James Hardie Industries PLC (JHX) 2009 Q2 法說會逐字稿

Good morning, everyone. I appreciate everyone coming over this morning. We're going to follow the same approach we always do. I will cover the business, kind of how the business is running, and Russell will cover the financials and come back to Q&A.

The business did run well during the quarter. We were happy with the bottom line, considering the market we're competing in. Before the asbestos adjustment obviously, it has the FX adjustment in there. So the number to look at is the $36 million against the $49 million -- sorry about that -- anyway against the $49 million same quarter last year, 26% off. But in the market we are doing business in, we're happy with that result.

We have kind of made a very small change this quarter in the presentation. Basically for the last three or four years, all the businesses in Hardie had been running the exact same business strategy. It was the original business strategy that we adapted in the mid-90s for the US, and we reset the Asia Pac division about four or five years ago. It has worked very well in Asia Pac, so this is just our global strategy.

Our job is to grow demand for Fibre Cement, maintain our market position in the category, and we do that through differentiated product offering.

The second-quarter results out of the US, fairly predictable, meaning that it ran like it normally runs. The market was off obviously, so sales and volume were off about the same. Price flat, meaning sales and volume were the same. They were not off as much as the market itself. Price flat, EBIT down and EBIT margin down, but still good at 23.9. So in the range that you had for several years.

Half-year result, very similar actually. We had a tougher first quarter to comp against, and we did second quarter. So that's really the main difference between the first quarter and the second-quarter results are the half-year basically being off a little bit more on the EBIT line because of the first quarter comps. Again, the EBIT margin of 23.19, very solid for where we're at with the business, where we're at with capacity utilization and all the rest.

The market conditions I'm sure everyone is aware we are still kind of on that roller coaster down in the US. Starts were down 35. All the reasons you hear about, inventory, affordability, availability of financing. Probably the key point on this slide is the repair and remodel. It is coming off a little quicker now. It is lagging new construction. It is not coming off of as much as new construction, but it has picked up momentum as far as its decline.

There's not a real good -- housing starts you can kind of tell what is happening. Repair and remodel is a lot harder. There's not good published numbers. We use Home Depot and Lowes same-store comps to just kind of estimate where the market is in that area.

The key points out of the US, again sales down declining market. Canada is not as bad as the US, so it has held up a lot better. ColorPlus is still doing well. Repair and remodel, like I said, is weaker than it has been.

Freight costs increased. We really absorbed the spike in fuel costs in the second quarter. As you know, fuel costs are back down, but the second-quarter results did -- were impacted pretty significantly by that spike in fuel costs in terms of freight. That is the main place it hits us. And sale price was pretty much flat as we have been talking about. We consider plus or minus 2% flat because there's so many things moving around in the business model with different product, different regional mixes and then just general pricing.

The announcement we had on the plants is a little bit of a departure from where we have been. I think in previous discussions with investors, we have talked about being able to keep the nine facilities running through the down, assuming it did not go below the 800,000 starts. We actually do believe now it is going to go below the 800,000 starts.

So we have closed both Fontana and Summerville. What this allows us to do obviously is service the business. If it drops off significantly more, we will service it more economically from the seven plants. It also allows us to flex up. If it does not drop off and business were to be better than expected, we would not have any trouble from the seven plants, and we would have a similar economic result.

We also see these plants will probably be shut down around two years. In other words, if it was just going to be six to nine months, we would not have shut them down. Anything over a year became iffy. When we started looking at it and said, hey, we can probably run on seven plants for a two-year period, then it becomes a pretty easy decision.

The outlook in the US, I means nobody knows is the answer. The market is not at the bottom yet, so how long it takes to get there and how steep it is, we're not sure. Obviously we're expecting it to go below the 800. Plus, we're facing a seasonal down, so it is going to be a very quiet winter in our view.

Repair and remodel we would be a bit concerned with repair and remodel. Declines might accelerate a little bit more. Again, I do not think they will get anything like the new construction declines, but they will be more than what we have seen over the last year.

Our job, as you know, is to grow demand for Fibre Cement and then maintain our category share. Growing demand for Fibre Cement, as you will see from our preliminary demand chart, is very difficult in this market, but we have been maintaining it well. And we meaning that people have not been falling back to a vinyl category for cost savings. And within our category, we have done well holding our position.

This used to be a beautiful chart, but it is quickly becoming a depressing chart. You can see the market decline. The black line has been very significant. We have done well with the volume and the revenue but obviously only to a certain degree.

On primary demand growth, which is how we basically measure our market share gains, it is very thin obviously in this market, much thinner than we would want long-term. But again, I think it reflects that our business model is holding up pretty well. People are not running from the category for cost savings, and we are getting some improvements.

On the pricing, again we're pretty satisfied with our pricing. Going into the downturn, that was kind of one of the key drivers of us making reasonable returns in a downturn was to hold our pricing unlike most building materials. And although this is challenging, we have been able to do it, and we would expect to continue to do it.

Same thing on EBIT margin. We have stayed in that 20 to 25 range. Again, it is not a quarterly range; it's not meant to keep every quarter in that range. So we are two quarters through the year, and our forecast was that we would stay in the range for the year, and we again maintain that forecast now.

On the Asia Pac business, this has been a bright spot for the Company over the last couple of years, and it's a good thing because it's becoming a bigger part of our business unfortunately as the US becomes a little smaller. But the quarter was a pretty good quarter. Of course, they get the help in the second quarter for the half-year from the FX. Exchange rates now, if they stay where they are, obviously we won't get that help in the future quarters.

But even in local currency, this business has performed very well in declining markets, Australia and New Zealand, the main ones, and the Philippines off a little bit.

Kind of key points for them, you have the market, the softer markets. I think everyone is aware of that. But we did have good results, and these results are really being driven by the move to a non-differentiated product mix or a differentiated product mix, I'm sorry, against the substitutes in Asia Pac.

So these businesses will be a little bit more challenged in the future. New Zealand has already come off quite a bit, but we think they are going to perform well. Very similar to how the US business has performed. They will do better than the market. They will hold their pricing, and they will get their returns.

Let's hand it over to Russell at this point.

Thank you, Louis, and good morning, ladies and gentlemen. Clearly the result for Q2 has been adversely affected by the US position. We have had a decline in earnings, a decline in cash flow and also a decrease in capital expenditure because we don't have the expansion plans in a down market that we had in earlier times.

In addition, we have had a net profit that has been affected by a number of non-recurring items, asbestos adjustments. This is the first time I think we have seen a really material adjustment in the asbestos provision arising from a change in the Australian dollar weakening against the US dollar, and I will have more to say on that later on.

Also, unfavorable tax adjustments arising from FIN 48, which is a US standard accounting standard, which we adopted at the beginning of financial year 2008, so about 18 months ago. At the time we announced that -- or adopted that -- we announced that quarterly profit results would move around as we reassessed uncertain tax positions, and we have taken an adjustment of $20 million in this period reflecting FIN 48.

In addition, we have had an increase in expenses associated with the ASIC hearings, which are currently occurring, and I will also have a little bit to add on that later on. But we have removed that from our earnings guidance for this financial year because we are just so uncertain about what the costs might be within the remainder of this fiscal period, and we just could not give earnings guidance without excluding asset costs from the forecast. And we also paid in this quarter the first of four installments under the final funding agreement, $27.4 million paid to the asbestos injuries compensation fund. And we also announced this morning the omission of the Company's interim dividend.

Contributing factors to the deliberations, which were very lengthy in relation to the decision to omit the dividend, were really threefold. The first one is the significant change in the macroenvironment following the last revision to our dividend policy, which occurred in May 2007 after we implemented the final funding agreement. You may recall that during the period when we were negotiating the asbestos arrangements, we ran a very low dividend payout ratio deliberately to conserve capital for the possibility of different arrangements than those that ultimately applied. And after that was put into place, we announced a dividend policy of 50% to 75% of earnings being paid out each year. We have now revised that because of the uncertainty in the macroenvironment.

Part of that is reflected also in the market uncertainty. That is obvious to everybody that the US housing market is in a very severe cyclical downturn. In fact, the peak housing market in the US was really in late 2005, early 2006. It hit us a little bit later like about nine months. So we're well into the third year of an industry downturn in the US, and as Louis highlighted earlier, the R&R segment is -- which has become an increasing proportion of our volume in the US business is going through its own downturn now a little more steeply than was the case. And all of that I guess is exacerbated by the whole global economic environment.

In addition, we have a third factor, which is some James Hardie specific issues. We have a number of tax matters firstly in Australia but also with the IRS in the US and also future domicile. Each of those creates uncertainties and in the case of at least the first one mentioned on this slide, the 99 disputed amended assessment, which is the subject of litigation between the ATO and James Hardie, we have had a further delay in the court hearing of almost the year, and that obviously creates further uncertainty.

So with all of that in mind, we decided to omit the dividend and to undertake a review of the future dividend policy.

Looking at the results for the quarter, net sales down by 12%, our gross profit down by 18% to $113 million, so a higher gross profit down than is the case with sales, and that reflects the fixed nature of many of our costs. SG&A expenses were down 6% in the quarter to $55 million, and I'm pleased to say that we have been getting good momentum on that, in fact, increasing momentum on a monthly basis. They have proved to be pretty sticky because we have really been seeking to manage those down since very early in the year, but we're now starting to get better traction.

Asbestos adjustments, a very big swing there, $140 million positive, resulting from the depreciation of the Australian dollar against the US dollar. It peaked at about 98.50 dollars I think it was in mid-July. We use 0.96 dollars at the end of June. By the end of September, it was at 0.80 dollars. So that adjustment $140 million reflects only part of the fall in the Australian dollar because it's now trading at about 0.65 dollars this morning I think.

The overall EBIT as a result of that was $192 million after that foreign exchange adjustment on the asbestos provision versus $45 million in the corresponding period. And after income tax expense, which included a net one-off adjustment, the net operating profit was $153 million.

If we normalize those earnings on slide 24, so we adjust for asbestos, ASIC expenses in the period and the one-off tax adjustments, the net operating profit was $36 million for the quarter, which is down 26% on the corresponding period of one year ago.

Turning to the half-year, the reporter results, sales and gross profit down and SG&A expenses also down by about 5%. And asbestos adjustment is a lesser number because in the first quarter we actually had an adverse movement in foreign exchange. So the EBIT reported is $215 million, and after-tax it is $155 million. So showing some improvement, but it is only on the basis of the foreign exchange gain in asbestos.

The half-year normalized results on slide 26, if we add back those adjustments, the net operating profit is $76 million versus $120 million for the first half of last year, and it is a decline of 36%.

Turning now to segment net sales in the simplified form that we adopted this year where we are now operating with two segments rather than three, we have deleted the other as a result of closing the pipes business, and so the USA and Europe is now one division or reporting segment.

The sales were down 16% for the US and Europe segment and up 4% for Asia Pac. The Asia Pac number is a result of up 5% in US dollars but down 1% in local currency, which we term in this case to be the Australian dollar, representing a 2% down in sales volume and a 1% increase in sales price. So the total was a 12% decline in sales for 342 million dollars.

Similarly looking at the half-year for sales, the same sort of factors contributing to downturn in volume in the USA and Europe and quite good volume in Australia, but getting a tailwind from currency in the first half to give a 10% increase and an overall downturn in sales of 13% to just over 700 million dollars.

Looking at segment EBIT, US and Europe Fibre Cement was down 26% to $61 million for the quarter. Asia Pac Fibre Cement up 14% to $14 million to give a total segment EBIT of $70 million, which was down 22%. The general corporate expense is excluding ASIC, and we will look at general corporate in more detail shortly, but was running quite flat excluding ASIC expenses, and total EBIT was up -- sorry was down 26% to $57 million.

For the half-year, US and Europe is down 35% in EBIT terms to $127 million, Asia Pac up 21% to $30 million, a very flat result in R&D to give us a total segment EBIT down 31%, down by $65 million to $146 million, and a decline in corporate expenses, excluding ASIC of 13% to 24% and, therefore, a total EBIT of $122 million, which is down 33%.

In terms of corporate costs on slide 31, you can see that ASIC expenses in the period showed a big increase in the $5 million for the quarter, and that really was very back-end. The trial started in the federal court right at the end of September, and the costs that were incurred in the month of September were really high. We anticipate that as long as the trial continues, we will continue to bear a very significant monthly cost.

Other costs, which is the line that we used to really give an indication on how the recurring pattern is going, was up 17%, which was a very disappointing outcome, but we are incurring heavy expenditure on advisors in relation to the two ATO matters that are on hand and also on domicile. So most of the increase relating to that move from 9.8 to 11.5 in Q2 was the result of additional advisory costs. But there was also a contributing factor of high foreign exchange costs being incurred on Euro and Australian dollar-based costs.

Somewhat similar picture in relation to the corporate costs for the half-year. It is a flatter result overall, but only because we took a non-US warranty provision of $4 million in the period in the half-year '08, and that is not recurred in this year, but the other numbers, particularly ASIC expenses and other costs reflecting the same sort of pattern as in the quarter.

Moving on to net interest, you can see here the one that I think we should be highlighting is the bold one here, which is the net interest expense which excludes the interest activities in AICF. Some increase in interest costs there associated with the higher debt levels that we have been running this year relative to last year. That is largely the result of the share buyback we undertook, which ran from about October of last year through to January/February of this year, and that is obviously debt funded. So we have had a higher average level of debt during this period compared with the first half of '08.

Income tax expense, reflecting the operating profits income tax, has come down. But we have had some adjustments as I highlighted earlier and a slight increase as a result in the effective tax rate, excluding the asbestos and tax adjustments up 1% in the quarter.

Similarly for the half-year, the tax rate up a little bit on the prior period.

Turning to EBITDA, some of these numbers I have reported on earlier. I think the one that probably needs to be dealt with most relates to depreciation and amortization. There's a slight increase there in Asia Pac Fiber Cement, which is tied to a translation of Australian dollars and other Asia Pac currencies into US dollars, some new assets and also some very small adjustments that were made, but a 53% increase is not the norm that we would expect going forward. It is likely now to actually come back to pretty flat levels. And the result was a 21% downturn in EBITDA, excluding asbestos and ASIC expenses for the quarter.

For the half-year, you can see that the D&A for US and Europe has now stabilized. That is reflecting the fact that with the downturn in capital spending over the last couple of years, we have got very little construction in progress, and we would anticipate that from here forward the comparable numbers on depreciation and amortization in the US business will be very flat. I say that because I noticed that some analysts have got an continuing increase in D&A, which is very unlikely given our capital spend and status of the construction in progress. The overall EBITDA was a downturn of 28% to $150 million for the half-year, excluding the one-off items.

Looking now at cash flow, cash generated by trading activities was down 43%, reflecting that downturn in the US business in particular, and the net operating cash flow level $93.3 million for this half-year was down 60% on the prior period, so a very large downturn. Some of that for the period was the result of a payment to the AICF, which we have not had in prior quarters, and also, as I said, it was the first of four payments we will be making before the end of this fiscal year, and it is really an adjustment item that we have included in the cash register highlighted. That 93.3 is very similar to the net operating cash flow for the first quarter. We did have the one-off or the first payment to AICF, and if we exclude that, we were positive cash flow for the quarter. But we also had an increase in working capital.

Sales in September in the US business were less than expected. October has been -- or was much improved on September, maybe not better than expected but much improved on September, and since the end of September, we have actually seen a fairly substantial and steady decline in working capital. So I would be hoping that the cash flow numbers will be better in the third quarter.

Net debt at the end of the quarter was $174 million. Obviously up on last year for the same period because of particularly the share buyback. But it is up on Q1 when the number was 153.2, reflecting that working capital and also the AICF contribution.

Looking now at capital expenditure, which continues to show some decline, there is only really stay business capital in this first half period, particularly in the US business, and we expect that sort of trend to continue for stay in business expenditure. We do have a couple of fairly small projects that we will see a minor increase in CapEx in the quarters going forward, which are not stay in business but they are very modest levels of expenditure.

In terms of our debt, at the end of September, we had $490 million of facilities. Our net debt, as I indicated on an earlier slide, was $174 million, and it left us with unutilized facilities and cash of just over $315 million. The term to maturity of those facilities on a weighted average basis is two years. We operate some of our debt on six monthly rollovers, so they are evergreen type facilities. We declined to extend $41.7 million of facilities that we were unable to agree with banks on terms, and during November we signed a new facility for $50 million with terms consistent with our existing facilities.

In terms of key ratios, I think this column for the first half of FY '09 is really reflecting the operating leverage unfortunately in a downward direction, but the numbers are quite strong, particularly around the return on capital employed, return on shareholders funds and the margins. But it does reflect the lower volumes going through the business, and I guess just highlighting that operating leverage to the cycle.

In terms of our debt numbers, which is really the last four lines there, continuing to show very strong debt capacity indicators. Our gearing ratio remains quite low. The net interest covers are very strong, and the net debt payback similarly also very, very strong.

The asbestos fund, through our reporting, we see the financial position of the fund, and every half-year we provide this to the market. The holdings of cash in the fund at the end of September was AUD110 million. We have three more payments to make, contributions that will total of the order of about $70 million by the end of this fiscal year. And then on the bottom half of the slide showing the claims paid, legal costs and insurance and other recoveries to give total net claims costs for the half-year of AUD42.5 million, which is above KPMG's estimate and also up on the prior period. Some of that I understand is due to the fact that the fund is now settling claims much more quickly than it has been doing as a result in part of the negotiation and mediation process that was part of the New South Wales government reforms, and that has led to an acceleration of settlement of claims which obviously brings cash payments forward. So some of that is due to a claims increase. Others due to a more favorable pattern in settling claims which leads to reduced costs.

In terms of a summary, obviously the results have been materially affected by adjustments, some of them favorable, some of them unfavorable. Further declines in the US housing market are also impacting us, and we're continuing to reset the US business as Louis highlighted. We have closed two plants or announced the closure of two plants in recent weeks. And we're continuing to trim our SG&A and MG&A costs across the business as well. Corporate costs are continuing to be affected by our legacy issues. We seek to manage those as best we can, but we cannot always set the agenda, and we are experiencing some delays and delays of themselves incurred costs.

We omitted the interim dividend, and that dividend policy is under review. And just finally, the results obviously remain subject to a fluctuation in Australian dollar/US dollar rates in particular. I know a good example of that is that if the Australian dollar/US dollar prevailing rate of around [AUD]0.65 continues through to the end of this quarter or at the end of this quarter, we would anticipate that we will have a similar sized adjustment in the asbestos provision at the end of Q3 as we have had in Q2. And we will also have an adverse impact from the translation of Asia Pac earnings in Q3 as a result of the severe decline in the Australian dollar against the US dollar, although to some extent that will be mitigated by the current level of Australian dollar costs we are incurring on corporate activity.

The final thing I would like to just draw to your attention is pages 17 to 19 of our MD&A, which is with your results pack. That contains the split between Fibre Cement core business and asbestos and perhaps gives a little more visibility in the underlying performance of the core business than the reported results do.

So we thank you for your attention, and I would just ask Louis to come back to the podium.

Thanks, Russell. I just have a few summary comments before we go to questions. I guess on the business side, it is pretty straight forward. We had a good result. We're happy with the result given the market conditions we're facing. In particular, the US business has been able to maintain price, manage costs and hold their market position despite the declining market for both new construction and repair/remodel.

The plant closures, I covered kind of what triggered that. The fact that we now believe that the starts will fall below 800. That we do believe that the facilities could be closed as much as two years, which makes it economically a very favorable decision. And facing the seasonal slowdown over the next four or five months, obviously we did not have the luxury of taking a wait and see. So that basically was the drivers behind the decision.

On the dividend we understand it was not anticipated or probably was not anticipated by most investors. I would caution you not to over read that. In our view we're being cautious for good reason. That being the current uncertainty in the global economic environment, and the other is we do see potential for some cash outflows for the Company in the foreseeable future control.

So with that, opening up to questions. If we can hold the media questions until the end, I would appreciate that.

David Leitch, UBS. Congratulations on a great result I think in the circumstances. Nevertheless, I saw some comments from, say, Toll Brothers the other day saying that in their quarterly release, October being like way worse than August and September. I noticed your guidance talks about a range of 95 to 116 compared to 76 in the first half, which is like 10 a quarter for the next two quarters or 20 a quarter if you are an optimist.

Am I reading that right?

Yes, you are reading it right. And the thing to understand is, again, we look backwards. Toll Brothers has the luxury of looking a little bit more forward than we do, but we look backwards. And we had a pretty solid July/August. In September orders just fell off. So at that time we're thinking this thing is over. You know, get ready for winter. And then we had a little bounce back in October, which was good, but now November has been very quiet. So we're just going with the assumption we do not know that December, January and February will not look just like November order filed those right now, which is very soft.

So it's not that we know where the market is going to be. We don't know that it won't be that bad. So our guidance is along those lines. It is conservative guidance, but to be honest with you, it could very well play out that way.

And secondly, I just wanted to ask, you are recurring expenses on domicile staff, where has the sinking got to on that?

Yes, well, we have been working on domicile and been incurring expenses for a long time. What we flagged I think a little bit with our dividend comment is that if we were to redomicile out of the Netherlands, it would have some cash outflow associated with it.

Where I thinking is we have narrowed the alternatives, there is no question, but we don't have a recommendation at this point. In any redomicile, the corporation will go to shareholders. But at this point we don't have our recommendation ready for shareholders.

Can I ask when you're thinking the board might get to that point?

Well, it has been a challenging project, and the reason I say that is because you start down a track, and you hit a showstopper, and then you're on a new track. So now we're on a track that we think looks very good, but if we hit a new showstopper, it would change the timeline. So I would prefer not to give you kind of any indication when we might be coming to shareholders, but again since we have considered it in our dividend policy, obviously we do not think it is way down the road.

Andrew Scott, JPMorgan. Just maybe following on from David's first question, we're going into the seasonally tougher part of the year. Russell said you did have a pickup in October, but your inventory level, particularly finished goods, was a fair bit higher at the end of September. How do you feel about those inventory levels? And maybe following on from that, what do you see as sort of a run-rate at the moment on your capacity utilization now that you do have the two plants shut down?

So how do I feel about the inventory levels, they were higher than we anticipated at the end of September. By the end of October, they are back in line, and they are managing to their target inventory for April 1 now. So inventory will increase over the winter from where it is today, but it will probably not be higher than it was at the end of the second quarter.

As far as capacity utilization, of course, the utilization in the seven plants that are operating will increase, but the overall utilization will fall because you have got the two plants that are shut down. We're just edging below the 50% on utilization currently, and during a seasonal slowdown in the winter, we would probably come below that, a reasonable gap below that.

Just to be clear, that is on your fully installed capacity, not the -- (multiple speakers)?

Yes, it is fully installed. Yes.

And just one more maybe for Russell. The line on the various tax potential liabilities has been that they still remain very much potential, and you believe you've got a good case. I'm just wondering, reading the comments around the dividend reduction or suspension, that seems to be a little bit more certain than maybe some outgoings. Am I reading too much into that there to think that there is a bit of a change in the terminology?

Yes, I can't take care of that. There has not been. On the 99 assessment, our view is exactly as it always has been. That is a large assessment, though. So if there were cash outflow, it would be a fairly large cash outflow. On 2002 I think we have indicated that we have been in settlement discussions on 2002, so those are obviously confidential but still ongoing.

Michael Ward, Morgan Stanley. Just a point of clarification really. You talk about 800,000 starts. Is that for one particular month or quarter, or is that your expectation for a full 12 month period?

Yes, that would be kind of our run-rate annualized, where we see it kind of approaching right now on an annualized basis. And normally when we talk about starts, we knock out high-rise because we do not participate in high-rise. But then when we do our planning, we put Canada back in. So we actually work with a little different number in the business than we talk about outside of the business. Because US housing starts are very easy to see for everyone, so that is why we talk about US housing starts. But we see the run-rate falling below 800.

Okay. This might sound a little bit strange given the point in the cycle we're at, but when you made the comment that renovate and remodel is now starting to turn more aggressively on the downside, Russell made the point that it took you nine months to feel the impact of the initial downturn.

When things do start to improve, does that imply that you will not see any real improvement until a period, say, maybe nine months to two years after the improvement?

No, it is a good question, though, because it does come -- your view on R&R actually kind of gives you the answer to that.

As far as the original nine-month lag, the reason that was so long is because at that time it was a blow and go type market where it was boomtime. Everyone in this supply chain had a bunch of inventory. So they worked off that inventory. That is the opposite now. There is very little inventory. So as people need more product to build houses, we will get those orders pretty fast.

But the R&R we're now really really raising a huge red flag with RNR. But it is a little bit different than I think previous market downturns where normally R&R does pretty well when new construction is doing poorly because people decide to stay in their homes, and therefore, they do the fixups that they were going to leave to the next owner if they moved.

I think what the big factors here are two things. One, do they have the financing available to do a relatively large job, which would be a reside. That would be a relatively large job. Are there equity lines of credit going, and can they get a second on their home?

And the other thing is, if -- there is so much price depreciation in the housing -- in the US right now, is it worth their investment to take on a major project in the house?

Now the reason I say we're not raising a major red flag is because we don't know how long that is going to last. So if we get through that, get over those hurdles, then I think R&R kind of comes back and has more of a normal curve to it. But if it does lag new construction coming out of the downturn like it did going in, then obviously we would be down a little bit longer.

So that falls in -- I think the R&R falls into the uncertainty. It is hard to predict. But the pattern right now is different in my mind; it is different than it was in the previous downturns.

Todd Scott, ABN AMRO. You mentioned that you have extended your penetration on the ColorPlus line. Can you give us an update in terms of your expanded ColorPlus strategy and what you have seen maybe in terms of gains in the Southern markets?

Yes, we have -- and we do -- just for everyone's information -- we do run two color programs in the US. In vinyl markets where we're doing basically a substitution against vinyl, we run ColorPlus in a certain way that we have been running for four or five years. When we got into the Southern markets and the Western markets that really you were not selling against vinyl at that point, you were selling against Hardiprime or Cemplank prime, that was not a good enough program to pull builders across the line because they were pretty satisfied with the product they were using. So theoretically switching costs to go to color was higher than their perceived value for going to color.

So what we have done is gone to a job pack program to where that switching cost goes way down. Basically we take all the complexity out of it for the builder.

How is it going? I think it is going well. We have signed up some builders, but we're still in the very early stages. It is a hard time to get a builder to make a change, a significant change in his business system right now. That does not result in lower cost.

So what we have done is we have made color more affordable to these builders, but we have not made it less expensive. But I think it is going well. I think that program is going to be very successful, but it is more of a five to seven-year type program rather than something that would take place in five or seven months.

Thanks and just one more if I might. I understand it is uncertain to or it is very difficult to estimate, can you give us an idea of what we should be allowing for in terms of the full-year ASIC costs or maybe even a range that we could have in mind?

Yes, we cannot or else we would have. So our visibility on these costs is a bit delayed because most of the costs are not directly to Hardie. But, as Russell said, you're in a very expensive period. The trial is going quicker than it was originally thought it would go, which is good news for us because if it was going to go any longer, it would be real depressing, meaning from a cost standpoint.

But it is the very expensive trial unfortunately, and we're in the middle of paying the kind of majority of the bills right now. In other words, we are seeing very high costs on a monthly basis right now.

Rowen Gallagher, Credit Suisse. Two questions if I may. First of all, on your cost side, post the 30th September, have you seen any relief starting to flow through on freight and pulp? We understand pulp costs are now coming down.

Second of all, a question for Russell. The effective tax rate has gone up in the last year, presumably because of those tax adjustments. Can we have a bit of a better read as to what to expect for the full year?

Okay. I will take the freight and pulp. Freight and pulp we're expecting to come off not only this quarter but probably for a few quarters to come. Freight being driven largely by fuel price and pulp being driven largely by the strength of the US dollar but also some supply/demand changes as well. So we do expect those to help us this quarter and for sure next quarter, and we will see how it goes after that.

As far as the tax question, I will give it to Russell.

On tax the way we do each quarter is to estimate what the position is likely to be at the end of the full year, and we make adjustments based on that. So we have seen an increase, and it is partly due to the geographic mix of earnings for the group.

But I think I previously indicated that an expectation that the effective tax rate would be 35% plus or minus 2%. We have fallen outside that range, and I think we probably just broadened the range if anything to plus or minus 3%. So it is higher -- I would agree with that -- and it is likely to remain or possibly going to remain a bit higher than it has been. But we will be doing a full true-up of it at the end of the fiscal year.

Julian Livingston-Booth, Citigroup. Just a couple of questions. First of all, the dividends, should we assume them to be 0 in the next couple of years before the upturn starts?

Yes, no, I would not -- again, like I said, I would not over read our change in dividend at this point that strongly. I think the language we used in published information is that conditions would have to change significantly. So it is not so much about the time; it is what is going on.

So I would not -- the dividend policy would be under review. I think it would be safe to say that the whole world is not going to get back to normal by year-end. But if it did, obviously we would look at it differently than we are looking at it today.

Thank you. And also, just the interest of the margin performance, that is I guess probably quite better than you expect it to. Could you talk about the moving parts that will help your margins this quarter?

As Russell commented, we're getting our SG&A costs drifting down. So we're still funding the initiatives that we think are key to making or increasing our competitive position in the downturn. But we have had other SG&A programs that have been killed because we did not feel that in this type of market they were driving any customer value. So those kind of programs are kind of winding down. So that has helped us a bit. Price being up slightly helped a bit. The plants continue to run well. You said the margin surprised me. The margin did not surprise me.

If you go back and ask me two years ago if I thought we could run these kind of margins and this kind of volume, I would have told you no. But, as we have moved forward in the downturn, the organization really has responded quite well as to how you run a smaller business and eliminate as many fixed costs as you can.

The big key is right now our contribution dollars per truck is very similar than it was 12 months ago or even 24 months ago.

So where the margin gets under pressure is if we get our same number of dollars per truck is how many trucks do you ship. So if you're going to ship less trucks, obviously you either need to get your dollars per truck up, which we don't think we will, or you're going to get your fixed costs down, and we did a bit of that. So that is why we're hanging on at the 23.9, which I think is a very good EBIT margin for current conditions.

Yes, I guess your annual guidance assuming in the second half your margin will dip materially below 20%, so just talk about that?

Yes, we did not give guidance quarterly. I think what we now have is a lot of confidence that our guidance annually we're going to be in that range for fiscal year '09 is obviously -- we feel strongly we will be in that range.

As far as the next two quarters, I would not say it is automatic that we fall out of the range, and I would not say it is automatic that we stay in the range. It is too early to call. It is going to be driven by volume.

Okay, any other questions? Any questions on the phone?

[Doug MacPhillimey], Macquarie.

Just a quick question if I may on ColorPlus. There was a chart that you had in your recent US (inaudible) presentation showing ColorPlus volumes per market where basically the penetration in the third and fourth quarters of FY '09 was expected to increase, increase quite a bit. I was just wondering if you're still kind of confidant of those types of increases in those markets where ColorPlus has struggled to gain traction versus the Northern market given the recent economic events?

Yes, I can give you just a few comments there. I have not looked that data specifically for probably 45 days. But the West is tracking pretty much where we want it, and the South is lagging a bit. But overall I mean we're still talking about small volumes. The ColorPlus penetration in the South is going to be S-curve like every other market development initiative, and we're going to be on the flat part of that S-curve for a first couple of years. So it's going to be pretty hard to read.

Overall, though, we are very, very satisfied with ColorPlus. The customers see the value. We're getting the contractor base position well to put it up to where there is not touchup involved, and our distributor or our distributor network has been established that can handle the product through the channel. So everything is kind of going as planned, not on a day to day basis but on an overall basis.

Excellent. Thank you.

Any other questions on the phone?

[Emily Bank], Deutsche Bank.

Just a couple of questions further to the comment on cost. Obviously 23.9% EBIT margin this quarter was a very good result. You mentioned comments that freight was a negative. I was just wondering if you expect -- obviously freight should improve given what has happened to oil prices, but just wondering if you're expecting any significant costs as a result of the Pulaski ramp-up as is normally the case when you're ramping up a new line?

No, it's a good question. Pulaski is an established plant, and it is probably one of our best manufacturing organizations in the Company. We think they will do that startup because there's no urgency to the startup. It is more preparing ourselves to just have a little bit more regional flexibility than we have had with just the one line running. So I mean it will cost us some money, but not a lot.

But I think the way to look at it is, the Fontana shutdown, the Summerville shutdown, the Pulaski ramp-up, all those increased costs, redundancy costs and startup costs, can probably be offset over the last two quarters by the savings from shutting the plant down and have a little bit lower delivered cost to market.

So it's going to be a wash. It's not going to be a wash in the third quarter, but by the end of the year, it is will be a wash.

You mentioned that the 20% to 25% EBIT margin target is a full-year target. Does that, therefore, imply that potentially going into these next couple of quarters that you might dip below that?

Yes, and that is nothing new. I mean the shorter the period, the higher the variance. So we have already had months where we have been below target. I probably should not tell you that. But that is just the way it goes.

You get anything a short enough period, you're going to have more variance, and that range is really intended for an annual target rather than a quarter by quarter target.

Everyone knows -- I believe everyone knows that follows Hardie knows that the third quarter is the hardest quarter to make money, and that is what we are in right now.

Matthew McNee, Goldman Sachs JBWere.

I have just got an additional question for Russell just on the tax. Russell, can you just give us an update just on I think you said that the tax case for the 99 order has been pushed out by you. Can you just give us an idea of when do you think the 2002 and also the IRS ones will be resolved?

Just quickly on the 2002, I'm not sure if you referred to this before, but you're referring to 2004 and 2006 year. Is that an extension of that audit, or is that just the same as what was originally indicated?

On 99 the pace has been pushed out to a start date of September '09. So we're looking at I think probably six months after that before we get a decision.

In relation to 2002, that audit started as just for one year. I cannot remember the exact quarter, but it would be in the last 12 months or so that we announced that 2004 to 2006 had been added as a period that the ATO was auditing, and we are as indicated in the process of discussing a settlement with the ATO, and it is covering all periods which are subject to audit, not excluding 99, which is beyond auditing into the litigation stage.

I'm sorry Russell but -- (multiple speakers)

In relation to the IRS, it is very hard to give an indication of the timing on that because it is subject to the internal processes of the IRS. It is not a court hearing. So the process is that we will be allocated an appeals officer, and then we will be having a hearing. But we will not know the hearing date for some time I would not think.

So we have launched our appeal. We did that in August I think it was. So we are three months beyond that, and we still don't know what the appeals timing will be. Does that answer all of your questions on that?

Sorry, Russell. Just on the $200 million for 2002, is there a chance that number could go up?

I don't think we can comment on that at this stage.

All right.

Andrew Harrison, Dow Jones.

Just the dividend suspension, I mean you have got a bit of money there. How come you did not make any contribution to a dividend?

Yes, like I said, it was driven by both the macroeconomic factors and some potential Company cash outflows we may face in the next couple of years. Why didn't we make any dividend or why didn't we reduce dividend rather than eliminate? And the answer was we wanted to keep all of our cash in the balance sheet rather than return some.

There are no further questions from the phone. Please continue.

That is it? Okay. I appreciate everyone coming today, and we will see you next time. Thank you.