James Hardie Industries PLC (JHX) 2009 Q4 法說會逐字稿

Good morning everyone.

We're going to go for an on time start since we've got a little more to cover this morning than normal.

I appreciate everyone coming.

We'll go through our full year and obviously our quarter as well.

A few other things in the pack this time, so I'm going to go -- I'm going to kind of whip through some of our standard slides, and if I go too fast and you have some questions later, feel free to hit them in the Q&A.

I want to spend a little time on the HardieZone launch, which is a new product launch we launched in the US.

And then Russell's got several things he needs to go through, because obviously we have the new KPMG report and we have the year end financials.

Okay.

The agenda is going to be the same.

I'll cover the overview and the operating, Russell will take care of the financials, and then we'll handle the Q&A together.

So the -- I think the full year came in where most people were expecting it to come in.

We got there in a little different way so we'll talk about that a bit.

The business ran extremely well during the quarter, so we had some pretty good EBIT generation even with the market as soft as it is.

But we also had some provisions we took.

The kind of the story I'll tell here is about the same story as I tell every quarter.

It seems like the market's not in good shape, continuing decline and the business is running really well.

So we went into the downturn really with a view of staying ahead of it, so not getting caught behind it from either a cost or an inventory standpoint.

We wanted to hold our contribution margins, we wanted to hold our market share and we wanted to reduce organizational cost.

We've done all that.

In addition to that we've stayed on strategy, which is our strategy statement.

It hasn't changed.

We've been very effective I think in the downturn in improving our market position even as the market declined.

For the quarter you can see volume down 23%, price up a little bit, EBIT down 35%, and EBIT margin fell below our target range to just short of 18%.

For the full year, the comps are very similar, 20% down on sales, 21% on volume, average price up a bit and EBIT down 36%, EBIT margin for the full year still in our range, down 5.4% versus last year.

The market conditions in the US I think everyone is kind of familiar with them.

We peaked at 2.2m housing starts.

We're down now -- I think last night's number came out at around 458,000.

So that's 77% off the peak, 50% off last year for the fourth quarter, our fourth quarter.

For the full year they were off about 38%.

So everyone knows that story.

It's getting to the point where I don't think the market needs to worry about when it's going to bottom, because we're at such a low level there's not much to go.

If it gets worse from our housing starts from the numbers standpoint, it obviously can't get much lower.

Repair & Remodel is a little bit more at risk because that hasn't come off near as much as new construction.

That was really our concern going into this planning year.

So far, so good on that front, I think it is off a bit more than it had been last year, somewhere probably over 15% or around there.

Remember our Repair & Remodel comes in two ways, either through the big box stores like Home Depot and Lowe's, which is probably holding up a little bit better because those would normally be smaller purchases.

Or through re-sides, which would be a big ticket purchase that would be somewhat driven by consumer confidence, the prices in the market for housing and also the availability of finance.

But anyway I think R&R is down more than it was last year, but certainly less than new construction.

And for the fourth quarter obviously sales were down in a declining market.

It is right across the board but obviously some markets are better than others.

But all regions are being affected.

ColorPlus, our main product strategy that we've been running for the last three years or so continues to grow for us.

And we have reduced our organizational cost and also have done a little bit of improvement in price.

Just more slides on the market, which may not be worth looking at.

But it's just that story of as we've gone into the downturn in the market, obviously the forecasters were more optimistic and every re-forecast is usually lower than the previous forecast.

So it has been 100% it's been lower than the previous forecast.

The current one by NAHB is below the 500,000 which is about where we planned our business for.

I want to talk about the HardieZone launch.

This is a technology we've been working on for about five or six years.

Basically, I'll walk through it, but it is across our full exterior product line it's not just our siding products.

And I think the main thing from a market perspective is when you think about James Hardie, you can't think about the products we made in the 90's, where most of the rest of the market is still sitting.

You've got to think about the products that we're developing technology for now and what we've been launching over the last five, six years and HardieZone being the latest launch.

And one of our marketing guys, some of you probably know him, John Dybsky, came up with this slide which I think does tell a good story.

Most of you probably know James Hardie invented non-asbestos fiber cement back in the late 70's.

And when a few of us showed up in the US in the 90's, basically we did inherit that fiber cement technology.

And it is very good technology.

It's -- it gives you durability, it gives you low maintenance and it gives you a look like -- the look of wood.

But when we started working in the US, we saw a lot of upside for this technology from a product standpoint.

So the first thing, you can see the different generations but some of it's been to do with what you put on the board, like a primer on the second generation.

When we first came to the US, fiber cement was a non-primer product.

And then -- and by the way, primers on fiber cement are different than primers on wood, because you're trying to manage different things with a cement product than you are with a wood product.

And then we started working on the substrate itself.

And then we started working on the adhesion, the paint adhesion between the substrate and the -- and whatever paint finish you're going to put on.

And then we started working on modifying density so we could make thicker products and shapes.

And then more recently we started working on, well how do you kind of zero in on a market need for a product, rather than just have one product for all markets.

And there are different things.

Most of you are aware the climates in the US or North America are very different.

And you have a lot of things that our people worry about when you're putting a product in the market, exterior look and the basic brand premise again remember is durability and low maintenance.

So product performance is key.

And they have to worry about not only the amount of rain you get but the amount of humidity, when you get your rain, how cold it gets the differences in humidity in the market on a regular basis.

So they have a formula with a bunch of variables in it and it basically gives them a reading of one to ten.

Now we didn't know initially how many different HardieZone products we'd launch.

But we've decided to launch two, which covers most of the market needs in either the markets with extreme temperature changes throughout the year or extreme heat and humidity.

So you have the six through ten zones, which we are calling HardieZone10 and the one through five zones which we are calling HardieZone5.

And like I said, it's just now the product that we're going to sell in Chicago is actually built for Chicago and the product we sell in Orlando is built for Orlando.

Before we were building one product, like we do with our Cemplank product, which is a basic generic fiber cement that uses 90 technologies.

That will bridge both geographies, but it won't do it as well as HardieZone5 or HardieZone10.

And you can see there are just -- there are fundamental differences driven by the climate.

And the center column on both these slides, if you want to look at them later really talks about what the buyer is looking for, and what's most important from the buyer's standpoint.

And then I think a really important point, because our color product is becoming so important to our product line, it's really the main product in HardieZone5 and it's becoming a better product for HardieZone10.

It's becoming a higher volume product in HardieZone10.

So, all of our HardieZone work was developed with ColorPlus in mind, so it all fits together really well obviously.

So -- and we did also make a change to our warranty.

Fiber cement in the US got known for its headline warranty of 50 years.

But through research the 50 year warranty wasn't really accomplishing what the company or the buyers wanted.

What the buyer really wanted was a non-prorated warranty.

So that's what we've offered with our HardieZone products.

So we no longer have a 50 year warranty, but we have a 30 year non-prorated warranty which is basically two times retail, is the non-prorated portion of it.

Going to the outlook a little bit for US Fiber Cement, like I said, we set the business for 500,000 starts, a little bit less than that and we were anticipating a reduction of around 15%.

So we did this back, first of the calendar year.

Everything has gone well.

We've gotten a little tight on board a couple of different times, but we've been able to handle that without any problems.

We're going to hold that basic capacity utilization pretty easily I think through the summer months.

And then we'll see how the winter looks with the seasonal downturn and the continuing decline in the overall market.

We will finish the HardieZone launch this year so it's a rolled out launch.

So there's a couple of markets getting the board now.

All markets have gotten the new pricing for the board but not all markets are getting the new board.

And I will have to tell you that the US business, it continues to surprise me how well it has performed.

It's had a really good another three months under its belt and it's been running very well in the first quarter as well.

So what do we expect?

Like I said it's just straight arithmetic or some kind of mathematics.

We're getting so low that even if we have big percentage drops it's not a lot of unit drops.

So I think it's safe to say on new construction sites, we're getting near to bottom.

But then that doesn't mean we're at the bottom or it won't go below 400,000 or it won't go below 350,000.

That just means the difference between 400,000 and 500,000 is not that big when you're trying to schedule your production.

And some of the positives, there are a few positives.

Affordability is way better for the reasons that are simple.

Obviously money is very cheap but also housing prices have fallen quite a bit in most of the overbuilt markets.

So affordability has improved.

Despite that, inventories are still high, so that's a negative.

And credit, even though it's cheap money, it's hard to get.

You need to really qualified to get a mortgage now, not like it was over the last three or four years.

And then consumer confidence is a little bit better but obviously it's at very low levels.

I'll whip through our normal slides here.

This picture you know it's going to keep going down obviously.

That's reflecting starts of somewhere around 800,000 and we're already down to 500,000.

So it's going to keep going down.

Our market share, our defense of our market position has been good.

We're obviously, you can see over the last four quarters have grown small amounts of primary demand or market share gains.

But the big thing I think is we've been able to hold that contribution per truck in a market when all builders, everyone in the supply chain is thinking about cost, cost, cost.

And we've improved our price somewhat, held our share.

So we're pretty happy with this.

But obviously our main objective is to grow market share and in this market it's been tough.

And we're looking forward to getting into a market where a differentiated position for a builder will be his primary concern.

How do I sell more houses rather than how do I build my house for less money.

Selling price has been good as I commented.

We did have a price increase that went into effect May 1.

It'll be phased in over a two or three month period.

It's on our siding products not our interior products.

And it's our current products plus, as I indicated earlier, we've given pricing on our HardieZone products at the same time.

So the market is fully aware what the different products cost.

And by the way there is a price delta between HardieZone5 and HardieZone10.

The EBIT margin, like I said on a quarterly basis, fell below the range for the year.

We were in that range, about 22% something, 22.8% I think it was.

That's extremely good.

We've got some things helping us.

We had lower pulp cost, a little bit lower cement cost, lower energy costs lower freight costs due to fuel.

That's offset by lower utilizations.

So, so far this quarter looks pretty good from both -- at least how we've expected the business to track it's tracked well.

And I think first couple of quarters we're likely to stay in our range and the second couple of quarters we'll have to see where we end up.

But if things stay as they are now, I think we can probably get back in the EBIT margin range for at least a couple of quarters.

Asia Pac, most of you know, like everyone in the world they are having to deal with declining markets.

Australia business has responded extremely well, very similar to the US business.

They probably have some more upside on the manufacturing side but on the market side they've done a really good job.

On the cost side, they've done pretty well on the non-manufacturing side.

New Zealand has a few more fixed costs in it than we'd like and their market's been off more sharply.

So their ability to hold their EBIT margins in the declining market is not as good as either the US or Australia's.

I think we'll fix that up a little bit, but it's still delivering decent returns in a pretty soft market.

Obviously these are in US dollars so it throws all the comps off.

From a full year -- when I say that what I mean is I look at these businesses to see how they're running I look at them in their local currencies, I don't look at them in US dollars.

But anyway you can see the full year accounts were pretty good and the EBIT line was actually up in local currency rather than down for the year.

Asia Pac, the key points here, well I'm repeating myself.

The Australian business ran really well.

The market is getting softer but I think we're in very good shape.

New Zealand and the Philippines, the Philippines market is not as bad as the other two but it's a small market, so we don't track it as closely.

Obviously we have the change in foreign exchange affecting the numbers you see in these businesses.

And sale of differentiated products in both Australia and New Zealand continues to go very well.

So the full year EBIT was up 4% in A-dollars.

The outlook, we expect the markets to be softer overall.

New Zealand's, pretty low level and maybe that will maintain at that low level or might get a bit softer.

Australia, here we do have two direct competitors on some of our products.

So with a declining market the intensity of competition on those core products are at a high level and will stay that way.

But the key for Australia is they're moving away from those core products, as far as where they make their money, with their differentiated product strategy which is working very well.

So I hand it over to Russell at this point and then come back for questions.

Thank you Louis and good morning, ladies and gentlemen.

So clearly, as Louis has explained, our result has been affected by a further decline in construction activity in all the housing markets.

In the quarter just concluded down 50% in the US, 23% in Australia and for the full year not quite as bad, down 38% in the US, 14% in Australia and 34% in New Zealand.

So we've had some pretty severe headwinds during both the quarter and the full year.

In addition net operating profit was affected by asbestos, ASIC expenses and some minor tax adjustments.

In the fourth quarter we paid both the third and fourth installments to the Asbestos Injury Compensation Fund and that amounted to more than $50m, so we had an increase in debt as a consequence of that.

We also, during the year, had reduced cash flow as a result of the settlement we entered into with the ATO in Q3, as well as the payments to the AICF and a reduced earnings contribution from the US.

However, if you add back the ATO settlement and the payments that we made to the AICF, we had a very strong cash flow in the circumstances, $166.4m, which I think was a very creditable result.

We're continuing to constrain capital expenditure.

As you'll see later on it was even higher -- sorry, even lower in FY09 than it was in FY08.

And we will see continued constraint on CapEx going forward.

I think everybody is aware that the results of James Hardie are very much influenced by movements in the A-dollar US dollar exchange rate.

That's not just limited to translation of results.

It's also covering corporate costs that we incur in Australian dollars, particularly in this past few months, in the past twelve months, given some of the -- the nature of some of the expenses that we've been incurring.

A depreciating Australian dollar has a favorable impact on the translation of asbestos liability.

And as you can see from the graph there has been a very significant deterioration of the A-dollar against the US dollar in the past six months or so starting from about August, July of last year.

And then from a depreciating Australian dollar we have an unfavorable impact from the translation of the amount that we have deposited with the Australian Tax Office relating to the '99 Amended Assessment which is the subject of litigation.

I should just add perhaps at that point that -- the fact that we've had substantial expenditure in Australia in the past few months on the ASIC hearings.

Actually we were very fortunate I think to get a windfall gain from the fall in the Australian dollar.

The US dollar cost of those expenses incurred would have been much higher had the Australian dollar not fallen in the way that it has.

And that's not just a translation effect, that's actually real cash.

Turning to the Q4 results, on a reported basis, you can see that net sales were down 23%, gross profit down 35%.

We had some savings in SG&A expenses and I would add that the underlying level of SG&A expenses is actually lower than is indicated here.

We've had fairly significant project related expenditure which we don't strip out in these reports.

And so the underlying level of SG&A being incurred is somewhat lower than what's indicated in this slide.

We've had some savings in research and development.

Last year we had a significant asset impairment in this quarter as well as for the full year related to the US business.

Those impairments haven't recurred in that business.

We've had material asbestos adjustments in both years, very material in fact almost $200m in each year.

And the net result of that is a 12% improvement in EBIT but really only because of the translation effect.

So it's $160.4m loss versus $181.5m for the corresponding quarter of last year.

There's another expense item there of $14.8m which reflects an impairment on investments undertaken by AICF in its investment portfolio.

We've previously had losses there and we've disclosed them as what we viewed then as temporary.

But given that the losses have now been going for almost two years, in fact about a year and a half and that the loss has grown, we've decided to declare it as other than temporary impairment under US GAAP and the result is that we've now booked the expense.

It's unrealized and I should add that in April and May there's been some recovery in the value.

But we haven't reported that and indeed we're not permitted under US GAAP.

This is not mark-to-market accounting.

It's actually just based on valuations.

And in future if there's any recovery or further improvement other than when it's crystallized then we won't be reporting it.

We will be, presumably, taking hits if there's a further deterioration in the portfolio.

But it's very different or slightly different maybe from mark-to-market accounting which some of you will be familiar with in financial institutions.

We had an income tax benefit for the quarter arising from tax affecting the increase in the asbestos liability and that was very similar last year.

And the end result is 12% improvement in result from $132m loss -- sorry, to a $130m loss from $147m one year ago.

Looking at the Q4 result on a normalized basis, you can see that there was $7.2m profit for the quarter, which was 57% lower than last year.

So this is where we add back the non-recurring items and adjust so that you can see the results from the core business.

A $7.2m profit, as I said somewhat influenced by project expenditure which we haven't stripped out.

So the underlying performance is probably somewhat better than that, but nevertheless, not as good as last year's quarter.

For the full year, looking at it in the same basis, the reported results influenced by very similar things, although with somewhat slightly different outcomes, particularly the asbestos adjustments.

Here you can see that in fact for the FY 2009 notwithstanding the significant increase in the Australian dollar liability which came through in the quarter, in fact on a US dollar basis, the weaker Australian dollar/stronger US dollar more than offset the increase in the Australian dollar liability assessment and there was $17m gain reported in US dollar terms.

A somewhat perverse outcome but driven wholly by the relative value of the Australian dollar against the US dollar.

So the net operating profit for the reported period was $136.3m profit versus $71.6m gain (sic - see presentation) last year.

And then for the full year on a recurring basis, on a normalized basis, you can see that adding back those one-off items produced a $96.9m profit for the full year, excluding asbestos, ASIC expenses, asset impairments and any tax adjustments.

And that's a downturn on last year's results, slightly less than half of last year's result of $173.8m.

On segment net sales, US and Europe for the quarter were down 21%, Asia Pacific down 28% to give a total sales decline for 23% for $241m revenue report.

For the full year, we had 21% downturn in US and Europe, only an 8% decline in Asia Pac Fiber Cement.

So that's again that influence of the fall in the Australian dollar in the second half, not producing a similar outcome as in the quarter.

It just averaged over the year.

And the total reported sales of $1.2b were down 18% on the prior year.

In EBIT terms you can see there the reduction in US and Europe Fiber Cement and also in Asia Pac Fiber Cement.

R&D expense we saved 16% for the quarter.

And the total segment EBIT was down 34% to $17m -- sorry, down 34% to $35m before the general corporate expenses.

Now the general corporate expenses are up to $17.7m.

I'll explain that in a subsequent slide, but there was an unusual item that influenced the corporate expense for the three month period.

And as I indicated before, the total EBIT is $17m which was a 61% decline on last year's number.

For the full year, influenced by the same factors, total EBIT excluding asbestos, ASIC and asset impairments down 40% to $171m.

And the total reported EBIT was $173m, adding back for adjustments.

Corporate costs which I alluded to before for Q4.

The items that I'd call out there, I guess are ASIC expenses somewhat lower than we'd anticipated.

And the result is better I think, because most of the work that was being done in preparation for the hearings was probably done prior to the latest quarter.

And we had a lower level of spend and a lower level of activity based on that.

The prior quarters, the first three quarters of the year averaged about $4m, so you can see that that $1.7m it was a pretty significant reduction which was very welcome.

The legal provisions is accounted for under SFAS 5 US GAAP standard for accounting for contingencies.

So we've added to some legal provisions there.

And on other costs at $5.3m we've showed a fairly significant reduction, 29% down on last year.

And as I indicated that still includes a fair level of project expenditure, so the underlying level is actually going pretty well.

For the full year, a very similar treatment and an 18% worse outcome on total costs but driven substantially by ASIC expenses and the bringing to account of legal provisions under SFAS 5.

Interest is not a big item in Hardie, but we put this in for the record.

At $9.4m year to date, the interest expense at that level is reflecting a higher level of debt averaged through the year but a lower level of interest rates.

So it's very similar to the prior year's $8.3m.

Turning now to tax, 52.8% effective tax rate for the quarter was high and I'll give you an explanation for that in a moment.

It was actually slightly lower than in the prior corresponding period which was a very high 58.8%.

What happens there is that at Q4 we obviously adjust the tax for the full year and so we get some anomalous results.

And in both of these years we've had some anomalous outcomes.

For the full year the result was 41.4% effective tax rate.

And that is higher than the prior year and higher than years prior to that even as well.

And I'll just perhaps try to -- given the level of interest that's been shown in this matter, I'll try to give a bit of an explanation as to what's driving the increase in the effective tax rate.

There are in fact three major factors.

The first one is that while we were investing in the expansion of capacity of the US business, which was the case up until 2007, we were deriving very significant tax benefits from our arrangements that we had with the Netherlands Government.

And that's under the contract arrangements, it's not part of normal Netherlands tax law.

The contract runs from the year 2003 through to 2010.

So it's getting towards the end of its life.

But effectively CapEx that we made in businesses outside the Netherlands resulted in us gaining some tax benefit in the Netherlands.

As the capital expenditure in those businesses has declined, we no longer get the benefit that we were in the period from about 2001 through to 2007.

So that's had some influence on the effective tax rate.

The second factor is that there are some significant costs that we've been incurring for which we receive either no deduction or a partial deduction or a deduction at a very low rate relative to the normal statutory rate.

Some of the cost that we've had, that fall into this category are things like the Special Commission of Inquiry related costs that ran through to 2007.

We've also had since 2007 about $20m of costs that we've incurred on the ASIC proceedings.

We've increased the litigation provision both last year and this year and we get no deduction for litigation provisions.

We've also had an increase in costs in the Netherlands, in corporate costs in the Netherlands because from 2006, we've moved an increasing number of functions that are run out of the Netherlands office, that used to be run out of other jurisdictions where we had higher statutory tax rates.

And all of these factors have been impacting earnings adversely.

And where we don't receive a deduction or we don't receive a commensurate deduction we see tax expense as a higher proportion of earnings and that leads to a higher effective tax rate.

The third category of influences is that we have permanent differences in James Hardie, otherwise known in US terms as permanent adjustments.

Now this is accounting terminology.

I know not all of you are accountants, but you've probably heard the expression timing differences and permanent differences.

The classic permanent difference is goodwill amortization.

We don't have goodwill amortization in Hardie but we have equivalent things.

And for those sorts of items you don't get a tax deduction and so that leads to a permanent difference.

And by its very nature a permanent difference in tax accounting is something which doesn't change much over time.

The dollar value might change from period to period but the nature of it is that it is a permanent difference and so it goes on.

As our profit has declined, and that's something that's been occurring now for two or three years as we've moved into a deeper trough in the cycle, the permanent differences represent an increasing proportion of our earnings before tax.

And that therefore is leading to an increase in the effective tax rate as well as a very significant impact on our taxable profit and on our reported profit.

So when we talk about in our results releases, about the geographical mix of earnings and expenses, it's these factors that we're referring to.

So they are very high tax rates.

We've actually run these numbers on the higher profits that we were reporting two or three years ago.

And had we not had the downturn in the profits cycle, we would actually be reporting very similar tax rates as we were up to three years ago.

EBITDA for Q4, that $31.9m after depreciation and amortization, obviously was down 46% on the prior year.

You can see there that there's been a couple of strange numbers coming through in the US business, depreciation and amortization.

That's reflecting some adjustments in the prior period.

And also the fact that we've now capitalized or moved from capitalized assets into depreciable assets almost all of the construction in progress in the United States.

There's a bit still outstanding where we've got some minor projects still worked on but most of the CIP has now moved out.

Asia Pac influenced by exchange rates there showing a reduction compared with the prior year and also some minor adjustments to show a 46% decrease.

But the net result was a total EBITDA of negative $145.6m and that compares with $167m in the prior year.

For the full year, $199.3m in the US business was down 35%, so that's obviously a big decline, similar sorts of numbers as we've seen going through Asia Pac, R&D and also the corporate line.

And the depreciation and amortization amounts there very much in line with the full year for the prior period.

And the total EBITDA was $230m positive reported versus $19.9m in the prior full year.

The cash flow, the net result of net operating cash flow after payment to the ATO that we undertook in the third quarter and also the full year payment to the AICF was $45.2m negative position.

That's versus $319m in the prior year.

In the prior year there was no impact from any special settlement on tax nor was there a payment to the asbestos fund.

And so there's a very material and adverse turnaround in net operating cash flow as reported here.

But for -- if you take out those special payments, the net cash flow was half of what it was in the prior year, $166m which I think was a good result as I said earlier.

Capital expenditure was down.

And in fact if we just go to that slide, you can see that we had a very significant saving, a 32% reduction in CapEx at $26m and that is expected to continue at around those sorts of levels.

It may be up a bit this year but not materially.

In terms of debt facilities, our debt at the end of March was $281m which was a $50m or so increase on the prior year, reflecting the sorts of payments that we made during the past twelve months.

And at the end of that period we had $217m of cash and unutilized facilities, so a very comfortable position for it.

The key ratios, I guess this is a real reflection of the -- what's happening through the cycle.

We did pretty well through to FY06 and even into FY07.

But this is starting to show the full impact of a downturn that's really quite a long period now.

You can see that reflected in the return on shareholders' funds, which is less than half what it was two years ago at 11.2%.

And by the way this is after adding back things like asbestos, adjustments and AICF.

Return on capital employed also showing a decline, EBIT margins also declining, gearing ratio and the debt capacity indicators also showing some deterioration.

But I think overall if you compare this with other companies in our sector, these are very, very strong results.

We're continuing to earn good profits, continuing to generate cash flow.

It's not as good as it was but if you look at the conditions, the US housing sector is off more than 75% from what it was three years, ago, less than three years ago.

It's a pretty remarkable downturn to have an industry running at 25% what it was two or three years ago, and we're still managing I think to do really well in the circumstances.

So we have had our results very adversely affected by the declines in housing activity.

Corporate costs are continuing to be inflated by remaining legacy issues.

We're still having some buffeting from things like asbestos adjustments, unfavorable ASIC expenses, tax adjustments and litigation provisions also legacy costs.

But the results are still producing a very strong net cash flow from operations.

Just turning to legacy issues, the ASIC proceedings, I think most of you will be aware that judgment was found in relation to the main issues that were the subject of those proceedings.

However, we're still awaiting orders in relation to penalties, exoneration and costs.

And we expect that those will come through in the next three months or so.

In addition, we've had some developments on the ATO matters during the past twelve months.

We settled the FY 2002-2006 audits and with the ATO by paying AUD153m which was $102m at the time.

The FY99 amended assessment is the subject of litigation, and the substantial hearing -- court hearings in relation to that matter are scheduled for September of this year.

One pleasing development which didn't get on to the slide was that in April we actually settled with the IRS in the US, the outstanding issue on the notice of proposed adjustment relating to the Netherlands US treaty.

That was a potential $50m contingent liability.

And that settled without any payment and the findings were in favor of James Hardie.

So that was a very good development.

In relation to domicile, we're continuing our review of our future in the Netherlands.

It's a very complex set of issues, driven by corporate law in the Netherlands, Australia and the US and also tax laws in those jurisdictions.

And we're incurring reasonably substantial costs in relation to that project.

Turning now to asbestos funding, we had an updated actuarial report at March 31, 2009 as we do at the end of each financial year.

The discounted central estimate showed a substantial increase to AUD1.8b -- almost AUD1.8b up AUD335m on the prior year.

And that's based on the roll forward of the liability, rather than the actual estimate at March 31, 2008 and I'll explain that to you in a moment.

And in accordance with the final funding agreement James Hardie will not be making a contribution in financial year 2010.

That's based on the cash flow statement that we saw earlier that showed a negative net operating cash flow of $45m for FY 2009 and that triggers no contribution to the fund in this current financial year.

In terms of the updated actuarial estimate the roll forward that I referred to is KPMG actuary's estimate at March 2008 of what the provision would be at March 31, 2009, operating on the same parameters and that was AUD1.446b.

There's been an increase in the number of claims particularly for mesothelioma, which is the asbestos related disease that attracts the highest settlements and so that's led to a material increase in the liability, AUD236m.

There was a lower discount rate because of the fall in Australian interest rates last year.

The discount rate was around 6%, because it was a very flat yield curve.

The yield curve now is a more normal curve.

And the net result is that in the out years, like years eight and beyond, the discount rate is 6% but the early years are being discounted at rates as low as 2.5%.

And that leads to a very significant impact in the discounted central estimate, AUD188m added to the central estimate as a result of that change in the discount rate.

Now, there's been a reduction in average claims cost and also in legal costs of AUD72m and the net impact is about AUD1.78b.

That's Australian dollars.

If you look at it now in terms of the accounting liability, and this is based on the actuarial estimate and I say based on the actuarial estimate because under US GAAP there are some adjustments that are made to the actuarial estimate as we then move to establish the liability for James Hardie's accounts.

We start with the central discounted -- sorry, the central estimate per the discount.

We add back a discounting and inflation allowance because we work on dollars of the day.

So our accounting liability is in fact based on undiscounted results.

We take account of provisions for claims handling costs, some other US GAAP adjustments around administrative costs in the AICF which are not accounted for in the actuarial assessment, so we add that to our liability.

And there was a couple of other minor adjustments and then we tax effect that liability.

And the net post-tax liability produces in US dollar terms $756m, so a significant reduction there.

In terms of the actuarial estimate being a little more complicated than just looking at the discounted central estimate, this is a chart that I think is actually very informative because it takes account of the expected range that the actuaries have derived each year and also looks at the undiscounted estimate.

And if one's looking for a single figure that I think best expresses what's happening with movement in the asbestos liability, it's probably the undiscounted central estimate.

And it's not the first time I've said that.

But you can see here that the result of the past year's movements in interest rates that influences the discount rate has had a very marked effect on the discounted central estimate.

But the undiscounted estimate at AUD3.124b has increased less than AUD100m on the prior period of AUD3.027b.

So it's not nearly as adverse.

And the discount -- the movements in the discount rate in other words, produce a lot of noise in the discounted central estimate, but it's not terribly relevant to what's going on in the underlying liability, which I think is best measured through the undiscounted value.

That's undiscounted and inflated by the way which is different from the way we account for it.

And then in the undiscounted range, KPMG's estimate is that it's now AUD1.9b to AUD5.5b, and that hasn't changed very much from the prior year.

Just one final comment on that, you can see that the undiscounted central estimate hasn't moved wildly during this period.

I think there are eight single points there.

One would expect if everything was remaining equal, that over time that number would actually come down because you're paying off -- each year you're paying off one year's claims.

So I'm not pretending that this is not an adverse movement.

The very fact that that number is staying the same and not falling by the amount that's paid out each year is something that's adverse in terms of the estimate of the liability.

But it's not as adverse as might be apparent from the discounted estimate for this year.

In terms of a fund update, the fund at the end of March had assets in cash and short term investments of AUD143m.

That's after that impairment that I referred to earlier of $14.8m which was about AUD18m.

The claims paid through the year amounted to AUD102m.

That's obviously higher than what KPMG was estimating would be the case for FY09 and was also a significant increase on the FY08 actual number.

Just important to note though that that did include a significant acceleration in the settlement of claims, and that acceleration is consistent with the reforms that were adopted by the New South Wales Government in 2005 and 2006, I think it was.

And where there was a move or an attempt to move away from litigation more into mediation and negotiation of settlements.

It does actually save money over the long term but it has led to a higher claims payment in the past twelve months.

Legal costs also higher, slightly tied into that -- into the claims paid.

And insurance claims and cross claim recoveries also showing some increase, which is a pleasing development.

So the total net claims costs were AUD90m, which was materially higher than the previous estimates from KPMG and also the prior year.

So that's the conclusion of my presentation.

And I'll just hand it back to Louis for questions and answers.

Thanks Russell.

We'll open up to questions.

I just want to make sure Russell's mike is on as well?

Okay?

So depending on who is going to answer the questions, you can answer them from there.

Yes.

Okay, so Emily.

Thanks, Emily Behncke from Deutsche Bank.

Just a couple of quick questions, first thing around the US housing activity, the business in obviously based for less than 500,000 housing starts.

Do you have a feel for the trajectory?

Or do you think that, given the inventory position, that housing's going to remain sort of pretty weak after fiscal year '10.

And secondly what sort of environment do you think you guys would need to see in order to achieve a pick up in the market share growth.

And then finally just one question for Russell on the tax side, I'm just wondering if you can give us some indication as to where you think we should put our tax rates going forward.

Okay.

On the market questions, what do I think is going to happen to the housing market?

I'm not sure.

As I've said many times I'm not an expert in that at all.

What we try to do is just stay far enough in front of the downturn to optimize our financial result.

And we'll try and do the same thing when it flattens out and starts growing.

Now part of Emily's question was good because there's a psychological impact on the businesses we sell to depending on what the market's doing.

And the builder is, on the new construction side is the main decision maker for our product.

So over the last two and half years his main thought process has been how do I reduce the cost of my construction because I'm basically building houses at a higher price than the market is now at.

So it's one thing to dump inventory at a loss, but you can't build houses at a loss.

So they're very focused on cost.

And our product, which -- a lot of the wood has gone away since we've been in business in the US, and our main competitor is vinyl which is a much less expensive product to install than ours.

So we're a cost increase to most builders who are making the decision.

So when does that decision become easier for him?

When he's reset his business model to where he knows his cost are now below what he's going to sell his next house at.

And then it becomes, well how do I sell more houses because I'm making dollars per house I sell.

And that's where we become advantaged again.

So I've described over the years -- I modified it during the downturn of course, but I've described over the years what I think the psychology of a builder is.

In a sold-out market like we were in for several years they're basically production companies.

The faster they build the more money they make because they have no shortage of buyers.

In a soft market they should become marketing companies where they can make money per house, but they need to sell more.

So they need to have features or locations or designs that will allow them to increase their market share against other builders in the market.

And then in that middle market, which was a declining market, clearly they turned into purchasing companies because they had to quickly reduce the cost of construction.

So when do I see that happening?

I think when we start getting some flat quarters, some flat comps.

I think some of the builders -- I do believe some of the builders can now see -- so I get a question in the hallway what's this optimism about we see from some of the builders because, clearly, the numbers aren't showing there's any improvement.

And I think the optimism is people see how they're going to get through the thing.

A year ago when we were sitting at almost 1m starts and we were talking about going to 500,000, a lot of people were saying, well I don't know how to get through this thing that just seems impossible.

I think now that we're down there and there are some companies that are doing well enough, they see how they're going to get down it and then they -- through it, and then they see how they may be better positioned as they come out the other side.

So I do think when we start getting those flat quarters we'll get our PDG numbers back in shape.

And Louis where is the HardieZone new product priced relative to other products?

HardieZone relative to our Hardie products, basically the HZ10 is priced with our normal Hardie line product pricing and HZ5 is around 3% more than HZ10.

And again those would all -- both those lines and our current Hardie product line will transition completely to HardieZone over this fiscal year.

And then those product lines will sit above our Cemplank line and the other generic fiber cements like Certainteed, Nichiha and Maxi.

They'll sit above both from a benefits perspective, also but from a pricing perspective as well.

So do you mean the prime product of ColorPlus when you say --

ColorPlus will all be HardieZone, yes.

So we will only put ColorPlus on HardieZone products.

Did I catch both your questions before I go back to Russell?

Yes?

Okay.

Russell.

Thanks Louis.

Emily, that's a question that's very difficult for us to answer, I think, at this point in the year because of the uncertainty regarding the outlook for FY2010.

So I don't think it's wise that I give you any guidance on ETR at this stage.

Thanks, [Doug McMillen] here from Macquarie.

Just a quick question on what the actual utilization rates are tracking at.

My quick take on it was around 38%?

And secondly just whether you can provide any further clarity on the extent of some of the price rises that you mentioned a bit earlier, Louis?

Yes the utilization is somewhat just below 40%, our guess.

So that's a pretty good calculation.

And then the price level increases I think most of you know US building materials are priced regionally or by market, so there wasn't an across the board number.

Some markets -- a lot of the HardieZone5 markets saw about a 9% increase.

And a lot of the HardieZone10 saw anywhere from 3% to 6%.

Now having said that, there were a few markets -- well I don't know if any markets were below 3%, but there could have been a few just below 3%.

And there would have been some above 9%.

So it was done market by market, it wasn't done nationally.

Alright, David.

Yes.

I have two questions.

I guess the first one was about the restructuring of the domicile.

Just if you could give us any advance on timing or when you expect to come to that decision?

Have you set a time limit on it bearing in mind the ten year tax plan with the Netherlands?

The timing, my comments are pretty much the same as last time.

It's in the near term.

We expect to recommend to shareholders our re-domicile proposal.

And we're still there.

We're still basically going down the same track we were last quarter.

So not a lot has changed, but obviously we're doing all of our pre-work to make sure, when we go to our shareholders, we've got as many things nailed down as possible.

So it would be in the near term.

Thanks.

And secondly, my second question, I heard you say I think that you're expecting margins to get back to 20% or that level over the next couple of questions -- next couple of quarters.

And I just wondered expecting a normal level of seasonality this year given that we seem to be at the trough of the cycle and there's some talk that things may improve towards the end of the fiscal year?

No.

The reason I would think we may get back into our range is because of the seasonality effect.

Now seasonality increases are fighting basic market declines.

So the markets will still be down in the coming quarters over last year.

But our business is set up and performed pretty well in lower volume quarters, in the winter.

So I think, I think, like I said, first quarter is looking pretty good to me.

Now we're not even -- I guess we're half way through it.

And it's a little bit risky to predict out in this market we're in, even another four and a half months, but it doesn't look terrible to me right now.

I think we've got the business set up well.

I think our organizational costs are at the right level.

We've got our contribution dollars per unit at the right level.

So I think, if everything stays the same, I think we would be, like I said, probably able to get there.

The winter months are a tougher call so, number one, it's too early and, number two, I would expect the market would still be in some decline in the winter months.

Add to that the seasonal downturn.

Add to that the fact that we won't build any inventory this year because we have so much capacity available.

We'll work hard in the winter to keep our financials in pretty good shape.

So that's kind of my summary.

It's not -- I'm being honest with you, it's not for sure.

But it looks like right now I'm a bit optimistic at how we come through the summer.

Thank you.

Louis?

Yes.

Paul Bastian.

I'm a shareholder and I'm here with the Asbestos Diseases Foundation of Australia.

So my question is pertaining to the AICF part of your report.

For my end I fully understand that when the settlement was reached and it was negotiated, that no one would have foreseen a global economic crisis, a global recession and its impact on the Company, let alone the rest of the world.

And likewise those negotiating wouldn't have had that in their mind that we would, within such a short period, have that upon us.

I know now that the Fund has notified the Government that, in their preliminary review, at the moment there is insufficient funds to cover the liabilities moving forward for the next three years.

And that's set about some discussions with the Government in terms -- under the funding arrangement what happens.

I'm also aware that under the funding arrangement, it doesn't mean that James Hardie won't pay money into the fund, but it might mean that the money it pays under the formula is not enough to meet those forward estimates.

I guess the questions that I have, there are three parts to them, is firstly has the Company done any forecasting itself in terms of when the market might turnaround, and when the Company may be in a position to actually go within the formula, start to meet those forward estimates.

The second question is, that I note on page five in relation to the AICF notation that the Company says it's not in a position to make any contributions beyond the funding agreement.

I understand that, but I guess my question is would the Company consider alternatives, if they were put to them, to ensure that victims were fully compensated under the fund.

And I guess my third one is probably in relation to that '99 tax liability.

I guess the question I have there is that if that goes bad for the Company, do you see that as having an impact again on your ability to meet the funding arrangements in the fund.

Okay, yes that is a very good summary.

I hope I get the three questions right.

The first one is a forecast.

The analysts in this room actually have very good forecasts for Hardie.

And it's all dependent on, obviously, the macro environment.

But they have very good models for our US business which drives most of our profits.

And I think to a lesser extent, but still good models for the Asia Pac business.

So I think anyone trying to forecast Hardie cash flow, can easily go to whatever external forecast they believe, or if they want to use a range of forecasts, and then go to the analyst's forecast for the business.

And they'll be close enough for those purposes, or as close as you can get I would say, keeping in mind that we as a company don't have any better external forecasts than anyone else.

So if housing starts are x, we believe we'll make y.

But if housing starts are 2x, obviously we're going to make a different amount of money.

So I don't think the forecasting's a problem.

And obviously as a public company we just can't go out and say, we're going to make this much money, and this much money, and this much money for future years when we don't know that to be true.

The second thing, as far as contributions outside of the agreement, the whole agreement was set up to make a long term deal where we would put -- make contributions to the fund when we had the money.

And then we would not put the Company at risk by being -- making contributions to the fund when we don't have the money.

Okay?

And this is a good example.

I mean we did have operating income or operating cash flow last year of, I think it was AUD166m.

But between the contributions we made to the fund, which were around AUD110m, and the contribution -- or the assessment, or the settlement we had with the ATO which was AUD102m, that's how those get absorbed.

So Paul, as I see it the key point there is you can forecast our cash flow and use whatever external forecast you want, but the tax office is still in front of contributions to the fund.

So now we have paid our 50% on that '99 assessment when we received the assessment.

So it's not the full assessment from a cash perspective that's at risk.

But if we were to lose the '99 assessment and a cash flow would result because of that, then that would be a reduced contribution to the fund if our cash flow in that given year did not already meet the requirements to the fund.

And yes, Paul, you don't know me, I can't handle three questions.

You've got to remind me what the third question is.

The other one was on page five Louis.

The Company's made the point that it's not in a position to make contributions beyond the agreement.

The question I had was whether you'd be -- the Company would be prepared to consider alternatives.

I accept what you're saying.

Yes.

There is a formula.

No, I think that -- that's a good question, but I don't think it's a question you can ask for the Company.

I think there's a lot of stakeholders involved.

And if everyone was willing to do something different, I guess you could do something different.

But from what I understand, the people involved in this, from a broad perspective not just the Company, feel that the agreement does provide the contributions long term that we were trying to accomplish.

And that putting that long term in jeopardy to try to solve a short term promise is not where anyone has gone.

So we as a Company obviously aren't there either.

So that's kind of where we're at right now.

Hi, Andrew Scott from JP Morgan.

A couple, first one maybe one for Russell, Russell, I just wonder if you could talk about the balance sheet and particularly just on the liquidity side of things.

I note in your slide you talked about $220m of cash and available facilities, retiring about $50m of those.

Given what could be a fairly lumpy cash outflow through the legacy issues, how do you feel about that?

Does that feel like enough?

It seems to me it could get quite tight if you have a few adverse findings and other costs there.

Yes, Andrew I think we're pretty comfortable.

I mean basically we've got a reasonably good handle on what we think is likely to unfold over the next few months, including with any proposal to re-domicile which will obviously, in aggregate, be subject to shareholder approval.

So we're feeling pretty comfortable with where we're at on cash flow and funding.

Thanks.

And Louis just the Australian business, I understand -- just on the management side, I understand Peter's no longer with the firm.

Could you run us through where we're at with the management position there, and is it still open to be filled or --

Yes.

Peter Baker held the EVP Australia position over the last year or so.

He joined the Company when we were working on the renegotiation of the fund we talked about earlier.

So he has left the Company.

We have not refilled that position.

The Asia Pac business unit management reports to Grant Gustafson in the US.

So he's spending more time in these markets.

And then you know Sean O'Sullivan is taking over the investor relations and media relations side.

Thanks.

Angus Grigg from the Financial Review.

I'm wondering can you tell me --

Angus I'm sorry, I'm going to interrupt you.

Normally I make sure we get all our investor questions out of the way before we switch to media.

Do we have any more?

Telephone maybe?

But let's check the room first.

Yes Emily, back to Emily, sorry about that Angus.

Louis, I just wondered if you could give us tiny bit more color on the HardieZone side and if you're happy with the ColorPlus spend and ColorPlus growth in the quarter.

It's obviously a new product, so you've given us some indication as to the price points.

And so it's going to be launched across the whole of the US.

Is there any sort of color you can give how long it's going to take and costs?

Yes.

It's a technology we've been working on about four, five, maybe even six years now.

Basically think of the difference between a shotgun and a rifle.

So we have very different climates in the US, but when we got down to it we said hey we've got two really distinct climates, one that has a very wide variance in temperature day to day and the other that has very wide variance in humidity.

Okay?

So our HardieZone10 product is more similar to our base product because, when you think about it, non-asbestos fiber cement was designed for the Australian climate which is more like our sunbelt in the US.

We did make some changes to HardyZone10 but a lot -- most of our changes were made in HardyZone5.

I think it's really what we're doing with this business, okay.

Most people think cement boards are an old business, a boring business.

That's kind of what I thought when I joined in 1990.

They'd been around 80 years.

But when I started to learn the business I realized basically the cement boards we were selling at the time were only around about 10, 15 years.

It's a very new technology.

And we found that out early on the process side, but in another three or four years we found that on the product side there was the same kind of upside with the technology.

So we're on a pretty steep development curve with the technology.

And we're the only company doing that.

So normally in a new industry that's less than 30 years old you would have a vendor community, machine builders doing the -- a lot of universities doing the R&D.

In fiber cement that doesn't exist.

It's kind of by accident, but it doesn't exist.

Hardie does 90% of the R&D in our industry and one other company does the rest.

And most participants in the industry don't do anything.

So we see a lot of upside still on the development side.

And HardieZone is just kind of our next step there.

And we spend a lot of time on paint performance on our product because we do think that's the key.

When the market in the US went so much to vinyl they were trying to get away from maintenance.

So what we're trying to do is deliver that same maintenance desire they have but with a product that doesn't look like plastic.

So we spend a lot of time on how to substrate areas up to the paint surface.

So does the distribution change at all or --

There'll be some markets that will be more complex.

You'll have some markets that are all HardyZone5, some markets that are all HardyZone10.

But then you'll have some markets that are mixed.

Those markets will either be markets with mountains or markets that are right on the border between 5 and 10.

So it is more complex.

And the on-the-wall cost, is that --

On-the-wall cost, just the material price difference.

Right.

Yes.

So it's not going to be a big change, but there might be a slight increase in on-the-wall cost for HardieZone5.

And just finally how long do you think it will take to get that product to launch throughout the US?

Yes, we're going to roll it.

So I think it will take most of this fiscal year.

So we'll be done by April 1, but it may be last couple of markets get it in February, March.

And the other question I had was on the ColorPlus growth.

There's obviously margin uplift the more ColorPlus you sell.

First thing is, are you happy with that.

And secondly is there an additional uplift on the -- when you launch HardieZone.

Yes.

No, the Color contribution is the same whether you put -- no matter what board you put it on, depending on what your market pricing is of course.

And we're real happy with ColorPlus.

We're starting to get a little bit of traction in the Southern markets, which is where the big opportunity is, because the Northern markets are definitely on a penetration curve that's going to continue with ColorPlus.

Sorry Louis.

It's Michael Ward from Morgan Stanley.

Just further to Emily's question on HardieZone, does it make you rethink your terminal market share of 35%?

No, it makes us think we can get there.

So -- and the reason I say that is that at the investor tours we've been, I think, pretty open to the fact that if you take our growth and put it on an S curve it doesn't get you the 35%.

You've got to have some bumps to get there.

And we think HardieZone is one of the bumps.

And Repair & Remodel is certainly another bump.

So there's a few bumps up that need to happen to get us to 35%.

But no it's -- HardieZone's not new, or something we decided this year, or something we decided this downturn.

We've been working on it for, I think, four or five, maybe even six years now.

So assuming more normal market conditions, should we see improved rates of market penetration over the next sort of five, six years?

I think you will.

And are there more bumps required after this to get to the 35% or --

I think the Repair & Remodel needs to accelerate, and I think it already has started, and there's probably a few more.

We've got to get Artisan penetration on the top of the market.

If we sit too long on our market model, I think you'll get some of the high end buyers moving away from our product as more of the middle of the market moves on it.

So we've got to have our Artisan product at the top end to satisfy their needs.

Thanks.

Okay, any more investor or analyst questions?

Okay, on the phone any investor or analyst questions?

Your next question is from the line of Simon Thackray from RBS.

Please ask your question.

Thanks, morning guys.

Most of mine have been answered, but just a couple of quick ones.

Lou, any trend around -- obviously the housing downturn has hit pretty hard the custom builder segment.

Can you talk a little bit about what you've seen around consolidation of your custom builders first of all?

And how your mix shift -- sorry, your customer mix may have shifted towards the majors and what you expect over the next maybe 12 to 24 months.

That would be the first question.

And then probably, if I've missed it I apologize, just a bit of an update on the four major marketing issues that we set through in Denver on regional penetration, the house packs, the non-res and the re-siding market, that would be helpful.

Okay the -- yes I don't think I'm going to be able to be get in all your questions, so I'll kind of short cut the first one.

We haven't seen a big customer mix change from a -- at the builder level through the downturn.

I think the reality with custom builders is they're more sitting on the sidelines and not building homes.

But they haven't been dependent on debt to keep their business going.

So they've just kind of idled their business and waiting it out.

Whereas some of the more production builders, obviously had some cash flow problems because they would be making bets on land in a market when land was overpriced.

So they had to work through that.

As far as our initiatives in the business, obviously we'll go right through the business again in our September US tour.

But I can tell you the business is running really well, not only from a day to day standpoint, but our initiatives are running also.

So our Job-Pack program, not knocking it out of port, but it has been put in place, brought some builders on, starting to create tension in the market, other builders trying to decide whether to follow.

Non-res, our Matrix products out of Australia are going pretty well, Zero to Landfill is going well.

I missed maybe one or two others, but as a general statement we've stuck to our strategy.

We're funding all the initiatives that we've been highlighting over the last couple of years.

I think it was regional was the other one.

How you're doing on the regional initiatives?

Yes.

Now regional as far as the regional mixes we're fine.

Everything is going well.

There's no disconnects in any of those programs to talk about.

Alright, great.

Thanks.

Any other on the phone from analysts or investors?

Your next question comes from Lou Capparelli from Black Rock.

Please go ahead.

Thank you.

Hi Lou and Russell.

I'm looking at slide, 58 is the number of it, on the asbestos fund update.

And I just want to get a few things clear in my own head.

You guys paid out AUD91m last year.

From the cash flow statement it looks like you put into the fund AUD110m.

And the balance of the fund in terms of cash is currently AUD140m.

So you've, in really rough terms, got about a year and a half worth's of funding for claimants.

Now ideally and obviously these are not ideal times, you'd want to have a buffer of a couple of years, two or three years?

And if you're saying that you're not going to be able to pay into the fund for the next two or three years, does that mean that you'll probably need, assuming a run rate of AUD100m a year, it will -- basically the next AUD500m of free cash flow has to go into the fund, because that's what you need to do to get back to the point where you've got that buffer?

Okay.

I think I got the gist of your question.

First thing is we have not said that we will not pay into the fund for the next two or three years.

I saw there was a comment in the paper today that we wouldn't pay into the fund 'til at least July of 2011 or something.

Whoever's working off that forecast that's not our forecast it's someone else's forecast.

So number one, if we have cash --

What is exactly your statement then in relation to what you're not paying or paying into the fund?

Well what we know right now is we're not contributing in fiscal year '10.

Fiscal year '10 that we're currently in -- okay.

That's all you've said?

And you're going beyond that?

That is all we've said.

And then once we get back into --

Positive cash flow.

Positive cash flow and start contributing, then we contribute to the 35% cap or to whatever the requirement of the fund is.

So you've said our next AUD500,000 in cash flow would go to the fund, that's not quite accurate.

35% of our next AUD500m in cash flow may go to the fund but not the next AUD500m.

So the fund contributions are on a 35% cap.

Okay.

But if that's the case, and your claims are accruing at the rate of AUD100m, you're going to have to presumably ration payments to claimants so that --

Let me cut you off again, Lou, just because I think I have your question and I know we're running out of time, and we have some others in the room.

We do not run the fund.

Okay?

The fund is independent of Hardie.

We contribute to the fund.

So now in the agreement it does cover what the fund managers, the fund Board would consider in a time when Hardie is not making the full contributions, so the contributions to fully meet the needs.

So that's not a Hardie management decision, you know, how to pay installments or to look for loans or whatever the -- there's two or three different options in the agreement that that fund has that they can pursue.

But again that's not Hardie's decision to how they would pursue that, or which they would pursue.

Yes.

But I mean I guess the point still remains is that the fund remains under-funded and it's your -- you guys are -- it's a wholly owned subsidiary of Hardie's.

So the legality of it, it may well be as you say.

But I'm just wanting to get to understand how the claim is going to be funded is really my question I guess, because I'm assuming that the claims will be continuing at roughly AUD100m a year.

I think there's a technical point.

And if Russell wants to make it he can.

Your comment that it's a wholly owned subsidiary is not accurate.

But as far as how funds for claimants are generated during a period of shortages of Hardie contributions, again that's -- our commitment as a Company, and again I think this is broadly understood and agreed to by everyone involved, meaning the other stakeholders involved, is to contribute, based on our agreement, over a very long period of time.

So I don't think anyone involved thinks they can -- Hardie can all of a sudden start pulling more money out of the corporation and be sure that the agreement works down the road.

So it is unfortunate that our contributions are not meeting the projections of KPMG over the next two or three year period.

But it is not something that we have a solution to.

And there are procedures that are outlined in the agreement.

Again this isn't a surprise.

As Paul said, it is a surprise that the US market is at 500,000 housing starts.

It's not a surprise that this fund would run through periods where the contributions from Hardie would not fully satisfy claimants over the next two or three year period.

But I guess the upshot is that the claimants are going to be asked to sort of carry the pain in the sense of, I don't know, getting paid in installments or some sort of deferral of their claim payments.

Yes.

I'm not sure how to comment, Lou.

I think the fund will be looking for alternative sources prior to going to installments, but I'm not certain of that.

Right.

And it may not be a wholly owned subsidiary, but it is consolidated on to your balance sheet?

That's right, yes?

That's correct.

Yes.

So I mean whether I call it a wholly owned subsidiary or not, in sort of accounting and certainly legal sense it would be, yes?

And the distinction between a wholly owned subsidiary and the AICF relative to you guys?

It sure is.

It's not a --

Lou we're going to be down in Melbourne tomorrow if you want to pursue this --

Yes, fair enough.

Because I've got a full room and I don't think everyone is done with their questions, especially from the media.

Okay?

No worries.

Okay.

Thanks.

Thank you.

Okay Angus.

Just on that issue, you said you're not going to make a payment in the financial year 2010.

That's correct.

Which would mean that the next payment you'd make would be in July 2011, is that not the case?

No it would be July 2011.

Yes.

No, it works off the cash flow in one year.

No, 2010.

The next possible payment date, given that we've already declared we're not paying in FY10, is July 2010, because FY2010 is up to March 31, 2010.

So in testing whether a payment is made on July 1, 2010 we look to the cash flow that is generated in the year ending March 31, 2010.

Okay.

So can you give us an idea whether you think that payment -- you will make a contribution that year, or do you think it would be, as many analysts have suggested, into 2011?

Yes.

Well if we generate cash flow, we'll make a payment.

Now the question you're asking me, will I generate cash flow?

And that's not a statement I can make.

Evidently you have analysts' forecasts, which I told you the analysts in the room understand the business pretty well.

And if they have analysts' forecasts that say we're not going to generate cash next year, I'm not going to tell you they're wrong.

You must have some idea, though, of whether you're going to make money or not next year?

We have our basic plan and basic contingencies like any business would.

But we're not able to say right now what our cash flow for this fiscal year, which we're 45 days into in a market meltdown situation over the last couple of years, we're not able to say what we think we're going to generate on cash flow.

Just finally to the point that Lou was making, is it the situation now that for the next maybe three to four years even longer, that Hardie's will essentially be run for the asbestos victims?

I mean is there a business left?

Again the maximum that we contribute to the fund is 35%.

So shareholders retain 65%.

But you said before 35% or what was required by the fund?

Whichever is less.

Okay.

So it's a maximum of 35%.

Yes.

Okay.

Can I just g (inaudible) from the Herald.

Could I just ask you to elaborate on one of your answers to Lou Capparelli?

According to my notes you said, I don't think anyone involved thinks they can all of a sudden start pulling money out of the Company and be sure the agreement works down the road.

Right.

So are you saying that --

See, one of the benefits of the agreement -- the benefit for future claimants is that there's a possibility that we'll be contributing portions of our cash flow well down the road.

Let's face it, it is a single -- it's a bet on a single company, so you can't be guaranteed that we're going to be there down the road.

But if we are, then we're contributing a portion of our cash flow.

The benefit from the shareholders, and even if you look at it more indirectly, for other stakeholders is that the Company is more likely to be there down the road if, when there's not cash, they're not siphoning off whatever other assets there are in the Company to make these contributions.

So that was the balance in the agreement.

In other words -- yes, that was the balance in the agreement.

So periods of no cash flow, no contribution.

In periods of high cash flow, maximum contributions up to the needs of the fund.

I think I understand that.

But I'm just wondering that if -- you said that this wasn't -- you agreed with Paul this wasn't foreseen when the agreement was put together.

Right.

And are you saying that if for whatever -- for reputation reasons or whatever reason, if James Hardie did decide to make an extra contribution to get over this short term problem, are you saying that someone asking you to do that puts risk to the whole agreement?

Well, I mean you're talking about a specific example and I'm talking about how the agreement works.

So -- and you have to realize the rest of the Company is set up to fund this commitment.

Okay?

So when I say the rest of the Company, our agreements with our banks and everything else is set up the way this agreement is structured.

So yes, a small contribution to a fund would change a lot of things at Hardie.

Can I ask one follow up question which is, Russell did say how comfortable you were with your debt position.

What would it mean for the Company, for example, if the fund were to borrow from -- you were to lend money to the fund so that people who have very short life expectancies don't have to be paid in installments, so the installments arrive after they've died.

What would that extra -- what would that really mean for the long term health of the Company, given that everybody seems to think this is an issue for two or three years?

I do think the AICF is probably seeking potential loans.

But I mean if they sought those loans from you, from James Hardie?

Yes.

At this point they have not sought the loans from us.

But Russell's comments I think were meant to indicate that we don't have a financing crisis like a lot of companies do right now.

But certainly they weren't meant to indicate that we think we have excess cash or excess credit lines.

Sorry, can I just come back in, back on to this point?

I'll just read back what you said.

You said it's unfortunate that our contributions are not going to meet the projections of KPMG over the next two to three years.

So that indicates that you think that there may be a contribution in July 2010, but for the two to three years it's not going to meet -- that contribution is going to be well short of your asbestos liabilities.

Is that correct?

What actually happens is at the end of every fiscal year KPMG gives a number that covers the next two to three years.

And without any contributions in fiscal year '10, we're not hitting that number.

We came within 8m of that last year.

But in fiscal year '10, without contributions, we'll fall behind that number.

Now next year they will come up with a different number and that will take into account the fact that we haven't made any contributions in '10.

So there is a catch up, okay, but the catch up period is when Hardie is generating cash.

The catch up period is not when Hardie is not generating cash.

Louis, it's (inaudible).

Can you give us some kind of update as to where the negotiations are?

You've made representations to government, where that political negotiation is.

And whether there will be any kind of outcome favorable or otherwise in your opinion?

No I really don't have a lot of insight there.

I can tell you we have had discussions with both governments and the directors on the fund, but I can't really give you any indication where I think things might be moving.

On the phone?

Your next question comes from the line of Julian Bu from Citigroup.

Please go ahead.

Lou, just a couple of quick questions.

First of all, just to follow up on what Simon asked about the four initiatives you highlighted last year.

So you seem to be saying they're doing well, but at this point insufficient to, I guess, make a big impact in terms of the primary growth.

Is that right?

I don't think that's quite right.

I mean we only -- we lay out our major initiatives and update our initiatives once a year.

And we plan to do that again in September.

But yes, certainly some of the stuff we covered in Denver last year is what's providing us pretty good result in a pretty lousy market right now.

So all I can do I cover it with a summary comment.

The business -- it would be hard to imagine the business being running any better than it is right now, both from a day to day standpoint and from improving our market position, through this downturn.

So I just don't think I can do a good job covering all those initiatives, you know, in this type of a forum.

Usually we take over a day on the US tour to do that.

I guess yes, it seems that in this past quarter the primary growth was still very little.

So without the initiatives, are you suggesting you might lose market share?

Well I would say it would be more difficult if we were standing, like everyone else, to hold on to what we have.

That's correct.

The fact that we're moving forward definitely is a key part of how we plan to grow market share in this type of market, certainly hold market share.

And we did have some primary demand growth last year.

I think it was 3.2% or something like that.

Okay.

And also I'm just interested in your view on your housing starts.

I think you were saying it's near the bottom.

I'm just curious why you are not providing guidance, despite last year I think the conditions were much worse, given the free fall in starts.

I covered this last quarter because I think the main sensitivity now is the repair and remodel market, not new construction.

If we lose another 100,000 starts in new construction that will impact our business a lot less than if we lose a major chunk of repair and remodel.

So I guess you're saying -- you are forecasting at this point 15% drop in R&R spending.

So are you suggesting the visibility is not high in that number?

Well it's not like housing starts.

You don't have an external number where someone tracks repair and remodel activities in our type of market.

So it's much more difficult to read where that market is right now.

One of the ways you can do it is through your same store comps from Home Depot and Lowe's.

But that's only a part of the repair and remodel market.

The bigger part for us, and probably a little bit more variance involved with it, is the re-sides which are, normally to re-side a house with fiber cement you're going to spend somewhere from $15,000 to $30,000.

So in this type of market that's a big purchasing decision.

Alright thanks.

Okay.

So a quick summary, I think I've given it to you a couple of times, but the market's no better, still getting worse.

There is some optimism out there, but we're just -- we have our business set.

We think we're optimizing our business model in this market.

We'll continue to do that.

And as far as the fund, full commitment to contributing to the fund, as per agreement, and we'll work with everyone involved.

But it's meant to be a 40 to 70 year fund.

And we did anticipate there would be periods of shortages.

And everyone is aware that those shortages are not intended to be made up by Hardie during those periods of shortages.

Now after the period of shortage, it will reflect in our contribution to the fund when we start playing catch up.

So with that, I appreciate everyone coming.

I appreciate everyone's interest.

And we'll see you.

Have a nice day.