James Hardie Industries PLC (JHX) 2014 Q2 法說會逐字稿

Okay, we'll get started.

I appreciate everyone coming this morning.

We're going to walk through this just like we always do.

I'm going to take care of a bit of an overview on the business.

Russell will take care of financials and then we'll going to Q&A.

Investors and analysts first and then if we have any media questions at the end.

Okay, so most of you would have seen we've had a very good quarter.

We posted largely on performance in the US business but really everything in the company ran very well in the second quarter.

Markets are for the most part, good.

In fact I should say they're good across the board with the exception of Europe.

Europe's still kind of flat but we're very small in Europe so it's not affecting us much.

Looking at the middle row, I think the more important number is the half-year.

Most of you know we had a pretty good quarter last year, first quarter, and then second quarter last year wasn't very good.

So the second quarter comp is partly so big based on the weak quarter we had last year but if you put the two together it's a very balanced kind of half year for us both years.

So, and you look at the improvement on this year over last year and it's, I think, telling you what's happening in the business.

Just a few points down below, like I said, everything's running well and all the markets are in good shape.

Things have gotten back to normal at Hardie.

I guess one of the big debates, probably come up in question, is how much is R&R up.

So you'll see sound bites saying it's low single digits, it's high single digits.

No one's saying it's, I think, in the double digits.

R&R is definitely up.

It's regional so there are a few regions where it's really lagging but for the most part it's up.

We estimate that based on the information we use that it's up in the low single digits.

I think we've been saying 2% to 3%.

It's probably a bit higher than that now but we're not seeing the 7%, 8%, 9% that some other companies are talking about.

I think that's regionally driven.

Our price is up pretty strongly this quarter, 4%.

That's got everything going right.

Okay, we talked about those pricing inefficiencies, which we felt we had dealt with and certainly we feel even more so now.

That's been tracking very well.

So the right price is getting in the right segment with the right product line.

That's part of the equation.

The other part of the equation is this quarter we had a nice mix, higher value mix.

So that contributed some HardieBacker price increase, which was effective kind of middle of the summer, is mostly in this result.

It's not every dollar in this result but it's mostly in this result.

We did take Cem up, very low markets on Cemplank, we took up just on market specific and really just took the floor price up, not necessarily the whole -- the list price for Cemplank didn't come up, more the floor price came up or discounts, the certain market, certain customers and then multi-family pricing -- bid pricing is up a bit as well.

You know we are seeing higher input costs, about $6 million for the first half.

We think it's going to end up $10 million or $12 million for the year.

So we're obviously able to kind of work through that.

It's a reality, we were in the bottom of the market and cement has gotten more expensive and will continue to do that for the next couple of years, I believe.

Not dramatically more expensive but it will go up, I think, every year for the next couple of years as their utilisations go up.

Pulp has been stubbornly high.

So it's not dramatically higher than last year but it is higher than last year.

The next bit is about Fontana.

Fontana is tracking as we want it to.

As far as what's been expensive, what's been capitalized, I think a little bit different how we forecasted it as we got into the rehab work.

But basically the project's going to come in at about the number we thought it should and it's going to come in on time and we're going to have all the capacity that we anticipated in that facility.

Then I guess that last comment is really talking about a lot of my sound bites last year was we put the organisational cost in ahead of the volume.

Well now the volume's starting to catch up to that and the organisational cost has slowed down.

So, it's all coming back into balance.

So those are the quarterly numbers.

As you can see, they are all up strongly for US and then like I say, I think there's a half yearly is a better comp to look at because last year's quarters were so unbalanced but so net sales up, price up, almost 3%, I guess, and then sales volume 15%.

Our forecast for housing is -- we look at housing, we look at US and Canada as targetable and then we pull out high-rise.

Okay, so our targetable housing went from [808], we think it's coming in at [957], so just under 20%.

Of course, we have a big position in R&R, so you don't just go straight up with new constructions.

So we are growing above the market index currently, as we calculated.

I don't think there's much question when you look at vinyl's growth or lack thereof and then you look at LP slowing down their growth.

I think you can see that Hardie's growing fast than the market.

So average price of our EBIT's up strongly and EBIT margin 22%.

So this half-year result is very much in line with what we're talking about, a full year forecast.

So I know it was a little bit hard to figure out at the end of first quarter because normally the first quarter is our highest margin quarter and we were aware of the fact that the second quarter was going to be a higher margin quarter and that's how the plus 20 forecast we were pretty confident on.

We remain confident on that forecast.

Obviously if something external changed it might impact it but we had a pretty big drop off third quarter last year and then fourth quarter was more of a drop off than we normally see in the fourth quarter.

We don't anticipate that'll be the same issue.

We will have the drop off in the third quarter but it won't be as dramatic as last year.

Then the fourth quarter will come back more strongly than we saw the fourth quarter come back.

That's our assumption, anyway.

That kind of talks to this, you can see last year on EBIT margin we had that problem where our second quarter didn't even come in range, which is a problem.

Then we had a big drop off third quarter and a kind of a normal type recovery in the fourth quarter now.

This year we had a good second quarter.

We see less of a drop off in the third quarter and a better recovery in the fourth quarter.

So that's where we get our EBIT margin forecast for US business.

Going to where we're at with housing, this brings you back to 2000, shows you volume revenue and housing stats for the US business.

So you can see a couple of things from the slides.

As you guys already know our participation per start or our market share is up quite a bit.

And that's again; we grew our position in R&R quite a bit over the last several years.

You can see that after price started coming down the revenue was growing slower than volume.

At least so far this year we've reversed that trend and we expect that trend to continue.

Okay, on the price reset I think Sean's gotten a couple of questions already on it.

We're getting ready to buy a small fabrication business to make windows, okay, and back in the early 2000s Hardie became a global fibre cement company.

Basically we got rid of everything else.

Over time we started to do a few things here and there that kind of complement the fibre cement business in the US, like we sell building wrap now.

We sell things that aren't attached to fibre cement but things that are attached to the building at the same time as fibre cement.

Building wrap's probably the biggest one but last year we bought a little company we call Razor, which is making parts for fiberglass windows.

Okay, so what happened when we had all these little bits of revenue, we just dump them in and divide by the footage of fibre cement.

It was no big deal, it didn't really change the equation very much at all.

But now with the purchase of Razor our actual attachment of building paper when a product is going up and buying a fabrication business now, it would just really start misleading you on what's happening with fibre cement price.

So we went back and restated fibre cement price without any of those extras in it for that base period so you could see what's happening just with fibre cement.

By the way, I think Sean's taken a couple of questions.

Well, if he would have done it the old way, what would be the comp on this quarter?

The answer's basically the same thing.

So it would have been up about 4% because we haven't done anything dramatically different this quarter outside of fibre cement but when we put the windows business -- we were concerned about putting the windows business in the old way of [getting] the price.

So that's why we made the change.

So you can see the last half of that downturn, which most of you guys know, we just kind of lost control of our pricing much more than we should have.

That's reflected in the fiscal year 2012 and even thought the market was getting better in fiscal year 2013 we weren't able to turn it around that quick.

So we do have it turned around now and I think your price trend going forward will be positive even without big market increases.

Asia Pac, mostly following the Australian market.

So new construction's better.

Of course detached homes where we made most of our money is up but not up near as much as medium density.

Then the other thing that's a bit strange is renovations isn't up right now, it actually is down.

So the market index for -- even though the headline number of housing starts is up dramatically, our market index for the opportunity in Australia for our business is just slightly up.

Despite that, I think the business is performing pretty well.

They continue to grow the brand, the Scyon brand, which is the main strategy in the business, and hold our position on the more traditional fibre cement products.

New Zealand's a good market.

We're up with that market.

I think we can grow faster than we are in New Zealand so we need to work on that some.

Pricing's up in the region.

Manufacturing costs are actually down in the region so some of the work we did on the new capacity -- although we don't have the new capacity yet, so that work showed similar opportunities on the manufacturing side.

So you guys are getting a little better manufacturing costs this year.

Then of course the results are -- it's hard to read with the change between US dollar and the Australian dollar but from our perspective we always look at local currency.

Australia and New Zealand are tracking well.

Philippines is kind of a flat year so far even though the market's up.

So we have some work we can do in the Philippines.

Okay, that's Asia Pac second quarter.

Like I said, some of that's in US dollars, which is kind of jerked around by the changing exchange.

Price is up 4% and the local currency volume up.

So obviously in the local currency revenue's up pretty strongly.

EBIT's up pretty strongly as well.

For the half year, similar story, actually.

A little better for the half year than the second quarter.

So the full half year results a little better than the second quarter result in Asia Pac.

So the outlook, what do we expect?

You know, we had a very good quarter obviously for two reasons, and we talked about this at the September tour and I think even at our last result.

We have a good market.

We finally have a good market back in the US.

I'd say it's not like the boom years by any stretch but it's an increasing demand market.

Less obsession about cutting costs in a home when you build it and a little bit more thought about selling the home and marketing the home.

So we're very happy with market conditions pretty much across the board.

Like I said, Europe is the only exception to that.

Then the other part is the business that's running really well.

So some of the problems we fought over the last couple of years, they're behind us.

So we're back on our game on pricing.

We're back on our game on market development.

We're back on our game in distribution.

So a few areas we had issues we've addressed and we're moving forward pretty well now.

Asia Pac didn't have those type of problems I talked about that the US had over the last couple of years.

So I think with a better market, they'll get more on the front foot again and start growing the business quicker than they have over the last year or so.

The Philippines, just -- I assume I'll get a question on it but I'll just say the Philippines as far as the storm, we didn't have any personal injuries in the business.

All of our employees are fine, the plant's fine.

We had a few raw materials sourcing issues as far as getting material to plant.

It's considered to be very short term.

We have some alternative sources that we may need to tap into but in as far as a change in market demand, we don't see any change in market demand.

So I think the Philippines storm fortunately didn't impact our business one way or the other.

Obviously we've been doing a lot of work in capacity so I think last quarter we told you we bought the land up in Carole Park.

That project's going as planned.

It'll start up early next year, calendar year.

Again, we always want to repeat that that plant starting up doesn't shut anything down so we're going to run three sites in Australia like we always have.

In the US, where a lot of capacity work is going on we have Fontana ready to start in January.

Some of you would have been there on the tour.

We've got these a little bit out of order.

Actually Cleburne's going to come on first with a third sheet machine.

It's a pretty low investment for a lot of capacity and that's because it fits well in some space.

We used to have a term operation in that plant and we have a lot of the infrastructure that goes with the extra capacity.

So we're investing in mainly a sheet machine and just a few other things rather than everything that goes with the production facility expansion.

Plant City is different.

It is going in the spot that we used to have a pipes plant so we do save some money on the investment.

The product line here will be density modified.

It gives a second source for [HLD Trim], which is our [southern trim] product.

So it's a little bit more expensive, it has a lot of finishing, (inaudible) aid investment that goes along with it and that's what drives the number up to $65 million but if it was a greenfield plant it would be quite a bit more than $65 million.

So we are benefiting from having the space in the existing site.

They're going to come online.

I think they'll come online about six months apart and I think Cleburne will be first, and then Plant City.

Probably Cleburne early calendar year 2015 and then Plant City middle of the year, maybe.

Okay, I'll hand it over to Russell.

Thank you Louis and good morning everybody.

So as Louis has explained, we had very favourable outcomes on sales volumes, on local currency revenues, EBIT and EBIT margins in all of the major business units.

That includes Europe.

Even though Europe is pretty soft in terms of economic and construction activity, it's actually doing reasonably well for us at the moment, just because we're relatively early in the start-up phase.

We've had some unfavourable movements, but not all that material in the quarter in New Zealand.

Weathertightness, just a $0.3 million charge this quarter -- $4.9 million for the half year.

Because of the fall in the Aussie dollar, we had a $90.4 million correction or downturn in the asbestos liability in the first half.

It was less than that in the quarter.

The depreciation of the Aussie dollar has had an adverse impact on the translation of the Asia Pac earnings.

Cashflow I think was a real highlight for us so far this year.

$175.4 million of cash generation is a significant turnaround from last year.

We'll see that a bit more in the cashflow statement as to the causes of the difference.

CapEx is up as you'd expect given that we've announced capacity expansion projects, so a fair bit of investment going into the Carole Park expansion and also the Fontana refurbishment.

Dividends for the half year totalled $163.6 million which was paid in July, $0.37 per share.

That was on top of the $0.05 interim dividend or first half dividend last year, so giving a total distribution of $0.42 from FY 2013 earnings.

The total payout was about $185 million.

We've announced an $0.08 dividend today, which is an increase from $0.05 last year, for the first half.

We've also announced an increase in the dividend payout ratio going forward and effective within this financial year.

We'll talk a bit more about that in a subsequent slide.

Going to -- oh, sorry, I'm not sure what's happened there.

Oh, sorry, Louis.

Oh, God, I've got this upside down.

Going to Q2 results, you can see the net sales were up 17% for the quarter, gross profit up 20% and the asbestos adjustment showing a $4.1 million reduction as a result of a slight decrease in the Aussie dollar in the quarter.

I think the far more important issue is what the normalised earnings look like.

You can see that on slide 21 $56.3 million was up 45%.

The pleasing thing, I think, was the way all the numbers falling down from revenue and volume were actually higher than in the line above, so it's been a very pleasing result for us in that sense.

For the half year, looking at the reported earnings, EBIT at $224.7 million versus $105.3 million.

But a lot of that was due to asbestos, $90 million of it due to asbestos which is really just a non-cash adjustment resulting from the depreciation of the Aussie dollar.

Net sales up 13%, GP up 17%, so the same sort of trend that we saw in the quarter.

So it's a pleasing result.

On slide 23, looking at the normalised earnings, you can see that the result is $108.3 million for the year to date.

So in fact what's a little unusual this quarter for Hardie is our second quarter has been stronger than our first quarter in terms of earnings, which isn't the normal pattern.

But for the reasons that Louis referred to -- you've got recovery in the market, stronger pricing -- we've actually had a change against the normal pattern, not material but it is a pleasing sign for us.

Earnings per share for the quarter were $0.244 which was up 30%.

As indicated before, we've declared an ordinary dividend for the first half of $0.08 which is up from $0.05 last year.

So a 60% increase in the first half dividend, earnings per share up 30%.

The segment EBIT on slide 24, Asia Pac obviously impacted by the downturn in the Australian dollar.

So the Australian dollar earnings were up 15% in spite of the fact that in US dollars it was showing only 4%, so a very good outcome there.

The total segment EBIT excluding the New Zealand, product liability expenses up 42%.

The general corporate costs, this is a slightly misleading indication that suggests there it's up 51% for the quarter, but last year we had some gains.

The controllable costs are actually running very much in line and that's also the case for the half year.

So the total EBIT was $67.8 million after the adjustment items which was up significantly on the $22.8 million.

The half year segment EBIT, a similar sort of story -- US EBIT up very strongly, Asia Pac impacted by downturn in value of the Aussie dollar relative to the US.

General corporate costs again showing some change there, but in fact it's not as bad as might be indicated, because we had two one-off items last year which were of benefit at $8 million.

So you can see that the expense is actually running much more in line on a controllable basis.

Turning to slide 26, this chart actually probably is just useful as a picture of what's been going on with the currency.

You can see that during the quarter it didn't move a great deal, but certainly compared with the prior corresponding period and compared with March 31, it's down pretty significantly.

That obviously translates through to earnings in the balance sheet in the way that we've highlighted here, which is the normal way we present this.

There's been about an 11% depreciation of the Aussie against the prior corresponding period and a 7% depreciation in our financial year to date so in the first two quarters.

Looking quickly at income tax expense, the ETR for the quarter was 21.5%.

That compares with 23.6% for the prior corresponding period.

A fairly similar outcome for the half year -- just a couple of bps different.

I would highlight that the movement that's apparent between the two halves and the two quarters relative to prior corresponding period is really a bit misleading.

We finished FY 2013 with a rate of 21.3%.

So in the way the US accounts for tax expense which is always looking forward to the year end, we actually misread the full year impact last year or full year forecast last year, finished up at 21.3%, so where we are with Q2 ETR and where we are with the half year are very much in line with the full year last year.

That's the way we'd expect to be -- in the low 20s -- in terms of ETR going forward.

Now looking at the cashflow which I indicated was a bit of a highlight for us so far this year.

You can see here that we've had a $31.4 million reduction in working capital in the half year.

That's been across almost all of the activities.

US business and also Asia Pac are just about optimised in terms of working capital -- all of inventory, accounts receivable, accounts payable, so we've had a big gain in cashflow there.

Last year we made a large contribution to the AICF, $184 million.

This year we haven't made a contribution to the fund.

That's been a big item obviously in the cashflow, but I think the underlying performance of the business in producing $175 million in half a year is a very good one.

Dividends paid roughly in line year to year and we finished the period with ending net cash at $126 million which is not a significant reduction on the 31 March position at $154 million, given that we've paid such a large dividend in that six month period.

Capital expenditure, it's up on last year as you might expect.

We'd spent $25 million at this point last year and spend this year is up to $44 million.

We'd anticipate that that will increase during this year or the rate of spend will increase as we have some quite large projects that are getting to a more advanced stage -- Carole Park expansion, Fontana refurbishment.

As Louis highlighted, the Board approved this morning some additional expansions in the US.

We do have further expansions under evaluation for the US business.

So $102 million is the expenditure on these two expansions announced today and there'll probably be more to come.

In terms of capital management, two changes in dividends that we announced this morning -- one was the increase in the first half dividend from $0.05 to $0.08 and also an increase in the payout ratio.

About this time last year, we announced that we were increasing the payout to 30% to 50% with effect from this current financial year, FY 2014.

We then actually delivered on that early by applying that to the FY 2013 result and now we're increasing the payout ratio to 50% to 70%.

That will apply for the FY 2014 year and beyond.

I think the other things there are fairly apparent.

We did have a small purchase under the share buy-back program at the end of July.

There was a dip in both the share price and the Aussie dollar which was very favourable for us.

That window hasn't been opened for us since that time.

In terms of debt facilities, we remain with $405 million of facilities, committed facilities.

They're currently unutilised given the cash position.

We have therefore $532 million of liquidity.

New Zealand product liability on slide 33, no substantial change here.

We've been dealing with this issue for some time in relation to product that was sold into the market between 1998 and 2004.

Initially there was significant insurance cover available for us, but the insurance cover is now being exhausted.

That led us about 15 or 18 months ago to start taking some charges over and above the insured amount.

We've revised that periodically, but in this quarter the impact was quite immaterial.

Then in April of this year, we had a claim from the New Zealand Ministry of Education in relation to product used on school buildings.

We're continuing discussions with the New Zealand government on that claim as well as preparing for potential litigation, but we still have a $20 million provision at the end of the period.

We think that that's adequate given the state of knowledge at the moment.

The impact on the Q2 result was minimal.

The asbestos fund, some details here on slide 34.

The fund started this year with AUD128 million of assets.

That's been reduced by claims paid of AUD73 million.

With other movements, it nets up to be about AUD72 million of assets at the end of September.

We have seen some concerning trends in mesothelioma claims which we've highlighted previously.

I think we've now got a much better handle on the what and the how.

What we still don't quite understand is the why that that's occurring.

There's still quite a bit of work going on in that space, but there is a definite trend in increasing mesothelioma claims that the fund is experiencing.

There's further detail of that in note seven of the financial statements for anybody who wishes to catch up with it.

So in summary, a very good quarter and a very strong half year as well.

Result for Q2 was $56.3 million.

For the full year, $108.3 million.

Sales volumes and higher average net sales prices.

What's not so apparent, I guess, in the result is that we have had some increases in cost -- particularly pulp -- but the business has been able to weather that.

We've produced much improved margins in both of the major segments.

Significant amount of work going on in capacity expansion throughout the business and also an increase in trends in dividends.

Hardie's perhaps in a fairly unusual place.

We've got very low debt -- in fact, zero debt -- strong cash position.

We're expanding the business, but at the same time we're actually increasing dividends.

So I'd expect that this is a trend that will go on for some time, because the cash generation of Hardie when we're in this growth mode is incredibly strong.

We see that as continuing into the near future at least.

In terms of FY 2014 guidance, at June we guided the market towards a result of around $164 million to $181 million.

That's been held by the analysts through that period.

As a result of the strong quarter we've had and the outlook we see for the next six months or so, we've actually increased the guidance to a range of $180 million to $195 million.

That obviously is subject to the Australian dollar to US dollar rate remaining at about $0.93.

That's to do with Asia Pac earnings.

That's ignoring asbestos which we don't obviously take account in this guidance.

But as long as the Aussie dollar stays at around that $0.93, the $180 million to $195 million guidance is relevant.

So we'll turn it over to questions and Louis will chair that.

Thanks, Russell.

Okay, this time we're looking for one question per analyst and then moving along.

It feels a little restrictive, but never mind.

You meant one at a time.

(Inaudible).

I do have one question to ask, but before I do, I just wanted to formally acknowledge Russell for this final result and to thank him for all the help and assistance over the years.

We wish him the very best in all the endeavours after this, Russell, so thanks very much.

Thank you, [Simon].

Quick question, Louis, just in terms of the public home builders, D. R. Horton came out with their Q4 yesterday or the day before -- I can't remember now -- saying that the summer had been a bit disappointing relative to the first half just in terms of trajectory of sales.

Given you lag to that cycle, I'm just interested in your views on whether this half -- this quarter in particular -- you've been a beneficiary of the very strong first half for the public home builders.

Do you see it somewhat diminishing in terms of the trajectory or flattening out a little bit over the next half?

Yes, I mean, the market's increasing, but it definitely tapered off.

It spiked a bit in the first half of the year.

It's tapered off, I guess, in the last three to four months.

We do lag anywhere from three to six months, so we'd still be enjoying the very strong growth that all builders had in the first half.

As far as our full year forecast, we're pretty confident that we've got that tapering off built into our forecast.

We don't expect the market to go the other way.

I don't think any of the other builders do either.

Just slowing down the growth rate a little bit.

Louis, Michael Ward from CBA.

You made some comments around Cemplank pricing, list pricing, floor pricing.

Can you just elaborate on that?

Yes.

Sorry, and pardon my ignorance, but what the effective difference between those two actually is?

The list price and the floor price, yes, well, certain customers would pay list price.

Then as you get into larger customers, they'd be paying closer to floor price.

So basically we feel like in some markets, our floor price got too low.

Rather than move up the overall Cemplank price, we just tightened the range between list and floor.

We did that in Pacific Northwest, Colorado and Georgia, somewhat in Texas, so it wasn't an across the board -- there was no price increase.

It wasn't across the board.

Again, it was just tightening of the range rather than pulling the whole market up.

Given that the pricing you had in Cemplank was weaker through that downturn--

I think you just broke Sean's rule, but I'm going to allow it--

Oh, but it's vaguely about the same thing.

Yes, but anyway.

Do you think that'd be the one that'd be first to move ahead of sort standard board?

Sorry, I missed the question, so which would be the first to move?

Do you think there's more room to move now on Cemplank pricing than there is on standard board pricing?

Yes, I mean, that's what we've been trying to do.

We've been trying to tighten the range between the commodity -- fibre cements with Cemplank is one of them and then, of course, our competitors are the rest.

Where Hardie's at -- now we haven't pulled Hardie down, so we've pulled the floor up on Cemplank.

I think like all building materials, when you're in an increasing demand market, most people excel on price to try and pull their numbers up.

So I think competition has come up off their floor levels and Cemplank comes off its floor levels in some markets and then Hardie's stayed about the same, so the gap's tightened a little bit.

Hi, Louis.

Jason Steed, JPMorgan.

Just a question on PDG, I guess.

I know you've stopped providing numbers--

Yes.

--on that front for reasons you explained at the time, but obviously you're making some pretty good progress on penetration.

The question is, do you see that accelerating as -- I think you said in September you've dealt with the SmartSide risk.

Yes.

How do you see that moving (inaudible) over the next two years as you think of [35, 90] I guess?

Yes, no, I definitely think we're going to be in accelerating growth mode against the index.

Part of that is, as the market gets further into the downturn the obsession with price gets less and less and, thinking about features in the home get more, so we'll have a more favourable market, they'll be more receptive to some of the premium offerings we have.

Then the other thing is our organisation's just running better.

So I think we did a great job going from boom market to downturn.

I think we ran well in the downturn for a while, but near the end I think we got a bit confused, and we had a lot of trouble transitioning to an increasing market out of that really dead market.

So we just weren't that effective.

If you remember, one of the big things we did in the downturn is reallocate a lot of field resources from new construction to repair and remodel.

That really helped us in the downturn.

We were just slow to get those resources retrained and regeared toward new construction.

I think we're 40% of the way there now.

I think it's developing pretty rapidly now, so I do think we'll grow at a much -- at a higher rate than we have this year and next year, so yes.

Any rough sense of -- I know it's just a half year -- a rough sense of the number or -- in terms of PDG at the half?

I didn't even calculate it, haven't calculated -- I think it'll come in somewhere between [6 and 10] for the year, but we didn't calculate it for half year.

What's more important to me now, when we're looking at that -- because I don't like -- I like the calculation, but I don't like the input on R&R because we're so big on R&R and it's an inexact input.

So what we do is we look at us and then we look at others.

When you look at the others this year you can definitely see -- even though the market's good, vinyl's having trouble growing.

So if vinyl's giving up business, who are they giving it up to?

Are they giving it up to fibre cement, to wood, to stucco?

So we look at that as well.

So, as you guys pointed out, there were a couple of quarters -- at least a couple of quarters -- where LP counts were better than our counts so, theoretically, what vinyl was given up, LP was getting more of than we were.

I think over the last two or three quarters we're showing that that trend is changing.

Lou, it's Andrew Scott, CIMB.

Just a quick one from me.

I think you spoke last period, and on the US tour, about the change in distributor you had.

I think it was in the Texas market.

That was pretty bit of a drag on the first quarter and a bit of a boost in this quarter.

I'm just wondering if you can give us some quantification around how much that actually helped this quarter.

Yeah.

Well, like I said, look at the two quarters together.

So anyone trying to figure out where we're at, they'll look at the quarters, look at the half.

That's the best thing to do, because we did have that -- Texas is a big market for us, and we had a total slop out of distribution.

So had you inventories going down and then inventories being rebuilt and that didn't all happen in the same quarter.

In addition to that we just had a lot tougher comp in the first quarter than we did the second quarter.

So if you look at the half year I think you're much better off.

But then that distribution change in Texas has worked well for us.

We haven't lost any business.

It's actually worked out fine.

It's worked out well.

I mean we didn't proactively seek to change, but I think we took advantage of the opportunity.

We may go to questions from the phone now.

Your first question comes from the line of Emily Behncke of Deutsche Bank.

Your line is open.

Please go ahead.

Thank you.

Good morning Louis.

Good morning Russell.

Just a question -- my one question on EBIT margins.

You've increased slightly your expectation for 2014 to now be above the 20%.

I'm just wondering if we continue volume growth in the US and continue PDG growth, as you've just said, would you surely not expect margins to increase, given some operating leverage in the business?

Yeah, I think if you look at it over two, three years, if things play out the way we think they will -- meaning a good market, business running well -- our struggle with that 20% to 25% range is probably behind us.

Next year I would think it'll be a lot easier to just naturally fall in that range.

Again, what we're trying to balance is the growth with the returns.

For a lot of years we were getting (inaudible) very easily.

In the downturn we had to work hard to get the return, and we shifted the emphasis on R&R to protect our market share or grow whatever market share we could in a bad market.

Now we've come out of the downturn and we're well positioned in R&R.

We've re-engaged new construction.

We've got our pricing fixed up.

Our manufacturing plants are running well.

We'll be starting up a lot of manufacturing plants.

Theoretically, there'll be a little bit of cost [blip] as you start those plants up.

We started one up this year in Waxahachie, a production line.

But we would think the concerns about our 20% to 25% range, both internally and externally, will probably go our way if things play out the way we think they will.

Thank you.

James Rutledge, Morgan Stanley.

Thank you.

I was just wondering about the outlook for the spend on R&D and SG&A over the next 12 to 18 months, and just noticed that the R&D number -- at least in this quarter -- seems to have come off a fair way.

R&D's numbers are down.

Our head count in R&D's about the same.

So we haven't intentionally restricted R&D, but there was one major project we finished up early last year, so we're not -- you're not seeing spending on that anymore.

It's all expense now.

So I think R&D will come back to previous levels naturally.

We're not going to race to get it back up, but we're not trying to hold it down either.

When I say it's going to get back to previous levels, that's more on an absolute dollars than any percentage.

We don't see the per cent R&D growing with the business.

We see the spend on R&D being very similar to what it's been.

If we see a need for a new technology that has a large investment, obviously we'll flag that for you before we get too far into it.

SG&A -- we grew SG&A ahead of volume, and now volume's definitely growing faster than SG&A.

There are a few things we want to do in the business that's going to require more SG&A.

We're just starting to think about how and at what rate to put that stuff in the business.

So I think you will see higher SG&A next year but, on a per cent term, probably not higher.

In other words, the volume would be faster than the SG&A growth.

Thank you.

Liam Barlow, Macquarie Bank.

Yeah.

Hi Louis.

Look, just a follow up question regarding that Texas distributor.

I recall that that shift away was during, primarily due to the refusal to solely carry Hardie product.

How is that strategy playing out with other distributors, and how do you think that's contributing to your volume growth and sales at this juncture?

Yeah, I think the -- we took on a major initiative to upgrade our channel strategy about two years ago now.

We started implementing the game plans about a year ago, maybe less than a year ago.

I do think we've gotten better because right through the project you could see our people picking up on the fact that we're going to change our approach with the channel.

So even before we had the game plans developed we had put more resources into the channel and we had started relating to the channel a little bit differently.

So I think the alignment's better.

I think the distribution strategy, which is separate from the dealer strategy, distribution strategy which is in the process -- well in their process of being rolled out, is favourable.

It increases alignment between our distributors and the Company, which has been a problem in the past.

So I think that's a positive trend.

As far as what I see in this year's numbers from that it would be hard to guess how much impact it's had, but I'd say it's positive now.

Again, all the changes we made in that distribution program weren't favourable, and that's favourable for the distributor.

They were mostly favourable for the distributor, but there were a few things we wanted to increase alignment, and that's what led to the break up in Texas.

We haven't had that specific issue outside of Texas.

Okay.

Thanks, Louis.

Yeah.

[Andrew Dobson], CLSA.

Good morning, gentlemen.

Louis, you talked a bit about the difference between pricing on interior and exterior products.

Can you just talk about where the growth of those two products are, or the comparison of growth between the two product segments?

Yeah.

The exterior's growing much faster than the interior, so that's part of the mix equation by the way.

I'm glad the question came up because I didn't mention it earlier.

Interiors is growing.

It's growing with the market.

It's not growing much right now, and exteriors is growing with the market, which is more new construction than interiors.

So interiors has a very high mix of -- a higher mix of repair and remodel than exterior.

So, just naturally, the index -- the growth index for exterior's higher than for interior.

Then we're growing market share on exterior, so we're getting that bump as well.

Yeah, so we don't actually give you the -- I think what we've given you is rules of thumb in the past at -- interior's about 25% of business.

It got bigger during the downturn, and it'll get smaller during the recovery.

So it'll probably go from 25% to 20% here in the next two, three years, is our guess.

So it's still growing, just not the same rate.

And not picking up the same sort of share.

I mean during the site visit you mentioned some (technical difficulty) any particular change.

Are you competing better against it or -- how are you (technical difficulty)?

The comment in September -- I think we covered in the September tour that the use of cement board behind tile was flat and now it's started to [decline] very slightly, okay.

This is driven by this substitution, by lighter weight, easier to use materials, mainly in commercial, but now creeping in to residential as well.

We don't have a change in strategy for HardieBacker right now.

We are doing a review of our strategy in HardieBacker.

I doubt if we're going to have any big shift.

It's just a matter if we get into a few different types of SKUs or not.

There's probably going to be outcome in that strategy.

It's a very good business for us.

Good returns, very good [money].

We're leading backer board.

We continue to grow share in our target channel.

We sell at huge premiums to what other backer boards sells.

Our retailers sell at huge premiums, so there's a lot of value creation, both for us and for the channel with our backer boards.

So there's no concern about decline.

Our backer board business is just -- it's not growing as fast as it had in the past.

Okay.

Thanks.

Matthew McNee, Goldman Sachs.

Louis, just a question on that price.

No matter which way you cut it you got nearly 4% year-on-year price increase.

Just trying to understand how much of that was (inaudible) between things like Cemplank and Prevail versus the more premium products.

So I think, previously, Cemplank, Prevail was around about 20% of your board or siding volumes.

Can you give us an update on where that's moved to?

Also is colour -- are we starting to see a little bit more colour, or more board sold as colour, than a year ago?

Yeah.

The reason we're up that 4% is because everything was going in the right direction.

So colour was up.

Cemplank, relative to Hardie, wasn't growing anymore, so Hardie was holding it's position and growing its position in some markets, the Hardie Prime boards.

We had trim increases relative to the rest of the mix.

HardieBacker growing slower than -- our interior products run slower than exterior parts helps you on mixed pricing, so it was down.

Multi-family bid pricing has come up some, so it was just a bunch of little moves that added up to 4%.

Then, of course, we had the HardieBacker price increase.

But you still haven't seen a big shift in that percentage for Prevail and Cemplank?

That's still about the same as a percentage?

Yeah, it's -- I'd say, the way you describe it now, it's running flat right now.

Okay.

No worries.

Thanks.

You have a follow up question from the line of Emily Behncke of Deutsche Bank.

Please go ahead.

Thank you.

I just wondered if we can get some sense as to CapEx expectations for FY 2014 and FY 2015 in light of the capacity expansions announced today.

Yeah.

I think we reviewed that recently.

We do have a lot of capacity projects we're working on.

So if the market demand runs faster than our forecast we will pull a few things forward.

But right now we're fairly comfortable with our comments around AUD150 million a year.

Now, we won't -- I don't think we'll get there this year.

So whatever we don't spend this year kind of spills over, but AUD150 million a year is what we're thinking.

If market demand's better than forecast, then we will pull some projects forward.

We have a lot of projects we're working on.

We've really built that capability in the Company.

We're just paranoid if the -- when you looked at that earlier slide of the volume growth in the business you can see housing starts came down pretty quick relative to how they're coming back.

Oddly enough, that's our preference, but if it did -- if that housing starts started ramping quicker we'd have to bring out more capacity forward.

So we're actually trying to get the time to build down on the future projects beyond Cleburne and Plant City.

That would obviously put CapEx forward if we did that.

Okay.

Can I have one more question, really quickly?

Yeah.

Just the higher payout ratio, the 50% to 70%.

Is that going to impact in any way any potential return if you don't complete the buyback?

Yeah.

I think we're seeing ordinary -- separate from the other returns.

Then we're seeing buybacks and maybe specials tied together.

So if we don't do as well with buybacks as we intended, then we'll turn that money into a special, but the ordinary stands on its own.

Okay.

Perfect.

Thank you very much.

Any other questions in the room?

Yes?

Stephen Johnson from the Australian Associated Press.

Good morning, Louis.

Just two questions -- the first one about the Australian housing market.

Now, in your notes you're saying that while residential building is picking up, earnings performance is only likely to be slightly improved compared to the previous period on 2012.

Why's that the case for the Australian housing market?

Yeah.

I think the headline number for the housing market in Australia's up.

So it's up to a good level, 155,000 starts is the forecast.

So that's a good level in Australia.

There's been a little bit of a shift that affects our business, and that's, I think, detached housing's up 3% or 4% and medium density is up by 28%.

We don't participate in the medium density nearly to the same degree as we do in detached.

The other thing is what we call R&R in the US is flat to slightly down right now in Australia.

That's unexplainable to me, but we've always used the same market information for that, so it's showing a decline.

So I'm not concerned about the Australian market.

It looks to me like it's going to be a good market for us.

I think what that guidance in our Group outlook is more about -- well, based on the forecasts that are out there we had a very big first half, and we might not have as big a second half.

That's how I'd read that comment.

Just a follow up about asbestos.

Just looking at your accounting -- Russell did touch on this.

The weakening Australian dollar since the middle of the year has affected your asbestos liability, so how -- it's now $90 million in front.

Will you just be able to explain how the falling Australian is, whether it's put up or down your asbestos liabilities?

A falling Australian dollar decreases our liability in US dollar terms, so the 11% decrease in the Australian dollar is -- actually, that's not a good indication because -- it's about a 7% decrease compared with the 31st of March through the 30th of September, which are the relevant dates.

That's what's led to the decline of $90 million in the value of the liability.

Is that clear?

Okay.

So it means you'll be paying $90 million less than you would have been otherwise?

Our payments for asbestos, in terms of James Hardie, are tied to our cashflow.

So we pay up to 35% of James Hardie's annual net operating cashflow to the asbestos fund, and we record the liability that the fund's actuaries arrive at on an annual basis.

So the two things are disconnected, i.e.

there's no guarantee that what Hardie contributes is going to satisfy the liability because our liability for contributions is tied to the success of the Company.

You mentioned earlier, Russell, about how there are increasing cases of mesothelioma and you will see more cases of payouts.

Would you be able to elaborate on what you said earlier?

Well, mesothelioma is the most expensive of the asbestos disease types to -- in terms of compensation.

The fund is seeing an increase in the in-flow of claims, and almost all of the increase in claims appears to be mesothelioma disease rather than the other types of disease.

That's increasing the amount of payments relative to both last year and relative to the actuarial assessment that was done at March 2013.

Beyond that I don't think I can elaborate too much because the--(a) it's a matter for the fund, and (b) we don't -- as far as I'm aware we don't fully understand exactly the causes of the increase in claims as of yet.

Alright.

Thank you, Russell and Louis.

Thank you.

There are no further questions from the line.

Okay.

Simon?

Do you have another?

Yes, just one quick follow up question.

You were talking about multi-family pricing, the space shuttle algorithmic model, whatever it is that you had for pricing that used to dive towards the bottom and caused so many headaches before.

How's that pricing got up?

Is that a function of what's actually happening in the market?

Or is it something that you fine tuned in terms of a proxy mechanism?

Yeah, I think it's a combination of both, but when we're as big a part of the market as we are, obviously, when we change our mind all that's likely to have an impact on what the market's going to do.

So we did change the model a little bit on floor pricing, so that was part of it.

Then, like I said, I think building material companies that sell on a commodity price basis are just used to going up in price when their utilisation's going up.

So we haven't changed our per cent of the category.

So as we've grown with the increased demand our competitors have grown as well.

So they would be getting closer to their target utilisation, so that I think their pricing would go up naturally.

Right.

So broad market based pricing's going up.

Yeah.

Okay.

That's great.

Thank you.

Yeah.

Any other second questions in the room?

Okay.

Thank you very much.

I appreciate it.