the front end of a building cycle. So we have the small pipes business in Florida, which, theoretically, that-- Pipes going in the ground should be going in the ground six to nine months maybe even before the start but definitely nine months before our product goes in the job. We've actually gone out to get some information from other players in that market outside of Florida, and it's just dead right now. That didn't bother us too much when we thought about it a little bit more, because the builders have so much ready to build right now, they're probably not worried about, When am I going to start something new. They're just basically, When can I restart what I already have ready to build on? So we don't have any special insight in the market. What we try and do as a business is we try and maintain our flexibility. So, if the market's off another 10% or 12%, we think we're going to be very quick to adjust to that level and hold our costs together and kind of deliver the result. But we don't have any special insight.

Now, as far as capacity, obviously, we're long on capacity in this market. The only thing we would be thinking about is, Okay, if this market does comes back and it comes back faster than anyone thinks, do we have enough capacity ready for a good market? So we're working on that a little bit right now. And, basically, what we'll do there is we'll just compress the critical pass, so we can get our-- if we need another machine or another plant out of the ground, we can get it out in 12 months rather than taking the full 24 months. We've permitted and everything.

And can I just ask on the margins? Given that the business is largely, I guess, variable costs, apart from those items you sort of said were not, how much-- On a flat market or the uptick, where's the leverage now in terms of that margin? Does it come through more on--? If volumes start to increase, is it more through the ability to get prices or--? Can I have a sense where the leverage is going forward?

Again, we're not aggressive price takers, so we're pretty patient with pricing because we follow value pricing philosophy rather than a commodity pricing philosophy. So I think your leverage is more around the infrastructure costs in the business. So, you've seen the market's down 55%. We've actually taken 23% of our headcount out. So, in relative terms, MSF shipped, we're kind of, as you'd say, fat right now. Now, we don't think we are. We think we have those people working on things that create value for shareholders. But that's where your leverage will come from in that you've got enough people in the organization to deliver a lot more product. Now, we might have to, obviously, up the hourly headcount a bit in some facilities, but, as far as the salary headcount, we'll be ready to do more without adding quickly to the headcount.

Just two, if I can. First of all, you flagged in December, I think, that, with the rollout of the retail stores, we might see a bit of margin impact as we saw some additional costs. Should we view that as being evident in the third quarter, or is that more something we'll see in the fourth? And to what extent does it ramp up?

And then just one maybe for Russell on the asbestos. I'm noticing that the average claims are sort of trending down. Obviously, next quarter, we'll get a revised KPMG estimate. But is there anything you're hearing from the advisors on why that's coming down? And does it look sustainable?

I'll answer Russell's question. We don't have any firm information that would make us take a view that asbestos is better or worse than it has been. Again, basically, we wait for that report to come every year, and then we plan accordingly.

I apologize. Your first question?

The rollout of the retail stores, just any margin in second and third quarter?

No impact because it's just too small. So we haven't rolled out past Denver. We are working on plans to roll out into the mid-Atlantic. And the comment about it compressing EBIT margins is pretty simple. We see the retail stores basically being a self-funding marketing program. In other words, all we want to do is hit breakeven in markets because the real strategic value to Hardie is getting the preference in reside shifted from vinyl to Hardie. So it's really-- It's a strategic initiative for the manufacturing business, but it's kind of run through retail stores. And the leverage is about ten to one. If there's $1,000 worth of siding on a job, there'll be at least $10,000 worth of costs on that job. So our people running those reside centers will be generating a lot of revenue per center per job and generating almost no EBIT. So that's why it will tend to pull things down. But the scale difference over the next year or two I wouldn't worry about because the scale difference will not impact-- You won't see it on our overall results. It will be pulling down but not enough for you guys to see it.

Good morning, Louis. [Roan Gallagher] of Credit Suisse. One question operationally, if I may, and then a couple for Russell. You touched on your ability to flex your margins have been commendable, given the downturn. How much more ability do you have to flex on your controllable SG&A costs, in particular, going forward?

Basically, what we always try and do is kind of take the short term and the long term. So when we just recently went through the business, we said - What's the strategic component of this activity, and what's the economic payback of the activity? So anything that has a good economic payback and a strong strategic value we do. So, now, you could say, Well, you could only do the things that have an economic payback in a really terrible market and kind of put the strategic stuff on hold. And you could. The window's unlikely to close. But that's certainly not the position we've taken in this business, and we don't anticipate taking that position. So we've been through recently-- We just reduced our salaried non-manufacturing headcount by-- I think it was 42 or 43 people. More importantly, we reallocated a lot of our field resource toward higher contribution products. If we get a truckload of higher contribution product, basically, return's much quicker.

Now, strategically, both initiatives are important. So we haven't given up on one product line in a market in favor of another. But we have biased it toward the ones that can return higher in the short term.

And then, for Russell, you touched on the corporate tax rate and corporate charges. Both of them have crept up. In regards to corporate charges, I think the previous guidance was roughly $8 million a quarter, with, obviously, the project advisory costs presumably something to fix the tax rate going forward. What shall we be looking at for both of those elements, please?

Roan, I think the corporate costs-- or the project piece of that is likely to come down. The big unknown is what happens with the impact of further currency movements - U.S. dollars versus euro and Aussie dollar. So I hesitate to provide more specific guidance, other than the fact that it's likely to continue to be at a higher rate than $8 million that we've talked about previously. So I think advisory costs will come down, but the other piece is a bit of an unknown quantity, unless somebody wants to predict the U.S. dollar direction, and I wouldn't be willing to do that.

Our CapEx spend-- Tax is impacted, as I said, by currency as well, but we're not looking in the near term to increase capital expenditures. So we'll go through this same issue. I think it will-- The tax rate will be a bit higher than 35% or 36% but not materially higher.

Hi. [Todd Scott of ABN AMRO]. Given the price pressures you must be seeing from your customers in the U.S., do you expect moving towards the Fighting brand a little earlier than you would have expected otherwise?

No. In fact, there's been no activity on the Fighting brand, and the move to Cemplank has been slower than we actually forecasted. So the-- I guess the thing to keep in mind with Hardie is, in a lot of cases, we can deliver a lower cost solution with Color, which seems a little bit backwards, but in a lot of markets that's the case. And the other thing is it looks like our brand is one that the builder feels helps him sell houses, because there hasn't been a mad dash to Cemplank at all, and there's been no activity on the Fighting brand development. It's on the shelf, but we haven't used it.

And just one more. Looking at the numbers and seeing housing starts going back 28% but the volumes only going back 10%, can you give me a little more color on how much of this is market share gains and how much might be strength out of non-res?

We don't sell any-- I shouldn't say any. We sell very little non-res. So, basically, the U.S. business is set up very heavily biased toward new construction residential. Now, what you will do is you'll get different movements in the segments. So, geography. Pacific Northwest has been better than most of the markets until recently. And then you'll get housing segments, where, like in Texas, where we have a pretty good big position in entry level and first move up, that seems to be down a lot more than the higher end of those markets. So you get that kind of movement. But, when we show the primary demand chart, basically, what we're saying is we feel that portion shown on the primary demand chart is market share gains. And we feel we're growing more market share today than we were six or nine months ago.

Louis, [Michael Ward] from Morgan Stanley. Two things. Firstly, can you--? There's been a lot of talk around housing starts. Can you just give us a sense of how the renovate and remodel market might play out over the next three to six months?

I was actually watching Australian TV in the gym this morning, and they had a thing about the equity lines being pulled in the U.S. I think that's a bad sign for R&R. So I assume you have equity lines in Australia. Basically, over the last 15 years in the U.S. as people have built equity in their homes through appreciation, they've taken out equity lines of credit. And then, when they want to remodel or buy a new car or whatever, they could use that line of credit and most times get a tax deduction for the interest paid. With the banks now pulling those lines because equity has dropped below where they feel comfortable with, I think that will impact R&R somewhat. Now, there are forecasts out there for R&R. So I think you'd be much better going by those forecasts than listening to Hardie. But I think the reality with Hardie is, and a lot of people have asked me this - How to do you get bigger in the repair and remodel segment? So, right now, you're over exposed in new construction, and new construction is getting hit hard. If you were 50/50, you wouldn't be getting hit as hard. And that is a true statement.

It's a real challenge, the R&R segment, because, basically, even though it's as large as the new construction segment and maybe right now even larger, it's hard to aggregate buyers. So when we go talk to a builder, we may be talking to someone that's doing as many as 1,000 housing starts. If we're addressing the repair and remodel segment, obviously-- Most of us will probably-- Most people in America will probably reside maybe once or twice in their lifetime of owning a home. So our business strategy has been built around leading new construction and letting repair and remodel follow, basically, on the premise that, when people update their house, they basically want what the new houses have as their standard. And I think it's worked really well in some of our big markets, like Atlanta, Portland, and Houston, where we're a very dominant market share player. The challenge for us is in the mid markets and the markets where we have low share. We haven't gotten that pull from new construction into R&R as much as we'd like. So that's what the siding center concept is about is getting-- providing a little bit more push in addition to what we have from the new construction position.

So I think repair and remodel will be down; what percentage I'm not sure. We're about a third exposed to it, so it doesn't hit us nearly as hard as new construction. But I think strategically the key is for us in the next downturn to have a much better position in repair and remodel because it's not something you can flip a switch and fix overnight.

Also, just on the Asia Pacific business, I think you said it had a better quarter. Margin was 19%. How do you think about the margin targets for that business versus the targets that you have in the U.S. business, and over what timeframe could we expect that to play out?

This is an unusual day because I have the three GMs for that business in the room here. Anyway, what they're working for is what we originally established in the U.S., which was a 20% EBIT margin. Now, clearly, New Zealand has a chance to outperform that. Australia has a chance to move above the 20%. In the Philippines, it would be a real challenge to get to 20%. But, overall, I think 20% to 25% long term in that business is probably a good target going forward.

Sorry. It sounds like the Philippines was pretty weak. Would that not imply that Australia and New Zealand are already there?

I think New Zealand's there; Australia's close, if they're not there. Philippines is behind. We've talked before why a country like the Philippines would be behind. It's not because our point of differentiate is weaker. It's really the affordability in the country. So, instead of selling fiber cement for $600 a ton, we sell it for $300 a ton in the Philippines. It's not because the value's not there; it's because the customer can't afford to pay for the extra value. So it's kind of limiting.

Okay. It doesn't look like there's any more questions from the financial community in the room, so we'll move to the phone. Are there any questions on the phone?

The next question comes from Matthew McNee from Goldman Sachs. Please go ahead.

Louis, most of mine have been covered, but just a couple of quick ones. Just on Asia Pac again, some of the guys are touching on the big increase in margin. But what's driving that? Is it just costs [out]? Are you getting price increases? What's really driving that?

It's been a pretty balanced improvement. But I think at the center of it is a more differentiated business in Australia. And then, in New Zealand, they've had Linea launched for several years now, and that product continues to grow strongly. In addition, we've gotten some manufacturing gains, and we have taken some market increase. So it's pretty much across the board. The businesses are just running better. They're better positioned in their markets. And, although there's still some price fighting on basic products in Australia, it's just not having the same impact on the margins as it had, say, three or four years ago.

And just another question. Just on Jamie and Rob, Jamie, particularly, I always thought was a James Hardie disciple. Can you give us a bit more background on why those guys have left? Is it a concern? What's happening there?

Both Jamie and Rob, like I said-- Robert Russell-- were very good contributors at Hardie. I enjoyed working for them the whole time they were there. I think the reality is they hit a point where they wanted to go try something themselves. And, specifically, Jamie has already joined a business that he's going to run. It's a very small business, but it's something he's going to run. And I think that was a big driver for him. And, with Robert, it was similar. It's just a long time at Hardie. And, although they're both still firm believers in the business, they just felt it was time to move on.

As far as how is Hardie positioned to go forward without them, obviously, we believe we have the management depth to where any one, two, or three people in our business aren't really driving the bus. It's a lot more than that. I think we have 1,800 or so people working for us. That next level down below the SLT, you've got some good, solid performers there that really are driving the implementation of our strategies. Now, our SLT, like most senior management teams, is very focused on the strategy piece. We probably do a little bit more on the implementation piece at the top level, but most of it's done the next level down. I think we're going to be in good shape, Matt, and, basically, I think both those individuals have really done us a good job and benefitted. I think they're both going to do well in their next role.

Sorry. Just one last one, Louis, just expanding on Roan's question about costs down. As you pointed out, housing starts have dropped 1 million already. They're unlikely to drop another million. But repair and remodel-- I mean, house prices are collapsing in the U.S. at the minute. If repair and remodel does take a big step down from here, what sort of--? Is that a different segment? Do you service that in a different way in terms of--? Is that an additional set of or group of costs that you get out there? I'm just trying to get a sense for how much more costs you could take out if you had to. And, if you did take any other lines off or plants offline, which ones are they likely to be?

Like I tried to indicate, I don't see where economics are going to drive us to want to close facilities. We kind of looked at it with just some scenario planning. You basically want to keep reducing production out of a site rather than close a site because you don't want to just pay freight people more. But, anyway, repair and remodel, like I said, the only good news there is it hasn't come off a lot yet. And, if it does come off substantially more, we're way underweight in repair and remodel. So it doesn't hurt us. It will hurt our backer business more than our siding business, obviously. But, you know, it's just one of those things.

I think one of the banks has a housing forecast out for 500,000 or 650,000 starts. If that happens, to me-- I'm not an economist, but that's a recession. So everything will be off, and we'll react to it. And, just like we said before we came into this downturn, there are certain things we'll have to do. But what we won't have to do is give up our market position. We value price. We'll continue to buffer to base demand loss through market share gains, because, in a soft market, people have to sell houses. We think we have a product that helps them sell houses.

Sorry. Just one final one, Louis. In the last quarter, you said that you were probably getting a little bit more optimistic than some of the pundits out there having obviously previously been a lot more pessimistic. Is that still the case, or are you now basically back in line with the pessimists?

I'd say I'm not at the bottom of the forecast. Those 600,000 and 650,000 forecasts-- I find it hard to believe. But understand that's based on very little, limited knowledge from a person that doesn't know much about economics.

No worries. Thanks a lot.

The next question comes from [Scott Rochsport] from "Sydney Morning Herald." Please go ahead.

Good day. It's a question for Russell - probably two questions. I was just trying to get a bit of an update as to the dispute you have with the ATO. And, also, I just want to know if you feel you're still getting tax benefits being based in the Netherlands.

Okay. Before we take this question-- It looks like we've gone to media questions. So any of the analysts or investors that want to excuse themselves are welcome. And then I guess we'll do it the reverse. We'll take the media questions over the phone first, and then we'll finish up in the room.

The first question, as I understood it, was relating to--

The tax-- Just in relation to the ongoing dispute you have with the ATO. I just wanted to get a bit of an idea as to where that now stands.

Well, we commenced litigation against the ATO on that last year. We expect that the directions hearings will get underway during April. And, until we have that in process, it's really hard to estimate when the substantive hearings might commence. But I do expect that it will be a fairly lengthy and drawn-out process.

Scott, the second one, please? Can you just remind me?

Given your higher tax rate for the year, do you feel you're getting any benefit being based in the Netherlands?

Yes, I think we are, although, clearly, the benefit that we receive in the Netherlands isn't as great, given that we've had some changes in our macro environment. So part of the benefit that we get in the Netherlands is from a high level of investment in our businesses, and just, probably temporarily, that investment level isn't running at what it has done historically. So we lose some of the leverage that we've had previously from the Netherlands structure. But I still think--

You've hinted previously that you may sort of review your-- you may sort of review your-- basing yourself there. Is that still out for review?

Yes. That review is ongoing.

Okay. Thanks.

The next question comes from [Ben Chen] from Merrill Lynch. Please go ahead.

Just a quick question. I think your continued market share gains are quite amazing, given fiber cement's price position versus competing products. As you mentioned, builders focus on costs in the current environment. Just to play devil's advocate a bit, could you sort of remind us of the current split between your sales direct to the builder and through a third party, just to get an indication that there's no products sitting out there in the lumber yards that's driving that market share gain in the last couple of quarters?

We don't ship anything to the builder. So everything's in the channel. Channel inventories-- Obviously, there would be little reason for them to be high right now, because everyone's worrying about cash flow in our industry. So I don't think there's much risk that six months worth of primary demand gains are sitting in the channel. The channel can't hold that much. But, again, there's no motivation for them to hold anything at this point.

Thanks.

There are no further questions from the phones at this time.

Thank you. Any further questions from the media? All right. Thank you very much. I appreciate you guys coming this morning.