James Hardie Industries PLC (JHX) 2012 Q1 法說會逐字稿

Thank you for standing by and welcome to the James Hardie Results Briefing Conference Call. I would now like to hand the conference over to your first speaker for today, Mr Louis Gries.

Please go ahead Mr Gries.

Hello everybody. Thanks for joining our Q1 results call.

Both Russell and I are in Dublin so we'll be doing the call, as we always do. I'll overview the operations briefly and then I'll hand it over to Russell for financials, and then he'll hand it back to me for Q&A.

We do have our AGM later today, in about an hour and 15 minutes. So we'll probably go for an hour or so and then we'll break up. If there are still questions we can go a bit longer than that. We don't have the control of slides so we'll be calling out the numbers on the slides.

So we'll start with slide number 3, which this kind of shows the agenda, as it always is. I'll give you just a little bit of an introductory summary. You've seen the results I think. Probably most people are across them. But the situation is pretty much as you would expect. The demand in the US is weak so the business is still running at low utilisations but it's running fairly well.

Pulp and freight cost are higher as expected, so the pressure on the EBIT margins is there, as we thought it would be. But we've made up a good chunk of that through better manufacturing cost. Finally, the non-US business is looking somewhat in softer demand, but they're also running well.

So we'll go to slide 5, if we could. Of course we focus more on the middle row. The net operating profit, excluding the asbestos and other things, you can see it was pretty flat for last year, down 3%.

We go to slide 6 -- it gives you just some of the headline numbers in the US business. Sales and volume were off from last year second quarter. Last year first quarter got the benefit of tax incentives from the US Government, so we were relatively happy with the volume in the current market, [plucked] a little a bit by category share, but we've got -- clawed-back a little bit against the market index, so I guess we're fairly happy with the volume.

Price was up just a bit. There was a mix of the last year's price increase - copped a little bit, so there was a little bit of positive pool in that direction and we did have some mix pulling it down a little bit, so relatively flat in price.

EBIT down, the 14% that you see there. That's more a reflection of last year's spike, where you can see the margin was to the upper end of our range and this year it's more toward the middle, bottom end of our range.

If you go to slide number 7, it's kind of hard to see, but if you look closely you can see our price graph; you can see the slope is changing a bit in fiscal year 12, relative the previous years where we had price increases. Again, that's very much expected. We haven't had a market increase this year. We don't anticipate one at this time. Basically our focus in on the market share and category share in the business rather than price.

Slide number 8, just again, that historical graph on EBIT margins. We're back up in the range - obviously not as good as last year same quarter. You can see last year's - there's a lot of variance in the EBIT margin, which isn't unusual. The year part of that was also a lot of variance with the first quarter, being basically a spike and then coming off each quarter after that.

Last year we did a bit of recovery on EBIT margin in the fourth quarter and this quarter again we're in the range and it feels like it's going to be a lot more consistent this year. So we're not expecting the kind of variance we had last year. We expect our first quarter, second quarter to look pretty similar. You'll come off a bit seasonally in the third, fourth, but we're just not expecting as much of it to come off this year, just because things are more consistent.

Now we'll see if that remains - it's kind of hard to call the third and fourth quarter at this point, but obviously we're halfway through the second quarter and the orders this quarter look very similar to how the order file was looking last quarter. So we are expecting definitely more consistency this year and we can see the first half pretty well.

Slide number 9 -- again, it's hard to read the quarter to quarter slide, just because there's so much variance when you go quarter to quarter in this kind of a comp, but against the market index we have kind of pulled even now for the last four quarters. We've been slightly above three quarters in a row, that's kind of making up for that wide gap we had four quarters ago.

But anyway, it is a difficult market to hold the category share against the discounters in the market, but after having had a bit of an issue last summer, we feel like we've recovered our position and we're improving on it.

Slide number 10, goes through the Asia Pac, same headline numbers. This is in US dollars, so obviously it's kind of hard to tell exactly what's going on in each of the businesses, but generally in local dollars costs are up some in the Asia Pacific businesses. But the businesses are running well in a somewhat softer market and you can see in the US dollars it's a very strong result, not as strong in local dollars, but pretty good returns out of the three key businesses there.

Slide number 11. Just a summary - and I guess I'd like to highlight the first bullet points, that's it a continuing difficult operating environment. It's probably the last - unless things were to get worse - it's probably the last time we're going to use the word difficult, because I think reality is this is just what our market is now. Demand is fairly soft, but that's what we're living with quarter to quarter now. So we've set our business up to optimize around that, both on the market position side and the financial returns. We're doing well with that - everything's the way it should be. So rather than continue to highlight that the market's off, way back from where it used to be, we are just going to accept this is our market until it gets better and it's our job to continue delivering in this type of market.

Second bullet point just covers the point I've already made. We expected higher freight costs and higher pulp costs and that's what we're seeing. SG&A's under control, no issues there. As I covered, price just a bit higher and manufacturing, which I don't have on the bullet point, giving us some cross-reductions, so that's good as well. Asia Pac area covering the three businesses, it's all softer demand. But other than that everything looked pretty good, although there were some cost increases that I think are going to be seen in future quarters, at least some of it around pulp. We actually obtained a little bit higher freight as well, but some of it would be in that quarter only and we'll get a little better cost result in the future quarters.

Go to slide 12, something everyone knows. The US market is off of what the volumes were last year - demand was last year, when we had the tax incentive. We're pretty much out of that period when there was extra demand, due to tax incentives, so we're seeing a pretty flat market from here on out. I think most forecasters have come down to that number as well. So we're not expecting any real help from housing starts the rest of this year. Like I said, we're set up to run well at current levels.

Slide 13. Again, nothing new here. We don't expect in the next - in two or three quarters to look very much different than the last quarter, except there'd be the two qualifiers in there -- (1) obviously seasonally in the US, the third and fourth quarters are going to be off the first two, just for seasonal reasons; and then (2) with all the market movement over the last couple of weeks, it remains to be seen whether that might affect the general [culminating], the US level of confidence. So there is a possibility that the market we've seen so - I mean, the demand we've seen so far could be knocked around a bit by further lack of confidence due to the financial markets, but at this point we're assuming that that's not going to be the case. But certainly if it is, we've already done our contingency planning and we'd be quick to react to that, but so far so good.

Slide 14, no changes here. Like I said, I didn't really highlight it very much, but we have -- the evidence is that we've done well on the category share claw-back. There's really no market share growth in this kind of a market, I think we're trying to hold our own. The less expensive products, like vinyl siding, chipboard siding, basic [P&L] products, they're a good advantage, so they're trying to grow the market share. I think at this point everything's flat.

Again, same time last year, I think those less expensive products were kind of the bottom of the market. We're doing relatively better than the market, because the market was more biased toward the starter homes. But I think that's probably self-corrected somewhat this year; with the exception of multi-family is still a higher percentage of the overall market. So as I always say, this quarter to quarter we're still on strategy, we're still delivering good results and we feel this is a pretty good result; a good start to the year.

Okay, I'll hand it off to Russell now for the financial overview.

Thanks, Louis. Good afternoon to everybody in Australia and thank you for joining us.

As you can see from the fairly flat conditions in the US and the slowing Australian market, we have managed to gain something from the appreciation of the Asia Pac currencies and also some lower SG&A expenses. We had very good cash flow in the quarter I think, particularly given that we achieved a debt reduction of some magnitude, about $13.5 million, but that after paying $35 million in withholding tax, flowing from the internal reorganisation of the corporate structure.

That $35 million obviously hit operating cash flow, so without that extra one-off outflow we would have had a far stronger quarterly result and I think a very pleasing outcome, notwithstanding that payment. That payment, by the way, was we booked a charge for that, as you may recall, at the end of FY11, so in March, but the payment actually went through in FY12.

We're on track to resume dividend payments this financial year, subject to Board approval. We'd be expecting to announce that with the Q2 results in November, with a payment of the dividend occurring early in calendar 2012. In addition, arrangements for the share buyback are now complete. We haven't yet commenced the buyback, but subject to share price we'd expect to be in the market sometime in the relatively near future.

On slide 17, a repeat of the graph that we've had in for some quarters now. I'm just showing that since 31 March there was a continued appreciation of the Australian dollar against the US dollar. That obviously increases the value, the US dollar value of the Australian dollar asbestos liability and that has an adverse penal consequence every time that occurs. I think from end of March to end of June was a 4% appreciation of the Australian dollar against the US dollar.

Turning to slide 18 and the first quarter results. Net sales were down 2%, so we were down in volume in both the US and in Asia Pac, 6% down in the US and 8% down in Asia Pac. Price was relatively flat in both segments, so most of the sales revenue reduction is due to the downward movement in volumes offset in part by the strength of the Asia Pac currencies against the US dollar.

Gross profit was down 7% to $108 million. SG&A expenses were quite flat, as was research and development costs. You can see there the impact of the asbestos adjustment. Last year we had a gain of $63.1 million in the corresponding quarter, but this year because of that 4% appreciation of the Australian dollar, we took a charge of $38 million on the asbestos liability.

Net operating profit as a consequence of those movements was only $1 million on a reported basis for the first quarter versus a profit a year ago of $105 million.

Turning now to slide 19, which look at the results after adding back those one-off items, particularly for the asbestos adjustments, you can see that we actually had a net profit, excluding asbestos, ASIC expenses and tax adjustments at $39.4 million, which was 3% down. So a relatively flat result on the $40.5 million we reported in Q1 of last year.

On slide 20, segment net sales, showing US and Europe down 6%, Asia Pac in revenue terms up 10%, but that was driven largely by a 20% appreciation of the Australian dollar against the US dollar on the prior corresponding period, on an average weighted basis and that was offset - or partially offset the fact that volume was down 8%. So a very strong result in US dollar terms, but when you looked at it in local currency terms, obviously nowhere near as flattering. Now that led us to as a 2% downturn in total revenue to $313 million.

On slide 21, looking at the EBIT. The US and Europe was down 14% to $48 million. Asia Pac was down 5%, again obviously partially offset by the strength of the Asia Pac currencies. Research and development was flat, so the segment EBIT was $64 million, which was down 13%. Corporate costs were down a bit, particularly the items relating to ASIC and redomicile, otherwise they were very flat, but we had a bit of a gain in total there. The total EBIT, excluding asbestos and ASIC expenses, was $56.5 million which was down 13% on Q1 of FY11.

Turning to slide 22, income tax expense. The effective tax rate for the period after tax adjustments was 26.5% down clearly materially from the first quarter of last year, which was at 31.4%. The major reasons for the reduction in the effective tax rate have been a change in the geographic mix of earnings. There are a lower proportion of earnings in the US and more in the lower tax jurisdictions, Asia Pac and also Europe. I think this is now at party getting its tax rate back to where we think it's at a sustainable level. We've largely worked our way through things like redomicile costs and ASIC costs. The only item that we have that is making any adjustment to this now is European earnings that are quite modest. We're recouping tax losses there. The tax losses we have in Europe are not tax effective, in other words they haven't been booked as an asset and that's really the only unusual item going forward that we anticipate. So I think the tax rate in the mid-20s is probably quite sustainable.

On slide 23, looking at cash flow. There's those of you who have been reading closely through your day, you probably would have noticed that the tax payments actually came in at $24.6 million, which is lower than the $35 million of withholding tax that we paid. The reason for that is we actually got a refund, quite a material refund, in one of our jurisdictions. So the amount of net tax paid was actually less than the withholding tax that we paid on the reorganization.

Net operating cash flow before the anticipated AICF contribution was $22 million, compared to $38.7 million in the prior year. So we had a slightly less flattering result than in the prior year, but nevertheless I think it was pretty much in line with the operating results of the Group and we had a good period of working capital management and are keeping the sales relatively well trimmed.

In terms of CapEx, you can see there that CapEx for the quarter was $12.1 million, compared with $13.5 million for the prior corresponding period. That's pretty much the quarterly level of capital that we expect to be spending going forward.

On slide 24 we look at debt. You can see that our net debt is now down to $26.9 million, that's a $13.5 million reduction from the end of March. The unutilized facilities are $293 million, so we've got plenty of head room. Since that time, of course, we've paid a contribution to the asbestos fund, so the net debt that we're carrying is somewhat higher than what it was at the end of June.

On slide 25 you can see a bit of an update on legacy issues and we've expanded quite a bit on the RCI/ATO litigation in part because of the history of it and also anticipating at the time when the judgment is forthcoming from the Full Federal Court, they'll be a reasonable amount of interest from people who hold Hardie or follow the Company on what it all means. So we've just tried to anticipate that to assist you. You'll remember perhaps that we took a charge on 1 September last year, which was immediately after the Federal Court issued its judgment when our appeal was dismissed. The charge was $345 million, but it had no impact on net operating cash flow at the time. We appealed that Federal Court decision and the appeal case was held in the Full Federal Court in May of this year and we're awaiting the decision from the Full Federal Court.

Once that decision is forthcoming, either party will have the right to seek special leave to appeal from the Full Federal Court to the High Court. If the ATO prevails and RCI doesn't apply for special leave, or the special leave is denied then Hardie will have to pay $184 million plus interest. Now, we've being paying the interest on a quarterly basis, that's been factored into our cash flows for quite a few years. So the interest adjustments after a decision would not likely be very much, but you could work on a rule of thumb that $184 million has been paid.

If RTI prevails and the ATO doesn't appeal, or the special leave appeal is denied, then we will receive a refund from the ATO and that would be $240 million at 30 June, plus interests and a portion of legal costs. We would also be reversing the charge we took, so the income tax benefit in the event that we prevail would be $403 million gain. So that's just anticipating the interest that might arise. We have no idea when the decision will be forthcoming, but that detail is a bit of a snapshot.

On slide 26, just an update on ASIC. The court of appeal judgment was handed down on 17 December last year, that's the Supreme Court of New South Wales. The Company's appeal was dismissed; the non-executive director's appeals were upheld. ASIC and Peter Shafron sought special leave to appeal to the High Court and that was granted. We are now awaiting details of when the High Court hearing will take place.

Now turning to slide 27, a bit of an update on asbestos. The details of the claims for the quarter are contained in the financial statements that were attached to, or included with the materials released this morning, Sydney time. They're on page F13 of the financial statements, along with a lot of other data on asbestos. The AICF had cash and deposits at 30 June of AUD44 million. James Hardie made its contribution on 1 July and that was $48.9 million, so on a pro forma basis the fund had $93 million as of 1 July. The fund, as I understand, is in discussion with the New South Wales Government, about a likely drawdown under the facility that was established with the New South Wales Government with assistance from the Commonwealth. The likely drawdown is to occur in calendar 12, the beginning of calendar 12.

On slide 28 are key performance indicators for financials. These are based on Q1 results, so that's a seasonally favourable time. We don't annualise these, other than on the basis of year to date, so this just reflects the first quarter. You can see that they're quite a bit stronger than last year. Whether or not that remains the case through the year we're yet to find out, but we're in pretty good shape, particularly on our gearing and debt service payback and so on. So you can see that we're still relatively [under-geared].

On slide 29 just a summary of the position. The result, excluding the normal things that we exclude, was $39.4 million. The principal factors influencing that result were obviously very flat markets and slowing markets in Australia. We had lower sales due to the favourable impact of the US tax incentives in the prior corresponding quarter, higher freight and input costs, in particular pulp. The average NBSK price was $1025 in this latest quarter compared with $993 in the prior corresponding period. So it was up over 3% which doesn't sound very much but it does actually have quite a material impact on the result. We had lower SG&A expenses and there was obviously a bit of a tailwind from the translation of the Asia Pac businesses currencies into the US dollar as a result of appreciation of those currencies.

On slide 30, just a reiteration of the guidance that was included in the media release that was made earlier in the day, Sydney time. We understand that the analysts range if $126 million to $140 million excluding asbestos, ASIC expenses and tax adjustments. On a comparable basis our forecasts are indicating that we'll fall within that range.

Clearly there's a lot of volatility around at the moment so that estimate of the guidance does assume that we have stability continuing with the exchange rates, particularly the Australian dollar against the US dollar, and also industry conditions in the markets in which we operate. But that's the guidance that we see at this point in time.

So I'll hand it back to Louis for questions.

Thanks, Russell. We'll do questions and as always if we could hold off media questions until the end, it would be appreciated.

The first question comes from the line of Emily Behncke from Deutsche Bank, you line is open, please go ahead.

Thank you and good afternoon Louis and Russell. Just a couple of questions, maybe the first one for Russell, just in terms of the buyback commencing. Are you -- should we assume that you guys are waiting for some sort of ruling from the ACO before you'll start that buyback? Secondly for Louis, just wondering if you could make a couple of comments around whether or not you are comfortable that some of the market share losses from '11 - based on this quarter's performance and what you can see of the second quarter - are indeed reversing and how you are going in the R&R markets? Thank you.

Okay, thanks Emily. In relation to the buyback, the short answer is that we're not waiting for the judgment from the full Federal Court which I suspect is what you're referring to. But obviously we will be taking account of the contingent liability that exists in relation to that case in determining the level of buyback activity. So you can see from the slide in relation to debt that we have plenty of headroom and we'll just be taking account of leaving behind, or leaving sufficient headroom to be able to meet that liability should it crystallize.

Okay and the question on market share, Emily, the way we track both the category share and now we're tracking one product outside of our category, we are accomplishing what we needed to accomplish. That's we had a blip last summer when we had a price increase. That's been slow to come back but obviously been working on it over the last three quarters and the trend line is definitely up. I think the [PDG] - which isn't an exact equation - but the PDG seems to indicate over the 12 month period we're probably getting back to kind of where we were. I think we still have some room to go there so we're going to stay focused on that.

Specifically on the R&R market, I think our program is running as planned in most markets obviously some better than others. The surprise on the R&R market is just generally on our activity is off this year versus last which is a bit of a surprise to us and I think also to forecasters. But you can see it's - you can see it in different categories whether it be re-sites, decking, windows are off quite a bit because there were tax incentives last year on windows.

So the general R&R activity is down and we feel we're doing well but it is a smaller opportunity this year than last.

Okay, next question. Facilitator, we need you to go to the next question if you have one?

Your next question comes from the line of Hugh Dive of Citigroup, please go ahead.

Yes good afternoon guys. Lou, last September you ran through your non-metro strategy sort of warning analysts this would result in higher US SG&A. How's that coming along in light of your, sort of, obviously success in cost containment in the US?

Yes, no the non-metro, which is focused in two specific markets, the Mid-South which is that region to the West of Atlanta and the Mid-West so outside the big metros in the Mid-West, yes we're fully funding that initiative and it's going well. Then there are smaller markets spread around the country, we're addressing those through kind of tweaks to our normal organizations. But we haven't pulled any SG&A money off the table for the market initiatives that we've covered with those guys over the last several years whether it be non-metro or R&R or ColorPlus job packs all that stuff is proceeding as planned.

I just have a quick question for Russell. Russell, what's the quantum of the European tax losses that we should be using?

It's, I don't know that we'd want to disclose that, Hugh, but it'll keep us going for quite a few years because we have some fairly heavy set up costs in that business. It's been profitable for the last three or four years but it's very modestly profitable so we've got a few years to go before we consume all of those.

Okay thanks very much.

The next question comes from Michael Ward of Commonwealth Bank, please go ahead.

Hi guys, Louis, you just made a comment earlier around the mix, the mix benefit of pricing in North America. Can you just explain exactly what happened there?

Yes it's mainly Cemplank so we do have more Cemplank in the quarter than previous years same quarter and I think that reflects a bit of the category share battle as well. Having said that Cemplank is still well below the number we had gone in expecting through the downturns. But it is up recently and we expect it probably will stay up for the remainder of the year. Bump around a little bit but it will be generally higher this year than it was last year.

But wouldn't - would you expect prices on average in '12 were pretty much flat on '11?

Yes, it's pretty hard to look out that far, but I would say flat to slightly up just like it was in the quarter.

Right, okay. Then just also you made some comments that you've got some benefits from improved manufacturing. I took that as a bit of a shift in your strategy that you announced in March. Are there further incremental benefits to come from that through the balance of the year or have we seen most of that already through Q1?

No, you'll see it - the program is going well I'd say. It's a bit of a reset so I know it sounds unusual for Hardie, we're good manufacturers. When we went into the downturn we kind of reset everything up the margin around unit costs rather than unit production. So this is a shift that's more fundamental than that. It's actually how we're approaching the machines and machine reliability. So we do expect more benefit to come.

We've got two plants that are kind of running out in front of the others and we've got a couple of plants that are lagging. But generally everything is going in the right direction and we will build momentum as we go through the year on that. Now having said that we'll have higher volume in the first two quarters than the last two so it'll be harder to see in the winter. But the actual unit cost savings would be expected to be better in the winter months than they have been thus far.

Okay, thanks. Then you made a comment also in Australia I think it was disappointed with the manufacturing performance. Can you actually just tell us what happened there?

Yes, I'm not sure I made that comment but I usually --

Well sorry it makes that comment in the slides and you kept saying it was quite good, so I'm a bit confused.

Yes that's right, you know the Asia Pac business has generally been on a really good run for several years almost quarter to quarter. This quarter we had higher costs, some of it was due to the higher pulp and like I said we actually had a little higher freight, which doesn't have much to do with manufacturing down there. But we didn't have as good a quarter manufacturing-wise as we typically have done down there and I would expect that to self-correct.

That was likely just a cost issue, was it?

Yes, yes it was costs basic throughput and costs.

Okay thank you.

Yes.

The next question comes from Matthew McNee from Goldman Sachs, please go ahead.

Yes, you made a comment that these markets, these soft markets might be something you might have to get used to for a little while. Let's assume that's the case and we did see soft markets going forward, in this quarter it looks to me like and I know this is a number that's hard to measure. But it looks to me like it's about a 5% volume growth over and above what the underlying market did.

Sorry, can you guys hear me okay?

Yes.

Sorry, I'm just getting a bit of feedback.

Yes we can hear you fine.

Oh sorry. So I'm just trying to get a feel for, you know how much do you think you can grow volumes realistically in a flat market. It used to be somewhere in that order of sort of 5% or 10%. Do you see things like R&R, you know non-metro, increased penetration of trim and stuff like that then allowing you to get back to sort of numbers or is it still too early to tell?

I don't think we can hit those kind of numbers in a (inaudible) market like this because certainly it's a soft market but more importantly it's a very price conscious market. So it's tilted for the - the cheaper materials. So vinyl and chipboard and panel products they just have an advantage in this type of market. Now I think the good news for us is some of those initiatives you talked about, clearly are kind of keeping us even in the market. But I wouldn't expect as many builders or homeowners out there that are willing to, you know, pay the premium to go to fiber cement off a cheaper product in this particular market.

I should - there certainly will be some but not as many as you would have in a normal market so in a lot of our housing markets prices are still declining. Home prices are still declining. It's just a tough market to make kind of a premium price decision. So our plan is to continue to win back some of the category share lost, to knock back the chipboard siding. They kind of had an easy run when people started looking for something that looked like fiber cement but wasn't quite as expensive.

So I think we've started to address that in the market now and our goal is to hold market share maybe creep up a little bit on category share. You did have a good point, we'll sell the extras, so we'll sell more ColorPlus relative to prime; we'll sell more trim relative to siding. We'll sell more non-metros relative to metros but that's kind of all built into the numbers. It's not going to end up in 5% or 10% until we get a more favourable market.

The next question comes from Doug Macphillamy from Macquarie. Your line is open, please go ahead.

Thanks, hi, Louis, hi, Russell. I just have a couple of quick questions. Firstly I guess just looking at headline housing starts and permit data obviously multi-family outperforming single family at the moment. Do you have much exposure to that multi-res market and is there something you're looking to possibly increase sales into?

Secondly, just a quick question around the cost environment. Obviously we talked quite a bit about freight and pulp but what about the cement side of things? You know are you seeing much in the way of price rises from any of your suppliers?

Yes, okay multi-family versus single family I would guess our market shares are close enough in the two segments to where that's not the fundamental issue for us. The fact that if there's more multi-family's built we'll put more product into the multi-family segment. The problem is that's kind of indicating, you know more rental units and less ownership units, which a rental unit and apartment probably has less than half the opportunity that you would on a single family home.

So as, you know and this is pretty typical in recessions you go more toward apartments and we're going to get less volume out of the apartments. You know if the same unit was single family we'd do a lot better. So no multi-family doesn't help us at all, although we do okay on market share in the multi-family segment. So we get the volume out of the segment but it'll probably be less than the volume we lost in the single family segment as it - kind of preference switched.

As far as costs, yes freight is still expensive. We're doing a little bit letter in the last, you know, six or eight weeks on it. I don't think the market has moved much but I get the feeling that we may do a little better market-wise for freight in the second half just because the economy is not as good as people were anticipating it would be. It's slightly better than last year but it's proving to be not much better than last year.

So I think freight may settle down a little bit. We'll see. I think it's just like anything else it's just basic supply and demand. So if they have too much capacity in the system then prices should come off a bit, if it's too much relative to demand.

Cement is not a big driver for us but I haven't looked at our cement costs probably the last three months. I think I looked at them at the first of the year. We're not fielding any increases in the US in cement that I'm aware of and it's probably come off a little bit from last year.

In pulp, you guys can track pulp easily. Against the modification, raw materials are more expensive so that would be second behind pulp and that's a bigger part of our mix so we kind of get the double hit there. But I guess the way to summarize all that is, you know this is one of those years everything is as expected. So demand is not where we thought it would be, raw material costs are about where we thought they would be. Freight is about where we thought it would be and our business is running at about what we thought it would. So if you look at the EBIT margin in the US it's kind of pretty much where we think it should be in this type of market as far as the level of demand.

We will be trying to accomplish the same thing as last year, we'll try and bring the business end at that 20% which is the bottom of the EBIT margin range. We'll try and do that as we gain back some category share. So that'd be a positive as well. You know this is going to be a much more consistent first half, meaning month to month it's actually been running very consistent. So we haven't had big spikes and big drop offs that we faced last year. It's been very, very consistent month to month and we expected two quarters in the first half to be pretty consistent as well. On the second half we'll get our seasonal but unless something changes due to recent activities in the market we're also expecting some consistency in the last two quarters.

Okay.

Your next question comes from the line of Andrew Johnston of CLSA. Please go ahead.

Good afternoon, two questions, Russell, first one for you. What sort of drawdown do you expect from the loan fund that's been set up for the AICF in 2012? Or to put it another way, what would your payment have been to the AICF had their - and look I don't' have the model opening front of me, but had the - and I'm assuming the amount you paid was limited by the 35% cap. So had that 35% cap not been there, how big would that payment have been?

I'm not sure that I can answer that, Andrew. Maybe I'm misunderstanding your question, but the fund would obviously not wish to exhaust the existing funds that it has before actually drawing down. I just hope that they'd be expecting to have some buffer and I think the Government would want them to have some buffer. I'm not actually very close to exactly how much they're intending to draw. But I am aware that they are in discussions with the Government and that it's anticipated that a drawdown will likely occur, fairly early in 2012.

Okay. The second question, Louis, with the US and you're planning now for business to track where starts are. Have you had a look at the opportunity again to introduce new products, your flooring products or in fact commercial products as a way of continuing to grow the business?

Yes that's a good question. Now wet area, flooring we do not have any activity going on there so that's on hold and no activity on the commercial side. The market initiatives that we are funding are, you know things more typical to the business around, you know non-metro, colour job packs, R&R all those things are going but we haven't added anything.

You know a big reason for that is wet area of flooring is a good example, it's a great product with a strong value proposition but it sells at a pretty big premium to the alternative which is basically either OSD or plywood. So it's just the wrong type of market to go in and try and do market development around something that's, you know at a pretty significant premium.

Can we please have the next question?

The next question comes from the line of Simon Thackray from Nomura, your line is open, please go ahead.

Hi guys, US sounds like you - it's fairly manageable in what's a pretty difficult situation. I just want to go back to Asia Pac, more particularly to Australia. The slowdown in the guidance the USD1.06 for the currency and I guess, you know July and August the ressie developers we're talking to are saying, you know, a pretty significant slowdown in the housing market.

Just want to get a sense of the risk on both a slowdown and what that does, I guess potentially the currency, that's probably outside your control and mine, but more importantly what where the sensitivity to the guidance might be for Aussie, seeing it contributes a much bigger portion than historically on the earnings' number?

Yes, and you know as Russell covered, the foreign exchange is one of the things we wouldn't have pretty much confidence in knowing where that's going to end up for a full year. So our guidance is based on our internal forecast that analyst range this year is pretty tight. So you don't have to really say whether you think you're high on the range or low on the range, it's just a small range. So we're kind of in the range based on our assumptions. But obviously there's some room for moment and we'd still be in the range.

But yes if you get a big move on foreign exchange, you know depending on which way it goes that could change things. As far as the Australian market coming off I guess it is coming off. Our Australian business is really well set up so our confidence would be, in the business will continue to run well even if the market opportunity goes down. But obviously total dollars out of the business won't be as great if the market is down more than we're planning.

Having said all that, I think the guidance, we didn't used to give guidance this early in the year. It's kind of early to give guidance but we're pretty comfortable with the range that's out there I guess is the only way to say it.

Sure, but I mean I guess, Lou, you know that well said, like what are the variables that need to shift materially to change that view of the world in terms of guidance?

Yes, well it's a good point. I do believe that if we changed it, it would be something external. So I believe we know pretty much how the businesses are going to run. Now you can always be surprised. You hit a bump in the road in one of the businesses it can make a difference, but that we wouldn't anticipate that. So it's going to be foreign exchange, you know translation of those Australia and New Zealand earnings, Philippines as well. Or it's going to be an external shock to the market. You know if the financial markets end up knocking the economy back in the US and demand comes off a bit that could change it.

But, you know, so, I mean, we - our assumption is on external stuff, we've always been pretty conservative. So our guidance is based on you know those conservative assumptions, but if it's worse than that, then obviously maybe our result would fall out of that range.

Sure, sure but --

Right now we're --

I guess the critical cost, the costings that you, you know the 20 million bucks in cost that you needed, the headwinds we identified at the end of the fourth quarter last year, you know, progress against that. How do you feel, you know, going forward?

Yes, like I said, internally the way the businesses are running and specifically manufacturing in the US, I'm very comfortable with the way things are going. I kind of summed up like any major initiative; not all seven plants are going to move at the same rate. We have two that are kind of way out front running really well. We've got two that are lagging and I think we'll pull those laggards up and we'll get, definitely get what we thought we'd get out of manufacturing.

Pulp is going to be about where we thought it would be. Freight like I said there's some chance that we'll get a little better freight rate in the winter than what we had planned just because the economy doesn't seem to be as good as it was planned to be in the US. So I think all in all it's like any other forecast, it's nine months from being done or eight or seven and a half now.

Sure, I get it; I get it, that's great, thanks.

The next question comes from Dave [Hulett] from UBS, please go ahead.

Hi, Louis, thanks for answering all these questions, two or three times. I just wondered with all the cash building up on the balance sheet going forward whether you'd thought about spending any of the money on something like a pulp mill or what else you could do with it besides buyback the few shares that you've actually got?

Yes, thanks, David. Yes we're looking at a few things outside fiber cement, but it wouldn't be big dollar. There's nothing inside of fiber cement that I would expect we would be interested in. so we'll use our cash, we'll obviously return more to shareholders than we have been because we've been pretty much keeping it here on the balance sheet for several years now. So we'll get back into dividends as you know and get the buyback going when it's appropriate.

As far as a large acquisition out of Hardie, I wouldn't expect that but as far as us making a move here or there for future strategic growth you might see that. But there is nothing in the works right now.

Thanks.

there are no further questions at this time.

Okay, very good, I appreciate everyone participating in the call and we'll see you next quarter thank you.

Media?

Media questions, I assume there weren't any. Okay that's it. Facilitator, that's it on all the questions, right?

Yes there are no further questions at this time.

Okay, thanks for your help, appreciate it.

Thanks everybody.