James Hardie Industries PLC (JHX) 2014 Q3 法說會逐字稿

Thank you for standing by and welcome to the Q3 FY14 Results conference call.

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

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

(Operator instructions).

I must advise you that this conference is being recorded today, Friday, February 28, 2014.

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

Please go ahead Mr Gries.

Alright thank you.

Hi everybody.

I appreciate you joining the call.

Myself, Louis Gries and Matt Marsh are in Dublin today and we don't have control of the computer so that's done in Sydney so we'll be calling out our slide numbers as we go through the presentation.

You see slide 2 and 3 those are disclaimer slides -- 4 just shows the agenda that we normally use.

I'll run through the operating review.

Matt will run through the financial review and then we'll take questions depending on what the subject is either Matt or myself will take the question.

So if we start on slide 6 you can see it's a pretty easy result to talk about.

Basically the markets we're participating in are tracking well and all the businesses are running well.

So basically things came in pretty much as we were expecting they would.

If you look at the centre row there which is the numbers we focus on $43.7 million operating profit which is up 17% over the same quarter last year and for the year we're up almost $43 million.

US stories are higher volume and higher price and in Australia volume flat, pricing up a bit and EBIT up as well.

If we go to slide number 7 that just covers the US and Europe in a little bit more detail like I said price and volume both good.

There are a few points on cost.

The first point obviously is fixed costs are being spread over a larger volume so that results in some reduction in total unit cost.

That's offset personally by higher input cost.

With the market continuing to recover, commodities pricing is improving so pulp is up, cement is up and energy is up a bit.

In addition to that most of you are aware we had the Fontana plant mothballed from the downturn.

It's been under construction.

It's actually now started up this quarter but we had some idle facility costs related to Fontana being down.

If we go to slide 8. Gives you just the headline numbers on the largely US but US and Europe business.

You can see volume up 11% -- a little bit higher in exteriors, lower in interiors, average price up 5% and that results in 17% increase in net sales.

A big bump in EBIT increase 75% and EBIT margin also much stronger than last year, same quarter.

On slide 9 we get the nine month result which is smoothing out a little bit from the quarterly.

Again revenue up 17%, volume 14% with exterior being higher than the 14%.

Average price up 3% for the year through three quarters.

Again a strong EBIT improvement, 44% and EBIT margin in the target range through the three quarters so in good shape to hit our range for a full year which is shown in slide 10.

Actually interestingly on this slide this is the first fourth quarter we've actually been above the 20% -- third quarter sorry -- we've actually been above the 20% during the years we're showing on this slide.

So we expect to be in the ranges we've been talking about all year and obviously we won't just scrape into the bottom of the range we'll kind of be solid in that range is the way we see it right now.

Slide 11 just shows the market recovery and how we're tracking to that.

You can just see the blue line separating a little bit from the black line -- sorry from the grey line which is indicating we're getting that price improvement this year where in the previous two years we had struggled with our price counts which is shown on slide 12.

Through three quarters we're up pretty significantly over last year and higher than the fiscal year 2012 level as well.

As we talked about we expect that trend to continue.

It's not driven as much by market price changes as it is by product mix and just getting our pricing cleaned up doing segments so $651 million through three quarters solid improvement over last year.

We'd expect to continue to get improvements as we move forward in the next year.

We will have some market price adjustments next year.

We've already announced an increase for April 1 on a lot of our [siding] products in a lot of markets.

But again it's not a huge increase it's kind of a price tune-up rather than a big price increase.

Slide 13 we move into the Asia Pac business.

Like I said flat volume there -- better pricing so that's kind of the story they have better EBITs as a result.

Slide 14 kind of shows that in some more detail because obviously we report in US dollars and we run Asia Pac in local currencies.

We kind of roll them up into Australian dollars which is more relevant for that division but you can see in the volume again as I said flat and then average price for the quarter up quite a bit.

EBIT up quite a bit as well in Australian dollars.

If you go to slide 15 similar story but we do have volume improvement over the three quarters and the price improvement you saw in Q3 was higher than it is for the overall year.

So again that's smoothed out a bit at 4%.

Still good EBIT improvement in Australian dollars at 21% and solid EBIT margin coming out of that region as well.

Go to slide 16 again this is just where we kind of have been thinking we're at and we still think we're at very good market.

It's not heating up too fast so we're able to keep up with capacity and run all our programs because as you know our focus now is really market share gains.

Because we're seeing increased demand due to both market activity and market share gains a lot of work being done right now around capacity which I'll cover in the next slide.

In Australia the markets were what we would consider okay.

It's a good market.

It's not a bad market.

It has shifted away from us a little bit meaning it's a little stronger in Western Australia than it is overall and it's a little stronger in detached housing than it is overall but still a good market.

New Zealand is good.

The Philippines is good.

So as I said when we started out, market conditions are pretty good where we participate -- no problem there from our perspective.

Slide 17 we'll go through the capacity and there is a lot of significant work going on in capacity.

I mentioned we started up the Fontana plant recently.

One of the lines has started now so we'll be ramping up that line through the rest of this quarter and next year.

We will be starting the second line which is the new line we installed in Fontana before the quarter is out so we'll start that up some time in March and then ramp it up through the year.

Plant City we're adding a fourth sheet machine.

Some of you know that we used to make pipes in Plant City.

We closed that operation down several years ago so we're putting a fourth flat sheet line in Plant City.

You can see the capacity in investment 300 million and $65 million invested.

The investment's not only in sheet machine capacity we have some raw material and some finishing capacity for our density modified platform so that's an efficient kind of capital investment but it is more than just sheet machine.

Then Cleburne, Texas you see we're looking to get 200 million feet of basically 5/16" capacity for $37 million that also is going into a spot where we used to have a trim line before we moved all of our NT3 Trim Capacity to Peru, Illinois.

So that is a flat sheet investment.

We're able to take advantage of finishing and raw material capacity already in the plant.

So we're getting an extra 200 million square feet of flat sheet capacity for $37 million so that's very efficient.

They're both expected to be commissioned as you can see in the first half of -- it should be 2016.

Fiscal 2016 yes.

Yes so we missed that.

It's first half of calendar 2015 -- sorry I just got that typo.

Asia Pac capacity is on track.

So most of you know we had a capacity up in our Carole Park plant and that's tracking well both from an investment standpoint and a timing standpoint.

So that's my slide I'll hand it over to Matt Marsh to cover the financials.

Thanks Louis.

On slide 19 it's probably apparent from our Release and Louis's comments we've had an increase in volume and revenue in the quarter in most of our major business units.

We had a favourable asbestos adjustment in the quarter as well related to the depreciation of the Aussie dollar versus the US dollar.

If we go to slide 20 you can see a reported profit of $92.2 million with sales up 10% for the quarter.

Gross profits were $121.5 million for the quarter up 26%.

So seeing the impact of price and the volume efficiencies come through with good leverage.

You see SG&A expenses decrease primarily due to a decrease in the legacy New Zealand product liability settlements and they're partially offset by some higher corporate costs.

Then finally there is a non-cash asbestos adjustment that you'll see noted there.

That was really an impact as a result of the depreciation in the Australian dollar exchange rate against the US dollar compared to the prior corresponding period.

If you go to slide 21 the normalised earnings that we look at are on this page where we have a net operating profit excluding the various items of $43.7 million in comparison to $26.7 million from Q3 of 2013 representing a 64% increase.

The legacy as I mentioned on the prior page legacy New Zealand product liability moved from a $7.5 million expense in the prior corresponding quarter to a $4.2 million benefit in the current quarter.

Again you'll note the asbestos adjustments driven by the effect of foreign exchange and total net operating profit for the period of 64%.

On slide 22 for the nine months we reported operating profits of $286.3 million versus the nine month ending in 2013 of $115 million.

Again net sales and gross profits were both favourably impacted as we discussed by volume and average selling price.

R&D expenses decreased you'll note slightly largely just as a result of the completion of certain core projects.

Then again the non-cash asbestos adjustment at the end of the December period impacted by foreign exchange rate movements.

On slide 23 for the nine months you'll see our improved headline net operating profit number again driven by sales in our gross profit.

You'll see net operating profit excluding the various items of $152 million up 39% from the nine months ending 2013 where we reported $109.4 million and then similarly asbestos adjustments driven by the effect of FX and excluding asbestos, asset impairment, ASIC expenses and New Zealand product liability, NOPAT for the nine months up 39%.

On slide 24 the segment EBIT so the USA and Europe fibre cement segment EBIT up 75% as well as the Asia Pacific fibre cement segment up 11%.

The adjusted US and Europe segment had EBIT margin to 20.2% for the period up 6.7 percentage points from the prior corresponding period and similarly with Asia Pacific reported EBIT margins increased 3.5 percentage points up to 23.5%.

So both major operating divisions have EBIT margins in the ranges that we've expected.

If we go to slide 25 segment EBIT for the nine months similar dynamics to the three months so the US and Europe segment reported $179.8 million for the nine months ending FY14 up 44% from the nine months ending 2013.

Asia Pacific up 11% again the EBIT margins for US and Europe up 390 basis points to 21.4% and Asia Pacific EBIT margins up 240 basis points to 23.2%.

You'll note here general corporate costs were higher compared to the prior corresponding period primarily due to some salary and compensation increases but additionally the prior period have some favourable items that were non-recurring for the current period.

On slide 26 a familiar picture that we find useful to see what's going on with the major currency.

There's been a 12% depreciation of the Aussie dollar versus the prior corresponding period and an 8% depreciation in our financials on a nine month basis year-to-date.

At the bottom of the page you'll see that that translates through to our financial statements in a similar format to what we've showed you in the past.

On slide 27 income tax expense for the quarter of $11.7 million was up $4.5 million versus Q3 2013.

Our effective tax rate in the third quarter of 2014 was 21.1% largely in line with where it was a year ago.

Page 28, income tax for the nine months was an expense of $41.7 million for the nine months 2014 up $9.2 million from the nine month period of 2013 where we paid $32.5 million or sorry we had an expense of $32.5 million.

You'll see the movement on the effective tax rate in the nine months of 2014 of 21.5% down from 23%.

You may note that we had missed our forecast in the nine month projection of 2013 and at year end our actual effective tax rate for 2013 was 21.3%.

So on that basis a very comparable tax rate.

On slide 29 cash flows so net operating cash flows increased for the nine months from $83.3 million to $254.7 million really driven by a few factors -- number one, the prior year had a non-recurring tax payment of $81.3 million related to the favourable conclusion of the RCI disputed fiscal year 1999 tax assessment.

Number two, a decrease in the Company's contribution to AICF as we didn't make a payment to the first nine months of this year and higher earnings net of asbestos adjustments as a result of the operating performance that we've talked about in this release.

An increase in net capital expenditure is primarily the result of a combination of previously purchased leased land and buildings at Carole Park as well as the Fontana refurbishment.

You'll see dividends have been paid through the first nine months of $163.6 million with an ending net cash of $185.2 million to the first nine months which is a good result in light of the level of dividends that we've paid through the year and just reinforces the operating division's strength through the first nine months.

On slide 30 capital expenditures of $73.3 million for the nine months up 75% from the nine months of the prior corresponding period largely driven by, as I mentioned, the Carole Park (inaudible) land and building, Fontana which Lou's already talked about and capital expenditures do include capital assets of $4.8 million related to a fibreglass windows business acquisition that we closed in December of 2013.

On slide 31, capital management has become more of a focus and it will be more of a focus now and into the future and following a review of our capital management strategy we've outlined the objectives and framework that you see on this page.

Our objective of capital management is to optimise our capital structure with a view toward the target net debt position in the range of one to two times adjusted EBITDA.

While dependent on the below factors I'll discuss in a second we're targeting a net debt in the north of $500 million.

The absolute level of debt will really depend on a number of factors including but not limited to the internal needs to finance growth via capital expenditures and investing appropriately in research and development.

Where we believe we are in an operating economic cycle the objective of providing a consistent and ordinary dividend, ensuring sufficient liquidity buffers for unexpected challenges and giving us a buffer for strategic opportunity as well and then overarching objectives to minimise our cost of capital.

So our objective is to move swiftly in this direction through the full extent of this approach but it may take some time for this to fully play out.

On slide 32 some additional items on capital management.

So today we announced 125 year anniversary special dividend of $0.28 per security in recognition of our celebration last year of our 125th year company anniversary.

That dividend is declared in the US currency.

It will be paid on May 30, 2014 with a record date of March 21, 2014.

In November we announced an increase of our dividend payout ratio to 50% and 70% and we continue to operate under that.

Then in November you'll also note that we announced an ordinary first half dividend of $0.08 per security up from $0.05 in the prior corresponding fiscal year and that was declared also in US currency and will be paid on March 28, 2014.

On share buybacks, in May of 2013 we announced a share buyback program to acquire up to 5% of our issued capital.

As of today we have repurchased just over a million shares of our common stock with an aggregate US value of about $12.2 million and an average market price of AUD11.94.

On slide 33 debt we have total facilities of $405 million at the end of the period December 31, which are adequate, we have ending net cash balance of $185.2 million and giving us total liquidity at the of the third quarter of $590.2 million.

On slide 34 an update on New Zealand product liability and Ministry of Education.

Our New Zealand product liability an item familiar to you from prior quarter releases that we've had.

In the third quarter we did recognize a benefit of $4.2 million due to favorable settlement activity in the three months ending December 31.

For the nine months we did recognize an expense of $700,000 to reflect the movements and the provisions for new and existing claims during the current fiscal year.

Regarding New Zealand, the New Zealand Ministry of Education representative action in April of last year, the Ministry of Education filed a representative action against two of our subsidiaries in New Zealand.

In December we finalized a commercial settlement with the Ministry of Education and while the terms of that settlement are confidential and the settlement did not have a material adverse effect on our financial position, or on the result of our operations or cash flow.

If we go to slide 35 the asbestos fund, so as of December 31, AICF had paid claims of AUD104.6 million and ended December 31 with cash and investments of AUD69.4 million.

There - I will note there was an increase in asbestos claims during the nine months, we are monitoring the claims activity closely.

But as we said in the November result, at this stage the increase isn't clear if it's a change in the trend or random variation.

Previously we've seen upticks in one period and only for the claims that settle at a lower level in the next period, as I think many of you know KPMG and AICF will issue the annual actuarial study in a few months and that will be our next best indication of how the activity through the first nine months is playing out.

On slide 36 we do expect full year earnings excluding asbestos, asset impairment, ASIC expenses, New Zealand product liability and tax adjustments to be $190 million to $200 million.

Obviously that's dependent among other things on the housing industry in the US and Australia, average exchange rates.

We've assumed an average exchange rate of $0.89 to Aussie, and although US housing activity has been improving for some time, the market conditions do remain somewhat uncertain with some of the recent weather activity especially.

If we go to slide 37 in summary net operating profit excluding asbestos, asset impairment and the other items of $43.7 million for the quarter and $152 million for the nine months.

Largely driven by higher volume in the US and Europe segment as well as Asia Pacific on price.

Higher EBIT margins in both major operating divisions.

We're continuing to invest in production capacity expansion as Louis noted in Fontana, Cleburne and Plant City.

The special dividend of $0.28 per security in recognition of our 125 year anniversary.

And through the first nine months we paid a total of $163.6 million of dividends and for fiscal year 2014 the first half dividend of $35.5 million to be paid in March of this year.

Okay Eileen let's open it to questions, okay?

Thank you very much.

Emily Behncke, Deutsche Bank.

Good morning Louis, I'm just wondering if you guys could give us a bit of a sense, there's been a lot of discussion over here about the bad weather in the US, and whether or not that has impacted significantly your Q4 volumes to date?

And also wondering if you're able to give us a bit more -- quantify the price increase that you were talking about?

That's all from me.

Okay yeah we obviously we have had pretty severe weather in most of the US.

Our order file's not as strong as we had forecasted it would be right now, so we're running less than 5% below our order or forecast.

And we kind of expect since we have an April 1 price increase, that that will be kind of offset by dealers stocking up on board for the spring season at the March price, rather than buying board in April or May.

Again a certain allowance based on historical purchases to manage the price increase with commitments they have.

So I guess my comment on how that all nets out is we do see a better housing market, it's a better demand.

We do see some kind of temporary weakness due to weather, but we also expect a bit of a bump due to our price increases.

So we think it's all going to kind of average out pretty close to what we had forecasted originally.

The price increase in April is exterior products, and it's very different product line in regions, so like I said it's more tuning up pricing than it is taking a general across the Board increase.

It will probably come in more than 2% and less than 3%, so somewhere in that low 2%, maybe mid 2% range is probably the best guess for full year fiscal year 2015.

Okay, great and you guys are happy with the market share growth in the quarter and looking forward?

We are, you know quarterly comps add a lot of variance, because you've got your variance from the previous quarter and this quarter.

But we are tracking pretty much where we want to track in the market, both from our share growth and just our participation segments.

So we think our market model's running pretty well right now.

Great, thank you very much.

Jason Steed, J.P. Morgan.

Good morning Lou, good morning Matt, I guess it's good evening to you in Dublin.

Maybe I can just pick up on the pricing question just to start.

In particular I guess with reference to what you've seen in this period, another solid improvement I guess at a top level in terms of price.

Could you give us a sense sort of in terms of just aggregating that around mix, I think in the second quarter you did reference a pretty solid increase in HLD, not much in Cemplank and not a great deal in Prime.

Could you just help us a little bit better to understand this increase?

Yeah, you know what, I don't really have the details, the guys worked it out in the markets.

But like I said it was kind of a tune up, so I don't think well it's certainly not across the Board, you know and on the product lines, there's no one product line that took a big increase.

It was more like I said a tune up, take a little bit here, take a little bit there, and it's either where we're at in that market, or where our product lines are against each other in that market.

So with some markets we have Cemplank Hardie and colour all targeted in a market, so you've got to make sure that delta between those product lines is right in that.

And that's been mainly what we've been kind of working on.

Now our increase this year is we've covered before, has been mainly around getting our tactical pricing straightened out, so you're seeing that kind of increase a little bit every quarter as it gets cleaner and cleaner.

So that's why the 5% this quarter, of course again it's a quarter so the variance is higher.

But we are getting cleaner pricing still quarter to quarter, and I assume that impact kind of goes away in the next two quarters I would say, will probably be as clean as we're ever going to be with our tactical pricing.

But as far as details on the overall price increase, I apologize I really don't have them, and it was probably a very long document.

Because like I said it was very market and product specific, product line specific in market.

So mainly what I focused on was what was driving it and what has it averaged out to, so it averages out like I said in that low 2%, depending what the mixes look like next year, and what was driving it yeah okay.

Got you, okay thanks and I appreciate that.

And would it be fair to say just again on your comment regarding price increases being exterior for next year.

You're not looking at a backer increase for the coming fiscal year?

Yeah we didn't announce a backer increase, we'll review backer pricing, we're pretty satisfied with our pricing now.

Our product is sold at a pretty large premium over fiberglass cement boards, so we wouldn't want to risk share for price at this point.

So I think if we do take any pricing on backer, it's likely to be similar to what I just described on exterior where maybe one region we have the price, not exactly where we want it and we'll take a little bit here, a little bit there.

But I wouldn't expect any significant price increase on backer at this time.

Okay got you thanks, and just a final one on SG&A, obviously a few ins and outs around NZ product liability, but fairly steady.

Can you give us some sense of when you might look to kick up the investment, I guess in sales, particularly with reference to what you flagged back in September around looking at a door knocking strategy to start to really push your penetration further out of your core areas and as you start to push in to non-metro.

When should we start to think about that in terms of a big addition to your sales force as it were?

Yeah we do we have our SG&A increases built in to next year's plan.

I don't think they will outgrow the volume, in other words we expect our revenue increase to be greater than our SG&A increase.

So on a percentage basis you won't see an increase, on an absolute dollar basis you will.

But I guess one of the things we worked pretty hard on this year in the SG&A area is taking a real serious look at kind of what was helping us drive the business and what was just there and needed a good review and a lot of the waste has been kind of addressed.

So we're adding things to the business, but you're not seeing big increases because we have pulled other costs out of the business that we didn't feel were helping us drive a result.

We do have -- oh by the way yes specifically about what we call our Ambassador Program, we have rolled that out.

We ran it two markets last year, I think we're running it at five markets this year.

So that's one of the programs that we're definitely funding to a greater extent, and then in the south we have several programs that Ryan is funding, that would be neutered as southern division.

We had a good year, primary demand growth in the southern division, so we're working harder on that again next year.

We think we might have been kind of underestimating the opportunity there, so we're doing a little bit more primary demand growth work in the south, and Ryan's funding some programs to kind of help drive that.

Okay, great.

Thanks, Lou.

Thanks for those answers.

Simon Thackray, Citigroup.

Thanks.

You guys can hear me okay?

Yes, I hear you fine.

Okay, thanks Lou.

Thanks, Matt.

Just I guess going back to that mixed question that Jason asked before, rather than looking forward, just a sense in the quarter Lou, and really for the rolling nine months, in terms of how that mix shift in products and higher value products between Cemplank, between [Primeline], between ColorPlus is playing out.

Can you just give us a sense of that in terms of the outcome in the quarter and for the nine months?

Yes, I actually don't have that quarter breakout but --

Just directionally.

Just directionally in terms of how the mix is moving.

That's good.

All right, that makes it easier.

It's been very steady.

So we've gotten our arms around the Cemplank versus Hardie growth, so that's flattened out, and we've also gotten some momentum on the colour side, remembering that we pulled that color from some segments in the market where the value -- in the southern markets where the value wasn't being recognized.

So we've done that and now we've kind of done a reset at what segments we want to go after and we're seeing growth there.

So I'd say pretty much everything's growing in the bands we wanted to grow.

So we did have to reset a few things.

I think we've done a good job on that and now things are pretty steady.

So I have a feeling that year-end will give you that product mix number and it will be very consistent with what we talked about at the half year.

Okay, that's excellent.

Just a couple of housekeeping ones.

Sorry Matt, on slide 23, it's only a very small point and I might be amiss here but even with the buyback you had the EPS growth going up less than the net profit growth, 38% versus 39%?

Did I say 23, slide 23?

Yeah.

Is there any reason for the difference or it's just a rounding issue or something?

Yeah.

No, I don't think there's much to be read into that.

Right-oh.

Okay, maybe you can come back to me.

And just another little housekeeping issue that the higher corporate costs on slide 44, the other costs, the $8.2 million versus the $5 million?

What was the driver for -- I might have missed that, I'm sorry.

It's headcount and compensation-related.

Yes, I got the stock comp, that's the line above.

The $8.2 million though?

Yes.

I actually don't have that noted, so --

Okay.

That's all right, I can come back to that.

That's fine.

And all my other questions have been answered.

All right, Simon, we'll come back to you on those two.

Andrew Johnston, CLSA.

Good evening, gentlemen.

Just on cost inflation, can you tell us where that's running for the quarter and for the nine months?

I'm just trying to compare your price increases with the underlying cost inflation to try and get a real price increase there?

Okay.

You know, everything is up, you know, across the Board but when you add it all together through nine months in the US it's somewhere around $10 million.

It probably ends up, you know, pretty linear through the fourth quarter so you're looking at maybe $12 million or $15 million for the year.

Okay.

And with the change in the pricing and I haven't got through my numbers yet, but it looks like that EBIT is going up a bit more than just what that price increase might be.

And so I'm just trying to understand what has been the growth rate in your ancillary products, because they're now taken out of your average pricing, right?

So just trying to understand whether the growth in those products, both in volumes and price, is any different to the overall market?

Okay, you're talking about the non-fiber cement products we pulled out of our pricing equation?

Yes, that's right.

Okay.

I wouldn't know that.

It's not affecting our number, it's not affecting our price comp because we restated everything without those products in it.

Okay, but in terms of your earnings it's a rounding error, really?

It is a rounding error, no doubt.

It's a rounding error.

Okay.

Okay, thanks.

And Matt, your comment about capital management.

I'm just trying to -- I suppose I get the feeling that you're looking to take a more aggressive approach on capital management and that's probably a change to where the business was six months ago, so just interested in your view on that.

And in your comment specifically you said you were going to move more swiftly but it would still take some time in terms of implementing, getting the -- I assume that comment was around getting the gearing into a position where you want it to be.

Yes, so on both questions, Andrew, we will move quickly but given that we're in currently a net cash position, moving from that net cash position to that range of debt that we discussed.

We just won't be able to do that quickly.

So that in and of itself will just take some time.

Okay.

And just as part -- I suppose as part of that the $0.28 special dividend that you've announced this quarter, is that over and above the capital management that you'd announced earlier in that what you didn't buy back you'd give out as a special dividend.

So is that $0.28 over and above that sort of target for this year, or is that all part of it?

So everyone's aware that we announced a share buyback program in May of last year and of up to 5% of the issue capital, and for the first nine months we've obviously purchased a relatively small amount.

Recently we have gotten more active in the market with share buyback.

We still look though -- we look at a mixture of the special and the buyback within that buyback that we announced.

I guess you should expect that depending on how we perform and market factors that it is very likely that we'll continue to use both of those interchangeably.

Okay, so the $0.28 announced today is outside that?

Outside that --

I think that's a fair way to think about it.

Okay, great.

Thanks very much, guys.

Hey Andrew, I just want to add something.

Really, our capital management, we're just slow to get out of the gate.

We knew we needed to give them more money back and we kind of had some plans and we were just slow to get out of the gate to the degree we needed to.

So now Matt's done a lot of work and I think we're more prepared to kind of get to the debt level that we had foreshadowed before.

The other thing that's going on, and we'll update you guys at full year, is if the business keeps running as well as it is and the market recovery keeps going the way it is, which we expect both to happen, we're probably going to spend more capital money in the next three years than we originally gave guidance on.

We haven't totally sorted that out so we will change our guidance at the end of the year here -- well, I shouldn't say we'd change it but we'd expect to increase our capital expenditure over the next three years if our forecasts kind of stay the way they are right now.

So that obviously plays a part in net debt as well, so hopefully we'll have you a little bit more clarity year-end than that.

Okay, terrific.

Thanks.

Jean Dieudonne, JCP Investment Properties.

Hi guys.

Just a question regarding your gross margin.

Your revenue is -- overall revenue is up 12% and cost (inaudible) up 9%.

Your gross margin is up from 32% to 34%.

I'm just wondering when you're thinking in terms of that improvement in gross margin, what's the mix between I guess operating leverage in terms of the kind of scale and what is actually driven by efficiency of your plant versus -- and what it actually costs, and the negative impact is actually a cost increase.

So is it mostly due to having more efficient plant or is it due to mostly from the leverage on the price?

This is Louis.

I'm not actually looking at the numbers but I'd say, you know, we have things going in the right direction.

We have more market demand, we have market share growth, we have higher utilizations than our plan and we have somewhat higher pricing.

So there's not any one of those things that's driving it, it's just kind of a natural event I think when you get into a market like this.

So how far can this gross margin go if you get to (inaudible) your plans, if 34% can go to 35%, 36%?

I'm sure the range -- yes, 34% is not the cap.

I'm not sure I could tell you, not looking at any of our forecasts.

I'm not sure what I can tell -- I can tell you the exact range it might stay in but there would be a range around that 34% I'd say.

Right, okay.

Because I did notice that your pulp price was up 14% and the freight, I suppose freight is up.

So it appears some of the underlying cost is up a lot, so it looks like it's mostly been driven by better utilization of your plants.

One of the stories about our business this year is we were able to focus on certain things and improve our capability and actually freight is one of those areas.

So even though freight, the cost of freight was up generally in the US this year we didn't incur that in our business.

So that's a good example of where we'd get some improvement there.

Okay, and just one last question for me, please.

When I look in terms of your SG&A, you already mentioned that the SG&A [needs] to go up next year.

I was wondering with in order to achieve your long term target is it going to be incrementally more difficult, I guess more costly, to penetrate markets where you have low share in terms of the ability to gain incremental share is going to be more costly, or not?

I don't know.

I guess everyone takes a little (inaudible) truth first and if you look at our business, that was new construction and that was substituting for wood that doesn't perform well in the market as a siding product.

Then we moved onto vinyl new construction, then we moved on to vinyl (inaudible) model, we've moved into non-metro.

So there's some -- there's definitely some kind of correlation there.

We're getting in the tougher stuff and getting the last, you know, 5% or 6% harder than maybe the middle 5% or 6%.

But the way our business runs, you know, you're not going to see it.

We kind of balance our investment in growth when our returns that we try and generate in the business.

So when we're more focused on growth and we have good returns in the business, that means we will spend more.

So with Hardie's returns, pretty much everything we do works.

That not only goes for every business we're in, meaning every country, every segment we're in, every product line we're in, it all makes returns.

So some make higher returns than others but you know, we don't see our margins dropping as we go forward because it's getting harder to kind of penetrate.

We don't see that happening anytime in the near future; when I say near future I'm probably talking five to seven years, I don't see that happening.

Okay, and can you clarify CapEx in the next [fiscal year]?

I think you mentioned initial CapEx next year.

Is it going to be in the range of $150 million for the next couple of years, or couple or three years, per annum?

Our current guidance is 150 and we're looking at our -- we're doing a lot of work on capacity now, so we announced the stuff that's been approved.

But we have work going on in Tacoma expansion; we have work going on in a mid-south green field.

We have work going on for more capacity in the north.

So we have a lot of work going on that isn't announced, and depending on how quickly we want to take these projects on based on market demand, you know, $150 million a year doesn't get us outside of what we already have planned.

So I think as we're going to pull some stuff forward and when we pull some stuff forward you're going to see that $150 million guidance go up.

Now, I don't have a good number for you so we're not really changing our guidance at this point because we don't have hard plans that say we're going to spend X more but I do think where we're at with our capacity planning we're likely to have that completed by the end of the year and we'll be updating that capital expenditure guidance.

And it's almost all -- it's almost all US by the way.

It's not so much the other regions.

So I'd just like to clarify, it's $150 million for the next two or three years or it's just $150 million for next year?

No, I think we had $150 million for three years out there.

Thank you.

Your next question comes from the line of Liam Farlow from Macquarie Securities.

Please go ahead.

Hi guys.

Just wanted to I guess ask some questions around the Asia Pacific result.

The volumes are flat in Asia Pacific; what are you seeing across the Australian market and your current outlook and I guess market share trends?

And just to sort of follow on from that, pricing was up 6% but EBIT margin was only up 3.5%.

What are you seeing I guess in inflationary impacts within the region as well?

Again, you guys know even though I'm an American I hate quarterly results because there's just too much variance in quarterly results.

But having said that, I guess our guys have shown me that the market, although the market in Australia is good, we really had no complaints.

The shift in the market more toward Western Australia, more toward attached isn't playing to our strength, okay.

So our position in Western Australia would be lower than the other states and our position in attached would be lower than detached.

So I wouldn't say -- I think our Scyon product line is running well.

The growth there is good, but I wouldn't say we're gobbling up market share in the Australian business, but we're not losing market share.

Right now our guys would be claiming some gains and I'd be discounting that in my mind.

I just came back from Australia, market and plant visits, about three weeks ago, so I had a lot of time to talk to the guys about this.

I think we're doing the right things in Australia, but I would like to see higher growth than we're currently getting, just basically because we just built some new capacity and I like to take to take advantage of that to the greatest degree possible.

So as far as the pricing EBIT margin, again I think the quarterly comp is wrong.

The way you should look at that is more the nine month 4% which I think is a lot more realistic.

And again, some of that is product and some of that is market.

And as far as their EBIT efficiency I think they're doing well.

Based on what we want to do with the business I think they're doing well.

Their plants have opportunities.

The Australian plants are in kind of a middle of a reset project that tries to drive more efficiencies through those plants, lower unit costs basically, and I think one of the plants is well underway and the other plant is getting started on that process.

So again, I wouldn't look at the decimal points too closely down there.

I think the business is running like it's been running.

It's been on a good path for several years.

I think we're maintaining that momentum.

Scyon's proving out to be a very profitable product line and that's where our focus is.

Okay, and just to follow-on from I guess that reset process that you're pursuing, what are some of the targets you're trying to achieve with that?

Sorry, I didn't get the question.

Just following on from the plant reset process in Australia to try and get some sort of improved efficiencies, what sort of margins or returns are you targeting from that process?

Yes, you know, I'd rather let that just play out to be honest with you.

Yes, no problem.

We get very good returns on that business.

It's really a very healthy business but obviously we expect to get more money out of the plant, but you know, out of the plants, but I wouldn't want to put a forecast out there for how it might change the return in the business.

Okay, no problem.

Thanks Louis.

Yes.

Andrew Peros, Credit Suisse.

Lou, just an extension of the question on cost, perhaps I can ask it a different way.

Of that $10 million increase that you mentioned a little earlier, does that include increases for pulp and gas?

And then perhaps if I could take it one step further, wondering how much higher do pulp and gas prices need to go before you start to worry about hitting the 20% to 25% margin range?

Okay, yes.

I rolled it all up, so it has pulp, cement, silica, gas and power.

Okay, so that's the $10 million through three quarters in the US business expected to be $12 million to $15 million by the time we're done.

You know, a lot of you guys have heard me say this before, I just don't worry about the price of pulp.

I don't want to pay the money to hedge it to smooth earnings, so I'm happy to ride with it.

So if pulp for some reason became way more valuable in the market I guess we'd see it in our EBIT margin, but I wouldn't worry about it.

I think pulp's been pretty expensive through the last couple of years.

I would expect at some point for it to settle down.

I think it's somewhat currency-driven and somewhat, I don't know, supply and demand driven obviously, but we just don't worry about it.

We're not going to be sitting here a year from now and saying hey, we didn't make -- at least I don't believe we will -- we didn't make our margin because of the price of pulp.

That's not going to happen.

Okay, thanks.

James Rutledge, Morgan Stanley.

Thank you.

Just a follow-on from Jean's question earlier.

Just looking at the production cost benefit on that gross margin in the US, and at the risk of talking to quarterly numbers here, last quarter you flagged that there was a 160 basis point headwind to gross margin whereas now you're saying for this quarter it's 110 basis point tailwind.

That just seems like a big turnaround to me.

Is that -- is there just one thing in there that's really explaining that or is that just better utilization out of plants?

Because I don't think utilization would fully explain it given volume growth has slowed in the third quarter relative to second quarter?

Yeah, but you know -- yeah, I'm not sure I can answer your question but we're building inventory right now, so we have Fontana coming on as new capacity but the plants ran very strong in the third quarter building inventory.

So I'm not sure I can answer your question.

I haven't looked at the numbers that way.

Sean can remind Matt and I and we'll be able to kind of answer your question.

I just can't answer off the top, it isn't something that I've looked into.

Sure, okay.

I suppose just on the gross margin that you talked to of 34%, do you think that would be conservative given that third quarter is typically a low gross margin quarter and then you've got those Fontana idle costs coming off into the -- as we move into the fourth quarter and into fiscal 2015?

Yes.

I mean, as I've mentioned many times before, you guys are way more exact with your models than I am.

So I agree that your third quarter margins are normally thinner, and that's why I said there is a band around that 34%.

I don't know if the band would be 8 points around the 34% or 4 points around the 34%.

So it's just not something that I focus on in the business, so -- we just use different equations to look at the business.

Can you give us a sense of what I suppose the impact on gross margins, the idle costs of Fontana coming off are into the fourth quarter?

Thank you.

You know, it's -- we're in a constant period of starting up, building and starting up capacity and we still have Somerville idle.

So what I would tell you is even though I did comment on it, don't think about it because it's not enough to move the needle.

It's a one-off, it's not a huge number.

It's enough that we're -- you know, you look at it internally and say oh okay, that makes sense.

It's not something to say uh-oh, we have a problem.

We'll have -- I mean the cost of ramping up Fontana will be way more than that idle facility cost, but we just ramped up Waxahachie.

So like I said, I think over the next three, four years all those costs are just part of doing business because we're always going to be bringing on new capacity as long as the market keeps expanding or stays at the good level and we keep growing market share.

Sure.

Okay, thanks Lou.

Michael Ward, Commonwealth Bank.

Thank you.

Louis, the market -- you obviously talk pretty favorably about the market.

We see the US home builders delivering pretty big profits, pretty big gross margins.

Can you just talk through why -- when you talk about the price increase for April you talk about a tune-up.

Why don't you have the confidence to actually put a more material market price increase through?

Well, we certainly could.

We're not commodity pricers, so --

I'm not necessarily arguing that you are, I'm just saying that I thought -- yeah.

No, no, no, no.

I'll just kind of explain it for everyone on the call.

Most people in our industry will price off capacity utilization, so when things start ramping up and new capacity hasn't ramped up to the same rate then prices go up pretty dramatically.

And when it goes the other way, when supplies are ahead of demand price comes off pretty dramatically.

We're just not like that.

We're value pricers.

If we wanted to put our price up we could but we're way more focused on market share gains than pricing improvement.

So right now in this type of market we're going to err on the side of having the right price to max -- optimize our share gains rather than having the -- you know, optimizing our price and slowing down the growth.

So the value in the business model is really driven by the scale we can be.

If we hit 35.90 rather than by a lot of the questions we're getting today, which is 34 margin versus 36 gross margin or 38 gross margin.

Although those are good for quarterly results.

If you kill any of your kind of long term demand for your product, we just think it's not a good trade-off.

So the reason we tuned up the prices, we're very focused on market share gains and didn't want to introduce a large market price at this point.

We just don't think it's good for the business.

Is that a strategy that you're likely to carry out for a number of years, or is it something you could see changing next year.

What would be the catalyst to make you change that?

You know when we're -- well again, it depends on the segment and it depends on the geography, but when we're at -- say we're at 16% -- I don't know where you guys estimate, or at 17% share for fibre cement.

Now we want to get to 35%.

It's too early to worry about what's the true value of fibre cement.

We're value pricers.

We sell fibre cement at a lot higher price than other participants in the market and we're very satisfied with that.

So we think one of the things fibre cement does offer to the US market, is some consistency around pricing, which they don't get with commodity products.

Okay, can you also talk a bit more about the Backer business.

You commented that I think the volume growth rates were lower than say the 14% volume growth we've seen for the first 9 months of the year.

Can you give us a sense of what the Backer volume growth rates have actually been for the first 9 months of the year and why it was actually down in the third quarter?

They would be low single digits Backer growth rate and the reason is because just like I said about exteriors are 35.90%.

We basically have an upside that's twice the share we are now.

Were in Backer, and in a lot of our target segments, we're actually very high share players above 50%.

So there's not that doubling up possibility.

In some geographies, we're already very close to a terminal share in our segments.

So what we're doing right now is we're growing with the market in Backer, not necessarily growing market share.

Okay.

Then the R&R market, you don't talk as favourably about that.

I mean, I've always understood it's sort of an 18 month to 2 year lag.

Are you a bit disappointed that you haven't really seen a bit more impetus in the R&R market?

No, the R&R market does lag new construction and it also doesn't have the same kind of variability.

So new construction went from the 2 million starts down to 500 and during that same period of time, our R&R opportunity might have dropped, I don't know, 15% or 18%.

So we are in a better R&R market now and we do see it starting to pick up momentum.

So it's better this year than last year and we think the improvement next year will be greater again.

Having said that, the best story we have about R&R is our ability to participate in that market and grow market share.

So we grew it through downturn and we're growing it right now.

I didn't talk much about R&R.

It is in the same kind of 15% ramp up that we're getting in new construction opportunity, but it is a better market than it was last year and we're very well positioned against vinyl with R&R with our programs.

Okay.

Sorry and just one last question -- more house-keeping than anything.

I just noticed that the Fontana upgrade, you're now saying it's 250 million square feet, whereas I think just 3 months ago you were saying it was 300 million square feet.

Why the change?

That was a mistake by us.

We interchanged Plant City and Fontana, so I think we showed Plant City has 250 million square feet and Fontana as 300 million square feet, and it should have been reversed.

Right okay.

Thank you.

We just got that today.

I haven't talked to Shaun and Matt hasn't talked to Shaun about do we need to go and correct that, or is it something that needs to be done or not, but we just got it today, so we apologise for that.

That's fine.

It sounds like it's corrected.

The next question comes from Matthew McNee from Goldman Sachs.

Please go ahead.

Just a question to Matt just on the capital management.

Matt, as you are aware, you guys are pretty constrained because of the asbestos agreement on what capital management you can do on sort of rolling 3 years and dividends you can pay on a rolling 2. Now I can see how you can use a lot of your bullets and get yourself to that target gearing of sort of AUD500 million in the short term, but the question with me is, does that -- you know under the constraints that you had, can you hold your gearing within that target range?

Like in 3 years' time, if you model forwarded, would you still be in that target range or would your gearing be below, just based on the constraints you have?

Yes, that's a good question Matt.

We think that given the constraint that we have -- that the gearing range that we provided today, we could operate in over a period longer than just the 3 years.

Okay, so with the 15% et cetera, you know the payout ratio is 75%.

If you max those out, you can keep the gearing at that level.

I mean the way I look at it, in 3 or 4 years you'd be -- I mean obviously it's dependent on CapEx and a lot of other things, but your gearing would be dropping down the bottom of that?

Yes, I think as you said, it's dependent on a lot of factors, including earnings, CapEx, distribution back to shareholders and again, given the constraints that we have within the (inaudible) we think that the gearing range that we talked about today is sustainable over a longer period than just the 3 years.

Okay.

So you don't think there's any need to go back and try and review the agreement, or try and get some sort of amendments to it or anything like that?

Is that even a possibility?

No.

Okay, no worries.

Thanks.

The next question comes from the line David Leitch from UBS.

Please go ahead.

Hi and congratulations on a great quarter.

You gave a very colourful, helpful answer, Louis to Emily's great question at the start about demand, but I am still just a bit unclear myself as to whether I guess what the home builders are actually saying, or what you're seeing as to whether it's just a cold weather kind of thing, or whether home building really is recovering at the rate that we hope it's going to.

I just wondered if you could just provide a bit more colour around that demand outlook as you see it over I guess the next quarter or two or three.

Yes.

David, I guess first and foremost, I'm not an expert on home building demand, but what I would say is, I think I definitely feel like the market is going to be better again next year.

Okay now, like I said, there's going to be some spots and I think we're in one right now where the order files run behind our forecasts and it's not really about demand for housing, as it is an external factor like weather, which we're not worried about.

Keep in mind also that I like a market that grows slowly, as it grows for a longer period of time.

So if I run a commodity business, I would want to see housing up 30% next year.

That way I can jam my price up when capacity got short.

Okay, we covered that on an earlier comment.

We don't jam our price up when capacity gets short, and we don't actually like to see capacity get short.

So going into this thing, our guys we're planning on a growth band of 15% to 25% --25% super-hot market, 15% good market where we're growing some market share and we'd thought we kind of end up somewhere maybe around the 15% or a little bit higher and that's kind of how it's playing out.

So in a kind of a weird way, it's doing exactly what we want because as I said before, our value is in market share, and if the market gets on fire, market shares can be harder.

So we like it where it's at.

So if Aussie starts grew 10% next year, I'd be fine.

If it grew 15%, I would be fine.

I wouldn't want to see growth at 25% and I wouldn't want to see it not grow at all.

So I think we're in a very safe market already.

I know the way other building materials companies run their business.

You know, they might be a little bit concerned because extra demand means extra price for them, but it doesn't mean that for us.

Okay, but I mean you just think that what you're seeing at the moment is definitely weather related and not some more durable pause?

Most forecasters drop their forecasts in January, but they drop them I think -- I'm going by memory now because I haven't looked at them since they dropped them at a 15% level.

So it was kind of funny because I don't go to many industry events, but I happened to be at an industry event when that was going on and the commodity guys were redoing their plans and I'm like, yes that's good that's fine, no problem, but again that just shows the difference in the business model.

So the value of Hardie doesn't changes if the market's up 15% or 20% next year.

I appreciate that very fully.

Alright, thanks very much for that.

I appreciate it and great quarter again.

Thanks cheers.

Okay .

(Operator Instructions) Your next question comes from the line of George Clapham from Arnhem.

Please go ahead.

Hi Louis.

Just a question going back to Wardy's question re R&R -- I think might have missed it, but what's the sort of mix now if you look at R&R -- I presume Backer is largely an R&R business and in terms of your volumes with new construction?

It's a good question George.

I haven't asked for an update on that, but we came into the recovery at 70%/30% -- 70% R&R and 30% -- that was an our estimate -- 30% in new construction and new construction has grown much quicker than R&R, so you're somewhere around that 60%/40% right now, but that's probably another area Shaun needs to remind us.

At full year, we'll give you our estimate there, but we're still going more in R&R than we are new construction, but more of our growth is right now, obviously new construction rather than R&R.

Just one other question.

This relates more to your customer base.

You said obviously the larger builders seem to have taken share.

Are you getting any sort of traction, or are you seeing any recovery in the custom builders and is that a better business for you in terms of the margin channel and also in the R&R market, in terms of the big boxes, et cetera?

Is there any sort of trend in your customer mix?

Not really.

I mean we have a really good position with big builders, so the fact that they're back with their land building at a higher rate than the overall market, helps our Cemplank business because they'll either buy Cemplank or colour as a rule.

Mainly, Cemplank.

As far as the custom builder segment, I think that segment's fine and we get our share of that business through the independent lumber yards, but we don't track it as closely as we do some of the other segments.

As you know George, we talked before.

One of our initiatives has to be to put a top of the market product line together, like the Australian business has done with Scyon and we have our first product there Artisan, but we need a product line rather than a product and that is one of the initiatives we're funding in the business to a greater extent right now than we were a year ago, but it will take a while to pull that product line together and launch it in the market.

You know George, again we talked many things about the business.

When we're thinking about R&D, it all returns well.

So the boxes, custom homes, production homes, R&R -- it all returns well.

So we don't think of trade-offs.

We have our target shares in each segment and as long as we're tracking toward those shares, we don't worry about that one's returning a higher rate than the other right now because they're all at such a good rate.

It's not like you're going to make any trade-off decisions.

Of course, that's a good reminder why we never want to run into erratic capacity because then we would have to be forced into trade-offs and with everything returning so well, you just don't want to get to that position.

Sorry, I've just got one other.

This relates to some of the other newer initiatives.

You know, the windows and that.

Can you touch on that.

Have there been any developments there?

Yes, I guess it's in their report.

We disclose we spent AUD4.8 million buying a fabrication plant -- a fiberglass window fabrication plant.

Again, what I talked about before is we like potentially the idea of a fiberglass window fitting into our re-side market segment, but you know we're not players in that industry, so we've got a lot to learn before we can really feel like we might have some kind of business in windows.

So at this point, basically funding a start up to target some pilot markets.

If we can prove a capability, meaning the [value] proposition for fiberglass windows in between vinyl and wood clad windows, our ability to produce, run an efficient supply chain and generate demand in three or four pilot markets and we'll consider turning into a business we want to invest in a bigger way in, but that decision is probably at least 3 years or probably 4 years off.

So no one should worry about fiberglass windows at this point.

Thanks Louis.

Yes.

Here's a follow on question from the line of Simon Thackray from Citi.

Please go ahead.

Thanks very much.

Lou it's all been a very positive picture in the market, both in the quarter and I guess looking ahead.

Normally, you have one or two little areas that you say you're not performing as well as you would like them to.

Not to take anything away from the quarter, which has been fantastic.

Where are the additional opportunities where you'd like to see a bit of improvement, or where have markets maybe not behaved the way you would have liked them to, because there's always some area you normally talk to?

Yes.

Thanks Simon.

You know it's almost 12:30pm in the morning over here, so I thought an easy result, not many questions, but you guys have proved me wrong.

We're still not -- we're getting traction in Midwest and North-East, but not the traction we want.

So in the Midwest, LP has been a bit of a problem and in the North-East -- just resetting that program in the North-East has taken longer than we thought it would, but I think Shaun [Gant] took over that geography about a year ago.

I think he's doing all the right things.

I think we'll get that traction, but if there's anything that's tracking behind, what we wanted to do a year ago, would be our Midwest and North-East market share program.

Can you give us a bit of specific or a bit of colour around the percentages versus target?

No, we're growing.

You guys can see vinyl shrinking in those regions, so we're growing.

We're just -- I guess I've used the expression before -- just our organisational capability.

Instead of being able to juggle three or four balls, we're still only able to juggle one or two, which means you get R&R going, but you're not doing what you should in new construction, or you're not doing what you should in multi-family and our channel reset there has taken a little bit longer than it did in the rest of the country and just kind of a normal drag.

So percentages we're behind now, but I think more in months okay.

I think next year we'll be where we thought we should be in the Midwest and North-East this year.

So I would say we're running behind and that's not criticising anyone working on the program now, because I think the guys that are working in that geography led by Shaun are doing a really good job.

It's just there was more to fix than -- and it's taken a little longer to fix then I would have guessed.

That's excellent.

That's all I need.

Thanks Lou.

Yes.

There are no further questions at this time.

Mr Gries, please continue.

Alright, no it's fine.

I appreciate everyone joining the call and all your good questions and we'll be in Sydney in May and see you there.

Thank you very much.

That does conclude our conference for today.

Thank you for your participation ladies and gentlemen.

You may all disconnect.