James Hardie Industries PLC (JHX) 2013 Q4 法說會逐字稿

Good morning everybody.

Looks like we should hope for rain every results.

I can just do them on the phone.

Anyway, we'll run through it the normal way.

This is going to be a repeat of the last result which I did do on the phone.

We thought we were going to do a little bit better in the quarter.

Obviously, we went into the year thinking we were going to do a little better for the year.

You know, again, the summary, you guys know the summary.

The volume we're pretty happy with.

I guess, Sean has got a couple of questions and I've just got a question on the 8% comp on volume.

I think when you look at the volume trends in the business, actually the fourth quarter came in right around where we were forecasting.

So we're happy with where the market is at and we're happy with where we're at relative to the market on volume.

So the work we need to do is in other areas.

So, I think we'll probably -- I'll go through the slides pretty quick and I'll let Russell go through his and then we'll kind of handle that other stuff in detail when we go through -- when we get to questions.

So anyway, you can see the operating profit for the quarter and for the year, excluding all the other stuff, is down $4 million.

So on much higher -- 12% higher, volumes, obviously, that's a disappointment from a bottom line standpoint.

So again, we'll talk about that.

US in the quarter, sales were up, I think, 8% -- or volume was up 8%.

Sales price, I don't think was down a full percent, but it was slightly down.

Most of that, at this point, is mix, so there is no slippage of any price in markets anymore.

So it's mix at this point, pretty much entirely.

The input costs in the business aren't a problem.

They've been favourable this year, so despite the fact we didn't hit the bottom line number we were looking for, it wasn't an input cost problem.

Freight is starting to get more expensive right now.

It started in March, which is typical for this time of year.

We are doing a lot on the capacity side.

So we've got some money going into that, both in Fontana, the Waxahachie start up, Plant City ramp up.

Peru has come up to kind of like three shifts on the second line.

They're 24/7 on the first line.

So we do have some inefficiencies hitting us as we bring capacity back up.

Fixed manufacturing costs.

That's again, a lot around -- we kind of shrunk the organisation around the seven sites and now we're getting ready to do construction and run more than seven sites.

So that's going to stay in the business, the higher manufacturing costs.

It will be spread as volume continues to go up, obviously.

Part of the capacity work we've done -- again, the product mix pre downturn and post downturn, because we did a pretty good job in the R&R market and with a few of the kind of more less core like products.

Our mix has changed quite a bit.

So we're setting the factors up kind of for a mix that we're anticipating will continue to improve.

I'm forgetting about the Cemplank deal, but we are talking about other products that are becoming a bigger part of business.

Then we're also moving toward regional manufacturing.

So what we want to do is we want to end up with a southeast, a northern and a western kind of manufacturing hub, where all products are sourced regionally.

This isn't all that new, but now that we're back into a growth situation, the freight benefits of getting there is significant.

Of course, you've got a lot of investment -- not a lot of investment -- but you do have investment to get there as well.

So some of the asset impairment is about that shift, that what we used to do in these in these plants isn't what we'll do necessarily in the future.

Summerville is probably the best example of how it used to be a Siding plant.

We'd like to make it a HardieBacker plant.

There is no HardieBacker in the southeast manufacturing.

Then we talked about the organisational costs.

So, there's numbers, EBIT was a little better than last year, but nothing really to comment on because it came at a lower overall EBIT margin.

In the full year result, again, we're pretty happy with the volume.

We like the way the market is and we feel on our PDG count, we indexed just about 6% above the market and, of course, we take into account the new construction increases, but also the repair and the remodel and we knocked out a few things like high rise and that.

But for the most part, we're very happy with volume.

We like our traction in the market.

We think we're better in the market this year than we were this time last year.

So we're starting to build some of that capability back in the new construction.

So we're happy with the volume.

Average price, when we came in at year, I know I said flat, plus or minus 2. It comes out minus 1 for the year, which, I'll be honest with you, it is a little bit of a surprise to me.

I thought we'd be flat and I knew there was some risk around that both ways.

But anyway, we came out minus 1.

You can see we're flat on EBIT, despite the extra volume to deal with and when we get into Q&A I'll kind of go through how I see that thing, breaks out as far as kind of where the extra EBIT would have been lost on the extra volume.

Here is our EBIT margin chart.

Obviously, it's just before -- the market peaked at 2007.

So fiscal year 2008 and you can see it's been a steady decline, so obviously, it's a trend we have to reverse, and you know we're committed to doing that.

You can see the housing market is definitely -- well, number one, much lower than it used to be, but definitely on a much more positive trend, even in the last year.

So the slope of that line, the black line, is good and we feel it's sustainable.

So it's -- we don't think it's anything that will likely flatten out in the near term.

Average price -- and we'll come back to this slide -- but basically, you can see we peaked in fiscal year '11 at about $652 and then we lost about -- I can't remember - $7 or $8, '11 to '12 and then we lost another $7 or $8 from '12 to '13.

So over the two-year period we lost $13 and again, that's something we do have to reverse.

There is two different parts.

One are more price-conscious segments are at lower prices than they were two years ago.

But also, we're selling more of that board relative to the overall mix.

So that's the other problem.

So we'll cover that.

But we have got to reverse that trend.

So we've talked a lot about what we put back into the business and I think you'll remember, in the downturn we did pretty well because I think number one, we did kind of scale down the size of the organisation as the market opportunity went down.

And two, we did a lot of reallocation of resources to make sure we had our resources pointed at the stuff that was still going to kind of pay back for us in a down market.

So we pulled a lot of stuff off new construction and put it on repair and remodel.

So now, we are in the process of reversing those trends and that's one.

We're putting more bodies in the business.

But two, we're doing some reallocation again toward new construction.

So that's the sales side of it.

Then you have a marketing component.

R&D we did increase this year.

I don't expect that to increase much in the next couple of years from the level we're at now.

Then we put a lot of money in the supply chain, because we just see there is a lot of opportunity now, as I commented earlier, to get more to a regional manufacturing and there are just a lot of inefficiencies in shipping our product, which is very heavy, as far we do.

So we did put a lot of more capability in supply chain.

Unfortunately, I'd say, we're not getting paid back anything on that yet and that's another thing that's got to change.

Now, we've done some good work in that area, so we kind of understand it better than we used to, but we haven't started turning it into dollars yet.

This -- I think most of you know, or some of you know, this new R&D facility is non-fibre cement and it is outside of Chicago.

So it's in Naperville.

So we look at a lot of it is targeted at coatings.

With the ColorPlus business getting as big as it has, we just felt that we were a little bit exposed in not having technical capability in coatings.

We worked very closely with Valspar.

They obviously have the capability, but we didn't have any of it in our Company we kind of felt uncomfortable with that.

So we committed to that expenditure.

Also, we've got non-fibre cement stuff there.

Some trim products and obviously fibreglass, to do a pultrusion and, in the future, possibly fibreglass windows.

I guess the bottom bullet point is a key one.

We ramped up costs faster than volume this past year and we can't do that again and I don't think there is any reason to.

I think we've got like two-thirds of what we want in the business in the business right now.

So it's just potential incremental adds from here, but not big adds that will move the needle much on the EBIT.

Okay, Asia Pac.

Asia Pac is a different kind of a flip side of US and that's meaning the US had a better market.

But I don't think we delivered as well as we could have in a better market.

I think the flipside for Australia, especially, in the Asia Pac region, is they had a soft market and they didn't deliver as well as they could have in a soft market.

So, it's not that they ran the business poorly.

I just think they left some money on the table.

It was a little bit disappointing for me, because we had just been through it in the US, so -- and we kind of had the blueprint for how to handle a downturn and the downturn here wasn't nearly as severe as the US downturn.

But I think kind of the fundamentals are still the same and we missed a few of them, production planning especially.

Last summer we had too much inventory in the business and then it really had to restrict production and unit cost got hit because of that.

But anyway, obviously it is a very good business in Australia.

New Zealand has been positive.

It's on a very positive track, both market wise and internal capability and other executing.

Philippines had an off year.

The market is fine.

They had had a good two or three year run in the Philippines and they just lost some of their momentum and fell back a bit.

So we expect that to bounce back pretty quickly.

But anyway, the fourth quarter in the region wasn't anything to brag about.

There weren't any big issues in the region.

But it just wasn't that good of a quarter for this region, which is -- especially the Australian business -- used to delivering good results very consistently.

Considering sales volume and price.

Kind of fine, I guess, relative to the market they are in.

Lost some money on the EBIT line relative to last year on a similar -- a little bit more volume, a little bit less EBIT.

So that's not great.

Again, it's a quarterly variance.

So you don't want to overreact to it and then the EBIT margin was down a bit.

The full year -- and this has the impact of the -- a few of the mistakes they made in the earlier quarters.

So net sales down a little bit because price was down a little bit and volume pretty flat in an ordinary market or a down market, whichever you want to call it.

EBIT down and that, to me, I trace almost all of that back to their ability to react to the lesser demand in our plants in Australia.

So -- anyway, EBIT margin 2.5 points off, still sitting right at the 20%.

I guess, part of our announcement today, we are expanding Carole Park.

So we would have talked to you about a year ago, based on our forecast for the business, which I think are pretty reliable.

We have got a lot of data points on the core business.

Obviously, it goes back a long way.

We have a lot of confidence in where our category share is and how consistent it is in Australia.

But more importantly, we've got the Scyon line growing to be a bigger and bigger part of the business and that does use capacity.

So when you see the price rises in Australia, those are largely mixed rises, as we sell more and more Scyon.

So we started out -- we actually started out with a greenfield concept for our new capacity here and it just wasn't affordable.

So this $89 million investment was like $200 million, when you want to get the green field.

The benefits of greenfield were pretty incremental over the benefits of expanding Carole Park.

Now, one thing we were a little bit uncomfortable with, we haven't closed the deal, but we are working on due diligence to acquire the land we're on in Carole Park.

Because we are a little bit uncomfortable -- although it's a good lease and it's a long term lease, we're a little bit uncomfortable investing that kind of money in a site we don't own the land.

Now, just as a reminder, we don't own the land in Asia Pac anywhere.

So -- and in Waxahachie in the US we don't own the land.

So, it's not like we don't invest in plants where we don't own land.

But we'd just feel a little bit better if we owned that land.

So we are in the process of buying that land.

I think -- I don't do well with all the square metres to standard metres, to standard feet.

But it's about 30 million square metres we'll get on the new -- basically, it's a new line, finishing some building and a new process put in the middle of the new line, which is kind of a product investment, rather than a capacity investment.

We'll build it -- I don't think we'll have any trouble building it.

We moved a US construction guy down here about a year ago, when we started scoping out the project.

So he'll stay down here to build the -- build the equipment related to the addition.

So, I guess, we got it under expected benefits.

It's really around Scyon.

A lot of Scyon is sold in Queensland and we can only make it in Rosehill.

So that will allow us to make it up in Queensland.

It does have a -- part of the investment is to make a flatter, smoother sheet and then obviously we will get lower freight costs, some scale advantages in the plant and the ability to meet future demand in the business and we're not closing on any sites to get there.

Okay, so I've probably covered this.

It's hard not to be confident in the housing market, where we are at right now.

It's pretty steady.

It's very steady.

I shouldn't say it's pretty steady.

Our ability to forecast has been way better than normal, which -- and I'm going back probably 18 months, probably 21 months now.

The market has been very predictable.

So that part of it has been very good.

Of course, all the forecasts are that it will continue, assuming there is not some huge shock to the economy.

We have a lot of capacity projects going on.

So I'll cover some of those again in Q&A.

We just have to get more serious about our EBIT returns than we were last year.

We definitely miscalculated.

When I was standing here a year ago, I would have thought yes, we'll go for 20, if we get 19, maybe 18.8, something like that and we get the other things accomplished that we want to accomplish, that's fine.

But I didn't see us coming in at 17.1.

So, we've got to get more serious about that.

In Australia, I guess, your feel for the market is better than mine.

But it looks flat to maybe slightly better, at least from our perspective.

New Zealand looks good and the Philippines I think, like I said, they'll have a bit of a bounce back, I believe.

So I'll hand over to Russell.

Good morning folks and thank you Louis.

So, Louis has run through most of the factors, so I'll skip some of this.

Price in the US was impacted by the focus on multi-family as well as in the new starter market and the move up homes, first move up homes, being a higher proportion of the market.

So that hasn't assisted our returns.

Also, the amount of money we were investing in organisational capability as well as incurring some costs in both the quarter and in the full year on capacity planning.

Quite a bit of that fell through to the expense line, was not capable of being capitalised and therefore had an adverse effect on earnings.

Also during the period, we reviewed New Zealand weather tightness.

At Q4 we elected not to take an increase.

Didn't see the need for that.

But it finished up with a $13.2 million charge for the year and left us with a $15.2 million provision at the end of the financial year.

We took some asset impairment charges, $11.1 million in the quarter, $16.9 million for the full year and of the $16.9 million, that was spread around five different plants and all but one were tied back to capability and capacity for the future, so you can see that this is really just a consequence under US GAAP of the capacity planning that we're doing and as a result of some of those assets being disused over the past four or five years, when we go back into have a look at capacity, we can't use all of the assets and we finish up having to replace them and then impairing the existing assets.

During the year we made a contribution to AICF of $184 million, AUD177 million, and we paid dividends as well of $188.5 million, which was a very significant increase on the $17.4 million we paid in the prior year.

The payment reflected dividends of $0.43 per security.

Today, we've also announced some second half dividends.

An ordinary dividend of $0.13 and a special dividend of $0.24 to give a total of $0.37 for the second half dividend and those dividends will be paid on the 26th of July 2013, bringing the total for the year, in terms of declared dividends, to $0.42.

I'm sorry, to $0.43.

Moving on to the results, net sales for the quarter were up 6% to $327 million.

Gross profit was up by a similar percentage.

SG&A expenses, as I think we flagged in previous quarters and also you can see it coming through the numbers that Louis reported, were up 19%.

Most of that was in the US business.

So there is a very significant increase, as Louis indicated.

We're aiming now not to have that increase on the existing level of expenditure, although we'll probably continue to see percentage increases on prior corresponding quarters in the early part of FY14.

Research and Development expenses were up 7% to $9 million and the asset impairments that I talked about are also represented in this slide, at $11 million for the quarter.

Asbestos adjustments, $131.6 million, and almost all of that was due to actuarial assessment.

In fact, one of the maybe minor notable features of this result, is that for both Q4 and for FY13, there has been only minor movements attributable to foreign exchange, whether it's for earnings or assets -- asbestos impairment.

The exchange rates were very stable and had little impact.

So almost all of that $131.6 million adjustment, for asbestos provision, relates to an increase in the actuarial estimate.

The net operating result for the quarter was a loss of $69.5 million, largely attributable to the asbestos adjustment and that compares with $480.7 million earnings at this quarter last year.

Almost all of that $480.7 million -- in fact more than -- $485 million of that was attributable to the fact that we booked a reversal following the court decision on the RCI tax case in Australia, so that was $485 million that we booked on that.

Moving on the full year, just looking at the recurring basis of the earnings if we adjust for those items that are non-recurring and don't impact operating earnings, we had a $30.7 million profit for the quarter, which was down 11% on $34.5 million last year.

You can see there the reversal of that tax adjustment a year ago was $485 million -- was a very big part of the $492 million that we took.

On to slide 23, which -- sorry, on to slide 22 -- I'm looking at the full year result.

Net sales were up $1321 million, up 7%.

Gross profit was up 3%, so we lost some of that at the gross profit level.

SG&A was up 14% for the full year, to $219 million.

Some of that was New Zealand weather tightness.

In fact, about half of that increase was New Zealand weather tightness and about half was run rate.

Research and development was up 22% to $37 million, then asset impairments and asbestos, which we've already talked about.

So the net operating profit was $45 million after all of those factors, compared with $604 million in the prior year, which was substantially impacted by the $485 million tax write-back that we had.

Turning now to slide 21, as it is on here.

It was a different number on my pack.

The full year result on a normalised basis, adding back those adjustments, was $140.8 million, compared with $144.3 million for the prior year, so just off a couple of percentage points.

On to slide 22, the segment EBIT was up 4% in the US business for the quarter, $37.8 million.

The Asia Pac business was down a little, 6%, to $16.7 million, and R&D expense up 25%, by $1.4 million, to give a total segment EBIT of $47.6 million, which was relatively flat on the prior year.

So the total EBIT came in at $37 million, compared with $41.9 million which was a 12% reduction.

Segment EBIT for the full year, as Louis highlighted in his section, the US and Europe segment was very flat, $162.5 million.

The Asia Pac business was down 13% to $75 million.

R&D spending was up by 26%, to $26 million.

That produced an EBIT for the Group of $181 million on a recurring basis, which was 7% down on the prior year.

Moving on to income tax expense on slide 24, the quarter, as I've previously flagged, doesn't mean a lot here because all it is a true-up under US GAAP.

The quarter's tax charge was $5.6 million, which produced an ETR -- and effective tax rate -- of 16.4%, which was a little higher than last year.

The far more meaningful number is the full year result because this is obviously tax expense and tax rate calculated on the basis of the full year rather than just a true up.

The tax charge was $37.4 million and the effective tax rate was 21.3%, which was down almost 2% on the prior corresponding period.

Moving on to cash flow on slide 26, the net operating cash flow for the year was $109.3 million on the basis of US GAAP.

That compares with $387.2 million.

It may appear a bit odd that we're not actually contributing to AICF this year, FY14, when we're reporting here a positive cash flow, positive operating cash flow, which is the basis on which the contribution to the fund is paid, but that's a result of the way in which US GAAP requires us to treat cash that's been dedicated to the AICF, which was the case a year ago.

So of the cash we had a year ago $135 million was dedicated and, therefore, it doesn't go in to operating cash flow because we made an early payment to the fund.

So maybe the easiest way to look at this is to take two years' cash flow together, and you'll see that we have actually contributed, on that basis, almost 35%.

There's a reason why it's a little different, but we will be making no contribution to the fund this year.

CapEx, purchases of property, plant and equipment, was up well on last year's numbers -- $36 million a year ago, $61 million this past year.

It was up significantly at the fourth quarter -- $20 million of CapEx in the fourth quarter.

We anticipate that that will continue to increase in line with the sort of capital spend that we've talked about for the US business.

Then, fairly soon, we'll expect to see some of the expense coming in for the expansion of the Australian business as well.

So there'll be quite a significant uplift in capital expenditure starting, likely, in the first quarter of this year, FY14.

Just looking at the spend in FY13 you can see that the $61 million was split about 80% to the US business and about 20% to Australia, or to Asia Pac, which was mostly Australia spending and the comment at the bottom flagging that we will continue to have increases in CapEx in FY14 and beyond.

Looking at slide 28 on liquidity, during the quarter we completed a refinancing of our debt facilities.

We established new facilities of $355 million and we retained an existing facility of $50 million, so we have total facilities of $405 million.

Gross debt was zero at year end.

In fact, we had cash of $154 million, so available liquidity is $559 million, and we've extended the term of our facilities to a total of -- or an average of 3.1 years, which is up substantially on where it was a year ago.

So it was a very timely refinancing.

Always better to be borrowing money when you don't actually need it.

As a consequence of that we're well set for the sort of outflows that we're anticipating over the next couple of years.

Just a little bit more on dividends -- the fact that we've split this year's dividend into an ordinary dividend of $0.13 -- or the second half dividend of $0.13 -- and a special dividend of $0.24 is really the outcome of the provisions in the asbestos agreements.

Under the terms of the asbestos agreements we have a lot of flexibility in what we can do and the way we can do things, but we're always very diligent about the way in which we characterise the dividends.

The special relates to the fact that it was either a share buyback or a dividend, but we've chosen to characterise it as a special dividend.

The $0.24 that we paid is really in lieu of what we'd previously announced as a share buyback a year ago.

The share buyback wasn't activated so we've described it as a special dividend.

Looking more, perhaps, into the FY14 capital management, we did announce a while ago that we were planning to increase the dividend payout ratio from 20% to 30% to between 30% and 50% of net operating profit.

We've already achieved that actually in FY13, at least at the end of the year.

We will remain with that 30% to 50% distribution going forward into FY14.

We've also announced this morning that we're going to renew the share buyback facility to 5% of issued capital for the next 12 months.

We have had some feedback in relation to the announcement that we made a year ago about people are a bit confused about why we have a share buyback announced.

The reason for it is that the ASX actually requires that companies announce, but not activate, share buyback programs through a cooling off period of two weeks.

Our intention is to be, actually, fairly opportunistic about share buyback activity.

If we see a drop in the share price we don't want to have to wait for two weeks for a cooling off period before actually activating a program.

So our expectation is that Hardie will actually have a share buyback program on foot almost all of the time.

We may not activate a program in FY14.

If we do it will be driven by share price level as well as by financial metrics such as return on equity and our outlook for capital requirements.

If we don't activate the buyback program during FY14, or to the extent that we don't, we expect to continue to have a further dividend payable to shareholders in July or around July of 2014.

I guess the bottom line out of this is, obviously, we'll have a share buyback program available to us.

Ordinary dividends will flex with earnings and special dividends will be driven by what might otherwise have been applied to a share buyback if we -- or to the extent that we don't activate the share buyback.

So I hope that helps people to understand what was driving it.

Perhaps we didn't communicate as clearly as we should have a year ago, but this is about returning Hardie into a more efficient capital position, but there are various ways in which we can achieve that.

We don't have to do share buyback in order to do it.

If it's more efficient to do it by way of special dividends, then that's what we will do.

Moving on to asbestos -- a few slides, given that at year end we always do an actuarial reassessment, and that has been the case at 31 March this year.

The discounted central estimate increased by AUD114 million to almost AUD1.7 billion.

We did make contributions to the fund of $184 million in the past year, including an early contribution of $139 million that enabled the fund to repay a New South Wales Government loan under the standby facility that it provides to the fund.

As noted here, and as I indicated before, we won't be making a contribution to the fund in FY14.

The net liability -- this looks a little unusual against -- or it's contrary to expectation, I guess, given that we had an increase in the actuarial estimate and foreign exchange rates were quite steady, one would have expected that the net unfunded liability may have increased.

In fact, as you can see here, it's gone from $942 million a year ago to $851 million at the end of '13.

That's largely because the fund received a very large payment from Hardie last year, so it's still holding quite a significant asset base at the end of 2013, and it's repaid the loan that it had from the state.

In addition, there have been some unusual outcomes, I guess, on the discounting and inflation allowance.

Interest rates were down in Australia, but inflation is down as well.

So there's a large reduction in the liability as a result of those movements.

It's very pleasing to see that the liability is actually coming down, even though the actuarial estimate isn't necessarily indicating that that's the way it would go at face value.

This slide is one we show each year end.

It's relating to the actuarial estimates.

It's, I think, one of the better ways of capturing what's going on.

As I've said in the past, the blue line here -- which is a very flat line, as you can see, across the many years -- the nine years or so that KPMG has being doing the actuarial work -- is actually a very -- relatively steady line, but it's the discounted central estimate in the blue line.

It's got a lot of noise in it in terms of discount rates and discount factors.

I think it's the least accurate representation of what's happening with the liability.

Far more reliable is the orange line, which is the undiscounted estimate.

You can see that that's been trending down.

Also the orange bars -- which are a representation of the range of estimates that KPMG arrives at each year -- and you can see that, over time, the range of estimates has actually been narrowing, particularly in terms of the top of the range coming down, which is, I think, quite a pleasing evolution of the liability.

Moving on to the claims paid and cash flow of the fund you can see that the claims paid on a gross basis were AUD112 million, which was pretty much in line with the actuarial estimate of a year ago.

The fund was very active in insurance and cross-claim recoveries.

It had a very significant inflow in respect of the HIH reinsurance during this year.

So I think AUD35.7 million is probably a record for the fund in terms of its third party recoveries.

The net claims cost as a consequence were AUD85.6 million, which is significantly below the AUD107 million that had been anticipated in the actuarial estimate of a year ago and was not all that significantly -- given the number of claims that we're about -- on the FY12 numbers.

A quick snapshot of the fund's asset position -- you can see here that a year ago it had cash of AUD62 million, which it subsequently repaid a loan from the state, which is marked there at AUD30 million as the second last line.

Hardie made a contribution of some considerable size and, together with all of the outflows and recoveries, it left the fund with AUD128 million of assets at the end of FY13.

So although we won't be making a payment to it this FY14 year, the fund is in very good shape in terms of its assets.

Moving on to a bit of a snapshot on New Zealand weather tightness -- and noted that since FY02 we've been having weather tightness claims in New Zealand relating to issues with the building code in New Zealand that existed from 1998 to 2004, when the Government reinstated it -- some old building code practices that had dropped in the mid-'90s.

The claims involve multiple parties, relate to very poor construction practices and alleged loss is almost always due to excessive moisture penetration.

So it's all about the building envelope.

As I indicated earlier we recognised expenses during the year of $13.2 million in FY13, and also had a provision at the end of the year of $15.2 million.

We've had third party recoveries in relation to most of these claims through the period up to the end of FY12.

Only since the end of FY12 have we been -- or at the end of FY12 and subsequently -- have we been taking significant expense into our own accounts.

Subsequent to year end there has been a further development.

We made an announcement to this effect in April.

The New Zealand Ministry of Education has issued a claim through the New Zealand court process seeking damages against three building materials companies, including Hardie.

It's a really unusual sort of a claim in New Zealand, in that it's got characteristics of a class action, which is not a common form of action in New Zealand.

It certainly is alone in terms of all the claims for weather tightness that have been lodged.

We've taken no provision at the end of FY13 in relation to this claim for a number of reasons.

One of them is that there's no damages specified in the claim and it relates to multiple buildings on multiple sites.

The Ministry of Education is unable to tell us what the damages are in the claim, or even outside of the claim, as it relates to the whole of the buildings or in any individual buildings or any individual schools.

So it would just not be possible to arrive at an estimate, let alone to any probability.

We suspect that we're going to be waiting for some time before we know what the damages are by building, by school, or an aggregate.

That's at least the indication that we've had.

So we'll keep this under review, but there was certainly no basis in our mind for making any provision.

We may finish up with a range of loss.

We may finish up with zero loss.

We'll just have to see how it plays out, but I expect that this is going to be a very, very protracted process.

Moving on to summary, as we've indicated volumes were very satisfactory in the US business.

Price maybe not so satisfactory, but some of that's structural in relation to the way the market has evolved.

But we expect that to change perhaps during this next 12 month period.

We had lower earnings from Asia Pac and we did make a significant contribution to the fund through the year and also paid a very significant dividend of $188.5 million.

That concludes my presentation.

So we'll move on to questions.

Louis can resume the --

Okay, yes.

Simon Thackray from Nomura.

Just a couple of questions.

Russell if I can just start.

You made the comment about SG&A fourth quarter is $58 million for the fourth quarter US and that would be roughly the run rate going forward.

So it's sort of $230 million to $240 million annually.

So what should we be thinking about?

I don't know how reflected the $58 million was, but what we'd expected to do is see it flattening out with the increases.

So if it's $58 million times four I'm not sure.

It might be $58 million times four plus a bit.

But it won't be at the same rate it's been at.

Yes, it's not growing at the same rate.

I guess that leads into the next question Lou, which is just trying to come up with this EBIT bridge to your expectations for a 20% plus EBIT margins.

You said before you need to do better than that the first couple of quarters to hit.

Yes.

So could you maybe just help us -- well help me step through the bridge.

Yes, yes no problem.

So you've probably all done the arithmetic.

So, you know we had a 17.1% which was $162 million in actual EBIT dollars.

So if we had a 20% last year we would have -- on the same exact revenue, we would have needed $190 million, so about $28 million short.

Of course some of that would have come at price.

So let's call it you were $30 million short, because as your revenue goes up, you need a few more dollars.

If you take a look at that price slide which we had up, I can probably get back to it.

But the -- you know we kind of peaked on price in the US business in fiscal year '11 at $652 million and then like I said we slipped [$13 million] since then.

So if you had all [$13 million] on last year's volume, it would have been about $19 million, okay.

But now some of that's mixed.

So the $19 million wouldn't have been straight to the bottom line.

So if you figure maybe $15 million would have gone into bottom line, we still needed another $15 million on the cost side, okay.

So you can get that in unit cost or the other costs in your business.

Like I said, going into the year I thought we might have been able to stretch to a [$20 million], but what I really want to do is get kind of back ready to grow the business, both from a capacity stand point and from a kind of capability on the sales marketing side or demand generation.

But we did come up short and the short part of the cost wasn't that we put more money in than we thought we were, we just thought we were going to get some efficiencies in the business that we haven't gotten.

So I think next year when you look at it, so say we grew the business 12% volume again and your price is -- so your price is flat, the difference between the EBIT this year and last year now isn't $30 million, it's looking more like $50 million.

So the $50 million comes, if we get the $50 million, the $50 million, a portion of it comes from the extra volume, the 12% extra volume, a portion that would in my mind have to come from just slightly higher pricing.

So we will have a price increase in HardieBacker.

We've had a small -- we've had an increase in a small product line, HLD Trim and we've had some movement on the floor at assembly pricing.

So we do have some price improvement happening in the business.

What we don't have is a market wide increase in the business and at this point one is not planned for fiscal year '14.

So the reality is to pull back up to $20 million, which would be just the bottom of our target range.

You know we're going to have to get those efficiencies in cost that we thought we could get this year that we didn't get.

So that's kind of the challenge for the business.

If we get 1% price, obviously that would be about $10 million in the [50s], so you still have to get -- and then you get your volume contribution, say that's another whatever it is, say $25 million.

Then it's another $15 million in cost.

So we've got to get that cost piece.

There's some in the plants, but a lot in between us and the customer as well, so the supply chain part of it, which is the sourcing, the product scheduling and the free component.

So that's how we get there.

Now is it possible to do?

It's certainly possible to do.

Is it an easy thing to do?

A business our size, you know maybe increasing EBIT by as much as $50 million that's not an easy thing to do.

But you know I still think that's certainly our intention in the business and that's what we're aiming for.

So, that's very helpful, thanks Louis.

I'm just looking at you're pleased with volume and you're sort of indicating your market was 6% from a system and your PDG therefore was 6% to get to your 12, 6% versus a market in housing that's gone up dramatically more than that, including multifamily and an average pricing outcome that suggests you're doing a hell of a lot more volume at the low end.

I'm just trying to work out how the price is -- I know take your point about the EBIT bridge, but how your price gets up from here.

In our previous concerns, you don't want to invite competitive capacity expansion either by taking price at the low end.

Yeah, that's a good point.

Again, sorry about that.

One of the upsides we may have in the plan is the housing market.

Certainly it looks better now than it did two, three months ago when we did most of our planning, So whether that sustains itself through the year or not.

But our volume going with our plan is something I can definitely see is achievable if you look at other years where you had increase in demand markets, meaning housing was on their way up.

You take your March volume, multiple it by 12 and add another about 5% and that's kind of an indicator of where you might end up for the year.

Now, March is affected by weather.

Sometimes you get an early season, sometimes you get a late.

So you've got to dig in a little bit and kind of apply some judgment.

But based on the March times 12, our volumes look okay.

Now if the housing market's better than it was forecasted to be in January, we might have some upside.

So then we get back to Simon's real question which is if all this is happening in the south and the west and it's happening with big builders and it's happening with multifamily, can you really get your price up?

That's where there's kind of a -- that's where it becomes difficult to communicate externally because we look at price per segment, okay.

We don't necessarily look at the overall average price that we give you.

We look at is our Cemplank price coming up?

What's our contribution margin on Cemplank doing?

Is our multifamily bid pricing coming up?

What does that contribution margin look like?

Then obviously with HardieBacker Trim.

So even though you may see a price decrease because Trim didn't grow as a fast a rate as Cemplank, that doesn't mean you have a contribution decrease during that same period.

So Cemplank has been growing as a part of our business, partly because the gap between Cemplank and Hardie got larger and more people chose to move down and partly because there's a lot of activity and there's a lot more price conscious buyers out there.

So, what we can do is we take care of the internal piece, meaning if we had the gap wrong or presented the products wrong, we can address that.

But if big builders -- I think we have agreements with 19 out of the 20 big builders in the US and I think about 14 of them use Cemplank exclusively.

If they use more Cemplank, the good news is we're going to get the business.

The bad news is it's a lower price than if we were selling them a Hardie brand.

But we do have all that in our forecast.

So again, it's not stuff we can ignore.

It is one of the estimates we had wrong last year.

So I'm not actually telling you we're right on top of this, We know exactly what's going to happen.

But it's a possibility that more Cemplank would lead to that price not coming up next year and if that price slipped another $6, $7 even on an average basis, I think it would be very hard to find a 20% EBIT margin.

Thanks, thanks Louis.

Then just quickly Russell, in terms of CapEx, for '14, obviously with Carole Park coming on.

CapEx for '14 and just confirmation of the tax rate please.

Yes thanks Simon, both good questions.

So CapEx for this year, the indications are that it will likely come in at about $150 million for FY14.

I think frankly our guys are going to struggle to spend at that rate.

I don't want to give a different number, but we'll have a pretty good feel for it as we get through the year, but I'll be pretty surprised if we actually achieve that sort of spend level.

In terms of the effective tax rate, I think I did flag at Q3 that we've been guiding through FY13 at 25% plus or minus 2%, but given the way things had evolved through the year it was more likely to vary more to the down side than 2% and that's the way it played out.

I think the 21% or so that we had for the full year is probably about as low as it will get.

It is going to be very driven by what happens with the geographic mix of earnings.

As you guys know, the US at 38% is including state taxes, is the highest tax rate that we see in our mix of business or jurisdictions.

If the US market turns up or the business turns up in the way that Louis has just described, then clearly that has a pretty significant impact on our ETR.

But I'd say 21% is about as low as it will get and it will be somewhere between 21 and 25 in all likelihood for FY14.

Good morning, Andrew Peros, Credit Suisse.

Russell, while you are at the mic, perhaps I'll start off with you firstly.

Appreciate the comments you made a little earlier around the buy-back.

But just wondering if you could help us out, at what point or where does your share price have to be for you guys to pull the trigger on that buy-back?

Sorry, at what point is it not accretive I guess from your perspective?

You'll learn after we've traded Andrew.

All right.

Then I guess failing that, if you do decide to repatriate capital through a special div, would a $0.24 dividend be likely?

Or is that something we should expect?

It's not the CFO who makes the decisions on dividends.

It's something that the board always preserves its right for.

I mean my expectation would be that as I indicated to you that ordinary dividends will flex with earnings, given the dividend payout ratio policy that we've adopted of 30% to 50% and we'd be looking to do special dividends, in lieu of buy-back we've announced a 5% buy-back.

So I think you can draw from that that roughly the same sort of special dividend that we've contemplated is likely or at least in our minds for FY14 on that basis.

But it does depend very substantially on the extent to which we do or don't do share buy-back activity.

Okay thanks.

One for Lou, perhaps just a point of clarification on R&D.

Obviously head count's up, costs are up and running well above trend.

I think you've previously guided to roughly about $25 million to $30 million in R&D spend.

Is that something you're still targeting going forward?

Yes.

I think the increase in R&D last year was around a couple of specific projects, one of which will show you if you come on the tour this September at Fontana.

So I think the spike in R&D dollars was very project driven.

So it's not meant to be necessarily a higher level of spend going forward.

I think it might settle down a little bit this year, actually.

Okay and the plant at Chicago that you've just opened, is this - just wondering how we should think about this.

Is this something that you think is a necessary requirement to grow market share or is this something that you have other aspirations of in terms of growing margins or how should we think about that investment?

Yes, that's a good question, because it is a mix.

So the coatings part of it is to protect our position with ColorPlus and Fibre Cement.

So you know our brand promise is around durability and maintenance.

So since we didn't own any of our technologies in coating and Color Plus was getting to be a bigger and bigger percentage of our product line.

We just felt like we had no issues with Valspar and that agreement I think runs through like 2016.

So it's not like it's coming to an end in the near term.

But we just felt like we had to build our capability.

Now I do think we'll get some benefits by having that capability.

But it's almost a certainty supply investment rather than an enhanced margin investment.

Then I would say right now probably, I'm guessing, I didn't even ask the guys to check my guesses here.

But my guess would be we're probably spending two thirds of our money on coatings and one third on non-fibre cement product development.

That would be searching for a new category to invest in to a greater degree and kind of grow another leg in the US besides fibre cement.

So that would be long term strategic investment.

Andrew Johnston, CLSA.

A couple of questions.

Louis, just on the -- you mentioned before about the mixed shift and you mentioned targeted penetration into particular markets.

Can you expand on that a little, because that seems to be the issue around the margin?

Yes it's probably yes you run the margin, but like I said if I give you a longer explanation.

I guess the work we did in the early 2000s up till the downturn was kind of right in our sweet spot, a lot of (inaudible) Plank and we were just getting Color established.

We didn't make much money on Color at the time, but it wasn't near as big a part of our mix then.

So we were getting very high margins, almost everything we sold okay.

Now Cemplank we get returns on, but not anything like the normal margins we get on the middle market stuff.

Anything in the top of the market has so much market development that goes along with it, you don't get your margin there either.

So, what we need to do is, I mean we need to grow all segments okay.

So we can't be a 35 company, we can't see fibre cement get to the size that we want it to be or the market share we want it to be if we're just willing to participate [where we] make these huge margins.

That's what I said - so I don't think -- we don't manage it -- well obviously no company would.

But we don't manage it at average numbers.

It's how you're getting to that average, that's a lot more important.

I don't want to mislead you.

There is some management gap or management performance in that number.

In other words that number could easily be just throw six bucks on it.

Could be easily [$6.45] with perfect price management okay.

But then the rest of it is about different segments growing at different rates and big builders picking up a little bit more of the business on a recovery than they had going into that downturn and stuff like that.

Okay, but we're seeing the emergence of the custom builders back again, so that should help --

Yes, you know I don't think there's -- there's been maybe some movements in the market.

I've seen some of the papers on multifamily and some of the papers on -- by the way, the other thing we didn't do well last year is we didn't go our northern business well.

So forget that the northern market didn't grow as quickly as say southern and western markets, from a demand standpoint.

We didn't do as well ourselves within that northern market.

So it was kind of a double drag on that.

As you know Color is highly bias toward the north.

But yes, you're right.

I think all the segments will come back and they'll be a little bit different than they were but -- and I've seen papers on mix.

All that stuff's right.

But that's not at the core of what's happening okay.

We're a little bit higher on market share as we calculate it than we were last year.

But we've just got to keep climbing that market share curve and not be confused by, hey, more multifamily, less you now this, more that, because we have to participate in all segments.

We're capable of participating in and making returns in all of the segments.

So that's what we need to do.

So what was the issue in the north?

I assume that's north east.

It's just you know, not everything runs well in a business.

So the north didn't run as well as it should have last year.

Was that marketing or a --

Market side, market side.

Not enough consistency in the market.

Not enough emphasis on new construction what was coming back.

Not as good with the general as we should have been.

All right thanks.

Liam Farlow from Macquarie.

Just a quick question on New Zealand weather tightness.

Obviously you've seen an increase in expenses and a higher provision, even excluding the Ministry of Education Claim, where do you see those claims during the future?

What's recoverable from insurance from here moving on?

What are some of the scenarios you've looked at with regards to potentially the Ministry of Education Claim or are there potential claims that could emerge over there?

As far as scenarios you're pointing too is this a New Zealand liability or will it go beyond New Zealand business.

We don't see we're in that magnitude of claim at this point -- start even going through that early thinking.

As far as insurance, Russell, you got the update on the insurance?

It was largely covered for a certain period of time and now there's some dispute going on.

So right now the coverage isn't fair for what's happening right now.

Is that not expected to return from an insurance coverage perspective?

No.

It's Michael Ward from CBA.

Just in Simon's question you elaborated the $50 million.

You talked about the 12% volume.

You talked about 1% price.

It sounds like a lot of it is coming from the efficiency side rather than the price side.

Can you maybe just give us a little bit more detail?

Is it as simple as 12% volume comes through and the efficiency benefits fall out?

Or is there more that needs to be done in the business on the efficiency side?

No, there's definitely more that needs to be done in the business.

So you definitely -- your volume contribution dollars -- straightforward.

We actually have to increase our contribution dollars per unit as well across all the units we ship.

So there are some things we did in the business during the downturn, especially on machine performance, that were very good.

So we get much higher throughput on a lot of our -- most of our machines in the business right now.

We just haven't turned that into the dollars that we should have.

So it's an internal -- I mean I would have never predicted this.

I think our organisation's finding it hard to move to high demand again.

So the machines are running -- they're running well -- but, like I said, we're just inefficient in other things we're doing, whether it be sourcing, scheduling or shipping, to where a lot of your benefit of running well doesn't find its way into bottom line.

So the business needs to run better next year than it ran this last year.

There's just no two ways about it, and these are run better.

That's not to say we're a poorly run business.

I mean this is a Hardie standard.

This is still [20% to 25%] margin range we're looking for.

It's not judging you by what peers can do.

It's judging you by what we're able to do, what our potential is in the business.

We didn't operate near our potential last year.

We came up short.

So, of that non-price contribution to the expected earnings improvement, is it the volume side that's big?

Or is the internal efficiency side that's probably big?

It would be the volume -- you've got the three pieces.

If we did get 1% we got 12%.

The cost side, I think, is more like $15 million, $18 million.

So you can't get there on cost, you can't get there on price and you can't get there on volume.

You've got to do all three better.

Okay, thank you.

Maybe just a question for Russell, on the cash flow.

Just looking at the trading, or the cash generated by trading activities.

Can you talk us through the big change in other non-cash items, what that is from a positive 73 to only a positive 11, and then make some comments around working capital, where you've had an outflow of $34 million this year?

Sorry, did you say on the other non-cash items?

Yes.

So the 73 to the 12, and then just some comments around working capital, whether or not you're happy with the performance there.

I'll have to get back to you on the 73, Michael.

I just can't recall what that is, or what that was for FY12.

It's certainly a big number.

I'll get back to you on that one.

On the networking capital movements we -- I think we're probably in much better shape than we were across all of our businesses in working capital.

We did run quite a program in the middle of 2012.

That's calendar '12.

I think we've made some pretty good progress there relative to the prior period, but the business in the US is growing, and that clearly does soak up a fair bit of working capital.

If I look at all of the areas -- particularly our inventory and our accounts receivables across the Group -- we've probably got some way to go but, generally, I think we're in pretty good shape.

Thanks.

Hi.

It's Emily [Vankey] from Deutsche Bank.

Just wondering, Louis, if you might be able to -- you mentioned at the beginning of the presentation that while the US market was good that you guys could have done better.

I presume that's on the costs side.

I'm wondering if that is the $15 million to $18 million or so that you're thinking that you need to find in FY14.

I think last year was probably $10 million to $12 million we missed.

That turns into a bigger number because I think we're further along in a few areas.

Again, I think if you really want to be critical about our performance last year the 12% volume is fine, but we should have done better in the north.

So we should have had a bit more volume by doing better in the north.

If we did better in the north we'd have a bit more price.

So I've been working at Hardie a long time -- 22 years -- eight years in this job.

I'd say as reflected (inaudible).

At the eight years I've been in this job this is one of the -- this is either the worst or second worst year I've had.

That's not to say we had any big mistakes.

It was missed opportunities rather than performance gaps.

It's just missed opportunities.

The market's starting to co-operate with us and we're spinning our wheels in too many areas.

So we've got to quit spending and get more traction.

Okay, thanks.

Just with the price increases that have been announced in [Baca] and, I think, you said HLD, wasn't it?

I'm just wondering--

HLB Trim and -- we did make a product enhancement on Trim, so some of that's going to be offset by cost increase due to the edge enhancement we made in (inaudible), which isn't implemented yet, but it'll come in in the next couple of months.

Okay.

So on the basis of those market increases would that get you to the 1%?

Or do you need some mix to work in your favour?

We need a little bit of help on the bottom of (inaudible) market and we need a little bit of help on [big price] and multi-family.

Okay, thanks.

You mentioned 6% PDG growth this year.

Where is that mainly coming from?

New, R&R, which parts of the country?

Yes, well, I can tell you where it came last year.

It was south and west dominant because, like I said, the north didn't do as well as we should have.

I think we're steady on our R&R program, so we haven't had any resources pulled out of R&R.

I feel like the gains we've had there will continue, which, those are mainly in the vinyl markets.

So the other bias will be toward new construction.

So we're going through a little capability gap in the construction because so many of our good people went into R&R.

We don't want to just pull them out of R&R, put them back into construction.

So some of our newer people are going in the new construction so it's a bit of a training emphasis now to get the new resources up under construction, get the market development and vinyl markets.

So what -- in FY13 what would be the new versus R&R mix in your volumes, roughly?

I didn't even try and calculate, to be honest with you.

Okay.

That's just more of an intuitive sense of where we're at.

So R&R would have gone up by more than new in terms of share?

Yes.

I think that's probably right.

Okay, thank you.

Because we definitely have more of our resources pointed there.

Thank you.

Lou, Andrew Scott, CIMB.

Just, maybe, following on from that, I'm just -- and you alluded to -- the start -- struggling to get back to that US 8% volume.

If we take a one quarter lag, I think, US total starts are up high 30s, single family up 29%.

If you assume about 35% of that single family comes through to you, you're already at, probably, 10% or very close to in terms of a volume growth, and that's before you get the other 65% growing at a smaller rate.

What am I missing there?

Otherwise I'd be saying I would have thought your PDD slipped in the quarter.

I think one thing you missed is -- did you say you thought we'd get 35% in new construction or--

Thereabouts.

I mean you can bring it back to 30% , it's not going to change the equation too much, but--

Okay.

So our current share on new construction's very similar to R&R.

So we don't do it so much in our share.

So the guys that calculated that in our business will just calculate it to opportunity, and they'll calculate the opportunity increase and then we'll look at our change relative to the increase.

So it's market share -- before market share, after (inaudible), and that's how they get the PDG.

So I'm not sure.

Sean will have to help you with that specific arithmetic, I think, but the really tough thing -- and the reason we don't publish PDG anymore is no-one's out there with a good R&R market, market number.

There used to be some people out there.

At the DNH we had one at some time.

Someone told me they were coming back with it, but we found it to be very inaccurate.

So we were just a little bit worried about publishing numbers which end up being in decimal point results and indicated this is where we're at, because we think it's directionally right where we're at.

We use a couple of proxies for the R&R market.

We get a lot of insight into what Home Depot and Lowe's does in building materials, so that's one of the biggest things we use for the R&R market.

The other thing we get is, we get the vinyl.

We get the vinyl numbers and then -- the thing that's emerged recently -- and you guys would be aware -- this is, LP is starting to grow chipboard siding again.

So they're numbers you can -- you can figure out their volume from the results.

That's a one industry player now.

There's some smaller players in hardboard siding, but they don't add up to much.

So we see the vinyl in decline.

So it's -- if vinyl wasn't in decline, then you'd say well, you might be guessing wrong on your R&R index, but we're pretty confident, with vinyl in decline, and at the rate LP's growing and at the rate (inaudible) are growing, it all calculates to be in line with our PDG and our result.

I guess you guys follow the bricks.

We don't follow the bricks so much because we don't feel they're -- we're not swapping out for bricks, and they're not swapping for us.

Anyway, Sean, you'll have to show him how we calculate that.

I didn't quite follow it.

Okay.

Just one more, just Carole Park addresses, I guess, the new capacity in Australia, but it leaves you with a very old Rosehill plant.

Have we come to a bit of a CapEx hump there, to bring that back to expected standards for Hardie's?

The answer's no.

I'm trying to reflect on the old part of Rosehill.

The sheet machines are fine.

I can't remember when the sheet machines were put in.

One of them was put in just before we built Fontana.

We since expanded that and, I think, the second one we invested in, probably in the '90s.

As far as making sheets -- Australian plants are more than capable of making sheets in a high throughput manner, so that's not a problem.

Where their business is quite different is after the autoclave.

I think so many investment and finishing lines in Australia have been not as good as it could have been.

It depends too much on manual labour, and labour's very expensive in Australia.

So I think we'll start to work through the post-autoclave investment, in both the sites down here, not just the new finishing capability that goes with the new sheet machine, but other finishing lines we have in Australia.

Rosehill's sitting on expensive land.

That's why I thought we might move off of that site.

Quite honestly, the difference in their cost relative to a green field or even a new Carole Park it doesn't justify moving.

Okay.

We might check if there's any questions on the phone please.

We do have some questions over the phone.

The first one comes from Jason Steed with J.P. Morgan.

Please go ahead.

Oh, hi.

Good morning, Lou.

Good morning, Russell.

A couple of questions -- I'm sorry to go back to the 20%, but I just wanted to pick up on two points around that.

We picked up from Meritage Homes the last couple of days that their rebates from building materials companies are rising.

Appreciate that's across a broad spectrum of building products and materials, but I just wanted to get a sense of where you are in terms of rebates and just a reminder on how you calculate that.

Does that sit within OpEx or is it a -- or does it affect your average sales price?

And then the second question, just on input costs in terms of, Lou, the structure that you went through in terms of getting back to 20%, pulp going up, freight going up too, you obviously need to offset those as well.

So maybe you can just comment how you see overcoming that.

Does that imply even more price action and a shift away from Cemplank for instance?

Yeah, so on the builder rebates, so you see net numbers, and our builder rebates have changed recently because we've taken some of the builder discounts off invoice and put them on rebates.

So we'll see a higher rebate in the business but you won't see a lower net price because of it because it will just be trading rebates off for a discount on invoice.

So your -- sorry to jump in there -- so your sort of average implied discount as it were hasn't really changed, it's still where it was say versus the year-ago and you don't expect it to increase despite the structural change?

That is correct, and the structure, I think you just pick the builder that's on a bit of a run.

So I don't think overall that builders -- well, I'm not close enough to the other products.

Maybe the other products as they get their pricing up, or are going back to the big builders with more rebates, I'm not sure, but that's not our intention.

We think our pricing with our big builders is where it needs to be.

As far as -- yes, you're right on pulp and freight.

Now, freight -- of course, freight always goes up seasonally so we're seeing that now but we do see the risk that both freight on an annualised basis and pulp, our annual number could be higher and right now we have some increase in there but we don't have either of them going -- you know, rising very quickly or strongly.

So that would be one of the things obviously not very much in our control that could get in the way of us hitting 20 even if we did all the internal things well.

But right now, you know, we're not quite two months through the year.

They're kind of where we think they should be if our overall forecast is right.

So now, like I said, that can change, they're commodities, both of them so they can go on a run, but right now we're comfortable with the pattern of increases that both pulp has taken and the freight haulers have taken.

Okay, great, thank you.

And one just quick last one, just on the Blandon closure, I think it's about a -- it's about a 200 capacity plant.

Just remind us, I can't recall whether that was on the cards, or maybe you could just remind us of what -- why that decision was taken with that plant specifically.

Which plant was that?

As in not to reopen, I should be more specific.

Blandon?

Yes.

No, Blandon, I guess we've talked in general terms about Blandon in the past and you know, almost always -- and we saw it again with the decision in Australia, it almost never makes sense to move a plant.

You always kind of -- if you start somewhere you're going to have better returns if you stay where you are and kind of optimise your uniqueness in their plant rather than just giving up and moving on.

I think Blandon's been our -- the real exception that you guys would remember, we bought Blandon from Etex.

It was a Cemplank plant, one of the two, and it was their initial plant in the US.

Now, we didn't like the plant the day we bought it, we thought it was in the wrong place and we didn't like the machine, but we thought with incremental investments, just as I described there we'd get better returns than just kind of closing it down and starting new somewhere else in the northeast.

We felt the same way about Somerville when we bought that and I think in one case we were right, Somerville and in Blandon's case we were wrong, we should have -- when we bought the Temple plant in Texas we saw that it just -- what was in the plant wasn't going to deliver what we wanted and we gutted the plant, kept all the infrastructure around raw material and effluent and all that and just put new machines in the plant.

That's what we should have done with Blandon, okay.

And if we stayed in Blandon that's exactly what we would do now.

So it's been, you know, a couple of mistakes made along the way.

But now we're just of the mind, and the numbers kind of point too, you could put in incremental capacity in Peru and Pulaski and get a better return than by fixing up Blandon.

So that's why we're going to fully exit the Blandon site and I think the latest impairment reflects the land and building value as it's anticipated as we sell it.

Okay, thanks very much, Lou.

Yes.

Thank you.

The next question is from David Leitch with UBS.

Please go ahead.

Oh, good morning, long conference call.

I was just looking for a bit of guidance on CapEx in FY -- total CapEx in FY14 and maybe even the following year, given the Australian expenditure and that you've indicated some spending in the USA as well.

What's our official guidance there?

Yes, so officially we're saying $150 million per year, I think that's right.

It may not actually be levelled at two years, but the $300 million, $100 million of which is in Australia and a couple of hundred in the US, kind of looks good to us.

Thanks very much.

Yes.

Thank you.

The next question comes from Matthew McNee with Goldman Sachs.

Please go ahead.

I'll just make this quick as well.

Russell, just the legal -- sorry, the insurance recoveries you got in the asbestos this year, was there -- there was a significant element of one-off in that, so where would you expect that to go next year?

One-off is probably a little strong, Matthew, in terms of the explanation or characterization of it.

The actuaries are always very harsh in their assessment of recoverability of insurance proceeds, and AICF had a very substantial exposure to the insolvency of HIH, and given HIH's financial condition there was a very high probability that there'd be significant challenges in recovering from HIH liquidators.

As things have played out, AICF has been very successful in the courts, including the courts in the UK in asserting its rights, yet that's not allowed for in the actuarial estimate.

It's not complete but it's unlikely that future years will contain the same sort of dollars in terms of cutting through to recovery on the HIH proceeds because most of the gains have been had.

The other side of insurance recoveries is typically some one-offs that come through in commutations of policies.

Those things are -- they happen periodically.

They haven't been big dollars in FY13 and they're unlikely to be big dollars going forward.

And Russell, just one other -- just -- from memory, Rosehill and I'm not sure about Carole Park but I think they were originally owned by the fund, the original fund.

Is that the case now or not, with the land?

It's not the case now.

Just a little bit of background to that.

That -- those properties were part of the $300 million or so seeding of the funds of the Medical Research and Compensation Foundation in 2001.

That fund didn't hold onto the land and buildings for any of the sites in Australia or New Zealand for a long period of time.

I'm a bit rusty on exactly when they were sold but I think it was about 2003, 2004 period, though there are different owners of the site now.

As Louis indicated we've been successful in negotiating the purchase in relation to the Carole Park site which was in fact being marketed by the owner.

And what's the term of the lease at Rosehill?

It's got -- I'm not going to be precise here, Matt, because the numbers didn't -- or the years didn't match up on all the sites, but we've got a right to extend the lease through to sometime in the 2030s, I think it's about 2035, something like that.

Oh, okay.

So we're not at risk of being evicted from the site.

Yes, no worries.

Thanks.

Thank you.

The final question on the phone comes from Ben Chan with Merrill Lynch.

Please go ahead.

Oh, thanks very much, Russell.

Just -- it's my understanding there was some restrictions regarding the payout ratio on maybe a rolling two or three year basis under the asbestos scheme, and I'm just wondering.

I understand your 30% to 50% guidance is ex-asbestos.

What about other NRIs?

I'm specifically thinking about if you do take a provision for the New Zealand schools liability.

If your payout ratio would be calculated post that potentially or if that's just completely irrelevant?

No, it's not irrelevant, Ben.

The amount that we're permitted to pay out by way of ordinary dividends is 75% of the past two years' earnings, always -- in an average of two years I should say.

So it's reasonably complicated, I've oversimplified it in describing it in the way I have, but it is -- you know, anything effectively goes to those earnings.

So in other words, New Zealand weather tightness would be one of the many factors that impact the base on which the 75% is calculated.

Thanks.

It looks as though we have one more question there.

We've just got one question from media.

Hi.

Kylie Williams from AAP.

I was just wondering if you could provide a little bit of colour of where you think the Australian housing market is heading over the next 12 months?

Yes.

I'm not an expert on the Australian housing market.

As far as our people in the business, they're planning for it to be flat to just slightly up.

So they think the declines are hopefully behind us and will be a little better market.

Do you think interest rates are going to start to kick in and make a difference?

I think that's the reason for the optimism.

Thank you.

Okay, we appreciate everyone coming this morning.

Thanks.