James Hardie Industries PLC (JHX) 2011 Q4 法說會逐字稿

All right we'll go for a bit of restart here by saying we're pretty satisfied with the year. I mean the market in the US hasn't gotten any better. You know it was expected to get better in the year 09 and it kind of never happened. It started a little bit off with the tax incentive that went off in May and then fell back to pretty much where it had been before. We did make the mistake of believing that it was going to get better so we had our production scheduling long in the US which increased our unit cost a bit as we brought our volumes up and down in the plants.

But you knew all that back in August. We told you that during the August result. Since then business has run pretty well. Basically we've been right on forecasts as far as what we were expecting to happen on volumes. Pricing's been good. Product mix is good. Unit costs in the plants have been pretty good.

You know we had the bumpy second half when the third quarter result was down and the fourth quarter's pretty good for a winter quarter. What you want to do is just look at those two quarters together because they're just some things that spilled over quarter, second to third and third to fourth that made it look bumpier than it really could have. Outside the US we ran very well. So you guys probably know all our businesses that make returns and generate cash but there were improvements in Australia, the Philippines and Europe. So New Zealand's in a tough market and they've been kind of staying flat but the other businesses all show an improvement. Of course those businesses with the strength of the currencies contribute in US dollars are relatively stronger than they perform.

So if we go to our first slide, I guess I got the clicker somewhere. First slide I guess is the headline number for full year, $116 million down from $133 million last year. We'll go through that a bit as we go through different businesses. In the US and Europe fourth quarter, pretty flat on the sales volume price and therefore revenue. The EBIT was up a bit, 11% and that was driven by a fixed cost difference. But a lot of that fixed cost was actually in last year's numbers so things like bonuses and year end accruals were not as high this year as they were last year and that made part of the difference.

Now our run rate wouldn't be quite as low as the fourth quarter reflects but it wouldn't be far off that and the margin fourth quarter 19.5%, I think it's pretty good for the level of activity in the market and the fact that it's a winter quarter.

So there you see the full year result and again, the volume down 4%, price almost making up for it but EBIT down 23%. So the quick math there, the EBIT down 23% was around $48 million so it was pretty significant. When you add the fact that we had a price increase that was roughly $25 million, there's $73 million there. Now the 4% on volume, you know that's going to get you something like $15 million or a little bit more than $15 million of it. The rest of it really was around cost and a good part of that was pulp and one other key (inaudible) we used around $25 million. Freight was high, so that was around $10 million and some of the costs in the plants are part of that product scheduling problem I already referred to. A few other product initiatives that we had in the plants that drove our costs up last year.

If we go on the price, you can see we've gone out maintaining our price slope there. Now you know we don't have a price increase plant for this year. We will get some price improvement just because last year's price, when they've been a full year's worth of price. So you'll see some price improvement for that plus next. But at this point we don't have a planned market price increase. Our EBIT margin getting in just short of our 20% range, I think it was 19.7%. The last half really was kind of okay. It was that second quarter that got us. We had a very strong first quarter last year. As you can see it was right up to 25% then that second quarter dropped off quite a bit as we had to put the brakes on production.

So it was way lumpier than it needed to be last year. We would expect this year to be much flatter so we won't come out of the chute this year like we did last year without very big first quarter, a really big first quarter. But we do feel it will be a steadier result of this year than what we had last year.

Then the next line kind of gives you a history of the business. So you can see, those housing starts are the black line, they really flattened out and obviously volume and even revenue for us has the same kind of flatness. Which brings us to how we're going against the market. I think the best way to look at this slide is to think about the total downturn. Clearly before the downturn started, we were growing primary demand and basically that means market share. But we try and index it for new construction and for repair and remodel opportunity. Even though it was a sober market we were moving pretty good on primary demand and as the downturn started that got thinner and thinner until this year was the first year it went backwards on us.

Now the last half of the year was slightly positive. The first half of the year was negative to a greater degree then the second half was positive. So we ended up, I think, $3.8 million or so negative.

We're just finding it very hard in this market to grow the business so we've got a lot of initiatives that are working really well, getting a lot of traction. But at the end of the quarter you can't quite see the volume. I think the problem there is, I mean we are running a product strategy where we're premium pricers relative buyers in the market. I think pretty much at every level in the market now, everyone's quite a bit more price conscience than they have been. So everything we sell again for the most part is lower cost. So you have vinyl which is a much lower cost and you have your discounted fiber cement which you know, they're a pretty gap between us and them. Then you have your OSB siding, both the planks are cheaper and then the panels are cheaper because they're cheaper to install as well.

So what we're expecting on primary demand growth is we come into this next year at a downturn. By the way we don't see the market getting a lot better from a demand standpoint. Now I always tell you, we don't have any crystal ball that you should trust but you see the same announcements that we do both informal announcements on the starts and also the builder announcements which we probably talk to the builders and get a little bit better indication. You know you see them out there, we have some idea what's coming and we don't think it's going to be a worse year in new construction but we don't think it's going to be much better if it's better at all.

So the key for us this year, I think is to stick on our just basic market execution. Probably not focus so much on market development around the new products. Then focus more on operations because we will be facing higher pulp costs again next year and higher freight costs again next year because we're in a bad position now where the economy has come back to some degree but the housing market has not. So things like freight have gone up because the general activity in the market is there, it's up but the housing itself has not come up. So the freight we're paying now is quite a bit more than we were paying a year ago.

So we think that cost increase in our business this coming year will be around $20 million but obviously at this point it's a forecast. Both freight and pulp are basic commodities that can swing around pretty quick. So the key to the year going in just like this year, we made a good financial return in a pretty difficult market. That would be our same goal next year. Now we want to do that without losing any position in the market and we want to do that without coming off our basic strategy. So we're not interested in really changing our basic strategy. We're still planning to fund R&D, market development and product development. But on the market development stuff, we'll probably stay more towards the ColorPlus non-natural repairing model which we have a better chance of getting paid for in this kind of market than things like the Artisan product and some of the higher end products.

Now we did have the almost opposite result in Asia Pac. It's really, I mean the center of the Asia Pac region is the Australian business. The Australian business is running their product leadership strategy extremely well. You know the market's been pretty good, I guess up till now. It may be coming off a bit. So we have a good combination. We have good momentum and it's been driving the result. Now keep in mind as you would have seen in our MDNA, in local currency, it's still a very good result but in US dollars it looks better, better than it is just because of the change in currency.

This would be the first time I think in, I don't know, a lot of years that the Asia Pac has actually had a higher EBIT margin than the US business. So they've got a very good EBIT margin at 22.5%. So just a very solid result. We know the Australian market's coming off. The Philippines market looks like it's in pretty good shape. New Zealand, we can't read it. Looks a lot like the US market. You just can't tell it's going to get better. But even with the market, if it does come off some in Australia, we think the momentum we have in the business down here, we'll probably get through it in very good shape.

So just a quick summary, you see the bullet points. As you know price is good, our SG&A is pretty well controlled and I want to point out again, we haven't come off strategy. So the SG&A that we pulled out is not strategic stuff because of the R&D product development, market development. Our head count is lower but our sales head count relatively less but the business is actually higher. So we pulled out things outside in the market more than in the market.

Yeah and you can see the rest of those yourself. My quick summary is very good return in a difficult market in the US and very good return and growth in Australia. Slide 15 - which we probably got this straight from one of you - just shows the housing starts. You can see that spike was due to tax incentive last year and it's come down pretty steady since then. I guess we're just a little bit ahead of where we were before the tax incentive.

Our outlook, yeah you can see the bullet points there, but again our focus good returns again. Probably not a lot of growth until we get some market turnaround in the US, Asia Pac the opposite. We think we can both grow it and continue to get the good returns. Then the priorities haven't changed. I guess that goes to my current stand strategy. So all the products we showed you before. All the segmentation and how we looked at the different markets, different segments, all that's still in place and being funded. Our ColorPlus strategy is the one that really does, the one product strategy that really does work in this market. So we've kind of doubled down on that over the last two or three years and it's paid off for us, so not a lot of change there.

I'll hand over to Russell and then I'm sure you'll have questions and we'll come back and I'll take care of the operating questions through to basic business unit questions and Russell will handle the other things. There's a few more of the other things this quarter so.

Thank you Louis and good morning ladies and gentlemen. So as Louis explained, the results that we've achieved and referred to this morning reflect a very weak US housing market partially offset by a strong performance of the Asia Pac business which had an even further tail wind in the currencies. All the Asia Pac currencies are stronger through this past year than they were in the prior year and we also had lower SG&A expenses. We had a very cash flow which enabled us to achieve a further reduction in debt. In fact our net debt at the end of March was just $40.4 million. Partly as a result of the low level of debt which means that we've got a less than optimum capital structure at the moment but also as a result of other changes. I'll talk to that in a later slide. We've announced earlier this week that we're reinstating dividends, proposing to undertake a share buy-back subject to the right conditions in the market and I'll have more to say about that shortly.

This slide shows the strength of the Australian dollar against the US dollar. It's been a pretty steady climb through this past 12 months and that's obviously helped us in the translation of our Asia Pac earnings given the dependence particularly on the Australian business in that Asia Pac earnings mix. It's had an unfavorable impact from the translation of the asbestos liability but of course that is largely non cash in any particular near year. It has a long term impact potentially but it doesn't impact the following year or two very significantly at all given the long term nature of that liability.

On slide 21 you can see the results for Q4. We had net sales up 5% slightly stronger gross profit growth, SG& A expenses were down about $5 million which obviously helped the quarter. The expenses were up which is just a timing issue. There's no significant ongoing change there. That really was just the way the cost hit. We had a very substantial income tax expense for the quarter, $52.4 million. $42.6 million of that related to withholding tax charge on an inter-company dividend that - well we've taken in Financial '11 but the payment for that will be in Financial '12 so that it will disconnect between the cash flow and the earnings at least as far as the years are concerned.

All of that left us with a net operating loss of $1.8 million for the quarter which was slightly down on the net operating loss for the prior year. Looking at the normalized result in this slight here, slide 22, nothing significant to report there other than that tax amount and if we add back to that and the other more minor non normal items you can see that the result was $33.3 million which was up 41% on the $23.7 million for the prior year, prior year quarter.

Turning to the results for the full year, you can see that net sales were up but unlike the quarter, gross profit was down 6%. SG & A expenses were also down and about the same pattern as the fourth quarter. A slight increase in R&D expense and a much smaller asbestos adjustment in the full year, $85.8 million versus $224 million. That's largely related to currency as you'll see in later slides and most of you would have picked up from your review of the results released earlier, asbestos is relatively stable other than in the impact of currency in the asbestos liability.

Income tax expense, a very large item of $443.6 million negative on this result. As you may recall, we took a $345 million charge in relation to a '99 amended assessment. We did that in Q2 and then we've had a further charge of $32.6 million in this quarter. So we've got the normal tax expense and then we've got two very material items that have really significantly impacted the results. So the reported loss was $347 million for the year tied largely to those unusual tax charges. Interestingly we also had a, obviously a very material loss last year of $85 million of last year's loss as you can see from this slide was largely due to asbestos. This year's loss largely due to tax charges, unusual tax charges.

The normalized annual result on slide 24 when we add back for those unusual items of asbestos and tax and a few other things, the net operating result after asbestos or excluding asbestos, ASIC expenses and tax adjustments was $116.7 million which was down 12% on the prior year's $133 million. As Louis said in the market circumstances, we're operating particularly in the US but a result that we're reasonably comfortable with. Turning on slide 25 to segment sales for Q4, you can see that the result in the US, the sales result in the US was very flat. Asia Pac was up 16%. The A dollar accounted for some of that. About 12% of that 16% increase was currency and the other 4% was accounted for by volume.

In terms of the full year sales results on slide 26, you can see there that the US and Europe was actually down 2% given all the circumstances in the US market in particular and Asia Pac was up 19%, 12% of the 19% due to foreign exchange rates, 7% due to performance of our Asia Pac business and of that 7%, 5% was volume and 2% was price. Turning now to segment EBIT and you can see that for the quarter it's mostly very favorable so we had a good EBIT improvement in the US and Europe business as well as in the Asia Pac business. A very strong result there in US dollar terms. Corporate expenses were down. Asbestos adjustments were actually favorable for the quarter and the end result was an EBIT that was $50.8 million which was up $39 million on the prior year's equivalent quarter.

On slide 28, the segment EBIT for the full year, the US and Europe business, contrary to the fourth quarter was actually down very materially, $40 million and it was highlighted that the pulp impact was pretty material. I think that's best indicated by the fact that in FY10 the average pulp price as measured by NBSK was $770 a ton. For FY11 it was $983 a ton average. So it's 28% increase in what's our most material commodity input into the product.

Asia Pac fiber cement was up for the full year. Interestingly the pulp impact in the Asia Pac business not nearly material as the US business. We still buy in US dollars but of course the Australian Dollar currency and the other Asia Pac currencies were exposed too like the European Peso and the New Zealand Dollar were stronger so the strength of the currencies muted the impact of the commodity price increase.

Research and development costs were up slightly and the total segment EBIT was down 12% to $220 million. A pleasing reduction in corporate expenses and it left us with a total EBIT of $104.7 million for the full year. The $8.7 million positive just in case anybody is questioning that in relation to ASIC was the result of third party recoveries. We did report that the third quarter and other than that recovery which was about $10.3 million, we've had relatively low expenditure on the ASIC which we hope is closing out fairly soon.

On slide 29, income tax expense, you can see here that adjusting for the charge that we took in Q4 for the withholding tax on the inter-company dividend produces an effective tax rate of 25.7% compared with 31.6% in the prior Quarter 4. That does reflect some trueing up of tax always does at the fourth quarter and we did have some adjustments to make this year as a result of the transfer of the domicile from the Netherlands to Ireland during the year. So there's a little bit of trueing up there. 25.7% is probably a lower ETR than we can expect to see in the near term.

For the (inaudible) year tax, obviously these big items that we've had, the two big items that we've had relating to the RCI tax charge taken in Quarter 2 and the inter-company dividend withholding tax in Q4 impact at $380.7 million but adjusting for that tax expense was $56 million for the full year and that produced an effective tax rate of 31.1% which was down on the prior year's 34.4%.

On slide 31 looking at cash flow, I know this is a bit of an eye chart but I think it's a useful way of actually looking at the Company's cash flows. We've had quite a good year I think in terms of cash generation. The net operating cash flow for the full year is reported as $147.2 million. That was the result after paying $64 million to the asbestos fund. So on a comparable basis, it's about $210 million and was actually up on the prior year due to lower tax payments and also some favorable working capital movements.

We continue to be actually quite cash positive even in Q4 which is not normally a great quarter for us. I mean we do okay in Quarter 4 but we did have a $32 million cash generation in Quarter which I thought was a very pleasing outcome. As a result of that good cash flow, the Group's debt was reduced significantly. It came down by about $94 million to $40.4 million as I indicated previously.

On slide 32, just a quick look at our facilities position. We've got unutilized facilities in cash of about $280 million and we're comfortably within all of our covenants and the weighted average remaining term of facilities is 1.9 years. So at some stage we'd like to lengthen that but we don't feel as though it's anything that is required urgently. Turning to a few slides on asbestos which we usually do at year end. KPMG actuaries or actuarial as it's now known has produced a further revision as they normally do at 31 March each year. The discounted central estimate was down by AUD60 million and I'll go into some of the detail associated with that. As a result of the strength of our cash flow during the past 12 months, James Hardie will be making a contribution of $51.5 million to the fund in July of this year.

On slide 35 some detail on the movement in the asbestos liability, you can see there on the third last line the net post tax liability in Australian Dollar terms is down by AUD71 million. So that includes the AUD60 million being the net present value and then a few other changes to the accounting liability as well which were favorable producing a AUD71 million reduction in the liability. After the 13% appreciation of the Australian dollar during the year, the US dollar liability has actually moved up $966 million to just over $1 billion. As I indicated before, that's largely non cash in the near term.

Now looking at the trends, I think we can be quite pleased with what's going on with the asbestos liability. You can see here there are 10 data points so this is the tenth actuary of assessment that KPMG has prepared since mid 2004. So it's a very good period of which to see what's happening. The blue line or grey line at the bottom there is the discounted central estimate. You can see it, that's actually quite steady. When we were negotiating the arrangements with the New South Wales Government in 2005, that was not what that line looked like. Our indications were that that line would continue to grow in size and in other words, the net present value of the liability would grow. Not because the liability itself was likely to grow in undiscounted terms but just because it peaked in 2020 and as we got nearer to 2010 the NPV effect was an increase. So I consider that to be a pretty good result to have it flat lining in the way that it is.

The orange line represents the undiscounted central estimate which I think is way more important or a much better measure of what's going on with the liability because it doesn't have the noise of discounts rates in it. It's at its lowest point in the past 10 years. Now you always hope that that would be the case because obviously over the period of these 10 actuarial reports, we've been playing down the liability, in other words meeting the claims as they come in. so you'd be hoping that it would come down but it has come down. You can actually see that it's actually trending down quite nicely as is the range of estimate. So that's represented by the bars and I think the impact of that is pretty clear. The top side of the range is declining quite steadily and it's actually trending in all the right directions I think.

In terms of the fund's position, the fund had AUD60 million in cash and short term investments which is down a little bit on where it was about 12 months ago. The fund has no borrowings under the New South Wales Government financing arrangement. In terms of the outflows you can see there AUD76 million flowed out of the fund during the year.

Claims paid were down. Legal costs were up both exceeding the prior year and exceeding KPMG actuarial estimate. That's a result of the fact that they had some quite important cases to take on in FY11 and obviously they incur high legal costs on complex cases. In relation to insurance and cost claim recoveries, you can see that those are up. The main reason for the increase in that is there's a couple of policy computations during the year. That sort of increase or level of cost claim insurance recoveries is unlikely to be sustained and that $17 million is probably the more normal result.

So that's it on asbestos and moving on to capital management. You may recall that in late 2008 we decided to suspend payment of dividends. There were a number of macro issues at that time. No-one was really sure what the impact of the downturns in markets was likely to have so we were very concerned about US housing and other housing industries. We faced a great deal of uncertainty at the time in relation to James Hardie specific issues as well. We had quite a long list of tax issues, domicile, the ASIC case was obviously nowhere near as advanced as it is now. We had a higher level of debt. So I guess what's changed is our debt has come down. We feel a lot more confident about the contingent issues that we're managing really in terms of the financial impact on the Group. The only one that's outstanding I think is the 1999 amended assessment which we're litigating with the Australian Tax Office. We've taken the charge on that this year. So the only change in that is going to be we either pay the Australian Tax Office AUD184 million if we ultimately lose on appeal or the Australian Tax Office refunds to us about AUD260 million.

So we know what the outcomes are and it's pretty well binary. Carrying the low level of debt that we are now, we think that we really have a very poor capital structure so part of what we're about with both the share buy-back and the resumption of dividends is to improve our capital structure somewhat. So after the release of our second quarter results this year which will be about November, that results announcement is likely to include a declaration of an interim dividend and then we'd be expecting a final dividend to follow subject obviously to all the sorts of normal conditions that are attached to dividends, relation to board approvals and outlook and so on.

The end market buy-back, we've announced earlier in the week that we're seeking to acquire 5% during the next 12 months obviously subject to market conditions. That announcement also advised that we are having a look at our corporate structure. The corporate structure that Hardie has had is really the result of a move to the Netherlands that we took about 10 years ago and then in the middle of the last decade we negotiated the asbestos arrangement so we sort of did a rather interim structure relating to asbestos. It's not very efficient or effective in terms of a structure that now applies which is an Irish parent company with subsidiaries in the US and Asia Pac as being the core businesses.

So under that changed arrangement relating to the Domicile and Ireland, we're trying to get a more efficient and effective structure going forward. The first part of that is a charge of $32.6 million on the payment of an inter-company dividend from the US business up through the holding company structure and we've incurred a charge of $32.6 million in relation to that.

Moving on to legacy issues, the saga of the '99 disputed assessment we hope is getting nearer to an end. There was a three day hearing in the Federal Court of Australia which concluded yesterday. We're awaiting a decision and all we can note that a decision has been reserved and we're hopeful that we'll hear sometime in this financial year, FY12. In relation to ASIC proceedings, the High Court hearing is now going ahead. Leave was granted to both ASIC and to one of our former executives and the High Court hearing will occur later this year. We don't have specific dates for that but there's limited further exposure for James Hardie in relation to that. There will be some cost to it. We're likely to incur some cost. We may get some cost back if it all comes out favorably, but it's not likely to be material in relation to our natural results.

In relation to asbestos, the arrangements for the funding with the New South Wales Government has moved forward. All material conditions precedent have been satisfied and there would not be a lot required for the ARCF to be able to borrow or draw down under that facility and is quite likely, I would think, that the facility will need to be activated later this year or more likely in early calendar 2012.

The KPIs on slide 39 - clearly the EPS is reflecting a slight downturn in earnings in the past 12 months. There's been no material change in our issued capital and so that's just reflective of the result. We've had the decline in return on shareholders' funds as a result of the way in which we measure this which excludes tax items and asbestos liability. We've had lower earnings and higher capital base so that's impacted adversely on the return on shareholders' funds.

The other margins are looking quite strong and when you look at the four gearing related or debt related items on the bottom left of that you can see the impact of the very low debt and one of the motivating factors for us in reinstating dividends and undertaking the share buyback.

On the final slide, slide 40, obviously a good result for Q4. An increase of 41% to US33.3 million. A decrease in the full year's result, however which reflects an increase in input costs, higher freight costs and lower sales volumes, particularly in the US business and that was partially offset by a very good result in the Asia pack with the help of currency and also some lower SG&A expenses across the business.

So we've announced new capital management as a result of the greater stability that we see and we hope that some of these abnormal items which have continued to affect us will have a lesser impact going forward.

That concludes the presentation and I'll hand it back to Lou for questions.

Okay we'll do questions as always in the room from investors and analysts, then on the phone and back to the room for media questions and then back to the phone for media questions.

Louis and Russell good morning, good morning everybody; a couple of questions if I may. Louis can you just talk about the competitive environment in terms of your competitors' pricing behaviors et cetera. We know Certain Teed have sort of swung their prices around and we've seen traction with Downer Pacific and then a second question is - conscious of the utilization rates and your outlook for a flat housing market, can you just give us a guide on your capital expenditure expectations for FY12 and 13?

Yeah thanks Ron. Competition it really hasn't changed so you have kind of three materials that we compete with the most. That would be vinyl siding, wood siding which in this case is largely either SP siding or cedar siding and then, you know, fiber cement. So the fiber cement is either Maxi, Certain Teed and [Uchihia]. They all sell at discounts to Hardie. Probably the only thing that's happened this year that's noteworthy is Certain Teed did announce price increase. I didn't see any other announcements from the other guys and I don't know if Certain Teed stuck with theirs or not so I assume they got part of their market on a price increase and part not.

But having said that, we're in the same position. If you want to buy cheaper fiber cement we have our brand sent blank and then there's three other brands so that hasn't changed much.

Louisiana Pacific makes an OSB siding which is - you guys probably all know what OSB is - they largely, my understanding is, they don't publish their mix. I don't know if any of you have it, but they largely make panels and then they make some siding as well and they make trim boards. So I'm not sure what they've done with their pricing. I don't think I've seen any - I don't think we've seen any announcements. They do sell at a number lower than Hardie and all three products would be premium priced. Our panels would be premium priced and our planks would be as well.

They, on the quoted announcements you've probably seen, they do talk regularly about their siding is growing. I do think they have a bit of an advantage in the market in that if you have a fiber cement user that doesn't feel he can get away go into vinyl in the market he's in, you know, first day OSB siding can look very much like fiber cement siding. So I think that's an easier dropdown for some builders.

Now I would believe that most of the gains would probably be in a panel area rather than planks area. We don't have that information specific though.

As far as our gains and capital, I think - did we give the normal 50?

Yeah 50 was up.

So I think we've done 50 the last two years and we'd be pretty comfortable with 50 again. Keep in mind, you know, we're not going off strategy so we're still making good returns, still generating good cash, so that the product initiatives that we have in place in the US will be ruled out. It's just a matter of what the rated rollout is and most of our capital over the last couple of years have been around product initiatives rather than - we don't have a need for basic capacity so it's been product initiatives for the most part.

Did I catch all the questions there are? Okay. Emily?

Thanks Louis. Just a couple of questions; firstly could you remind us please the additional costs that you incurred in the first half of this fiscal year and let us know you think that that's likely to happen in fiscal year '12 and secondly, on the topic of market share, just looking at the difference between the first home buyers segment given they've gained some share in the US market, are you still comfortable that your share is flat or growing in that sort of upper end? I'm just wondering if you could comment on the share in those different segments please.

Okay. Costs in the first part of last year were high because we had inefficiencies when we ran our product up which would normally pick up pretty quick as you continue to produce, but unfortunately then we crashed it back down so we had inefficiencies.

I kind of covered earlier, we had some product initiatives, we had the production scheduling issue, so we think around $20 million of last year's cost don't need to be there this year okay. Now what will offset that unfortunately is we see about US22 million or US20 million maybe extra in pulp and freight. So basically our operating plan is to offset the pulp and freight with better operations, meaning we've gone through a learning curve. The products I'm talking about are our Heritage shingle product, our 12 foot trim product and our new eased edge A2 plank product, so those are the products I'm talking about.

So that's kind of the plan going in. Now we're going to have to be very good to do that but our guys are usually very good so I have confidence they'll be able to do that.

As far as our share in the different segments - fiber cement's kind of middle third, top third of the market type product. There are a few exceptions to that. In Texas we're well positioned in the bottom of the market and in Georgia we do better towards the bottom of the market than we do in most geographies and then the final exception is Oregon market. Were also in pretty good shape. But for the most part we're middle to third and top third of the market type product.

So there have been changes between single family and multi-family and there have been changes between, you know, say starter home versus first move, second move, semi-custom and there's also been some regional changes.

We don't dwell on them too much. I mean you can get into some pretty elaborate arithmetic and try and figure out how much that's affecting us or not affecting us, but our job is really to do as well as we can in each of our markets. So in a market where we're right through the market like we would be in Texas and our job is to grow share in that market versus a market like Chicago we're it'd be top third of the market, we're obviously trying to grow down in that market.

The thing that went against us last year that made it a little bit unusual besides the fact that a lot more of the starts were multi-family and single family, I think single family starts were actually down last year and single family has a lot more footage per start whereas the tax incentive was really biased toward the bottom of the market. So even though our demand was better because of the tax incentive, I think our competitors that sell lower cost siding products were relatively better than we were as the tax incentive came on and you can kind of see that in vinyl siding who do publish their numbers in their association. They had to spike around the tax incentive and I believe that tapered off quite a bit since then.

Did that cover your question?

Maybe just on R&R, how are your shares going --

Oh yeah R&R's going well. Now the R&R market opportunity wasn't great last year and we've thought before the main problem there is although people aren't planning on moving you would think well then they're going to fix up what they have and generally that is the case. But with prices still dropping they don't know if their quote: investment in their house is ever going to get paid back because we're going to be anywhere from US16,000 to US30,000 for a major reside of a house that either had water vinyl siding so it's a pretty major investment.

So even though the market opportunity wasn't great, I think in the past probably in September I said hey we're probably great in four or five markets and we want to be good in 25 markets okay. Now we're probably good in seven or eight markets and we want to be good in 25 markets. So it's your typical s-curve when you're on the flat part of the curve for a fairly long time before you start turning up. So we haven't turned up in maybe seven or eight markets now and we're working on - we're literally working on - 25 but we're on the flat part of the curve in most of the markets.

Lou, Simon Thackray from Nomura. Just a couple of questions - just in Aus, quarter on quarter I don't know what it is in Aussie dollar terms, the price actually went backwards, the average price. I'm just wondering what the --

Yeah I know it did and that wasn't much to do with our pricing; it was almost everything to do with our mix, more backer and less siding relatively and regional mix, more south and less north. So it was just mix, there were no real drops in price.

While we're on mix and maybe turning to the US, ColorPlus has been a pretty important contributor through the downturn in terms of that ability of the margins to subsidize and help out. What is their sort of current growth rate now we're looking at on ColorPlus?

I don't think we have it in our materials anywhere. I think we told you guys that in September, but I could tell you it continues to go up.

So both in the north our percent color is continuing to go up and in the south our percent color is now going up. So now it's a number you can see in the south which, you know, in the past we'd be scraping right along the bottom. We're kind of off the bottom in some of the markets.

Our ColorPlus is a very good initiative. We think we're going to drive further than what we originally thought and keep in mind when we talk category share we talk volume, we talk footage. So we're not talking about a revenue share. So we would be very positive on the revenue share side of things, but obviously we're more concerned about how much volume do we get and then we worry about what price we get on the volume and that kind of helps us get our return.

So ColorPlus is still our most critical and most successful initiative.

Because I'm trying to reconcile that with average prices in the US at the rate at which they go up given the price differential for standard thickness on ColorPlus.

Right.

I would have expected if it's such a strong growth engine, average pricing should be going up a little faster than it is. I mean is that just a function of having to sell more Cemplank versus --

Well the Cemplank hasn't moved much - I mean it has moved some but really not as much as we forecasted, but yeah you have Cemplank and you have HardieBacker which pulls your average price down and you have Trim and Color which pull it up and for the most part it gets pulled up every quarter, but there is some downward pressure coming from the HardieBacker because HardieBacker is much larger relative to siding today than it was when we started the downturn, much larger.

And then just finally - in terms of the US20 million odd on estimated increase in costs, is a fair whack of the operating costs side of the percentage for the US and I know the guys are very good at getting it out, but can you give us a little bit more help in terms of your confidence level in achieving that US20 million and what sorts of things can be done from here because you're already addressed a lot of the operating costs anyway?

Well no, like I said, last year had some one-offs and learning curve on the east edge, learning curve on Heritage single and learning curve on 12 foot planks. So all those things are now kind of out of the learning curve than the normal operating so we'll get the benefit of that and then the production scheduling - you know we won't have that problem again.

So what's my confidence - I mean it's kind of one of those things we have to do to get to the 20% margin in the kind of market we're in. So my confidence is that the organization will respond but one of the things Mike and I, Mike Hammas, our chairman and we flew down from Dublin last night which is a long trip for the chairman obviously, but anyway one of the things we're talking about is, you know, in a good market already got used to the direction we're right and when we're directionally right, all the financials just happen.

In this kind of market you have to be exactly right so your margin for error is much smaller and you can see that in our production scheduling hiccup last year. If you were to roll the clock back three years and made that mistake, most of you wouldn't even have noticed it in our results.

So I think it's a good question. I think we have to run a very good business if the market's not any better the share and open freight comes in where's it's forecasted to come in, to stay at that 20% EBIT range, but I do think most years we run a very good business. Last year we made a few mistakes. I don't expect to make the same kind of mistakes this year.

It's kind of interesting - when we set that range so - I'll babble a little bit here - when we set that range I wanted to kind of communicate to the market how we made tradeoffs in the business. Okay so a lot of you have modeled our business and in good times you could see well you guys should be able to run a lot harder than 25, you could be running 30s maybe, and what I tried to communicate is I'm trying to show you how we balance the equation, how we balance growth with return okay. Now we're on the other side of that where we're working hard to keep at the bottom of that range, that 20% range, and we're having to work very hard, but we're not doing it at the expense of the strategic initiatives. So again I want to keep pointing out we have not come off strategy. When you people come in September to see us again, you'll see all the same kind of things we work on. We spend the money on R&D, we spend the money on product development. A little bit less right now on market development because you're just spinning your wheels in too many markets, but we're still doing all that plus we think we can get to 20 again so that's kind of what we're aiming at.

Now probably give you a little more guidance in August when we have four months under our belt or something we can probably tell how much of those costs we are actually getting.

Thanks Andrew Johnson, CLSA. Louis can you talk a little bit about how Europe's going? You mentioned in the notes about performance or that's making a significant contribution to the earnings and then back into the US, if you can just comment on some of the other products. I think Artisan had a soft launch and then perhaps what about other products into the US, some of the ones that are doing so well in Australia?

Okay. As far as Europe I don't want you to misunderstand me on Europe. The best thing about Europe it doesn't cost anything. So it does contribute cash and it does contribute EBIT dollars, but it's too small - it's too small to really impact our results very much.

But I like where we're at in Europe. It's a masonry market so our product mix, which is basically designed for frame construction, doesn't apply one to one in Europe. So we're going to have to do product development and we've had a gentleman named James Gleeson who works for us in Australia most of the time, he just finished up I think it was a two year stretch as GM in Europe and his focus was well what would be the products that we could develop for the European market that would deliver a valued proposition in masonry construction.

So Mark Fisher who has responsibility for international and myself made a couple of trips recently with James and we've kind of gone through it and I think there are some opportunities for us there.

So we'll be trying to accelerate the growth in Europe, but it's off a relatively small base. Now I think, you know, just in my mind we wouldn't be in a geography where we didn't think we could deliver US100 million in revenue and 20% EBIT margin. So that's the kind of - that would be the first kind of hurdle we'd be looking at in Europe and that would be several years down the road.

As far as new products - the Australians have done a great job with the umbrella brand which I don't know how to pronounce. What do you say - Scyon or Scyon or Scyon - okay Scyon - anyway they've done a great job with that umbrella brand which has their Artisan product under it. They have their one area flowing and a few other siding products that we wouldn't be considering for the US.

The reality is the US market is not in the mood for new higher cost products right now. So we have one area flowing on hold but that is a product we think has opportunity in the US. Artisan we have launched. We sell a bit of Artisan. It basically has increased 40% this year over last year, but it's still very small and basically every house we sell of Artisan we actually make less money as a company because you're basically selling Artisan to people that normally buy ColorPlus. We make more money on ColorPlus than we do Artisan just because of the economies of scale and the freight hauls and everything else.

So that's what I said, on the really market development intensive products I'm going to be less enthused to go after them again this year. I've just got to see this market show some sign of life to where people are back investing in their house, putting value added features in their house rather than just stripping more and more out of the house.

I mean the fundamental problem - I think I might have seen it in one of your papers this morning - you can buy an existing house at a much bigger discount now to a new house than is normal okay. So when you're building a new house now you're actually choosing to pay a pretty high premium over what you could buy on the market and much higher than normal.

So it's just not - I mean there's some buyers in the market obviously that are happy to spend more, but that's not generally the case. Even though you might be in one of the higher segments, it's just not generally the case right now.

Okay. Yes?

It's Michael Ward from CBA sorry. Are there any major differences - I mean you've painted a pretty dour outlook for the housing market generally - is there any major difference between non-metro markets and metro markets?

Yeah we've talked about it before. I mean the metros were over-billed; the non-metros were not. So the non-metros are relatively better than the metros right now and you probably Michael know the story about we slipped back in the non-metros with our price increase last year. So our present in the non-metros has increased and like I say we think we're getting traction - well we know we're getting traction there. But as far as just flipping a switch and it all coming back, that hasn't been the case but we are tracking in the right direction.

Thanks and just maybe one for Russell - the corporate expenses came down quite a bit this year. Is that sort of where we should expect it going forward or is there further to come?

Michael I think we have made some good strides in reducing corporate expenses. That's off the back of the fact that some of the project type things that we were working on have declined; things like ASIC and Domicile and so on.

So I'm hoping that the reduction that we've got is sustainable.

Thanks.

Thanks for that question Michael. The rest of the room is letting me down. I told Russell coming over the questions are going to be five to one for him and now you've let him off the hook.

Louis, Doug Macphillamy here from Macquarie. Just a couple of quick questions - firstly, I mean you're talking about a pretty flat environment in both new construction and repair and remodeling. If you feel that business can grow volumes in that type of external environment - I know it kind of goes back to some of the market share gains which have been up previously - and secondly, just a bit of an update I guess on the pulp side of things with your costs, is hedging something you're looking at or is your view still not to (inaudible)?

Okay. Yeah we'll start with the market share. Do I think we can grow market share? I do actually think we can grow market share, but I have no proof of that because we weren't able to grow market share last year. So there is a possibility that we're just in the - we're just so far into this downturn and everyone's become so obsessed with their cost that we're not getting it very far with market share.

So kind of the hurdle I accept for the US business is give me my returns and if you can give me some market share give me some market share but give me my returns first. Don't be spending a lot of money trying to grow the market share and then come up short on your return okay.

Now having said that, we have no intention of losing position. So if you go through the arithmetic last year you would say against the market index you guys are washed a little bit. If think if you want to look at that, we gave you the equation exactly like the guys do at every corner. You can kind of explain things away if you want. We're not trying to explain them away. We came up a little bit short against the index. Whether that repeats itself this year that's certainly not something that we'd be that comfortable with.

Now how would we grow market share? R&R's our best opportunity to grow market share okay. So I think we have pretty good traction in our R&R program and also I think R&R has the best chance of recovering somewhat okay. I like the chance of R&R getting off the bottom. I think it established in fiscal year '11 better than new construction because new construction kind of goes against you; houses can get smaller, they can go multi-family or they can be starter homes. Well the good thing about R&R is the houses are already built so if you're going to get a reside you're going to get that reside. Whether you get it this year or three years from now it's going to be the same house.

Going to pulp, hedging pulp - yeah this is a long - I can give you a short answer - pulp hedges are very expensive now okay. The long answer is I still would not be tempted to hedge pulp. You guys know we work very closely with our pulp mills and we know what it costs to make pulp. We haven't, I haven't talked to any of them recently but $400 is about the number you need to make our type of pulp. It could be up to $450 now but they're selling it for $1000. We don't pay a thousand (inaudible) a thousand.

Now all of us that have had macro economics 101 know that can't last very long. You can't make something 450 and sell it for a thousand for very long. I actually am a little bit of - I'm a bit of a disbeliever on the forecasts going out as long as they do for a thousand dollar pulp.

But why don't we hedge pulp, which was actually the question? Because we can afford not to. So pulp hedging, if you're in it long term, costs you somewhere between 2% and 3%. If you jump in and out it's probably worse than that, but I don't see any reason to spend 2% or 3% to smooth earnings or to smooth cash flows because we don't have a need to do either, is our view.

Thanks for that, and any implications from the floods in the US at the moment on your businesses that you're seeing?

I think I've talked about weather once in my career and that was it, so yeah, there's been a lot of weather. Obviously, Australia got hit very hard and parts of the US got hit very hard. We definitely see the shift in demand regional but at the end of the day it's not worth trying to figure out what it's - I think quarter to quarter it's just not that important.

Jason Steed from JP Morgan. A couple of questions, maybe staying with pulp. That discrepancy I guess has been known about for a period, but can you give your sense of what the drivers are, the supply constraints and what will change at the end of the day? I mean my understanding is that they're not, but how do you see it coming about in terms of changing that gap.

Well first, changing, demand's up. I think China was a very crude explanation for it, so I won't use that, but I think China uses more paper, more pulp than they used to. But having said that, there's a lot of idle capacity so even in North America there's a lot of mills that could be making our pulp there running.

So I think the industry has been fairly intelligent or cooperative, whichever you want to call it, about getting your supply ahead of demand again. But I mean when you tempt people with $550 margins on a basic commodity, that's something that's going to make a decision to start bringing the supply up to meet the demand.

So I do think there's higher demand in the economic recovery in most parts of the world. By the way, the US is coming back economically as well. It's just how we're not following, how we usually lead actually and now can't even follow.

But so I think demand's up and the supply hasn't pulled up as quickly. So I don't think it's anything different than that.

Thank you, and maybe just moving back to R&R, do you envisage the proportion of your revenues coming from that side of the market? Clearly you think that is the stronger side, so I think you're about three quarters now. Would you sort of envisage that number going up materially as a proportion of total revenue?

Well I mean it goes up. If new construction stays flat in the market for R&R increases, obviously it goes up that way or if our share increases it goes up that way.

Again, our job is to do three things right; our new construction market position, our renovation market position and our repairer market position. Right now, obviously, we have the highest in the three is the repair because we have exclusives with Home Depot and Lowes that we're doing with the lion's share of the repair business in the US that kind of walk out. It's where people buy six, eight, 10, 12 planks at a time.

Going into the downturn we were higher in new construction than we were in what we call re-sides. I think that has started to balance out and the measurement would be balanced if not now maybe by the end of the year. So that's how we become higher repair remodel is if our share continues to grow and we actually surpass the share we have in construction.

Thank you, and maybe the last question for Russell just on tax looking into the full year particularly with the fourth quarter coming where it did, the effective tax rate (inaudible) cents around that going into FY12?

Going into FY12? We'll probably see a rate going forward a little bit below 30%. That's the result of some of the things that we're doing. We've left behind a lot of those legacy issues that were negatively impacting the tax rate, so those are no longer with us to the extent, so it's likely to come in below 30% due to a number of factors. Europe, for example, we're now making profits. We never booked future income tax benefits and in Europe we've got large tax losses and so we're just obviously recouping those against future profits as we go along.

So those little things are all impacting ETR.

Thanks, Russell.

Any other quick questions? Sean tells me he double booked me not expecting all these questions today. Do we want to go to the phone first, I guess, to see if there's any other questions?

For participants on the phone wishing to ask a question, please press star one at this time.

Next question comes from the line of Hugh Dive of Citigroup. Your line is open. Please go ahead.

Yes, good morning, Lou. One of the sort of key features of the result we've seen is an improvement in the Australian market share, predominantly in Queensland. Given that Queensland shows some pretty similar dynamics to Western Australia, high labor costs, competition for labor thinning with the mines, can you give me some idea of fiber cement's penetration into WA and what will require you to actually put a plant into that market?

Yeah, I'm not an expert on the Australian market but WA is a brick market so far as I understand, so our relative market share in WA would be much smaller than it would be in any other state. So far as putting a plant in WA, it's a good question because we are starting to push up against our capacity in Australia, so the guys are right now working through capital proposals to, I think, first debottleneck one of our plants so we can get more out of one of our existing facilities and they will be looking at an additional facility probably in the next three years or so, so we would expect to build the capacity in Australia.

Geographically, where would you look to put that?

Right now preliminary work at scene is not in the west and, as you know, if we are going to build a new plant we don't like to tip our hand too much because we'd like some help to build the plant if that kind of help is available from any of the states or other areas. It would not be in WA at this point. There's not enough market demand in WA.

Okay, but looking forward, that appears to be an opportunity set there?

Pardon me, I didn't catch that.

I mean just given that sort of labor costs are high, construction costs of houses are high, there seems to be an opportunity to take state market share away from double brick.

Yeah, I agree. Taking market share from double brick is a long term kind of market development exercise. The other thing, we can hit WA out of the Philippines if we were interested in a siding market share type initiative. I think we could head it out of the Philippines pretty low delivered cost.

Any other questions on the phone?

There are no further questions at this time. I'll now pass the call back to the speaker.

Any media questions in the room? Any media questions on the phone?

Thank you very much for coming. I appreciate all the questions and see you next time down. Thank you.