James Hardie Industries PLC (JHX) 2011 Q1 法說會逐字稿

This is Louis Gries, I have Russell Chenu with me and we will run through our Q1 results and do Q&A at the end.

I don't have the slides, Russell and I are doubling up so I don't have the control of the slides.

We will be calling out the slides as we go through.

So slide 2 is our disclaimer language, slide 3 gives you your basic agenda which is what we normally do.

I will take care of some comments on the operations.

Russell will run through the financials and then we will go to Q&A which I will handle.

Onto slide 5, this gives you the headline numbers.

As you know the foreign exchange with the headline number around due to the asbestos liability on our balance sheet.

The one we look at is the net operating profit excluding the asbestos asset and tax adjustments.

We're down a little bit on last year but basically a flat result and obviously we'll get into that a bit more.

If you go to slide 6, the US business is where most of the negative change was or all of the negative change actually.

Net sales were up a bit, volumes flat.

Average price up so that's what caused the sales to go up.

The EBIT was down on higher costs so I'll cover that some and the EBIT margin still pretty good at 24% but down quite a bit against last year when it spiked at about 30%.

Before I go onto the specific slides, I'll just give you my summary, which I normally give you up front.

Basically the first quarter was a good quarter from a business perspective but the demand really got soft.

In May the order file basically started reducing every week for several weeks in a row.

We discussed in the past pulp and freight, this year are quite a bit higher than last year.

Those are two pretty significant costs in the business.

Unfortunately in Q2 the soft demand is continuing so thus far in the quarter order files are relatively week for the summer period and pulp and freight remain high.

Actually in fiscal year 2011 we actually anticipate volumes to be lower than last year.

I understand this is probably a surprise to most of you and it's been a bit of a surprise to us.

We thought fiscal year 2010 was the bottom of the market at least from our perspective 2011 is now expected to be below 2010 on a volume basis.

Despite that we're pretty confident the US business will continue to run well but the market opportunities are very limited.

Offsetting this a little bit is a very good performance in the Asia Pac businesses in addition to improving markets in those businesses.

So the general summary as you would have seen our guidance and the rest is we're going to be down this year.

Returns are still getting the business but we didn't get the start to the recovery that we were looking for.

So we're not going to have improved results on last year.

You know we see it as down on last year, not significantly, but definitely off due to the volume and then higher costs.

So we'll go into the quarter slide 7 you see average price is up and I normally get a question later how much is market price and how much is mix.

It's about half and half.

It's not exactly half and half but it's about half and half, half being the mix and half being the market price.

Slide 8 EBIT margin as I said good at 24.1% but not as strong as last year's spike and most of you would know, we normally get that spike in the first quarter.

So 24% is a bit disappointing for a first quarter but again that relates back to the demand falling off in May and the higher pulp and freight costs.

Slide 9 shows our primary growth performance which is basically our index against the market.

You will see it's negative in the quarter.

Quarterly results have a lot of variance if you look at the trend line over the last several years, so I wouldn't over react to that.

But even on the rolling average you can see the points coming together which means PDG is thinner.

So we can go into that a bit.

I mean we had a very tough cut last year.

If you look at the chart you'll see for the quarter and Q1 fiscal year 2010 you'll see very strong PDG.

You know that's when you remember how this formula is done, we lag the market so there's just a bit of variance in the arithmetic quarter to quarter.

Having said that on the price increase, which was not followed by any direct competitors that we know of, we do think that some business moved to the cheapest alternatives in the quarter by the most price conscious buyers.

We don't think that was significant and I think we're just going to have to see how PDG plays out quarter to quarter to really understand exactly where we're at.

You know our basic strategy hasn't changed.

We're still about growing market share and maintaining our category position.

Slide 10 the Asia Pac businesses.

As I said this business is operating, well as you know, it's The Philippines, Australia and New Zealand all those markets are better to slightly better and our businesses are performing better.

Then we had favourable foreign exchange rates so everything is up pretty significantly.

But we don't want to lose sight of the fact this is a single quarter in a trend that's been going on, 20 or 25 quarters.

These businesses have been getting better.

As far as how they run the product strategy, even our manufacturing has been getting better for several years now.

This is an exceptional quarter but we expect these businesses to continue to perform very well in the market.

So a quick summary on slide 11, you know, I don't want to beat it to death but the US is very tough.

Market opportunity is very limited.

We had set this business up for a kind of slow recovery, we didn't get it.

So we ended up with more inventory than we like.

You will see our working capital is up a bit.

We've already started to bring that down.

So we started bringing the inventories down.

Basically the first indication that we really got as far as how soft the market was going to be.

It started in early May I think when we did results in the end of May we indicated it's been a couple of weeks where the market is very soft, we'll just see how it develops.

It was soft right through June and right through July so we pulled quite a bit out of inventory by restricting production in July, which will mean that our actual unit costs that you'll see in the second quarter will be higher as we run those inventories down.

In addition to that you will remember that we started to put more funding in some of our growth initiatives.

Mainly that would be Artisan, our shingle products and of course our (inaudible) model which we've talked about before and our colour program.

We are not going to pull those initiatives back.

So we've gone through the business and looked for all the opportunities to reduce spending without really changing our supported growth initiatives.

So we're going to run a little bit higher SG&A this year, that isn't going to be the big difference between the two years.

The big difference between the two years will be softer demand and higher costs due to pulp and freight, which is the second point there and the third point as well higher SG&A.

Then we did increase prices at the beginning of fiscal year.

That price is not fully in our results but it's well on its way so we will have higher pricing this year than last.

Also on slide 11 you'll see the Asia Pac bullet points.

The markets are better, we're doing a great job in Australia with our product strategy.

New Zealand is improving as well, it's not quite up to where Australia is as far as executing on their strategy but they're doing a much better job.

The Philippines business has been on a good trend over the last couple of years and that continued in the first quarter.

Of course we are getting the foreign exchange, we don't know where that will end up over the year but we certainly got the benefit of that this quarter.

Slide 12, I guess you guys would be across this.

We had the tax incentive that went off I think it was the end of April, so you see improved housing starts and then they start coming down again and then I think you would have probably seen the most recent ones aren't favourable at all.

I don't know where housing starts are going to end.

I think most people think they're still going to be slightly better than last year.

So then the question becomes, well if housing starts are slightly better why would your volume be off some.

First I am not sure housing starts will end up better than last year.

I don't think anyone is certain what the winter months are going to look like and certainly we're not certain what they might look like.

Secondly part of our volume performance last year was we did get a Spring build at the end of the fourth quarter not a huge one but we did get one before the tax incentive went off.

Right now I guess I'm just a little bit pessimistic and I'm not sure, you know, we're going to get any help in the fourth quarter as people get ready for the Spring months.

But anyway we'll see how that goes.

Slide 13, you know, it's just kind of a summary for everything which I think is fairly repetitious.

The only new point on that is we've been a little perplexed by Texas which as you know, Texas is a good state for us, it's a reasonable chunk of our volume.

It has just been pretty flat and you would think it would be doing better than it is, but it hasn't.

If it comes back a little bit our results may be a little bit better than we're anticipating, but I certainly wouldn't go to the bank on it.

So at this point I'll hand it over to Russell who will run through the financials.

Thank you, Lou, and good morning everybody.

So on slide 16 in the Overview slide, I guess it's obvious that the weak housing activity in the US has had an adverse impact on earnings as has an increase in costs.

That's been offset by a very significant improvement in Asia Pac earnings and some reduction in corporate costs.

At this stage I'm suspecting that given that you guys have had the results for a few hours some of you are probably wondering why we haven't seen the same sort of cost increases in the Asia Pac business that we've experienced in the US business flowing through to earnings of the Asia Pac segment.

The answer to that is that we have actually seen similar cost increases particularly in pulp and to a certain extent freight as well.

Clearly the economic factors are a little bit different in those countries.

To the extent that we did incur adverse costs movements in the quarter over the prior corresponding quarter it was actually offset by currency and also by momentum in the business.

So we had higher volumes, higher fixed cost recovery and the stronger currency and the stronger momentum actually more than offset the increase in costs.

So earnings in the quarter benefited significantly from the strong contribution from the Asia Pac business.

There was a tail wind on currencies, particularly the Australian dollar against the US dollar and Australia is by far the biggest chunk of the Asia Pac earnings.

We had a higher average net sales price in the US business and as I said we had some lower corporate costs.

Turning to slide 17 and just looking at the foreign exchange movements.

This slide I think is very helpful in trying to explain what's been causing some of these movements.

In the shaded bits on slide 17 you can see that in the first quarter of last year the currency, the Australian dollar opened at about $0.68, by the end of the quarter it was at $0.80.

The average through the quarter was around $0.75.

In the quarter just completed, the Australian dollar opened at $0.90 on 1 April and fell through the quarter and climbed back a bit to $0.86 and it probably averaged about $0.90 through the quarter.

Those are very significant changes in values quarter on quarter and you can see that flowing through the results in many ways.

On the bottom of slide 17 in our normal way we've just highlighted the areas that are impacted by the currency movement.

On slide 18 is probably a really good example of how that has moved.

You can see at the EBIT line that there's been a $184 million turnaround in EBIT for the whole Group and that is almost all accounted for by asbestos adjustments.

That asbestos adjustment is virtually solely the result of that movement in the Australian dollar that I talked about on the earlier page, of and $0.80 dollar at the end of the first quarter in 2009 to $0.86 at the end of the period.

So it's the movement through those quarters that's relevant.

That actually then steps through t account for the turnaround in the net operating profit or loss.

So even after all the tax and other impacts a $78 million reported earnings loss in Q1 of last year moving through to a $105 million gain in this year accounting for that $184 million movement.

If we look at slide 19 you can see the impact of removing the asbestos adjustments and as is apparent from our headline result the $40 million quarter in this current year after asbestos adjustments, ASIC expenses and tax adjustments is virtually line ball with the $41.6 million that we reported for the first quarter of last year.

On slide 20 net sales in the US Europe Fibre Cement segment were up 4% to $233 million, Asia Pac had a much more significant increase; a 39% increase to $85 million.

Half of that movement in Asia Pac was due to currency, the strength of those currencies against the US dollar and half of it was due to sales volume.

None of it on average was due to sales price.

In fact one of the things that is a bit interesting in our results I thought was the fact that the Australia dollar sell price on average in the Asia Pac business was moved by about $1 in more than $900 in the two quarters that we were looking at.

There were actually improvements in the sell price in those businesses particularly in Australia as we've introduced differentiated products, we continue to get the benefit from that.

However, any benefit we got in the individual businesses was overwhelmed by the fact that we had a much higher proportion of sales in The Philippines business than in prior periods.

Of course we get a lower average sale price in The Philippines than we do in the other two markets and so there is a dilution effect as a result of that and that's what caused there to be no movement in the average sale price per unit in Australian dollar terms and that's what we meant by the comment in the MD&A that this was the result of geographic sales mix.

On slide 21 looking at the segment EBIT and you can see there that the US business was off 18% with over $12 million and that was largely offset by a much stronger contribution from the Asia Pac business, which was up about $11 million and slightly more than doubled its EBIT contribution.

Overall at the EBIT line the results were flat $64.9 million versus $63.8 million a significant gain achieved on reduced legacy costs.

A $3.6 million gain there which was pleasing to see and the total EBIT as we highlighted earlier was a $184 million turnaround largely the result of the movement in asbestos provision as a result of the currency shift.

On slide 22 looking at income tax expense you can see that on a slight reduction in operating profit before income tax, so down from $66.2 million to $58.2 million we had an almost equivalent reduction in income tax expense the consequence of which was that there's been a material reduction in the effective tax rate from 38.1% in the first quarter of last year to 31.4% in the first quarter of this current year.

There were two factors contributing to that reduction in the effective tax rate.

One was the reduction in legacy costs.

As I think we've tried to explain before legacy costs we either got no tax deduction for at all, which was the norm, or in the cases where we did get some tax deduction for it, it was at a very low rate.

So a reduction in legacy costs has quite a substantial leverage effect in terms of our effective tax rate.

With a $3.5 million reduction in legacy costs on the prior corresponding period that is quite a material contribution to the reduction in ETR.

The other factor was the geographic mix of earnings.

Clearly with the downturn in the US earnings in the US have suffered.

The converse is also the case in Asia Pac we've had a higher earnings contribution from the Asia Pac businesses.

Asia Pac generally the tax rates, particularly in New Zealand and Australia art 30%, in the US the tax rate is around 40% and so the higher proportion of earnings from Asia Pac, lower proportion of earnings in the US means that we have a reduction in the average tax rate.

In fact in the period we're looking at, the proportion of earnings on an EBIT basis from the Asia Pac business more than doubled from 15% to about a third.

So there was significant leverage involved in that and both the reduction in legacy costs and the geographic mix of earnings are the two factors that explain that shift in the ETR for the quarter.

On slide 23, looking at cashflow, you can see here there's something that obviously we don't like reporting but there has been a reduction in net operating cashflow and it's a reasonably complex set of issues in here.

One is that as a result of US GAAP, the contribution that we were preparing to make to the Asbestos Fund on 1 July, so we were carrying a cash balance at 30 June and as a result of the US GAAP that is treated as restricted cash.

So in other words it's been earmarked for the contribution to the Fund and under US GAAP it comes into a separate category and even though it's restricted cash, it's part of operating cashflow.

So that's had an adverse impact in our cashflow.

We also made a contribution, or paid a tax payment, part of our exit tax from The Netherlands of about $18.6 million in the quarter, which is a one off payment.

As Lou alluded to we also had some adverse movements in working capital.

In other words the sort of reduction in inventory that we normally get seasonally in the US in the Summer didn't actually occur as we'd expected.

As Lou also indicated, we're running that inventory down now, we've come along way even since the end of June and that will unwind in the second quarter.

But the end result of all of that was that the net operating cashflow level, we're normally quite proud to announce that we've had some pretty good and strong positive results, we've in fact got a negative result, minus $25 million versus a positive $82.4 million last year.

Now that's not going to be the sort of thing we anticipate continuing through this year.

I am sure that come the second quarter and subsequent quarters we'll be reporting positive cash and that will flow through to the year.

In terms of capital spend you can see there that there has been an increase about $10 million in the first quarter of last year and $13 million this year.

I think we previously highlighted that although we're not undertaking a major expansion of manufacturing capacity we do have spend going on in relation to finishing capacity, enhancements in the expansion of finishing capacity as we move through changes to our product range particularly adding differentiated products.

That's where the core of the spend has been.

Ending net debt was $172 million and that flows from slide 23 to slide 24.

Total facilities at the end of June were $265 million that's a reduction on what we've reported in prior quarters.

We retired $161 million of facilities in mid-June as planned and that happened because we don't see those facilities being required going forward and facilities are expensive to hold when you're not using them.

As I said the net debt was $172 million.

The gross debt of $215 million includes the $63.7 million planned contribution to the Fund and even in spite of that we finished up with unutilised facilities and cash at the end of the quarter of $93 million.

We remain well within our financial covenants with our lenders, very comfortably within those covenants.

On slide 25 and 26 looking just briefly at the legacy issues update and I don't think there's any significant changes here.

The asbestos funding that the governments of Australia and New South Wales announced in November of last year, we're still working with the New South Wales Government to get those arrangements in place as well as working with ARCF and we're hopeful that sometime after the Federal election in Australia those - that arrangement will be concluded.

In relation to the disputed amended assessment for fiscal 1999 we are continuing to await judgment from the Federal Court proceedings.

We've given the MD&A as well as in the financial statements, we've made disclosure.

In the notes to the financial statements we've made disclosure about the financial impacts of the alternative outcomes of that case and as I think I've explained before the outcomes in that case are effectively binary.

In relation to the ASIC proceedings, the hearings were concluded in April/May of this year on the appeals and we're awaiting judgment from the New South Wales Court in relation to those proceedings.

Domicile on slide 26, all of the activities relating to re-domicile from The Netherlands to Ireland are now complete.

The Board of Directors held its first meeting in Ireland at the end of June and that was the final step in the company's transition.

So I'm pleased to advise that in future quarterly reports, we won't be reporting anything in relation to the change of domicile.

On slide 27 a quick update on the Asbestos Fund.

Payments in the period, particularly net payments were actually very low.

The AICF holdings of cash and short term investments were AUD$63 million at the end of March.

At the end of June they'd declined to only AUD$57 million so the claims paid were largely offset by insurance and cross-claim recoveries.

Hardie made a contribution to the Fund of AUD$73 million or $63.7 million.

That contribution was made on 1 July so as at 1 July the AICF's liquid holdings amounted to almost AUD$130 million.

The contribution that we made was at the 35% cap as per the final funding agreement.

We expect that that sort of contribution at the cap will be required in the near term future years.

On slide 28 looking at the key financial ratios, those first five ratios there are all on an annualised basis for the first quarter.

So it assumes that the subsequent quarters are at the same level which from the earnings guidance we've given is obviously not going to be the case but that's the way we report it.

Gearing and debt service capacity indicators are at very high levels as you'd expect for a company that's carrying the low level of net debt that we are.

So in summary on slide 29, for the first quarter US and Europe Fibre Cement EBIT was down substantially.

As we indicated we've had higher costs of inputs particularly pulp and freight but also in some other areas.

SG&A expenses were higher, that was a planned outcome but we've subsequently addressed that to some extent and the SG&A will in all likelihood not reflect the same sort of increase as we go forward.

It was partially offset by an improvement in net price.

In Asia Pac a very solid result assisted by the currency movements and those two movements in those segments are also reflected in the EBIT margins.

The US was down 6.7% to 24.1% and Asia Pac increased 8.1% to 25/9%.

I think that's the first time we've reported that Asia Pac EBIT margins are actually higher than in the US Europe segment.

So a great performance by the guys in the Asia Pacific business.

The net operating profit, excluding asbestos, ASIC and tax fell 3% to $40.5 million and the contribution that we made to the AICF was almost SUD$73 million.

Just a couple of other points that we might draw attention to.

One is that we have stopped reporting Australian dollar financial results in our release materials.

That's something that we thought was no longer as relevant as it was when the company adopted that some years ago in the transition to The Netherlands.

I think everybody understands now both US GAAP format as well as US dollar reports, which is the currency in which we report, so we've simplified the reporting as a result of deleting the Australian dollar currency accounts.

The other thing to draw attention to is the back of the MD&A report contains the cashflow earnings and earnings statement and balance sheet that we normally provide which separate the core business activities from the reported earnings and asbestos.

So it gives you a good handle on the financial performance of the core business.

Finally on slide 30, just a quick look at the guidance.

Lou did a very good job I think explaining what the factors are in that.

Clearly we've got challenges in the US environment.

Volume has been decreasing month on month since April.

The costs are up in many variable cost areas and that's having an adverse impact, but we are continuing to see good results out of the Asia Pac business.

But overall we expect that the result for FY11 will be in the range of $110 million to $125 million excluding the impact of asbestos, ASIC expenses and tax adjustments with those last two not being big factors in this year we don't expect.

I would just draw attention to the fact that given that Asia Pac is now a much more important leverage factor in our earnings, that given that forecast guidance or earnings guidance we've assumed an Australian dollar to US dollar exchange rate of $0.86 for every one cent movement in the Australian dollar, $0.01 movement in the Australian dollar.

The EBIT impact of that $900,000, the after tax impact is about $650,000.

Just to round out the sensitivity that's not relevant to the earnings guidance because we carve out asbestos but the current sensitivity of the asbestos liability to movements in the US dollar is $7.8 million for every one $0.01 movement in the value of the Australian dollar.

So that draws to a close the commentary.

I'll hand it over to Louis to take questions.

Okay, thanks, Russell.

We'll do questions as we always do.

If we have any media on the phone please wait till the end of the other questions.

So over to the Operator for the first question.

The first question comes from Doug Macphillamy from Macquarie.

Please go ahead sir.

Thanks guys.

Just a couple of quick questions if I may.

Firstly just a bit of a rundown on the competitive environment in the US at the moment.

I mean you did mention some slight market share losses.

Secondly, I was just hoping to get a get a bit of further detail on what some of the drivers of those 26% margin in the Asia Pac business were, given that was a pretty big number?

I guess just thirdly what you see as a sustainable margin in that Asia Pac business?

Okay, I'll start with the US direct competitors, I think you were referring to direct competitors.

I think overall the comment about the US is pretty much everyone in our industry had felt we were going to have a better year this year from an opportunity standpoint.

That hasn't happened.

All of us kind of got ready for it maybe a little bit more spending in our case on the growth initiatives.

But pretty much everyone I think probably got caught with a little extra inventory.

We certainly did.

I think our channel did and I think our competitors did.

So there's probably been a little bit more aggressive pricing to run down those inventories.

We haven't done that.

We've restricted production to run down our inventories and we started that process in late June.

So yeah, I mean we've gone over this before, the correlated PDGs, you know, there's just a lot of variance but we do think there has been some loss of volume during the quarter probably triggered by both - you know, it's a very difficult quarter for anyone to make money.

You would have had more people chasing lower cost options if it's available.

Long term it's not a huge problem for us because as you know our Cemplank brand does sit on the bottom of the market as a low cost option.

So I wouldn't expect that share loss to be something that is sustained.

Again I want to point out it's pretty small, so it's not - we're not talking about lower volumes in fiscal year 2011 because of share loss, we're talking about lower volumes in fiscal year 2011 just because of the market opportunity.

Asia Pac 26% you know is it sustainable?

I think, you know, consistently over the last couple of years at results' announcements I've talked about how well our Australian business is running, their product strategy.

They're running it every bit as well if not better than the US business.

So I have a lot of confidence that the Australian business is positioned to deliver good returns for a lot of years to come.

New Zealand the performance in the New Zealand business has been good from a financial perspective, but we do think it has the potential to do more than it's been doing over the last couple of years.

So I do expect to see higher returns out of New Zealand.

Then The Philippines business really started improving quite a bit about 18 months ago and I expect that to continue.

So as far as sustainability to returns, I mean it's a little bit hard to say.

But what I would like you think of is think of Asia Pac as more of a US style business now than it had been five years ago.

So I think it's going to be the same thing.

They're going to balance their returns versus future growth and we still have some gains to make in manufacturing down there.

We might have to address capacity in Australia at some point.

So that business really has been transformed into, you know, a business that's more set up like the US business and the guys are doing a great job with it.

So I do expect returns to continue.

Doug, I apologise, I wrote down two questions, but I think you had a third.

What was your third?

Sustainability of margin?

Oh yeah, so I covered that off on Asia Pac.

The drivers?

Oh the drivers are just, you know, are shifting to a higher value mix that the customers are willing to pay for.

So it's new demand in the market for our type of fibre cement and direct competition can't produce the same product so it basically comes all back to us.

Okay, excellent, thanks for that.

The next question is from Emily Behncke from Deutsche Bank.

Please go ahead.

Thank you.

Just a couple of questions.

In terms of the volumes in the US, Louis, looking at slide 9 the PDG growth has obviously been a little bit less, or is considerably less when the market has been soft versus when it's been strong.

It sounds like primary demand has softened again this quarter.

I mean, what do we - do you think we need to see an improvement in housing before you'll see that accelerate or how should we look at those market share gains, particularly given housing starts, they are forecasted for an increase this year and similarly for repair and remodel given your thinking your volumes will decline in fiscal year 2011?

Yes the repair and remodel market opportunity this year is harder to read for me than new construction.

But it's either going to be flat to down.

Like new construction it's going to be spotty.

Some markets are going to be up slightly but other markets are going to be down.

Yes, I mean I think we're getting pretty good traction in R&R.

I just think the market, because it's kind of gone backwards on us this Summer is less likely to spend on a big ticket item that can be deferred.

So on something like a roof where you have a storm or you have a leak in your roof, you're going to fix that regardless of what's happening in the market.

A reside is a little bit different.

I think we've talked in the past if we get ten opportunities in resides and we only land three, the next highest category will be people that defer.

So in other words if we land three maybe five defer and two do something else.

So I think we're seeing a lot of that.

Not in every market, I was just in the Chicago market and the Chicago reside market is probably better this year than it was last year.

But I don't think that's the rule, I think that may be more the exception.

As far as PDG growth, again we've talked before, what has to happen to get us higher and on a better curve as far as penetration curve toward 35% target market share, you're right we need a flat market to a slightly - to a recovering market which we thought we were going to have this year, we don't.

But that will put the builder in a different frame of mind that being he's going to be more interested in increasing market share as a way of improving his profitability.

I think this fall back after the tax incentives did catch everyone by surprise.

I mean I thought we were all a little bit concerned about it but when it actually hit I think it's going to knock this back into our thinking of kind of will this thing ever end.

I'd better watch my costs and all that and that kind of market is not good for people to make a decision to spend more on their siding.

So I am still of the same view as when we went into the downturn a really hot housing market is a market where we're going to sell fibre cement because the builder is going to think he can make more money on his house because he's not worried about selling houses.

In a flat housing market he's more likely to be looking at how he can sell more houses, so that's kind of what I believe is our best market to increase market share.

In a declining market, like we have been in and now are back in, you know, I think it's all about what's the cost of construction and that doesn't play as well for us.

So what is PDG going to look like this year.

I think we'll be slightly positive but we're not going to have big numbers.

You know what will it look like when we get a recovery?

I think it will improve significantly?

Now we have talked in the past kind of the missing or lagging parts of our business have been on our new construction, I mean, sorry new construction non-metro R&R and then our Color Plus program is addressing, you know, going deeper in vinyl markets.

So we remain focused on those three things and I think the primary demand growth will improve as the market improves.

Sorry, given the inventory position on yourself and your competitors in the quarter do you think it's likely that potentially you might regain some of that share that potentially you lost due to the competitors discounting?

No I don't think you'd lose it just because of high inventory levels in the industry.

So like I said, on our inventory level we didn't discount to get our way out, we just restricted production and we restricted it quite a bit.

So you're going to see higher unit costs from Hardie in the second quarter because we'll have less spreading because we'll actually sell more than we make.

What do I think is going to happen with other manufacturers?

You know, you'll have some people kind of no doubt restricting production like we are, but you also have some people dumping inventory.

So I expect, because the market is not near as good as almost everyone in the industry thought it would be, I expect a very difficult year as far as people getting themselves in shape to get through the Winter.

You know you just can't carry high inventories in the Winter so everyone is kind of in the process of addressing that one way or the other.

Just finally, the 20% volume growth in Asia Pac how much would you attribute to market share growth versus market growth?

Yes that's a good question.

I think it's just a little bit too early to say.

But I think at our September tour we will try and give you a better estimate of that.

But to be quite honest with you I haven't been in - it's mainly coming out of Australia and The Philippines.

I just haven't been in those businesses but we'll kind of get you a better read on that before the September tour.

Thanks very much.

Yes.

The next question is from Rohan Gallagher of Credit Suisse.

Please go ahead sir.

Hi, Louis.

Good morning, Louis, Russell, good afternoon everybody.

Just in regards to primary demand growth obviously the trade off there is your penetration pricing strategy.

Obviously that will hold the margins up.

Is there any change of thinking in regards to that pricing if we have got softer housing conditions for a short time?

Yes, I think you're referring to our value pricing strategy.

I don't want you guys over-reacting on one quarter, okay.

This is probably the most unusual quarter in the downturn for the industry, because everyone again thought it was going to be better and it ends up as of May falling off quite a bit.

So I think there's been a bit of scrambling in the industry that's not kind of a long term trend, it's just a kind of a correction.

I don't want anyone to believe that, you know, we have your typical price market share trade off, okay.

Because largely we sell on installed costs, so we're selling against things other than fibre cement.

So whether it be vinyl or wood or bricks, stucco stone it doesn't matter.

The builder doesn't really make his decision based on our material price, he makes his decision based on our installed costs relative to the alternative.

So no, no change in our strategy.

I wouldn't over-react to my comments.

I'm acknowledging that there's been some leakage due to our price increase, but again it's not significant and it's not a game changing type situation.

It's just leakage, it's short term.

I have no concern that it's a long term trend.

Yes, and second question, Louis, is that obviously it's been pushed out 6 to 12 months but obviously with your more differentiated product mix coming through they're thicker, heavier products which means that they're more capacity holds.

Where do you see your effective utilisation rate at the moment and where would you see, you know, new capacity being required going forward on the assumption that we do trend back towards more normalised housing?

Yes this is one of the areas we're going to cover in September on the tour.

You are right, we are making thicker products which use more capacity so G2 has been a good growth product for us, that's a higher capacity.

Our HLD trims have been going well for us.

So we are using more capacity per square foot, we are also getting more revenue per square foot so our returns are good.

But we'll use more capacity in the future than we have in the past.

Having said that I actually (inaudible) Rohan, the last thing I've been worried about this quarter has been capacity utilisation so I didn't even have anyone calculate it but I would guess we are still in the 40s.

Okay.

Where will we need it in the future?

You know it's going to depend, some of it is going to be about the growth products so we're going to need some Artisan capacity on the East Coast.

We're putting more Color capacity in - we're putting our first Color capacity in Texas so we'll have kind of new capacity around products.

We put single capacity in Pulaksi, so we'll have the new capacity around products and as far as regionally where is the US?

I mean we're pretty well balanced right through the US meaning that we don't have any plants running 24/7.

So we have upside in all of our facilities to take care of regional demand increases.

I couldn't tell you right now, you know, the West is going to come back stronger than the East or something like that, but whatever happens we'll be able to respond to it.

Okay thanks.

Just finally, Russell, I'm a bit perplexed with all these ATR amended assessments in your legacy.

Some of those things were September last year, they were due in March this year.

Have you guys got any ideas as to when you'd anticipate something in relation to the 1999 amended assessment and so on?

No, Rohan, unfortunately we can't give you any indication on that because it's totally outside of our control.

It depends on the Court activities and so we're dependant upon, you know, the Judge's own timetable in letting us know.

Okay, well we won't hold our breath then.

Thank you very much, gentlemen.

The next question is from Michael Ward from CBA.

Please go ahead sir.

Hi guys.

It is just a quick one, I was wondering if you could give us a sense of how much volumes were down, year-on-year say in the month of June or July in the US?

Yes I mean I know the number but do we give that kind of guidance.

We just don't give that guidance, but you know we tried to indicate from about early May on.

I mean, yeah, I get the sense it's obviously fallen away.

Yes.

I mean you were minus 1 for the period I was just wondering, clearly there's been a big shift over that period so it would be helpful if you could give us some sense of what that might be?

Yes, I don't think we want to start that precedent.

But the way to look at it since we've been kind of tracking negative comp since early May obviously we had that Spring build that started in March and continued right through April.

So I sense that it's been off and we've given you our financial guidance and rather that's going to be, well a lot of that is costs which I think I have given you kind of a rough idea on costs.

We think our basic costs around pulp and freight and that will be around $30 million higher this year than last year.

Right, okay.

So you can figure that we have our price increase so the most of the rest of the difference will be volume.

Yeah, okay thanks.

Just on the SG&A as well, I think Russell made a comment that you were looking to address that given things are a little bit slower than what you are anticipating.

Can you just give us a sense of what you are doing there if you are not actually touching sort of the growth initiative areas within that cost component?

Yes, you know we do what I guess any business does when there's less money on the top line we start looking through all that costs in the business.

It doesn't move the needle, you can call it waste or you can call it poor timing on certain spending whether it be advertising or whatever.

So specifically where we started our - wrapping up our growth initiatives we haven't pulled back.

But just general support of the business we probably have.

Our head count is down a bit from where it would have been in April and I think our spending on basic brand support and that is probably being tweaked a little bit.

So just that normal stuff you go through and say do I really need to spend this, this year and if the answer is no then we don't spend it.

Now on the Artisan, on the repair and remodel, on the Color and more recently on our non-metro markets we have increased our spend.

Okay.

Then just quickly, on the tax rate, Russell, you normally give us a bit of assistance there given the bigger shift of earnings to Asia Pacific, is this quarter's rate a pretty good indication for the full year?

Well subject, Michael, to the mix, in other words the proportion of earnings by region I don't see any reason for their to be a significant shift other than the fact that I suspect that as we go through the year we won't be seeing quite the same level of gains against last year in legacy cost savings.

In other words that spend reduction started to happen during FY10 and so that little bit of it will go away.

So I think we'll be looking at an ETR for the full year in the range of sort of 32% to 34%, 35% would be my guess.

Okay, thanks, guys.

The next question is from Hugh Dive from Citi Investments.

Please go ahead sir.

Yes, sorry my question has been answered.

Thank you.

The next question is from Simon Thackray from Nomura.

Please go ahead.

Thanks very much, morning guys.

Sorry about that, just quickly looking at the volume, I know everybody has been talking about he volume ad nauseam on the call but we talked last time about some contracts with the major home builders, you know, that you'd got some traction there, Lou, last year with Horton's and Lamar and a couple of others.

What's the status with those guys now in terms of the product mix that they're buying and the status of those, the penetration and building with Color Plus?

We have regained business with the biggest builders in the US and some of that business is going to Color, which is good.

So all that's the same.

I think our agreements with Horton and Lamar specifically are going as planned now.

I think their level of activity in the market since 30 April is much slower than it was prior to 30 April.

So we're good on the big builder position and I think if we had the leakage and we've tracked it, it's more the multi-family which is bid pricing, so non-metro markets have kind of leaked on us a bit so we need to shore that up.

But yes, again you guys know what the kind of ratio of volumes are with the fibre cement manufacturers.

When we say we're down on volume we think we're are going to be down on volume this year.

It's not leakage in share because it would be hard to leak that much.

It really is we just don't see the market opportunity being the same this year even against very limited opportunity next year.

Now keep in mind we're sitting here and in early August so you know, the Winter months may be better than we think, but I just refuse to believe that you can kind of play catch up in the Winter in the US.

It's just in my mind too hard.

So we're looking at somewhat reduced volumes against last year.

Am I sure that's going to happen?

I'm not sure but it certainly looks that way based on our file now.

It's sort of hard, I think the sort of sense I'm getting is it is hard to reconcile though because if I look at single family starts and we assume a one quarter lag, which we've grown accustomed to, then they're up 46% year-on-year and anyway most of them look at the year, as Emily pointed out, the volume will be up slightly.

So it's hard to sort of see how based on the mix how volumes will be down, year-on-year.

Yes, the lag is a good point because I believe in our May results I indicated that we had a positive comp in February, March and April.

So that's right when increases were in housing were going.

I think the reality is everyone was buying in anticipation.

So I don't think we have the lag.

So certainly our July volumes didn't reflect what happened in April.

I think our April volumes reflected what happened in April.

Right so it's contemporaneous now rather than lag?

Yes because I think everyone was anticipating it, so everyone kind of got their inventories ready and then they found out the demand fell off quickly and then started pulling back quickly.

Right, so that's probably how we should be looking at the rest of this year then, yeah?

I wouldn't be penciling in a lag this year.

I wouldn't.

Okay.

Just in terms of a bit more regional colour, in terms of what markets have, even the terrible market performed better than others.

I just note you made your comments about Texas, but also the cost to serve.

Is there a different cost to serve in those markets in terms of you know freight differentials etcetera that may weigh on the margins or have an impact on the margins?

Yes, there'd be slight differences but you know with all of our plants having available capacity we're going to have relatively low freight rates everywhere.

With our higher cost plants being the ones that are shut down, you know, most of our plants, the variance between unit cost among our plants would be much smaller now than when we are running full out.

So I would say there is a difference but it's not measurable.

you know, it would be more than offset by customer mix, product mix and the other things.

So regional mix isn't going to drive our numbers so much.

Right, so it doesn't' drive the cost line heavily the regional mix?

In terms of what markets are doing better than others, sorry, Lou, you might have mentioned that one?

Yes, that's a good question.

I mean we've been perplexed by Texas because you would think the macro environment in Texas would be more favourable than most markets in the US but it's just been down.

But I think we're more focused on Texas just because we have a larger share of our volume in Texas.

Yes other than that there's nothing to brag about and there's really - you know we're kind of past the Florida, Arizona, California, Nevada, you know, I mean that's just old news.

Yeah sure.

You know those markets relative to last year, I'm not sure, but they're probably doing as well anything now because the base is so low.

Pacific North West has had some spurts and then it's kind of died.

So I think we were kind of waiting for that to come back and have an early spurt and I think it has picked up a little bit in the last four or five weeks whereas Texas hasn't.

The South East, when I was in DC earlier looked pretty good.

Of course there's a lot of government jobs in DC, so I think that was helping a little bit.

The Carolinas, you know, look like they might bounce, Georgia definitely they were building a lot more in Georgia pre-tax incentive and I think that's going to stop now.

I don't think that's a story for Hardie.

You know we are a national marketer, our spread is pretty good.

We are a little overweight in some markets and underweight in others but it's really not going to change our results that much.

Nothing dramatic has happened in that regional mix that's going to change our results.

Right.

Then just really briefly and I know Michael was alluding to it before just in terms of cost.

Remind me if it was 17.7% margins in the fourth quarter of 2010 and 24% now, is that - we've always sort of thought the fixed cost base is low and you had pulp and freight move against you, what worked in your favour?

No, I don't think pulp and freight haven't moved against us since the fourth quarter it's just dramatically different than the first quarter last year.

Right, okay.

Yes so but keep in mind the fourth quarter and you know if you look at our little chart you can see almost every decline ends with the fourth quarter and then you get your bump in the first quarter.

Now the bump this first quarter was smaller than most and that was driven - I mean if we had April type demand through May and June we would have had a very good bumper, we just didn't have it.

Okay, but there's nothing else in the cost structure?

No like I said the main thing on cost is we're going to have to work off some inventory.

So our second quarter costs...

Well the margins will be lower?

Second quarter unit costs will be higher.

Margin, you know, I mean no one has asked me the dreaded question yet, are you going to stay in the 20 to 25 range?

Are you going to say in the 20 to 25 range, Lou.

Oh, yeah good question.

I'm thinking the range is still attainable even with our pessimistic view of the market but I'm still not sure that our view is pessimistic.

I'd have to, you know, when I'm talking to you in November I'm going to know a lot better.

Because right now I can through the second quarter on our order file and I don't like what I see, but I can't see the third quarter.

Yeah, got you.

So normally with my personality I'd say you don't make money in the Winter, so that's kind of where I'm at.

But if I'm sitting here in November, I'm in Sydney in November and you know, demand looks better than we thought in the Winter, maybe it's a little different picture, I'm not sure.

Yeah, fair enough, fair enough.

So July presumably volumes were below the PCP then?

Yes, but July's volumes were off, May's were off, June were off more than May and July is off more than June.

Great, okay.

Thanks very much.

The next question is from Matthew McNee from Goldman Sachs.

Please go ahead.

Louis, can you hear me okay?

Yes I can.

Most of my questions have been answered but just a couple.

Firstly just on the price increase sort of circa 6% in the quarter and you were saying half of that was market increase and half was mix.

Was most of the mix Color Plus, is that's what's driving that?

Yes, I mean you'd have Color pointed up at the same time Cemplank and G24 down, but having said that I don't think our Cemplank volume percentage changed much so it would be mainly be HardieBacker that would pull it down.

So what's - I mean obviously you are still getting some pretty good growth rates in Color Plus, is that right?

Yes I think we indicated we're about 20% Color Plus now.

You know I think we'd be right around that level in the first quarter as well.

I mean Color Plus is going extremely well and I expect it to do that for another two or three years.

Our expectations for Color Plus basically increase every year.

Yes, now the other question, which I'll go back to and which has been beaten to death is the volume question.

But one of the issues I think that we're all sitting here with is we get, you know, very simplistic measures of what your market is doing and yeah we look at housing starts and even if we take out the lag and if we look at R&R activity and if we put in lags or take out lags, no matter which way we cut it, it looks like activity is actually up year to date.

If the market goes sideways from here it will remain up on last year.

So the question I suppose I have is, how confident are you that it is the market that is leading to your weak order book and not lost market share or some pull back in actual penetration of fibre cement?

Matthew, yes as far as lost category share, certainly we do our checks so we know exactly where we're standing there.

You know we just are not as optimistic, keep in mind we are flat, okay.

So you are saying housing starts are up, you guys are flat it must be going somewhere.

I understand that view but again my point is if you go more to where did our volume go in March and where did our volume go in April, I think it went towards those starts pre-tax incentive.

Then we started falling off pretty sharply at the same time the builders start falling off pretty sharply meaning May, June, July.

So I'm not sure, I know the external forecasts are still for better housing starts and I'm not sure that's going to happen.

Then I'm not sure here resides are.

Now I know where our kind of walk out repair and remodel business is, we're in good shape there meaning that that market is not taking a big bump on us.

But I do think the reside business it's just a little tougher this year not because it was great last year just because everyone was expecting it to be better and now everyone is going to kind of question well what' really happening both in the housing market and in the economy.

Yeah, look I mean I suppose the other thing is you look at someone like LP and their volumes in that same quarter were up massively like 40% odd, which is consistent with what we saw with new owns or single family.

But just again clarifying, you are not expecting any significant gains in market penetration but you're equally not expecting any backward, you know, loss of share for fibre cement.

You're saying that your share of the fibre cement market might have come back a little bit but not that materially, so really your pessimistic view is very much based on your view that housing is not going to - it's going to go backwards from here basically and as will reside?

I think that's a good summary.

I think you bring a good point up with LP I mean they do, most of their siding is your basic panel siding.

I am meaning a 4 x 8 sheet and they are up.

They did report they are up quite a bit and I think they've won some plank market share.

We kind of know where that is so we have an understanding of how much it is.

But they have benefited.

I mean they are the cheapest product out there.

they're cheaper than most competitive fibre cement.

Having said that, you know, against our volumes again if you take all of LP's volume increase and put it on Hardie's volume line it really doesn't change our story.

In other words it's not enough to change our story although I'm sure it's very important to them, it's not enough to change our story.

So, yes what we're talking about is we had a decent order file, February March, April, okay.

Things stopped in May and I think you're going to hear this story when you start getting second quarter results from other companies.

Things stopped in May, they got worse in June and they're worse again in July, okay?

So when does that trend stop?

So is it a correction or is it a false start?

That's really the difference between those that forecast better housing versus kind of how I am thinking now.

I think it was more of a false start than we just had a correction.

Demand was pulled forward for the tax incentives.

As soon as underlying demand catches up to the market we'll be fine.

There'll be people thinking August should be okay because the demand that was pulled forward should be taken care of now and we're back to underlying demand.

But if we're back to underlying demand it's pretty well level.

So my belief is it was a false start not just a small correction we're going through.

No worries, thanks a lot, thanks.

The next question is from Chris Haynes from Concord Capital.

Please go ahead sir.

Louis, you might have answered this, just last year you were forecasting, you sort of made some comments on profit.

At the same time do you reckon you are any better this year than you were last?

I think our guidance...

I think you said 60, 30 to 67 is that right, this time last year?

Yes we did, Chris, as I recall.

You know you've got to remember what he climate was this time last year.

I mean March was probably the depth of sort of where the markets were at and the first quarter was a pretty difficult sort of read.

Nobody was sure where the sector was going.

I think the way to look at our results, I have our AGM presentation in front of me.

You know in fiscal year 2010 we delivered $133 million net, in fiscal year 2009 and a lot more starts we delivered what around I think it was $100 million?

That's right.

Now our guidance is between those two numbers.

So basically we're saying relative to the market, you know, the business has progressed through the downturn but it doesn't comp well to that spike we had last year where pulp was very cheap, freight was very cheap.

Our business ran very well last year, okay so that's the other comp.

Now is our business running well this year?

It's running well but it's not running as well.

Part of the reason is because we do have more SG&A in as we started to ramp up funding on growth initiatives expecting a recovery.

We have more inventory in the system because we were expecting the recovery and we had the price increase which is a good thing, but we had some leakage around the price increase so need to circle back and make sure we mop that up.

So our business sis running well but it's not running as well as it did last year.

So that's where we're at.

If you think $100 million in 2009, $133 million in 2010, but a lot of help and a business that was running almost perfectly and now we're saying our guidance is in between the two with higher costs for pulp and freight and the business not running quite as well, that's mainly around we're believing the recovery was coming and clearly now we don't believe the recovery is coming.

I mean we believe it's going to come but not this year.

Thanks.

There are no further questions from the telephones so I'd like to hand back to our presenters.

Right, well we appreciate that.

There are no immediate questions I assume?

There are no further questions from the telephone.

All right, all the questions were good.

I understand it's a hard result to understand based on where external forecasts are at for housing.

Our first quarter number and our full year guidance.

So I understand there's more questions.

I say we'll just see how it goes.

You know, Hardie is not a quarter to quarter company, I think you'll get a clear picture that we're running our business well.

We're getting returns in a very difficult market but it's just not going to be as easy as last year.

Either from market opportunity, I think it's more difficult but also from cross selling.

So thanks, appreciate it and look forward to seeing you guys in September.

Thank you.

Thank you ladies and gentlemen, that does conclude our conference for today.

Thank you for participating.

You may now disconnect.