James Hardie Industries PLC (JHX) 2009 Q3 法說會逐字稿

Thank you for standing by, and welcome to the James Hardie Q3 FY '09 results briefing. (Operator Instructions).I must also advise today's conference is being recorded, Thursday, February 12, 2009.

I'd now like to hand the conference over to your first speaker today, Mr. Louis Gries. Please go ahead, sir.

All right. Thanks, Joel. Hi to everyone. I appreciate you joining our Q3 results call. Russell and I will handle the call. I'll handle the front part, and, when we get to the financials, Russell will take over. And then we'll go to Q&A after that. Russell and I are in Amsterdam, and the broadcast is being run out of Sydney. So I don't have control of the slides, so I'll be calling off slides.

I assume we're on our cover slide now. We'll go to our disclaimer slide, number 2.

On slide number 3, you see our agenda. Like I said, I'll take the front half, Russell will take over, and then we'll go to Q&A.

Slide 4. I assume most of you have seen our results already; again, concentrating on the middle row, which excludes the various items. Obviously, the market's still in very deep decline in the US, but, overall, the business performed well relative to the market.

Going to slide 5, just another cover slide.

And then slide 6 is just a restatement of our global strategy in fiber cement. You'll see as we get through the presentation that we're still funding several growth initiatives. Although the US market share gains are proving almost impossible to get at this point, we are holding our position in the market. The strategy has proven to be sound in the three main businesses of the US, Australia, and New Zealand.

Slide 7 is a little bit on the Q3 results out of the US. Relatively speaking, as I said, it's a good result. But, obviously, everything's down, driven by the smaller market opportunity, as both new construction and repair and remodel continue to decline.

Slide number 8 shows the nine-month result. It's slightly better in the top line, indicating, unfortunately, that the decline actually accelerated through the year rather than starting to flatten out through the year, as we were-- I guess, everyone was kind of expecting it might.

Slide 9, market conditions. I mean, there's no good news on the page - probably bullet points that you're all too familiar with. The market starts were down 43% in the quarter. Repair and remodel is down to a much lesser extent, but it is coming off significantly. You know, the normal things are driving that, meaning the recession we're in in the US, the high unemployment, the tight credit, falling house prices-- pretty much the same problems we've been facing for over two years now. Inventory's high. Obviously a lot more foreclosures, and builders are still reeling.

If we go to slide 10, kind of the key points on the US business is that we're holding our own in the market, but the market's declining. So our volumes are off, obviously. That was in every region except for Canada. In Canada, we were able to grow volume a bit. ColorPlus continues to grow as a percentage of our product mix, which is a good thing. And then the average net selling price did improve. Our guidance on that has been flat, which means plus or minus a couple points. It was a little bit over that but still what I would consider flat.

On slide 11, again, you're all too familiar with the external forecast. But I guess what this slide shows-- In the last two forecasts, even the bullish forecasters have become bearish. And this is NAHB looking at 649,000 starts in 2009.

We go to slide 12, and it's more outlook. Obviously, we expect housing to continue to be weak. We're actually-- We've actually set up the business for lower starts than are forecasted. We set up around 550,000. This is consistent with what we've done a couple times during the decline trying to stay ahead of the market. Again, we feel we can pull up relatively quickly. So, if we're aiming a little bit low, we won't lose any business. But, if we're not, then we're well positioned to kind of optimize our returns at that level.

The real concern I have beyond housing starts is the housing starts have gotten so low that the majority of our business is driven by non-housing-starts; so, repair and remodels, for the most part. And I'm concerned that resides will start coming off quicker than they did over last year. So that's kind of a downside risk I think we have from a demand standpoint in calendar year '09.

Again, we hope to grow market share, but we feel strongly we'll at least maintain it. And our fiber cement category share, I think, is also pretty solid.

Going to slide 13, you can see the graph that used to be an S-curve is now looking more like a mountain range. It is coming off pretty quickly, as you can see. And, obviously, volume and revenue follow it. That's for the US business, obviously.

Slide 14, primary demand growth. I've already commented. We're not losing share. But, over the last three quarters, we haven't gained much either. And I'm afraid we're going to be in that position until we do find the bottom of the market. But it is a pretty good result in a market that we sell-- Uninstalled cost, we sell about twice what vinyl siding sells for, which happens to be the market share leader in the US. So not where we want to be but probably the best we can do as the market continues to drop. Once it flattens out, I do expect to start to see the business growing share again.

Slide 15 is average price. Like I said, it is up a bit year to date and a lot driven by product mix, obviously. I mentioned that Color was up again. So I consider it pretty flat pricing, even though it's showing up a bit.

Slide 16, which is our EBIT margin-- We did stay in the range in the quarter-- the 20% to 25% range we established a long time ago. And I'm quite sure we'll be in that range for the full year. But, quite honestly, not knowing where the bottom of this market is, I do expect that we'll start falling out of that range, at least on some quarters. And I'm not sure where we'll be for the full year next year. I think that will depend a lot on the actual volume or market demand.

Slide 17, Asia-Pac. These numbers don't look good, but, actually, they're just more driven by foreign exchange than anything. The businesses outside the US did quite well, in declining markets.

Slide 18 shows on a nine-month basis the numbers look better because the FX impact is not as great.

Slide 19, and here's the key points for the Asia-Pac business. The market is coming off. Australian (technical difficulty). As I said, the (inaudible), especially in the third quarter, (inaudible) impacted by the stronger US dollar.

Bullet point three, I guess, is the key point. When you look at bullet point three, you see that non-US businesses and Asia-Pac had a pretty flat performance in a declining market. So I think we did a good job there. Differentiated product. We continue to grow in both Australia and New Zealand, which is good.

So, anyway, those businesses are running well. Obviously, we're starting to look at what needs to come out of those businesses as the market continues to decline. But, at this point, they're running quite well.

The outlook in Asia-Pac is for a softer market in calendar year 2009, as you're probably well aware. Philippines is probably going to be flat and maybe a little bit up. But that's a small part of our Asia-Pac business.

Slide 20. At this point, I'll hand it over to Russell Chenu to overview the financials for you.

Thanks, Louis, and hello to everybody.

I'm on slide 22. And it's very clear that our earnings have been adversely affected by further decline in US housing construction activity; particularly new construction but also, increasingly, by remodeling. Our net operating profit has been affected materially by asbestos, ASIC expenses, and tax adjustments.

Due to depreciation of the Australian dollar, we had a very significant favorable adjustment on asbestos provision in the quarter. It was $93.6 million and, for the nine months, $194 million. That's the result of the depreciation of the Australian dollar during the past few months.

We incurred ASIC expenses of $5.8 million, and that brings the nine-month total to $12.3 million. So it really has had a much bigger impact this year than we've seen previously. And it continues to impact us.

We had some small tax adjustments - a favorable one of just over $4 million in Q3 and unfavorable of $11.9 million in the nine months. That relates to FIN 48 on uncertain tax positions, and it does include some foreign exchange impact during the nine months as well, because those uncertain tax positions are largely Australian-related.

During the quarter we announced the settlement of some audit issues with the Australian tax office, which relate to the years 2002 to 2006. That announcement was made in December. And we also paid the settlement sum to the Australian tax office. That was AUD153 million, which was about $102 million. So that had an impact on cash flow in the quarter.

We also had a further quarterly installment payment to the AICF. And, obviously, the decline in earnings, particularly in the US business but also with the reduced US dollar amount from the Asia-Pac business as a result of depreciation of the Asia-Pac currencies, had an adverse impact on cash flow as well.

However, we're very happy with the level of cash flow, as we'll see when we get to the cash flow statement, notwithstanding the conditions.

We had some reductions in working capital in Q3. Those were largely arising from reduced activity levels because we've not been carrying any significant excess inventory or excess accounts receivable. I think our working capital is in good shape and has been through most of this year. So the reduction was the result of changes in activity.

Our capital expenditure continues to decline, and we made the second of four quarterly installment payments to the AICF in Q3. And that brings the total to just over $50 million to date.

On slide 23, we've just got a graph here which shows a two-year history of the Australian dollar versus the US dollar. And we've put this in because it's not a one-way street for Hardie in any adjustment to the US dollar/A-dollar exchange rate. And I guess this has been as dramatic a change in the A-dollar value in a short period of time that I can remember. In July of last year, it peaked at about $0.985, as I recall, and it's been as low as $0.60, in October/November, and struggling to recover since then.

The impacts on Hardie are as follows. There's an unfavorable impact from the depreciating Australian dollar on the translation of the Asia-Pac results, and that's very apparent in this quarter, where we're seeing a significant reduction in US dollar sales and earnings. And yet, in local currency terms, the businesses have been performing very well, although New Zealand, in particular, has been feeling the effect of a downturn in the New Zealand economy.

Also, the declining Australian dollar has a favorable impact on corporate costs incurred in Australian dollars. So, had the decline in the Australian dollar not occurred since the middle of last calendar year, the US dollar costs of running the ASIC case or our part of the ASIC case would have been even higher than they were.

We got a favorable impact from the translation of asbestos liability balance, the provision that we carry. So you can see that in the $194 million adjustment to the US dollar value in the nine months. That's a very material sum in anybody's language.

And, finally, we have an unfavorable impact from the translation of the Australian-dollar deposit that we have with the Australian tax office, which relates to the 1999 amended assessment, which is the subject of litigation. That was a deposit that was made in mid-2006, and it continues to be held with the ATO. And that's an Australian-dollar-denominated sum. So we have a translation effect of that each quarter when we restate.

Turning now to slide 24 and looking at the results for the third quarter. Net sales were down by 25% to $254 million. Gross profit was down 30% to $82 million. We had a slight reduction in SG&A expenses of 6%. R&D expense was pretty steady. Last year, we had a $32.4-million asset impairment at this point, which was following the closure of the Blandon plant in Pennsylvania in October of 2007. And we also had asbestos adjustments this period of $93.6 million. So the EBIT on a reported basis was $118.9 million for the quarter just concluded, but a very large part of that was the asbestos adjustments, which are unrealized foreign exchange gains.

After interest and after tax, the net operating profit reported was $111 million versus $17 million a year ago, and the $17 million had been impacted by that write-off of the Blandon plant.

On the next slide, slide 25, we look at the same quarter to show the recurring results of the core business activities. So, adding back the asbestos adjustments and some AICF matters which are very small, ASIC expenses net of tax of $4.3 million, the profit for the quarter, after tax, was $16.5 million, which was down 56% on the $38 million that we earned in the prior, corresponding year.

For the nine months to the end of December 2008, on slide 26, you can see that net sales are down 17% to $961 million. Gross profit is down 24% to $320 million. SG&A expenditure is down 5%. R&D, again, is flat. And we have the large asset impairments and asbestos adjustments. Noteworthy, I think, is the $250 million turnaround in the asbestos provision; again, as a result of the movement in the A-dollar versus the US dollar.

The EBIT on a reported basis is $334 million, which was a significant increase but, again, substantially the result of material asbestos adjustment. And the net operating profit after interest and tax was $266 million on a reported basis, which was a large increase on the prior, corresponding period - $75 million.

Adjusting the nine-month result for the unusual items produced a profit of $89.7 million versus $156.8 million for the prior year, so it's down 43%.

Turning to sales for the third quarter, the USA and Europe fiber cement segment, on slide 28, is down 26%. The Asia-Pac business was down 25% to $58.5 million. And that is almost solely the result of foreign exchange, because the volumes in the A-dollar revenues in the quarter were in fact very flat compared the prior, corresponding period. The overall result was sales of $254 million, down 25% on the prior year.

For the nine-month period on slide 29, the US and Europe business sales were down 20% to $740 million. And the Asia-Pac business down 2%-- in fact, it was relatively flat in US dollars and up in Australian dollars as a result of a very large proportion of the total sales being in the first two quarters, when the Australian dollar was somewhat stronger than it has been recently. So the total sales are down 17% for the nine months, to $961 million.

Looking at segment EBIT for the third quarter on slide 30, we've already covered off, I think, on most of the segments. But the total EBIT was down 38% to $46 million. Corporate costs are steady, down just a little bit, to give a total EBIT of $31.6 million for the quarter, which was down 46% on the $58.9 million in the previous year.

Some standout numbers in the bottom half of that slide were a $93.6. million asbestos adjustment in Q3 '09 and a $32.4 million asset impairment in Q3 '08. And the total EBIT was $119 million versus $25 million, as a result of large adjustment items.

In the nine months on slide 31, the total segment EBIT is $193 million, which was down 32%. Corporate expense is down 9% to $39 million, excluding ASIC expenses. And the total EBIT of $154 million is down 37%, excluding asbestos, ASIC, and asset impairments. ASIC expense, as we've already highlighted, is running at a high level - $12.3 million for the nine months, which is almost three times higher than they were in the first nine months of financial '08. And the total EBIT as a result of all of the adjustments and, especially increased by the asbestos, is $334 million, up from $145 million in the prior nine-month period.

On slide 32, looking at corporate costs, ASIC expenses for the Q3 were $5.8 million. That's the highest quarter we've had. And other costs, at $12.6 million, were very flat compared with the prior corresponding quarter. And the total is $20.3 million, which was a large increase of 23% that was largely driven by the increased ASIC expenditure.

For the nine-month period nine-month period on slide 33, a continuation of that. ASIC expense is a material increase on the prior year, but the other costs, at $32.4 million, remaining relatively flat. And, given the amount of activity we've had going on on a number of fronts, including the ATO settlement and various other matters, that's, I think, actually doing reasonably well in all of the circumstances.

On slide 34, looking at net interest expense, and these numbers are quite small, the only one I want to speak to, I guess, is the net interest expense, excluding the AICF net interest income, which is the line that management manages and focuses on. There's been an increase in interest expense from $2 million a year ago to $2.7 million in Q3 '09, and the reason for that is that we're running a higher average debt balance, both in that quarter and for the year-to-date. So there's been a higher level of interest expense. Some of that flows from the share buyback that we undertook in the latter part of 2007 and the early part of 2008. That increased our debt by $200 million or so. And, obviously, that flows through to interest expense.

On slide 35, these numbers, I'm sure, will be picked up. I'll just try to explain the effective tax rate for the quarter. It's 47.2%. At the end of Q2, we had an effective tax rate of 38.9%. And each quarter end we estimate or forecast what our full-year tax rate will be. And, at the Q3, that's just concluded, we forecasted the full-year effective tax rate will be 40.3%, and then we've adjusted the year-to-date number just in Q3. And, because the profitability in Q3 is so low and we take a period-to-date adjustment, it actually has a greater-than-proportionate impact on the Q3 effective tax rate. So our earnings before tax in the first half were $111.7 million, but we only made $23.1 million earnings before tax in Q3. So that's what leverages up the ETR for Q3 '09.

Nevertheless, on slide 36, there is something of a mea culpa from me. We've previously given guidance of 35%, plus or minus 3% for our effective tax rate in the past. We have got it pretty wrong in this year, and I'll take the rap for that. The factors that have contributed to that are, first of all, the geographic mix of earnings and expenses, including things like the ASIC expenditure, which is running at a high level, which we take in the Netherlands and we get a very low tax deduction for that type of expenditure. There's also some impact from the fact that we have quite material permanent differences by geography. And, because the profits are down and the permanent differences from period to period don't change very much by definition, they represent an increased proportion of earnings before tax. And that's actually led to quite a significant jump in our effective tax rate. So we're now at 40.3%, and we wouldn't see that coming down materially in the near term. And that is the case because of the fact that the profit position isn't expected to improve, given what's going on in the economies in which we operate.

On slide 37, just a quick look at EBITDA. You can see that the depreciation and amortization for the US and Europe fiber cement business has declined by 15%. That follows about $70 million of write-downs in assets in the prior 12-month period. So we're starting to see the full effect of that come through in this quarter. And the total EBITDA was $131.9 million compared with $39.6 million in the prior nine-month period, including the asbestos adjustments, AICF, and ASIC, and asset impairments.

On slide 38, the similar analysis for the nine-month period again sees a reduction in depreciation and amortization due to asset write-downs but not as material in the nine months because you're not seeing the full effect in nine months relative to just Q3. The total EBITDA, excluding asbestos, ASIC expenses, and asset impairments was down 31% to $195 million. And total EBITDA up to $375 million, compared with $187 million, if you included all of the nonrecurring-type items.

On slide 39, cash flow statement in abridged form. The net operating cash flow is reported there as $25 million for the nine months of financial '09, compared with $279 million for the nine months of FY '08. That's a 91% decline. However, I just should highlight that the Australian tax office settlement is included in that $25 million net operating cash flow, as is contributions to the AICF of just over $50 million. If you add those onto the $25 million of reported net operating cash flow, the cash flow actually comes to $176 million, which I would consider to be a very respectable result in the circumstances of a declining market.

Now, we've had some tailwind from working capital reductions as business activity drops. But, nevertheless, the working capital is in good shape, and the operations are performing well. So we are seeing a very strong operating cash flow that isn't perhaps showing up in that $25 million number because of those special payments.

On the following line, purchases of property, plant and equipment at $17 million is a continued reduction in CapEx, down $12 million from the prior, corresponding period. Our net debt at the end of December was $240 million. I think what's noteworthy in that is that it is a pretty similar number to where we were at March last year. That was at $229 million. What's significant also is that, at the end of September 2008, our net debt was $174 million. We paid out $125 million to $130 million to the ATO and the AICF in Q3, and yet our net debt increased only $66 million. That's because of the level of cash that was generated from operating activities, including working capital reduction during the period. The working capital reduction in Q3 was in fact just under $50 million. So we had, I think, a very creditable performance in managing the net debt as low as it was, given the material payments that were made during the quarter.

On slide 40, just a quick look at capital expenditure. You can see that the US business is what's largely accounting for the reduction. It's running at practically half what it was a year ago.

And, on slide 41, just one slide on our debt facilities. At the end of December, our debt facilities totaled just below $500 million. They're still at the same level. We were carrying gross debt of just under $300 million and cash of almost $60 million, and the net debt, as a result, was $240 million, leaving unutilized facilities and cash of $260 million. We will be paying a further $50 million to the asbestos fund in Q4. And that will complete the payments due in FY '09.

On slide 44 (sic - see Slide Presentation), the standard key ratios that we give, you'll note in all of those cases there's a decline in the key performance indicators of the business. That's not surprising, given the decline in activity levels. And the debt capacity indicators on the last four lines are showing that we're still in very good shape. Yes, the numbers are not as high as they were, but, in fact, they were ridiculously high a couple of years ago and we're now seeing more normal levels of net interest expense, cover, and also debt pay back that are still very, very strong.

In summary, we've had a net operating profit for the period that's been affected by favorable asbestos adjustments, unfavorable ASIC expenses, and unfavorable tax adjustments.

Our EBIT has obviously been affected by the reduced contribution from the US business. And we're expecting to see further declines in the US housing market.

Our corporate costs are holding reasonably well but are continuing to be effected by ongoing legacy issues.

And we have, in our view, very strong cash flows continuing to come through from the operations.

As a final comment, I would refer you to pages 18, 19, and 20 of the MD&A for the balance sheet, statement of operations, and cash flow statement, with and without asbestos for the nine months to the end of December. I think that's a very good snapshot of how the core business looks and continues to perform.

So, with that, I'll hand it back to Lou for questions.

Thanks, Russell. Joel, we're ready to go to questions. Could you do me a favor and line them up, so the analysts and investors can plead all their questions before we move on to the media questions?

Thank you. (Operator Instructions). (Inaudible), Macquarie.

Congratulations on a pretty solid result in a tough market. Look, I just had a couple of quick questions; firstly, on the repair and remodeling exposure versus new housing exposure and just whether you can put any metrics around what they've moved to over the most-- including the most recent quarter.

Well, it's-- I don't know about the recent quarter. But, if you look at the year, we've definitely gone over to 50/50. We're more toward repair and remodel, and I think we're quickly-- As the housing starts continue to decline, we're quickly heading toward 60/40, 60% being repair and remodel.

Keep in mind this isn't the greatest news for us, because our market share in new construction is much higher than it is in repair and remodel. So it does have some impact on that primary demand growth chart that we showed. That's part of what's pulled it down.

Excellent. Okay. And, just a couple of other quick ones; firstly, Louis, a question around current conditions and how the order book's looking for the fourth quarter at this stage.

And just a quick question for Russell as well, just on the cash flow. Obviously, off heavily on a nine-month basis. But just if you could remind us of the impact that that-- a lower or, in fact, a negative operating cash result will have on the FY '10 contributions into the special purpose fund for asbestos.

I can probably handle both of those. The first one on the order book-- We decided to pull the business down to the lower level of demand that we're anticipating could happen next year right before the end of December. January orders were a little bit better than we had forecasted, but not good enough to change our view. And February's kind of tracking right around where January was, I'd say. So, basically, orders are a little bit higher than our trend line would indicate, but they're not high enough to make any adjustments.

As far as the cash flow, Russell covered off that pretty well in his comments. We had two big outflows this year. Well, it would be a four-part outflow to the fund of over $100 million. And then there was $100 million to the ATO. Those two outflows offset what we expect the business will generate in cash this year. So we'll have pretty close to a zero cash flow from a fund perspective. So they'll get-- It would face a year without any contributions next year.

Okay. And are you quite comfortable with the buffer that's built into the fund at the moment, because that's obviously an area of sensitivity at the moment.

The buffer-- We're not quite right up to the target on the buffer, but we're very, very close to it as we make our final payment this year.

Okay. Excellent. Thanks very much for that.

Julian Bu, Citigroup.

Lou, a couple of questions for you. First of all, I presume the raw material costs are just starting to go down. When are we going to see the benefits?

The question is a good one. Of course, our biggest raw material is pulp. Pulp has come off quite a bit so far. So we're starting to see those benefits already. And you would have seen some of that in the third quarter. And then cement has come off to a much lesser degree, and that is a much smaller impact for us. So cement has come off some. It probably needs to come off a bit more. But, with our business model, the only raw material costs we talk about a lot is if pulp is swinging real high or real low. And, at this point, it's kind of in the middle. It's come off the high, and it's kind of sitting in the middle. The forecast may kind of inch its way up. I think it may-- just a little bit down, but I don't expect any big help in calendar year '09.

So (inaudible) is not sufficient for you to maintain this 20% (inaudible) margin assumption?

No. Pulp couldn't make that much of a difference. It would have to be volume. Remember, we make good margins on our products. So a raw material cost to us will help a little bit on the margin, but it doesn't drive our bottom line.

Okay. And, also, just in terms of the decline in R&R this quarter, what's the number? How much was that?

There's not a published number. That's what makes it difficult. We get to look through the retail boxes that-- We do business, obviously, with both Home Depot and Lowe's, so we do look through that. But, to be quite honest with you, I think the reside market-- Now, reside different than what goes through the retail boxes. The retail boxes is more smaller jobs. The resides, where an individual resides its entire house or, possibly, a multi-family project that would reside-- those would go through the professional channels.

Now, there's no good numbers on those. We get some indicators through our customers. And it wasn't terrible last year. I mean, it did decline, but it wasn't terrible. And we're growing a little market share in R&R, so that's kind of offset it for us. But I'm just concerned with the housing prices continuing to fall and unemployment increasing. I just think consumers in the US are making less big-ticket decisions. They're deferring them.

And residing your house is not like reroofing your house. A lot of times when you reroof, it's triggered by a leak that needs to be taken care of one way or the other. With a reside, a lot of times you can defer it with just a paint job.

Okay. Just, lastly, you are assuming starts at 550,000. You just sounded, I think, more bearish than last time.

I'll tell you what; I was a bit surprised by the rate of decline in the third quarter. As I said earlier on, we were kind of seeing the year-- pretty steep declines first and second quarter and less steep third and fourth. And, actually, I believe third quarter fell off more sharply than either the first or the second. Of course, we're not-- I'm talking our fiscal quarters. Sorry. We're not seeing our fiscal fourth quarter yet to really know where we're at. Yes. We're a little bit bearish. But, like I said earlier, about three different times in this decline we've aimed well below the market with the feeling that our business model and our manufacturing model flexes up pretty well. So you're better to be right on the low side than-- I mean you're better to be right on the low side and wrong on the high side because you can take care of the high side versus the other option.

So we were a little bit hopeful that it might start slowing down, the decline, but we don't see it yet. So, rather than stay hopeful, I guess we have gotten more bearish. But we won't lose any business if it does start flattening out.

All right. Great. Thanks.

[Emily Benko], Deutsche Bank.

Just a couple of questions, Louis. Just in terms of rebasing the business to that 550,000-start level, I think it was at 750,000 or so before. I'm just wondering if there are some costs associated with rebasing the business that impacted the US fiber cement margin; so, I guess, ex-rebasing the businesses, if the margin would have been higher.

And I'm just wondering if, given you guidance is roughly around $100 million of net profit, does that--? Are you assuming that you guys will dip below that 20% to 25% margin in the fourth quarter therefore?

As far as the cost of pulling more things out of the business, in the third quarter, we were on kind of a drift-down program, which worked all right. But, like I said, it didn't seem like we were going to get the benefit of holding resources in the business as the market continued to decline. The cost had been taken in January, consistent with when the reset was done again. So the cost came in in January. You haven't seen those yet. But those would be basically offset by the end of the quarter with the gains of the lower-cost organization and activities.

So, as far as the third quarter margin, that third-quarter margin was a pretty good result on the volume we had. So there was nothing that really pulled it down or pushed it up. It was just pretty much a solid result for that type of volume.

If volumes deteriorate further-- I mean, if there's-- Is there a level at which you don't think you'll be able to meet that range?

I tried to indicate that in my earlier comments. The way the business model is performed is we basically make very similar contribution dollars per truck we ship than we have at any time in the past, even before the downturn started. So our problem isn't that our margin's under pressure. It's just that we have less trucks to generate the contribution dollars off of. So, as the volume goes down, you have less trucks. Now you say, well, just take more cost out. We've done a pretty good job on the-- in the plants, keeping our costs pretty linear. So we have-- I guess the secret to making the same dollars per truck is getting a similar price and having a similar unit cost on the truck.

But, now, your organizational costs don't come down at the same rate as your manufacturing costs when you start losing volume. And a lot of those manufacturing costs are-- I mean a lot of the organizational costs are what we call our manufacturing fixed costs, which is depreciation, tax, and insurance, which-- you know, depreciation being noncash and tax and insurance just being something you have to commit to and you don't have any real discretion on.

So, yes. If the volume keeps coming off, we'll fall below the 20%. Do I think we'll be below the 20% on the fourth quarter? I think we probably will. But, like I said, I'm pretty sure the full year will fit in that range in pretty good shape. And then it's just going to depend on how bad the market is next year.

Okay. Thank you.

[Rowen Gallagher], Credit Suisse.

A couple of questions. Obviously, the actual freight-- all the oil costs are coming down. It would appear as though you're spreading yourselves fairly thin. So no real changes on the cost side for freight. Is that correct?

We have gotten some help on freight. It spiked in the second quarter, and it started coming off near the end of the second quarter. And our third-quarter freight was pretty good. And fourth-quarter freight will be good as well.

So, again, it not like we're not getting any help from the cost of doing business. We do see lower pulp, we do see lower cement, and we do see lower freight. And we do see lower energy costs in our plants. So, like I said earlier, that's all helpful, but it can't offset the loss in contribution dollars due to the volume because we make very good contribution margins. Those kind of costs help, but they can't offset volume.

Sure. And there was a comment about your planned SG&A reduction. And you've been obviously working through that quite well. Have you actually quantified your targeted SG&A reduction?

It sounds like you want me to tell you what it is.

That would help.

We have our targets in the business, but I doubt that we're going to be making that public.

No. That's fine. And, with the rebasing the business again, unfortunately, we have seen plant closures previously. Is there any expectations of further plant closures at this stage?

We just went through-- We're only at about 40% or so capacity now-- capacity utilization. We have the seven plants running still. And we went and looked at it, and it just-- Even with our bearish forecast, it makes sense to keep the seven running because the freight and the future efficiencies, meaning when you have to ramp back up, kind of offset any benefits of another site being closed from a cost standpoint.

Okay. And a final question for Russell in relation to the head office domicile. Could you provide some status in relation to that, please?

I could take that, Rowen, because it really hadn't changed much. Obviously, the work we're doing is progressing, but we're not ready to come to shareholders yet. But we do anticipate that we're going to address the domicile issue in the short to medium term.

Okay. Thank you, gentlemen.

Simon Thackray, ABN AMRO.

Just a quick one, Russell, on the tax rate. You said you were a bit surprised at 40% or more-- obviously, the question around the domicile Rowen's asked. But, given you seemed surprised where it was-- where it ended up in the quarter and where guidance is now in the mid range, did something else change, because I think the guidance doesn't look like it's changed all that much from where it was before. So, if the tax was higher, did something surprise you to the upside in the underlying business?

No, there's no surprise in the underlying business, Simon. It's only-- It's a surprise only in the sense-- you know, the extent to which the permanent differences in our tax calculations impacted the tax rate because of the low level of earnings. I have to say that that blindsided me a bit, because I'd previously believed that we were going to be running at around that sort of 38% level, which I think is what we've indicated previously.

I think I was just trying to reconcile that to the previous guidance, in my head, where we were. So, with the higher tax rate and the guidance, in my view, not seeming to have slipped, perhaps there was something a bit more positive in the underlying business. We can discuss that at a later point.

On the asset cost, then, in terms of where they're tracking year to date, what should we be sort of factoring in for the full year now for asset costs? You'd have a pretty good line of sight on the estimated full-year costs?

Well, not really, because that will depend a lot on what happens with the court proceedings. We're not in control of that. So we're a bit of a passenger with the day-to-day activity of the court. We've got our own views on how much it's likely to cost. In our views, we probably wouldn't see much of a material reduction from Q3 in Q4. It could be significantly different.

I'm just trying to get a sense of what you're factoring in in terms of-- The guidance excludes it anyway, I presume, in terms of the asset costs. So I'm just trying to get a sense of what it might be in the fourth quarter. And, no doubt, knowing lawyers, they'll be quick to bill you when the time comes.

Just, I guess, then, Lou, in terms of the operational side of the business, you sort of made the point, I guess, for the first time that margins can fall below 20%, and, perhaps in the fourth quarter if the volume comes off again, that might be the case. Now, it's a seasonal business, of course, this one. Is it really safe to assume, however, that we could recover-- even with volumes still in decline and the lag, we would recover some of that margin going into the sort of first quarter of FY '10, for example?

Again, the margins looking like they might fall below the 20% target isn't a surprise. We talked about that when the Group was over in Denver last year. It just becomes how many trucks you have to cover your costs and put to the bottom line.

Now, having said that, you bring up a good point. I mean, normally, the summer-- the first and second quarters of our year are by far our best quarters to generate profit. So the question is - Does your seasonal improvement get fully offset by a continuing declining market, or is it stronger than the continuing declining market, so it puts you back in a little better shape as far as trucks shipped?

Well I guess we just wait and see.

Yes, because I wouldn't know the answer.

Me either. But, if you know beforehand, let us know.

Matthew McNee, Goldman Sachs.

Most of my questions have been answered. But just a couple of quick ones. Russell, just in terms of the domicile, the potential change, is there any significant cost expected to be around that? And, also, just clarifying, you're saying now that you expect the effective tax rate sort of go-forward to be around about 40%. What would that be if you did change your domicile? How much impact are you going to get on that?

Matt, those are difficult questions to answer. I don't think we can go into the details of that at this point in time. But there obviously will be some costs associated with re-domicile. And there is potentially some change to the effective tax rate. But I don't think we're at liberty to go into the details at this point.

All right. No worries. Louis, just a quick question for yourself. I'm just interested in your view on how you're seeing the US economy generally at the moment. Obviously you're living right in amongst it. As you said, we saw that extremely sharp decline in activity late in the calendar year. How are people feeling? Do you see that there's any signs of any positivity in the US economy at the moment, or is it just too negative to even be able to predict?

Yes. I don't see many positives, Matt, to be honest with you. And I think you can see it with the automobile numbers and the housing numbers and any big-ticket items, even high-end business and clothing brands and everything. It's all gone into stall mode right now. I think a lot of people are deferring spending until they get a better handle on where the economy is ending up. So I can't really say I see much positive there to make me think that this thing might end sooner rather than later.

No worries. Thanks, guys.

David Leitch, UBS. Please go ahead.

Good evening. My question related to tax and domicile as well. And I guess it was a request that, if we could get some kind of tax reconciliation that would show how we get from a 40% rate, you know, that would start at the US rate-- so to try to understand what these prevalent differences are, rather than just having to rely on a guidance number with no idea how it was arrived at in the first place.

And I guess my second point, just, while it's a request, is just to note that the domicile issue seems to be getting more and more pressing and becoming more and more important than the share price, as you can tell just from the questions. And having a tax rate of 40% was a very complicated structure and a tax dispute that all seems to be getting to be more important than the almost nonexistent level of US housing starts.

David, I'll probably prefer to answer your question because I don't think there's any technical answers there. I don't know what other companies do, but our situation is way more complex than it should be, basically. And trying to reconcile our taxes for you I don't think would accomplish much. Of course the headline number for federal tax in the US is 40%, but we pay other taxes besides federal in the US. So we actually pay more than 40% in the US. But having said that, that's not really the only driver that can pull it above 40%.

As far as the domicile, the domicile, like tax, is just more complex than it should be. We've worked hard to move forward on that. I think we've done a good job. There's not as much flexibility as you would like there to be. I guess you're not supposed to move a corporation at the drop of a hat, because it's hard to do. There's three different jurisdictions involved. We have Dutch law. We have tax law in three different countries. And we have securities law in two different countries. So it's not simple. I mentioned earlier that I think in the short to medium term we'll have a recommendation for shareholders. I think that recommendation for shareholders will also provide some guidance on the current tax situation and the tax situation going forward.

Louis, can I ask-- Obviously, reducing complexity-- that's clearly an obvious advantage. But can I ask what else it is that you would contemplate when trying to achieve a restructure? Would it be to bring the shareholders closer to the business physically? Is it to be effective from a tax perspective? Or what are the principles that you look to?

Well, we're not getting to a lot of detail. Number one, it's got to be sustainable. And we don't think the Netherlands domicile is sustainable for us. So it's got to be a step toward sustainability. Number two, as I mentioned when this call started, I'm in Amsterdam. Russell is in Amsterdam. Our GAC is in Amsterdam. Our SLP was in Amsterdam last week. The management presence in Amsterdam requirement is difficult. It makes it difficult to run a business that's primarily in the US and the rest of it in Asia Pac.

On the tax side, obviously we're not interested in doing something that's foolish from a tax perspective. But that wouldn't be the main driver of a re-domicile.

As far as closeness to the shareholders, quite honestly, that's not one of our considerations.

Good. Thanks very much.

Andrew Scott, JPMorgan.

Hi, guys. Thank you. Just a couple of quick ones. First of all, just-- We mentioned costs coming down. Have we seen the full inventory impact on that, or have we still got maybe some cash flow benefit to roll through?

The inventory will continue to decline if the activity declines. But, basically, we run our inventory or try to run our inventory on days rather than dollars. So as daily shipments go down, theoretically, you need less inventory.

Sure, okay. So there's not too much of a price impact we should expect in the last quarter?

No.

Okay. Louis, you mentioned sort of the increasing importance of the repair and remodel to the portion of the market in terms of your exposure. Any expectation that comes away? It's probably at the margin. But what does that mean for price and mix, given the various products that go into sort of new housing versus R&R?

You probably get a little bit of help in repair and remodel, but I doubt if it's enough to move the needle. It's probably a little bit richer product mix. And you have fewer discounts in R&R than you would in new construction.

To stay around that flat plus or minus 2% guidance range?

Yes. I think that's a really good result in the kind of market we're in. So I do believe we'll be able to continue to do that. But it's a really good result. We'll look at some market increases where they make sense. But I'm not sure how much that could be, to be honest with you.

Great. Thank you.

[Michael Ward], Morgan Stanley. Please go ahead.

Just quickly following up on that last question from Andrew, did you actually have any market price increases during the last quarter?

We did not.

Right. And would you expect any into Q4?

No.

Okay.

We'll be looking at potential increases in the start of the fiscal year. But I think they would be on select products and select markets. It wouldn't be across our product mix.

Okay. And just quickly, also following on from Rowen's question, you talked about the SG&A. If you look at SG&A versus sales, it's pushing out to sort of 20%-odd for the third quarter versus around 16% for the full year. Have we seen any of the benefits coming through yet in terms of the right-sizing of the business down to sort of 550,000 in the third quarter, or is it more expected to fly through in Q4 and beyond?

You get a little bit beyond the fourth quarter. There will be some reductions in the fourth quarter that will be offset somewhat by exit costs of employees leaving the organization. But I think you'll see the SG&A drift down. But, again, there's just certain parts of the SG&A that we feel we're better off hanging onto than cutting. And those go around growth initiatives like ColorPlus trim, really moving that market share. We got more people on R&R, repair and remodel. And then, of course, with our margins, anyone that can sell us an extra truck of material can pay for themselves pretty quickly. So we've been careful not to pull down the sales force to the same degree as we have the rest of the organization.

Okay, Thank you. And just finally maybe a question for Russell. Russell, I think you made the comment around the payment expected into the AICF for this quarter is $50 million. Was that correct?

Yes. That is correct, Michael. We have quarterly installments this year. But the quarterly installments have to be completed within the 12-month period. So we've had one on the first of July, first of October, first of January, and then we have another one due in mid-March.

Oh, okay. And, so, just to clear up in my own head, are you having quarterly installments going forward? Or is this just a one-off for this year?

That's not something that we could make a call on at this stage. The default position under the final funding agreement is that Hardie makes an annual contribution on the first of July, always subject to the cash flow cap. Hardie also has an option to elect the quarterly installments if it wishes to do so.

Right. Okay. And that $50 million that you mentioned was a US dollar number, I assume?

That is correct.

(Operator Instructions). Emily Benko, Deutsche Bank.

Thanks very much. Just a couple of quick questions. Louis, I was just wondering if you could give us a bit of an update as to if you're pleased with how the ColorPlus [job pack] are going. And, secondly, if you could let us know-- I think you made a comment that the Australian market's competitive. If you could just let us know what's happened to price this year--

The ColorPlus job pack program, I think, has been run pretty well. We've had a few bumps in the road but nothing major. But, clearly, the take up has lagged our forecast. And I think that's mainly around getting customers to make that type of decision in this type of market. We do have a lot of commitments, some of them coming out of the ground now. So I think the program works. We've been at it about a year. We'll probably modify it a little bit to make it more effective in the market. We'll probably modify it a bit work better for repair and remodel. At the end of the day, it's a good program. It cost us a few dollars to put in place. We haven't yet captured that money back, but we expect it to start paying back starting this year.

Second question, Emily, I forget already.

The Australian fiber cement price.

I think the-- I didn't dig into the prices in Australia. The business is running really well. They are facing a little price competition on the core products. And clearly the differentiated products are growing quickly and offsetting pretty much all or most of that. I don't think there's been a big shift in the amount of price competition in the Australian market. I think it's been how it has been for the last couple years on core products.

Great. Thank you.

(Operator Instructions). As there are no further questions from those on the phone lines, I'd like to hand back to the presenters for closing remarks.

Great. Thanks, Joe. I appreciate everyone's interest in the Company. All the questions were good. Summary is the same. Business is running extremely well and the market is extremely poor. So although results are down, I think we're optimizing the opportunity for shareholders. Thanks. And we'll see you guys in May.