James Hardie Industries PLC (JHX) 2013 Q3 法說會逐字稿

Thank you for standing by and welcome to the James Hardie third quarter 2013 results briefing.

At this time all participants are in a listen-only mode.

There will be a presentation followed by a question and answer session.

(Operator instructions) I must advise you that this conference is being recorded today, the 27th of February 2013.

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

Please go ahead, Mr Gries.

All right, thank you.

Hi, everybody.

We're going to do -- Russell and I are in Chicago this afternoon, so I've been told that everyone has the presentation so we'll try and make sure we refer to what slide we're on and we'll take the same approach as we normally do.

I'll do a quick business overview.

Russell will go through financials and we'll come back for questions so you can drill down in specific areas.

So the cover page, Q3, fiscal year '13 management presentation.

The second page, our disclaimer, the third page telling you what I just said, the fourth page, (inaudible) and the fifth page is the first page of the presentation.

So as you can see, a very flat result, very similar to the nine month result, so we'll go through that in some detail as I flick through the rest of the slides.

But the $28.8 million obviously is a relevant number compared with the $28 million last year and $113 million and $109 million, so about a 3% improvement but, you know, for all practical purposes, flat.

Slide number six, so US and Europe Fibre Cement.

Okay, so the flat result obviously is no longer surprising because there would be good volume growth, so we did have a stronger quarter on volume in the third quarter than we had in the first half.

The EBIT down a bit.

Price started to flatten out, which we'd been kind of indicating that although we are down 2% in the previous comps -- the first quarter and the second -- we saw that the price (inaudible) maybe start increasing in future quarters.

That's without a price increase and it is driven a lot by mix.

So price is part of the story, a big part of the story, actually.

The other part of the story is the spending, which we've talked about.

Most of the cost is cost we intentionally putting into the business and then there's another component of the cost which is more of a unit cost where despite having some favourable raw material costs in the last year, we are bringing up capacity in several places and if capacity comes up a bit less efficiency, basically it goes through a curve that usually takes six to eight months and so we're seeing that at a couple of facilities.

We just started -- not that it's affecting the third quarter result -- we just started (inaudible) number one line (inaudible) mothballs, so we'll be dealing with that for the next four or five months, as well.

Additionally, in this quarter we had kind of a, well, we had a write-off so it's a one-off because it's -- we had an issue in West Coast manufacturing where they just didn't handle an inventory situation as well as they should have and the result being a write-off of about $2.5 million.

So not a good performance on our part there and that does also, you know, kind of have some impact on the flatness of the EBIT but still, we're using most of our incremental dollars in getting up the extra volume (inaudible) loss in price, especially the first half were increased costs which was going right through the year.

Now that we're starting up more capacity, we do have inefficiencies in unit cost.

So, slide 7 which shows you the nine month result in the US.

Same story, volume up 13%, average price down for the nine months, just over 1% and the EBIT also down just about 1%.

Lost 2.2 points on EBIT margin, obviously a higher revenue than last year without the additional EBIT dollars to go along with it so it reduces the EBIT margin by 2.2 points.

Go to slide 8 and we've been talking about, you know, getting the business ready for market share growth.

I think the first thing to keep in mind, or to remind you of, is our business did well going into the downturn for a couple of reasons.

One, we anticipated it and planned for the lower levels it forecast, forecasted housing starts.

Rather than the average of the high numbers figuring that we could add back easier than we could take off so that was one thing we did well.

Secondly, we did begin to manufacture at that at time which was important and the third thing is, we did take cost out pretty much across the Board because our belief was, we had a lot of money in the business for top line growth.

Top line growth wasn't going to happen for several years, so pull those resources out and put them in when we get back to market recovery.

So not saying exactly like it's a hugely detailed plan but conceptually we're doing what we planned on doing.

I do think we get the added benefit of not only having those costs in during the downturn but we also had the added benefit so the resources are going, we need them now rather than where they were, you know, before the downturn because our product mix and our market mix has changed quite a bit.

So the resources we're putting in now, as you can see from this slide, the biggest bump in resources were from a percentage basis not from a total headcount obviously, but it's in that supply chain area to support all the work we've done with job packs for ColorPlus.

But you can see manufacturing's up 7%, marketing, this is mainly field sales, up 9%, supply chain 29% and R&D also up.

Now, the R&D spending is on the core fibre cement projects but the change there is we're now starting to spend on non-fibre cement.

So we have opened a lab in the (inaudible) area where the R&D is related to fibre cement but it's not kind of fibre cement platform type work.

Mostly of that spending right now is around coatings for fibre cement but we also have some technologies we're working on that are complementary to fibre cement.

We've given an indication, I guess, on a later slide, that, you know, we've been putting resources in the business, pretty aggressively, not crazy aggressive but pretty aggressively.

And the top line or the volume line has grown but the volume line, or at least the revenue line has grown at a slower rate than the costs we're putting into the business.

We see that kind of changing as we go forward.

Not sure exactly what quarter we'll change but we're at the point now where a lot of what we have in for phase 1 market development, a lot of what we need is in or it will be in very shortly and if we continue to grow to top line better than the market index, which we are, and then if the market index continues to improve, so you've got pretty strong top line growth together with slowing down of the cost adds in the business, we see the kind of relationship more like you're going to want it, which is revenue growing faster than cost and profits growing faster than revenues.

So we also in the year, just the first step of the capacity I said we started at (inaudible) one.

It wasn't a big capital spend on (inaudible) one and for our fibre cement plan, I guess, $34 million for Fontana's not big either but it is a reengineered plant now.

We -- this was the first plant in the US, it's one of our smaller scaled plants, and California's more of a HardieBacker market than a siding market.

Basically it just (inaudible) markets and we do sell siding in California but it's not a dominant share in the market.

So we're configured Fontana now with a five foot sheet machine in place and where we had a four foot sheet machine so we can now take the -- make the full mix of flat sheets so the shipping (inaudible) in our plant will shrink, which will make it a lot more competitive.

We also put in automated HardieBacker equipment so we reduced the reliance on manual labour that it had when it shut down.

We also have [density] modification in the plant now so it can make a [GT] product as well.

So I mentioned it's not meant to be a slide that we continue to provide, it's just meant to be a slide that fills in some of the blanks about what we've been talking about as cost to build market share.

By the way, the capital for Fontana $34 million, but we have a lot of expenses in the business right now as far as work on other capacity plans that also obviously show up in our results.

Slide number nine, quarterly EBIT, and obviously this is the concerning chart to most of [US dollar] Hardie.

We did talk about putting those cost in, we knew it was going to dampen the EBIT return.

The price has been more stubborn than we thought it would be.

Basically the pricing problem is two things, CemPlank pricing are just your basic product in the market for certain segments is lower than it has been, so it's declined in price over the last two years.

Then there's a greater mix of CemPlank, especially based on the mix of homes and -- that are being built now, more toward multi-family and some -- more toward basic home and some of the big markets.

So, anyway, EBIT margin lower than we anticipated.

In this quarter we didn't hit our number, we didn't hit our internal number.

Part of it was that $2.5 million and that was really -- it was that plus the cost in the plants were just a little bit high with some of the ramp-ups but the main thing was the $2.5 million.

So we did pull off our guidance a little bit, I think.

I don't know how many millions of dollars, but it was driven partly because we didn't deliver the number we felt we would have in the third quarter and probably because right now just for some reason, our order file doesn't look as strong as we think it should in order to hit our volume forecasts in the fourth quarter.

Now, I want to stress, we don't see any trouble in the market.

We see the market strong, the builder confidence is there, builders are planning to build the houses, houses are selling, there's appreciation in most markets, so we don't see it as any statement about the housing recovery.

We also don't see it as a statement about our market share or category sharing business.

We're right now just thinking we're not going to get an early start to the season and maybe that's because kind of numbers have been ramping up month to month and seasonal declines weren't quite as great as they have been in the last couple of winters, meaning that our best percentage volume increase are in the third quarter.

So, anyway, we just can't call it right now.

We don't know if it'll come back next week and (inaudible) off the other [file] or, you know, it'll kind of lag and the season starts a little bit later than normal.

So that's the kind of reason for guidance.

As far as the EBIT margin, that's about 10 quarters we've been below that target -- or basically below it -- and then we had several years even in the downturn where we were in the target.

Then, of course, before the downturn (inaudible) target.

So the reason we provide that target range is we want to show you how we're going to balance returns and market share.

Now, although it may not seem like it this year, the market share growth is a harder, tougher challenge than the financial returns so we did want to make sure that when we got back into a good market that we are ahead of the curve as far as putting the resources in the building market.

Now, like I said, I think we have a lot or most of that phase 1 (inaudible) in the business and now I think it's starting to kind of go for that balance we -- you know the one we strive for and that's get in the target range and also hit your target growth.

So we will hit our target growth this year against the index but we won't hit our financial target range so -- but I don't think we're going to start living down there, (inaudible) living down there I should say, but we won't start living down there in a good market.

We'll (inaudible) and we've kind of given an indication that we'd do that.

Slide 10, nothing new there.

Obviously we were on a steady -- a pretty good price slope for a lot of years.

Some of that was due to market increases.

Although we're not a regular taker of price we have had market increases during this period, that graph shows, and pretty much part of it is due to product mix improvement.

Now, what's gone against us in the last year, I guess it started over 12 months ago, now, the product mix started going against us.

So some of the higher value products slowed in growth and like I said earlier, some of the lower value segments -- and therefore our products -- started accelerating growth and our pricing on our CemPlank product came down as we got into the category share issue a couple of years ago.

So we don't have any across the Board market price increases planned for this year but again, we do expect to see this line flatten out and start to move up slightly through the year, because we're anticipating the next move in a more typical direction, maybe not as sharply as it has in certain period in the past, where we don't expect it to go south like it has over the last five quarters or so.

Slide 11, go to Asia Pac.

Now, the Asia Pac story is pretty consistent, a good story, but Asia Pac numbers gives us scale of business which are largely driven by Australia.

Australia is one of the toughest challenges from a market perspective and I think we did okay meeting that challenge.

We've grown our -- again, against a market index we've grown and we've also grown our high end Scyon line.

So those are both good stories.

There is more competition -- or more competition for fixed volumes and fixed demand in the market now so we've lost some pricing especially our core products which has had some impact on our results.

In our manufacturing I think was a little bit slower to react to the realities of market demand so they had to pull capacity off too quickly in the second quarter.

And in the third quarter it's been better so you can see our EBIT margin in the third quarter is down 1.8% where for the full year it's down a little bit more than that and that reflects that, in fact getting more in balance with demand now.

Now in the other two businesses, they're smaller so they don't move the needle much.

New Zealand's a very good story.

It's been running well, picking up volumes, pricing looks okay, costs look okay so New Zealand's good.

And the Philippines is kind of okay, it's not -- they're not knocking it out of the park but they are running pretty well in a market that's pretty good.

So the two small businesses are kind of delivering as expected and I would say considering the market demand in Australia we've done okay, but we could have done a bit better in Australia through this first three quarters.

Having said that it looks like third quarter is a trend line -- hopefully started a trend line up because I think manufacturing can and will continue to improve in Australia.

So the nine months' results which I already eluded to -- of course it's all US dollars -- but in the local currencies the business is roughly as I described it.

Slide 13 I guess I've covered all these points in my comments so far and at this -- I think best to just let Russell run through his and we'll come back to questions and you guys can drill down on the specific issues either in the US or Asia Pac that you want to understand better.

Now on the outlook we are confident with the housing markets on the right track.

It's not to say we're sure nothing bad's going to happen but it sure doesn't feel like it.

It's a gradual build, pretty good pick-ups last year and expect pretty good pick-ups again this year as far as just housing starts.

And we also anticipate that as housing starts continue and house appreciation ramps up a little quicker we'll get a little better demand on the R&R as well.

The second point I guess we've already covered.

The third point I already covered as well so we've been growing costs quicker than revenue and we anticipate that that those lines will cross in the next several quarters and we'll get back to getting an extra EBIT out of extra revenue.

And then the capital -- I talked about the $34 million but that's obviously just one of several capacity additions we're working on so we can talk about those when we get to the Q&A.

In Australia -- we're still cautious in Australia so we're just going to take that approach.

We're going to plan that it's not going to get much better and if it does we'll react, but it's a little bit hard for our guys to read right now.

New Zealand's pretty favorable market conditions we feel and the Philippines are fine so no issues there.

As far as the Group outlook what we call it -- I guess we used to have this as our strategy slide.

Probably the best thing we've done, I mean I know we're not in our financial target band but the best thing we've done right through the boom to the downturn to the recovery is we're staying on strategy.

So I think there's a good opportunity for organic market share growth and we're wanting to invest in that.

Investment is a little bit out of phase with the demand right now but we think that's going to change.

(Inaudible) still two focuses for us and obviously the jump back which enables the ColorPlus and selling the full house rather than product by product.

And those are the main key initiatives in the US.

As you know we (inaudible) Group strategy.

It's organic growth.

It's a differentiated position and it's a high category share in the markets we participate, so nothing's changed there so at this point I'll hand it over to Russell.

Thanks Lewis and good morning to everybody in Australia and hello elsewhere.

So looking at the highlights for the -- both the third quarter and for the nine months year to date in terms of earnings and clearly as Louis has highlighted there was a bit of a tail wind in terms of sales volume growth, particularly in the US, not reflecting the improved market environment with volume up 17% for the quarter.

Price has been constrained by target penetration into price sensitive market segments and that's reflecting all of product mix and geographic mix.

As well as an emphasis on segments at lower ends of the markets and less mix in the -- or a lower proportion of sales into the higher end products just because the opportunity is slanted that way.

We talked about the funding of the initiative costing that -- quite a lot of money and impairing current quarter and current year EBIT margin that, as Louis has indicated that's likely to swing the other way in future quarters.

We have an unfortunate increase in accounting provision for New Zealand product liability.

We first took a charge on that at the March quarter of last year in terms of a provision for future claims that have not yet been identified as a result of the insurance cover looking as though it wasn't going to be adequate.

And we took another charge in Q2 which we thought at the time was going to be sufficient to cover the liability but as Q3 unfolded we saw an increased incidence of claims and also an increased cost per claim or expected cost per claim, partly as a result of other defendants showing a propensity for insolvency.

So as a result of that we've had to increase the provision in Q3 by $7.5 million so that's a charge of $13.2 million in the year to date.

And we have decided at this point to actually put that into the excluded items so it's in the reported US GAAP but it's taken out of the non-US GAAP in the same way we treat asset impairments, ASIC expenses, asbestos adjustments, tax adjustments et cetera.

Unfortunately that's adding to the list of excluded (inaudible) but we think that in the interests of showing the performance of the underlying business it's a more logical way to actually account for this particular item.

We also had some asset impairment charges in the quarter, $5.8 million.

These charges arose in relation to the refurbishment of sheet machine one at Waxahachie plant in Texas and the planned refurbishment of the Fontana plant which has been announced today.

And these assets are effectively redundant and obsolete assets identified as part of the refurbishment plans for these plants.

So those are assets that just can't be used or won't be used in the revision of the facilities and they have book value of $5.8 million, so we've written those off.

So those have been the key factors impacting the results for the quarter and the nine months.

As previously indicated we've contributed $184 million which is equivalent to $177 million to the fund earlier this year and as a result of two dividends the second half FY12 dividend of $166 million and a first half dividend of $22 million we've paid out now $188 million in this financial year.

Although the $22 million is not reflected in the Q3 results, it was paid in January.

But nevertheless $188 million dollars paid to shareholders this year compared with only $17 million in the prior year, FY12, to this point in time.

On slide 18, you can see here the sort of pattern of the impact of the Australian dollar on James Hardie's results.

In this recent period in fact for both the three month and the nine months the impact of foreign exchange rates and foreign exchange movements has not been significant in FY13 relative to FY12.

So I don't plan to dwell a lot on that going forward in the way that I sometimes do because we just haven't seen the level of volatility that has been the case in past quarters.

In fact I'd say it's the most muted we've had for the last four or five years.

On slide 19, this is the US GAAP basis of the reported results.

You can see here that the full year -- sorry the full quarter result was $31.5 million compared with a loss of $4.8 million last year at the EBIT level for Q3.

The reason for that big swing is largely due to asbestos.

The individual components have swung around a bit but most of that change was due to a movement in asbestos.

Turning to slide 20 which I think is the more informative one in terms of the underlying business.

For the third quarter on a non-cap basis we have a result of $28.8 million excluding asbestos, asset impairments, ASIC expenses, New Zealand product liability and tax adjustments and that was up 3% on the prior year's corresponding quarter which was $28 million.

For the nine months on slide 21 you can see that net sales were up, gross profit was up, SGNA up, research and development up so it's very similar to the third quarter.

EBIT however was down by 15% and the net operating profit from the US GAAP basis was $115 million which was down 7%.

So you can see on that slide the way that cost that we talked about in terms of SGNA, manufacturing, admin as well as research and development has impacted the result.

I think it's readily apparent from this slide.

And on slide 22 looking at on a non-GAAP basis you can see that the underlying performance of the earnings with those excluded items is a profit of $113 million for the nine months relative to $109 million in the prior year for the nine months was -- is up 3%.

So just very flat results unfortunately given the increase in volumes and the increase in revenues that we've been seeing particularly in the US business.

On slide 24 looking at net sales -- sorry slide 23 rather, looking at net sales for Q3.

US and Europe (inaudible) revenue was up 16% by $32 million on volume, that was up 17% and Asia Pac Fibre Cement revenues in US dollars were up 6% to $96 million on volume that was up 6%.

So there's a bit of a playoff taking place there relating to geographic mix and foreign exchange rate movements as well as product mix but clearly the US dollar sales are in line with the revenue with the volume increases.

The total sales revenues up 13% to $320 million so quite a large increase in sales revenue for the quarter.

On slide 24 the strength of the improvement in the third quarter is perhaps more apparent because the nine month sales increases are less than -- in the three months is a percentage basis, total revenues up 7% for the nine month period but up 13% for the three months.

So momentum is with us in terms of sales.

Turning to slide 25, looking at the segment EBIT on a non-GAAP basis you can see that very flat EBIT performance in both the US and Europe Fibre Cement segment and the Asia Pac Fibre Cement segment.

Research and development expenses up, corporate costs relatively flat and all of that contributes to a slight decline in EBIT excluding those items and we get a big asbestos adjustment as indicated in the prior period which gives us a very significant lift in EBIT.

That's only because of foreign exchange movement on asbestos for the quarter.

On slide 26 a similar analysis for the nine months also shows that it's a fairly flat EBIT result.

Asia Pac Fibre Cement perhaps being the exception down 13%.

Research and development expense up as well and general corporate costs showing a reduction but it's not a reduction in the underlying rate of expense because most of that gain of about $6 million or $7 million was the result of a foreign exchange item in the first quarter and some costs recovered from the ATO relating to the RCI matter.

So without those two items that corporate costs actually were slightly up but not significantly so total reported EBIT there on that basis is down 15% largely on the back of New Zealand product liability expenses and asset impairments for the nine-month period.

Asbestos not being material in that nine-month period.

Turning to income tax expense on slide 27, and I won't dwell on the third quarter because as I think I've explained before, the way US GAAP works in relation to tax expense that you estimate your tax expense and your [EGR] for the full year and then you reverse engineer the current quarter to match that so this is just an outcome of that process and produced an effective tax rate of 19.4% for the quarter versus 23.6% for the prior corresponding quarter.

More importantly, I think is slide 28 where the effective tax rate is 22.5% which clearly is the sort of rate that we're anticipating for the full year and that's a little below guidance that we've given before.

I think we've indicated previously to people that the rate was likely to be 25% plus or minus 2% and the reason it's fallen out of range is that the US business which has the highest statutory tax rate is below expectations and, as a result of that, the geographic mix of earnings is actually triggering a lower effective tax rate for the Group for the full year than we'd anticipated.

So we've fallen out of range and I think that we probably just need to widen that range in terms of guidance so where we were saying 25% plus or minus 2% it probably should be 25% plus or minus 3% in the near term to take account of expected volatility in our US earnings as we go through the early parts or the next phases of the recovery.

We're not correct in describing it as the early phases given that we've now been in recovery in volumes for about five or six (technical difficulty) cash flow.

There's some reasonably encouraging news here in the quarter -- sorry, this is on a year-to-date basis this statement and you can see that net operating cash flow which is about halfway down the page for the nine-month period was $83.3 million versus $109 million in the prior corresponding six months.

The good news is that in the quarter we actually had a $90 million net operating cash flow That $83.3 million was $7 million negative at the end of Q2 and the significant cash flow that we had in the quarter just completed was a normal seasonal downturn.

Particularly in the US business we liquidate stock a little.

We collect receivables so they reduce on the lower value of sales but there was also some planned and some unplanned working capital reduction so we had a bigger drop in inventory in the US business than anticipated because of the volume gains and we also had some planned reductions in the Asia Pac business particularly in Australia where we'd been running unfortunately too much inventory.

So the net impact of that was a very strong quarter in terms of cash flow.

Turning to the capital expenditure, you can see that that's up on the prior year, $42 million for the nine months compared with $25 million for the prior corresponding nine months and the amount of CapEx in Q3 was, in fact, $16 million which is the largest quarter we've had for some years.

We'd be expecting that that will continue to trend upwards.

I'm not saying that every quarter's going to be higher than the previous quarter but the likely trend is in line with what Louis explained that CapEx will increase.

The ending net cash was a significant increase as a result of that strong cash flow generation.

At the end of Q2 we had net cash of $77 million.

At the end of Q3 we had $160 million so we are very, very liquid with zero debt and very long on cash.

That's a convenient place to step off to capital management on slide 30.

As I indicated earlier, we've paid significant dividends with this year to date.

We've had no share buyback activity during the nine months to the end of December.

In fact, we haven't bought any shares since October 2011 and included in that slide, 30 years and reiteration of what we announced at Q2 which is that subject to share price we'd like to be buying back shares to distribute approximately $150 million to shareholders but if we can't or if we don't do a share buyback then we'll seek to distribute that to shareholders by way of dividend after the conclusion of the FY13 year and we have also indicated as we did in November that we're in the process of revising our dividend payout ratio from 20% to 30% to 30% to 50%.

On slide 31, this is of no great moment I guess given that we are very long on cash but this slide just notes that we have the $160 million in cash.

Also that we are currently in the market for a refinancing of our debt.

The facilities we have, have become very short term in their remaining life so we're looking to put new facilities in place with a longer life to hopefully save some cost and that will position us to find capital expenditure and also the improved returns to shareholders that we've flagged.

On slide 32, just a brief note there on AICF's, the asbestos fund's cash position.

At the end of Q3 it had AUD151 million.

Claims paid have been quite significant this year and there's been a reduction in the claims carried forward at the end of each quarter so the claims totalled AUD98 million partly also a result of the fact that there's a higher proportion of mesothelioma claims in the total claims paid and that's the most expensive compensation by disease type.

So that's increased the level of payouts but the fund has been very successful in insurance and cross-claim recoveries.

In the nine months to date, AUD34 million recovered from those sources so it's left the fund with a fairly healthy balance of AUD150 million or so.

On slide 33, just a quick look at some of the key ratios.

EPS slightly up on a diluted basis on the prior nine-month period.

That's annualised and on EBIT to sales it's obviously down and down fairly materially from 16.4% to 14.5% for the reasons that we've alluded to in the discussion and the debt service ratios there showing an incredibly healthy position.

Negative gearing meaning that we're very long on cash and very low interest expense and interest paid.

So in summary, as per slide 34, we've only had very slight increases on prior year underlying earnings for both the third quarter and the nine months not reflective of the improvement that we're seeing in sales volumes particularly in the US business.

Price and some costs in the business have been drags on earnings but that is not expected to continue for very much longer.

On slide 35 we have revised our guidance.

We have put previously indicating $140 million to $150 million for the full year FY13 earnings, recurring earnings that is, on a non-US GAAP basis.

We've revised that to $136 million to $141 million so we've narrowed the range but dropped the range also to reflect the expectations that we have particularly in relation to US earnings in the balance of this year.

So that's the final note from me but I'll hand it back to Louis for questions.

Thank you.

Thanks Russell.

So we'll go to questions from investors and analysts so if the facilitator could do that for us?

Thank you.

(Operator instructions) Our first question comes from Emily Behncke with Deutsche Bank.

Please go ahead.

Good morning Louis.

Good morning Russell.

Just a couple of questions.

Looking at the 17% volume growth you achieved in the US, just wondering if you could give us a sense as to where the share growth has been.

Is it more on the new side or more on the R&R side?

Secondly, you talked a little bit about expecting better pricing outcomes and wondering if there is anything other than mix in the better pricing outcomes that you talked about.

Just finally on the cost side, obviously SG&A is up.

Is that something that we should expect to stay at those levels and should we expect any further additions to staff in the next 12 months or is that largely done?

On the volume growth, we had pretty good traction on the R&R through the downturn and I would guess that most of our new share would still be reflecting that traction.

So that's largely against vinyl.

As far as new construction, we're just getting kind of resourced and back to new construction and in the north, where there's a lot of market share opportunity against vinyl, we don't see the same kind of confidence in the builders that we're targeting that we see in the south.

So that's why I think we're picking up more business in the south and a lot of the big builders in the south and in the west would be more inclined to CemPlank than one of our higher value brands.

So I'd say at this point we're probably still picking up more from R&R but we're getting ourselves reset to more fully go after new construction in all the key markets but that's going to lag some.

Pricing outcomes other than mix well, multi-family -- a lot of multi-family goes and bid pricing so we would expect as market demand goes up those bids will firm up as well.

So you would get some improvement there and then I think CemPlank in some markets will be not in a position that they'll have to match low ball numbers from direct competition as much as they have over the last say 18 months.

But I don't think that's anything more than price just drifting up.

Like I said, it's not a marketing increase so to speak.

SG&A increases, now you'll see some more increases but not at the rate we increased this year.

So, like I said, the trend lines and revenue increase in the trend lines on SG&A increases basically kind of cross so our% SG&A starts going down rather than up but I do see some more increases but just not at the same rate.

Great, thank you.

So with -- just sorry, back on the pricing side of things, I had heard and I don't know whether this is right, that you've moved to more of a market-based price with discounts being applied with a little bit more -- well, discounts for big clients like the big home builders being applied with a little bit more rigour.

So, I mean, is there some benefit potentially from that?

You mentioned big builders specifically, so we have a very good market share with the big builders or a category share, sorry.

We've always had, like literally every manufacturer of any scale in the US would have builder deals.

Now, what happened is you'll recall I think it's coming up on three years ago when we had a market increase we kind of lost track of some of the category share and we lost it.

So in order to recapture that category share and stay under [3590] program we had to go back in.

So any time you go back in you're obviously going to get it at a lower number than you lost it so that's part of the problem.

I think that part of the problem is not yet behind us but it's more behind us than in front of us so the price is lower than it needs to be theoretically in an increasing demand market.

So I do think it'll kind of drift up and then, like I say, there's just more CemPlank so you guys see the numbers and the big builders.

They're coming out of the downturn faster than your independent builders or your semi customs.

Thanks and just finally, Home Depot had a very strong result overnight with comps of 7%.

Are you seeing similar demand growth in your repair and remodel business?

We saw a bumper in Home Depot comps in our isle basically.

We found a lumbar isle for siding and a flooring isle for tile and they did have a bump but it wasn't anywhere near 7%.

So yes certainly had a very good result and I saw Lowes came out as well and they were better than expected.

So I do believe R&R will pick up as far as the major re-sides, I expect that to pick up as well so I do expect their market to get better.

It just won't get better at the same rate.

It's less volatile than new construction so it didn't go down as far or as fast and it won't go up as fast or far but I do expect it'll get better as house values get better so you know that equation.

We're a pretty big decision for a home owner so they've got to feel like it's got some investment value attached to it.

As far as our business is to finish -- as far as our business with Home Depot and Lowes, it's been pretty solid so we've been tracking fine in their stores so we're getting that repair part of it and that hadn't been an issue at all.

Excellent.

Thank you very much.

Thank you.

The next question comes from Keith Chau with J.P. Morgan.

Please go ahead.

Thank you.

Good afternoon Louis and Russell.

Just a few quick questions from my end.

Firstly, Louis with respect to the audit book, I think in the second quarter result, you reflect on it being quite strong and now it's kind of come off a bit.

So just wondering if you could provide a little bit more colour in that respect and what you expect going into FY14 and maybe just a couple of quick ones for Russell.

Firstly, CapEx for the full year, are you able to provide a bit of guidance on that and lastly, either Russell or Louis, market and category share, where does that currently sit at the moment?

Okay, the order file I kind of think it's just kind of normal variance, to be honest with you because I think the market activity is fairly good.

There's absolutely nothing that leads me to believe it's not.

So you know, at least you remind me I was right in the third quarter because we were pretty solid November when we finished up the quarter up 17, which was a little stronger than we anticipated going into that quarter.

Now I would say we're a little bit behind what we anticipated going in, in the quarter, but normally it's just a matter of when the, and you've got to remember we had an early season last year and I don't think we're having an early season this year.

So I don't consider it a problem but I think our forecast for the fourth quarter, volume wise was higher than right now it looks like we're going to come in.

Now, the game's not over yet, there's actually still enough time between now and April 1 to where if things picked up we could hit our forecast but it just doesn't look -- I'm just not that confident.

As far as, I'll take the market share category share because it kind of relates.

As far as thinking well maybe vinyl's not growing -- I mean not declining or maybe competitive fiber cement's taking more of our business or maybe LP's had a spike in demand.

I don't see any of that.

So I don't believe any of that is affecting our order file, I just think there's just a little drop off in activity in the market for our product right now and just like in the fourth quarter when we were three percentage points or so higher than we thought we'd be, we called that strong.

I don't want to create the impression that we don't have any orders and we have working machines running.

We're just off a bit, we're not off like we don't know what to do we're off so much.

It's not that kind of situation.

So market share, I mean yes, you can look at category share quarter-to-quarter.

You cannot look at market share quarter-to-quarter because it isn't able to move that fast, you know.

Market share, it's more of a trend line.

It's very hard to estimate because you can't get any real data points.

You work with kind of the normal surveys and then you got your regional mixes because first and foremost, you know, regional preference for exteriors is going to drive your decisions.

So it's not like you can turn California into a plank market.

It's impossible, so if California comes back stronger -- not that they are, but if they did come back -- California, Arizona came back stronger than the rest of the country, theoretically then (inaudible) market share goes up and everyone else comes down, but having said that, for several years now we've been saying we're kind of in that mid teens, 13, 14, 15 and for fiber cement as a whole and I think that's pretty accurate.

I think we've picked up in R&R and probably right now, because of just how houses are being built, you know, new construction's probably been flat, I mean, which was good news during the downturn, that we could keep it flat in new construction, but in that category share, like I said, other than that little dip we had three years ago, we do track category share fairly closely and we're very comfortable where we're at on category share.

Okay, thanks Louis.

Thank you.

Sorry, we didn't take the capital question.

Sorry my apologies.

So Keith, on capital it's hard to get a handle on exactly where this might finish up but my guess would be that we would probably be about $60 million for the full year because it just depends on the timing of payments to suppliers and we're in the middle of some fairly hefty planning in relation to future plant developments.

Okay, Russell, and that Fontana CapEx, that's likely to happen in the first half of FY14?

Well it'll get spread out over a full 12-month period in all likelihood.

Okay great, thank you.

So it'll be pretty evenly spread through the period.

Ta.

Thank you, the next quarter comes from Andrew Johnson with CLSA, please go ahead.

Hi, good morning gentlemen.

Couple of questions.

First of all, if we can go back to where your volumes are (inaudible) tracking.

I'm interested in identifying whether you're seeing homebuilders looking to build much cheaper houses and also look at the geographic differences in relation to that.

I refer back to Boral's comments in their result that they were seeing builders looking to use products cheaper than bricks and so their volume growth was much lower than what single family growth was, if you can comment on that in relation to what you're seeing and perhaps is CemPlank perhaps picking up some of the brick markets in the South?

Okay, so I'm going to talk about it more conceptually than maybe Boral did, pointing to the numbers because I don't think you can -- I don't think you should worry about it in our numbers.

There is a lot of things we can do that would overwhelm any kind of a trend we have toward different type of homes, but basically I think the reality is when the building industry was very hot everyone could afford whatever they wanted.

The builders kind of, like I said before, their bottleneck was they could sell homes easily.

There was a lot of demand, so the bottleneck was how fast could I build a home or how many homes can I build based on the land that I have available.

So a lot of their optimizing of profitability went into bigger and better and then pricing that up at a higher average margin than the overall house.

So when we went into the downturn then obviously it flipped the other way.

All of a sudden their costs of construction, as prices start diving, because affordability went down the cost of construction is higher than the prices they were selling at.

So then they had to go through that whole process of getting cost out so that when they did sell a home they ended up with more cash than if they didn't sell a home.

I've described it before, there's kind of three processes.

The first thing they do is they go to the vendor and try to get price concessions.

The second thing they do is they -- what they call value engineer, which means they de-feature, so they pull any costs out of the home that the home owner is not aware of, meaning it's not easy to see if you have five eighth inch gypsum or half inch gypsum or you have 24 inch spacing on studs versus 16 or you have two by sixes versus two by fours.

So it's kind of that value engineering.

Then the third thing is the de-feature where you were offering granite counter tops as a standard and then you dropped it down to an option and the prices had fallen so far when the consumer pushes back you say hey, when I was getting $512,000 for the house it could be a standard but now I'm down to $350,000 so I have to offer it as an option.

I would say in the downturn most builders, not all builders, but most builders went through that process like three times.

So it's vendor concession, value engineer, de-feature, vendor concession and part of the de-feature is you get smaller and part of the de-feature is you use lower cost materials.

So do I think that has happened?

Yes, and do I think it'll reverse itself?

To some degree.

It won't go back to where it was when everything was crazy and anyone could afford anything but I also think that as people get more comfortable that maybe their home is at least part investment and putting features in a house could end up with a better quality of living or however they see it.

They like their house more but also could end up with a more marketable house when they went to sell it.

I think we'll correct back to there but it just doesn't happen overnight.

They definitely de-featured the house and I think they'll reverse that trend but it might take, you know, it'll be more of a steady change over two or three years rather then, I don't think anyone's out there declaring hey downturn's over, we can go back to doing what we like to do.

Everyone has that profitability equation in the front of mind.

Okay.

Okay, as far as bricks and CemPlank, you know, I don't know.

Our Texas market's doing pretty well right now.

I haven't got much feedback from the guys that's because of brick loss of market share.

I think they're on the wall cost is not quite double ours.

So brick is fairly cheap in the Texas market.

In other markets where it's not kind of the standard product, it's much more expensive but I would say that if -- we are selling more CemPlank, so probably the same psychology is going to us selling more CemPlank.

If they think staying with Hardie, staying with colour can help them sell a house they probably will but if they think the buyer's not sensitive to it and they're a production builder, they'd probably rather be on CemPlank at a lower number.

Right, okay.

In giving your comments, Louis, about CemPlank, its -- price has come off over the last couple of years and you're selling more of it, is it perhaps not surprising that your average price has held up as well as it has?

I wouldn't go that far.

We're still not at the terminal share of CemPlank that we forecasted it would end up at over I think it was about five years ago, first time we published our product mix shift, kind of grass or (inaudible) kind of, but so it was in a steady path and then it's wiped and it's starting to settle down so that's somewhat due to what we did, meaning we lost our category share.

When I say lose category share I don't want anyone to think well we went from 90 to 50, you know?

In some market segments we did get below where we think we need to be.

So some of it was created by that mistake and then some of it was just created by the market realities.

I mean holding a brand in the market at the same positioning for a 20-year period is fairly challenging.

So there's a natural erosion of brand value and then as that happens, brands like CemPlank then have an opportunity to grow their piece of market.

Now, I don't want to mislead anyone.

We're not far off the percentages we talked about in September so this isn't like a quick switch by everyone in the market from Hardie to CemPlank.

The reality for us is, and obviously we would invest in it with R&D, we've got to keep building more value in the Hardie brand and that's the best way to slow or stop the cannibalisation of the Hardie brand by CemPlank or any other basic commodity fibre cement.

There was just, with the renewed focus on financial targets and your comment there about things continuing as they are, you expect to get above 20%.

What does that actually mean in terms of how you provide KPIs and provide guidance and direction for your business managers and is there any change in focus in terms of whether you'll pull back from pursuing some markets as hard as what you have been just to ensure that you do actually hit those financial targets?

Yes, so like I said, the thing I like about Hardie is we've been able to stay on strategy in any kind of market.

So I guess we don't want to panic and say well I'm not going to deliver that kind of result again, I've got to get that number and it doesn't matter how I get it.

It matters a ton how I get it.

I just see we can get there the right way, you know, probably I feel like I was a little aggressive getting ready for the market share growth and so it's a little bit more of a correction than I would like to make but it's not moving off what we're doing.

So that's the first thing I want to make sure I point out.

As far as pulling out of some markets or de-emphasising some markets, the thing we think about every day and we need to continue to think is like I say, it's a lot tougher challenges at [35/90] you know?

So is it expensive to go into non-metro markets relative to metro markets?

Yes, and no doubt it's expensive but you just can't be 35/90 if you don't sell in the smaller markets.

So most product categories use kind of distribution to sell in those markets.

They just don't do market development.

They sell the market standard.

They don't have the returns in our product that go actually do the hard work to change the standard from whatever it is, a chipboard siding or a vinyl siding to Hardie.

They just can't do it so we've got to do it.

Having said that, there's been some market initiatives that haven't worked so we've tried to go with colour in the new construction southern markets and basically switch from Hardie prime field paint to colour and we haven't been very successful with that.

So we're upside down on that initiative and I don't see it ever coming right side up.

So we'll pull back from that but now the good thing about that initiative is we felt we needed that scale of colour in a market in order to get everything else going and we have gotten R&R colour in a lot of those markets, but now the scale on R& R is big enough to where if we de-emphasise new construction colour say in Houston and San Antonio we don't have to de-emphasise colour R&R at the same time.

We make good returns on colour R&R so we would be going through the Business doing a lot of that evaluation work now.

In fact it's pretty much all done.

Then similar on the main [fashion] and capacity side.

So we're becoming more and more like Australia where those of you that have been in our plants know that we have a continuous process before the autoclave and then more material processing after the autoclave.

So we're becoming more like Australia where we're spending more and more of our money post autoclave.

So I think there's an opportunity, manufacturing wise, to kind of lift our game post autoclave, especially relative to our industry, we're brilliant before the autoclave and I think we're average after the autoclave.

So I think there's an opportunity on the cost side to get returns out of manufacturing post autoclave.

Then also with the capacity, because our product mix has changed so much I think there's a real opportunity to get another three or four points of return out of our investments versus what we kind of went with when we were scaling up the business.

So what you'll see is most of our future investments will be like Fontana.

We'll take a plant and we'll design it specifically to return in a certain way and Fontana it's going to be small radius.

Somerville we're trying to switch it to Hardie backup plant because it's in the just perfect place.

It's in an okay place for siding and it's in the perfect place for HardieBackers.

So we'll look at re-engineering that plant for HardieBacker and then letting Pulaski and Plant City kind of take care of the siding.

Plant City makes [8C10] and Pulaski [8C5].

So right now in the business that's where most of the intention is, is getting better at making the economic decisions that get you the last two or three points rather than the big strategic decisions like let's go with colour, let's go with [Excel de-trim] this and that.

We've laid that strategy.

You know, it's a long-term strategy.

We know how it works, so now it's how do we optimise around the bigger strategy?

Okay, that's great thanks and perhaps one last question for Russell.

Can you just clarify the change in guidance?

Am I right in looking at the new guidance actually includes some one offs in that guidance as well?

I think there was about $7.7 million of additional one offs that's embedded in that guidance.

Are you referring to the foreign exchange gain, which we reported in Q1 and the cost recovery from Q2?

Oh, so they're not new to this quarter then?

No, they're not new to this quarter.

They were there in Q2 when we gave the guidance of 140 to 150.

Okay, sorry I missed that.

All right, thanks very much.

That's okay, good.

Next.

Thank you, the next question comes from Simon Thackray with Nomura Group.

please go ahead.

Thanks very much.

Lou, Russell, good morning or good afternoon.

Just going back a second, Lou, we talked about a couple of the lines, obviously, coming along.

You've got Fontana CapEx and Fontana.

Can you just remind us in terms of where the line opportunities are from here in terms of which lines get switched on or where we're going to see the scheduling if you like of existing lines returning and new lines coming on?

Just so we get a feel for the ongoing level of investment during this period of recovery in bringing capacity back on.

Yes again so actually like I said was done just a couple of weeks ago.

Fontana one and two will come on probably in January.

Somerville, we're doing some preliminary work there.

The plant was designed to make siding.

It's a good sized machine to make HardieBacker but we haven't proven that the machine can make HardieBacker.

So we're spending some money to kind of run trials this year to prove that out.

Because it is a higher value asset if we make HardieBacker than in siding.

Then we have XLB or NT3 sorry, Trim North which is basically incremental capacity at the exiting site.

Then the next thing we have is, that's pretty much laid out and we haven't got the permits and everything but the third sheet machine in Texas where took the trim line out of that plant during the downturn.

Cleburne.

Oh sorry Cleburne yes.

So that plant has raw material and finishing capacity and good demand.

So it's kind of a perfect place to put a sheet machine in because you get the other stuff for free.

Then after all that, that's the two to three year look.

Then beyond that, next to evaluators a third line in Peru, a third line in Pulaski, a second line in Decoma and a fourth line in Plant City.

So the theme you're getting here is we're going to do a lot of investment on our sites before -- at least at this point it looks like we're going to do a lot of investment on our site for additional capacity before we move off to another greenfield.

So, we don't see, there's some opportunity, mid-south and north east, there's opportunities for freight advantages.

But at this point it's looking like the incremental cost advantage of putting a line in the existing site, especially when you can use either raw material or finishing capacity that already exist, outweighs the kind of shipping radius benefit we might get from a greenfield.

And then of course we've got the Australian capacity which we do need more capacity in Australia.

We worked out a greenfield.

We do have a greenfield option.

It's too expensive, so we're working on brownfield alternatives right now and we haven't gotten -- we haven't quite gotten there but I would believe that we're going to have a good brownfield solution in Australia for the extra capacity, we need to support Scyon.

Okay, thanks Louis.

Now just with those incremental costs and obviously the ramp up in supply chain costs in particular during the quarter, you make the point that revenues and ultimately profitability should now start to rise faster than costs and you'll be targeting margins in excess of 20%.

Can I just get some clarification on the timeframe, just looking at the trajectory as we're moving through the fourth quarter, in terms of what your current look is at the cycle?

Whether that margin expectation starts in Q1 of '14 or Q2 or is it a year-end target?

Just to give us a bit of a sense on what you're sort of planning allows for?

Yes I mean it's a great question and I'll be the first to tell you it's not going to be as exact as I'd like it to be.

But we won't hit 20% this quarter I can tell you that.

I know you like certainties.

So there's some certainty for you.

But yes I believe we're on the game for next year, but you know it's hard to hit 20% for the year and when we say over 20% we're talking annual.

It's hard to hit 20% for the year with the winter seasonal downturn we have in the US, without getting out of the shoot pretty good in that first and second quarters.

So if you don't have a good position at half year you can't pull it out in second half.

So I mean it's a forecast but I think we can hit 20% and that means I think we need some 20% pluses in the first two quarters and if we get them, then I like our chances.

And if we don't, then it's going to be delayed a little bit.

But the big thing is and I know this is a little tough for everyone to kind of figure out.

The big thing I want to communicate is, you know, we made a choice to kind of ramp up spending to get ready for growth and we're just a little bit wrong on some of our pricing and cost forecast.

But it's not a problem balancing the financials with the growth.

We just came up short on what our forecasts were.

I mean our cost adds were about what we expected.

But obviously those are very easy to control.

So and the volume by the way is about what we expected, which is not as easy to control.

So we just missed it on the price, you know I said flat plus or minus two and I was thinking flat.

And we're definitely going to be down.

Then some of the cost issues of bringing up the capacity and stuff like that, I mean we just got -- we were just a little aggressive with our forecast.

I have been kind of surprised Simon, you know, you're living in a down market.

You hate it.

You're doing well, but you're just waiting for that good market.

I thought the organisation would just flip the switch and be ready to go and to be quite honest with you it's more getting ready for operating well in a better market than I would have anticipated.

And it's probably a mistake on my part because I knew we're one of a few companies that took the extras out.

So you've got to build it back in.

So it shouldn't be that big of a surprise, but hindsight is not I guess.

So anyway, we'll be shooting for it next year.

If we don't hit it, you'll know we missed it because we couldn't do it, not because we weren't trying to do it.

No point taken Louis.

While we're talking about margins and I guess long term strategy targets, you know 35, 90, the cost of defending and achieving those targets when you're the clear market leader is obviously greater and you can't really fractionalise your costs across to your competitors.

They get whatever benefit you give to the category.

Just thinking longer term, can you give us some colour on what you're seeing with the competitors and their activity and then importantly, I mean is there any opportunity quite frankly for something like Toll Manufacturing for competitors if they can't do the job in the category?

Yes you know, those are all things that I would say we would consider just like anyone else would think about.

I would have to tell you there's not many manufactures that want to depend on someone else for their supply.

So I wouldn't think any of our existing competitors would think Toll Manufacturing from Hardie is a sustainable business for them.

The other thing is, I can't see where we would make more on Toll Manufacturing than we would on CemPlank . So I don't want to mislead anyone there either.

We make not only financial returns on CemPlank, we make economic returns on CemPlank.

It's not like we're just defending a position by having some kind of a loss leader out there, that's not what we're doing.

It's just you know the middle of our, I think I said end September, the middle of our product line returns well than both the top and the bottom.

The reality is, we've got to build more into the middle, because we need to invest more in the top.

So we need to build more in the middle so we can use that return to get out of the middle to invest in the top.

And defending the bottom, the only thing I need to tell you is our competitors, they're just running a business just like everyone else.

They didn't do anything wrong.

We made the mistake.

They didn't make the mistake.

They just benefitted from our mistake.

Okay I got it.

And just on the home builders I know there's been a couple of questions on it.

I just want to clarify something.

The pricing for the major home builders and you talked about the de-featuring the product and obviously trying to take advantage of the lower prices.

But, just in terms of your arrangements with those majors, are there sort of price escalators in the contractual arrangements you have with these guys in terms of price?

I mean we shouldn't be expecting that prices are flat forever with these major home builders during this upturn should we?

I would agree with that.

The agreements would vary, but a normal agreement will have price protection for a period of time.

So if the market price goes up, they might get a lag of X number of days to a certain date.

So basically what they're trying to do and they do it with all their categories not just us, they're trying to make sure when they got a house they're selling them for $200,000, that they have price protection up through the completion of that project so that they know that their costs aren't going to go up because of vendor increases while they're building that house.

So, some of them run till the end of calendar year, that's pretty typical.

Then others have like a three year, four month lag time.

So they're structured differently.

But yes, there's no reason to believe that segment would always be at the price it's at, but I think there is good reason to believe that (inaudible) builders' volume and professional purchasing organisations and the price sensitivity and the business model, they're always going to be below the market.

Whether they're buying siding, plumbing, insulation, roofing it doesn't matter.

They're always going to be below the market.

Okay that's clear.

Then one really quick one for Russell.

The buy back again, Russell.

So can you just sort of talk us though?

I know you're saying we get 150 next year in dividends if nothing happens in the buy back, but the rationale for not being active.

Well the rationale Simon is pretty straight forward because this is all about returning funds to shareholders and we have options.

We either do a shared buy back or we do dividends.

So there could be a mix.

But we're not driven to a shared buy back because of any sort of capital structure reason.

We'd be driven to a shared buy back because it's a very attractive option relative to returning funds to shareholders by way of a dividend.

We don't get distracted by franking credits because we can't frank our dividends to Australian shareholders and capital return currently isn't a significant prospect for Hardie given our Irish structure.

So it's pretty straight forward.

We're just looking to the best, the better way of returning funds to shareholders and if we perceive that that's a shared buy back, it will be driven there by value.

If it's not there, we will return funds to shareholders via a dividend.

Okay, thanks Russell.

Thanks Louis.

Okay.

Thank you.

The next question comes from Guy Bunce with Citigroup.

Please go ahead.

Thank you and good afternoon.

Two issues that I wanted to ask.

First of all in relation to US sales mix and the impact on price.

Can you just clarify, even with a rough estimate what percentage of sales would be going into the multifamily and starter home market?

The multi-families is an easier one to answer because I can point at that direction.

Our multi-family market share would be similar or a little better than single families.

So I can't remember what multi family is up to now, 24% or so.

What you've got to realise is multifamily usages -- I'm giving you rough -- you guys can go and get the right numbers.

I'm just giving you rough stuff.

About half the usage per mortgage family unit versus single family unit of the type of multi-family we sell.

So you can see as the single family shifts to multi-family, say it has gone from being 15 multi-family to say 25, as an example, then basically our opportunity on those starts get kind of half.

But our likelihood of getting the business does not change very much.

Okay.

Now the likelihood of that being a CemPlank brand versus a Hardie brand depends on where you're at.

So if it's in a color market obviously it's going to be a Hardie brand but if it's in the south, it would more likely be a CemPlank brand.

In the west it's kind of like 50/50.

Some of the builders of multi-family preferred a Hardie product mix and, you know, some go for the CemPlank.

As far as starter homes, I don't have a good estimate.

Our good penetration of starter homes is in Texas and we're a little bit over way Texas right now, meaning the Texas market is doing better than markets in general.

So that's how we'd be kind of up on the starter homes because it's more of a geographic thing rather than across the Board because in the north, we don't get starter homes.

So we don't get starter homes in the north and the mid-Atlantic.

We get starter homes in Texas, Georgia, we get starter homes in the big fiber cement [stainer] markets which would be Portland East and Georgia.

That would where we get most of our starter homes.

So again what I don't want to, you know, mislead anyone is we're not complaining about the market.

The market is fine.

Okay.

The mixers will move around now.

I did make a comment, I think it was family, you know, the big builders are coming out of the downturn quicker than the other builders and, you know, the big builders are like 19 out of 20.

We'd prefer CemPlank under normal homes unless they're building color and then obviously they'll be on Hardie.

So that's where we'll get a lot of, you know, we'll lose some of our Hardie percentages as big builders take their share of market.

Now, there's a lot of forecast for how big, big builders get but, you know, certainly at least at the start of recovery, they've come out of the chute quicker than a normal building community or the ones they compete with.

I'm not giving you much guidance.

I can remember in September we kind of gave everyone an indication of how much CemPlank we sell relative to the Hardie brand and I would say it's less than most of you think it is, but because it's increasing it shows up in our numbers.

But like I said earlier, I don't want anyone to think that Hardie is becoming CemPlank.

In certain segments, CemPlank is the, you know, kind of has a high share of position but across the Board it's still a much smaller part of our business.

You made a comment along the lines of you get half the usage in multi-family.

Is that referring to the revenue per square meter versus say a single family?

Is that what you're referring to?

No.

That's how much volume goes on the house.

So a single family house rough estimate is 2500 square feet is the opportunity.

In a multi-family it's more like 1400 square feet.

So there's actually lots of opportunity.

It goes back to that early question about when Boral was talking about de-featuring of buildings.

Well, the number one way to de-feature a building is make is smaller and the easiest way to make a home smaller is to put it up against something else.

So they're sharing walls, they're sharing interior walls so they don't need as many exterior walls space there.

Yes.

So this trend obviously we think as we come out of the downturn and the recovery accelerates that the mix will change back to more traditional single family.

Are you actually seeing that evidence in your business today?

No.

It's way too early and by the way, I think there's two factors.

You can go through previous downturns and kind of see that.

So come out of the downturn, everyone's concerned about affordability.

They go for more, you know, more multi-family and then it kind of wears off as the recovery goes on.

But I think the other thing we're dealing with in the US, and you feel a lot with the housing stock, it never really did get absorbed even though the market is getting better, and they were building too far out of the city centre.

So Riverside, California, Elgin, Illinois, markets like that were being developed single family and I think it's unlikely that those will ever become boom markets again.

So if you then go closer to city centre, you'd probably going to have less land to do it so you're probably going to be more inclined to multi-family.

So you're going to have a higher percentage of multi-family.

So no, I don't think it's changed the business type trend.

I think it's like a 20 or 30 year trend.

What we're seeing now is more the impact of the downturn but if at the top of the market we were 15% multi-family and you can get forecasters a lot smarter than me on this, I would say the top of the market next time you might have 18% multi-family and if that market gets done after that, next recovery you might have 21%.

Okay.

I think that's more about the radius to the city or the commute than it is about, you know, the affordability fundamentally changing in the US.

I think you've just got to be closer and being closer means you have less land and less land means you're going to have zero lot lines which we had a lot of or you're going to put a few things together, a few walls together to make better use of the land.

Yes.

Great.

And secondly, just getting back to this issue around the margin that Simon was talking about, can you give us some sort of assessment as to the underlying assumptions behind that?

In other words, what do you think would be required to see those US margins back above 20% in the first and second quarter?

What sort of revenue growth, for example, would we need to see?

I think our revenue growth is fine.

I think our volume growth is fine.

I think our price has to start being slightly up and slightly down.

I think our unit cost, delivered unit cost, has to be heading down.

Then I think our organisation cost increases has to start tapering off.

So you don't have a silver bullet.

It's not like a commodity business where you've been running a loss and your costs are going to stay the same and you're going to raise your price four times between now and September.

So we're not in that kind of business so you're got to kind of do it on all sides.

So if those four things I said would actually happen this year, we probably would have made it this year.

We kind of had enough volume to get in the game this year but we decided to spend some of it on the market share funding.

So we don't need a miracle, we just need pretty good management around the optimisation process, not only around the growth side.

So Hardie is going to have to manage better next year than they did this year and that starts in May.

But it's not like you're suggesting the price needs to increase materially or significantly say, you know, 5% to 10% in order to achieve that sort of margin expansion.

It's a culmination of the growth factors.

No.

I mean, you could do that, you could do that overnight, and get back in your range but I do feel that's a trade off.

I don't think the market is looking for an increase from Hardie right now.

We're looking for conversions in the market.

So I don't want people worrying about what the price of Hardie is when they're trying to decide whether they're going to come off vinyl or come off chipboard.

I want them kind of feeling that Hardie has a stable pricing policy unlike the commodity products, which we do, we've always valued price.

We didn't go down in the downturn.

We'd be one of the few, if not the only company that didn't go down in the downturn and we just can't, you know, because we're not in a range we want to be in.

We just can't do a price increase.

I mean, we could but it wouldn't be the right way to do it.

Okay.

That's it from me.

Thank you.

Right.

Thank you.

The next question comes from Liam Farlow with Macquarie.

Please go ahead.

Yes, good afternoon, guys.

Just a couple of questions from me.

Most of them have been answered but firstly, you'd spoken previously last year around transport costs in the US.

Are you seeing that import cost moderate into this year?

Secondly, could you just give us a bit more of a detailed run down on what you're seeing in Australia at the moment?

Okay.

Input costs have been fine and there's no trends starting that looks like it's going the other way.

So I think we'll take more forward gains over the next year than we did this year but right now things look okay.

That goes for freight as well.

As far as Australia, as far as the market, is the question about the market?

Yes, that's right.

Yes.

So you've asked the wrong guy.

I'll see if my Australian friend here has a comment.

Excellent.

Well, you know, Lou and I had visibility into the Australian market.

Well, we don't spend a lot of time in it.

The anecdotes that I pick up from talking to our guys is that it's a pretty challenging time, a lot of uncertainty, lack of consumer confidence but that there may be some recovery on the horizon, given the reduced interest rates, that it's a pretty competitive market at the moment relative to more buoyant times, particularly in the non-Scyon brands for us.

So I think you know Mark Fisher so he takes care of non-US and guidance discussions we would have with the -- we don't know what's going to happen with the market so let's plan like it's going to be a poor market, run our business that way and then if it gets better we'll react.

So we're kind of very simple minded at Hardie.

We don't think anyone knows what the Australian market is going to do so let's just assume it's going to kind of go as it is.

I don't think anyone is talking about falling off a cliff so let's assume it's going to kind of stay tough.

We'll get our numbers in a tough market, we'll grow that Scyon share in a tough market, we'll hold our [Quo] product share in a tough market even if it is more price competitive.

Then if it's better, we'll just wrap up.

So yes, we don't have good insight.

Even the guys in the business we discourage them -- we discourage if they're guessing what the market is going to be and placing their bets accordingly.

We'd rather have a very conservative approach.

Well, what do we think?

We know the market will be at least and then we'll kind of set up for that.

Yes.

Okay.

All right.

Thanks, guys.

Thank you.

If there any other analysts that wish to ask a question, please press star one now.

If there are any media parties on the line who wish to ask a question, please press star one now.

Gentlemen, we're showing no further questions.

Right.

Thanks for everyone's questions.

I hope we kind of gave you the insight you're looking for and look forward to seeing you guys in May.

Thank you.

That does conclude our conference for today.

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