James Hardie Industries PLC (JHX) 2009 Q1 法說會逐字稿

Good morning, everyone.

Welcome to the results announcements for first quarter.

Same approach as we always take.

I'll cover off the business stuff and hand over to Russell on the finances and then we'll go to Q&A.

The quarter was actually a quarter where the market did what we thought it was going to do and that was continue to decline at a pretty steep pace.

The business ran very well.

The bottom line performance, considering the market, was good.

The comps against last year don't look that good because last year was a record quarter, I think, both on EBIT and EBIT margin.

So -- but without the asbestos, we had the net operating profit of $41.6m.

And you'll see later the Australian business ran well, Asia Pac in general ran well, and US business stayed in the target range for EBIT.

So we'll go to US.

This is a picture of a house in Nashville using our product, ColorPlus product.

So the quarterly result, we're down 20% in the first line and it was basically the same on volume.

It was very slight average price drop.

I think it was $4 or $5.

That was around product mix.

We had a heavier mix toward interior products, which sells at a lower price than our exterior products.

EBIT margin -- EBIT was down 42%.

Like I said, that was a bit to do with the spike we had last year on EBIT in the US and just generally less volumes, so less contribution dollars to put to the EBIT line after you pay for all your organizational costs.

And EBIT margin did drop significantly over last year, but right in the middle of our target range.

We haven't changed anything in the business in the last quarter.

Still running the same strategy.

A little bit more focused on the bottom line, keep things together.

But we're still very focused on both the primary demand growth for fiber cement, our category share and shifting the product mix toward the higher value products.

The market update, I think everyone's aware of it, starts were down 35% versus same quarter last year.

July just came out yesterday or this morning, I believe.

They were down about 30% in July over last year same quarter.

The -- probably the only real significant -- and I don't know if I'd call it significant -- but repair remodeling is coming off more right now.

I think it's around -- from the numbers we see and we're forced to use same store comps out of Depot and Lowe's as our best guide for repair and remodel, but it's about 12% off.

And there's not too many positives in the market, obviously, between inventory and builder confidence and all the rest of it.

That would all still be very negative.

Key points for us in the US, obviously we declined in sales, with the market, not at the same rate.

But you'll see later we didn't grow a lot our primary demand in the quarter.

It was better than the fourth quarter, but it is getting more difficult for us to grow the share as we -- as the decline becomes more prolonged.

ColorPlus is still growing, which is good.

Like I said, weakness in repair and remodel did dampen our interior sales more than in previous quarters.

It was still -- still picked up a little bit on mix against exterior, but it did decrease some.

Freight costs are a pretty big issue right now.

Freight costs are very high due to the fuel cost, but also, with the lower level of activity in the industry, you have less opportunities for backhauls.

So a lot of trucks are having to leave our factory full, go to market and then come back empty.

So obviously, that's a lot higher rate than if they leave our plant full, go to market, pick up something in that market and come back full.

So we have seen a significant uptick in freight.

Average sales price, pretty much what we've been telling you.

We're holding it pretty flat.

I think our guidance is bad.

We think we'll be plus or minus 2% and we were minus 1% and it was all about mix.

The outlook, we haven't really changed our views.

Our April reset, we did do a good job.

We picked the market just about right.

We're a little bit below where the market is, so you're able to stretch up a little bit.

We're looking pretty good in the second quarter.

The order file's fine and our production relative to the order file is good, so we're in pretty good shape.

We do expect repair and remodel to remain soft for a while.

That, I think, is driven largely by falling house prices and people hesitant to make as many big dollar repair and remodel decisions with their house price falling and then there'd be an equity -- access to equity consideration for them as well.

We had good cash flow in the first quarter and the operating business cash flow is still performing well.

Obviously, our goal is to grow market share.

It's becoming more difficult, but we think we're going to continue to grow a little bit.

And then, we are maintaining our category share and we expect to maintain that going forward.

Just a quick look at the graphs.

This is the history of the US business.

So you can see the housing starts still coming off at about the same rate.

Our volume and our revenue are obviously following that somewhat.

This is the primary demand growth chart we talked about -- I mentioned.

It was -- it actually -- from the quarterly comps in PDG, it's hard to comp quarterly, because you've got four things going.

You've got last year's housing starts, this year's housing starts, last year's volume and this year's volume.

So you've got a lot of variance and that's why we smooth it out.

Last year -- last quarter's comp actually was negative.

This quarter's comp flipped the other way and it went pretty good positive.

But the more important line is the solid line and you can see as we went -- entered the downturn it became more challenging to grow the primary demand.

And it looks like, for about five quarters there, we held it at about the same level when you look at the four quarter rolling average.

But that's becoming much tighter with the two dots in this quarter and we would expect that again to be challenging through this year, as the market tries to find a bottom.

Selling price, as I said, is pretty much as we've been forecasting.

We haven't been cutting -- we haven't taken across the board cuts in our product pricing in the US.

Of course, you'd have some competitive situations where you cut your price.

We've actually taken a little price on Cemplank recently, so it probably hasn't hit our results yet.

And we're also taking a 2% fuel surcharge and that'll be coming in the second -- tail end of the second quarter and the third quarter.

But despite all that, we still expect pricing to be relatively flat through the downturn.

The EBIT margin, like I said, I think it's pretty strong, 23.9% I think it was.

When you look at the volumes we're doing that with, it's a pretty good result.

And I indicated in the fourth quarter we had a little hiccup in the business where we didn't quite plan the volumes right and it resulted in that EBIT margin dipping and our inventories spiking a bit.

This quarter, we've reversed those trends.

Of course, it's always easier to get the EBIT margin in the first quarter, so there's a bit of that there as well.

But quite honestly, it's a tough market.

The business did run very well in this quarter to deliver that EBIT margin.

This is one of our new products in Australia.

I think we're just in the launch or prelaunch phase.

It's up in Queensland.

And this business has done a really good job moving to a more differentiated position.

And this product is just the latest in a long line of products they've successfully launched in the market and starting to create good demand for.

Asia Pac did run well.

Philippines isn't running as well as we'd want, but it's the smaller of the three.

Australia is doing a nice job.

And New Zealand's facing a pretty significant downturn in the housing market, but they're still delivering pretty good results.

So obviously, you've got to worry about the foreign exchange here, but even on local dollar comps the businesses ran well.

Strategy here very similar to US strategy.

Only thing they have a little bit more concern with the two direct competitors in Australia obviously trying to discount their way to higher market share.

So it's a little bit more challenging for this business to just always want to keep moving forward and moving forward, because they've got to watch their back a little bit more.

But they've done a nice job and, like I said, the new products are really making a difference.

The markets -- the market in Australia has been soft, I guess, by historical terms.

It's not dramatically impacting our results, but I guess you get -- I don't stay right on top of the Australian market, but I've gotten the view that it's going to get better and I've gotten the view it's going to get worse.

So if it gets worse, our guys will have to manage that.

If it gets better, we're well positioned.

New Zealand will get worse.

I think everyone agrees on that.

So again, it's a good business.

We'll maintain our pricing and product margins and all the rest, but we'll be doing it with less volume in New Zealand as the market comes off.

The outlook in Asia Pac, I guess I've made a few of those comments, but basically we would expect it to be a softer market we're dealing with.

But business is running well.

A lot of the -- we have a lot of momentum in this business, especially the one in Australia.

And I think we're in pretty good shape.

We do have a little fix-up to do in the Philippines.

It's mainly around manufacturing, so it's not something we can't resolve pretty quickly.

At this point, I'll hand over to Russell Chenu.

Thanks, Louis, and good morning, ladies and gentlemen.

Okay.

In terms of the overview, the result was obviously affected by further declines in the US housing market.

It's a very difficult comp for us, Q1 of this year, because the prior corresponding period was a record EBIT and a record margin for the US business by some considerable amount.

And given the importance of the US business in James Hardie as a Group, that obviously has a big impact on the overall results.

And so, it was going to be very difficult for us to maintain the same sort of levels that we had last year and that's reflected in these results.

Cash flow was down as well as a result of the reduced contribution from the US business in the environment in which it's operating.

We did have a significant reduction in capital expenditure and I'll talk more about that later.

Asbestos, we saw again adverse moment in the currency, with the Australian dollar appreciating against the US dollar during the quarter by a little under 5%, a movement from 91.7 cents at the end of March to about 96 cents at the end of June, and that has a big impact.

It was $40.5m, which is a non-cash expense in this period.

Obviously, something that may impact in future, but certainly not at the -- not in the current period.

Also of note, we realigned our reporting segments.

You'll be aware that, at the end of 2008, fiscal 2008, we closed the pipes business that was previously in what we called an Other segment with the European business.

Now that the pipes business has closed and all the other businesses that were in that segment, including Artisan Roofing and Chile, we've disposed of, we've decided to just reduce the segmentation to two segments.

The European business relies substantially on the US business for its sourcing, not in terms of pricing or marketing, but clearly there is some significant relationship between the two.

And so, we've put the US and Europe together in one segment and Asia Pacific remains as the Australia, New Zealand and Philippines businesses.

Moving on to earnings, you can see the impact of the downturn in US activity in these results.

A 14% downturn in net sales.

26% downturn in gross profit.

Some savings achieved in SG&A.

As Louis indicated, we've reset the business a number of times in the past two years.

We're continuing to see some of the savings coming through and we expect that that will continue to show up in future quarters.

The asbestos adjustment that we discussed a moment ago, a very significant effect on the result and an increase on last year.

Interest expense, a very minor $1.1m interest expense and income tax expense down by 20 -- sorry, down by 44% to $20m.

The bottom line obviously isn't good.

Just a little bit better than breakeven.

But as the next slide shows, when we back out the impact of asbestos, reversing that $40.5m foreign exchange adjustment on the asbestos provision, the result is a bit more respectable.

It's still down 39% to $41.6m once we exclude asbestos, but it's still not a bad result in all of the circumstances.

The following slide, 24, is looking at the segment result, reflecting the new segmentation of USA & Europe and Asia Pacific.

The sales in the US & Europe segment down 20%, reflecting the US downturn, partly offset by improved results in Europe.

We continue to grow that business.

It remains very small, but it has improved its sales and its earnings performance quite materially in the last 12 months or so.

Asia Pac up 17% in terms of sales, assisted by stronger currency against the US dollar.

And overall, a 14% result down to $365m in sales for the quarter.

The segment EBIT.

US & Europe down 42%.

Asia Pac up 27%, reflecting a currency gain or a currency assistance, if you like, of 12% and an underlying performance improvement in the business of 15%, accounting for the 27%.

And the total segment EBIT up 37%.

General corporate expenses were down, and I'll speak more about that in a subsequent slide, to give total EBIT excluding asbestos down 39% to $64m and a total EBIT down 69% to $22.9m.

Looking at corporate costs for the quarter, you can see that the total there was $12.4m, down 21% on $15.7m last year.

The equivalent quarter last year, we had a $4m charge relating to a non-US warranty provision and that obviously isn't repeated.

It was a one-off.

And the improvement in the underlying spend here is actually better than shown in the slide.

I think you'll be aware that we have corporate costs incurred in US dollars, in euro and in Australian dollars.

Clearly, the strength of the euro and the Australian dollar against the US dollar has an adverse impact on corporate costs.

We get a benefit in terms of the Asia Pac results, but we get a negative on the corporate costs.

And that's shown up here in the fact that the underlying level of expense isn't coming through in US dollars.

We estimate that the corporate costs in the quarter were inflated by about $1m versus the prior corresponding period.

So that, I think, is an indication of our cost management is actually working, although not necessarily showing up here.

ASIC proceedings costs amounted to $1.5m for the quarter.

We anticipate an increase in ASIC proceedings costs in future quarters, including this current quarter two that we're in now.

The ASIC proceedings go into substantial hearing in late September, so there's a lot of activity in that area at the moment.

Very, very expensive legal teams working on it.

We're paying costs in relation to the Company's own defense as well as those of the former officers and directors.

And there will be some increase in that in future quarters for as long as the ASIC proceedings remain on foot.

Turning now to net interest expense, gross interest expense was up, reflecting the increased debt levels as a result of the share buyback we undertook last year.

The net interest expense excluding the AICF net interest income is probably the line here that shows that most accurately, the $2m up from $1.1m.

And we've had strong cash flow, so our debt is down at end of Q1, but the payment of the dividend and payment of contributions to AICF will see that go up.

So I'd be expecting that that interest expense line in this quarter will remain about the same in future quarters.

Turning now to income tax expense, this is a slide that we introduced a while ago to show the impact of adjustments to give an underlying indication of the effective tax rate.

In this period, it's relatively low compared with prior quarters, just under 33%, as indicated on the bottom line there.

We had a small one-off item in Europe that had a more significant impact on the ETR than would normally be the case.

But because the numbers, the absolute numbers, are relatively low, given the underlying profitability, it actually did have quite a big swing in the effective tax rate.

We've previously given guidance that the tax rate would be around 35% plus or minus 2% or 3% at this adjusted level and we continue to expect that that will be the case in future quarters.

Some commentary in relation to a number of income tax issues that we are currently managing.

In 2006, we received an amended assessment from the Australian Tax Office in relation to transactions going back to 1999, which is a good indication of the sort of delay that you see with tax affairs.

That's been -- continued to be in dispute.

There have been a number of court hearings already relating to it, but those court hearings have not reached the substantive hearing stage.

And it is currently set down for December, early December this year, and expected to take about four days in the court.

So that will be in the Federal Court.

And we anticipate that we'll have an outcome on that within a few months after the court hearing.

We also have tax audits going on, as previously disclosed.

There is a tax audit with the ATO in relation to 2002 and also for 2004 to 2006.

Both of those remain work in progress.

Notwithstanding that, one of those matters in 2002 has been a matter that triggered an announcement by us earlier in this year and that was for the reinstatement of a former subsidiary by the name of James Hardie Australia Finance.

And the Federal Court issued an order upon application by the Australian Tax Office about 10 days ago for that company to be reinstated.

And that is in process and will go through what I expect to be a reasonably protracted process in the period ahead.

In addition, during the recent months, we've announced that there's a dispute arising with the Internal Revenue Service in the US relating to what in the US is called a notice of proposed adjustment, which is the equivalent of an amended assessment in the Australian context.

The dispute arises from an adjustment or an amendment to the US Netherlands Treaty that was -- tax treaty that was renegotiated in 2004 and took effect at the beginning of 2006.

The exact matter relates to whether or not James Hardie qualifies under the limitation of benefits provisions in the amended treaty.

And the IRS is taking the position that we don't qualify for the concessional withholding tax rates on payments of interest royalties and dividends from the US business to our Netherlands parent company and subsidiaries in the Netherlands, and we take a position that we do qualify for the concessional treatment.

So that will work its way through a normal process, which in the US is somewhat different from Australia.

The NOPA was issued in June.

We've responded to the NOPA and then the IRS has issued what's called a 30 day letter, which is a demand for us to either pay money as assessed or to appeal.

We responded on Monday indicating that we will appeal and we've lodged our submission in relation to that appeal.

Unlike Australia, there is no cash impact until the matter is finally resolved, either through an appeal process or through a court hearing and, in the US, there are dedicated tax courts.

So it may be quite a lengthy process to get an outcome on this and I don't expect it to be resolved in the very near future.

We're also -- as unrelated to income tax matters, obviously we've got the ASIC proceedings which are going to be reaching an important stage in the very near future.

So if you add the ASIC proceedings and the tax issues, in terms of corporate activity, there's a lot going on.

We've attempted to quarantine people who are in the operating side of the business from being involved or consumed with the corporate issues.

There's a very small team of us who are managing that.

And we would anticipate that there'll be likely developments in future quarters and obviously we'll make announcements as necessary.

Turning now to EBITDA, I think this is pretty much as expected.

Depreciation and amortization pretty much in line with previous periods.

The total EBITDA excluding asbestos was down 35% to $78m and, after asbestos matters, down 59% to $37m.

Looking now at the cash flow, which is I think a very strong story yet again, obviously the EBIT is down substantially at 69% to $23m, as indicated on the prior slide.

And we announced or indicated at the Q4 results, the full year results in May, that we'd had a bit of a miss in relation to our working capital.

We were a bit slow in responding to -- or slower than we should have been in responding to the fact that the US market didn't turn up in February and March as it normally did.

Somewhat to our surprise, almost right on tick on April 1, there was an upturn in demand in the US business that we would normally have seen earlier.

But we were carrying very significant inventory compared with target at the end of March.

That's corrected during this first quarter and the result has been a $47m reduction in net working capital for the Group.

That's mostly in inventory.

It's not exclusively in inventory, but we've certainly had our eye on the ball in terms of working capital management in this quarter and the results have shown up.

We paid $20m of tax in the quarter in our different jurisdictions.

And the result of all of that was a net operating cash flow of $95m, significantly down on the prior corresponding quarter, where we had $130m plus, but it's still a very strong result in the circumstances.

Capital expenditure, as shown on the purchases of property, plant and equipment, was below $4m, which is down significantly and is probably actually at the lowest point in the cycle.

The movement in net cash was $76m and that, in fact, was the reduction in net debt, which is I think a very strong result in the circumstances in just one single quarter to see a $76m reduction in net debt.

And so the net debt at the end of June was $153.2m compared with $229m at the end of March.

Looking very briefly at capital expenditure, as indicated in this slide, it was down.

The only thing I want to add to that is that I think that, in future quarters, it will not be sustained at this sort of level.

We have a number of relatively small projects in train, which will see a slight up-tick in that.

And I'd expect that, for the full year, it'll probably come out about the same as financial 2008, which was just below $40m for the full year.

Looking at some of the key ratios, clearly they're down, given the external environment and our performance in that environment.

So return on shareholders' funds not looking too bad in the circumstances on an annualized basis.

Return on capital employed, EBIT to sales margin, gearing all showing some decline.

Importantly, our debt service capacity indicators in terms of interest cover and debt payback continuing to be very, very strong and showing that we have considerable capacity to take on further debt.

In summary, the results obviously significantly affected by the continuing declines in the US market.

And I guess we're not seeing a lot of tailwind in the Asia Pac region in terms of industry activity, although we're getting the currency benefit coming through.

Our operating cash flows continue to be very strong despite the challenging market conditions.

We have attended to our organizational cost base in the US and in the corporate arena and we're starting to see the benefits of that come through.

And we continue to be affected by asbestos adjustments.

The final point here, I think, has been something in our presentation packs before.

It's probably got a bit more importance now and so we've expanded the note.

We will see some adjustment going forward and each $0.01 change in the A dollar versus the US dollar is equivalent to about $8m of adjustment in the asbestos liability.

Given that the A dollar has fallen against the US dollar by 10 cents or so in the past two weeks, if that remains on foot, we'll see a very substantial adjustment at the end of Q2.

Those -- the adjustments in the past have -- since in fact we booked the liability in 2006, has been almost uniform one-way traffic each quarter, with an adverse movement.

We may be about to see an adjustment if the current exchange rate level holds.

So that's the end of the presentation and we will happily take questions and Lou can respond.

Thanks, Russell.

So on to questions.

Any media we'll do at the end.

If you can frontload them with business questions, that would be good.

I'll take all those.

And if we get into tax or other financial issues, I'm going to get Russell up here.

So anything -- yes, David?

(Inaudible question - microphone inaccessible).

Well, you get the double head, right?

You're in a declining market and then you'll have your seasonal downturn.

So obviously, we wouldn't expect the third or fourth quarter to track like the first and second.

So we are looking at the middle of the range down of the analysts ' estimates at this point.

That's our best guidance.

We are -- I guess I didn't cover in the presentation.

I'll probably get it in questions.

We are facing higher input costs pretty much in all of our businesses, but especially the US, so there is -- there will be a challenge the rest of the year to hold things together.

We're confident we will, but freight's up significantly.

Pulp's up.

Cement's down a little bit.

Energy's up.

So we've got some things that want to pull the bottom line down, but obviously we're fighting that.

Lou, I guess carrying on from Leitchy's question about the assumptions you're making.

Yes.

So what are you expecting for housing starts, if anything at all, for '09 to have some level of confidence about giving guidance?

Nobody knows where the housing starts are ending up and most other people aren't giving guidance at all, so --

Yes.

No, we're not -- we don't know where the housing starts are going to end up either.

We set the business for somewhere around 800,000 starts.

It's going a little stronger than that right now.

I think July was at the 960,000 range.

Of course, we don't participate in high rise starts so we work off at a 960,000 to get to our housing starts that help us deliver results.

And that's where we're sitting.

We're sitting 800,000.

If it's 900,000, we'll stretch up to 900,000 without much problem.

If it's below 800,000, we'll have to take some more stuff off.

Right now, I think we'll actually -- which is pretty unusual for this time of the year, we'll actually put a little production back on.

So we'll put a little production on in Texas.

And we'll probably, if things stay the way they are -- I'm not saying they will, but if they stay the way they are, we'll probably put some more production on on the east coast, Pulaski.

The reason for the additions -- obviously, it's about basic demand running a little bit higher than we thought it would.

But the other thing is, with the freight number really increasing, your freight per mile increasing, normally we base load the plants based on a national demand and react to the regions that are running hot or cold.

And a regular [move] for us was Texas imported a lot of board usually out of Florida.

Well, right now, the freight rates from Florida to Texas have increased significantly.

So we don't have that kind of insurance policy, if we get a little bit short in Texas we'll just bring it in from Florida, because the cost of doing that has gone up significantly.

So that's why we'll be adding -- so we're almost being forced to now start balancing our supply demand by region rather than more nationally, like we used to in the past.

So I guess there's a cost of bringing those plants back up in that environment versus the freight cost, so there's an initial step-up.

Right.

So margins could come down -- step down significantly (multiple speakers).

No, I don't -- I think margins in the third and fourth quarter will be driven by our volume.

So when you look at how many dollars we make per truck, we're very successfully holding that, okay?

But we have less trucks to pay for the organizational cost and then put it to the bottom line.

So as your volume goes down, your EBIT goes down.

It's that simple.

But we're not losing the contribution per truck, which is a huge factor in our good results that we're able to hold our contribution per truck.

But if the houses aren't being built, obviously you can't hold your trucks.

Now -- and as far as starting up plants, it's not a big deal.

So currently, Texas is running the equivalent of three shifts.

Bringing it up to four shifts is not a lot of people and there's no learning curve.

We know how to run the plant, so it's just a matter of putting the people on and getting your base training done.

And it won't cost us hardly anything.

It will be a net saving in its first month.

Pulaski is a little bit different.

We've never run Pulaski number two, so that would be the initial start-up of the line.

We usually think start-ups cost $1m or $2m, probably more toward the $2m.

Having said that, we have a really good organization and we have our best manufacturing guy in Pulaski.

I think we'll probably beat that.

Can I ask a question of Russell, then, on tax?

Can I hold all Russell's questions?

Thanks.

Good morning, Lou.

Rohan Gallagher, Credit Suisse.

Lou, two operating questions, please.

First of all, can you just elaborate on the rebase of the costs or rebasing the cost base in April?

We've had a few recently, I'm blurring into one to the other, actual -- what you've actually done.

And the second thing, can you just comment about any competition threat from CertainTeed and Nichiha, particularly in these adverse market conditions?

Yes.

You're right, Rohan, the -- the resets are always largely driven by production, right?

When you don't have your production capacity balanced well with demand, you can build a little inventory for a while if you think that might change, but at the end of the day you've got to get your shifts off the machines.

I'm going by memory, but I think about 200 people exited the business, but it wasn't just production people.

We did go right through the whole non-manufacturing part of the organization, looking at it for what we'd need based on current market expectations together with, obviously, our strategies in the market.

So we tried to take about 10% off the non-manufacturing side of the business.

We're not quite getting that yet, but we're gaining momentum there.

It's coming down to that level.

It looks like it's coming down to that level.

The plants have really responded well, with the exception of their lack of spreading of basic fixed costs.

And our fixed costs, we think of depreciation, tax and insurance, so we don't think of the organization as being fixed cost.

But outside of the fixed cost spreading, the plants have done a really good job.

Their throughputs per machine day have actually come up a little bit and their material yield has improved as well.

So they're running very, very similar unit cost at lower plant loadings, which is part of the reason we're getting our -- or maintaining our product margins.

Direct competition, you have -- in the US, you have CertainTeed, Maxi and Nichiha.

They're all by their nature discounters.

They're all positioned against our Cemplank product line.

I indicated we have moved our price up a little bit on Cemplank.

Pretty much everyone in the industry also moved up.

It's not only fiber cement that's going up.

Most building materials in the US are actually going up due to the input cost.

Now, what you do get is you get a lot of desperation price cutting by business from at least two of those three manufacturers.

Sometimes we respond with our Cemplank line and sometimes we don't, but we don't feel that our category share is eroding during the downturn.

We feel like we're holding onto our piece of it and obviously we're doing well on price, so I think overall we're pretty happy with that.

So there's no necessity to launch a no-name brand at the moment (multiple speakers)?

No.

Our Cemplank brand is performing fine for that more price conscious builder.

Good day, Louis.

Doug Macphillamy here from Macquarie.

I was wondering if you could just quantify those price increases in Cemplank that you were talking about before and whether the others in the market have followed and found that to be enough.

And secondly, whether they're entirely cost recovery or whether you're aiming to get a little bit of margin out of them, just given where the cost environment is going over the next three quarters.

Yes.

So Cemplank's about roughly 13%, 14% of our business, I think, and we took 10% on Cemplank, so that's roughly 1.3.

It doesn't go in instantly, especially with all customers.

Some customers have contracts that require a little bit of a longer notice.

We gave the whole market 30 day notice.

Like I said, those numbers will start coming in tail end of the second quarter and the rest of the year.

On the fuel surcharge, which was 2% across all products, that'll probably start hitting at the very end of the second quarter.

As far as the other people in the industry, like I said, most materials are -- I shouldn't say most, because I'm not certain that it's most.

But there's a lot of activity with price increases in the US business, which is pretty unusual in a downturn.

But the reason there is all the activity is because of the increase in energy costs probably driving most of it and just general input costs other than energy.

So that's it.

Thanks.

Lou, it's Andrew Scott, JP Morgan.

Just a couple, if I can.

First of all, just on the -- if we can just get an update, please, on the retail strategy and whether the slowdown in the R&R market changes your plans on the rollout there.

The retail strategy, for those of you that are coming to Denver next month, you'll see that up close.

But retail strategy in Denver has pretty much worked for us.

When you look at it strategically, basically, what we wanted to make sure we did in Denver is we went into the market and created Hardie as the preference in [re-side], because most markets, [hard vinyl] is the preference in re-side.

So it was really our first attempt to intervene directly in a market.

It has worked.

Visually, the way you can think of it is what we've done is tried to create Hardie as a big boat in the market that creates a big wake.

And as consumers become more aware of Hardie and start understanding the Hardie value proposition and show a preference for Hardie, the people will jump in our wake -- the other contractors will jump in our wake and also start promoting Hardie into the re-side market.

That's worked very well.

Having said that, I don't think it would be any surprise to us or probably most of you that we're pretty pathetic in retail.

We're pretty pathetic in contracting and we're pretty pathetic in in-house selling.

So those are things we've gone up the learning curve enough to where we know how to run a business, but we would not be best in class as far as a contractor or an in-house seller.

So the project, which I think is like 2.5 years old now, is just now getting close to EBIT breakeven, which isn't bad because we -- I think we spent around $400,000 in the market on advertising, supporting the initiative.

So basically, you can think of it -- when you hit EBIT breakeven, you can say you have a self-funding marketing program, okay, because really what you're trying to do is create value for your manufacturing.

You're not trying to make money as a retailer or a contractor.

Having said that, we learned a lot.

Hardie is a new construction company, basically, for the first 16 years.

And I think the main thing we got out of Denver is the understanding that the concept works and also how those businesses run.

So what we're doing now is we're trying to create that same type of wake in other markets without our direct intervention with siding stores.

So like I said, we'll have a good update for anyone coming to Denver on that, but of course, we'll have the slides and everything available for everyone else.

But we won't be rolling out any more new stores in the foreseeable future, but we'll be rolling out programs that try and accomplish the same thing.

Thanks.

Just one more.

One of your slides mentions Canada.

It's not a market we talk about a lot, but obviously, as the rest of the pie shrinks, it becomes a little bit more important.

Where does that fit in terms of your sales break-up now and how do you see that market progressing?

Yes, it's a really good pick up there, because the Canadian market has not been in decline like the US market has.

Roughly -- us Americans think of Canada as 10% of the US.

That's the rule of thumb we have.

And it gets really not much more focus than that.

I would guess -- and I'm not working with information I've looked at recently, but I would guess our market share in Canada is probably about half of what it is in the US.

So what that means, since they're not shrinking and we have a lower market share in Canada, basically that's hurting us a bit on primary demand growth, so -- but it's small enough that you don't worry about it.

But we are -- we have been actively marketing in Canada for, I'd say, about seven years.

Nigel Rigby, who a lot of you guys know, has that responsibility along with the northern states in the US.

We do very well on the west coast, where there's a lot of wood.

Toronto is very difficult - there's a lot of brick.

And then, most of the rest of Canada has a lot of vinyl and we've been doing well again in the vinyl area, especially Alberta and that area in there.

Just as a percentage of your US sales, Louis?

I'm going to take a wild guess.

It's half the market share and it's 10% of the opportunity, so it's going to be 3%, 4%, somewhere near 5%.

Thanks.

Julian Bu with Citigroup.

Louis, if I could, two questions.

First of all, on the Australian market, it seems you have a more cautious view on the Australian housing market.

You are not expecting a recovery.

How is that?

Why do I --?

Probably because I'm an American and I don't know enough.

Our business is set up to handle a larger market.

So just generally, probably the way I think and most of our -- the way most of our guys think is plan for this and, if you get this, you can react, but don't plan too high, otherwise it's a lot harder to come down than it is to go up.

But I have seen -- I looked at Boral's announcement yesterday and I have seen just a few things since I've been down here this week.

I would say our people are pretty bearish on the Australian housing market, but I've seen some more positive stuff.

But I think it's going to be in that range, that plus or minus range, where it won't matter.

Our guys will be able to react if it's a little bit softer or if it's a little bit better.

Okay, thanks.

And also, back to the competition issue, you are saying you are holding category share.

My understanding is you are not necessarily holding the share among the top 20 builders, so where are you getting share?

I think top 20 is probably a little extreme.

The top five certainly have moved away from Hardie, where they could, to get lower prices from direct competition.

We get share everywhere else.

We would be above our overall share everywhere but the big builders.

And now I'm talking category share.

So if you say non-metro markets, if you say repair and remodel markets, if you say regional builders, if you say custom builders -- if you go through all the other segments, we're going to be above our average, because we are below our average in the very big builders.

It's something we'd like to reverse a bit, but they are definitely the most -- the lowest priced business.

The gap between what we sell at and what one of those big builders might buy at in a specific market could be more than $200.

Okay, thanks.

And also, in Australia, are you holding share relative to the competition?

No, we're growing share.

I don't know if it ticked up at all.

Shane, has it ticked up at all this quarter or is it --?

A little bit.

It's been about a three or four year steady increase.

Shane, what's your estimate of your share now?

I don't know.

That's something I thought we'd published.

If it's not something we publish, obviously -- okay, that's fine.

We do know it internally and the reason we know it internally is basically, I guess, because all the pulp comes in from outside of Australia, so you can tell what pulp gets used in fiber cement.

So we know how much pulp we're using, we take it off the total amount of pulp imported, and that gives us our share, because the formula for pulp -- across the manufacturers, the percent pulp in a product would be very similar.

Louis, just on the -- Simon Thackray, ABN Amro, sorry.

PPI [data] last night for the US, pulp up again and silica up really strongly, about 7% in July, cement about breakeven, I think, so just remind us -- and obviously energy costs going through the roof.

Just remind us about what you can do in terms of contractual periods you can lock in prices and when those resets occur and what's happening on the [fuel] cost side.

Pulp, we just follow the index.

Now, we buy a discount off the index, so we don't have any lock in on pulp.

We have been buying pulp at deeper discounts recently, so we're doing a little bit better relative to last year than we're doing -- our comps are a little better than the NBSK comps would be against last year.

So we're buying a little bit better on pulp.

Silica, I don't think we're impacted.

The silica we buy is basically a byproduct, so we're not -- there's not many people running silica businesses that serve Hardie.

In fact, I don't know of any of them that are.

So we buy a byproduct.

That hasn't gone up on us.

Cement's come down a little bit, so -- cement's come down.

The big hit has been freight.

So same quarter last year, our costs were up around $10m and 70% of that would have been freight.

So the manufacturing side's not bad, because like I say we're getting the higher throughputs and we're getting the better material yield.

But if you just look at the input cost in the business, roughly around $3m non-freight and $7m freight would be pretty close.

Okay.

Anything before I hand over to Russell?

Okay.

Thanks, Louis.

Any questions on corporate matters?

Rohan?

Russell, in relation to the IRS, I'm not sure if -- I'm not familiar with NOPA, but if it's -- assume the analogy with Australian amended assessment, what indicative numbers are we talking about here?

That was something we disclosed, Rohan, I think, in the announcement.

For 2006 and 2007, which was the period under review, it amounted to about $45m, I think it was, in tax and penalties and interest -- primary tax, penalties and interest.

Now, that will go up and down a bit.

It's not necessarily indicative of all years.

So were things to remain the same, we could have higher or lower amounts in future periods.

Yes, Simon Thackray, ABN.

Just -- if you line up all the tax authorities, the IRS and ATO and maybe even the Dutch, and say can we sit down and have a chat about tax and (inaudible) for 2008, is that something that you can contemplate?

Is that something you can do to get clarity?

Things are going to be popping out of the woodwork left, right and center.

And we've got lower CapEx - I don't know how that's going to impact the Dutch US tax treaty again in terms of tax going forward.

At what point do we get some sort of clarity around how big this issue may be?

Well, it's not -- it's not an issue, I don't think, Simon.

It's a range of different issues.

Clearly, we have discussions with officers of the various tax authorities.

One of the challenges we have at the moment is that we -- there's still work in progress.

So until you know what the situation is, then it's very hard to actually achieve a final result.

And it's got to go through various processes.

So it's a long process.

Potentially a long process, yes.

So what about the issue of the domicile, then?

Is that an easier process relative to tax in terms of time lines?

And can we expect something positive or a plan or --?

It's a very different process, entirely different, because it's very internally driven.

But it's a matter of record that we have been reviewing our future domicile for some time.

And our tax arrangements with the Netherlands authorities are subject to a contract that was entered into in 2000 and that contract expires at the end of 2010.

So we're working towards that as a timetable.

And I guess it's fair to say that the IRS' view on whether or not we qualify under the treaty arrangements between the Netherlands and the US, as amended by the protocol in 2004, is something that will weigh on those deliberations.

And on that issue, can the Dutch have their own view as well, presumably, on tax?

Is that an issue that could arise for Hardie?

I guess it could for any company operating in the Netherlands.

Clearly, every jurisdiction, whether -- we operate in New Zealand and the Philippines as well.

So all jurisdictions are subject to review, but we are not subject to audit at the moment by Netherlands tax authorities.

Thanks.

Any further questions on corporate matters?

Okay.

Louis, do you want to resume the microphone?

Yes.

I guess all the questions in the room from the financial community were said.

Anything on the phone?

Your first question comes from Matt McNee from Goldman Sachs JBWere.

Please go ahead.

Just a couple of quick ones, guys.

Firstly, Russell, the European business, now that the other -- from what I can gather, the other segment is now gone.

So where you have picked up the loss in that business?

I'll take that for you, Matt.

The European business isn't currently running at a loss.

It's running at a slightly positive EBIT.

It's picked up in the US business, keeping in mind that we -- all the product -- pretty much all the product we sell in Europe is shipped from our US plants.

And although we do have an European organization in place, that organization does report to one of the senior managers in the US.

So since it was a small -- has a very, very, very small impact, rather than leaving it as a standalone, we just lumped it into the US, where it receives its product from.

Louis, I think you've been quoted as saying that you're going to try to manage a bit more for margin going forward, rather than market penetration.

Assuming that's correct, what exactly does that mean?

Does that mean you'll cut back on sales guys more aggressively going forward, rather than just manufacturing guys?

I don't like the quote.

It's not exactly what I would intend to say.

Basically, what I tried to indicate is we want to continue to fund our growth strategies, but we just have a little bit more of an eye toward the bottom line.

So when you're growing 10%, 15% a year, it's pretty easy to just keep focusing on going harder and harder and harder.

Right now, even with market share gains, we're a shrinking business.

So we think it's in the best interests of our shareholder to balance the two things a little bit more than you would in a good market.

So -- and where does that come from?

Some of the growth initiatives have been tapered back, if we didn't see that they were on a critical path, meaning we're going to slow down the overall initiative by taking some of the funding away.

We've reviewed everything in the business, and forget about growth initiatives, every piece of literature in the business, basically how we do business, how we take orders.

So we've gone through that whole business process review, looking for the waste in the business.

I think we've gotten a bit there.

So we're not -- we're still -- our job, as the strategy says, is to grow market share against alternative building materials and that's the primary focus of the organization.

The main initiatives we have in that area are right now, on the product side, obviously, are color, trim.

Segment wise, it's repair and remodel and non-metro markets.

So we have plenty of gains to get in those areas.

And Louis, can you just give us an update -- I know things don't change much in a quarter, but can you just give us an update on how you're going with color in the south, the trim offering, whether you've totally got that product right and also just initial penetration of Artisan, whether that's going as you expect?

On the color, first, in the south and the west, it's a good question.

And again, for those coming to Denver, you'll get a really good update there.

But the block for color was not a product problem.

It was more of a supply chain problem.

In other words, the market wasn't ready to take a product like color and get it to the builder on the wall in an effective and economical manner.

So we've actually redesigned how we go to market with the product in what we call our prime markets and we'll basically be selling job packs to the market.

Rather than selling palettes of products, we'll be selling job packs, and we think this is going to really open it up.

We have a pilot that we've been developing with two distributors in two of the markets.

And it's a lot of change.

It's a lot of change for everyone in the supply chain.

But it looks like it's going to work pretty well, so like I said, we'll update that a bit.

On the Artisan, that's a good example of an initiative that we've pulled a little bit of resource off.

It's a really good product.

There's no problem selling the product when you get in front of the right customer.

Early days, the right customer is a guy that normally builds eight or 10 houses, because that's who you're going to start with and very custom end of the market.

In this type of market, he might be building two or three.

So the costs of getting to him right now are pretty high relative to return, especially since we produce the product in Reno and ship it nationally.

So we have high freight costs on the product currently.

But the product is very well received, but it's safe to say it's running a bit behind our -- it's running behind our penetration curve forecast for the product, but that's been a conscious decision, rather than a lack of opportunity in the market, I would say.

And your next question comes from Emily Behncke from Deutsche Bank.

Please go ahead.

Hi, just a couple of questions from me.

Just in terms of your competitors, just wondering if they have actually gained any share given that a couple of plants have come on recently.

And just, I guess, following on from that, is that the reason behind putting the European and the US segments together to -- so that you don't outline any competitive information to those guys?

And then, a couple of questions for Russell.

The $12m of corporate (inaudible) that we can take that for the full year, times it by four for the full year?

And just in terms of the accounting treatment on the balance sheet of some of those tax issues, just wondering if you're expecting those to be on the balance sheet sometime.

Okay.

A couple of those were for Russell.

I don't have to remember them.

But the one on the Europe fiber cement, that's just administrative.

It's just too small to worry about reporting independently.

I don't think, if any of our European competitors knew what we were selling in Europe, that it would change their approach to their business at all.

So it's not really a commercial reason that we just lumped it under the US.

We just didn't think it was worth reporting by itself.

I was thinking more in terms of not isolating the US business, rather than the European business.

Yes, no.

Again, the European volumes are very, very small, so you wouldn't be able to tell the difference if we included them or didn't include them in the overall.

As far as direct competition, I commented we feel pretty strongly we're holding our category share.

It has shifted a little bit, in other words where they get their business from.

Obviously, we know how much they're running their plants and all the rest of it.

And it came up earlier in a comment about big builders.

Clearly, both Nichiha and CertainTeed have gone for big volume chunks from the big builders.

As they've done that, they've given up volume in other areas.

Keeping in mind if we, with nine plants, have a freight concern, guys with one or two plants that -- CertainTeed's a good example - one plant in the Carolinas and one at Oregon and they have a large part of their business in Texas, okay?

So they had a big freight problem.

It would be two or three times more than our freight concern.

So I think what they're doing is they're trying to, through the big builder, get business closer to their plant.

I don't think any of the three have significantly increased their share.

And when I say significantly, I mean significantly for them.

Obviously, it wouldn't be significant from a Hardie volume perspective.

But even from their perspective, I don't think anyone -- any of the three are winning share right now.

And in terms of the price discounts that they've had to offer to gain those big builders' volumes, do you have a sense for what sort of discounts they're offering?

Yes, it does -- I should correct myself on that last comment, actually.

Nichiha, being a new player, had no business a year ago and they do have some business now, so they would have a share change.

Yes, the discounting will be -- it'll depend on how -- everyone who runs a business faces the same issues.

Sometimes you need the volume worse than other times.

And when you need the volume worse, you do it at a lower price.

So you do get some pretty deep discounts and it can easily run below the Hardie line.

It can easily run $200 plus.

And then they'd have some business they would take closer to, whatever, $100, $140.

But you wouldn't see much of that business going less than $100 discount against the Hardie line.

I'll let Russell handle your other questions, Emily.

Thank you.

So Emily, in relation to corporate costs, that's something that's very difficult for us to forecast.

I think you flagged the $12m, which was the cost in quarter one.

And that's a product of a lot of different inputs, including ASIC costs, and I've already flagged that ASIC costs are likely to go up.

I think we tend to manage more actively the other corporate costs in that slide, because that reflects the underlying level.

I indicated that that's heavily impacted by or can be heavily impacted by foreign exchange rate movements.

We'd expect that the underlying level of that will come down, absent the impact of currency.

But the overall level this year in particular, with the ASIC proceedings costs and potentially some ATO costs as well, relating to litigation and just ongoing advisory and review work, could be reasonably volatile.

Your other question, as I understood it, was relating to the impact of the tax -- the open tax matters and tax disputes on the balance sheet.

Is that correct?

Yes, that's correct.

Okay.

So that would really arise also through earnings.

And under US GAAP, as a result of a change in the US GAAP about two years ago, maybe a little less -- it was actually at the beginning of our FY '08 fiscal year, so it's a bit over a year ago.

We adopted FIN 48, which is a new standard.

And FIN 48 requires companies that prepare their financial statements in accordance with US GAAP to review uncertain tax positions every period.

And we go through a very disciplined process relating to a FIN 48 assessment on every uncertain tax position.

And as long as we establish a more likely than not position relating to an uncertain tax position, then it doesn't impact the financial statements, either earnings or balance sheet.

So given that that hasn't happened this quarter, does that mean that it won't happen in the future?

Certainly not the case.

As I said, it's subject to review every quarter.

If circumstances change during a quarter, if the tax advice changes or if there's some particular change in the event, it could actually lead to a change in the FIN 48 determination.

So it's a really open book and I would not be in a position to make a forecast in relation to what might happen out of that, because it really is just -- by its very definition, it's an uncertain tax position and the fact that it's uncertain means that it might change.

Great.

Thank you very much.

And your next question comes from Lou Capparelli from BlackRock Investment.

Please go ahead.

Hi, guys.

This question is probably for Russell.

I'm just interested in understanding the interplay between your annual asbestos amounts and any potential liability in relation to the tax issues you've highlighted.

My understanding - and I don't know if this would be the case with your Australian disputed assessments - is that the ATO has certainly made other companies make a payment of something like up to half the amount in dispute.

And then you guys are allowed to treat that as a receivable if you're disputing it and then hopefully you win and you get your money back.

But in that period, if that is the case, does that have any impact on the amount you'd have to pay as asbestos compensation?

I guess where I'm coming from here is what sort of protections would there be for asbestos claimants?

Do they have a degree of uncertainty now in relation to whether the fund will have enough cash in it to make payments?

Yes, thanks, Lou.

I'll take that question.

So the way you describe the tax assessment is exactly what happened with '99, so we did pay half of the assessed amount.

We are fighting it and -- so it's on our balance sheet, but it hasn't been run through the income statement.

And you are also correct - most people would know the agreement's a public agreement and the cash flow cap is based on net operating cash flow, so a cash outflow does impact the contributions to the fund.

Of course, that was anticipated when the agreement was developed by both sides, so that's why there's that two to three year buffer.

And I think the fund right now is within $5m to $7m or $7m to $10m, in that range, of being topped up the way you would -- the way you'd see it in a steady state.

But certainly, cash outflows, whether they be to the tax office or anyone else, that affects our net operating cash flow does reduce the cash flow cap that the fund receives its contributions based on.

So, sorry, just to clarify, when you say you're within $5m to $7m, you're within $5m to $7m of what?

Of needing to make an additional payment to get the buffer up or --?

No, no, no, sorry.

We're not in that.

That's the AICF.

They received a big contribution from Hardie last year and are receiving quarterly contributions from Hardie this year.

So at this point, they're in a good cash position based on expected outflows for their fund.

So that wasn't a comment about Hardie.

That was a --

Okay.

So are you saying that the fund is, as far as -- as best it knows in terms of expected payout, got a two or three year buffer?

Right.

Yes, that's my understanding.

All right.

Thanks.

And your next question comes from Ben Chan from Merrill Lynch.

Please go ahead.

Hi, guys.

Just got two quick questions.

You've obviously given us a lot of detail on the market share movements on a national level.

I suppose just on a micro level, are you seeing any high incidence of builders shifting back towards vinyl given the steep house declines -- sorry, steep house price declines and the lower cost of vinyl?

I suppose just a couple of coal face comments there, if I could.

And also, would you just be able to remind us at the moment the price -- the cost differential per house of putting vinyl on a house compared to fiber cement on a house, on a whole house basis?

Yes.

It is a good question and it's something that obviously we're monitoring pretty closely in the downturn, because most builders would have a target for how many dollars they want to take out per house.

And the answer to Ben's second question is roughly $1.50 times your sidewall would be your cost for Hardie versus vinyl.

So if you have a 3,000 foot sidewall in your house, it's around $4,500.

So if I have a target -- say I'm the purchasing agent and I have a target I've got to take $22,000 out of a house, it's obviously very tempting to say, hey, I can get a quarter of that out of my siding.

What works for us in that case is the switch.

Normally, when a builder wants to take $22,000 out of a house, they want to do it in a way that the house maintains its marketability in the market to the home buyer.

And that's where we win on that thing.

So the decision to move from fiber cement back to vinyl -- because that builder probably would have moved from vinyl to fiber cement.

For him to move back to vinyl is actually a big risk for him on the marketability question.

So we have not seen much of it.

And I can tell you, my experience and my questioning of our organization, it would be less than five significant builders, and I don't even know of five.

But it would be less than five.

It's just really not happening.

And it was something we were concerned about.

I remember when I was in the [Raleigh] market last December, we made some builder calls.

And of course, fiber cement is normally on the -- above -- higher up in the market than vinyl.

So we made -- so there's always that segment where either you're mostly fiber cement or you're mostly Hardie, but you have both materials in the segment.

And we made some calls in Raleigh and clearly the builders there were considering -- they were on fiber cement and were considering going down to vinyl for the cost savings, and they have not done that.

So for the most part, we're in good shape there.

People understand, I think, even in a market like this, there is more value in Hardie than there is in vinyl, even when you figure in the cost difference.

But what you do have when you're sitting in a market like this and you're using vinyl, you've got that value differential, but you also have the switching cost.

So that's why it's hard to create new business off of vinyl in this market, because they're trying to cut $22,000 and then you're showing them the higher cost of your product and you're showing them the switching cost as well.

Did I catch your question there or did I miss part of it?

No, that's good, Louis.

And just quickly, just a housekeeping thing.

If you look at first quarter '08 US volume numbers and the restated ones you provided today, there's only about a 10m square foot difference, which I assume is attributable to Europe, so very minor.

Just following up on a couple of questions there.

Yes, I do not know the European volumes right -- European volumes right off the top, but it may be of that magnitude.

I'm not sure.

Yes.

Thanks.

And there are no further questions on the telephone at this time.

Okay.

Just a couple of summary comments.

So I think, like I opened, we had a huge first quarter last year, so the comps don't look that good, but the -- and the market has declined pretty much as we expected, a little bit better than we expected.

In fact, the market clearly hasn't come down to the most pessimistic forecasters, even the external forecasters.

So that's a bit of a positive.

And our business ran really well.

We're holding our unit costs in pretty good shape, even with the lower volumes.

We are fighting freight right now, so we're going to have to get a little bit more creative on how we get product to market, either get our length of haul down or get our motor transportation switched to a lower cost mode, at least for some of the business.

And like I said, the second quarter, up to this point, it hasn't fallen off the cliff, so -- for the most part -- and of course, Russell covered cash generation.

For the most part, the businesses are running well.

That's the US and the Asia Pac businesses, so we're riding the roller coaster down, but we're doing it pretty well.

And we're actually pretty encouraged by how our business has performed and the fact that our business results have maintained the range that we thought it would.

I don't think we have any media in the room, do we?

Okay.

So that's that.

I appreciate everyone coming and see you next time.