James Hardie Industries PLC (JHX) 2013 Q1 法說會逐字稿

Thank you for standing by and welcome to the James Hardie Industries Q1 2013 results conference call.

(Operator instruction)

I would like to now hand over the conference call to your first speaker, the CEO of James Hardie Industries, Louis Gries.

Please go ahead Mr Gries.

Thank you.

Russell and I are in Dublin.

I don't have control of the slides so I won't be reading off the slides.

We'll start and flip through these slides until we get to slide 5. I think the results have been out in Sydney for a little while so (inaudible) and you're all across it.

Basically, from my perspective, the result was good.

Volumes (inaudible) up in a stronger market in the US and (technical difficulty) been starting to put resources in the US business in anticipation that the recovery will continue at at least a moderate pace.

Those resources are all directed, obviously, toward starting to grow a share for fibre cement in the market.

So back to our 35, 90 as the primary focus, if indeed the market is in recovery for a long period of time, which we anticipate it may be.

Asia Pac numbers are off largely due to the Australian decline in market opportunity.

The rest of Asia Pac is tracking pretty well.

Because of that lower opportunity in Australia we have started to pull back Australia business consistent with the lower demand.

So we'll go through slide 5, (inaudible) on the net profit, operating and excluding the asbestos and other things, we're up 11%.

If I go to slide 6, volume is good.

Construction is up obviously greater than our volume is up but when you take the whole market index it's not up quite as much as our volume.

We did have, at least for the quarter, what looks like pretty strong PDG.

We'll see how it plays out over two or three quarters, but right now we're on the strong side on PDG.

Price is down 2%.

I think I gave you guidance over the last couple of quarters that expected to be -- price could be [flat] -- up or down 2% this year.

Obviously first quarter we're at the low end of that range I gave you.

I think it's a good range for the year.

We'll see how it goes.

I think it maybe will start (inaudible) back up as this year goes on but we'll see.

Then EBIT up 5%.

Just a slight pickup there from last year and EBIT margin just hit the 20%.

So just touching that range in the first quarter obviously means we're still in the game for 20% EBIT, but as we've done the last couple of years, we'll be kind of reaching for that 20% rather than easily exceeding that as we had in pre-downturn years.

But again I'm not going to let the 20% EBIT margin drive what we do in the business.

We're really very committed to back to growth as our first objective.

That's what you're going to see in this quarter and right through the year as we put more resources in.

If we don't have the volume in price our stats will be stretching that 20%.

Go to slide 7. Again you can see for the fiscal year 12 kind of flatten out on price and fiscal year 13 starting the same way and I anticipate to continue that way.

We have had a very small market kind of tweak on pricing which will have a little bit of a positive impact.

But what you're seeing coming through is, at the end of the downturn especially when we lost category share and then had to win it back, that did dampen our price.

Now, we're selling a little bit more (inaudible) than we had pre-category share loss.

We're selling (inaudible) at a lower number.

Our commitment is to protect the kind of entry level most price conscious segment of the market so that has pulled our price down.

In addition to that this quarter we didn't get the mix improvement that we were targeting.

We did get a slight mix improvement but not as much as we were targeting.

Then due more with following trends.

So the reality is that down at the bottom of the market it has more to say on our price and then we didn't do as well with the top of the market products this quarter.

Now, I anticipate that that's a temporary situation just (inaudible) colour trend, but obviously it's something we'll continue to work on.

Go to slide 8. That's just the EBIT margin slide.

As you can see we just touched 20, which is low for our first quarter there's no doubt about that.

The cost side of the business isn't bad.

The manufacturing plants are running well.

We get a few exceptions where a couple of the plants are not running quite as well as we'd like.

But overall the network's running well.

Pulp, relative to last year, is okay.

Freight, I don't know if the market for freight did much better, but our performance on freight is a little bit better.

So it's really not a cost problem on the variable cost side of the business.

But we are spending more, as I said, to get ready for a better market (inaudible) and that has a lot to do with market development initiatives.

But also on the operations side of the business we're resourcing up in manufacturing.

We're currently working on six capacity additions which obviously pulls engineers out of plants and puts other engineers into plants.

So just generally costs are up in the business in anticipation of the sustained market recovery although at a slow rate.

We go to slide 9, Asia Pac numbers.

As they come in Asia Pac numbers are really kind of pulled down due to the market decline in Australia.

New Zealand's okay.

The Philippines is real good and Australia's down, probably not as much as the new construction starts in Australia obviously, but pretty consistent more to the market index.

Maybe we're doing a little better than the market index down there.

The other things in the results are okay.

With Australia being the bulk of the Asia Pac business obviously its pulled down our profitability a bit.

Our guys in Australia are working to get everything balanced as far as what we have in the business based on anticipated demand.

We're probably light in that just a little bit but I think overall we have no problem getting where we need to be.

Slide 10 is just a summary slide which I've already picked up with my comments for the most part.

I will repeat for the previous quarters the recovery is kind of nice because it's very consistent month to month, so our guys have been able to plan it pretty well.

We got (inaudible) on-board just in one market and any import board and it's pretty inefficient (inaudible) and now operation scheduling has kind of been right on with the demand increase.

So everything's kind of going in a pretty planned way in the business.

That's largely because we're not getting spikes in demand and then fall.

It's pretty steady month to month and that's been going on for about 13 months now.

Asia Pac, again I already commented.

Australia's the market that's off and New Zealand's not great but relative to last year we can count well and New Zealand, I believe, we did fine in the first quarter.

Then the Philippines is coping strongly against last year in the first quarter in which I expect that to continue.

And slide 11 -- how these guys -- you can see the last three quarters up pretty strongly.

In addition to that we work on a -- we're kind of in the right type of market as far as where the demand is.

It's not all on the bottom, it's not all on the top, so the markets were -- or the segments were good at demand spending, increasing.

There's no good external number for R&R, but R&R has also started to improve.

Not to the same degree obviously as new construction but the R&R market is better.

We're doing well especially in the northern markets with our R&R initiatives.

That's probably where most of our PDG growth is coming from, no so much from the construction.

On the outlook slide, which is number 12, obviously we're not going to declare the recovery's here to stay.

But certainly we're planning around a sustained recovery, although at a moderate rate, which to be honest with you they're both our preferred.

We wouldn't want to see the market spike.

We don't think it will and we wouldn't want to see it kind of run out of gas in a year or two, and for the most part we don't think that'll happen here.

Obviously that depends a bit on our general economic conditions in the US which are not as probably solid as most of us would want them to be, but we seem to be going okay quarter to quarter at this point in the US.

Australia, I don't know.

Most you would know the Australian situation better than I. But we'll be ready for whatever happens in Australia.

If it starts to stabilize we'll be in good shape.

If it were to come up a bit more we know what to do in order to react to that.

Slide 13, I mean, there's not much on this slide.

It's a normal summary slide.

We're certainly not moving off strategy now that we're coming into a recovery situation in the US.

We'd actually be more doubling down than moving off so we're going to stay, but again our shift is from trying to balance the top line and bottom line to give you more top line focus again.

So everything's the same there.

I'm repeating myself that Australia, we'll be careful in Australia until we understand kind of where that market's going to go and when and what the recovery might look like down there.

At this point I think it's quite - that was slide 13 by the way.

At this point I'm going to hand it over to Russell Chenu to go through the financials.

Thank you, Louis and good afternoon everybody.

Looking at slide 15 on the highlights of the quarter's results, we saw, as Louis noted, improved volume in the US in a more favourable market.

Stats were up significantly, R&R improving a bit and that enabled us to grow volume.

Our price in the US has been constrained substantially by product mix.

As Louis referred a higher proportion of (inaudible).

There's significant weakness in the Australian market and that had a particularly big impact on volume but also on cost.

As I'm sure you guys in Australia are aware variablising (sic) costs in Australia is a much bigger challenge than it is in the US.

So we've seen a somewhat delayed response in the cost environment to any downturn in volume.

We were also reducing inventory during the period so the -- that cost impact was actually magnified relative to the sales volume as we took inventory down.

We have non-recurring foreign exchange gain of $5.5 million, as we've noted in the results.

That was a realized gain.

It arose on the repayment of intercompany loan balances following the settlement of the RCI case.

It is obviously a non-recurring item so we've called it out pretty substantially in the narrative to make sure that people understand that it has impacted the result.

We had strong net operating cash flow in the quarter.

We finished the quarter with about $300 million in cash with zero debt.

So a very strong position at the end of March was actually improved during the quarter.

We contributed to AICF a total of $184 million so far in 2013 financial year, and that represents 35% of the FY12 cash flow.

We made that in two separate payments and we'll see the impact of that on AICF in a later slide.

Subsequent to the end of the quarter we've also paid a dividend of $0.38 per security during July.

The total amount of that dividend was $166 million.

On slide 16, looking at the impact of movement in foreign exchange, I think it's pretty apparent from the two shaded areas which represent the AUD/USD exchange rate during this latest quarter and the prior year's equivalent quarter.

There was a decline in the value of the Australian dollar.

It was about 4% depreciation compared with an appreciation in the prior year.

That impacted the translation of the Asia Pac result into US dollars by about $700,000.

So an adverse movement there in terms of translation as a result of depreciation of the currency.

On slide 17 you can see there the increase in net sales was 8% on the volume movements that we had with particular growth in the US and downturn in Australia, but it averaged out to be an 8% increase in sales in US dollar terms.

The SG&A at $44.3 million that's where the $5.5 million foreign exchange gain reported.

So that 3% downturn in SG&A expenses is -- in fact, if you rule out the $5.5 million, foreign exchange gain was actually an increase.

Asbestos adjustment showing again because of the depreciation of the Australian dollar versus an appreciation last year which produced a translation adverse movement, and the net operating profit as reported as a result of those results, $68.5 million this year versus only $1 million last year.

If you look at slide 18 where we look at the adjusted basis, adding back the asbestos adjustments and other items, you can see that the recurring profit other than the foreign exchange item was $43.8 million this past quarter versus $39.4 million last year, so 11% increase with a few adjustments.

Also, for the foreign exchange it was a slight downturn of just less than 3%, but would have been $38.4 million.

On slide 19, the segment sales, obviously a stronger upturn in the US than for the Group as a whole, 15% increase, 17% increase in volume partially offset by a 2% downturn in price.

Asia Pac was a 7% reduction in sales value to $87.7 million.

5% of that was due to foreign exchange, 2% due to volume and there was a small movement in price.

So the overall sales were up 8%.

On slide 20, looking at the segment EBIT you can see that the US had a 5% upturn, Asia Pac was down 16%.

As I indicated, foreign exchange accounted for about $0.75 million of that downturn to $17.7 million.

We had some costs that we've been incurring including in this latest quarter where the activity level has increased on feasibility study work for a potential expansion in the Asia Pac region and that's had an adverse impact on earnings as well as the cost issues that I talked about in volume as well.

So the total segment EBIT was $62 million which was 3% down on the prior year and then corporate expenses as described in the total EBIT excluding asbestos and ASIC was very flat.

On slide 21, looking at tax, adjusting for asbestos and minor tax adjustments produced an effective tax rate of 23.5% in the latest quarter compared with 26.5% in the prior corresponding quarter, and I think both of those were within the guidance we've given previously of an ETR of around 25% but plus or minus 2%.

On slide 22, cash flow, the cash generated by trading activities was $60.8 million versus $73.2 million in Q1 of last year.

The net operating cash flow, however, after all the movements, was $49.6 million versus $22 million last year, so there's been an improvement at the net operating cash flow level.

The main reason for that is that we had a large tax payment last year in the first quarter, $25 million on a net basis, which was not recurring this year.

We haven't had any significant tax outflows so far this year and so that's produced an increase in the net operating cash flow for the quarter.

CapEx was up a little bit and we expect that that trend will continue.

We've got a number of initiatives going on in terms of capacity tune ups as well as the normal BAU CapEx, so we're expecting some increase in capital spend over the coming quarters.

It won't be dramatic but it will be, I expect, fairly steady.

The movement in net cash as a result of all of those cash changes was a $32 million increase in cash position to almost $300 million at the end of the quarter.

Turning to slide 23 on capital management, as I mentioned, we paid a dividend in July so that's subsequent to quarter end.

The total dividend paid from FY12 earnings was $0.42 per security and that was right at the end of dividend policy payout ratio of 20% to 30%.

We also announced with the May results that we were activating a share buyback capability of up to 5%.

All the administrative arrangements for that are in place but we haven't seen the sort of market conditions that we've regarded as conducive to the attractiveness of share buyback, so we haven't been active but we're positioned to be active in the event that the circumstances are right for us.

Onto slide 24, looking at debt, you can see that we still had $280 million of debt facilities.

We have cash of $300 million so there's no need for us to be drawing debt and therefore we haven't.

Since the end of the quarter, we've contributed a further $45 million to the asbestos fund and we've also paid a dividend, so the position regarding cash has changed pretty dramatically since 30 June, about $200 million of that has gone out, so we're holding a much reduced cash balance right at this point in time.

On slide 25, a bit more detail on AICF's cash position.

As you can see, the fund repaid the New South Wales Government early in April as a result of Hardie contributing AUD132.3 million which occurred on 2 April, so that at the end of June, the fund had AUD142 million in cash and deposits.

We have made a further contribution to the fund on 2 July and on a pro forma basis on 2 July, the fund would have been holding AUD187.6 million.

It has had a fairly heavy quarter in terms of claims paid.

There's been some relatively large claims settled in the quarter and AUD35 million in gross claims was paid out during the quarter.

On slide 26, just noting key ratios, I don't think there's anything there that's really worth commenting on.

A relatively strong performance in terms of ratios continues and are debt service capacity indicators are extraordinarily strong.

In summary, on slide 27, the first quarter result was $43.8 million obviously assisted by the foreign exchange gain at $5.5 million on the intercompany loan completions.

We've had moderately improved US but subdued US operating environment.

The higher sales volume in US and Europe has assisted strongly.

We've had a slight reduction in SG&A expenses, but it's only really due to foreign exchange gain because, as Louis commented, we're actually gearing up on some initiatives, particularly in the US, and we also had depreciation of the Asia Pac currencies against the US dollar which helped us in terms of translation of the asbestos liability that was a bit of a drag in terms of the translation of Asia Pac earnings.

That concludes the presentation and I'll just hand back to Louis for any questions.

Thank you.

Thanks, Russell.

We'll go to questions now, if the operator could help us out there.

We will now begin the question and answer session

(Operator instructions)

Our first question comes from the line of Andrew Johnston from CLSA.

Your line is now open, go ahead.

Good morning.

Good morning, Louis.

Morning, Russell.

Just in relation to the US, with the focus being on -- hello?

Yes, you're good.

Okay, thanks.

In relation to the US, with the focus now back on market share growth, Louis, what are the metrics that you're giving your guys to determine how much they spend in terms of SG&A costs and market development costs?

They're really not working on a ratio so, fortunately, our US business is small enough we can kind of sit down and plan it as a team.

They're not working at ratios as much as we are how to support a particular initiative in what rate.

It depends a bit on the volume ramp up, but I'm not expecting anything to spike in the business.

I don't think you should think our SG&A is going from X to X a lot, but we will be putting expenses in the business both on the market side and, as I indicated, on the capacity side.

All the different projects we have going on our current expenses (inaudible) at this point.

Okay, and Louis, you made a comment about the northern region, you think the R&R market in the northern region's going particularly well for you and that's probably where your PDG has come from.

What are the -- can you just talk a little bit about what you're doing differently out there or what the progress of the initiatives up there compared to other parts of the US and, I suppose, quite obviously what that means as you progress those initiatives elsewhere in the market, what that means for your business there.

PDG (inaudible) against vinyl and most of the vinyl runs in the north or (inaudible) Carolinas, so when we get traction in R&R in the southern markets it's normally (inaudible) market to some degree (inaudible) fibre cement standard siding in a lot of those markets.

So if we pick up more volume there it's going to be in Trim or possibly Color for prime in the south whereas in the north, everything we pick up is against vinyl so that's where we're getting true primary demand growth.

The program does run better in the north right now than the south because when you're developing a market against vinyl, at the curb the people in the neighbourhood can see the improvements made to the house at the curb.

In the south where they might (inaudible) with wood Trim or (inaudible) and you convert kind of more to our preferred solution which is full wrap colour, they really can't see that from the curb.

They get that benefit over a longer period of time.

So my comment is mainly about the fact that when we convert R&R business in the north it's normally off of vinyl so that's going to bump your PDG numbers.

And then secondarily, there is a point that our programs run better in the north than they do in the south and we're working on that, kind of enhancing in the program in the south but we haven't quite figured it out yet.

Okay, thanks a lot.

The next question comes from the line of (technical difficulty) JP Morgan.

Your line is now open, go ahead.

Hi, Louis.

Hi, Russell.

Couple of questions.

Maybe, Lou, just to start in terms of your comments around the mix improvements that you were targeting not coming through.

It sounds like that's particularly obviously in ColorPlus.

Is that just a function of, I guess, the hangover of where the market is and you expect to see that higher end higher value product pushed through across the remainder of the year?

Yes, that's a good question.

They're a little bit different, we've had kind of a below target program in both Trim and ColorPlus.

On the Trim side, we got good traction in several key markets last year.

I think most of you know we've done a lot of track development in Trim which has been very successful and we went for a couple of relaunches in several key markets, we got good traction.

There are a couple of regions where we don't have that traction yet.

Some of it's due to product positioning and some of it's due to our programs didn't run as well as we should run them there.

So do I think Trim kicks up (inaudible), I really do.

Now whether it's a one quarter blip or maybe two quarters, I'm not sure, but I think we'll get Trim back in the growth rate we were aiming for in the short term.

ColorPlus is a bit of a mix issue, meaning geographic mix.

So a high percentage of what we saw in the north is colour, so yes, some very high colour markets that aren't growing at all anymore because they're probably at their terminal share which few of them are at 90% and a couple more in the 80's.

So we've got to get some of the other markets that got stopped at 45%, 55% growing again in the north, so we're working on that.

I don't think that's much of an issue, just more good work for our guys.

Then south, the west is a challenge.

Those of you coming on the investor tour, we'll kind of get you back up to date on why the west is more of a challenge than even the south, but we've got good traction in the south and a little bit of traction in the west.

So do I expect Color to kick right back up?

We'll grow Color in share, I'm pretty confident of that, but probably not at the rate we had targeted.

But do I think we'll grow Color over a longer period of time at the rate we're targeting?

Yes, I do, it's just right now we've just got some work to do to get it back up to the rates we're looking for.

Great, thanks, Lou.

Maybe the next one which I guess follows on to a certain extent, the fixed capacity additions that you're making at this point, in looking at the costs for the quarter and I appreciate it's just a quarter but if you net up pulp and freight, it appears as though that underlying COGS has gone up quite significantly.

Presumably that's all to do with the fixed, well mostly to do with fixed capacity additions.

How do you see the run rate going through the year?

Because it appears to us, at least, to be quite a big shift from where you were last year to where things are in this quarter.

Yes, some of that I think we might have covered at full year.

We have a few different accruals, we've adjusted some of our accruals which are non-cash (inaudible) and manufacturing, so I think that's part of the difference between this year and last year.

As far as the plants, the plants actually are running quite well because the price mixes, the cross mixes went up as much as (inaudible), but we're satisfied with the way we're going in manufacturing.

Like I said, we have a couple of plants.

They're not quite where we want them to be but the network as a whole is actually running at a higher rate than it's ever run.

We've brought on extra shifts, so that's a good accomplishment overall though there's a couple of spots that hasn't responded as well as we'd like, but we're pretty confident that will straighten itself out.

So as far as the (inaudible) which obviously when you see it all lumped together, we see the part where the plants provide unit costs on a cash basis every month and then there's the other things, depreciation and, like I said, certain accruals, those would be up but the cash costs would be in good shape right now.

Okay, thanks, Lou, and then, Russell, a quick question on tax.

Obviously towards the bottom end of your range you indicated at the full year, maybe you could give an idea of where you expect to land up in the full year and perhaps just elaborate on why we're getting sort of towards the bottom end, if you wouldn't mind?

The reason for the bottom end, Andrew, sorry, Jason, is that we've just had a change in geographic mix so as we go forward I'd expect sort of 25% plus or minus 2% that we've previously indicated is where we think we'll finish up.

In fact, under the US GAAP, what you do is to predict the full year result at the end of each quarter and that's how you determine the effective tax rate, so that 23.5% is an indication of what we're expecting based on current knowledge of the full year result.

Okay, understood.

Thank you very much.

Your next question comes from the line of Michael Ward from the Commonwealth Bank of Australia.

Your line is now open, please go ahead.

Hi guys.

Just some more questions on the manufacturing performance.

Louis, I think you've said a couple of times now that the performance as a whole has been quite good but there was a comment around Asia Pac where there were some plant performance issues which impacted the gross margin.

Is that where you think the network has been weak or have there been specific instances in the US where it's been weak as well?

We've had a couple of plants in the US just a little bit off the mark where they should be, which isn't that unusual.

Obviously we've got seven plants a couple are running a little stronger than you thought and a couple are weaker and we definitely had a couple that are weaker.

In Asia Pac, it's more the ability to kind of react to the lower demand and, as Russell said, I just think in Australia it's harder to do than it is in the US but, in addition to that, you know, that probably our US guys -- I don't know, we're just a little bit better prepared for the kind of loss of volume that we had and the Australian plants are probably not -- because they're not as modern as the US they're not set up to take off the volume as quickly as -- and kind of if you're wrong and there's more volume there it kind of -- go back the other way and put it back on as quickly as the US plants.

Having said that, I mean, I just think it's an early morning for our guys in Australia that they're manufacturing both this year right down in a softer market.

In future years it's just going to have to be more flexible so we just need to build that in the kit building down there.

I don't think the guys have done poorly, I just think it looks like we're lying in the downturn little bit on our ability to pull the stops out.

So not the end of the world but it's something we'd like to see kind of do a better job over the next couple of quarters if the demand is soft.

Okay, great, thank you, and maybe just as an extension to that question and your answer that maybe parts of the US weren't firing as much as you -- as well as you had hoped, I think you also make a comment in that gross margin section of the release that there's fixed costs added into the US business in the manufacturing side.

Is that - was that all deliberate or was it - was some of it actually a function of the fact that the plants didn't perform as well as you'd hoped?

No, it's all deliberate.

Okay.

Yeah, I mean, we're now -- I mean, we haven't gone from one extreme to the other but we now feel like our main job is to make sure we get the demand, actually had a demand again so that's not only now what we're learning relative to demand but also like I said we have six projects.

Well, based on our forecast which is always a little bit below the external forecasters you really don't need those fixed projects.

But the cost of being short on capacity is just too great to the business so we're going to build insurance in and make sure even under a very strong recovery we have the capacity available.

So we're spending a fair amount of money on that.

I mean, you could say if we've timed it just right, if we knew exactly what we were going to sell we'd time it a little differently than we are now but it's still just a deferral of costs rather than a -- avoiding costs.

So we look at it as an insurance policy but we're definitely (inaudible) capacity.

Okay, all right, and, sorry, just a final question.

I think you made a comment earlier that you had taken some of the small market price increases in different products.

Can you give us a sense of what you're talking about there?

Yeah, we could get a small increase pretty much across the board.

It varied a little bit region to region but it would be -- you would definitely sum it up as a small increase and then on deciding the product lines spec was more of a tune-up where we had some adjacent regions not quite right relative each other and so we took a little bit here and there.

We didn't reduce any prices so when we had that situation we just took care of [Delta] small increase and that was mainly on Color, by the way, not so much [applying].

I think we [did] anything of - any (inaudible) on (inaudible).

Okay.

Thank you.

Next question comes from the line of Simon Thackray of Nomura Securities.

Your line is now open.

Please go ahead.

Thanks very much.

Hey Lou, hey Russell.

Just following on from Michael's question there, you said the tune up on price happened in Color and not in prime and PDGs been coming out of R&R in the northeast where, particularly in New England, I think, penetration's up 80% to 90% some of those markets.

Theoretically can you just tell me what happens if we get the northwest -- Pacific Northwest, Texas continuing to fire in the south, firing faster than the north and you get a mix towards those prime board market over the next couple of quarters?

Again, we probably already had that a little bit so that would be reflected in the numbers and that's why it's hard to -- it's hard for you to see price, obviously, the same we see price.

We look at price by category and -- price by product line and price by region.

But having said that I don't want to shirk it.

I think I made it clear in the past we made a mistake when we let our category share slip and to re-establish our business with those customers a lot less more than if we would have never lost the business in the first place.

So, part of the (inaudible) Color is just that, it's going to be our recovery process and category share.

But having said that, you're right.

I mean, if we had a much stronger -- and by the way (inaudible) market history showing us as to what I referred to that we had [import board] into.

If we had a strong Pacific Northwest and Texas and the state of Georgia market charge situation's not strong now.

Pacific Northwest has been okay, Texas been hard so we (inaudible) in markets like that than -- our average prices going down and you guys overreacted afterwards because that's what you see.

[Plus] we wouldn't react to it because it's just -- our job is to kind of -- price per -- per market is not the delivering average price.

But having said that, I don't want to downplay it.

Point of our price [funk] as I just said is that category share.

Number one, we have more of the same (inaudible) in our product mix now.

Not only because some of our Hardy customers (inaudible) but because (inaudible) business in the (inaudible) quarter was with another manufacturer so we have more of [sand plank] in the mix, and also some point price through that whole process (inaudible) because of the -- like I said all re-establishes self with certain customers process.

So that's our main issue on price.

I understand why it's issue for the market.

Internally we don't like that we missed category share and kind of go back that way but the reality is we kind of moved on so we're pretty happy.

I think we're pretty happy that we have our category share and we're happy that we make margin on our products but I do that what we've shown ourselves here is we have to be better with pricing in future so we don't make a mistake like we made a couple of years ago.

That's helpful and just there is s sort of segue to the next part that the fourth quarter of '12, I think from memory, finished with the average net sales price in the US as $6.28 and it's gone up to $6.49, from memory, which is actually a reasonable jump.

I mean, I know that's obviously mix as well but is this all coming out of the higher -- or the proportion of growth that you've seen in PDG in the northeast?

Is that what's driving that change in (inaudible) pricing for the quarter?

I'm not looking at those same price comparisons but just generally in the winter because HardieBacker is still a pretty good demand product in the winter because they're indoor projects versus Scyon which is an exterior project.

When I look at forecast for the full year on pricing it's -- we -- do start picking up at the end of the year a little bit but it's pretty flat so we're not seeing fundamental shifts in pricing.

We have not gone out to the market with any attempt to quote correct pricing.

Our pricing, like I just said, is - it's okay with us.

We have to deal with the realities of -- you it was our mistake and our percentage and our price and the same point line is not what it was but it's fine.

So, yeah, I want to look at the quarterly -- the quarter change in price and think that we did anything.

That's just likely driven by the mix of business during those quarters.

Okay, that's helpful.

Roughly -- you said before that there's a $5.5 million FX benefit, I think, in the SG&A which depressed the delivered or stated SG&A price.

So that would have taken it back closer to $48 million, $49 million from what I can see in the quarter, which is really not much different to where it was in the Q4.

So was there something that I've missed in the Q4?

I'm trying to find out where the actual growth in the SG&A is, the underlying growth in the SG&A expenses.

We have -- when we compare -- at least externally, Simon, we compare with the prior corresponding quarter rather than the prior quarter so when you talk about that.

I appreciate that -- quarter on quarter.

Well, there hasn't been an increase quarter on quarter as you've noted but relative to Q1 of last year there has been an increase because of the funding of initiatives so we got a few things going and when you get advisory costs involved it can add to costs.

We can expect that to rise from here?

So I think the comment is that the costs we're incurring are ramping up and not being slugged into the business so we didn't mean to mislead you that in the first quarter we put a zillion dollars in all of a sudden but it is becoming -- the actual operating SG&A is becoming greater for each quarter.

I think when you look at the fourth quarter, if you want to think about it, it's operating SG&A versus (inaudible) some other SG&A.

We would be up on the upper (inaudible) SG&A and there were maybe a few slugs in the fourth quarter that weren't so much about the operations.

Okay, great.

Thank you.

Our next question comes from the line of Andrew Peros from Credit Suisse.

Your line is now open.

Please go ahead.

Hi, guys.

Can you hear me okay?

Yeah, I can hear you fine.

Okay, I'll start off, there's a few questions for Louis.

Firstly, Louis, could you quantify the market and category share gains achieved throughout the quarter?

I've noticed the primary growth chart you typically include in the package is missing this time around and secondly on pricing, apologies for focusing on this but I think I missed your earlier comment.

Could you just perhaps clarify whether there's been any discounting in absolute terms to grow share in any of your markets?

Okay, yeah, so the primary demand chart which we used to publish, I guess we started it several years ago when there were external indexes for R&R that we felt pretty comfortable with and a year ago and I think every quarter since we indicated that because we were now having to calculate our R&R index externally we weren't comfortable publishing PDG numbers especially on a quarter to quarter basis.

Having said that, obviously we're (inaudible) that we have a decent index for the market so we do do it internally.

The other thing we watch internally is we watch substitute products that we watch vinyl siding numbers which are published through a similar institute and then we watch -- engineer wood chipboard siding which are kind of in the Pacific results if you read the results and make a few assumptions.

So, yeah, we -- so based on our calculation we're happy with our volume, actually.

But as I just said we don't publish it because we feel it's good for internal purposes but to go out there and declare it externally, we just got a little bit uncomfortable.

There's too much our work and not easily verified externally.

So that's where we're at there.

On the pricing are there any discounts specific that we're trying to use to generate demand (inaudible) [cement]?

If I asked the question in that way I'd say, pretty much no.

You're probably across most of our programs.

We have [bundling] programs for Color.

We have (inaudible) programs which is basically a bundling program.

We have big -- so we have a, kind of different segment pricing, we have [big] pricing and multifamily so we have all the same types of pricing that we've had in the past.

The reality is on the (inaudible) line we don't control our price and where you would probably think, well we do it, we react to competitor price, would at some point brand and all the other brands we have were kind of the proactive price here but actually with sand plank we're more of a reactive pricer than a proactive pricer.

So with sand plank declined in price (inaudible) question.

Not recently but when we are in the (inaudible) of re-establishing our self (inaudible) brands, yeah, we did make price adjustments on sand plank and that's part of what you see in our results as I covered earlier.

Okay, thanks, and maybe one final question.

I think the comments around the buyback are a little different to those expressed at the last results.

Wondering if you could clarify what conditions specifically you're looking forward to see that resumed and perhaps the desired capital structure of business going forward or at least over the next few years?

Yeah, why not hand that question over to Russell.

Thanks, Lou.

I'm not sure that they are different and I'm not sure that we also want to flag exactly what sort of thresholds we're looking for and what will guide our activity but the sort of prices that have been prevalent or prevailing during the last quarter, it certainly wasn't attractive for us.

But as I said, we are ready to be active if the market circumstances are attractive for us.

The capital structure?

The capital structure as we flagged at the full year and in all of the annual report materials that we released, it is our intention to move into a position where we have a more efficient capital structure than the one which we'd had for quite some years but it's particularly the case now when we're with zero debt and substantial cash.

Now, we won't be moving there straightaway but over time we expect to be getting back to a stronger or a greater debt position, net debt position, than Hardie has had for some years.

The reason for that is that we've managed to eliminate almost all of the contingencies that we have and certainly all the material ones have gone so we've got a more predictable business.

With the exception of Australia most of our markets are either looking flat or stronger so we feel a little more confident about the market circumstances as well as the corporate circumstances.

Our next question comes from the line of Guy [Funs] Citi.

The line is now open.

Please go ahead.

Thanks very much.

My first question is, are the large US home builders continuing to take market share at the expense of custom --

(Technical difficulty)

-- and what impact is that having on --

(Technical difficulty)

James Hardie?

Okay big builders would have increase their market share.

How does that affect currently -- yeah, not so much in my view.

I mean, the big nationals normally use our sand plank brand or our Color brand.

They don't use a Hardie prime brand.

The more custom-type builders, if they're not going to use Color would be more likely to use Hardie.

But I tell you, [if -] when you add up all our numbers it's not gonna move anything to a great degree.

It's far as our participation with the big builders, especially the nationals.

We'd probably be a higher market share with the nationals than we are the market as a whole so that certainly doesn't hurt us.

National builders do get volume breaks from all the manufacturers in the US including us so it's a slightly lower contribution margin.

So it's kind of a mixed bag.

I mean, the way we look at it is we have to participate with every segment whether it's large builder, custom builders, whether it's custom homes, market homes.

Even in some markets we participate with the starter home segment so it's not anything we worry about, the shift in the category of home (inaudible) building now.

So Louis does that sort of explain partly the unfavourable mix on the US price and can you give us an idea specifically of what sort of percentage volume was sold into the price sensitive multifamily and starter home segments?

Well, yeah, I mean because you only see the numbers -- you know, coming on average and you also see the numbers relative to a period of time when our category share wasn't as good in say the starter home segment or the multifamily segment.

It definitely plays a part but this is -- you know, I am going to repeat myself again I'm not trying to run from our average price.

Our average price does reflect kind of a penalty that we incurred because we didn't handle our price increase in 2010 as well as we should have.

So I'm trying to think ahead here and everyone else wants to explain it in a different way, so there's some mix involved but this is just a reality of where we're at.

We have lower numbers for the most part on sand plank and we have somewhat higher value on sand plank.

In addition to that we did sell -- we're not selling at the target link on Trim and Color, now we're selling more Trim and Color but just not enough to offset the lower price products to the same degree as we had planned.

So last quarter specifically and the quarter before I kind of indicated our price is flat to slightly up or slightly down in the foreseeable future.

We're just way more concerned about market development or volume growth than we are about price improvement.

There's not a product line we sell that we don't make good returns on, so I understand why there is so much interest in our price.

I've tried to take responsibility for it, so I just can't explain it any better than I have.

So, yeah, there's some mix in fact on our price that wouldn't be helping us but it's not because of this -- this year it's not because of the houses that are being built and it's not because of the builders there building the houses, it's more kind of what we've done in the market.

Okay.

Just one final question if I can and that is just -- sorry to labour on the point but the issue of investing in SG&A in the US.

So if you look at the Group level SG&A expenses as a percentage of net sales for the period was 13%.

Where do you see that percentage going in the US over the next say two to three years?

Well obviously there is two -- there's an enumerator and a denominator.

I really am not sure it won't stay the same or go down but it's not going to be timed perfectly with the volume.

So you know again we're not a large company where corporate will tell the businesses what percent they can sell on SG&A.

We fund our initiatives based on a 35/90 strategy and what we think the market conditions are like and how receptive they're going to be to our programs and I guess I've covered before most of our market initiatives run pretty negative for at least three years.

So right now we're putting money in it but you may not get a return on it for three years and this is expense money but again I don't expect, you know, the 13% to spike because at the same time we're going to get volume increases if our assumption is right that the recovery is sustainable.

So all I'm saying is it's not perfectly timed and if I had to choose one or the other I'm going to choose to fund growth initiatives and have a little bit of variance in our EBIT margin.

Having said that I guess the reason we established that 20 to 25 targets every year because we want to kind of make sure you guys knew how we balance things, okay we (inaudible) so we're not going to put so much money into the business that we don't get good returns but we're not trying to optimize the bottom line here at the expense of future growth.

So right now I'm saying we're probably looking to stretch to 20 again this year and probably a reason for that is we're going to put some money in the business to support some growth initiatives.

So kind of that's what I'm telling you, we're still committed to our 20 to 25 but I'm saying this year rather than be a year late with growth initiatives, you know, by delivering whatever we deliver say -- you know, whatever you want -- say it was 21, 22, 23 instead of 20, rather than wait the year and deliver a few extra points on the EBIT margin I'd rather get things started earlier rather than later.

So that's going to be the balance, you know the trade-off we're making.

Okay.

I understand.

Thank you.

Yeah.

The next question comes from the line of Emily Behncke of Deutsche Bank.

You line is now open, please go ahead.

Thank you.

Good afternoon.

Just a couple of questions.

Obviously the 17% volume growth in the US when you look at the percentage of our business exposed to new housing implies pretty significant market share growth and you mentioned R&R as being the main driver there.

I think back in 2010 with the price increase that you were talking about earlier you lost some market share.

So could you quantity at all the extent of the primary share that you guys have gained and where you see it currently?

Yeah, I haven't looked right back at last year same quarter to figure out what our category share was and I felt -- I did -- you know, you guys picked up on a comment which is correct, it's a (inaudible) the driver of our growth against the market right now is against vinyl and for the most part that would be fairly mild.

Having said that I don't want to overplay that because we've seen some good trends, even in with some big builders kind of wanting to move away from vinyl even very early in the recovery.

So there are examples and maybe that stopped at big builders.

There are examples of some of the big builders moving away from vinyl in certain developments right now.

So but anyway, if I had to guess, you know, I'm a simple person so I am going to say [33.33].

Okay so we've talked a lot about pricing on the call but just in terms of your expectations around volume growth and market share are they tracking, in line or ahead of your expectations at the moment?

Yeah, they're in line.

I mean, I think the first quarter was a very nice quarter and the second quarter we're doing about the same.

So obviously if you get into this time of year you want to be -- I mean, in any recovery you want to build the momentum and I think we have built market momentum but I think the industry got a quick start in the first quarter and has now kind of slowed down in how their -- where they're at in their projections some of our business.

So second quarter I think similar, maybe a hair down from the first quarter which isn't that unusual by the way and then the third quarter, you know, we just don't have a look yet but what I like is how the markets feel.

When you visit the markets I like how everyone in the market is thinking, whether it be builders or dealers or home owners and then I like how our guys are back us as far as what we're trying to accomplish getting ready for growth.

By the way I'm going to circle back and change my guess.

I'd say -- you know, 100%, a GDP growth of X I would say maybe 20% might be category share, 20% might be new construction and then 60% would be R&R.

So R&R is the bigger piece that's driving it but we do have some help in those other two areas as well and as you know the category share gain is coming to an end because we're very close to where we're comfortable with our category share.

Sure and on slide 10 there's a comment there saying that partially offset by lower average sales price and higher fixed manufacturing and organisational costs.

I'm just wondering are some of those temporary or should we expect some of those to reduce in the next quarter?

Okay.

So I guess this is the question that hasn't come up and maybe it should come up, maybe it should be a comment by me.

You've got to remember when we went into the downturn we were very successful making a lot of our costs variable, okay.

So costs that are classified are fixed we were able to reduce at close to the same rate as volumes being reduced.

A lot of other companies in our industry and probably most of the companies in our industry don't take that approach, okay?

So they sat on a cross structure to some degree.

So they had what they called a lot of operating leverage now coming out because their incremental margins will be much higher than their average margins (inaudible).

We, on the other hand, have put a lot of those thoughts right back into the business.

So we did without those costs for a four or five year period, so we have that (inaudible) but now to run a factory 24/7 some of those costs have to go back in and the (inaudible) of that is fixed costs and the way you count the things in a manufacturing business.

So I guess I've talked to investors about this in the past, our situation is our incremental margins aren't necessarily going to be significantly better than our average margins we've been getting because we made so much about our costs (inaudible).

Having said that obviously we have depreciation and real estate tax and stuff like that that is fixed.

Just looking at your quarterly margins usually the Q1 is the highest margin of the fiscal year.

Do you think that with higher utilisation rates, et cetera, that that may not be the case this fiscal year?

Yeah, it's a really good point, Emily because normally our Q1 is our EBIT margin, I guess I kind of didn't quite point that out when we looked at the slide, our EBIT margin slide.

I'll kind of stretch to 20 EBIT margin this year is driven on the assumption that we'll continue recovery.

So the seasonal downturn won't have as big of an impact on our business as it would in a normal year.

So, yeah, I think if we get to 20 for the year it's going to be a pretty flat 20, meaning (inaudible) at 20 first quarter and second quarter probably be there, maybe a little bit shorter there.

So the fourth quarter has to make up for any shortfall we have in the third quarter and the third quarter with all the holidays, Thanksgiving and Christmas, you probably aren't going to hit the 20 even in a recovery market but the fourth quarter you may be able to exceed it.

So that's how you get there on 20, you're exactly right.

Pretty close to 20 first half, third quarter [jobs], fourth quarter comes back above the 20.

That's how you get to the 20 EBIT margin.

Just finally your capacity utilisation at the moment?

Yeah, it's a good question which I don't have an answer to.

I think right now our thinking is in the mid-60s because -- I don't want it to sound like we don't calculate it, I just don't have the number off the top and the last time I had a discussion it's in the mid-60s and that's driven by change in product mixture and the downturn in as much as the square footage of board that you guys see that we're selling.

I can run through the type of capacity projects we're thinking of just so you guys have a clue.

I don't think I did it last time last quarter but, you know we had the Fontana re-start up, so we're going to re-engineer Fontana before we start -- that's our plan A at this point.

We haven't got a proposal together but -- and what we're trying to do with Fontana, if we can, is make the California plant kind of competitive with the other plants by shipping a fairly tight shipping radius, which means that we're going to make it a very full product mix and be efficient on everything and (inaudible) they're a little bit hamstrung to do that.

So we're kind of looking at how we might approach that.

So we got that start and we also have a similar situation in Somerville which we haven't done much work on that but we're going to figure out what product mix we want to police at Somerville and what kind of re-engineering should go into that.

Then we have (inaudible) number two line start-up which we are underway with and that's a pretty good example.

You'd have expenses going in that currently.

We'll probably start that off in January.

Then we anticipate the need for new [shape] machine in Texas which will probably go in into Cleburne and the area that we -- is handling the initial XLD Trim line.

With our (inaudible) in Peru we need more capacity, so we'll be adding that and I'd like to get our (inaudible) capacity on the east coast.

So that's kind of the nature of our capacity projects that are working on right now.

So it's a pretty -- because, you know, again we talked about these variable and fixed costs, because we were for 15 years building plants non-stop and we have resources in our business to do that.

When we hit the downturn very few of those resources actually got laid off.

They got reallocated into manufacturing.

So then you finish the downturn and you don't have those people available to take care of your capacity projects.

So we're in the process of kind of rebuilding that construction organisation by pulling some of those people back out of manufacturing into construction which means that you have to hire replacements in manufacturing or in some cases we've actually recruited new people for construction.

Okay, great.

So the CapEx for FY13 what sort of number should we be expecting?

I can't remember if we had given any guidance but we've been running under a 100 and we're definitely going to go over 100.

Start going over 100 and we'll hit some -- even in the US business -- I think in the US business 100 is probably not met at the point and then in Australia we're planning on a major capacity addition which would be expensive because everything is expensive in Australia.

All right.

Okay.

Thank you so much.

Okay.

The next question comes from the line of Andrew Scott from RBS.

Your line is now open, please go ahead.

Thank you, gents.

Just two quick ones from me.

Louis, first of all just hoping you could expand on the parameters around the guidance a little bit?

Obviously you're sort of below the analyst range.

Just the commentary around that is assuming a stable housing market.

You've just sort of spoken at length about the housing market improving.

Is that stable market very conservative or does stable mean more of a continuation of the trend we've seen to date?

Yeah, we'll take the mystery out of guidance there.

We picked the centre of our range and went a little bit on each side.

So I mean we took our forecast as it sits today internally and put some money on each side of it for the range around it.

So obviously we have assumptions in our forecast and market analysts would have assumptions in their forecasts and I think most of the difference would be in what we're doing internally.

I'm not sure the market analysts are believing our (inaudible) forecasts for housing and we're not either.

You know, we think houses are going to come in almost midpoint or we forecast it versus the [Zelman] forecast which is the forecast we found to be most reliable.

So I gather we're thinking differently on housing units.

I think mainly we're thinking different internally.

A lot of that stuff I already covered today which would be the difference I believe between marketing analysts forecasts and ours and of course market analysts wouldn't have any real information as far as we're trying to plan our business for the recovery.

So I think it's kind of a normal disconnect.

You know, a lot of you call which then -- me letting you guys know what we plan to do with the business in a recovery and it's more costs here and more costs there, it's not focused on market increases.

So all that stuff that if we were optimising EBIT we'd probably usually be able to get to the market forecasts but really that's not where most of the value creation is and we get the market development kicked up for fibre cement against vinyl and the price.

Thanks, Lou.

Do I take it you're intentionally avoiding giving up a specific housing number that's factored in there?

A specific housing number?

No, we don't.

Yeah but I think you guys know where we came in and I think you know where (inaudible) is and still (inaudible) half way, so it's not hard to figure out where we're at.

No problem and just quickly, obviously we've seen some pretty significant flooding in the Philippines, not a huge part of the business but maybe just any damage there and any disruption, particularly given I guess it's going to be coinciding with the weak Aussie market at the same time?

No, we don't have any impact forecast in that business.

Great.

Thank you.

Your final question comes from the line of Bridget Carter from The Australian newspaper.

Your line is now open, please go ahead.

Hi, I was just wanting to ask about the Australian housing market.

I mean you've talked about a deteriorating market and these quarters' results.

Can I ask how much worse has it got since the previous -- you know, when you reported the full year results and I guess the other question I have is to do with the carbon tax and how much of a difference that's made with respect to the Australian result and what your view is on that as well?

Wellbeing an American I'm not the best guy to ask so I'm going to hand this over to Russell, okay?

Okay.

Thanks, Lou.

So with regard to the movement since we announced the full year results there certainly hasn't been any improvement apparent in the Australian market as far as we can see it.

Approvals seem to be down, it starts down, there seems to be a general lack of confidence although some people are reporting that since the Reserve Bank reduced the cash rate in more recent months they think that things are going to improve but we haven't seen that come through yet.

With regard to the carbon tax I think that's a very long term issue.

We haven't seen any evidence of a significant impact arising from carbon tax in our business at this point but that's not to say that it won't be something that comes through over the longer term.

Okay.

Thank you very much.

There are no more questions from the audio participants.

Okay.

Thank you very much and I appreciate everyone joining in the call today.

See you.

Bye.