James Hardie Industries PLC (JHX) 2010 Q1 法說會逐字稿

Good morning everyone, this is Louis Gries.

I'm here with Russell Chenu, we're actually in the meeting room where we're going to do the EIM and the AIM later today.

Sorry we couldn't do the results in person but we just got a very tight time schedule.

I'll be calling out the slides so hopefully we stay on track.

Right now the cover page, and I'll flip through the disclaimer slide.

So I think everyone has a hard copy of it.

We'll do the agenda.

So we've set up the result announcement just like we always do.

I'll take care of the quick overview and go through operations very quickly.

Russell will take care of the finances and then we'll come back and I'll either answer or steer Q&A.

If you go to slide number four, I guess we've probably surprised quite a few of you with the first quarter results.

We weren't expecting to get off the year in such good shape this year.

It's very strong results.

Obviously I look at that row where we have net operating profit excluding asbestos asset and tax adjustments.

So this is our first positive quarterly comp I believe since the downturn started.

It's a combination of several things and I'll go through it detail.

But basically the business did run very well, both on plant and market side.

Then we got some help with lower commodity pricing for both pulp and energy.

If we go to next slide, that's just a cover slide for the operating review section so we'll go right on to slide six.

And I'm sure, as most of you are aware, that's just restating the strategy that's been in place for many years now at Hardie.

I think the, again I know I'm repeating myself, but from previous quarters we've really performed well but we've done it in a way that has kept the business on a long term strategy.

So we continue to support our R&D project and market development initiatives, at the same time we're generating pretty good returns in a very depressed market.

We go to slide seven.

This is just headline numbers.

You can see volume and sales did continue to track down due to the smaller market opportunity.

But our average price is up, our EBIT was up a little bit in the US, and EBIT margin was up pretty significantly.

The slide number eight, the market conditions are still declining in the US so fortunately we're in the summer months, so the volumes there are good relative to winter months but they are lower obviously than they were last year, pretty significantly.

So housing starts all the way down to 582,000 starts which is about a 46% reduction from last year and 26% of the peak, so there's a much smaller opportunity on the new construction side.

It does feel like we're getting near the bottom, things are flattening out.

Our volumes month to month this summer have been relatively consistent.

So we read that as we are bumping along on the bottom.

I'm not saying it's not possible to get further declines but right now it doesn't feel that way.

Of course we'll have our seasonal downturn so our winter volumes will be lower than what we're experiencing right now.

But as far as just the overall demand without the seasonal effect it seems like we're flattened out a bit.

Our Repair & Remodel is down but obviously it's down less than new construction has been.

So slide nine.

You can see the key points.

They're pretty obvious.

Sales are down due to the weaker market.

It's down across the board.

There's some markets here are better, there's been a fair amount of positive talk about Texas recently and we're pretty well positioned in Texas.

And that market is probably doing, or that state is probably doing better than other states in the country.

But it's a bit of a mixed bag but it is down across the board just in varying degree.

ColorPlus continues to grow as a percent of our product mix.

Our results this year as I said the plants ran very well.

We did a good job on the market side.

We did a good job with pricing, we had a price increase.

We had the HardiZone launch.

But also we definitely get some extra margin from much lower pulp cost than the same quarter last year, lower energy cost, and our freight system is running more efficient right now than it was a year ago.

We get a lot of help there.

On the SG&A side we're down again, so that also helped.

So very good EBIT result out of the US.

Not one we would except to be able to be sustained right through the year obviously.

But it's tracked well so far in the fourth quarter as far as volumes.

And although pulp has increased some it's a long way from where it was this time last year.

Slide 10, I guess there's a bit of encouragement on this slide assuming that you can believe forecasters.

Because they were downgrading forecasts on a regular basis over the last three years and the July forecast by the NAHB is actually the first upgrade we've had during this period.

It's a small upgrade to what they had in May.

And then of course they also projected 2011 for the pretty good increase up above 1m starts in 2011.

I wouldn't bank on that.

Again we're focused on not so much what the recovery looks like, just so we get into a flat market we'll start growing positive comps and probably start doing better on market share gains at the same time.

Go to slide 11, the outlook.

I guess I've already kind of covered.

We do believe it's nearing the bottom, or on the bottom.

Again that's not taking into account the seasonal downturn we'll run into in either September or October.

And certainly although we're flattening out I think there's still a lot of issues out there.

So it's very low level of activity especially on the new construction side and there's still come concerns that we list there that would indicate that it's not going to just be straight back up.

So as a business our success in the downturn has really been about staying on our long-term strategy.

So we've done that, we'll continue to do that.

And then really generating good earnings in a difficult market, and positioning our business so that if we get a recovery that's quicker than anticipated we're able to respond to the opportunity.

So overall we're very optimistic about how the US business will perform going forward.

But again it's qualified by a very low market opportunity.

Slide 12 is just our top line growth chart for the business so you can obviously see that it's still coming off quite significantly.

Slide 13, is a bit encouraging because as most of you know we were having more success growing market share against alternative materials when the market was hot.

When the market declined that became more difficult.

We didn't lose market share at any point during the downturn, which is good since we sell at a pretty large premium to vinyl.

But it did get pretty skinny there a couple of quarters ago and we've widened out a bit.

Now that'll be market share gains in the segments but it'll also be some mixes involved.

Geographic mix is probably helping that shift a little bit right now with Texas being better than the rest of the country.

In slide 14, that's selling price.

I indicated that we did get a price increase in the first quarter, which is coming through now.

So about half the increase over last year is probably market price and then there's a few mix things.

Product mix being a big one, customer mix being also a contributor, and rebates.

So net-net we worked out a little bit better because we have lower rebates than we had a year ago.

Go to slide 15, you look at our EBIT margin slide it looks like a bit of an over correction despite going up to over 30 there.

But again rather than this being a managed result it was really a combination of the business running extremely well at the same time, some of our key cost items were declining.

So again it looks good for the year meaning that I am sure a lot of you are concerned with the low level starts.

If we could stay in our target range and since we started out so strongly and we're feeling pretty good about the second quarter as far as volumes go.

I don't think we have to worry about the range until the very end of the year.

Obviously the winter months especially November, December, January and possibly February will be very quiet, very hard to generate income during those months.

And that's again a combination of low level starts and seasonal downturn.

Slide 16, AsiaPac also facing declining market opportunity but they had a good quarter.

This slide 16 is in US dollars, on an Australian dollar basis they comped better.

But the business Australia, New Zealand and even the Philippines now continue to perform well relative to the market opportunity.

Philippines has actually picked up quite a bit from last year and that's just more internal than external.

We're running that business better than we were a year ago.

New Zealand business is tough but they're doing okay relatively speaking.

And then Australian business, I do like the way the Australian business is performing in the market especially.

Slide 17 the key points, just what I covered, I think the business is doing well, AsiaPac business.

There's your comps in Australian dollars so you can see volume off 13% and EBIT off 13%.

So we've kept the bottom line pretty consistent with the top line, which obviously isn't easy when you're losing volume.

And there's no real optimism for a stronger market in either Australia or New Zealand.

So we're going to deal with soft demand I think.

So slide 18 does have the outlook.

Further declines in Australia and New Zealand, stay at the very low level.

And I'm very confident we'll continue improve our positioning on these businesses so we'll buffer some of the declines.

Okay, so that covers my operating overview and we'll go to Russell Chenu.

Slide 19, that's the cover slide for Russell.

Thanks Louis.

And good morning everybody and thank you for joining us.

As is apparent, although we've got a very good result for the quarter the results do continue to be affected by weak housing activity in all of the markets that we operate in.

We also had fairly significant impact on profit this quarter from Asbestos, not do much from ASIC this time as there was no significant expenditure incurred in hearings.

So we've seen a downturn in expenditure level there.

And we've also had a very good result in managing SG&A spending which was down significantly compared with the prior periods.

However we've had significant volatility in the AUD exchange rates.

A depreciation since June of 2008 versus an appreciation since March 2009.

And if you go to slide 21 I think that's very well illustrated in fact.

Year on year, so that's June '09 compared with June 2008.

And the reduction or a depreciation in the value of the Australian dollar versus the US dollar was about 18.5%.

In the quarter ended June versus quarter ended March the appreciation was about the same, obviously in the other direction, up 18.1%.

And on the bottom of that slide we've actually put in the impacts that the movements have had on earnings and on the balance sheet.

I hope that that helps people to understand.

And you can see in that graph just how volatile the Australian dollar has been against the US dollar.

Now turning to slide 22, this I think is a pretty straightforward quarter to report on.

You can see that net sales were down 22%, on volumes that were much lower as well as the depreciation of the AUD versus the US dollar year on year.

The SG&A expense reduction is very obvious there, down 24% to $41m.

Research and development, very flat.

Asbestos adjustments a very, very large movement there $120m which is all foreign exchange related and it's the impact of the movement in the Australian dollar in only the three months from the end of March to the end of June.

At the end of March the Australian dollar was at $0.687 at the end of June at $0.812.

So a movement up of 18% produces a very material impact on reported earnings.

The EBIT, a loss of $57.1m versus a profit of $22.9m a year ago for the quarter.

And a small contributing factor to the good result was another income positive item of $4.8m.

$4.4m of that was unrealized gains on interest rate swaps and I'll deal with that in a later slide.

And also $0.4m gain on realized position on investments of the Asbestos injuries compensation fund.

We took a hit on that in the year ended March 2009 and as financial markets have recovered a little bit we've seen a bounce back and AIC have actually realized a gain of the $400,000.

So the net operating profit on a reported basis for the quarter was a loss of $77.9m versus a very marginal profit of $1.4m for the corresponding quarter of the prior year.

Turning to slide 23.

If we look at that on a normalized basis you can see, adding back the Asbestos adjustment, the foreign exchange loss in particular.

There are a number of other smaller items there, reduces the net operating profit on a normalized basis to $41.6m, which was up just a very small amount of 4% on the prior corresponding period of last year.

Turning to slide 24 on segment net sales.

A pretty dismal picture here with revenue down overall 22%, down 21% in the US and Europe segment and down 26% in AsiaPac.

The 26% in AsiaPac was 18% due to currency and another 8% due to the underlying business results of the businesses that comprise that segment, which is Australia, both building materials and pipes, and the New Zealand building materials business, and the Philippines building materials business.

On slide 25 looking at segment EBIT you can see that the US and Europe Fiber Cement was up a very pleasing 5% given the downturn in sales revenue that was I think, a very, very strong result.

AsiaPac Fiber Cement down 31%.

Currency contribution 18% of that downturn and the Australian dollar performance down 13%.

Our total segment EBIT was flat at $75.7m.

Corporate costs up a little bit but that resulted in an EBIT excluding asbestos and ASIC expenses which was very flat at $63.8m.

We then have asbestos adjustments and other items that contributed to an EBIT loss for the quarter of $57.1m.

On slide 26, and the numbers on this are really for the record so I'm no going to dwell on it but just some items on interest expense showing AICF and the rest of the Group.

During the past few months we've entered into interest rate swaps and on slide 27 we give a few details of that.

We've taken advantage of what we think is a fairly temporary downturn in US treasuries market to lock in some interest rates for extended periods.

We've entered into, or we now have a portfolio of swaps with a face value of $250m.

The weighted average interest rate on those swaps is 2.49% per annum and the average remaining life of the portfolio is 3.6 years.

We've had a mark to market because we don't qualify for hedge accounting under FAS133.

And the reason we don't qualify is that we don't align the face value of the swap contract with our principle debt, in either dollars or in maturity, and that disqualifies us from using FAS133.

The consequence of that is that we'll need to mark to market each quarter and in the period under review, the first quarter, we had an unrealized gain of $4.4m.

If I just add that the reason we don't actually align swaps and underlying debt is because it's actually not an economic, or it hasn't been an economic proposition since we entered the swaps.

It's much more attractive for us to actually manage that more actively and it does have this perverse outcome of meaning that we're going to have an ongoing mark to market position each quarter.

In addition we had the realized loss for the first three months on the interest rate swap contracts of $400,000 and we expensed that.

That's really the net settlement on the interest rate swaps in the quarter.

So an adverse outcome there.

Turning to slide 28 is where we show income tax expense for the quarter.

The middle line there showing operating profit before income taxes, excluding Asbestos, is one of the important lines there.

And on the basis of our expected full year results we've got an effective tax rate for the quarter of 38.1%, which is pretty consistent with what we had in the first quarter of last year but lower than the full year tax result that we had in financial year 2009.

On slide 29 a quick look at corporate costs.

You can see here that we've for the first time here identified the Domicile related costs.

In the quarter just concluded we expensed $4.5m in relation to Domicile and this period last year we had only $200,000, it was a very quiet, a relatively quiet quarter for us on the project.

So we'll continue to show that up to you in the coming quarters as well.

As we've indicated in our disclosures previously, the expected total cost on that project is $21m.

And you can see that the rate in the last quarter was quite high.

So that means actually there's quite a lot of the cost has already been incurred, there won't be a significant amount still to come.

One other thing I'd highlight on this slide is that the other costs for the first quarter just concluded are $5.4m, relative to the corresponding period of the prior year at $8.7m, suggested there's been a significant change in the underlying rate of expenditure.

That's actually not the case, so the reason for that is that we've just had some non-recurring adjustments in each quarter that's disclosed on slide 29.

In other words we took up an expense, a non-recurring expense in Q1 '09 and we've had some non-recurring benefits in Q1 2010.

So the underlying cost levels are running very similar in each period, each year.

It's a bit under $8m in each quarter.

So please don't factor in an ongoing result like Q1 of 2010.

Moving on to slide 30.

The EBITDA excluding asbestos and ASIC expenses on this page came at $79m, which was a very flat result compared with Q1 '09.

And you can see there the impact that the other items have had.

On slide 31 a look at the cash flow.

Very strong cash flow for the quarter.

Net operating cash flow of $82.4m and that was after some working capital -- adverse working capital movements of $34m.

A relatively low level of movements in the other items, tax and interest.

We had a higher level of capital expenditure in the quarter.

We're doing a bit of spend in the finishing area in the New Zealand business and in the US.

And so as you'll see on slide 32 there's a fairly significant level of expenditure relative to the past few quarters, probably the past eight or so quarters.

Expenditure will continue at a slightly higher level than it has been in recent years but it's not going to continue at quite that sort of level that we've reported.

On slide 33 a quick look at the debt and facilities position.

Our total facilities at the end of June amounted to $447m.

Net debt at $228m leaves us with unutilized facilities and cash of $218m.

And I think the very pleasing thing in the quarter from a treasury point of view was that fact that our net debt has decreased by $53m compared with March 2009.

So it's a very strong level of free cash flow that's contributed to enabling us to reduce the net debt by that much in three months.

We remain well within our debt covenants and so we're in a very comfortable position I think given the headwinds that we've been facing in terms of markets.

On slide 34 a quick look at key ratios.

And I guess these ratios, particularly the ones that are annualized, are reflecting the strength of the quarterly result.

So they're reflecting a strong improvement compared with the full year FY09 in terms of return on shareholders' funds, return on capital employed and EBIT to sales.

Very strong debt service capability indicated in our net interest cover ratios and also our net debt payback.

On slide 35, the summary, I think was very strong result in US and Europe EBIT.

Lot of factors contributing to that lower average manufacturing costs, lower freight costs, decreased SG&A particularly in the US business.

Improved plant performance as well as the increase in net sales prices that Louis referred to.

In Australian dollars the AsiaPac business did very well, given the difficult environment that those businesses now face, particularly the New Zealand business.

And we had a lower gross margin performance partially offset by lower SG&A expenses.

Overall the net operating profit excluding Asbestos increased 4% for the quarter compared to the same period last year.

Some factors that I think we'll elaborate on a little bit are the extent to which we were assisted by lower input costs, particularly for pulp, energy, freight, and cement.

They all showed reasonably strong gains compared with the prior corresponding quarter.

I find it a little interesting that we've now really in the fourth year of a downturn for Hardie, an industry downturn that is and it's only now that we're really seeing a reduction in input costs.

So in the first three years or so of the downturn that we've been experiencing in the US, we've still faced higher levels of cost for material inputs like pulp and oil and gas.

And it's only now that we've got well into this that we're starting to see a bit of a tailwind come through on some of those cost inputs.

So if anything those have detracted from margins in the prior quarters and now we're seeing the benefit of it and the margin coming through is much stronger.

And that has enabled us to really offset the impact of lower volumes, which has impacted the fixed cost absorption.

Although relative to most of our peer companies I'd say our fixed cost base is probably very low.

The net cash flow from operations remains very strong and Louis referred to the fact that the Philippines business is doing better.

I think our European business is also doing better.

So I think that we can say that all of our businesses now are very well positioned for the prevailing operating environment.

That concludes the operating results.

And I think if we just turn to slide 36, a couple of comments on legacy issues.

On Domicile the proposal was announced on June 24.

The documentation relative to shareholder meetings was distributed four weeks or so ago.

And we have a Stage One vote, as it's called, by shareholders on August 21, so that's later this week, ahead of another meeting of shareholders which will be called for some time later this year or early next year for a second vote.

But we're making pretty good progress on the redomicile project.

In relation to ASIC, the findings and reasons for the judgment were announced by the court on April 24.

And we are awaiting decisions in relation to exoneration costs and penalties.

And we expect that there'll be a judgment in relation to those forthcoming fairly soon.

On the remaining, or the sole remaining tax matter that we have outstanding, which is the 1999 amended assessment, the court hearing for that commences in Sydney on September 7, so only a matter of two or three weeks away.

And a result for that we'd expect possibly within this financial year.

So I think we're continuing to make steady progress on resolving legacy issues, and hopefully at some stage, not too far down the track, we'll be able to report that the 1999 amended assessment is the only one outstanding.

So I think those are the concluding comments.

And I'll just hand the matter back to Louis for chairing questions.

Thanks, Russell.

I don't know if we have any media on the call since we have a media conference later, but if we do, let's leave those questions to the end.

So leave it up to the facilitator to bring up the questions.

Your first question is from Doug Macphillamy from Macquarie.

Please go ahead.

Thanks.

Good day, Louis, good day Russell.

I just had a couple of quick questions.

Firstly, you gave some more specific targets recently around ColorPlus penetration targets over the next few years.

I know it's still early in FY10, but just how confident are you in meeting these hurdles this year, given the volume pressures that are still out there?

And just hoping to get a bit of an update on the Job Pack initiative, and a bit more detail on the traction you're getting with ColorPlus in the west and in the south in particular.

Okay.

The targets that we disclosed recently were three-year targets.

I'm pretty comfortable that we're going to track to those targets.

The ramp-up of the Job Pack program in the south and the west is starting to pick up traction.

So it's been on a flat part of the curve for most of last year.

We have converted a reasonable amount of business of the last, say, three months.

And a lot of those conversions are now coming out of the ground, even though activity's pretty low.

We are getting new developments on Color in Atlanta, in San Antonio, in Denver specifically.

Excellent.

And just in terms of your freight costs.

I'm assuming that the average delivery distance has increased, given there are less parts on line.

But are you finding that the decline in oil prices is more than offsetting the longer trucking distances per delivery?

I'm just looking for a bit of further clarity around the distribution and freight part of the business over the quarter.

Hello?

Hello?

Just one minute, Doug, won't be a moment.

Cheers.

Doug, you still on the line?

Yes.

Yes, still here.

Doug, you still on the line?

Yes, yes.

Sorry about this.

I assume I was cut off.

But anyway, the freight rate this year is lower than last year and it's twofold.

One, we have lower fuel prices which translates to lower cost per mile.

But also I think the supply and demand balance in the trucking industry now is favorable to us as well, so we have more choice as vendor.

So we're in a little bit more efficient freight model as well.

Okay, excellent.

Thanks for that.

Yes.

Your next question is from Rohan Gallagher from Credit Suisse.

Please go ahead.

Thank you.

And Doug, I didn't think it was that offensive a question anyway.

Good morning, guys.

Couple, three questions if I may.

Number one, can you just clarify what the absolute price hikes were at the start of this year.

Louis, second of all, you previously mentioned you'd based the business on 500,000 start.

We're now running at 580,000.

Are there any changes to that?

And my third question is in regards to the sustainability of your SG&A following the material reduction in this quarter.

Thank you.

Okay, thanks Rohan.

So the first one, price.

We haven't changed, so I think last quarter we said we're expecting around just under 3% across the full product mix.

That came different increases, different markets, different prices, I mean different products.

So backerboards didn't get any increase, the increases weren't on site even, they were more in some markets than the other -- others, more on some brands than the others.

So we're anticipating that our original estimate of just under 3% is probably pretty good.

As far as how production's set up, we did set up for about 500,000 starts.

As most of you would be aware, housing starts are less of a factor as far as our total demand now than they've ever been.

So 582 squelching up to 500, it hasn't caused any problem.

We haven't really had any shortages.

Now what does affect us a little bit is the regional spikes in demand.

So -- but we're able to flex up and down on the plans pretty well.

So we're running the production side of the business really almost exactly as we planned to, so no issues there.

On the SG&A side, I think our SG&A is at the right level.

I think it might have been a little bit lower in the first quarter than it will be in the second quarter, because we're more into the middle of the HardiZone launch in the second quarter.

So I think you see a little bit more expenditure there.

As far as number of people in the business and that type of spending, I would expect that to be flat right through the year, maybe down a little bit more in the winter months.

Thanks, Louis.

Your next question is from Matthew McNee from Goldman Sachs.

Please go ahead, sir.

Louis, can you hear me okay?

I can hear you fine, Matt.

Just a couple of questions.

Firstly, just on the rebate, just to clarify, you got (inaudible) annual rebates through distributors.

And you do adjustments to that in the first quarter every year.

Is that right, when I say first quarter, the March quarter, sorry, the June quarter?

So the fiscal first quarter.

And is that for the previous year?

Yes, actually, Matt, I don't do the accounting.

But I think, I think we actually adjust at the end of each quarter and some adjustments are over-corrected or under-corrected.

But the actual rebate's based on an annual volume target for the distributor?

It is.

A couple of points.

Not all of them would be calendar and not all of them would be fiscal.

So they're somewhat phased through the year.

And the other thing is, we're a small -- we use rebates in a small way relative to our industry.

So it just -- the way the industry has changed through the downturn has just resulted in us having somewhat lower rebates than we used to.

So it's no big movement, but it did impact net price a little bit and that's why I commented on it.

All right.

But it hasn't had a material impact on the margins in the quarter?

No, material, like I said, the -- it might have been like 15% of the total price difference.

But I wouldn't expect it to be that way every quarter necessarily.

No worries.

Just another one.

You're indicating that your volumes in the current quarter are tracking still pretty well.

And obviously this is certainly one of your strongest quarters as well.

Just given where your guidance is for the full year, saying that you're happy with the upper end of consensus, which implies $25m for the last three quarters or thereabouts, you could almost do that in this quarter, couldn't you?

Are you concerned that it's a market stage where it is if pulp goes up that your last two quarters may actually be losses?

And is -- because I would have thought in three months' time we might be sitting here and you've actually got your full year guidance.

Yes.

No, it's the right question because it's tough arithmetic to figure out how you get from 41 to the top of our range over three more quarters.

I think the reality is, Matt, it's just the wrong kind of a market to be bold with your forecast at this point.

We're only 4.5 months in, our volumes are tracking okay this quarter.

I think our volume this quarter will be similar, maybe a hair less than in first quarter, but pretty decent relative to the market.

And I don't know what to expect in the second half.

I don't expect pulp to go -- the reason we're getting the big pulp comp is because last year they were almost at historical highs.

And first quarter this year they were almost at historical lows.

I expect pulp to settle down somewhere in the middle.

That's what most have forecast.

So I can see why the -- us pointing toward the top of the range would be a bit confusing.

And all I would say, it's all around external uncertainty rather than anything we would know as a business.

So there's nothing internal that you know that we don't know that's causing you to say that's just purely those external factors like pulp underlying market etc that the uncertainty's causing you to be cautious?

Yes.

That's correct.

And, sorry, just one to clarify again.

Pulp, I think you normally have a two or three-month lag on spot price to what you -- when it actually hits you.

So again, this quarter should have a pretty low pulp price as well, shouldn't it?

Yes, it'll be up a little bit, but you're right.

I think pulp's come like $50 a tonne off the bottom, but we wouldn't absorb the full $50 I don't think in this quarter.

Yes.

And sorry, just one final one.

Just on the market penetration, you indicated that obviously -- and you can see it in the numbers, that you seem to have grown the volumes better than what the underlying market's done.

And that's probably the first time we could say that for three or four quarters.

What areas are you seeing that?

Is it across the board?

Is it -- are you doing better in R&R?

Or are there certain regions you're doing better?

Yes.

I like what we're doing in the south now.

You know Nigel well, I think some of his thinking since he's taken over the south has maybe gotten us a little bit more traction.

We're doing a little bit better with big builders.

So we've been a little bit more serious about re-engaging with the right big builders.

And -- but there's still a few opportunities out there.

We're still not satisfied we're getting all the multi-family we can get.

And like I've said over the last three years, if we get a flat market then I'd become pretty optimistic that we should just be able to cover more just new construction business than we have in the past.

R&R, there's no doubt in my mind we're picking up share in R&R.

But it's really hard to measure, so I can't guarantee it.

So your long- -- you're still comfortable with your long-term projections, your market penetrations should pick up once the market flattens out?

Yes, I still feel very strongly that way.

And I feel very strongly that we're going to start getting off the flat part of the S curve with Color, going back to Doug's question.

So the market side of the business, kind of like the plants, it's running very well right now.

There's room to run it better, but we're certainly pointing in the right direction.

No worries, thanks a lot.

Your final question comes from Emily Behncke from Deutsche Bank.

Please go ahead.

Thanks very much.

Just a couple of quick questions, Louis.

Just around the price increase.

Obviously that 3% across the board price increase is very positive.

I'm just wondering how much of the average price increase this quarter was to do with some of the move towards the HZ product?

Yes, the price increase came through before the HZ board was launched.

So I would say a small part of the price increase was product mix and HardiZone would be part of the product mix.

But we just started rolling out the product, I think it was late May or June, so it would be pretty small.

So does that mean going into the September quarter that we probably expect further significant reasonable price increases?

I don't know if I'd call it reasonable, because HZ5, which is the higher priced product of the two HZs is also the smaller volume.

The other thing is, I think we covered in the last quarter, just because you have a higher price in HZ5 doesn't mean you have a higher dollar margin because we're going through an experience curve with the new technologies in HZ5.

So it'll be a while before we get a higher margin on HZ5, if in fact we end up there as HZ10.

Okay.

And in terms of pricing pressure from your small competitors, they're not trying to pick up some of what looks like some market share gains from you guys?

I think, I think our competitors, like everyone in the industry, they're not selling as much forward as they would like.

And they're discounting when they think they can get more volume through discounting.

But I think we're successfully defending our position within the category as we attempt to grow the category overall.

And just in terms of the repair and remodel demand in the US.

I note lows reported overnight.

And I think that the outlook statement, the result was slightly worse than expected.

Are you guys not seeing that sort of pressure in the R&R segment?

No, the R&R market is down.

I was very concerned.

I think I probably covered in a previous result that it would really dive as the new construction market continued to get worse.

I don't think it's performed as badly as I was thinking it might.

So I think from our perspective we're satisfied.

At the same time I do think we as a company are doing better in the R&R space, especially in the reside area.

So I think we're probably getting a little bit more volume out of R&R than we anticipated going into the year.

But that doesn't mean -- lows would have a much better indication what the actual market is off.

Do you -- are you doing better in different regions in the R&R market?

Well, yes, we went into the downturn with variable shares in the R&R market, meaning our big markets had better shares.

So as far as our programs to grow market share, it's your normal bell curve.

We probably have four or five markets that are running better than we thought they would, and we have four or five that aren't running as well, and most of them are probably doing pretty much what we expect them.

Great, thank you very much.

Yes.

Your next question comes from Rohan Gallagher again from Credit Suisse.

Please go ahead, sir.

Hi guys.

Sorry for coming back.

Russell, can you just clarify with the Domicile related costs, you've taken that all above line.

You did mention the total costs as $24m.

Can you just remind us how much has now been spent and how much residual to go?

And second question, Louis, in regards to the dividend.

I know it's early days, we're near the bottom.

But your cash generation is positive, your balance sheet's in strong shape, recognizing you've got some legacy issues.

Is that permanently off the agenda?

Or could that be considered at the half year?

Sorry, Rohan, can you just repeat the second one?

I didn't catch all that.

It's dividend.

I'll take care of the second one.

The dividend question is just too early to call.

So there's still a tonne of uncertainty out there.

So we've got to see where we're at when things start getting better.

So as far as mid -- as far as mid-year interim dividend, we haven't discussed it at this point.

I think it's a bit early to discuss it.

Over to Russell for the --

The costs.

Yes, the Domicile costs rose -- what we announced was $21m, of which $14m had been spent as at the end of -- or the time we announced, which was June 24.

So there's about another $5m to $7m to go from here would be a reasonable sort of an estimate.

Terrific.

Thank you, gentlemen.

Your next question is from Julian Bu from Citigroup.

Please go ahead.

On the margin, most margins this quarter, is any way for you to quantify the impact from the various factors you listed?

You talked about the pulp energy, freight, manufacturing, SG&A, etc.

Can you rank the importance of those?

Yes.

So some of them are less sustainable than others.

So pulp obviously has started coming up again, so that's probably the most at risk.

But like I said earlier, I think to Matt, that I don't anticipate to go all the way back up where it was.

And then freight, two pieces, you have your fuel portion and then you have your -- just your ability to buy portion.

I expect that our ability to buy freight will remain pretty good right through the year.

So the short answer, and it's not an exact answer, is you might have had 6 points of EBIT margin from all the very low input costs that we talked about.

Now, some of that will stay, so some of the free portion will stay and so it's not a full 6 points.

And everything's not going to just go right back up.

In other words fuels start to go up again, but it's not going up at a real steep rate.

All right, that's helpful.

And also just the interims of the -- back to the guidance.

In the past few years you generally generated 30% to 40% of earnings in the first quarter?

Yes.

I guess, any reason why that should change this year?

No, I think the only reasons, the reasons it could change are the ones we've already highlighted.

As you know, as you get less and less utilized in a business, even a business like ours that is very low fixed cost, meaning the only things we see as fixed are depreciation, tax, insurance.

But still as you get very much lower in utilization, which we will be this winter with 500,000 starts in just winter months, you just have more fixed costs to use your contribution dollars before they fall to the bottom line.

But having said that, we don't know where the housing market is for sure.

We don't know how severe the seasonal downturn is.

And we don't know how long things like pulp and energy will be at their current levels.

So yes, so long answer to a pretty easy question.

We had a spike in the first quarter.

In the other years you probably looked at, the first quarter wasn't so much of a spike as more of a natural result.

And this is a natural result that was very good, plus a spike on top of that.

So that's what you've got to watch for.

Yes.

And also just in terms of the Aussie and the US housing starts.

Do you have -- what are your assumptions at this point?

Our assumptions on the recovery is going to be exactly the same as our assumptions on the downturn.

We're going to always stay below external forecasts with our planning because our business model is set up well to flex up without losing any business.

So I saw the NAHB, their July forecasts, they had a pretty good recovery they were forecasting in 2011.

We clearly would not plan for that until we started seeing that in the market activity that's happening in our business.

So we'll undershoot the market, but we'll have the flexibility to move up if the demand is there.

And Aussie housing, what's your assumption?

My assumption is that it's going to flatten out, and then my assumption is I'm not smart enough to know what it's going to do after that.

Okay.

Lastly, just the interim of the US housing, I think -- I don't take issue with your call of the housing being nearing the bottom.

How does the existing whole inventory impact on the new construction market?

Yes, obviously it dampens.

So if you have high inventory, if you have more foreclosures coming on the market, you will have less demand for new construction.

But still that would not I guess, put -- I guess that would not prevent the new construction market from having bottomed?

That's our assumption.

Like I said, we're seeing very consistent demand month to month.

And the thing you've got to remember, our downside and new construction is now small and our upside is large because right now, most of what we ship goes into repair and remodel.

So if new construction falls off, I think I covered this last quarter, 100,000 starts, it doesn't kill our business even though it's a 20% drop, because it's such a smaller part of our total volume demand now.

So fortunately, the unfortunate thing is we're in a market with very little activity.

The fortunate thing is, because you are in a market with very little activity on the new construction side, the downside risk is small and the upside opportunity is large.

Great, thanks Lou.

Okay.

Your next question is from Michael Ward from Morgan Stanley.

Please go ahead, sir.

Thank you.

Hi, Louis.

Just very quickly, can you put in context your big improvements in SG&A, in context with I guess comments from last quarter where you basically suggested that further improvements were becoming harder and harder to come by?

Yes.

I think there's a bit of a timing deal in the first quarter results, because we did point a lot of our SG&A dollars toward HardiZone.

And the spending on that's just a little bit delayed because it's a rolled out launch.

Having said that, the reductions are harder to come by as you get smaller.

But our commitment in the business is anything that's clearly not adding value, we're not going to -- you don't carry through the rest of the down.

Now, I don't want to mislead anyone.

We're still investing in R&D, we're still investing, I think you would have seen -- I think I saw it in the MD&A, that our -- actually product development costs were up, and that's around HardiZone, and our market development programs are all still running.

So we're not selling out our long-term strategy that -- to reduce the SG&A or increase the EBIT margin.

I think what you're seeing is a little bit more favorable than you would in the first quarter.

And as I indicated earlier, you might see that bounce back just a little bit in the second quarter.

I don't see -- I don't think there'll be a dramatic increase in SG&A costs.

But first quarter may be lower than the underlying costs.

Okay.

But you've obviously done a great job on that front.

When things do finally improve, should we expect it to maintain at around that 14% of sales level?

Because you do comment also earlier that you say those are variable costs and you don't have huge amounts of fixed costs in your business.

Yes, I know, that's true, but we wouldn't increase our SG&A as fast as our volumes will increase in a market recovery.

My guess is, if we get a good market recovery, we'll put 10% on our SG&A for initiatives, two or three years in a row, and then you probably depending on where the business is at then, you're probably thinking about do I need to carry that forward, do I have more initiatives I want to fund going forward or can I start tapering off a bit.

It wouldn't -- it would not increase at the same rate as sales if we have a good recovery.

So in effect, we should annualize SG&A and then add 30% and then flatline it from there, is that what you're suggesting?

I'm not actually a model builder either, so -- yes, that's how I think about it, but it's just not that, I think you know us well enough, Michael, that we're just not real black and white planners in that.

So I gave you how I think about it, but if our guys come in and say hey, I only need 4, or I need 14, I'm just going to look at what they need and say yes, I agree, or maybe that's a little too little or too much.

So we don't have a set formula.

Okay.

No worries, thank you.

There are no further questions from the phone, sir.

Okay, thank you very much.

I appreciate everyone joining the call and look forward to seeing you next time.

Thanks.

That does conclude our conference for today.

Thank you for participating, you may all disconnect.