James Hardie Industries PLC (JHX) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the James Hardie Media Briefing. At this time all participants are in a listen only mode. There will be a presentation followed by a question and answer session (Operator Instructions). I must advise you that this conference is being recorded today, Monday 23 November 2009. I would now like to hand the conference over to your speaker for today, Mr Louis Gries. Thank you, please go ahead.

Thanks everyone for joining today. I'm going to flip through this presentation we distributed. I'll do the first part, Russell Chenu, the CFO of James Hardie will do the second part and then we'll come back for questions. I will go through it pretty quickly because the results have been out for a little while so some of you may have already gone over them. I want to make sure we have enough time for all the questions so you can drill down in specific areas you are most interested in.

If you flip to Slide 4, I guess you'd be aware of the number that most investors look at when they're following our company is that net operating profit excluding asbestos and a few other things, tax adjustments and ASIC costs. The reason for that is normally with the asbestos agreement we have in place foreign exchange kind of whips around our headline numbers so that's why we look at it after that.

We did have a flat result versus last year, it's up 4% but nearly flat and that's a very good result, I guess, considering the type of market we're dealing with mainly in the US, although all of our markets are down a bit.

We will go to Slide 6. I think the only point in this Slide is one of the things we've done well right through the downturn is we've stayed on strategy. We've had a strategy in the US to grow the business organically over the last 15 or so years going into the downturn, you know, there were a lot of concerns about our ability to remain profitable and stay on strategy but we've been able to demonstrate that we've been able to do both of those things successfully.

Slide 7, I guess no news here. The second quarter was off again versus last year. The market is kind of settling down to a very low level of activity. The repair and remodel market is better than the new construction market for sure, but it's off as well. So the market opportunity for building materials' companies like ours is much smaller this year than it was last year.

Slide 8 shows that despite the smaller opportunity and a loss of revenue and volume we were able to deliver a good EBIT result that was driven by the better pricing. You can see highlighted down the Slide but also we had better costs in the business and the cost reductions were contributed to by lower raw material costs, especially pulp, lower energy cost and lower freight cost to customer.

Slide 9 shows very similar numbers for the half year, basically the two quarters were very similar quarter outperforming kind of what our expectations going into the year were but also the market expectations for the Company in this type of a market are.

Slide 10, this kind of just gives you the laundry list of key points. Some of those I've already made. The last point, goes to our ColorPlus initiative which continues to do very well penetrating in the market, which is good for the builder, it gives the home owner -- it kind of extends the value proposition of fibre cement, good durability with low maintenance. It gives us better revenue and better profitability.

That's been our major initiative we've been funding during the downturn and it continues to track well.

Slide 11 gives you an idea of what the forecasters are thinking about the market, NAHB's forecast but other forecasts are very similar, I'd say, and right through the downturn it was a story of every new forecast was a downgrade. Just recently you will see in recent forecasts they're looking for some improvement in the market in 2010. The most recent one, the October forecasts are all further improvement in 2011.

October housing starts were down, so it will be interesting to see what the forecasters come out with next. I think they will be similar but they may dampen their expectations al little bit. It's too early to tell whether October numbers really are just a blip or if maybe some of the positive trends that people have been expecting won't materialise but we'll see.

Slide 12 which is our outlook Slide kind of gives all the normal bullet points around there. It refers to the October decline how we run our businesses and changing. We are set up in the business to perform well financially. We've set the market so we'll hold our position there. It will be quieter from a demand standpoint in the next six months because those are the winter months in the US so demand will come off seasonally. Despite this, we do expect the US business will perform well right through to the end of the year but not at the same level as it did in the first half.

A few charts there which I'm sure you've seen before, Slide 13 shows the housing starts and how that relates to both our volume and our revenue.

Slide 14 is actually an index measure of our market share gains in the US market, so the wider the gap between the red and the blue line indicates more market share gains. The good news is we've gone through the downturn without losing any market share. We've grown right through the downturn, although not at the same rate as we were growing prior to the downturn.

Slide 15 is just showing the price increase which I mentioned earlier. It's up about, I think, just less than 5% this year. It's been a steady increase over the last 5 or 6 years.

Slide 16 is the EBIT margin graph over the US business. Our annual target for EBIT margin is to stay in that 20 to 25 range. You can see that last year we were in that range and this year we are back to being above that range and that goes back to the lower input costs that I referred to earlier.

Slide 17 talks a little bit about the non-US businesses which we call our Asia Pacific businesses, the Philippines, New Zealand and Australia. They had a very solid quarter, very good returns. The Australian market bumped up a little bit which helped the Australian business and in addition to that we had better manufacturing costs in both Australia and the Philippines so that gave us an EBIT margin bump. The half year result not as good as the quarterly result but we do expect second quarter type results to be more typical than what we had in the first quarter, so we expect to finish very strong in the non-US businesses. They are the key points.

Of course you have the foreign exchange issues there because we are a US reporting company but the businesses are performing well it is being discounted a little bit as you look at it in US dollars but in Australian dollars, especially the Australian business comps to last year are very good.

New Zealand, you know, faced a pretty serious downturn over the last 12 months. It is still a very soft market probably starting to flatten out or maybe even get a little better at this point. We didn't perform as well in New Zealand when the market started declining as we would have expected to, but over the last couple of quarters I think we've shored up that business quite a bit and the returns are good.

The outlook, most of you would understand the Australian market opportunity better than me, but our guys are feeling pretty good about it. New Zealand, like I said, looks to them like it's near to bottom so that will be a little bit easier in the future, and the Philippines, our market share in the Philippines isn't all that large to be overly concerned with the state of the market. But it does expect to get a little better.

We're indicating the external environment is still relatively challenging but we expect our businesses to perform very well.

At this point, I will hand over to Russell Chenu and he will start on Slide 22.

Thanks very much, Louis. Good afternoon ladies and gentlemen. Just looking at Slide 22 on the overview, as Louis indicated, the results have been affected by weak housing construction activity and really what we've seen is that the volume downturn has been offset and a little bit more by the improved performance of the business as well as the lower cost of some of our really key inputs, particularly materials and energy.

In addition we had, in the reported results, a severe, adverse effect from the appreciation of the Australian dollar having an impact on the US dollar value of the asbestos provision. That's particularly compounded over the prior corresponding quarter and half year where the Australian dollar was actually weakening relative to the US dollar. So we've gone from having big gains a year ago to having big losses on that foreign currency revaluation of the asbestos liability.

The thing that I think is worth noting there is that whatever is happening in that it is almost all non-cash, particularly in the near term. So it really is, in some respects, a lot of noise in reported earnings and we don't want to dwell too much on it, but they are very big numbers.

One pleasing thing in this year has been the strength of the Company's cashflow. In this latest quarter the cashflow enabled a reduction of $62 million in net debt, that takes the year to date, or the first half reduction in net debt to $115 million, so it's come down from $281 million at the end of March to $166 million at the end of September. That strong cashflow has come from the fact that we've obviously been enjoying lower costs as well as managing our working capital and other aspects of our balance sheet very, very carefully.

We've had a decrease in SG&A spend, that's selling, general and administrative expenses, and that's been across the board in all areas of the business, but particularly in the US business.

Turning to Slide 23, just a quick look at the results and these are the reported results so you can see there that our sales revenue was down by 11% but not by as much as the volumes, and in the US business our volume was down about 17% so we picked up some price benefit there. You can see there the significant reduction in SG&A expenses of 13%. R&D was practically steady and then the big impact of asbestos an expense of $63 million in this quarter versus a gain of $140 million a year ago, so that's a $200 million swing, which just emphasises the point I was making in relation to the earlier Slide.

So the total net operating loss for the period was nearly $20 million on a reported basis versus a profit of $153 million in Q2 of last year.

Now, what we do on Slide 24 is to add back or adjust for those matters that are one offs, so there's the asbestos adjustment and the ASIC expenses and then some tax adjustments. You can see there that if we look at the core business, as I see it, Q2 of this year produced a profit of $37 million after those adjustments versus the Q2 of 2009 of $36.2, so just a 4% increase, but when you bear that in the context of the volume downturn and the state of the housing industry that's a very, very good result.

On Slide 25, we look at the same sort of analysis for the half year and you can see there that sales revenue was down 17%, and the very big impact of asbestos adjustments, an expense of $182 million to date. As I said, just a revaluation of the liability so it's non-cash and it's the result of the appreciation of the Australian dollar against the US dollar for the period from 31 March 2009 to 30 September 2009. All of that produced a net loss at $97.5 million versus a profit of $155 million for the corresponding half year of last year.

On an adjusted basis the result for this six month period on Slide 26 is a profit of $79 million which is a 4% increase on the result for the prior half year. So, again, what we consider to be a very creditable result.

I think that comes through on Slide 27 where you can see some key financial metrics. You can see here that most of these are annualised numbers and they're showing a very good uplift on the financial year 2009 numbers and in some cases on the financial year 2008 numbers as well. For example EBIT to sales margin in the middle of this Slide 21.5% is higher than both FY09 and FY 08. The bottom four measures here, gearing ratio through to net debt payback are debt capacity indicators and showing that our company has continued to have very strong performance in terms of its capacity to service its debt. Our debt is down, as I said and the metrics are improving.

On Slide 28 just a summary, I think the businesses have all done particularly well. USA, Europe, Australia, New Zealand, the Philippines, in fact all of our businesses have done extremely well in this half year in very difficult market conditions. Our net profit excluding those factors for which we adjust, asbestos, ASIC expenses and tax has increased 4%. As I highlighted the net cashflow generation is also very, very strong through the half year and is higher than it was for the equivalent period of last year. That is the operating summary.

On the next two Slides just a bit of an update on the legacy issues. On Slide 29 an update on the position of the Asbestos Fund. At the half year end the Asbestos Injuries Compensation Fund had liquid assets of AUD101.6 million, that's compared with AUD110.6 million at a year ago. Admittedly as of one year ago it still had some substantial contributions to come through from Hardie in the balance of the financial year 2009. That won't be the case in this year ending 31 March 2010 because the Company is not contributing as a result of the terms of the funding agreement and the way the cashflow and contributions play out. But, as we flagged in the result this morning, we do expect that we will be making a contribution to the Fund based on our performance in financial year ending in March 2010. That contribution will be payable in July 2010 and may be made in quarterly instalments at James Hardie's election rather than in one lump sum.

On the second half of Slide 29, just a little bit of the detail on the claims paid so far this year. ACIF has had net claims costs of AUD49.4 million. You can see there that's roughly in line with the actuarial estimate. The Fund is running a little behind on insurance recoveries but that's a timing issue rather than a significant thing to be concerned about.

The net claims are up on last year but equally important as the claims paid is the claims made and in fact the claims made by number of claims this year to date are running at a lower level than they were last year and are also running at less than the Actuary's estimates for the first half of this year.

It is perhaps early days, we will have to wait and see what the balance of this financial year looks like but we are encouraged by the reduced rate of claims being made so far in financial 2010.

On the following Slide a bit of further update, firstly on asbestos and the on other legacy issues. I think you will all be aware that on 7 November there was a joint announcement by the New South Wales Government and the Australian Government about a funding plan for the Asbestos Injuries Compensation Fund.

The Commonwealth is to provide up to AUD160 million to the State and then the State will add that much again on a dollar for dollar basis, so that there will be a backstop facility available to the Fund for AUD320 million. I hasten to add that that is not necessarily a loan. It is a facility that will be available for drawdown by the Fund in the event it is needed to be able to pay claims at 100 cents in the dollar. So it is not a direct loan, it will be only available as a facility of drawdown in the event the Fund needs it. At the same time we reiterated our commitment to satisfy obligations under the final funding agreement and that is very likely to include a cash contribution in cash for 2010.

You will be aware that we have a matter in the courts with the Australian Tax Office which goes back to an amended assessment issued by the Australian Tax Office in 2006 relating to financial year 1999. That matter has at last found its way into the court and there was a Federal Court hearing in September 2009. We are still awaiting judgment on that and we expect that we will have judgment in all likelihood by March of next year but we don't have any certainty as to the timing.

In relation to that amended assessment that is being litigated, Hardie has already paid the Australian Tax Office $229.3 million, which is equivalent to AUD261 million. That is treated as a receivable on our balance sheet.

In the ASIC proceedings which have been well scrutinised, you will be aware that the court's decisions were announced earlier this year, final judgments in relation to that were issued in August, so there is nothing further expected from the trial judge, but all defendants, other than the former CEO of James Hardie, Peter Macdonald and ABN60, which is the former parent entity, James Hardie Industries Limited, all but Peter Macdonald and ABN60 have appealed the Supreme Court decision and the directions hearing in relation to the appeals was heard earlier this quarter and we're expecting the hearing to start in April 2010 and to run for about 10 days.

In relation to domicile, shareholders approved stage one of the proposed move from the Netherlands to Ireland. They overwhelmingly supported the proposal, and 99.3% of the votes cast were in favour and that was known in August. We are in the throes of completing the materials relating to stage two and we're hopeful of holding the shareholder meeting early in 2010.

I think that completes our presentation or review, and I guess we're open to questions. Louis, is that to be handled through the facilitator?

I believe it is, yes. Okay, can we open the call to questions please?

We will now begin the question and answer session (Operator Instructions). There are no questions at this time, please continue.

Okay well that's kind of the last thing on the agenda, so I appreciate everyone's interest in the Company and I look forward to seeing you in the future. Thank you, goodbye.

That does conclude our conference for today, thank you for participating, you may now all disconnect.