James Hardie Industries PLC (JHX) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen, you are currently on hold for the James Hardie Q1 Fiscal Year Results conference call. We are awaiting the arrival of additional participants, but should be underway shortly. Thank you for your patience and please continue to hold.

Thank you for standing by and welcome to the Q1 Fiscal Year Results conference call. (Operator Instructions) 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 the 15th of August 2014. I would now like to hand the conference over to your first speaker today Mr Louis Gries. Please go ahead, Mr Gries.

All right, thank you. Hi everybody, this is Louis Gries. Thanks for joining the call today. Matt Marsh and I, we're in [Dublin] and we'll walk through the results like we do usually, and that's I'll cover the operations overview, Matt will cover the financials and then we'll come back for questions and answers.

When we get to the questions, investors and analysts first and then if there are any media questions we'll take those at the end. The people in Sydney will be driving the presentation so we'll be just going on our slide numbers.

So slide 1 is just a cover page; slide 2 is a disclaimer; slide 3 is the rest of the disclaimer. Slide 4 is just the agenda and like I said, it's the same format we always go with. Slide 5 is another cover page, so slide 6 is the first slide we'll talk to.

So you can see our adjusted net operating profit was down 4% despite having a better market to operate in and despite division EBITs being up some. So we'll cover that. Matt will cover the differences that were driven by corporate, and obviously I'll talk through the business units at a high level.

We have some sub-bullet points in there which will go into some detail, but basically all the businesses are running in better markets, the US isn't as good as we anticipated it would be but it is a better market than last year. And I think our financial performance doesn't quite reflect that as well as it could have in a better market, so we'll go through that in some detail.

If we go to slide 7, the US Europe fiber cement results. You can see our sales volumes are -- it's actually slightly above market index, up 8% which you'll see on the next slide. Exteriors is up more than that. Interiors actually come up negative against last year.

Sales price is higher. Production costs were one of our issues during the quarter. Start-ups played into that but it wasn't exclusively the start-ups at Fontana and the start-up last year that still not up to design at Waxahachie.

So we've had plant inefficiencies due to the plants that are bringing on capacity. Those would be obviously Fontana's start-up of both line 1 and line 2.

Waxahachie started line 1 last year and is still experiencing difficulties. It's not that it's not operating at a fairly high level, it's just not operating at design yet. And then Plant City also brought up capacity this year and their overall efficiencies have fallen off as they've done that.

We were expecting a better housing market, I think as everyone was, and we put some cost into the business to mainly either support our efforts to increase capacity or support our market share initiatives in the business.

The costs are still in the business. It's not like we have to pull it out but if we would have known the market was going to be where it is we would have put less in. So we've kind of stalled the process in some areas as far as adding any further cost.

And then we discovered the fact that most people thought the market would be up 15%, 18% this year and it's looking more like 6% to 8%. So again, it's a better market, it's just not as good as we planned for.

So if you go slide number 8 you can see the details. Probably the highlight of the page is the price is strong. We talked about an increase we took in April which was around -- we thought it would net out to around 2.4% across the product mix; it was exterior products only, and that's probably about a third of our price improvement.

And the other two would be the tactical pricing improvements we made last year and have carried forward, and the mix improvements that we have realized some mix improvements in the business.

But if you go to net sales, up 16%, volume up 8%, like I said exteriors up more than that. Interiors was actually off about 3% for the quarter. And EBIT only up 14% and really in a market like this the bottom line should be up more than the top line as you know, and the reason it's not is mainly what I talked about; we've got a little more cost in the business than we would have put in at this volume.

But more importantly we have higher unit cost of production. Some of that's the commodity cost increases we've seen in cement, natural gas and pulp. Pulp, we came in at a year high but that was forecasted to come off and it hasn't come off.

So we're facing higher commodity costs and then we're facing both the start-up inefficiencies which I mentioned which we kind of planned for, but we're not quite on plan with our start-up at Fontana. And then the other inefficiencies that aren't so directly related to start-ups.

So EBIT margin, actually down 2/10 of a point versus last year, still within our range but clearly not where we'd want to see it in the first quarter. The first quarter is usually obviously a good quarter for EBIT generation.

Just to give you an idea of how much I think we're off where we would like to be for a quarter like this, my estimation is that we had $8 million more EBIT in the US business, which we could have clearly delivered with better plant performance. We'd be right in line where we'd want to be in a quarter like this. So we're about $8 million shorter in the US business and the EBIT line.

We'll go to slide 9. That's our chart; like I said, we're in the range, we anticipate staying in the range this year so this will start with the EBIT margin and first quarter doesn't change our view about where we end up for the year with our EBIT margin. But again, we'd rather see some above 23% in Q1 so we're a couple of points off of where would have wanted to be.

Slide 10, it�s your housing starts against our growth volume and revenue. The revenue line easily steeper than the volume line because like I said, we got the price improvement in the quarter. We are running above our market index.

We do a four-quarter rolling as the most accurate way to look at it in the business; we're fairly happy with where we are on a four-quarter rolling. We don't have this quarter's index; it's going to be positive but it's not going to be as positive.

And most of you would have seen that LP had a good quarter, LP being a � stone and wood substitute for our product, had what we determined to be better exterior growth than we had. Now, we have different market indexes so it's not quite one-to-one comparison but you still can't get around the fact that their volume growth looks like it was better than our volume growth, which is obviously not a good outcome for us.

If you go to slide 11, average selling price. Like I said, I think our price is tracking the way we want it to track. I think it's at the right level to fit in with our market share programs, but it's also at a good level from a return perspective.

We've got the tactical pricing straightened out so segment pricing is not leaking from one segment to the next. So we're very happy with the current level of pricing in the business.

Page 18 (sic) has the Asia Pac results. Oddly enough, it's similar to the US. I think we should have done better on the bottom line.

We had a 6% volume gain at 2% price gain in Australian dollars and we only had a 4% EBIT gain in Australian dollars so similar story. We should have delivered more in their case but we are not at the same magnitude as the US with probably $2 million, maybe $3 million.

The business, it's fine, it's well-positioned, it's well-run. Just you have a quarter and it doesn't comp as well as it should. I anticipate full year will comp better than the quarter does in Asia Pac, as well as the US actually.

To get to manufacturing capacity expansions, so we have three that are in construction phase. Right now we have Plant City number 4, Cleburne number 3 and Carole Park. We're giving you the amount of investment again.

I think the bigger story is the effort in the business to bring the capacity on, on top of the fact that we brought our number 1 Waxahachie back and we brought number 1 and 2 on Fontana back.

So there is a lot work in our manufacturing organization to kind of not only build this capacity but also bring it online. I'll have to admit, I think we need to do better with these three start-ups once we finish construction and we're done with Fontana, but it has stretched our organization a bit to have this much capacity work going on at the same time.

Slide 15, the short summary is even though the US isn't improving at the rate it was forecasted it was going to say at the end of last year, it's still an increasing market and that's mainly what we need. Our problem isn't that the market's not good enough, the problem is that we planned for the market to be a little better than it was.

And in addition to that, Australia, New Zealand and the Philippines are all good markets. So we're looking like we've got good markets to operate in. Organizationally we've kind of spun our wheels a little bit, it shows up in quarterly results.

I think we'll work our way out of that situation and get more traction and put more money to the bottom line, but I don't see it dramatically changing overnight. Our order file in the US, over the last six weeks since we flipped quarters, looks very similar to what it was the six weeks prior to that.

So it's not like we're getting momentum around the order file so I think we'll be dealing with these volume increases in Q2 and Q3 somewhat in the range of what we saw in Q1. I think interiors -- we can get more traction in interiors, I think exteriors it's going to be largely driven by what's happening with housing.

Housing, like I said, it's running softer than forecasted. There's still some forecasters saying the back end's going to be a catch-up; we're not really seeing that or believing that so we're not planning for a big catch-up in second half on housing starts.

Okay, I'll hand you over to Matt for the financials.

Thanks, Louis. So slide 17, Group result highlights. Lou's already talked about a lot of what earnings have been driven by sales volumes and prices up in the business units, albeit a little bit more modest than we thought it would be. The higher production cost we've talked about; we'll go into a bit more detail on input costs especially and then some of the plan efficiencies in Fontana and starting up some of the other lines.

And in the higher organizational spend you'll see as we go through some of the segment results, stock compensation is up, largely because of share price appreciation year-over-year, but there's also the increase in some of the discretionary spend and the labor cost as we've added some of the capability that Lou mentioned.

We continue on the capital expenditures for the three big projects, so we're continuing to invest there. You'll see on cash flow decreased from trading activities from $83.8 million for the first three months of the year to $87.9 million in the same three months in the prior year and I'll go through that.

During the quarter we've repurchased and cancelled about 715,000 shares of our stock as part of the share buyback for a total of about AUD9.8 million or $9.1 million at a AUD13.69 share price on average, and an ordinary dividend of $0.32 and the special of $0.20 for a total of $230 million was paid out on August 8th and we'll talk about that a little bit more as well.

So we go to page 18, the Group results. Net sales up 12% as we've already talked about, because of volume and price. Gross profits down about 30 basis points at a Group level, a combination of the higher production costs, the higher market prices, commodity prices on the input side and then the plant inefficiencies.

You'll see SG&A expenses here on a reported basis are up and I'll go through some of this in detail on some later slides, in part because of stock comp and in part because of discretionary spend, and the discretionary spend is a combination of corporate and then in the divisions.

And then EBIT and net operating profit you'll see some of the leverage in the top line loss there. It's really a few things. There's about $1 million, $1.1 million of interest expense from AICS that we report.

Other expenses increased largely due to the realized and unrealized FX losses and then income tax expenses increased about 12% due to an estimated higher effective tax rate, that I'll go through more in a bit.

On page 19, so $28.9 million of reported net operating profit in this quarter as compared to $142.2 million of reported in the same quarter a year ago. You can see the adjustments of asbestos. New Zealand weather-tightness liability decreased as a result of the higher rate of claim resolutions and just fewer open claims -- and so you can see that presents a variance year-to-year -- to get to an adjusted net operating profit of $50.1 million for this quarter and $52 million from a year ago, that was already talked about.

On slide 20, this is segment EBIT. So you can see US and Europe fiber cement segment up 14%, you know, driven by the dynamics that we've already talked about. EBIT APAC, in local currency up 4% on a reported basis, down 2% on a US dollar basis.

Then, research and development, up slightly, so about 11%. You know, I think that's just as a continuance in the last couple of calls or last couple of quarters. We've talked about it as timing of projects and it's gone kind of one way and this just happens to be going the opposite way. Still, a relatively small change.

Then, general corporate cost -- you can see -- is up 55%, year-over-year. Some of that is due to the stock compensation expenses and the accounting that we do for that. Then there's a smaller part of that that's due to some of the discretionary spend that was done at a corporate level to add organization cost there.

Slide 21 -- the slide that is familiar to many of you -- shows the historical changes in the Australian dollar versus the US dollar. The movement in the currency of those exchange rates this quarter had an unfavorable impact on Asia Pac results for earnings. It had a favorable impact on corporate cost in Australian dollars and an unfavorable impact on translation of the asbestos liability from March 31 of this year to June 30 of this year.

Slide 22 is just some discussion on US input costs over the last few years. Input costs are up significantly, you know, over the prior year and over the last two years. Primarily, you know, driven by pulp, silica and cement market indexes and the movement of those commodities in the market. Most of our -- many of our input costs, you know, obviously fluctuate in line with those market prices and that's what we're trying to show you on the left.

You'll see that pulp -- the NBSK pulp price is at a three year peak. The cost of natural gas has nearly doubled over the last two years. While we are engaged in good sourcing and procurement strategies and we're outperforming these market indexes, nonetheless, it does create some of the gross margin dynamics that we've talked about already.

On slide 23 is income tax expense and ETR. So, the adjusted effective tax rate is up compared to last year, primarily due to a shift in the geographic mix of earnings. Income tax expense excluding the tax adjustments has increased compared to the prior corresponding quarter, due to the higher ETR on a flat adjusted operating profit before income taxes.

On slide 24, a look at cash flow. Net operating cash flow decreased $42.5 million. The movement compared to the prior corresponding quarter is driven by working capital and non-trading activities. Working capital is primarily inventory, a little bit of an inventory build in anticipation of the market and replenishing inventory as well.

Net cash from investing activities is primarily driven by, you know, property, plant and equipment. That's related to the build out of the various lines that we're doing as part of the capacity expansion.

Then there was an increase in the funds that were used in financing activities. Those largely reflect the dividend that we paid of $124.6 million -- which was the 125th year anniversary special dividend -- and then the repurchase of shares through the stock buyback program of about $9 million.

Page 25 is a look at capital expenditures in the first quarter, of $48.6 million, up from $26.1 million in the first quarter of 2014 fiscal year. So we've continued to spend, obviously, on the previously announced three plant projects. We're continuing to assess and move forward with the greenfield and brownfield projects across the US.

I think many of you are already familiar with, in the first quarter of fiscal year 2014, we did the purchase of the previously-leased land at Carole Park. We are still tracking in-line with our last couple of conversations, where we said our plans are to invest about $200 million per year in capital expenditures over the next three years.

Slide 26, no real change on capital management. We are continuing to look at the capital structure, you know, with a view to get to a target net debt position in the one to two times EBITDA excluding asbestos range.

Our goals on capital management are unchanged. We plan to reinvest in research and development and capacity expansion over the next several years, while continuing to provide shareholder returns in line with our peers and the ASX index. The framework that we've been talking about, you know, is unchanged as well. So capital efficiency within a prudent kind of rigorous financial policy, while we expect there still to be strong cash flows that get generated at the same time.

So just a liquidity and capital allocation update -- from a liquidity standpoint, in May we added about $150 million of credit facilities that replaced and really augmented an existing $50 million facility that expired in February 2014.

Our total facilities now are at $505 million, with a combined average tenure of about three years. In May, we announced a new share buyback program to acquire up to about 5%. During the quarter, as I mentioned earlier, we bought back about 715,000 shares at about AUD13.69 on average. Then, we've talked about the dividends already.

On 28, on debt -- total facilities of $505 million, cash at the end of the quarter of about $32 million, so unutilized facilities of about $537 million. We remain well within the financial covenants. The $32.1 million of cash compared to net cash of about $167.5 million for March 31 2014.

That cash position above was reduced subsequent to the quarter, as the May 2014 dividend payment of $124.7 million was paid. Subsequent to the end of the quarter we moved into a net debt position, drawing about $320 million of our debt to fund capital expenditures, the dividend payment and then the contribution to AICF.

A quick update on New Zealand weather-tightness. In the first quarter, we had a benefit of about $1.3 million. The claim resolution continues to trend on a positive line. There are fewer open claims and there continues to be a reduction in the number of new claims. So at the end of the quarter versus last quarter, the provision for New Zealand weather-tightness had decreased, $10.3 million and $12.7 million respectively.

On page 30, asbestos funds, a pro forma. So the fund, as of March 31, had AUD65.5 million of cash, with about AUD18.8 million of insurance recoveries. At the end of June, AICF had cash and investments of AUD51.9 million. Year-to-date, for the first three months of this fiscal year, claims were about 2% above the most recent actuarial forecast and about 3% lower than the prior corresponding period.

Go to slide 31. So adjusted net operating profit of $50.9 million (sic � see slides �$50.1 million�). You know, improved sales volumes and price, the higher production cost, the higher input cost and the plant inefficiencies, compressing some gross margin a bit. While the operating segments' EBITs are up 5%, driven by the US up 14%, the unfavorable impact on tax, the fair value on the interest rate swaps and the foreign currency losses is what's causing some of the de-leveraging -- if you will -- from EBIT and net income.

We're continuing to invest in capacity expansions, both in the US and Australia. The FY14 ordinary and special dividends were paid in August, for a total of $230 million of shareholder returns. We're continuing on the strategy that we've described on capital management.

For fiscal year 2015, Lou -- in the outlook, earlier -- set a lot of the stage for this. We expect our adjusted net operating profit to be between $205 million and $235 million for fiscal year 2015, assuming several factors. Most importantly, the housing conditions in the US continuing to improve and exchange rates at or near the current level.

So with that, we can open it up for questions.

Thank you. We will now begin the question and answer session. (Operator Instructions). Your first question comes from the line of Jason Steed from JP Morgan. Your line is open. Please go ahead.

Hi. Good morning Louis, morning Matt. It's just -- maybe I'll start off with just two questions.

Just interested in, Louis, your comments on LP and I guess, the progress they've made against -- probably not against yourselves, necessarily, but, I guess, their own PDG into the market. I remember, around this time last year when we were in the US, I think you made a comment that, largely, the LP threat had been dealt with. I'd be interested in what they're doing which is leading to that growth, in your mind and how you deal with the threat this time around?

The second question, just on interiors is, I think the fallback in interiors you have flagged, but do you sort of see yourselves being able to arrest that and really keep interiors flat or is it really just a game of holding on for as long as you can?

Okay, thanks. First in LP, just again, describe what's happening in the market. So early days in Hardie, obviously we positioned ourselves against wood, based on our benefits for durability and maintenance. A lot of those manufacturers went out of business. Most of them got out of lap siding as we started to take, you know, the majority of position in lap siding.

Then, in around 2000, we started pointing toward vinyl, which is really more market development -- pretty big up-sell to vinyl so, you know, as much as two times the cost of vinyl, where wood, we were about 20% premium. Vinyl was the big share player at the time, you know, got all the way up to 44%. Okay, so we have been successful in maybe causing, or at least accelerating, the decline in vinyl and that's continuing.

So I think the reality is, right now, hard siding -- so if you think of hard siding being fiber cement and now LP with their, you know, chipboard or OSB -- whatever you want to call it -- siding, we�re both benefiting from the vinyl decline.

We benefit in different ways. So they have panel products, which they have a good position on, mainly against plywood. Our panel products are in the market, but they don't deliver either the share value or tongue and groove edge that you can get on a wood product. So LP or LP-like technology, has always been able to do certain things with a panel that fiber cement can't.

Then we have the advantage on the planks and then, with our work against vinyl, we start creating a market for trim. Houses that used to be vinyl didn't have a trim on it, so when you put fiber cement on you need some trim boards and Hardie's trim board portfolio has lagged our siding portfolio. So the difficulty in usability of our trim in all applications is not as good as it is with our siding.

So both PVC trim and hardboard or OSB trim started to, you know, enjoy some market demand on Hardie houses that, in the past, had been vinyl houses.

So that's how the whole thing, kind of, sets out. So they're heavy in panels. A lot of those panels go to building sheds and some of those panels go in to housing. They have a good trim position and then they have, what they would feel and we would feel, is an emerging lap siding position.

That lap siding positioning is, you know, really back to the future for us. I mean, I think the builders that make the selection know what they're giving up, as far as durability and maintenance. But they also get a lower cost and they get easier install, mainly because you have one set of tools on a job.

So, if I did communicate that I felt we had dealt with LP, I apologize for that. I think what happened is, we were unaware of the traction LP was getting, until about two or three years ago. Once we became aware of it, then we started to work on dual positioning in northern markets, which is against vinyl on one end and against LP-type products. There are a few other manufacturers of hardboard out there besides LP, but the LP is the one that's most active in the market.

So it's a quarterly result. If you look back at the past four quarters, which is how we do it because, number one, quarterly results have more variance. Then when you have two companies looking at quarterly results it has even more variance -- because it's their last year's quarter against their this year quarter and they might have had a good or bad quarter last year and then the same goes for us and then you compare the two companies.

But, at the end of the day, I still believe that LP is getting more business in the siding market than their value proposition really dictates. I think that's been somewhat driven by, you know, a gap in our positioning in some markets. Then the industry -- or the builders, in particular -- becoming more price conscious through the downturn. So the $800 or so they can save putting up LP is more important to them now than it would have been five or six years ago.

Having said that, you know, I think the reality is you're always going to have a product like LP out there. Mainly because of your advantage on panel and like I said, they have a good trim position. Whether it's to be trim in newer houses or other houses, they have a good trim position.

But they don't have the same value proposition as Hardie and you know, I think we need to do a better job re-establishing that more broadly in the markets. I wouldn't overreact to the one quarter. I mean, internally I would. But I think, externally, I wouldn't overreact to one quarter. But I wouldn't take all of vinyl's decline and just put it on our top line either, because it's obviously being split to some degree right now.

And Louis, there wouldn't be any reason to rethink penetration rates? I know it's one quarter, so I certainly take the point on that, but no reason to rethink your profile on penetration over the next three to five years?

I think the first kind of data point is the decline in vinyl seems to be pretty consistent. So, when you think of our 35/90, which is the brand for our growth strategy, most people know that was 35% of market share for fiber cement and 90% category share for Hardie.

I think probably a better way of thinking about it is, vinyl declines and I think the hard siding market share goes up. So maybe it goes to -- I don't know what it goes to -- say, 45% to %50. I mean, obviously, we've done some modelling but I'm not going to put a stake in the ground on what I think wood plus vinyl goes to.

Then your question is, well how much of the hard siding category do we get and how much does wood get? Like I said, the wood value proposition, I think, is well understood. There's a certain segment of buyers that would be, you know, very attracted to the lower cost and not so attracted or not so much influenced by the value proposition for the homeowner. But, it's all work that has to be done.

So would I change my volume expectations for the Hardie business over the next three to five years, which I think is your question? I think mostly you know we shoot for a kind of [four] PDG in a market like this at 6% and we need some 8% and 9% to grow at the rate we want to grow at. So I think that's still obtainable, but clearly with LP also trying to grow into the same space at the same time, it's definitely more a fight than it would have been if LP wasn't there.

Thanks Louis.

Question on interiors, I think we might have talked about interiors last September. Our product, again fiber cement boards has developed into really a premium priced product. So if you go back in time, the cost of using Hardie for a tile setter would be very close to the cost of using a glass mesh cement board. Now over time the retail outlets have realized the customer values our board, quite a bit more than the other boards, so we're growing share very quickly. Even when they start taking higher margins on our boards, we continue to take share.

So our price premium on our board, it differs around the US, what used to maybe a $0.50 to $1.50 premium can now be more like $2.50 to $4 premium. Now that's still not a lot relative to the cost of doing a job for a tile setter, but I think the premium has driven the most price conscious buyers back down to a fiberglass mesh cement board. Now I don't think that�s the biggest part of the problem that we face currently.

I think the bigger part of the problem is like the retailers when they found out they could grow market share with Hardie at the same time they take price, we kind of learnt that we were in part of the S curve where we could grow market share at the same time we could reduce resources, SG&A resources, in the segment. I think what's happened is we've gone too far and maybe the retail price has gone too far.

We'll have to do those studies and talk to our customers about that, but I think for us, where we have total internal control is I think we've got a resource allocation between the interior and exterior a little bit too far towards the exterior.

So I do think interior market share, especially in the retail channel which is by far the biggest channel, can be corrected fairly quickly with just some intervention on our part and how we allocate our resources and programs we run with the stores. So we've started concentrating more on interiors. It's too early to see how quick the recovery will be. I think this is a very unusual quarter that it actually comped negative in a better market. We had some negative comps when the market was going down, but it's an unusual quarter in that it comped negative in a better market. I'm not saying -- I'm saying we don't have the right trend line on market share. I'm really not saying that we're going to start comping negative.

Now we also, I think, covered that there is some new technology going out through the cement board share in interiors, so that�s affected the overall market share for cement board sum, which is again, a smaller part of what we're facing. The main thing we're looking at now as far as this negative comp is we haven't run our programs as well as we should have run them and that�s basically because we went too far on resource allocation internally.

Thanks Louis, thanks for the numbers.

Your next question comes from the line of Simon Thackray from Citigroup. Your line is open, please go ahead.

Thanks very much. Good morning Matt, morning Louis. Just following on from Jason there, just the expectation, you made a comment before, Louis, that you thought $8 million would be the EBIT impact had it not been for -- if you'd had better planned performance, et cetera in that quarter. Can I just clarify, is that $8 million EBIT with the volume that was experienced or is that against your planned volume for that quarter?

That would have been -- and Simon, basically I'm not happy with the result. I mean it's not a terrible result, but it's not as good as we would have known we'd done with the same volumes. So I think if we would have handled things better on the manufacturing side and anticipated the volume a little bit differently, not gotten the volume, but anticipated it a little bit differently, I think it's very easy to see where $8 million would be on the bottom line and I wouldn't be upset with the result to the same degree as I am now.

In fact, I wouldn't be upset with it at all, because I think to kind of deliver the financials we want to deliver this year against the investment in growth that we want to make, you've got to come out of the front half of the year in pretty good shape or else you're going to restrict somewhat what you're going to want to do in the second half of the year. I think that's where we're at.

We're not cutting back, but we are delaying some spending now that -- if we had the additional money on the EBIT line this quarter and could see it hitting again next quarter, we probably wouldn't be delaying some of that spending.

So did you quantify the delay or did Matt quantify the delay in terms of how much you're pulling back, [struggling] back?

Oh no, we didn't but I mean --

Is it a material number or is it more a --

We have -- I mean we, as you know, we spend a lot of money on marketing initiatives and we're spending a lot of money right now on capacity additions. So we were thinking of housing up 15% to 18% and now it's looking to me like maybe 6% to 8%. So yes, there's a different amount of money we would kind of spend and take off the bottom line under those two scenarios. You say it's material, I guess not material from a Company standpoint, but you know, from how we look at our EBIT line, yes, makes a difference.

Sure and then just going back a step about the plant inefficiency in Australia, there was a comment about Australian not performing as well. I think from memory the last, for as many quarters as I can remember now, Australia's been on the improve, been on the mend and the margins have been tracking back towards what you would consider good operating performance. Can you just give us a bit more detail about what's happening in Australia? Is it a one-off event in the quarter or is there something more fundamental that we should be looking at?

I think the reality is they got the same little situation in Australia that we have here and that's with our capacity and addition in Carole Park. A lot of focus has been on that, a lot of resources get sucked into that and they just didn't run as good this quarter that they normally run. But in their situation and in the US, it's kind of been going on about five months.

In Australia, it's shorter than that. So I would expect a bounce back from both organizations, but I actually consider it an easier bounce back for Australia because they only have the one capacity project, where right now we're still in the middle of starting up two machines, going to start another one in December/January and another one in maybe February/March.

So our US organizations just got a lot on its plate right now and obviously we've missed some things that we would normally get right and it's nothing dramatic. I mean it's increased machine delay, it's increased spend on maintenance, it's that stuff that adds up in a manufacturing plant.

It's not like we have a fundamental problem with running a plant. All our plants run, they just don't run at the same level of efficiency and unit cost that we're used to, or at least most of them haven't. There's three of them that are just doing fine and then there's five that are struggling to some degree and like I said, the plants dealing with the new capacity are struggling to a much greater degree than the ones that aren't.

Right, so with that in mind, Louis, just trying to put some context around the revised guidance or the guidance that's been provided, which is sort of 10% below where consensus is, is that -- just trying to understand the makeup of that. What are your expectations to hit that number? Is it you're expecting a turnaround in the efficiency of the plants or you're expecting a slow turnaround?

I guess linked to that question, this might be helpful for me, would be what are you seeing in the current quarter in terms of any improvements or any catch up on what was delivered in what has been normally the strong Q1; what's the current status and how are things tracking now?

Yes, so let's go with what's in our forecast, I'm not sure what's in the external forecast, but in our forecast would be housing starts, that'll deliver the type of volume growth we've seen so far this year. So we're not expecting a much better housing opportunity because the market plays catch up the last six months of the year.

There's still some forecasters out there indicating that all of a sudden a bunch of houses are going to get built and the year's still going to come out fairly close to what they originally forecasted. We're just not believing that, so that's not in our forecast. I guess if it did happen, it would happen at such a late period in the year that it may not even show up in our demand very much this year anyway. So we're not expecting the housing market to spike or quickly turn around or start really accelerating.

The other thing is, I think the other disconnect you have between the external financial forecaster Hardie and ours is we have all the corporate stuff in there, some stuff you guys know about which is the higher debt and then some stuff you don't know about till after the fact, which is interest rate swaps and stuff like that. But I think the higher debt and potentially higher tax rate are two things that are different between the two forecasts.

Now as far as what else is in our number that gets us to that $205 million to $235 million which is a pretty wide range which is normal for first quarter, it's not a quick turnaround on anything and it's -- I need to keep repeating, I don�t like the way the plant, I mean the plants, ran this quarter. But it's a quarter and like I said, it's a little more than a quarter in the US.

So it's not that we're in trouble, it's just that you have normal variance in a business and how things run and our plants kind of got outside of their normal band and didn't run as well as we'd expect them to run.

Now do we expect them to run in that normal band the rest of the year? I think we're going to have to do better on our start-ups because that's what we're facing. We're facing three big start-ups in the next nine months and we're coming off a start-up in Fontana, which wasn't done as well as it should have been done. So that's something we've got to flick the switch on and do better with our start-ups.

But as far as the operation of our plants, I think we just need to get back into the control band that we're kind of used to and I don't think that's that big of a challenge for the organization. We know how to do that, we haven't done it the last four or five months, but we know how to do it and I would expect in the forecast it's indicating that we would be able to get back in our band.

As far as commodity cost, we still use external forecasts for pulp to do our forecast because we don�t think we're actually smarter than pulp forecasters as far as what the global supply and demand looks like for pulp. So far their forecast has been wrong. It's stayed up much higher than was forecasted and we just have it in our current forecast. Therefore our current forecast is a lot more -- a lot higher priced pulp going further into the year than it had been.

Other than that, pricing, I think we've got our arms around pricing. The [org] spend, yes we're not going to increase spending at the same rate we did the first quarter, so that's in our forecast. Like I said, we're not into slashing programs in the business, so I don't think you should expect SG&A cost to come down, but I wouldn't expect them to accelerate until we get more comfortable where our market demand is.

Louis, just really quickly, related to that whole discussion, the small working capital build up which was obviously a result of a demand forecast error, if you like, versus what the market delivered, does that cost in the margin in the second quarter in the current quarter as you unwind that? Or is it not big enough to impact margin?

That's a good question, so going into the winter we'd have to restrict production in order to run our inventory down. We always build in the winter and what we'll do is we'll delay start-ups rather than not run our current machines in the winter. So I don't think it will impact us. When I say delay start-ups, you might be talking 45 days, something like that, you're not talking about six or eight months of delay of start-up. But that's the way you would do that.

Now one thing you probably are, you or one of the other guys would have picked up on, is some of our higher cost board is still in inventory, so you'll see that continue to come through for about a 45 day period as well.

Good, thanks Louis.

Yes.

Your next question comes from the line of Liam Farlow from Macquarie. Your line is open, please go ahead.

Yes good morning guys. I guess just following on from some of the points that Simon's raised, I'd just like to touch on, I guess, what are your current learnings in terms of CapEx expenditure and how projects are tracking to your expected budget spend on some of the plant expansions? I guess also, just how would you tackle start-ups differently compared to what you've been doing so far in terms of trying to turn around that performance?

Yes, as far as current learnings and the CapEx, I think the CapEx, the construction part of the CapEx hasn't been an issue for us. We didn't build anything for four or five years, so we're probably a little bit rusty in a few areas, but it didn't make much of a difference in the cost of the capacity. The bigger issue was we started up Waxahachie 1 and then that's like 15 months ago, then we started up Fontana 1 and 2 pretty close together.

Now what do we need to do different? I guess one of the things I need to point out, just so everyone knows, this is a different sized business than it was when we added capacity in the past. So looking at Carole Park, Plant City, Cleburne, Fontana, you're talking about starting up five machines in about 15 months. Hardie's never done that, okay, so it isn't necessarily we forgot how to do it, we just never had to have that many balls in the air.

So I think the number one kind of strategy in a start-up is the firewalls from ongoing operations and I think that's going to become even more critical as we get multiple start-ups going on at the same time. So you've got to think Waxahachie for an example, when you're starting up line one, which was the idle line, you've got to make sure the team running line two doesn't lose efficiency because they're running that design, a start-up, it has a ramp up curve.

So 30 days into a start-up you're only 30% up to your design, so if that crew kind of hits a problem, it's only at a 30% design equation, so it doesn't cost you near as much as if the other line in the same plan has a problem, because they're at 100%. So firewall�s number one.

I think structurally we've got to look at it differently than we looked at it this time and then probably the only other thing we've been talking about is we probably need to get someone across the four start-ups, meaning Fontana which is still being ramped up, Carole Park, even though it's in Australia is going to be a very similar start-up to Plant City and Cleburne, so we probably need to get at least one of our -- two of our senior people that are fully aware of everything we're facing during the start-ups so we're not having the same problem in two different areas and not benefiting from the learning in one area versus the other.

I need to tell you, I do think it's a challenge. I think we've stretched our organization pretty thin, but I'm also pretty confident now that we've stubbed our toe that we can get this thing figured out and probably be very successful on the future start-ups. That would be what I'm anticipating. Going back to Simon's question, we don't have big start-up inefficiencies for Cleburne or Plant City built into our forecast because we don't anticipate we're going to have them.

Yes, okay, thanks Louis.

Your next question comes from the line of James Rutledge from Morgan Stanley. Your line is open, please go ahead.

Thank you. Just firstly wondering what the tax rate�s assumed for it within the guidance? Secondly, just on the plant and efficiencies of $8 million just this has been focused on quite a bit but just wondering how that $8 million moves into the next quarter? Does that $8 million get fixed over the next two to three months or does it take the rest of the financial year to fix that up and I suppose how does that play into your second quarter margins? Thanks.

Okay I'll take that question first and then I'll hand you over to Matt for tax. I threw out the $8 million not to crystallize or quantify the problem. Actually in a business our size which isn't that big I understand but a business our size you have a certain amount of variance in the numbers you deliver and all I'm saying is you can look at the last quarter and say if we would have done this, this and this better you'd have another $8 million on your bottom line and we wouldn't be having this discussion but the reality is we didn't do it better.

Now just like I said that with manufacturing we had the market forecast and the manufacturing and efficiencies and the commodity cost forecast kind of all go against us. So it definitely moved us out of our band -- $8 million less than $3 million a month you'll get $3 million a month variance in our business but normally you've got one month offsetting the next and the next will come in the middle. So it kind of all disappears in the quarter well this time it didn't get this during the quarter because they snowballed.

So what do I think is going to happen in the quarters coming up -- I think we're going to have marginally better performance across the board and I think the kind of shocks that were introduced into the system with some manufacturing issues mainly to Fontana start-up, we're not going to have those types of shocks going forward. Now that all has to be managed.

Part of it is it happens but a lot of it is it happens because we didn't manage as well as we should have so in the future if we don't want it to happen we have to manage it better and I think the organization is ready to do that.

Okay thanks and I suppose you flagged on the last call that your second quarter margin would likely be better than your first quarter this year which is quite unusual is that what you continue to expect this financial year?

You know I can say yes but I also have to tell you I haven't looked at it but believe me I do believe second quarter will be better. It was better last year than the first quarter and why we changed our pattern I'm not sure but I feel the pattern is going to be the same thing this year where we'll get more out of the second quarter and then our winter quarters will be relatively better than winter quarters normally are against summer quarters. That's kind of -- I think we're into that same shape we were in last year.

Okay.

Matt you want to come in on the tax.

Yes on ETR. James on your ETR question obviously at this stage in the year there's a lot of assumptions still particularly on where the earnings come from so geographically where that mix is as well as the permanent adjustments versus the earnings. So what we've got in there at the moment is what we showed on the ETR pages of 24.8% I think it's reasonable that it will be in the mid 23% to 24% but our best look at it at the moment is the 24.8% and that's what we believe is reflected of the full year rate but that will adjust as the estimates become actuals and we get a better visibility on where those earnings are coming from.

Okay so if I assume the $205 million had a 24% tax rate in it and the $235 million at 23% is that kind of the way to think about that?

Yes like I said our best estimate at this point is the 24.8%. I think it will move around so it's hard for me to say -- give you a different number otherwise we probably wouldn't have booked the 24.8% but that's our best look at it and I think we'll get a lot more visibility for the half year.

Okay great. Thanks Matt.

Your next question comes from the line of Andrew Peros from Credit Suisse. Your line is open, please go ahead.

Okay it sounds like that question might have been answered already. How about next question?

Your next question comes from the line of Emily Smith from Deutsche Bank. Your line is open, please go ahead.

Thank you. Thanks very much Louis and Matt. I just had a couple of questions firstly around what you're seeing regionally and if you're happy with the market share growth in certain parts of the country? I think you talked in the past around the 6% PDG. Do you think that that's achievable in fiscal 2015 or do you think you could do a bit better than that?

Yes I do think 6% is achievable and I think we can probably do a little better than that. I think regionally the south were super strong last year and that settled down a little bit and the north has picked up a little bit so we're kind of more into the pattern now where your growth rate in the north is a little bit higher than the south.

If that holds right through the year I'm not sure. We're not really disappointed in any market right now. The mid-west obviously is where most of the competition against LP is. Our mid-west numbers were good first quarter and looked good coming into second quarter as well.

So really on the market side I think there's more of a market opportunity. We are continuing to see gaps in our offering and working hard on that but as far as our market programs around siding, everything looks pretty good right now both north and south.

Okay great and just you mentioned that you were expected 15% to 18% housing growth and now that's probably more like 6% to 8% how if at all as your R&R target sort of changed from a market perspective?

I think we went to Hanley Wood on the external and they came in pretty high. Last year they were expecting 7% and now they're saying it's more like 4%. Having said that I think our position in R&R continues to strengthen so we're doing well, market share growth and our R&R program.

Like I say when they said the market was up at 7% I guess we were looking forward to it but we didn't directly plan for that the same way we directly planned for housing starts because we didn't believe the 7% was as believable as the 15% so we ended up being wrong on the housing starts but we did believe that the 15% was believable on housing starts.

Great, thanks very much.

Your next question comes from the line of Michael Ward from Commonwealth Bank of Australia. Your line is open, please go ahead.

Hi guys. Louis obviously we haven't really touched on pricing but 7% is pretty good. You�ve sort of outlined the reason as to why. Can you give us a sense of whether or not you think that rate might maintain through the full year?

I think the tactical pricing work we did last year built momentum as we went through the year so our comp�s actually easier for that part of it. It's easier in the first quarter than it would be in the third and the fourth. So I think that 7% may settle down a little bit but it will only settle down from a comp perspective not from an average price perspective.

Yes okay. Then I don't want to harp on the $8 million but it seems as though it's largely attributable to head count, plan efficiency and also I guess some cost issues that you've outlined. Can you just rank in order which ones -- I assume is it plant inefficiency that was the biggest contributor to that disappointment?

Yes we're a manufacturing company, so yes.

Yes.

Plants are going to be where a lot of our costs are. So when they miss by a small percentage it's a big number. When you miss by a bigger percentage in most other areas it doesn't compare. So yes manufacturing is the biggest gap in our result this quarter.

Yes and maybe just a question for Matthew. Stock comp has obviously moved, you sort of alluded to that. There were the unrealized losses and then the interest rate swaps. Can you give us a sense does the stock comp increase sort of annualize and continue through the rest of the year? Then are you expecting any other unrealized losses or interest rate swap issues that we should be aware of at this point?

Yes the stock comp forecasting for the year as you know can be difficult because you have to forecast what you think the share price is going to do and then it depends on a combination of new grants exercised and new grants issued and vested grants exercised. So I wouldn't expect it to continue at the same rate if for no other reason because of how much the share price rose last year and I think the comps will get a bit easier. That's hard to speculate on because it really depends on what the market does with the share prices this year.

On interest rate swaps that's another one that a year ago I think broadly most economists and probably a lot of us over a glass of wine would have said that interest rates are probably going to go up not down and we're taking a loss on the interest rate swap because rates have moved down since we purchased it.

So I think it's fair to think that rates are more likely to go up than down to the extent that they go up obviously than what we experienced this quarter for the swap wouldn't repeat into the extent that they stay where they're at or they continue to go down it will create the short term pressure. We think given what our capital management strategy is and the pricing that we took the swaps out at that over the longer term that will still be a good value for shareholders.

Then on the OpEx losses I don't think that will repeat. I think that's a -- we had a unique circumstance this quarter in that we had dividends that had a record date in March and we re-valued those right before the quarter and then when they paid obviously we had to revalue them again and we don't expect obviously that that will repeat. So some of it is the timing of that and to be frank some of what's occurring in the FX losses this quarter is when we book the initial revaluation of those in the prior period we didn't do it correctly and so we had to catch that up this quarter.

Now that wasn't a material issue for the prior quarter but nonetheless it created a little bit of additional head wind or pressure for this quarter. So I do think that line item is unique to the quarter and that doesn't -- I wouldn't expect that line item to repeat. I think the other two line items are a bit tougher to forecast.

Okay no worries. Thank you.

Your next question comes from the line of Andrew Peros from Credit Suisse. Your line is open, please go ahead.

Sorry about that before Louis. Can you hear me now?

Yes can hear you now.

Yes just trying to reconcile some of the comments you made earlier about market conditions with US volume growth at 8%. You mentioned PDG was positive but not as positive as you would have expected. We know new housing was down so I guess that would imply R&R is up quite considerably. Would that be a fair assumption?

Yes I haven't asked the guys to show me how that equation we'd dissect it because like I say we don't follow quarter-to-quarter as much as a four quarter rolling. Our general comment on that is going to be the same. We're doing better in R&R than new construction but I don't think this quarter was an outlier in that. I think it would have been in line with what's happened in the last three quarters.

Okay and just a follow up on your comments around growth CapEx -- I guess I'm trying to interpret some of those earlier comments. I think in the previous quarter you guided to about $200 million of growth CapEx each year to the next three years.

Wondering how or if that might have changed considering that you're seeing a slower market and the impact that this expansion is having on margins? I think also included in that is an assumption around some Greenfield capacity -- should we assume that that continues to go ahead or should we assume that that's maybe put on ice for a later date?

You should assume it goes ahead and we booked the -- not in the -- I'm trying to figure out where to [inaudible] with this quarter.

Okay so you'll start to see some of that greenfield mainly in the form of land show up in our CapEx but you know the market hasn't -- I don't know I guess I'm like a lot of people I'm having trouble figuring out the market because we're in a recovering market and we're not yet at the level of housing that used to be recession type levels. So it's just like almost a different equation than what we've dealt in the past but I don't think we've been there long enough to say that our need for CapEx changes dramatically.

I think -- I don't know you guys probably remember better than me but I think the housing has been running softer than expected for eight or nine months now and I don't think -- that does allow you to do some deferrals on start-ups but I really don't think it allows you to defer building capacity just because it takes a couple of years to build capacity.

So you can't look at a soft period that's maybe less than a year and say hey we don't need that plant two years from now. You can be sure that our guys that work on our capacity planning are putting the new levels in their equations and if we can slow some capacity down and not put supply at risk that's what we'll do but at this point we're not there.

That's great. Thanks.

Your next question comes from the line of David Leitch from UBS. Your line is open, please go ahead.

Hi. Well I guess my question is pretty simple. It just goes to guidance -- the bottom end of the guidance is $205 million and historically Hardies has done better in the June and September quarters than it has in the back half of the year. I'm just wondering how confident you are about the bottom end of that range?

Yes we think it's the bottom so we're obviously pretty confident. I know what you're saying though David, the $50 million times 4 doesn't even get you to the full year and we just consider that an arithmetic problem as much as a bad fourth quarter problem.

So can --

Meaning -- kind of like Matt covered there's some things in that first quarter that dampened the first quarter result that aren't going to repeat in the next three quarters.

Would you care to put a dollar number on what you would say won't repeat in the first quarter? I've heard the $8 million but if you were to add up all the things that you would think you can easily eliminate out of the first quarter result?

No I think the whole idea of guidance is number one it's a $30 million ring so we're not trying to get the $205 million but we think $205 million is safe. So as far as giving you -- proving to you that it's safe I don't think we'd go to that degree but to answer your initial question we think the $205 million is safe.

Thanks very much. Appreciate that.

Your last question comes from the line of Andrew Johnston from CLSA. Your line is open, please go ahead.

Good evening gentlemen. Just a couple of questions around a few things there. You mentioned I think Louis and tell me if I'm wrong -- you mentioned some inefficiencies in the business that weren't related to start-up?

Yes we just had a couple and those would probably be the normal things that the start-ups getting it ready kind of create a problem. Those things if they weren't on top of start-ups we definitely wouldn't be talking about them but --

Okay.

We're just a bit disappointed in the performance of some of the plants that don't even have start-ups going on so --

Okay so a minor issue that's fine. On interiors you'd previously talked about losing share to flexible membranes. Is that still an issue? Is that category stalled or how do you see that going forward? Is that part of the reason you're losing share?

Well I mean there's two types of shares so share of cement boards going under tile is I would say in slow decline as both gypsum technology takes a greater share on the wall and what's triggered that is there's a fiberglass mesh gypsum technology that used to be patented and one company had it and the other gypsum -- another patent has expired. So the other gypsum companies are launching their products and they have a channel advantage through the gypsum channel.

So I think you're finding more gypsum reappearing on the wall. Now it's in a different form it used to be paper gypsum and now it's fiberglass mesh gypsum. So that had some impact on the total market share of cement boards and then that doesn't affect us as directly as the other cement board manufacturers because we've never been big in the gypsum channel. In fact we're very, very small players in the gypsum channel.

Now the other one the mats and the membranes which -- they're a little bit separate but they're kind of talked about the same, that's more of a floor product. Some of the membrane products show up on the walls but the one that goes after our space is the floor product.

I would say that is continuing to grow at a pretty slow rate. So that's not the problem we're talking about. We're actually talking about our share in the category so now we're in the cement board category. Our share in the category has declined recently and I'm not talking about a large decline but like I said we're down 3% in an up market in the quarter so again it's a short period.

So there's going to be a lot of variance in the comp but I still -- well what we've been doing in interiors is drilling down and we find a weakness in our program and that's we're probably under-resourced in certain geographies and that's where we're losing some share but now that share of cement boards that has nothing to do with membranes. That's largely in the retail channel as well rather than across all channels.

Okay thanks. Finally just trying to understand the as I've sort of mapped it the decline in primary demand growth forecast so if we go back to November there was expectations that in 2015 you'd be able to get double digit and then that would continue to expand from then in later years.

If we go back to about May I think the May number was about 9% and you expected to be able to remain at high single digit and now we're back at about single digit a bit better. What's caused that? Is that reflecting interiors demise or obviously in this quarter -- up until now you've had pretty similar growth to SmartSide and obviously SmartSide has had a good quarter but just the change to that outlook is what I'm more interested in Louis?

Yes so coming into the -- we handled it internally is coming into the recovering market internally we established 6% as the floor and like I said earlier but you need 8% and 9% to get where we want to go. So you're right last year I think we were right around 9% and I'm not saying we're not going to be around 9% this year. So I shouldn't have led you with that kind of -- but 6% is the floor.

I haven't seen the results I don't think one piece of information we need for that calculation is in yet but my guess is -- my guess it's going to be called through to trend if you looked at just that one quarter which we don't we look at the four quarters but if you looked at that one quarter you'd say it looks more like 6% than 9%.

Yes.

I don't mean to be forecasting that we're not going to do 9% because I'm pretty comfortable with 9%.

Okay alright no that's a bit clearer thanks. That's it from me thank you.

There are no further questions at this time. Mr Gries please continue.

No that's fine. Appreciate everyone's questions. Appreciate everyone joining the call and look forward to seeing those that are going to join us in the US tour in September. Thank you very much.

That does conclude our conference for today. Thank you for participating. You may all disconnect.