James Hardie Industries PLC (JHX) 2011 Q2 法說會逐字稿

Okay, I think we're going to start. We've got a thin crowd today. I understand there's a few other things going on in the market. So we'll get going. Same format - I'll cover the businesses a bit, Russell will cover the financials, and then we'll go to Q&A.

There's your first slide. As you all know, we concentrate on the middle row. Looks like our $20 million number was below what a lot of people were expecting. We gave a bit of a heads-up, so we'll cover how we got there and how it fits into our guidance.

So I think those are the two pieces of feedback we've gotten -- $20 million is lower than we thought, and if you have the $20 million how do you get through your range? So we'll talk about it a bit.

Next slide - US second quarter. It has Europe in there but you all know Europe's pretty small. I guess the most significant thing is volume down 15%. Keep in mind that everyone remembers our tax incentive in the US for housing; that expired 1 May, gave us a little bit of a false start. Spring build with most people's inventories, including our own, so I think the second quarter had a fair bit of running those inventories back down for lower expectations on the demand side.

On the EBIT margin, 19.6%, which, again, I'm sure most of you know, second quarter's usually a pretty good quarter for us. EBIT margin dropped off quite a bit. Some of that was one-offs. The biggest one-off was the inventory rundown.

Just as a bit of a comparison, in the first quarter we made 347 million feet of board, and in the second quarter we made 237 million. So you had that fixed cost spreading and also some labor inefficiencies in there. There's a couple of other things in the second quarter as well, but that was the biggest one-off. There was interest rate swaps and a few other things, but that was the biggest.

Go to the next slide - half year results. I think that's a truer picture, again, because we misread the market in the spring. We did build inventories higher than needed going into the year, so the first half's not an exact reflection of what's going on but it's much better in the quarter.

We're seeing a 22% EBIT margin which, as most of you know, is relatively low for us coming out of the first half, especially as you comp it against next year. That was driven by the things we talked about both last year and this year, and that's the fact that pulp is much more expensive and that freight is much more expensive in the US this year.

Basically, sitting here in November, I'm actually happier with the business than I was in August. There's no question -- we misread demand. We weren't alone but we definitely misread demand. Therefore, we increased our headcount too much, we increased our inventory too much, and then with our price increase, we didn't implement it as well as we should have and we gave up some category share.

Now, since then we've corrected those three situations. The headcount's back in line, inventory's back in line, and we have started to claw back on the category share.

The pricing side was good. That's actually a first half number - it indicates a second quarter number - that's a first half number. The second quarter number, I think, is $661 million. That continues to go well. Like I said, this year we just lost track of a few of the smaller markets, and the price increase resulted in a little bit of lost category share, which we're working back.

EBIT margin - talked about that a bit - you can see from the chart it's always better in the first quarter, down a bit in the second quarter, and then third and fourth are much higher to get the margin. I guess that's the point we want to make.

As far as the feedback on our guidance, we didn't change our range; we just pointed you more towards the bottom of the range. That's because we think the second quarter is not necessarily reflective of the next two quarters, a step down the next two quarters. It is the inventory - that cost about $5 million, the fixed cost spreading.

We lost a ball mill in the Philippines, which is fairly unusual for Hardie, but we did. That was about a $2.5 million EBIT impact. We had some options accounting which were non-cash, about $1.6 million, and then interest rate swaps another $2.9 million.

So, we just had some one-offs that we don't see recurring in either the third or the fourth quarter, and that's why we can get to the range. Now, to get to the range, we need to have a reasonable spring. Not a great spring, but if the demand going into the spring is reasonable, we feel we're in pretty good shape on our guidance range. Of course, if demand were to fall off - and you would have seen some of the comments from the builders this week or last week - there's not a lot of encouragement coming from the builders at this point.

We don't see any reason to be encouraged, but we do feel like the market's kind of on the bottom, so we don't necessarily see it coming off any more.

This is our normal graph - volume against revenue against housing starts. I guess you can see a little bit what the story is this year, meaning that we are kind of flat on housing starts. Maybe up a bit this year, but more biased toward the starter home, which we don't do as well in the starter homes as we do in the middle of the market. Vinyl does better on the starter homes.

You can see our grey shaded area and our green line just drifting down a bit; so that's that issue we've had for the first time, not only during the down but pretty much in the history of the business, where we're not indexing one to one with the market.

There's our primary demand growth chart, which clearly shows that - I believe I just looked at the dotted line quickly. I believe it is the first time we've been negative on [PDG] calculation two quarters in a row. You can see the gap on the moving average now is large enough where you'd say it's pretty hard to pick that up before the end of the year.

A little bit of that goes to the category share but, really, the bigger part of it is this market bias toward the bottom, where our market shares are much more in the middle of the market in the Sun Belt and near the top of the market in the Midwest and Northeast. Vinyl is pretty much positioned at the bottom of the market, not necessarily across the country but for the most part they are a bottom of the market bias.

So if you actually look at vinyl numbers, they're claiming a comeback, but it's more arithmetic than a comeback. There's not builders out there, that we're aware of, that are dropping from fiber cement to vinyl. That's really not what's going on. What's going on is just more vinyl houses are getting built than other type of houses.

Asia Pac - it's a very good story. It's a little bit misleading. This slide, it shows our volume down. That was due to the ball mill in the Philippines. We did lose some business in the Philippines because we didn't have product available. Hopefully, most of that will be picked back up this quarter. But overall the Australian business was up pretty strongly again. New Zealand was up a bit, and the Philippines was off.

Obviously you have your foreign exchange impact there on the financials, but the Australian business - it's kind of a recurring theme every quarter. It's running extremely well.

New Zealand has kind of re-set itself a little bit with the lower demand. They're in pretty good shape now, but we expect more gains there.

The Philippines had been running very well over the last four or five quarters. It was disappointing we had the ball mill problems, but it's a blip more than anything else there.

Then the half year story is very similar for Asia Pac. It's a good story.

The summary for the quarter - there's no surprises, at least there's not from our perspective. The market's not good. There's not a lot of activity. The activity there is, it's more toward the bottom of the housing market, sort of starter home segment. On major and big ticket items - re-sides - a lot more thought is going into that. So we have several markets where not only new construction being a problem but re-sides also being a problem.

The kind of repair walk-in business, Home Depot and Lowe's business, has held up way better than even new construction or the big ticket items.

We talked about the spreading effect in the second quarter. Pulp is going to stay higher longer than had originally been forecasted externally. So that's a bit of a drag but not too bad because we didn't have an optimistic forecast around pulp.

Asia Pac, we expect things to continue pretty positive down here. I notice some concerns about the Australian market coming off. Having said that, we're not only getting the benefit of a good market down here but we've also gotten the benefit of a lot of momentum in the business. We certainly expect that momentum in the business to continue.

The housing starts, which you guys are all too familiar with the housing starts story. I think that was one of the problems we had in August. There were still some relatively optimistic housing forecasts out there. We didn't quite see it, so that's part of what our guidance was based on in August. We're probably in about the same spot and the external forecast has come down a bit. So we're more in a line now, I think, with external forecast.

As far as the outlook, I mean you've just got to step back. This isn't a great year for us comping against last year. I think there's good reason for that externally, meaning the external factors, bias toward the bottom end, higher pulp costs, higher freight costs, and of course we had missteps in the business where we anticipated demand we didn't get.

At the end of the day we're in about the worst possible market we think we can get in. We're still making good returns. We've get some traction in a couple of the initiatives. ColorPlus, especially, is going well. It kicked up to 24% last quarter, which is up around 4% from the previous quarter.

We like the start we've got in non-metro, and we like the momentum that's carrying forward in the repair and remodel. Trim - it's a bit early to call, but we think we also have some early indication that we're going to start turning up our trim penetration.

So the market is not going to be good in the US. I don't know how bad it's going to be. Like I say, I really don't see where it can get a lot worse. I mean it could come off but I don't see where it can get a lot worse. I don't see a lot of optimism as far as pretty much anybody out there. Everyone's kind of now set for this very low level of activity. Certainly, that includes us.

Asia Pac - like I said, I'm very confident that the Asia Pac business will continue to perform very well.

We haven't changed anything. I think that's the highlight of our story during the downturn - not only the fact that we've generated a lot of cash during the downturn, but we haven't had to come off strategy to do that. We're still funding the initiatives that lead to that market share growth in the future, but this just is not proving to be a market, especially this year, that we can actually grow market share. So we're kind of holding our own, getting our returns, funding the key initiatives.

We're pretty confident that when the market breaks - we don't expect a big recovery, but when the market does break and become more of a positive market, we'll be in good shape.

I think that covers all my slides. I will hand it over to Mr. Chenu.

Thank you, Louis. Good morning, ladies and gentlemen. I thought I'd start with a little bit of a background context on the charge that we announced this morning in relation to the loss of the first appeal on the tax assessment that James Hardie received in 2006 relating to financial year 1999.

In mid-2006, after receiving the assessment, we paid AUD184 million to the Australian Tax Office, as a result of an agreement that we struck with the ATO. We left 50% payment to be determined when any ultimate decision was made by courts in relation to that assessment.

Since 2006 we've actually booked that AUD184 million and any subsequent interest that we paid on the unpaid balance as a receivable, so we didn't take a charge at the time, and didn't take a charge until September. The basis for that was that under US accounting standards, particularly FASB 5, we assessed that we were more likely than not to succeed in relation to contesting the assessment.

What has changed is that in September of this year we received a judgment from the Federal Court of Australia, which was against us, in favor of the ATO. As a result of that judgment we are not in a position any longer where we can justify carrying the accounting position that we think prevailed through that period from 2006 to 1 September; i.e. we are not in a more likely than not position for accounting purposes. As a result of that we booked a $345 million charge.

That does not mean that we have given up on what we think are still good prospects for success. We have announced that we are appealing the Federal Court decision to the full Federal Court, and we expect that there will be a hearing sometime in 2011 to hear our appeal.

The $345 million is a non-cash charge, so there is no change in the cash position until there is an ultimate outcome in relation to appeal. We are in the process of appealing to the full Federal Court, and whoever loses in the full Federal Court may, if it can justify the position, have a subsequent appeal to the High Court, subject to leave to appeal such a full Federal Court decision. So it is a little different from the current appeal we are going through, which is an automatic right. Any subsequent appeal is subject to the leave of the court.

If we're unsuccessful in the ultimate appeal, then we will be required to pay AUD184 million to the ATO. In the event that we are successful, the ATO pays us what we have already paid to the ATO. We have already paid the ATO AUD230 million. In addition the ATO would be required to pay interest to us on the amount that we paid to the ATO.

As of the end of September 2010, that accrued interest which the ATO would have been required to pay us, had that been the ultimate outcome, would have been $49 million. So we're looking at an amount, effective the end of September, coming back to Hardie in the event that we were ultimately successful, of AUD280 million.

Now that position will obviously change on a daily basis. So if the ultimate decision is not forthcoming until 2012, then it will increase significantly between now and then. The amount we pay the ATO doesn't change because we're already paying interest. But the amount that comes back to Hardie in the event that we prevail does change on a daily basis. So I hope that helps people understand the position relating to that change in accounting.

Moving on to the operating result -- obviously, as Louis has indicated, the activity, very weak activity in US housing, particularly in new housing, but also in R&R, to a lesser extent, is impacting our earnings.

We did benefit during the period from very good results from the Asia Pac business, including some tailwind from currency. So the US dollar weakness against all of the Asia Pacific currencies but especially the Australian dollar was pretty material in the results.

We have a higher average net sales price in all of our businesses -- US, Europe, and each of the Asia Pac business as well. We have also sustained some early downturn in lower corporate costs, and we see that that is likely to continue in at least the relatively near term.

We used the same range in the earnings guidance that we gave in this morning's release but, as Louis indicated, we guided towards the lower end of that range on the basis of the difficulties that we see in the US business in particular in the near future.

This is the chart that just indicates the switch in currencies. You guys will be well aware that there has continued to be significant volatility in the Australian dollar-US dollar rate. That has a big impact on results. This was clearly not a good quarter for us to be taking provision on the RCI assessment. In fact, I don't think we could have had a worse quarter, because the Australian dollar was at about $0.94, I think, at the time, which was 1 September, and finished up over $0.96 at the end of the quarter. But that is as it is and we can't change that.

We had also a very big adjustment to asbestos as a result of that continued appreciation of the Australian dollar during the quarter. I'll cover that in subsequent slides.

I guess it is swings and roundabouts on it. I mean we benefited from the translation of earnings of the Asia Pac businesses, and we obviously lost heavily in the RCI case and on the asbestos, both of which are non-cash.

Looking now at the Q2 results, you can see here that sales were down by 5% on a consolidated basis. Gross profit was down 21%; obviously a lot higher than the reduction in net sales. That's a result of substantially higher costs in some areas of the business, but particularly in the US with the pulp and other input costs being materially higher than they were 12 months ago.

SG&A expenses, however, are showing some significant reduction. That did include recoveries on some ASIC expenses from prior periods, which did have an impact there.

The asbestos adjustment was $108 million, due solely to foreign exchange. During the period, the quarter, the Australian dollar increased from $0.85 to almost $0.97, so a 13% appreciation of the currency.

The other thing to note, obviously, is where the income tax expenses increased to $364 million. That is reflecting the RCI charge that I covered earlier, on the '99 assessment. That report is only an income tax expense and not anywhere else in the financials. $345 million of that $364 million related to the RCI matter. So we had a massive net operating loss - $424 million for the quarter, compared with $20 million one year ago.

Looking at the adjustment of that to produce normalized earnings, you can see that the bottom line was a $20.7 million result. That is after adding back, in particular, $10.1 million of recoveries relating to ASIC expenses and the $347 million related to tax adjustments, of which $345 million related to the ATO. There are a couple of million dollars of other charges there, which is the normal quarterly reassessment of what is known as FIN 48, which is the position we go through each quarter, assessing uncertain tax positions. So, overall, a rather disappointing result for us of 20.7, which was down 45% on the prior corresponding quarter.

On a half year basis, a similar sort of analysis. Net sales were up 3% for the half year. That is reflecting the fact that in Q1 we were actually relatively in line on a consolidated basis. The US business was down, but Asia Pac compensated for that downturn in the US. That was not the case in the second quarter, where the sales in the US business in particular were substantially down on the prior year. That was not able to be compensated for by the Asia Pac business.

Gross profit down 8% to $210 million, and SG&A expenses are down also 10% to $81 million.

The EBIT was $70.8 million at that level. Then we had the very large income tax expense charge to produce a net operating loss for the half year of $318 million, compared with almost $100 million in the prior corresponding period.

On a normalized basis the asbestos adjustments for this period account for $45 million, so that was the $108 million for the quarter, adverse, offset by some gain in the first quarter to produce $45 million net.

The tax adjustments added back $345 million and, as a result, we finish up with a $61 million profit after tax, compared with $79 million for the half year of FY10.

Segment net sales -- for Q2 the US and European business obviously down by 12%. Asia Pac was up 16% to $87 million, which was a very good result given the issues we had in the Philippines during that quarter. The total is a sales that's down 5% to $288 million.

On a half year basis, position is slightly different. The sales were up 3%; US and Europe down by 4%. Asia Pacific sales up 26% - a very strong result, contributed some by foreign exchange movements, but also the underlying performance of the business to produce $172 million of sales.

In terms of EBIT for Q2, the US and Europe business was down 40% to $39 million. Asia Pac up 10%. FX contributed 9%, so that's just the movement in the rates, and 1% of it was the underlying performance of the business. Corporate expenses showing some improvement. EBIT, excluding asbestos and ASIC expenses, was $42 million, which was down 33%; and then showing the asbestos adjustments of a negative $108 million in the quarter, to produce a total EBIT of $56 million loss.

For the half year, similar sorts of presentation -- the US and Europe business down 29%; Asia Pac up a very significant 48%. Of that increase in the Asia Pac business, about a third of it is due to foreign exchange rates. Two thirds of it is due to the underlying performance of the business.

Corporate costs also down. The result at the EBIT level was $70.8 million versus a $58 million amount there for a year ago.

Income tax expense, with a particular emphasis on the effective tax rate - we had an increase in the effective tax rate for the quarter. It was just under 35%. That's the result of a couple of things -- one is the geographic mix of earnings, which was impacted by currency movements; so a lower level of profitability generally, given our permanent adjustments, is giving rise to some increase in that rate. We will probably claw some of that back during the next couple of quarters.

On a year to date basis for the half year it is 33%. That is about where we would anticipate that it will come out if the earnings guidance falls within the range, or if the earnings fall within the range of the guidance.

In terms of cash flow, I'll just maybe emphasize here that the provision that we took in relation to the '99 tax assessment doesn't actually feature in this slide because we start with EBIT and, clearly, any adjustment that we took in that provision reported through the tax expense line, and there was no cash impact other than a couple of million dollars that we pay in interest on the unpaid balance each quarter. So there is no material impact here as a result of taking that provision because it is a non-cash charge.

You can see here that the cash generated by trading activities was $123.6 million; down from 148.6 in the prior corresponding half year. The net operating cash flow after payments, but before capital expenditure, was $7.8 million positive. That is after a $63.7 million contribution to the asbestos fund, which we paid on 1 July. That is obviously down significantly on the prior year of $152 million. I think that slide explains adequately why that is. We have obviously had higher tax payments. We've had the contribution to the fund and we've had a change in the asbestos-related assets and liabilities as well.

The movement in net cash after CapEx is negative $4.6 million; so what we have managed to do during the half year, effectively, is recover, or almost recover in cash flow the amount that we paid to the asbestos fund in July. We finish up with net debt at the end of September of $139 million.

I would just add that we had a substantial improvement in cash flow towards the end of the quarter. That occurred as a result of a decision taken during the first quarter that we'd run inventory down in the US as a result of the higher levels of activity in the first quarter not being sustained beyond the removal of the tax credit in the US. What we've seen, it takes some time to convert that decision into cash. So we initially ran down inventory. It converted to accounts receivable. Then, following that, it converts into cash. So that explains the - it's not obvious in the slide, but it is, I think, an important fact that we've had some improvement in cash flow towards the end of the second quarter.

The debt position -- net debt at the end of the quarter, as I said, was $139 million. We are carrying unutilized facilities and cash of $125 million. We are still well within all of our debt covenants with lenders.

On legacy issues we continued to work during the quarter on finalizing the AUD320 million standby facility that the Federal Government and the New South Wales Government undertook in November of last year to put in place for the fund. I am hopeful that we are getting close to the finalization of that. We are in the process of concluding negotiations with the state in particular, because we haven't been negotiating directly with the Commonwealth.

The ATO position, I think I've explained as fully as I can, but happy to take any questions that people have on that. In relation to ASIC, two developments -- we are still awaiting judgment on the case where the hearings concluded in April/May of this year. We also recovered during the quarter $10.3 million from third parties in relation to expenses that we've incurred since 2007 through to this period.

The asbestos fund - Hardie made a contribution to the fund during the period, as I highlighted. That was $63.7 million. It was at the 35% cap, as per the final funding agreement. That cap applied to our net operating cash flow for financial year 2010 ended March. At the exchange rates then applying it converted to AUD72.8 million, as per this slide.

During the period the asbestos fund had substantial insurance and cross claim recoveries. Some of that arose from commutation of insurance policies in the ordinary course, and the fund paid claims of $48.7 million. So at the end of the September quarter the fund is carrying net assets of almost AUD107 million.

Further detail in relation to claims and so on is published in the financial statements - one of the notes in the financial statements. We are reasonably encouraged with the pattern of claims. It has continued to run well below the actuarial assessment which was released in May of this year.

Turning to key ratios -- just a couple of things that I would highlight here. The return on capital employed here spikes compared with prior years; so 22.8%. It is a bit of a quirk, actually, of what has happened with the tax provision as a result of the RCI judgment. What has happened is that we have moved assets - quite a substantial amount of assets - out of the balance sheet which related to the deposit that we had with the ATO - treat it as a receivable. We calculate this on average assets between one quarter and another quarter, and it has given rise to a very significant shift in the return on assets. It is really just a bit of an accounting quirk, rather than any underlying significant improvement in return, as I am sure you can realize with the sort of profitability that we have.

The other thing is the net interest cover and also the net debt payback continue to be very strong, notwithstanding the downturn.

So, in summary, a fairly challenging period for us, as Louis highlighted. EBIT in the US is down 29% year to date. Asia Pac, thankfully, contributing to - well, with a very good result that partially offsets the downturn in the US; and very good returns in terms of EBIT margins from the Asia Pac business as well, going some way to offset the downturn in the margins in the US business, both for the quarter and the year to date.

As Louis highlighted, we did have some one-off adverse movements in costs in the period. The rundown in US inventory, the ball mill failure in the Philippines, and a couple of other small things, including a market to market on interest rate swaps. I don't think the 20.3 million is really indicative of the underlying performance, but there's not a lot of joy that we can see ahead in the US outlook.

We do remain very focused on our long-term strategies. Clearly, we are making some, we think, quite good progress in those, both in the US business and in the Asia Pac business as well.

I just draw your attention to some other things. There are some additional slides in the appendix to the presentation that we have not covered here. Also in the financial statements, on pages 17 to - sorry. In the MD&A there are some additional abbreviated financial statements on pages 17 to 19, which draw a distinction between the core business, the asbestos compensation issues and the reported results.

So that concludes my presentation. Louis will take back the microphone for questions.

Thanks Russell. Okay, questions from analyst and investors and then we'll finish up with media questions.

It's Doug Macphillamy from Macquarie. I've just got a couple of quick questions. Firstly, on the inventory and, I guess, how far through you guys managed to get through the issue over the quarter, whether it is indeed finished completely. Secondly, just in terms of the product mix and whether there has been any kind of change since the tax credit expiry and corresponding downturn in demand and, just lastly, a little bit of info on the competitive environment within other fiber cement players and yourselves over the last quarter.

Okay. On the inventory we did get down to our target inventory in the quarter, so we don't need any further adjustments. It will be a strange year, in that our production volumes in the second quarter will be lower than any other quarter; so we're just going to run at target now.

Product mix - part of our price increase is still product mix. I highlighted that; we'll give you more color, which is obviously higher price on the same footage. We are getting a little bit more trim. Having said that, I think the big builders have done better overall than all builders, so a bit more Cemplank in there. Obviously, HardieBacker has held up better than the siding products right through the downturn and that's the case currently as well. So no big change to the tax incentive coming off, but just your normal product mixed trends that we had.

As far as competitive product, of course, we have the three fiber cement producers in the US, other than Hardie -- [Axiom], Nichiha, and CertainTeed. They did pick up a few points of category share between them. One of them is picking up more than the others. In fact, I guess a couple of them will be losing as well.

We have just monitored everything again. There is no further deterioration, but we don't see a bounceback yet, but we do expect that to happen. LP is the other one in the mix. There are a lot of questions or concerns about LP. Again, I think they did announce their volumes were down this quarter recently. They also are biased toward the bottom of the market with the panel products, so I think that helped them a little bit in previous quarters. I think they would be best case flat, kind of. That's our understanding of it. Okay?

I just wanted to ask one quick question of Russell, I think, about the interest expense relating to the outstanding tax balance and how that will be treated in the P&L. I mean how will you report that as part of the operating - I mean how much interest expense are you expecting to record, I guess, in a full year that would be relating to that? That would be the first part of the question.

Secondly, will you be treating that as part of the normal business or the business that you sort of exclude from guidance, if I can put it that way.

David, thanks for asking that question. I should probably have covered that earlier. As a result of taking the charge at 1 September, which was the date of the Federal Court judgment, we will be changing our accounting treatment of the interest going forward. So that will be charged against operating earnings. It will just be regarded as a normal interest expense.

The amount of the interest is a function of two things -- one, obviously, being the rate. Rates in Australia have been moving up. The ATO uses market rates as its base and then adds a very high margin - lender of last resort. Then we will see an impact as a result of the exchange rate.

Typically, what we pay is somewhere in the region of $2 million to $3 million per quarter. So would expect that it will come out at about $8 million to $12 million a year.

Then just one other question on the US business, on the operating costs. I was wondering if you're seeing any progress at all from the peaks on the pulp and transport costs?

I think the freight is settling down a bit as the general economy settles down a bit. The pulp is held up, like I said, longer than we anticipated. So it's still at, pretty much, historical highs. We still forecast that it will come off. I think it's come off just a little bit - like 30 or 40 bucks, but it will definitely be more expensive for longer than we had first forecasted.

It's Simon Thackeray from Nomura. Just a couple of questions - just an extension of Doug's question on inventory and really around the pulp, that David's just asked. Is there much pulp inventory in the carrying figure at the end of Q2, given the fact that production is running a little below sales volume?

No, I think we pulled that down in anticipation of lower production, so I think we're fine there.

It's not a big movement Q-on-Q, in terms of working capital, so the initial position.

Currency related, Mr. Chenu says.

Right, okay.

Just quickly - maybe for Russell actually. If you're unsuccessful on the ATO, the appeal on the RCI, can you just confirm exactly what you - in terms of the timing - I know you went through it in some detail - how much exactly you would have to pay, and then whether that potential is having an impact on any of the discussions around the standby loan facility with Australian New South Wales Government around the AICF?. This is obviously going to come out of working capital.

Simon, the amount that we will have to pay the ATO is AUD184 million, in the event that we ultimately lose the case to the ATO. No cash changes hands until the final outcome, other than that interest amount that we just talked about before.

As to timing, I mean I give up trying to forecast what's going to happen with the court outcomes. I mean we've had some very long periods between hearings and judgments, but I do expect, based on what we know from the full Federal Court, that the hearing will take place in calendar '11, probably around mid-year.

I can tell you that there is absolutely no influence of this matter relating to the RCI amended assessment on any of the discussions that we've had with the New South Wales Government and AICF. They're totally unrelated.

That's great. Thank you.

Any other questions in the room? It doesn't look like it. Any questions on the phone?

(Operator Instructions)

Your first question comes from the line of Emily Behncke. Please as your question.

Thank you very much. Just a quick question -- I was just wondering if you could make a comment on the current pricing environment and if you're expecting price increases in the near term.

Yes, we increased our price, basically, May 1, on both siding and backer in the US. We don't have any other price increases planned at this time. The price increases in May. The May increase has basically almost all come through. There are certain things that lag a little bit, but we're pretty much all the way through that now.

Great. Thank you very much.

Your next question comes from Matthew McNee from Goldman Sachs. Please ask your question.

Just a quick one, just on the volume. Louis, I think you said your sales volumes are down 15%. Can you give us an idea how much your production volume was down, and if that was in - I assume it was down, obviously, more than sales because you reduced inventory.

Yes, I don't have that exact number in front of me, but I did indicate we produced about 237 million feet of board in the second quarter. If you look at our last year's sales that would be pretty close to what we would have produced the last year; so it would have been off significantly.

Yes. I'm just trying to get a feel for how much of a margin impact there was by basically producing less than what you sold - less overhead or fixed cost recovery.

Yes, if you use $5 million you're pretty close. It might be a little bit more than that due to labor inefficiencies; but around $5 million is pretty good.

That's obviously just a one-off for this quarter because you're now back in line with where you'd like inventory to be?

Yes sir.

Now, the other one - just in terms of the volume again - obviously the down 15% is a fair bit weaker than what we think the underlying market was down in the quarter - and you've already highlighted that there's maybe a couple of percentage points of market share you are losing to others - what about the penetration though? I mean how are you seeing that as - obviously that slowed as well. Has it gone backwards? If so, do you - is it a structural issue? Is it something that's just a function of the markets that you service are just weaker than other parts of the market? I mean how do you characterize all that?

On the volume decrease I do believe quite a bit of the 15 - I shouldn't say quite a bit, but certainly a chunk of the 15 was due to the whole supply chain bringing their inventories down, just like we were. So everyone was expecting a better year and got ready for it, mainly in the first calendar quarter. So the music kind of stopped half way through May, and then people started kind of adjusting.

So part of that 15 was that, that our customers were overstocked, so they let it draw down even though demand would have been a little bit higher than their orders were reflecting.

As far as penetration, I think we're doing well in repair and remodel. It's a big part of the markets and shouldn't be underestimated. But repair/remodel, the re-side opportunity is definitely down, even over what it was last year.

On new construction I don't think we're getting any market share gains; I think everyone is kind of holding their positions as far as what kind of houses they're building. They're not going down; they're not going up. So I don't think new construction is doing anything for us. Obviously, our share of the middle of the market is much higher than our share of the bottom of the market, and the bottom of the market is relatively stronger than the middle of the market currently.

So with respect to - that the middle of the market, all the upgraders are all underwater on equity, et cetera and pretty much doing nothing, do you think that explains part of the weakness, and once that recovers--

I do. We definitely do. Having said that, we're not living in denial here. The market's gotten more price conscious, even in the middle of the market. You could even say on the top of the market; but the market is definitely more price conscious, so our category share was impacted. Like I said, when we raised price we didn't stay on top of all markets as well as we should have. The competitors got a message out there that wasn't necessarily the message we would have had out there, and we lost a little bit of business. But that would be - in my mind, that would be the smallest part of the negative primary demand growth. The biggest part would be the shift toward the bottom of the market this year, even over what we think it was last year.

Have your long term expectations for the business changed at all, or are you still sticking to your--

They really haven't; not at all. The real challenge for us, I think, over the next couple of years is to read when we should be going after market share gains again and when we should be willing to hold our position.

I'll be very honest with you right now; we're trying to hold our position in new construction currently. Like I said, we are very focused on growing in repair and remodel and we think we're doing well there. But we need to get into a better market before we get into big market share gains. That's just all there is to it. When I say better market, it's more starts, it's more re-sides and it's more middle of the market relative to the bottom of the market. So there are two or three things that have to happen.

Your next question comes from Mr Ward from CBA. Please ask your question.

Hello, it's just following on from Matt. You did make the comment earlier in the call that you were confident that you would be able to claw back that bit of market share that you've lost. You also now just said that you think, to get big market share gains, you need a reasonable market recovery. Is that -- the small share that you've lost, do you think you need the recovery to get that back, or can you get that back before a recovery really starts?

No, I think the category share is a separate issue from the market share. The category share we are working on currently, that's not something that is market dependent. The market share where builders are going to decide, or consumers are going to decide to spend more for our product than they would another product, that's where I think we need a little better market to get back to that.

So that market share that you've arguably lost will take, what, a couple of years to pull back, or--

I would hope not. I'd hope not. It shouldn't take that long.

Okay. Then, just quickly, net pricing in Australia or in Asia Pacific was very strong, up 9%. Is that largely a function of mix around the Philippines or was there something else going on there?

I cannot remember how much that was - you're talking local currency?

Yes.

We're getting some price improvement right across all three countries. I do not have the calculation for how much was mixed due to Philippines volumes being down relatively more.

Okay. I was just wondering if that's the sort of level that we should assume for the balance or--.

(multiple speakers)

I'd take more your trend line and a quarterly result, is what I would do if you're forecasting forward.

Okay, thank you.

There are no further questions from the line.

Any media questions? No media? No media on the phone?

Okay, we are done. Thank you very much; appreciate it.

You have a question from the line of [Philip Webb] from Sydney Morning Herald.

Hi Louis, how are you going? Hello? Hello?