James Hardie Industries PLC (JHX) 2012 Q2 法說會逐字稿

(Operator Instructions).

I must advise you that this conference is being recorded today, Thursday 17 November 2011.

I would now like to hand the conference over to your speaker for today, Mr Louis Gries.

Thank you.

Please go ahead, sir.

Okay, good morning, everybody.

We're going to follow the same approach we always do.

I'll run through the business side real quick.

Russell will spend a little time on the financials and then we'll come back to Q&A.

This was an unusual quarter in that it played out exactly like it thought it might.

The demand was very consistent month to month.

The business ran very well and basically, the stuff we were trying to get done, we pretty much got done and shows up well in the financials, so if you look at the middle row again, it's up a bit - it's up quite a bit on last year.

But remember, last year in the US, second quarter was not a good quarter for us.

So some of that reflects that the business ran really well this year and then some it reflects that it didn't run very well last year.

If we come to the US business, you can see the numbers.

Again, the reason the business didn't run well last year is we were just wrong in our demand forecast.

So the business that got pulled forward - the business actually got pulled forward with the tax incentive and then it kind of started to crash in about middle of May, early June.

We had too much production, so we had to really back off in our production, which bumped the cost up a bit and that - but anyway, this year's a much more even year.

The second quarter looks a lot like the first quarter.

The price is pretty flat, so we'll cover that when we come to the chart on price.

But all in all, a good result in the second quarter.

The better one that we look at is obviously the half-year, which shows you that kind of up a little bit on volume, flat on EBIT, and really what that reflects is those cost increases that we knew we were going to have around this year around freight, and to a lesser extent around pulp have been offset by a little bit more volume.

So plant's running pretty well.

On the price, price is relatively flat.

You will remember last year in May, we went for a market increase in both siding and backer and we did get the full increase in both products.

They were timed throughout the year, so at this point last year, you wouldn't had the full increase in the numbers.

So the reason we don't have a more positive [delta] on price this year is because it's reflecting both a regional mix, where relatively speaking both the south and the west are doing better than the north.

In the north is where we sell the lion's share of our Colour, so that tends to pull down the price some.

Then, we had a category share problem last summer, so as we've brought some of that business back and some business on the market share side, as well, against a wood product, that business comes at a lower price.

Just in lower price segments.

That's why it kind of goes quickly, when the price gets too far out of line.

EBIT margin.

Again, first half we're kind of in the same position we were last year.

We're on the low end of the target range that we set several years ago.

If things stay as they are right now, demand kind of tracks as it's tracking and the business continues to run well, we'll probably be in a similar position as last year.

If those two things happen, we'll bring it in at the low end of the range, right around the 20 mark.

That's through the year, obviously and then the next slide, primary demand growth.

This is the one that's - the one you have to be most careful about.

For those of you that have followed the Company for a while, we actually established this measure as we're going into the downturn, because we wanted to the market understand how well we were doing relative to a market index.

In other words, as the opportunity got smaller, were we losing market share, were we losing price or were we actually maintaining our position and growing it.

Now, it's a pretty good measure year to year.

It's a really bad measure quarter to quarter.

So that's why we always have the year to year, you know, the rolling average in the solid lines in the quarter to quarter and the dotted line.

But having said that, with so much of our business now repair remodel and we don't have a good external comp on repair and remodel, like we do with construction, it just becomes less reliable or less exact than it was when we started when we did have an external measure on R&R.

So my summary is we are running positive PDG this year.

Okay?

But I think for the quarter it was 15.

I don't want to mislead you.

We haven't had a super turnaround here and all of a sudden, we're going to start running fat PDG numbers.

I think for the year, we'll kind of have a decent, I don't know, it would be 5% or 6% PDG for the year.

It looks like that's what it's tracking at, which is kind of reflecting a couple of things.

One, I think some of the things we've been trying to do on the category share side and on the market share side against wood products that we're selling at much lower prices than ours and took some business from us had worked.

Then, the other thing is I think even though the housing starts are - well, addressable housing starts for us are down a little bit this year.

The type of housing start is probably biased better this year than it was last year.

Last year, it was very much starter home.

I think this year it has a more normal distribution on housing starts, which would work for us, so when you realize PDG is all about last - how we're doing against last year, support of this is a really good second quarter this year and our polling last year, but also we got the housing starts biased better for us.

Let see, what have we got here.

Asia Pac.

Asia Pac business continues to run well.

All of you would be aware the market has started to come off a bit in Australia.

These numbers, well, with the exception of price are in US dollars.

Even in Australia dollars are local currencies for all of our other divisions.

The trends are positive in the business and certainly the opportunities can be smaller in Australia, as you build less houses.

But we're still going to get, similar to the US story, we're still going to get pretty good returns and I think in Australia, we'll continue to grow our market share as well.

So they had a good quarter.

The region as a whole, a good half a year.

A half year again, just like the US.

It's just better numbers to look at than the quarter.

Buffers out some of the variance, but solid returns.

The Philippines is running really well and last year this time we had a ball mill problem at our plant in the Philippines, so we had to pull back on and not service all the demand.

So what that does is it gives us some of that bump on volume, but it gives it to us at a lower price, so it also brings down the average price in the region.

But having said that, it's a very positive story to where our Philippines business is running, but when you mix it up with the two business that sell at higher prices, obviously, it impacts the price a little bit.

Summaries.

Pretty easy.

You can see it there.

We're very satisfied with the way all of our business are running.

They're all doing pretty much exactly what we wanted them to do.

The US market isn't great, but it's not as difficult to manage and as the market we had last year, where it was up and down, it's been a very steady market.

So we've done well with our production planning.

We've done well with unit cost and the plans.

Freight has been a bit of a challenge, just because it's been more expensive this year, but our capability as unfreighted has gotten better as well, because we've been able to focus on it in this type of market.

Now, when I say demand has been very steady.

It has had some regional differences, so it's not like every plant is based loaded exactly right.

We're actually a little bit short on board on the west coast.

Now, we're moving some board in from Texas and stuff like that, which is just stuff you always do in a manufacture network, but - so everything's good in the US and Asia Pac, as well.

I'd like to see the New Zealand business run better.

I think they are kind of heading in that direction.

The market's not going to be better for a while, I guess, but the business can run a bit better.

We're working on capacity options for Australia and like I said, the Philippines are running very well.

Housing starts in the US.

These are total starts.

We basically internally use addressable starts, where we knock out high-rise starts.

The starts we use, addressable starts, are actually down a little bit on last year.

I think total starts are flat, so maybe a hair down.

Again, it's not a great market, but it's a market.

Fortunately, we've been able to learn how to operate in and because it's a fairly steady demand, it's worked out for us, pretty well this year.

The outlook, the US - yeah, I mean, you guys see the same reports as I do.

I would say along with hearty results, there's been a few other companies that have probably had results that were a little bit better than people were expecting.

No one's out there saying the market's getting a lot better.

I think we all feel comfortable where we're at in the market now than the better companies do.

As always, if we do get an increase in demand, we're more than capable of responding to it, so we're not doing any planning for higher demand next year, but we are capable of responding pretty quickly on that.

Asia Pac, I guess it's the opposite.

We're expecting less demand, so we're in the process of adjusting down, mainly production scheduling.

Just like the US, we're not going to come off our strategy, we'll just be a little more careful with some of our expense.

New Zealand.

New Zealand is - who knows.

I mean, I guess it could start increase a little bit, but it's at a pretty low level and the Philippines market has been good, so I don't think we have any great insight on that.

We haven't changed anything, so all of our priorities and what we try and do every day remains the same.

I do like the way some of you were at the September update and basically this year was an update.

We just went over stuff we had communicated in the past and talked about where we're at and I do like where we're at with the business right now.

Obviously, we're anxious for a better market, but in the meantime, I think we're building a little momentum in the business and probably continue to run the thing pretty well and get pretty good returns.

At that point, I'll hand it over to Russell.

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

Apologies for that, folks.

Okay.

So as Louis has explained, we had quite strong quarter.

Earnings reflecting increased sales volume.

Up 12% in total across the Group, with category and market share gains in most markets and also results supported strongly by appreciation of the Asia Pac business' currencies, so there was a total 15% increase in value of the Australia dollar value of the Asia Pac earnings and that obviously assisted the US dollar position.

However, that was partially offset by an increase in SG&A expenses, but SG&A is running pretty much as we'd planned.

US sales volume was obviously much stronger than in the prior corresponding quarter, which was badly affected by the cessation of the US tax incentives for housing in April and that started to flow through to us pretty soundly in Q2 of last year and both volumes and earnings reflect that in this particular period.

So we're comping against what was a very weak quarter last year.

As a result of that, really, as Louis indicated, I think looking at the year to date numbers, rather than just the Q2 comp, is probably a more reliable indicator.

We again had strong operating cash flow.

Debt actually fell and as I'll alert you to in the cash flow slide, we actually had some lumpy cash outflows, but notwithstanding that, we actually managed to get a slight reduction in debt for the half year.

We've reinstated a dividend announced in a separate announcement this morning and interim dividend for this year will be $0.04 payable in January.

As of September, we've started the share buyback that we announced in May.

We've bought approximately 0.5%, a bit more than 0.5% of the issued share capital and spent $13.7 million and bought back at $5.65, in that period, which subsequently acquired some more, but the activity has been very slow in the last few weeks.

Looking at the impact of foreign exchange, you can see here the way in which volatility of the Australian/US dollar rate has impacted us.

We've had a very favourable impact from the translation of Asia Pac results, this quarter versus the prior corresponding quarter and also a favourable impact from translation of the asbestos liability which is relative to 31 March rather than the prior corresponding period, so some weakness in the Aussie dollar in recent times has actually assisted us in that translation.

But it is all non-cash.

Turning to the Q2 results, you can see the net sales were up 15%, gross profit up 21%.

SG&A expenses, I would just highlight that the 35.1% that we're comping against reflected a $10.3 million recovery of ASIC related expenses one year ago, so it's - the 38% increase that's noted there is actually quite misleading.

If you adjust for the 10.3 recovery from last year, the increase was 7% and given the impact of the Australian dollar appreciation against the US dollar, that actually accounts for a big chunk of the 7% increase.

So it's actually running pretty much in line with expectations.

Asbestos adjustments.

As I said, the 86.9 reflecting a decline of the Australian dollar in this side relative to 30 June this year.

30 September.

This is 30 June and last year, obviously, a big loss as the Australian dollar was appreciating.

The rest of the slide, I think just one to note is the income tax expense - again, an unusual comp.

In Q2 of last year, we took a charge of $345 million, because we had just recently learned of the loss in the Federal Court of RCIs appeal against the ATO assessment and that loss in the first quarter instance actually resulted in us taking a provision for the net amount.

So there's a large, a very large - $550 million swing from one quarter to the next, but it was almost all non-cash in that swing.

Just unpicking those results, on the subsequent slide, slide 21, you can see that the results are actually much more normalized here and the total profit after tax, after tax adjustments and ASIC expenses and asbestos was 41.2, which is almost a doubling of the earnings for the quarter.

As Louis highlighted, that's a little misleading, just because we're comping against what was a very difficult, more challenging quarter in the prior year.

On a year to date basis, a half year, you can see similar sort of trends here.

Sales up 6% on volume that was up 12%.

SG&A expenses up a bit again, adjusting for that 10.3 million credit that we - or recovery that we had a year ago.

The SG&A is actually up only 3% rather than the 16% that's portrayed on this slide and a very large income tax expense adjustment.

So the total swing for the half year is actually $447 million, but again, it's not reflecting true performance of the business and that, I think, is more apparent on slide 23, where we've had a 32% increase in earnings on the bottom line, which we think is a pretty good measure of the reality of how the business is run.

But I think it would be quite hard to exaggerate how much that disruption last year, particularly in the US impacted earnings.

The business is running much better, there's no doubt about that, but it's also due to the fact that from month to month and even week to week, the business is just very stable at the moment, so it's both in a demand sense and in a production sense, whereas this time last year, we were going through considerable disruption in the period July to September as we reset the business for the changing demand in the US market.

Next sales, on slide 24 for the quarter up 14% in USA and Europe, on a 14% increase in volume, so the price there was very steady, as we've noted elsewhere and in Asia Pac, the sales revenue was up 18% to $103 million.

6% of that was due to volume.

16% due to a currency appreciation of the Asia Pac currencies against the US dollar and the rest was largely a geographic mix with the Philippines, which is a much lower priced market than Australia and New Zealand, with the Philippines constituting a much higher proportion of volume than was the case in Q2 of last year, so it's really just geographic mix of sales in this case.

The total sales were up 15% to $331 million.

On a year to date basis, 6 months, US and Europe sales up 3% to $448 million on volume that was up 3%, so the price was very flat.

Asia Pac Fibre Cement up 14% to almost $200 million.

Volume for the year to date is down 1% in Asia Pac.

Average selling price was down 2%, again because of that geographic mix of sales and the currency was at 17%, so to the extent that there's a gain, it's all accounted for by currency.

The total sales were up 6% from 645 million.

Turning to EBIT.

You can see here in Q2 that the US business on reasonably strong trading produced EBIT up 20% to 47.3 million.

The margin was up 1.1 percentage points to 20.7% and there was very little impact in this quarter of the pulp price.

You're probably are sick of us, in previous quarters for about 18 months, speaking to the fact that pulp was impacting the earnings.

In this particular quarter is was almost imperceptible difference in pulp cost.

It's not the same for the full half, but certainly in this quarter.

Then, in Asia Pac, the EBIT was up 42% to $25 million.

Margin up 4.2 percentage points to 24.8% and the earnings in Australian dollars were up 23%, so it's a business that's been performing very, very well, even in its local currencies.

The total segment EBIT up 29% to $68 million and for the half after adjustments, it's $58 million.

Up 38% on $42 million last year.

For the year to date, a slightly different story.

Very flat result in the US business at the EBIT level.

Asia Pac up 17%, almost all attributed to currency appreciation and the total segment EBIT up 5% to 132 million and overall, after corporate costs up 7% to almost 115 million.

Turning to tax expense, you would recall maybe at the first quarter, we had quite a substantial reduction in the effective tax rate.

That has continued in this quarter.

In fact, it's come down even a little more than it was or a bit below what it was at the first quarter, because the US earnings are a lower proportion of total earnings and the US has the highest tax rate that we incur and so a lower proportion has slightly reduced the effective tax rate.

Tax expense for the quarter was $14 million, which was down $2.3 million on the prior corresponding quarter.

The main reason for this shift from last year was that it was really around just the geographic mix of earnings.

On a year to date basis, a similar story.

A tax rate of 26.2%, which is done substantially on the 33% that we had in the first half of FY11.

Turning to the cash flow, you can see here that cash generated by trading is very flat.

$140 million this year versus 143 million last year, but at the net operating cash flow level, we have had cash flow of $37 million versus $8 million last year.

We've made a payment to the asbestos fund of $51.5 million and - that's US dollars - and we've had tax payments of $27 million, which is actually less than the tax that we paid on the - withhold tax payment to the IRS that we made in May of this year.

So we've actually had a tax refund that has somewhat offset the tax payment that we've made on that withholding tax.

In addition, purchases of property, plant and equipment, which is really capital expenditure was a little down on last year at $18.4 million for the first six months.

So movement in net cash and the reduction in net debt is $3.7 million after the share buyback and after the payment to the asbestos fund and after the payment of the withholding tax, so I think it's quite a strong result, given the trading conditions that we're operating in to reduce debt in that six month period with those quite large outflows.

Just looking quickly at the debt, net debt, 37 million at the end of September.

We have un-utilized facilities in cash of $283 million and we remain well within our conveyance.

On legacy issues, just a quick update on where we're at with the RCI case, which relates to an amended assessment from financial year 1999, so it's getting on for 12 years.

The charge we took after the loss in the Federal Court of Australia in September 2010 was $345 million.

We appealed to the Full Federal Court and in late August, the Full Federal Court - this was just after the release of our Q1 result so it wasn't reflected in those results.

But the Full Federal Court unanimously upheld RCIs appeal and it ordered that RCIs objection be allowed in full and awarded costs in favour of RCI.

The ATO had 30 days to decide whether it would appeal and on 30th day, it lodged documents with the High Court seeking the leave of the High Court to appeal.

We don't know when that appeal is scheduled to be heard, but we hope it will be either late this year or early next year.

We have reviewed the accounting that we adopted in September of last year, when we took the charge.

I think the conclusion we've come to is that it remains an uncertain tax position and under US gap, when you have an uncertain tax position, you retain the charge.

Notwithstanding the fact that we won in the last court hearing.

Asbestos fund update.

You can see here that the AICF has net cash and deposits of $74 million.

That's after Hardie made a contribution, as I said, of $51.5 million, which translated into $49 million or near to $49 million.

Claims paid in the half, that's gross claims, were $51.5 million.

There are details relating to the pattern of claims and the pattern of payments disclosed in the financial statements that we released this morning for the half year.

The claims are generally running quite a bit below actuarial forecasts, so the fund is actually coming along quite well.

The key ratios for the half-year.

EPS - well, I should highlight that in prior periods, when we've released these numbers, we've done the current year on a year to date basis and then, forecast for the full year.

That actually isn't a good indication of how the numbers are turning out, so we've modified this slide to go to just a year to date basis for all years, so the current year and the prior or the prior years are just reflecting year to date numbers, as noted at the bottom of the slide.

The EPS for the half-year was $0.183 and we've announced the dividend of $0.04, so the payout ratio is 22%.

There's no magic in that, but it is within the range that we advised the market of in May, when we said that we expected that the dividend payout ratio would be 20 to 30%.

All other numbers are looking quite strong and certainly within that capacity indicators, we're very comfortable.

In fact, possibly, if anything, running quite a lazy balance sheet in that sense.

The summary.

Quite a strong quarter and certainly a half-year that's very indicative of the underlying performance of the business.

The second quarter results comping against what was an enormously challenging quarter for the Company a year ago, we've seen a much more stable environment in the US, as well as in the Australia and New Zealand markets.

A little subdued, but still quite strong for Hardie, with growth in category and market share.

Higher sales volumes led to quite a few of the gains and we're pretty happy with the way the business is performing.

We've had higher freight costs across the business and some higher SG&A expenses, as well, but clearly getting a lot of tail wind from the strength of the Australian dollar.

In terms of guidance, this time three months ago, we gave guidance of $126 million to $140 million, which was then within the analysts' range.

Analysts' range has changed a bit, but we're sticking with our $126 million to $140 million guidance that we gave three months ago for the full year.

However, I would highlight that there's obviously some uncertainty around.

Probably the greatest sensitivity we have in this is to any change in or material change in the Australian/US dollar exchange rate.

Obviously, also, there's potential for impact from any downturn in confidence in housing in any of the major markets that we operate in, but that's usually lagged and we don't see too much outside of what we've already indicated this morning.

So I think the greatest sensitivity we have is to - the Australian/US dollar exchange rate in the balance of this year.

So with that, I will hand it back to Louis for questions.

Okay, I'll start with questions in the room.

Yes.

Hi Louis.

Hi.

Just a couple of questions.

I guess, the Australia - the Asia Pac performance was, I think, your best quarter ever.

I'm just wondering, when you look at the EBIT margin for that business, is some of the manufacturing gains that you've made there as sustainable over the longer term?

Yes.

I think the manufacturing gains in Australia are probably only about a third of the way there, so there's still so good gains to have in the Australian manufacturing side.

I think we've probably indicated, maybe, in May and again in September on the tour, we're going to have to make a capacity decision around investment in Australia and so our guys are working on that, as well.

So yes, no problem on the cost side.

Everything on the cost side in Australia is very sustainable.

The only question in Australia is where does the market end up?

Just in terms of the market share in Australia, I guess you're gaining share against other products.

Is that one of the reasons you're--

Yes.

All the new stuff is against - you know, it's a market share gain and then the Fibre cement core products is your normal competitive situation against the two other producers, so we're winning the lion's share of everything new and then we're holding our position on all the core products, the older products.

Just finally, you mentioned that you feel that the business in the US is gaining a little bit of momentum.

I'm just wondering if you can give us a little bit of colour around what you think are the major drivers of that?

Yes.

I mean, I think - well, firstly, in any organization, you have good runs and then you lose it for a while.

I think we're on a particularly good run right now, so everything's working as we plan it to work.

We've gone through all the segments in the last two or three years and (inaudible) non-metro multi-family backer segment.

I think that we have a good - our thinking is very good.

I think our execution could actually still get better and I think it probably is getting better.

The plant side is going well.

Like I said, we've made some recent gains on how we think about freight and how we execute around freight.

I think even smaller parts of the business, like customer service and that, we're finding the time to fix that up, since we're not as busy shipping things as we'd like to be.

Louis, it's Simon Thackeray from Nomura.

You made a comment about the Philippines.

Just to give us some perspective, looking at what happened with the pricing, what was the growth in the Philippine volume?

Is it so substantial to move the price down that much, considering--

Yes, it is.

All the price dampening in Australia is the Philippines mix.

In the Asia Pac numbers, it's all the Philippines mix.

As a portion of the total volume for Asia Pac?

Yes.

How much is the--

Yeah, I don't know if we give much of that.

I actually - I know you'll be happy about this - I went through it this morning, just to make sure we were spot on there.

And yeah everything's - and remember, you call it growth which is nice, because it's not really growth.

What happened is when we - it's not all growth.

We've got some growth in there, but when we lost a ball mill, we kind of pulled back into the Philippines.

So all of the stuff they shipped into their higher margin or higher price, not higher margin, higher price geographies, they actually pulled back from and took care of their domestic market.

So now they're back servicing the whole market, so it's more volume than last year, but it's not really growth, okay?

So - but it is at lower prices and it has impacted the numbers that much.

Now, there is a bit of a normal market share fight going on with our core products in Australia, as the market comes off, but that's not what's pulled the numbers down.

I see, got you.

Then, I know you like it this way now, there's a lot of moving parts with different strategies and different initiatives and none of us can model it anymore, which I know you like.

But can you give us probably a little bit of colour just on I guess on areas where you're not as happy with the traction or with the progress with the opportunities?

So the stuff that's on our agenda most now is we're still working fixing up our channel strategy, because remember we lost the category share last year because we just got a little bit far away from the channel in some smaller markets.

We're still working on that.

We'll - colour is growing at a slower rate than it has been in previous years, so I think that's just a matter of doing things up a bit and that kind of cuts across a bunch of things.

It's not pricing.

It's your install program, your service to market, who stocks the products, stuff like that and then the third thing, organizationally we're working hard on getting the organisation ready for a period of sustained growth hopefully.

So we've been running pretty lean through the downturn and we need more management in the organisation in the US, so that's - those are probably the three things we're working on the hardest right now.

I guess that's kind of positive in terms of direction, but looking at the cash flow and Russell to your point it's very strong for the quarter and putting - if I put the buyback aside it would've been stronger again.

If everything's at least - I think housing's heading towards a $1 million rather than $400,000, here's hoping in the US.

With everything tracking the way it's tracking and the earnings going where they're going, the free cash flow looks like it's going to be pretty formidable.

I mean, I hate to say it but you're on strategy, you're on program, but okay we all get that.

What's the next big thing I guess for Hardie?

More capital returns?

I mean, you're the only company I can think of in this space that hasn't made an acquisition.

Well, I mean you have to realize we're in a very - we have a business that returns very well.

We're very good at it.

We're very good at fibre cement and it's only 13% of the market and we think it's going to be 35%, so that's where all our effort is going currently.

Now, we're looking harder at Europe.

Just spent some time with Mark Fisher and the guys in Europe.

We're going to put some more money into Europe.

I think we're ready to do that and they are looking at a few things in Asia.

But at the end of the day it's still going to be US fibre cement, so if we generate the kind of cash that your models tell you we're going to generate, it'll find its way back to shareholders.

We're not going to do a big acquisition so it's--

Would you be more likely to see the payout ratio lift and some more capital?

Somehow some way you guys will end up with the money.

Good.

Thanks.

Good morning everyone.

Andrew Peros, Credit Suisse.

Just another question on pricing in the US.

Obviously it was flat for the quarter.

I'm just wondering, at what level or at what point do you expect to be able to push through price rises without losing any category share?

Second - well maybe a question for Russell - on the effective tax rate.

I know you mentioned it was low because of the geographic mix, but how should we think about that going forward?

Should we expect a lower effective tax rate going forward?

Thanks.

Okay, yeah, I'll hand it over to Russell.

I think we gave some guidance on that last quarter, which we're still supporting, but I'll let Russell cover that.

On the pricing, we have no plans for a price increase so those of you that know Hardie pretty well know we usually look at price for an April 1 announcement.

Okay.

At this point we have no plans for a price increase but we will look at price again this year and if we pass on it, usually we pass for a full 12 months.

If I had a guess right now I'd say we're going to stay focused on volume and market position and be less focused on price.

Russell, do you want to take that?

Thanks Lou.

Yeah, I think at the first quarter we gave guidance around the ETR of 20 - around mid-20's and we don't see anything on the horizon that's going to change that, so I would think Andrew, it'll continue to be sort of 25 plus or minus 1% going forward.

Jason Steed, JP Morgan.

I seem to recall from the US tour - correct me if I'm wrong - that you mentioned you'd be looking to spend probably between $50 million and $60 million at some point on Artisan capacity.

I'm just wondering where you were with that?

That's the first question.

Yeah.

We don't have any - we don't have capacity proposed at this point.

Just to bring everyone up to date, Artisan is our - it's equivalent linear product in Australia and New Zealand and it is an essential product for the US.

It's very important that we put our density modified siding products at the top of the line in the US.

So the problem with Artisan has been two things.

Timing is one.

We got ready to do Artisan at about the same time the market started coming off.

We thought we were still okay because markets come off but usually people that are building expensive houses don't worry about it too much.

When you're doing market development you don't need a lot of houses.

You just - you just need to get a certain percentage of the houses being built and then you start going up (inaudible).

This recession in the housing industry has proved to be quite different than the others in that everyone has become so price conscious, even people building expensive houses have become much more price conscious.

So we just made a decision early on that we weren't going to support it with the kind of SG&A dollars or market development dollars that we had intended to.

So we're kind of sitting on the product a bit right now and as soon as we kind of see a better market, we'll go heard on Artisan again and how much that means in SG&A and that - we'll kind of give you an indication when we get there but - the other mistake I made - I guess you'd call it a mistake - is we have our capacity on the west coast.

The demand that has been generated has been more east coast than west coast, so shipping out of Reno we're relatively tight on board in the west coast because we closed down Fontana.

Artisan uses more than its fair share of capacity so if we really wanted to go hard on say Artisan next year, which I'm not saying we are, but if we did we'd be pulling that west coast capacity and selling it on the east coast and creating more of a shortage on the west coast.

So there's a lot of reasons we're not going to start on Artisan as we should and I do think we need to lead with capacity, rather than market development dollars.

So exactly where that ends up and how much we spend on it, the guys are on it now and I think they'll have a proposal by April 1 2004 so we'd still be implementing it over 18 months.

It's not something that we're doing right now.

We're not building anything right now.

Okay, thanks then and moving on just to a couple more.

The R&R market, I remember comments made about the fact that it's been - it was weaker in the first and second quarter than perhaps had been expected and then getting into the third and fourth there would need to be some reasonable improvement in R&R to get you into the guidance range or to keep the business ticking over.

There are some forecasts out there and this is really the question that suggests that's probably weakening off again into sort of Q4 Q1 calendar next year.

Could you give some comments on that?

Yeah.

I mean, we deal with the big dollar type R&R's, so yeah, we kind of read all that stuff and obviously we talk to deep and lows and it's kind of hard to figure out.

So we kind of work with the guys that do our kind of jobs in the market, people that do resides, either Hardie resides or resides of other products.

I think the first quarter definitely started way slower than everyone - everyone thought it was going to do calendar quarter.

I think - I think it's gradually gotten a little bit better through the year.

So if you were to ask me which quarter was better, the second quarter or first quarter on the R&R side, I'd say probably our second quarter was a little bit better, little better market to sell into.

So we're expecting flat R&R.

If it comes off it'll hurt us but we're not expecting that but that doesn't mean it can't happen.

Okay and then final question.

Thanks.

Final question for Russell.

Just maintain of your unutilized credit facilities.

I think the cost is about $1 million this quarter.

Should we annualize that to $4 million to $5 million per annum for maintaining those credit facilities?

Okay, that's a good question Jason because really we're holding a very, very high level of unutilized facilities and it's not cheap.

It's a lot more expensive than it used to be.

The main reason we're holding that level of unutilized facilities is just because of the contingent liability we have relating to the RCI ATO litigation.

Once that's resolved we'll know whether we've got to pay, because once it goes to the high court or if it gets to the high court then that's - there's no appeal beyond that.

So if the ATO is not granted leave to appeal then we've obviously prevailed.

If it goes to appeal in the high court then it could be another six to 12 months before we have an outcome.

So we could have a period where we have this current level of unutilized facilities, in which case that sort of forecast you gave would be reliable but if the case is resolved more quickly than 12 months or then we could very well finish up cancelling some of the facilities that we've - in which case the unutilized - sorry the cost of holding those facilities would obviously go down.

Thanks Russell.

Andrew Johnston, CLSA.

Louis, a couple of questions.

First on - if you can go through any update on the channelling initiatives, particularly around house packs, sort of how that's tracking where it's working well, where it's not.

Secondly, just a comment on higher employment costs, where is that - which part of the business is that occurring?

You mentioned before about gearing the organisation for - potentially for an improvement so is that - is that what those employment costs are about?

Yeah job packs, I guess we gave an update in September.

I actually didn't sit in on that.

But I think they would have told you a couple of things.

One, it definitely works.

Okay.

Meaning when you're selling in house packs the channel can afford to support your product rather than transport it through inventory.

Two, when you're selling house packs your full package goes in the market without much disruption, sort of trim and say (inaudible) shingles or some of the other products don't get pulled out and switched out as they would if they go through a channel.

Three, it's really hard to execute in our company and our industry but we're doing it pretty well.

I can't remember how many markets we're into right now and we've kind of got it all stitched together so it's - it's in the process of being proven out and then automated from an IT site at the same time.

So I think that things - we think that thing's right on track.

It's going to be - it's going to be a very big shift in our business model.

We're going to be able to do it well.

I think the customer value will be there and I think the shareholder value will be there, so job packs are a pretty good story for us.

As far as employment, I'm not sure exactly what you're referring to but we did have a comment in there our SG&A is a little bit higher driven by some people costs and marketing cost.

Actually we're tracking right where we want to track with US SG&A.

I think we spent $24 million each quarter and that's pretty much where we want to be.

When we get a little better market we'll put some more money in.

As far as the cost for employing in the US, obviously that hasn't changed much.

We have - we have given increases, done salary reviews through the downturn so there have been increases but in the type of labour market we're in in the US, you're not seeing big differences in cost of employees, just the basic cost.

Did I cover that or was there?

No, that's fine thanks.

Luke, Doug Macphillamy from Macquarie.

Just a quick question I guess on the competitive environment.

You've commented that things are tightening up a little bit on the competition side in Australia but maybe just a bit of an update on what's happening in the US, both within the fibre cement category and the broader cladding market.

I guess that just goes into a bit of further detail on how you've won a bit of business back from some of your work competitors.

Well, I think the business has come back - come back in two areas.

One is multifamily and I think we ran through on multifamily program where we tried to take the human factor out of multifamily and we have basically a mathematical model running on how to price the job.

Basically our price goes up if we win nine out of 10 and our price goes down if we don't.

We don't wait until the job's been awarded.

We have - we have a mechanism and a program where they reserve the Board and then - so we work off of reserves.

We have seen two things happen.

We've seen our share go up and we've seen the price go down so this is an area where the competition was probably selling a fair amount of their product and I think it's a little bit difficult for them.

They've just always undercut us now so that that's an area of category share I think we've had some wins.

Also on the non-metros, especially in the mid-south, I think we've re-engaged in the channel in the right way so we're re-established the value of Hardie with some customers that we lost track of, so we've gotten some of that business back.

We're not - we're not as far along in the mid-west as we want to be on that same initiative, the non-metro initiative but the mid-south kind of proves out the model.

We just have to execute better in the mid-west I think.

Then on the LP side, LP as you know makes the chipboard siding which sells at a discount to fibre cement and looks close enough to fibre cement, where I think some - some markets or some builders have thought it was a good switch.

I think in the mid-west they continue to do well and in other parts of the Company - country I think we've probably gotten some of that business back as well.

Thank you.

David Leitch from UBS.

I just want to ask a little bit more about the Asia-Pac business.

The volumes in Australia were down weren't they and the volumes in New Zealand I presume were pretty flat, so all the volume growth came from the Philippines.

Would - That's right?

That would be a good guess.

The price over - but the margin was up 23%, I think - the EBIT sorry was up 23% for the quarter year on year in A dollar terms on - basically because of the Philippine volumes were up or because the prices in Australia were up or because some costs went down?

I still think--

So you started with Emily's questions.

She - she referred to the manufacturing gains in Australia so we are getting good cost gains in Australia.

In addition to that - I'm going by memory, but the price in Australia is up and certainly the Australian business is doing well but I think their volume is off a hair if I remember correctly.

I just read it this morning.

But yeah, Philippines is up strongly and the margins in the Philippines even on a low price are pretty good.

New Zealand's not doing much from a market or from a company standpoint.

It has gotten a little better.

I mean the business is running a little better than it did last year.

It's - I think the way to describe New Zealand is they weren't ready for a downturn.

Internally Hardie just wasn't ready for a downturn in New Zealand.

Maybe because it's a small business it didn't pay it the right amount of attention or whatever, so it probably took them an extra two years to kind of start dealing with how do you run a business without the demand you've had in the past.

When you get through the results, I mean the internal results where you can see it by segment and by region everything, you can see they're getting better but they're only getting marginally better.

They need to get better in two to three years in a row and then they'll be up to the standard of the US business and the Australian business as far as how it operates internally.

But having said that, I mean Hardie's a really weird company.

Everything runs well so they only run poorly relative to the US or Australia.

I mean, we're not a business that has these clunkers off to the side and then these shooting stars over here and it all averages out.

Every one of our businesses contributes to the bottom line at pretty close to the same margin amazingly.

So the Philippines' EBIT margin, Australia, New Zealand, US, even Europe, they're not very far apart.

But I just wanted to check just in this particular quarter in the year on year comparison, the Philippines actually would have been responsible for a lot of the profit growth, more even than the cost reduction in Australia just because of its volume growth?

Probably would have, but again it was because the comp it was going against, so it would have had good numbers last year if it didn't lose the ball mill.

So yeah, I mean Australia, we're not trying to deliver the message that the market's coming off in Australia and we're charging out and we're going to have better and better returns.

We're going to have good returns relative to the market so it's going to be the same [verbage] as the US.

We don't go to our guys and say hey they're building us a house, are you going to make me more money per house.

We say they're building us houses, you're going to make the same return on a unit basis.

It may be less absolute dollars but it's got to be a similar return to what we've got on the higher demand, so that's kind of the battle cry.

Thanks.

Lee - sorry Simon Thackeray Nomura.

I just had a couple of quick follow up questions.

We've been at a pretty high level.

Normally we'd talk about some specific markets that are maybe doing better than you expected which is always helpful for us.

Could you just give us a bit of colour on which markets you're seeing--

The north is up relatively speaking.

The west is up relatively speaking and Texas is kind of - kind of back where it had been.

It went through a little bit of a lull, so--

So Texas is back to where it was--

Yeah.

It went through a little bit of a downturn that was kind of unexpected actually.

Most people thought Texas was going to hold up pretty well right through and then all of a sudden they came off a bit, but I think they've shored it up a bit.

Yeah, so let's roll it out.

Now I'm not sure why that would be important for an investor.

Internally it's important because you've got to know how to move your board around, but we're always the same.

We look at - we look at our results by segment, by product, by region so the fact that one of our big - if one of our big regions were up and it was delivering better results and everyone would be high fiving just because we're overweight in a region that's doing well.

So if I had to sum up who's doing well and who's not, I think we lost track in the west coast so we'll probably straighten that out now so that's helped us and that's probably why the demand looks a little higher in the west coast.

It's probably a lot to do how well we're doing there.

Then the northern strategy, which has been running strong for a lot of years probably needs to - it's a bit more of a one trick pony than we'd like, so we'd probably need to catch up on R&R in the northern markets, whereas in the southern markets we'd be ahead on R&R.

So there's always things to do in the business.

There's always things we can do better and that's what we work on.

So like I said, maybe our focus earlier.

I didn't hit R&R as a big focus now.

I think we have an R&R program that works.

It's kind of proves itself out but and still on our top 20 markets, it's probably running really well on four, five or six rather than in 12, 13 or 14 of them.

Okay.

Then finally you talk about adding people and a bit more management depth but also I guess just on the cadence of the business, you've done a lot of work around the manufacturing cadence.

So what's the kind of level of - maybe I'll mention simplicity - the level of starts for housing where you think okay, we're going to have to kick in now and start investing?

Because you've always said look--

Yeah.

--don't assume margins go to 30% just because the housing market comes back.

Yeah.

If you go back to that - do you have it in the appendix?

Do you remember that slide in the appendix?

Let me see if I can find one.

I don't even know - here it is right here.

That's the old famous slide.

I didn't even know we still had it in the presentations.

The reality is the fact that housing starts are kind of flat isn't a necessary problem.

The question is what's the builder trying to do?

Is the builder just hunkered down trying to get through until it gets builder or is the builder in a position where his costs are actually lower than the next house he might sell price wise?

If it is, then he's thinking about marketing.

Okay, I don't think we're quite there yet, okay, but when we get there where the builder says demand's at a level, my costs and price are at a level that if I sell more houses I make more money.

That's who we need to get on our front foot on market development, okay.

On the R&R side it's not really that off - on or off.

On the R&R side we can be doing more and more markets and Nigel's working on that.

He's working on getting ourselves up in those tough 20 markets where we would be in the four or five that are working well.

So some of the SG&A dollars that is referred to onto the slide, almost all of it would probably be going more toward the R&R than the construction at this point.

I see the sense in that - and I'm not a housing--

Yeah.

--bull or anything like that--

Yeah.

--but if housing does flow for some reason switch back quickly, do you - do you down play your R&R opportunity--

No.

--here, let's go for what we know?

Yeah, I mean again, because--

Talking in terms of capacity.

--what do I do with all the cash once things turn around.

The answer is, I'm not going to go buy an ordinary business that requires a lot of cash.

(Inaudible) all we do right now, so we've just got to do all of it.

We've got to look at R&R and non-metro mortgage families, so no, we will not pull back from R&R at all.

Well, it's Michael Ward from CBA.

The average price move in the US was flat this year.

Obviously we've talked through the prospect that there's no market price--

Yeah.

--increase.

Can you just elaborate on maybe what you think is going to happen to the mix benefit over the next six to 12 months, because it's unusual that that is flat?

Yeah.

The - and I think it's flat because it's a kind of catch up on the category side, which - category share side, which is the lower priced board.

By the way, backer boards continue to run well so - and they're fairly well priced relative to the siding.

I expect price to be flat right through - right through this year and if we don't go for an increase next year it may be up a little bit due to mix but if it wasn't it wouldn't bother us.

Again, if we're getting what we done or we're getting what we want done (inaudible) we're getting what we done on multifamily and we're getting what we want done with trim and colour and it all ends up even price, we don't care because we make good margins on all of them.

So - but my guess would be flat unless we take an increase and then flat again next year, maybe a point or two up product mix, but it won't be - it won't be on the same slope that I had on that earlier slide.

Let's see if I can get this thing to work.

So you can see the slope on this line.

All our guys are expert at making graphs.

So it doesn't jump out at you necessarily but you can see the slope on that line is definitely turned around, so when you look at fifth or sixth to 11, you're going to be on a different slope than you are the next couple of years is my - meaning this year and next year.

Our focus again is on - we want to get that market position so again it's 35 and 90, right.

So during a downturn we got some early gains on that market share side and then they fizzled out and this year we're back positive again, but I think that's mainly category.

I don't think it's market.

Okay.

I don't think anyone's putting a lot more money in their houses.

It's still a tough decision even those - even if someone doing a reside to spend the extra money in this kind of a market, so I don't think we're getting much on the market side and we quite honestly, we're not spending as much money trying to get it, because we feel it's kind of wasted effort.

But we do - the category shows the opposite but we want 37 and 90.

We started loose at 90 so we're back on track there and as soon as we kick - kick - kick to 35 again we'll go on hard, but we're not going to confuse the market with a price increase if it hurts that effort at all.

In other words, if we're ready to go we're not going to come out with a mixed message of hey, we're really after volume, we're going to do this, this and this but we had to deal with this price increase as well.

So I think we'd be less inclined to take price next year, but it's not a guarantee we won't take price.

I'm just saying we'll be less inclined to take price unless the market changes a bit.

Okay, thanks.

In terms of Asia-Pac, is the pricing dynamic or is that different?

I mean, obviously--

Asia-Pac, Asia-Pac are more traditional prices.

They normally take an increase every year and I hadn't really talked to the guys.

I don't see the guys three days out of next four, so - what's that - we took one in August, okay.

So if they one it'll be a year from now or something.

I think they're taken about a year apart.

Is that right?

Yeah.

So they're more traditional prices.

They more look at their material cost and look at what the competition's doing, whatever the materials are doing.

We don't normally do that in the US.

We kind of - we look at it more on where we're at on market development side.

Thank you.

Right.

Any other questions in the room?

Alright, any questions on the phone?

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

Please ask your question.

Louis, just to clarify something on literally being discussed, just on the Asia-Pac business in Australia specifically.

Clearly the volumes have probably done better than what the underlying margin and I'm not sure the underlying market was probably down 10%, 10% or 15%.

Can you just give us an idea of what sort of primary demand growth you are seeing in Australia?

I think you mentioned 5% or 6% in the US.

Firstly, are you seeing similar primary demand growth in Australia?

Also, given that it's all this high on low density product and you're - pretty much anyone's making it, is your category share also going up as well?

Yeah.

We are positive primary demand growth in Australia, so we are gaining on the market and where our category share goes up it's exactly how you indicate.

When you get something new we usually hold at 100% so that pulls up the average of everything we do.

Having said that, the guys keep a close eye on what they call core products, which are the older medium density products and they track their share on that.

In Australia it's actually easier to measure your shares because I guess pulp is - pulp imports are public so we keep track on who's importing our pulp and how much we import versus everyone else, so we've got it pretty exact.

Yeah.

Do you have a sense for how much longer that primary demand growth may keep going?

I mean, obviously those products are only relatively new in the last year or two, so is that primary demand growth going to flatten off later this year, next year, the year after?

I mean, how much longer do you think that can keep going for?

I don't know.

I mean, I think it's more like a (inaudible) deal.

Okay.

You guys have a lot of bricks here that need to go away.

So in a sense that's quite different from the way we viewed the Australian market historically.

You go back three or four years ago, people didn't really talk about primary demand growth a lot in Australia.

So do you think we are seeing (inaudible) going forward, so it's a bit more like the US business in that regard?

Yeah, I think so.

I think some of the - some of you guys went to the little one day tour we had in Melbourne.

Some got quite (inaudible) out of it, but we - when I took that same tour a year ago I was - I was kind of blown away, because I had taken that same tour like five years ago--

Yeah.

--and it was night and day, how much - how much fibre cement is being used on the exterior down here.

Yeah, I mean I think we're, you know, at the start of a trend where bricks, which have been well established, double brick in a lot of cases have been well established in Australia.

The market's receptive to other alternatives and I think Hardie's is just well positioned to be the main other alternative, so that's why we're getting ready to build a plant.

If we didn't think that was going to last we'd get by with the [sites] we have.

With that plant, if it would make more sense, I mean obviously Melbourne's a bit of a growth market for you but it's also probably the one that's closest to its peak in terms of the cycle.

Does it make sense to build a new plant in Melbourne or would you just upgrade Sydney or something like that?

Yeah, the (inaudible) fairly major project there.

They'll look at a similar mega-plant for Australia as a possibility or maybe adding that to the mix we have now or they'll look at in market plants.

They'll look at (inaudible) or they'll look at like a two plant strategy like we have now.

So we could expand on existing sites.

So it's all up in the air now but basically the brief is done, get the business supported with a manufacturing strategy that'll last 20 or 30 years like we have in the US.

By the way, the US Australia plants, philosophically they'll be consistent but there'll be significant differences for what you'd build here versus down there.

On the investment and this plan in Australia it's likely to be pretty high, so we're not - we're not going to try and get by on the cheap here.

We're going to - we're going to build a plant that we think supports the product leadership strategy in Australia for 20 or - 20 plus years.

No worries.

Thanks.

There are no further questions from the phone.

Alright, very good.

I think that's it then.

Appreciate you guys coming.

We'll see you in six months.