James Hardie Industries PLC (JHX) 2010 Q4 法說會逐字稿

We'll go ahead and get started on our full year result.

We'll do it the same - I'll cover operations.

Russell will cover the financials, and then we'll come back for questions.

The first slide here - obviously the row we focus on is the middle row.

The top row is impacted by the FX exchange with the liability on the balance sheet, so we did finish out the year in good shape.

I'll kind of give you my summary and then we'll go through the presentation and see how many of the points come out.

But this full year result is much better than we would have thought we would have been able to do in this type of market.

You know, we got some help in the first half of the year on the costs side with freight and pulp and energy being relatively cheap.

That kind of changed in the second half, but again, the full year result was very strong.

I think we've probably reached the bottom of the housing downturn in the US.

Obviously it's a very low level.

We knew we were approaching it.

It looks like we have kind of hit it now.

All the businesses are running well, that was one of the keys to the result in fiscal year '10, was not only that the US ran well without a lot of market opportunity, but the non-US businesses all ran extremely well.

We are now facing cost increases, especially in the US business.

It's really too early to tell what the shape of the recovery in the US is going to look like, so we'll talk about that a bit.

And then we have started to increase funding on our growth initiatives in the US.

So it's just a little bit of a summary upfront, and we'll cover a lot of those points as we go through.

Fourth quarter in the US was the first quarter we had a positive volume comp in several years now.

Price was a little stronger than last year, so the net sales were up more than the volume, and the EBIT was up a bit more than that.

Again we're facing higher costs now, so the EBIT may not have been up as much as you would anticipate on a stronger volume, but we thought it was a pretty good result.

Full year - you can see in the full year volume was down 15; sales down 11, due to the help we got on price, and of course EBIT was up due to not only the help we got on price but the lower cost was able to offset the volume decline.

Just a slide, our standard slide on price.

Now it's a full year slide.

It's not quite a linear chart, but it's pretty close to it when you think we're building material, so we don't commodity price, we didn't go down in the downturn.

Most of the movement you see there is around mix rather than - most of the bumps in the line is more around mix than it is about differences in the market.

The EBIT margin - as you know we've had a long-term target - 20% to 25%.

We spent a lot of time above the target.

That shape we have for fiscal year '10 is very typical.

Normally we come out of the chute with our best EBIT margin in the first quarter as the building season ramps up in the US, and then it falls off quarter to quarter.

It was no different this year, but you can see the extreme, because we had the lower costs of pulp and freight coming into the year, so Q1 spiked, put us above the range, just slightly above the range for a full year.

Next year - I'm sure I'll get the question - next year what do we expect?

We think yes it's a pretty good target range for next year.

I think with the costs the way they are, and it being a little bit early to call where the market is going to be, we wouldn't think we'd be above the range, but we still think the range is a good range.

Now we'll see as the year develops a little bit.

Primary demand growth - they're basically how we measure how we're doing against the market - obviously indexed for new construction and R&R.

You see a little bit of an increase in the quarter.

I wouldn't read too much into that.

We're still in kind of a dead market.

I think what happened is -- that gave us a little more this quarter is with the tax incentives going off for home buyers, we got a little of that demand pulled forward.

So even though housing starts in the fourth calendar quarter weren't very good - which should reflect more what our sales would be in fourth fiscal quarter - we got a little bit more, and I don't think it was so much of our programs as it was just around the tax incentives.

Asia Pac finished up with another very good quarter.

Now a lot of their big numbers are foreign exchange, but having said that, every one of our businesses outside the US have run significantly better over the last year.

And it's not really a one-off; they've been on a good trend for several years now, and they're really gaining a lot of momentum especially in Australia.

But the Philippines business had a very good year, and New Zealand, after stumbling when the downturn started, they recovered pretty well.

So anyway, you can see all their numbers.

Full year result very good.

I think the Asia Pac - I think Dennis -- Dennis, our Financial Director in Australia, is down here, I think he said he had a 20% EBIT margin for the Asia Pac - that includes the Philippines.

That would be the first time we've ever hit that number.

So for the Group, you can see, in the quarter we did have slightly higher volumes is where we went over, we had a little bit better price, the plants are running extremely well for the low utilisations, but we are dealing with higher raw material costs, especially pulp.

Asia Pac is a little bit better story actually.

Of course they get the FX improvement, which we don't care about so much, but the business is running well.

Their product strategies are running very well.

Their manufacturing gains have been significant this year.

So that's always been a gap between the US and non-US businesses - our plants in the US have always run significantly more efficiently than the non-US plants, and the Asia Pac business is starting to close that gap, so they're starting to run more -- closer to potential.

They don't see the same cost increases as we do in the US.

Of course their pulp is up, but foreign exchange helps them a bit on that, and then the type of freight increases we're seeing in the US, we're not seeing in Australia.

So again, the summary is really simple.

We had a great year as a business in a very difficult year for the industry.

Shape of the housing recovery, you can see why we think we have bottomed out, basically the comps have improved even though they've been negative until this last quarter - three or four quarters in a row.

Now, I do believe the last quarter was propped up some with the tax incentives going off in the US.

How much that falls back, I'm not sure.

Our order file obviously ran positive comps in the first quarter for volume.

Our order file so far this quarter, very similar, but it is really hard to read.

I mean we're positive through today, I guess, but it's hard to read because we did have a price increase in April which allows customers to buy 10% more than they would normally buy.

So normally when you do that you have your increase, you get a bit of a spike and then you taper off the following month, and we have tapered off in May.

So we don't know how much of that is our price increase and how much is the tax incentive coming off.

So, I do expect a bit of a correction if the underlying demand is X, I think in the first quarter we went over that a bit, and in the second and third quarter we might be under it a bit.

I mean our forecast for this year is we think the top line is going to be easier than the bottom line for the first time in several years, okay?

But that's not a super positive statement because we feel the bottom line is going to be very difficult, because we're coming into the summer month with high freight and high pulp costs.

Now I think we're going to still make good returns, I just think it will be very hard to comp in the first quarter.

Now the full year comps may work out well if those cost increases kind of settle down as the changes in the market settle down a little bit.

The main thing I want to keep pointing out is all the businesses are running extremely well.

So if we get any help from either the market or on the cost side, we'll have a lot of leverage.

You guys know this stuff better than me, but the markets down here are better than the US, so Australia seems to be pretty good.

New Zealand seems to be coming around quicker than the US is coming around.

And the Philippines, most of our gains last year were in manufacturing, but we are getting steady gains on the market side as well, so a good market, a bad market down there, because we're still a pretty small player it doesn't affect us as much, but we do expect a reasonably good market in the Philippines.

So what do we do different this year than last year?

Like I said, the only thing is last year, because we knew we were coming in in the worst part of the downturn, we were a little bit cautious on spending and growth initiatives.

In October we kind of moved that around to committing to at least the first wave that we thought we should start funding, and we've done that.

Most of you would know we changed the organisation in January and that was kind of tied to where we thought we were in the market.

But Nigel Rigby - who is actually in the room somewhere -- (inaudible) at the top - now he has US P&L responsibility.

And Mark Fisher has non-US, but he works with Nigel on a lot of the capabilities in the US.

So those two guys are running the operations in the Company right now, and their focus is on market share growth and holding our position in the category.

So, the way we do that obviously is primary demand as it shows up there, shift to a higher value mix, more difficult for others to try and copy, our zero to the landfill initiative in the plants, which we have had a couple of plants hit that target - I think one has hit and one has approached.

And then as we start ramping up plants as we start ramping up the growth initiatives, obviously make sure the organisational capabilities are there to make sure we do that thing - do that well, and we don't build waste back into the organisation as it gets larger again.

And again, I mean, we're looking forward to a good year, but it's going to be a little tougher year on the cost side.

I'll hand it over to Russell.

Thank you, Louis, and good morning ladies and gentlemen.

As Louis has outlined, the results have been affected by weak activity, particularly in the US.

The US market I guess is characterised by some improvement in affordability, but that's offset by a continuing weak employment market and a severe constraint in the availability of credit.

So it really is stunting improvement pretty significantly.

Consumer sentiment recently has started to improve and maybe things will start to flow through, but I think those two issues of a weak employment market and the constraint on availability of credit is pretty significant.

Notwithstanding that, earnings in the quarter did benefit from higher volumes, higher average net sell price, improved performance in operations, and also the strength of the Asia Pacific currencies.

We had continuing strengthening of the A dollar and the other currencies against the US dollar through the year.

That's obviously reversed in recent weeks, but it did benefit the fourth quarter in particular.

We also had very strong cash flow generation.

Debt more than halved in the year, and that's put us in a very, very strong financial position.

And all businesses performed strongly, as Louis noted.

In relation to asbestos, we have had a significant reduction in the central estimate.

It went from AUD1.782 billion at the end of 2009 - March - to AUD1.537 billion - so that's down 14%.

And obviously that's been somewhat offset by an increase in the US dollar value because of the appreciation of the A dollar during the year.

So the improvement in the Australian dollar value of the central estimate didn't actually flow through to our results, but of course that's largely non-cash anyway.

Also of note was that there was a reduction in the number of new claims relative to the actuarial estimate for 2010 as well as against the prior year.

That's claims inflow, it's not claims settled, so it's claims made.

We have included this currency chart.

I had hoped that at some stage we might be able to drop this, but I think that the chart does -- or the graph line actually does show the extent to which our results get whipped around by currency.

And this is quite interesting.

I think, you know, two years ago, 31 March '08, the Aussie dollar was about $0.90; 31 March '09 it was about $0.68; and at 31 March 2010 it was again back to about $0.90, and it's gone south largely since then.

But significantly in Hardie because of the size of the asbestos liability in particular, but also other matters - like corporate costs that we incur in Australia - we get pretty significant impacts coming through from this sort of volatility in currencies.

And the bottom table there just notes in relation to this quarter and the year what the impact was.

Looking at the results for Q4, as we have highlighted it was the first quarter of positive comps for quite a few years - about four years in fact.

Net sales were up 14%, gross profit up 32%.

It was quite a pleasing result actually, until you get down to the asbestos adjustment line, and we'll remove that in the following slide.

But the net operating loss for the period was $2.3 million for this quarter versus $129.6 from a year ago.

In the following slide we look at the Q4 result after adjustments, and you can see that this is a much better story, and I think it's more convincing of the underlying performance.

The profit after tax, excluding asbestos and ASIC expenses and tax adjustments, was $23.7 million, which was a significant increase, in fact a trebling of last year's Q4 result, which was $7.7 million.

I won't go through all of those details because we will pick up most of those as we go into later slides.

But nevertheless, a strongly improving result.

On slide 23, the full year results as reported, show net sales down 6%, gross profit was up 7%, SG&A expense down 11%, and the asbestos adjustment, highlighting the movement in the FX rate as well as the change in the actuarial assessment - but it was a $224 million negative impact on earnings, or on EBIT for that full year.

And the full year result was an EBIT of $21 million versus a profit in the prior year of $173.6 million.

Overall, reported loss of $84.9 million versus a profit of $136.3 million in the prior year.

But that was very significantly mucked up by asbestos as you can see in the following slide - slide 24.

If we add back for all those unusual items such as asbestos and ASIC expenses, the result was actually $133 million, which was a 32% increase on the prior year's $100.5 million.

So quite a pleasing result to get that sort of improvement.

Turning now to segmented net sales, on slide 25, and this is for the quarter - you can see that US and Europe fibre cement sales were up 4% to $197 million, and Asia Pac sales were up 49% to $78 million.

39% of that was due to appreciation of currency versus the prior corresponding quarter which, in which the A dollar was travelling at around under $0.70; for most of this quarter it was above $0.90, so you can see that the impact was quite material.

And 10% of that improvement of 49% was due to underlying business results.

So most of it is foreign currency.

So a slightly different story for the full year.

US and Europe fibre cement sales were in fact down 11% to $828 million, but that was off a volume downturn of 15%, so in fact was quite a good result with a 4% improvement attributable to price.

And as Louis said most of that or much of that was due to product mix rather than list price.

And Asia Pac was up 9% to $296 million.

Interestingly, the average value of the Australia-US dollar exchange rate year on year didn't change a lot.

It was much about what was happening at the end of the year.

So of that 9% increase in the Asia Pac sales revenue, 7% of it was due to currency and 2% of it was due to underlying business results, which is different obviously from the quarter, and that was on very flat volume, that improvement.

The total sales were down 6% to $1.125 billion.

Looking now at segment EBIT for the quarter, on slide 27, you can see that US and Europe fibre cement was $35 million and up 8%.

A much bigger improvement in Asia Pac, in percentage terms 114%, so it more than doubled to $14 million.

R&D expense in the quarter was flat, and corporate costs were materially down to $6.7 million.

Last year the $17.7 million was very substantially project related.

We have had very heavy expenditure on re-domicile project and also on ASIC expenses, so there's been a significant improvement in the quarter there.

And the total EBIT, excluding asbestos and ASIC expenses, was $38 million which was more than double the previous year's.

And the total EBIT was $11.8 million versus a $160.4 million loss, so a turnaround -- a favourable turnaround there of $171 million, which was obviously impacted by asbestos.

For the full year, you can see that the US business was up slightly - 5% to $208 million.

Asia Pac up 25%, so a very solid improvement in Asia Pac as previously highlighted.

The total segmented EBIT was up 9% to $248 million, and again, corporate costs were somewhat down, tied to project expenditure in the prior year, and asbestos having a very big impact again in this period.

Moving on to tax expense - and I won't dwell too much on Q4.

Q4 is always a difficult one for us because it reflects the year end true up of tax expense, and we always, as you know, have a very flat quarter in earnings and any impact of tax is actually magnified by the very low levels of profitability.

But quite at odds with last year when we had a 52.8% ETR, this quarter produced an ETR of only 31.6%.

I think the full year is a much better indication of what's going on in the underlying tax.

The tax rate was 34.4% on normalised earnings versus 41.4% for the prior year, and that's reflecting the geographic mix of earnings, so we had a lower percentage of US earnings, a higher percentage of Asia Pac and other earnings, and with the US having the highest tax rate, and as it dilutes in the overall profit, it's favourable for the Group's effective tax rate.

We also had lower legacy costs in financial year '10, and legacy costs were either zero deduction or at a very low rate of tax, and that added to the tax rate in the last couple of years and is now dissipating and I hope won't be material in relation to the go forward position.

So I would be expecting that mid 30% range to be fairly normal for us going forward.

Turning now to cash flow, and I think this is one of the stronger stories.

You can see there that the cash generated by trading activities was up from $138 million to $296 million, so it more than doubled.

Tax payments also were up significantly to $48 million - more than doubling also.

We had two large payments in financial '09 - $110 million to the asbestos fund, and $102 million to the ATO for settlement of the 2002 to 2006 years.

Obviously they didn't recur in 2010, and that led us to have a net operating cash flow of $183 million, which was a significant turnaround on the prior year affected by those two very material outflows.

CAPEX was up, $50 million in FY10 versus $26 million in the prior year, and as I said, the ending net debt was down very significantly to only $135 million at year end, FY10.

Turning to a little bit of detail on debt on slide 32, and you can see that we have unutilised facilities of $292 million at the end of March.

We will be retiring about $161 million of debt facilities in June - so that's in mid-June - those are facilities that come up for maturity and we won't be extending them because we don't see the need for them.

But the weighted average remaining term of the facilities was 2.6 years at 31 March, which was up from last year by about a year, and that's the result of a new three year facility that we put in place at the beginning of this year.

We remain well within our financial covenants in the facilities.

Taking a look at the asbestos fund, and I guess this a longer report than we normally do at each quarter, because of the fact that there's an actuarial report, which we complete at the end of each financial year.

As I said, the discounted central estimate fell very substantially in Australian dollar terms, it was down AUD245 million - AUD50 million of that was due to unwind of the discount and AUD123 million was due to higher discount rate.

Obviously Commonwealth bond rates have moved up in Australia since their very low period of March last year and that flows through into the calculation of the discounted central estimate.

And there was AUD73 million reduction in the assessment because of the reduced claims, which was evident in the claims experience in FY10.

As a result of working through from the cash flow of the James Hardie Group and also the terms of the final funding agreement in the AICF's current cash position, Hardie will be making a contribution of $63.7 million or approximately that amount in July, on 1 July, and that will be converted to an Australian dollar amount late in June.

So that's just the US dollar sum at this stage based on the annual cash flow.

The actuarial assessment that was completed and relates to the accounting at our year end was released this morning.

It's released to the Australian Stock Exchange and it's also on James Hardies' investor website.

That's a 132 page report for those who have an interest in that subject.

On slide 34, the way in which we account for this, and there's a lot of detail in this slide which I won't dwell on, but you can see the impact at the bottom there, on the very bottom line.

The actuarial assessment has actually gone up this year in US dollar terms, notwithstanding that very material change in the A dollar value, which was downwards.

That's because of the change in the foreign exchange rates which you can see in the second last line there.

This is a slide that shows the trend in the actuarial estimate.

Previously we've shown this as a table.

This time we're showing it as a graph because there's now nine data points on this for nine separate actuarial assessments.

The bottom line, the blue line there, is the discounted central estimate, one which I don't put a lot of store on because it's obviously got the noise of whatever the commonwealth bond rate is, so it's got a discount rate factor.

The orange line and the bars I consider to be more relevant ones for comparison because they are undiscounted.

The orange line is reflecting the undiscounted assessment of the dollars of the overall claims liability and the bars represent the range of estimates.

So you can see that there's been a reduction to AUD2.9 billion in the undiscounted estimate this year, down from AUD3.1 billion in the prior year, and the range has also reduced a little bit, I think about AUD100 million in each case.

So it's a pretty good chart that, in terms of just showing the evolution.

There are nine actuarial assessments since mid 2004 that have been prepared by KPMG on broadly similar bases or to the extent that they've changed, that hasn't had a material impact and it's always been disclosed.

An asbestos fund update.

The fund had AUD63 million of assets at the end of March.

Also on this slide, there's a little bit of the history.

The claims paid were $95 million for the year.

That was $10 million below the actuarial assessment.

All of that $10 million came through in the fourth quarter.

Up until that time the fund's cash had been running very much in accordance with the actuarial estimate.

The overall net cost was AUD86.3 million which was also AUD10 million less than the KPMG estimate and slightly below last year's outflows as well.

We're including this slide for the first time.

It's a 12 month rolling total of mesothelioma claims, represented in the blue line, and asbestosis claims, represented in the orange line.

Including it -- because I think it's starting to tell a bit of a story about what's happening with claims.

These are the two types of asbestos-related disease, are the major ones in the AICF liability, and KPMG is still projecting a peak year of claims for mesothelioma to be 2010/11, so that's the current year.

So this is a fairly important inflection point for the asbestos liability going forward.

Of course, we won't know at the end of 2010/11 whether it is the peak year because we will need to see another couple of years of claims experience before being able to make a call, but it does tell an interesting line.

By using 12 months we actually take out a lot of the month to month or quarter to quarter volatility that would otherwise be apparent in the data.

That deals largely with asbestos, other than one minor topic in the legacy issues update.

I think you're all aware that in November 2009, the federal government and the New South Wales state government announced that they were combining to provide a standby facility to AICF to cover any shortfall in funding from James Hardie, largely as a result of a downturn in the US housing industry.

We're continuing to work with the New South Wales government to finalise the details of that facility but as of today that is not yet in place.

In relation to the '99 dispute that we have with the ATO and a subsidiary by the name of ICI, the court hearing was completed in September 2009 in the Federal Court.

We still await judgment.

The amount that we now have on deposit with the Australian Tax Office is AUD270 million, representing half of the assessment and interest on the unpaid balance since 2006.

So it's beginning to be a very much more material sum of money.

That was the equivalent of almost $250 million.

In relation to the ASIC proceedings, which is the other legacy issue we still have running, the hearings relating to appeals were held in the New South Wales Supreme Court in April and May and judgment is obviously awaited on those appeals.

We hope some slightly greater speed of progress in relation to domicile.

I hope we'll be able to stand up here in August and report this is now all completed.

It's been a very long saga for those of us who have been involved in it, but there is a shareholder meeting next week in Amsterdam which should see the final shareholder approval, we hope, and then within a couple of weeks of that we should be able to wrap up the project.

The main thing to report I think at this release is that we've settled on tax with the Dutch tax authority in relation to the exit from the fiscal risk reserve regime in The Netherlands and also the transfer of intellectual property to Ireland which occurred in October of last year.

We've paid a sum of -- or we have a liability to pay a sum of $41.2 million on those exit taxes.

Slightly unusual accounting treatment for those, at least for those of us who don't practice US GAAP.

US GAAP enables these taxes to actually be deferred so they're not expensed immediately and they'll be included in non-current other assets and then amortised over the expected useful remaining life of the intellectual property asset.

So it's not one time, it's not 10 years or 15 years, it varies according to the life of the asset and the value that attaches to that asset.

That's a future charge.

The $41.2 million obviously is a cash outflow.

Some of it was paid in 2010; the balance will be paid in the FY11 year, but it is not a onetime expense.

Turning now to the key stats.

I think all I'd like to note here is that, you know, apparent from our dollar results or values, FY2009 looks to have been a turning point.

FY2010 showing some significant improvement in many of those key ratios compared with the prior year.

I don't think there's a lot more I can say other than what Louis has said in relation to his summary of the year.

Volumes were down, especially in the US, off 15%.

We had some tailwinds from input costs and that more than offset the volume downturn which enabled us to report a much stronger overall result for the year.

We got a benefit from stronger Asia Pacific currencies, particularly towards the end of the year.

All of the businesses are performing very satisfactorily in the operational environment which they face.

Costs are now moving up.

The Asia Pac currencies are off relative to the US dollar, so some of those things that prevailed in FY2010 we'd currently have to say don't look as though they're going to be sustained through FY11.

But our cash flow does continue to be strong and the Company's in very good financial shape.

I think at that point, I would like to hand it back to Lou for questions.

Thank you very much.

Thanks, Russell.

We'll take questions in the room first and on the phone.

I don't know if we have any media questions on the phone, but if we do we'll take those at the very end.

Hi, Lou.

Emily Behncke from Deutsche Bank.

I just had a couple of questions around prices.

I think in the Q4 prices fell a little bit relative to the Q3.

I was just wondering if you could explain what's behind that and also give us a little bit more colour on the April 1 price increases.

Yes, the Q4 result, it was just mix, more HardieBacker, regional mix and a little bit of customer mix in there.

So Q4 prices were pretty steady through the year once the increase from last year was phased in.

This increase, both product lines involved, both siding and backer, I think we'll come in somewhere around 3.0%, 3.5% overall.

It's a little bit higher in backer, a little bit lower on siding products.

Of course all the segments phase in at a different rate, so we'll start seeing the benefit in May.

It'll probably be fully felt sometime in the second quarter.

Based on the current costs, like pulp and gas and diesel and things like that, would you expect that that price increase would offset those higher costs if they stay constant?

Yes, I mean, of course you know we don't attach the two, so it's a hard question to answer.

What do I think is going to happen on cost?

Fortunately if you're trying to follow the Company, the biggest cost we have out there is pulp, which is, you know, there's forecasters out there that are a lot more exact on that than we would be.

We just index to the markets.

We go up and down with the market and we lag it a little bit.

I do expect pulp to be high all year and pulp is a major input for us.

It can be pretty significant -- just kind of give you something to think about.

In the first half of the year when we were comping against the previous year, we had $32 million in help, okay?

That's pulp costs, freight costs and energy costs.

In the second half of the year, those costs were $2 million higher than the previous year.

So it is very significant.

That's why it's kind of hard.

You can just take 3.0% of our revenue and figure out about what that is and it could be in the same ballpark but they don't really run together, so I don't put the two of them together.

Just finally on capacity, what utilisation are you currently running at and at what point will you make some decisions around bringing some of the plants back online?

It really depends on the market.

We're in good shape on capacity.

We're obviously still very low, 40%, 47% maybe.

We have done a lot of work in capacity.

So we have lines that are shut down that are ready to start up.

We have lines that are shut down that will need a little bit of work to start them up.

And then we have some facilities that are down which we'll do a little bit of re-engineering before we start them up.

Also we have just a different product mix.

For our September tour, we've done a lot of work on this -- we've done our long term capacity planning as well, which includes colour plus sheet machines, new sites and finishing capability.

We're going to lay all that out in September.

But basically on our stated design, we're about 40%.

We're going to move our designs down in September.

We've done most of that work.

We want to finish it off.

We're not moving it down because we forgot how to run our plants.

We're moving it down because our product mix has changed quite a bit, so the utilisation on five-sixteenths inch siding, which our designs were originally based, on becomes less and less important as we move to the thicker products and moving some products off of hat check.

So we have plenty of capacity.

We don't expect a big market this year so we don't expect to actually start up any capacity.

We just expect to add shifts as required.

We've added a few shifts coming into the year.

If the order file doesn't get stronger we'll probably bring things back just a little bit.

I don't think we'll have to bring our headcount down.

I think we'll just have to be a little bit more careful with how much we're producing versus selling.

You're not going to tell us -- give us an idea on the reduction in the design capacity until September?

No, in September.

I went through the first run through.

It's not a change to business number, so actually it's more for you than it is for us.

We're going get you to the tour in September so there's a reason to come.

Lou, it's Michael Ward from CBA, just a little bit more on pricing.

The annual increase that you've reported for FY10 is about 4.0% in the US.

How much of that would be market and how much would be mix?

I didn't look at that, but my guess would be it would be two-thirds market, one-third mix over the full year.

Where you get your mix variances more are quarter to quarter, so I think we probably got closer to 3.0% we were looking for on the price increase.

And then with the colour and the trim, which both grew faster than the overall business, we got some mix advantage, but keep in mind with the HardieBacker becoming a bigger part of the business right through the downturn, that kind of pulls it down.

So, that's kind of a -- two-thirds, one-third is a good guess for you.

Okay, thank you.

Just also on the increase coming up, can you just outline for us some of your thinking around the decision process in actually making that decision to implement a market increase when it's obviously not something you do every year although we have now seen it for the last two years?

We do review it every year.

So we do review price every year and we try and take a very kind of market approach to it.

As I said to Emily, we don't attach it to our costs at all.

When you see the wave in our EBIT line over time, forget about the quarterly variances, but if you did our full year wave on our EBIT line, EBIT margin, a lot of that is the costs going up and down and the price not moving, okay?

So that's kind of built into our business model.

We currently have -- we just recalculated all the market share data and went through everything, and we think we're fairly accurate on what we estimate our market share to be.

Even with the market moving more toward R&R during the down, we're somewhere in that 12% to 13% range, which is pretty good considering that we went into the downturn with a much higher share, a higher share on new construction and that's become less of the market.

So that kind of just naturally pulls down your overall market share.

We think the market share ends up being 35.

That's not Hardie's market share, but that's kind of like fibre cement's market share.

And obviously we think we'll be in the 30s if the overall category's in the 35s.

So all of our pricing is around maintaining momentum in the market with our product category, without leaving a lot of money on the table.

So we don't take big jumps because we don't like to shock our customer base that's making financial decisions.

When they come to our product they're normally coming off a less expensive product with vinyl siding.

If we think the market momentum we have in a region with a product is as planned, then we'll normally take what we consider an acceptable increase.

This year 3.0% is pretty much what we average on siding.

So that's kind of the process we go through.

We do it every year.

We don't go up every year, but that's what we do.

Okay, thank you.

Also, just one last question on costs.

You obviously cite pulp, freight, energy as some of the usual issues going forward.

How has that affected your, I guess, willingness to invest in some of the strategic initiatives?

Not very much.

The business is going to have a good year.

[It is] a good business.

It's kind of hard to knock it off the rails even with pulp spiking and all the rest of it.

We don't feel like one's working against the other, pulp's soft so we don't have money to spend on market initiatives.

We obviously aim for that EBIT margin target, but quite honestly if pulp went up some more and we were at risk of falling out of that range, we wouldn't pull back on growth initiatives.

Growth initiatives are something that you really do have to stick with for several years.

When we went into the downturn we looked at what are we early enough to where if we stop it, we haven't really wasted much money, meaning we don't have much traction anyway.

Those are some of the things that we're restarting.

ColorPlus and trim, we funded those right through the downturn, so we'll be putting a little bit more money in there, but we're putting more money in Artisan for sure.

As you know we put a lot of money into repair and remodel, which we're upping that.

So I don't see pulp really trading off market dollars.

The big challenge for a company coming out of a downturn, which hopefully we will soon, is you do find a lot of waste in your organisation in a downturn.

We have found a lot of waste.

So the big challenge is do we allow the organisation to put the waste back in or are we very disciplined and make sure that waste doesn't come back in.

That would be most of our focus.

Almost everything we do in Hardie, we have less people doing it now than we did going into the downturn.

Naturally all the organisations would like to put those people back so they can kick back and take it easy, so we're going to try to avoid that.

Thank you.

Hello, Lou.

It's David Leitch from UBS.

Just a couple of semi related questions.

I guess the first one is could you talk a little bit about how volumes are splitting up between R&R and new construction in, I guess, the outlook as much as just what's been in the past?

I actually went through all those numbers about six weeks ago with the guys.

I think we came out 70-30.

In my mind, I was thinking more 80-20.

70 toward repair and remodel and 30 for new construction.

In my mind I had 80-20.

I think the arithmetic behind the 70-30 makes sense and that's what I would kind of expect this year.

But if that number's wrong, I'll tell you it's more R&R rather than less.

Thanks.

Kind of leading onto that, you've talked about the May order file and I guess the US housing stats are difficult to interpret just at the moment.

Can you tell us a little bit more about May versus the couple of months?

I know you don't usually do that, but just because it is kind of a different turning point?

The spring's always hard to read because although we don't have a price increase every year, when you do have a price increase, what we basically do is say you can buy 10% more than the average that you bought the last three months.

Because basically we don't want people buying ahead of the price increase, but we want them to be able to take care of their commitments in case they have some commitments out there at a price to their customer.

If you were inside our business, of course we don't provide quarterly, you would be able to see that May is normally a soft month.

So you get your seasonal build, and if you're lucky it starts in March and goes through April.

And then you get everyone settling down and see what the season's going to look like before they start putting inventory in the channel.

Sometimes the build doesn't start until April and then normally you'll get that six weeks or so and it'll start settling down in late May.

So clearly they started buying earlier this year.

We had a decent March and then we had a good April.

Again, the price increase numbers are in there.

Now the problem with May is we're not going to finish May with a bad number, but the settling down in May may be indicating more than just the price increase.

It could be indicating that besides the price increase there's a settling down due to the tax impacts coming off.

Now the way that would work -- that's not alarming, because the way that would work, say, we had kind of underlying starts going in at X and you have your incentives so it pulls the demand above X.

Then what you'll have is incentives go off, and basically you'll run off that excess demand that was pulled forward, so you'll run below X for a while and then you'll finally get back to X.

Now if X is -- if the slope of that line is pointed up, we're in good shape because we'll just dip below the trend line and then get back on it.

So that's the real question.

That's why I say we don't know what the shape of the recovery looks like.

I could be pretty confident in saying that I think in the next 60 days we're going to have lower demand in housing than the last 60 days.

But that's only because of the artificial demand pull-forward.

When that wears off, is it higher or lower?

Most of the forecasters are more optimistic than I am, which is normally the case.

I see no penalty for aiming low.

I only see penalties for aiming high.

We are very cautious with -- we're way more cautious right now than I thought we'd be, to be quite honest with you, because last October we did call the bottom correctly.

We thought it was going to bottom out and we were going to have our first volume comp in February, March or April.

We got our first positive volume comp in February.

We called that part right, but I just don't see reason to be optimistic that a lot more houses are going to get built this year.

I don't think less houses will get built, but I'm not sure a lot more houses will get built.

Thanks.

Any other questions in the room?

Okay, let's go to the telephone.

If our telephone participants would like to ask a question, please press star one on your telephone and wait for your name to be announced.

The first question comes from the line of Doug Macphillamy from Macquarie.

Please go ahead.

Hi Louis.

Just a quick question on the proportion of total US volumes which are now attributed to ColorPlus.

And also if you might just be able to give us a sense of how the HardieZone initiative is going over in the US.

HardieZone is going really well --start with your second part of the question.

I think all the customers understand the product line changes and the value in them.

The difficult markets to manage were the markets that had both products, but we've done that well.

The channel has responded very well to our approach with the HardieZone 5 and the HardieZone 10.

ColorPlus -- I'm looking for help.

Do we give the percent ColorPlus?

I can't remember, Sean.

No?

Sorry, we don't give that, but I do remember in our release we said it was more -- an increase this year.

I can tell you, Doug, ColorPlus, if anything every year when I see in May, I have higher expectations for ColorPlus rather than lower.

It's been very encouraging.

We finally have some traction in the south.

We have some of the production builders in the south using the product in key markets.

Now, it's probably at the centre of our product mix shift strategy and I think it's going to overshoot our expectations and probably every year we'll feel better about it.

We're getting good returns on the colour, not just on the extra board we sell, but the colour we sell on the board.

Everything on the ColorPlus program -- and we're actually putting a lot of the money -- well, right now it's mainly think time -- into our kind of final supply chain model for Colour.

I think we kind of gave you our early thinking on that a year ago, September in the US.

I think we refined that thinking quite a bit.

We've committed to the job pack program 100% so we're going for the big hit there.

We're not going to do it incrementally.

It's going to result in some capital spending over the next three or four years as far as capabilities to allow that to happen, but it's definitely going the way we want it to go.

I believe in most markets at some point, colour will be the standard product rather than primed.

I said most markets, and not just northern markets.

Excellent, thank you very much for that.

Your next question comes from the line of Matthew McNee of Goldman Sachs.

Please go ahead.

Louis, can you hear me okay?

I can.

Just a quick question on market share.

I think I remember in the US last year, for the first time you actually indicated that you thought you'd get terminal market share and R&R would be higher than new.

Can you just give us a bit of an update on how you guys think you've gone in terms of the last -- over the last 12 months or so, in terms of growth both in new market and the R&R market?

I think -- again, we did just do a very good analysis on this where we've tried to really start from scratch and say where's all the board going and how could that be and looking at multiple years and market opportunities and our volumes.

I would say my guess is pretty good.

New construction we've held our own, and R&R we've grown share during the down.

I think they're both -- in fact I think the first one's harder than the second.

Our R&R program was late to start.

It was probably a little bit further along than we realised when we did finally get going, meaning there was a lot of natural following R&R from new construction.

But our program now is much better.

We're still in the process of rolling that out.

I'd say we do it well in a handful of markets.

We need to do it well in about 25 markets.

We also have some concepts to how to improve it quite a bit so we'll be trying those out over the next year.

Louis, I think your share in the new market's probably in the low 20s and R&R's in the low teens.

How much would that have changed, do you think, since the downturn started, just in R&R?

Those shares are a bit off, Matt.

What we used to say on new construction we were moving toward 20 and R&R we were moving toward 10.

The reality is I think our new construction was a little bit lower than we thought going in and our R&R was a little bit higher.

But again, if you look at the numbers and stand back and say, well what's most likely to have happened, because basically we did best fit analysis, our volumes against market opportunities, and it looks like we picked up a point in R&R pretty much through the downturn each year, so we've probably picked up three points.

You can confirm that -- so we did that analysis on our volumes versus market opportunities, and then we looked at final volumes during the same period of time and that kind of agreed with the analysis.

So they're losing share, we're gaining share.

I think a few other things are gaining share in the downturn as well.

I think vinyl's losing more share than we're picking up.

No worries, thanks.

Any other questions on the phone?

At this time, there are no further questions from the phones.

Thank you.

Okay, I think that's it.

So appreciate everyone coming out and see you next time around.

Thank you.