James Hardie Industries PLC (JHX) 2015 Q2 法說會逐字稿

Okay, good morning everybody. We're going to follow the same format as we normally do. I'll take care of the operation stuff. Matt will take care of financials. Then we'll come back for Q&A. With Q&A, we'll go with investors first, media second. I guess Orica is announcing at 10:15 AM so we're on a tighter schedule. Some of you follow that company, so we've committed to be done by then. So Matt and I will try and walk through by 9:45 AM -- walk through the slides, give us enough time for questions from both investors and media.

We have updated the slides, so hopefully they get to the point a little better than the ones we replaced, and start from there.

Okay, I'm at slide 6. This is our summary slide. You guys are seeing a 12% increase in sales for the Group; pretty similar to last quarter. With the results, it's really better than last quarter is the bottom line. Return is better than last quarter, (inaudible) year up to 7% comp.

We have in here that the housing market is below expectations. It's a little different than last quarter. So last quarter we got fooled by the forecast and it resulted in some production scheduling issues at our plants that resulted in some inefficiencies.

This quarter, we were aiming where the markets sell down at housing start [rise]. So even though it continues to underperform the forecast in the market, we're now in sync with our production scheduling and market demand, so we don't have the same problem we had in the first quarter. Pretty much everywhere volumes are up to varying degrees, and shelf prices are up to varying degrees, so revenue's up.

In the US, I commented on the production scheduling. We had a few other issues in some US plants, really from that period from about -- it started in about February actually, and worked out a bit in most locations. Now Cleburne and [Peru] were the exception. They've been running well right through that period.

Recently -- since about July -- Waxahachie, Plant City and Pulaski have gotten the improvements we've been targeting. We still have Reno and Tacoma lagging a bit, and the Fontana start up is being much better managed than it was in the first quarter, so we got that sorted out as well.

That's part of the bottom line improvement we see in the first quarter relative to -- I mean the second quarter relative to the first, is the manufacturing part of the business is running better. All that benefit isn't in the quarterly results because, obviously, inventory. So it all hasn't -- a lot of high cost [board] came out of inventory in the second quarter, so we should see continued improvement there.

We like where we're funding our initiatives. So I think we've got [about] the right balance between the financials and the growth initiatives in the business. We'll cover capacity in a later slide, but we're pretty well set on capacity, both in the US and Asia-Pac.

I guess just confirming, as we did in August and September, the 20%, 25% range. We're operating in that range in the US business; feel pretty comfortable with it.

Then dividend, no change. We matched last year. Haven't changed dividend policy. Matt will cover that some.

So these are the numbers adjusted for asbestos obviously. You can see the bigger kick up in the second quarter drives the half year up consistent with our guidance, which, of course, we anticipated when we put out the guidance. So we got there.

If we go into the US, EBIT margin's down just a touch, both quarter and half year. Everything else is up, and pretty much -- well, pricing is similar quarter-to-quarter, Q1, Q2, but other things improved. The internal running of the business improved in the second quarter, which really drove the different result. It wasn't a better market. It wasn't better growth against a market index. It was really handling that extra volume in a more efficient way.

So here's our EBIT margin. You can see Q1, Q2 in range, mid to bottom. Again, we feel strongly that Q3 and Q4 will come in and leave us in that range, similar to last year.

These are the volume, revenue and starts. You can see starts the bottom line. Slope of improvement in housing starts is less than forecasted in -- less in our volume -- indicating that right now the business continues to grow quicker than starts, and the revenue rose quicker than volume.

Net sales price $679 per MSF for the first half, which is good. Right now, we talked over the last four or five quarters about improvements in [calcular] pricing. Those improvements now are built into the base, so the improvements you're seeing in pricing are probably 2/3 to 3/4 market price, which we took small increases and the exterior product line earlier in the year. Then the rest of it would be just a product mix in fact.

Asia-Pac, good market. Housing starts very high in Australia, I think near historical. It doesn't play one-to-one for us, just because of the move toward more density [with your] housing starts, but it's still a good market for us. We're up slightly more than our index. When I say slightly, within a percent of our index, I believe.

So no big market share gain going on right now in Australia, but good business performance. Of course, we have new capacity coming online. We're focussed on market share gains, going forward, but this year, slightly above our index for the Asia-Pac business. You can see the financials there are good across the board.

Then just a little bit on CapEx. We used to put this in Matt's section. We pulled it up into my section. Just walk you through it because it did change quite a bit because we are trying to protect the upside on some of those early housing forecasts, so we committed to bring on Plant City and Cleburne 3, Plant City 4, Cleburne 3, in very close timeframe.

With the settling down of housing starts over the last, say, six quarters versus what they were forecast prior to that, we're early with that capacity. So we'll complete it, but we'll defer start ups. Everything's on track, both time-wise and budget-wise, but we'll just stretch out the start ups and put more distance between the Plant City start up and Cleburne start up.

So, obviously, we're still working on current forecasts. If they change for the better, it might change what we do, but I would guess that Plant City 4 will start up late next fiscal year and Cleburne 3 will start up fiscal year 2017.

Carole Park will start up early next fiscal year, so you probably shift forward [out of] the new Carole Park line -- [offered a] new Carole Park line, probably in May. That has some unit cost advantages over existing capacity, so as we bring that line on we'll bring some existing capacity down so it's not all new demand that that line's coming up for.

Then Tacoma, we did purchase the land. That's a situation where we need to secure that land which is adjacent to our site, even though we don't need the capacity, probably, for two or three years; probably three years I would guess.

So we can utilise the site to some degree. The new site has some buildings on it. We use it for warehousing. We have some offsite warehousing [there], but basically it's to put a manufacturing plant on, so that won't happen for about three years.

Outlook and guidance; I don't think it's anything that would surprise you. [Mostly you'll follow housing] pretty closely. It seems like we're in this quarterly downgrading of housing forecast; still positive, but definitely lagging what the forecasters have got as short as six months ago.

We don't have a problem. We got caught on that, like I said, earlier in the year. Now we're aiming for the low end of our forecast. We'll stretch up if the market's better than that. The extra capacity in Plant City and Cleburne now gives us an opportunity. If the market really got hot we could bring that capacity on pretty quick and still meet demand. So we'll aim low and stretch up, similar to how we did in the downturn.

The $600 million we talked about several times over a three year period, $600 million. We'll spend more of that this year than the $200 million average and we'll spend less of it next year than the $200 million average.

Asia-Pac, fiber cement, like I say it's -- the business is running well. New capacity coming on, financials are good, more focus on market share growth when the new capacity comes on. So that's all going as planned.

The guidance -- we didn't change our guidance. We think the range is good. The range is still pretty wide for when the fiscal year is going to end, but we're comfortable with the range. We thought about tightening it and we decided to stay where we're at, so no change there.

Then, of course, we can't forecast the asbestos adjustments, so that's just a comment that's in the results every quarter. Handing over to Matt.

Good morning. So Lou's already covered sales volumes and prices were up across all of our major businesses. We're still seeing higher input costs, both in the market -- the plants, although they're running better across the network, we mitigated some of the 1Q operating inefficiencies in the second quarter. So you can see that in the margin rates.

Organisational spend's up as we continue to invest in growth, largely around headcount and discretionary spend in product and marketing related discretionary items.

Net operating cash flows are $34.1 million for the half year. Those are down year-over-year largely because of the AICF contribution. We'll cover those in more detail on the cash flow slide.

Lou's covered the capital expenditures through the first half are at about [$160 million, $158 million] through the first half. In the second quarter, we drew down about $380 million on our debt facilities, in line with, I think, what we've been communicating, and in line with our financial policies and financial management objectives.

Lou has already covered the $0.08 dividend in line with last year. The previously announced second half of $0.32 and the special -- the two specials -- paid in August, which you'll see on the cash flow statement.

So reported results: net sales up 12% on higher volumes and higher sales prices and local currencies in both major segments. Gross margins were up about 30 basis points, so sales price partially offset by variable cost combination of input costs which are mainly market related. For the most part we're outperforming market price increases on the sourcing side.

SG&A expenses are up, as I said on the previous slide; mostly headcount and some market and product related investments, some of which we pulled back on in the second quarter, but still up year-over-year. Between EBIT and net operating profit, interest expenses are up. Those are related to our debt position, and income taxes expenses are up, related to the higher earnings.

So this is the normal page, it takes us from reported to adjusted. You can see asbestos adjustments were favourable in the quarter, about 7%, because of, largely, foreign exchange between the beginning and ending balance sheet dates. That's compared to a relatively flat change in FX for the prior corresponding quarter.

New Zealand weathertightness for the quarter increased, really related to one existing claim. You'll see for the half that it's down, and there's a good trend on that liability. Adjusted net operating profit was up 16% in the quarter and 17% on EBIT.

Results for the half year look similar to the second quarter on the top line, up 12%. Again, volume and sales -- sorry, volume and average net sales prices both up. Gross margins up a little bit less, obviously, at the half because the first quarter performance gets added in there; but similar dynamics: higher average sales prices and volumes partially offset by the input cost and the plant performance.

The same result really on SG&A. You probably remember from the first quarter, in addition to the interest expense we also had some foreign currency as well as some interest rate swaps that flushed through other income and expense.

For the half year, asbestos adjustments are 5% favourable, again because of FX in comparison to an 11% favourable change from the prior corresponding quarter. For the half New Zealand weathertightness, the liability's down. There's less number of claims and there continues to be a reduction in the number of new claims as well. So adjusted net operating profit increased 7%, which was 11% in the operating segments, and that was partially offset by some of the corporate items and interest expense.

You can see our gross profits over the last three years have been relatively stable and strong, despite some of the recent inflationary pressures on input costs. That's in part because of the price increases that we've put through. We put through a price increase in 2014 and another modest increase here in fiscal 2015.

Production continues to increase, with good scalability and good efficiencies. That's despite some of the headwinds on the input cost side, which I'll show you here in a moment.

So you can see pulp continues to trend both higher than what we had originally forecast at the beginning of the year. The RISI index -- I think it originally estimated a peak sometime in the spring or early summer. It continues to really be at a pretty elevated level. Although starting to flatten out, you can see that.

Electrical costs: electricity is up. Natural gas has trended up quite significantly since 2013. Cement's relatively flat, although we're expecting some cement price increases in the market next year. Again, we're performing in all of these input areas in all -- in most of our local markets, better than the market rates but, nonetheless, the market rates are up and [you don't only] beat -- outperform the market rates, it still causes some inflationary pressure on our margins.

Okay, we'll go through the segments. In the US and Europe Fiber Cement segment, this is a slightly different chart than we've used. It's trending for the quarter in the grey bars, and the blue bar's the half EBIT for that segment. The top is the US and then the bottom is Asia-Pacific.

So for the quarter and half year, EBIT in the US and Europe segment it was up about 11% and 13% respectively, largely on the dynamics that we've already talked about. The US volume and price were both up, partially offset by some of the input costs and plant items that we have already discussed and SGNA.

In Asia Pacific for the quarter and half, EBIT was up 16% and 7%. Compared to the same period last year, EBIT and local currencies up 16% and 10% though. So obviously foreign exchange working against us on a US dollar reported basis but in local currencies, Asia Pacific businesses is operating well.

Research and development is broadly in line with what we showed you the last several quarters. There is some fluctuation, you will see, in the quarter and in the half year result over the last three years. There is really not much to read into that. It is just the normal fluctuation of us having people come on and off of projects. We tend to move people on to projects as the projects are brought up and when those projects expire, sometimes there is a bit of a lag, but no material fluctuation in R&D.

On the general corporate costs side, the most significant movement quarter to quarter or year to year would have been stock compensation, the share price was down obviously over the last 90 days about 20% in comparison to about a 14% appreciation in the prior corresponding period. So that had an impact. That was partially offset by some discretionary spend that nets to the modest increase for the house.

In terms of foreign exchange, this is a graph that you are familiar with, the Australian dollar versus the US dollar had a favourable impact on the translation of the Asia Pacific results year over year, a favourable impact on corporate costs in Australian dollars and a favourable impact on the translation of asbestos liability. That is both in terms of reported income and for the balance sheet presentation.

And income tax, we have an adjusted effective tax rate of 23.1% for the year. Adjusted income tax expense and adjusted ETR increased due to the mix of earnings in geographies with a higher jurisdictional tax rate. Income taxes are paid and payable in Ireland, the US, Canada, New Zealand and the Philippines. They are not currently paid or payable in Europe or Australia due to the tax losses in those areas, which are available to offset the taxable income. The Australian tax losses obviously are primarily a result from the deduction relating to the contribution to AICF.

First half cash flows from operations, you can see, were $34.1 million versus a year ago they were $175.4 million, so down about 80%, largely related to the annual AICF contribution of $113 million. Inventory increased slightly. Some of that is related to us bringing online another plant with Fontana. Most of that is related to that. Then we did have a sundry receivable related to insurance a year ago that did not repeat and that is what is causing working capital year-over-year to move.

CapEx is up substantially year-over-year. Most of that is related to four projects that Louis ran through earlier, the three expansions that we have been talking about and the purchase of the Tacoma land. Net proceeds from debt of about $380 million. You will see that we have got net debt of about $320 million.

So given that we are in a debt position now, we wanted to broaden, really, the discussion on our balance sheet to more around financial management which we are really thinking about in these three ways.

So it starts obviously with strong financial management which is really underpinned by strong margins and operating cash flows in the operating segments. That is then overlaid with a governance and a transparency framework and the way in which we are trying to manage the financials and the Company are very much as though we were an investment grade or an investment grade-like financial management. So in terms of ratio and financial policies and liquidity levels.

In terms of capital allocation, really no change from what I think we have been talking about. We will continue to invest in research and development and capacity expansions, to support organic growth. It is really our number one priority. We will continue to maintain the ordinary dividend within our stated payout ratio of 50% to 70%.

We will continue to consider other shareholder returns when those are appropriate, so it's a combination of the share buyback program which we announced in May, which is ongoing, and specials as they are appropriate and maintaining flexibility from a capital structure standpoint and an access to capital so that we can take advantage of accretive and strategic inorganic activity.

In terms of liquidity and funding, we have got about $500 million of revolving facilities, about 37% liquidity at the end of the September period. I will show you a maturity profile in a minute. We have a weighted average debt maturity of about 2.75 years. We are working on strategies to extend that maturity. We continue to stay and we are now operating within our conservative leveraging range on the balance sheet of 1-2 times adjusted EBITDA.

So financial management is consistent with what I think we have been saying. We wanted to broaden the discussion this quarter to give you a sense for how we are trying to think about it in the Company and it is really all around being able to withstand both market cycles, unanticipated events and be opportunistic.

This gives you a look at the $500 million of facilities and the maturity profile over the next several years. At the end of the September period, we had about $60 million of cash, $505 million of facilities above 37% liquidity. We had net debt of about $320 million compared to net cash of $168 million at the end of March, so Q4 2014. We are within the target net debt range that we have been referencing. We are in compliance with all of our covenants as well.

As I mentioned earlier, New Zealand weathertightness continues to trend favourably. This is a chart over the -- and includes periods from the last three fiscal years. But at half year, we had an expense of about $1 million. That was down from $4.9 million in the prior corresponding period. The decrease in this trend in the period is really fewer open claims and a higher rate of claim resolution, a fewer number of new claims.

Asbestos for the quarter and half year have some of the following highlights. So the first claims received for the quarter and for the half year were up 19% and 10% above the actuarial estimates respectively. Claims for the second quarter and the first half were 12% and 5% higher than the prior corresponding period.

The higher mesothelioma claims experience that we talked about in last year's results have largely continued along a similar trend for the first six months of this year. Average claim settlement is down for the half year, down about 6% versus the same period last year and down about 16% versus the actuarial estimate. That largely has to do with the number of large claims that has trended both below prior year and below the estimate, as well as, you might recall, in the 2014 result there were some large claims that had been pulled forward and paid earlier by AICF and those claims obviously are now benefiting the run rate.

I think you are aware that on September 15 the Company and the New South Wales Government were notified by AICF of their intentions to enter into discussions with both parties on an improved payment scheme.

So in summary, Group sales up 12% for both the quarter and the half. Adjusted net operating profits were up 16% for the quarter, 7% for the half. The housing market remains below where we thought it would be at the beginning of the year but certainly we have adjusted, as Louis said, our planning and our production scheduling accordingly and we are operating now with an ability to flex up higher volumes and net sales across our major segments.

We are continuing to invest in the business, both on a CapEx basis as well as in organic growth in the organisation and product and marketing activities. EBIT margins are in the range. We are expecting them to be in the range for the year and the first half dividend of $0.08.

Okay. We [will start with] questions. Yes.

Good morning. Emily Smith from Deutsche Bank. A couple of questions, please, [about] Louis. I think you mentioned that the issues in the Q1 relating to ramping up plants and things would last a couple of quarters. So I just was hoping we could get a bit of a sense for if there are any costs in the Q2 that may not be there in the Q3 as that sort of works through.

Secondly, on US market share growth, I was just wondering if you can make a comment on that and maybe a question for Matt: if you are able to give us any more colour around the CapEx expectations for this year and next year, please.

Okay. So unit cost coming out of the factory is Q1 versus Q2. Q2 is down but what we actually produced in Q2 was down greater than what was [booked] basically. So we do have some of that coming through to Q3. Having said that, we will produce less material in Q3 than we did Q2. So I don't know if it kind of all balanced out or whatever, but we have got some benefit of the lower unit cost produced in Q2 coming through to Q3.

As far as growth against the market index, we are in the mid to kind of higher PDG. So 5% to 8% and that is four quarter rolling average and it is relatively consistent. So I would say the market is kind of doing what it is doing and we are doing what we are doing and the difference in what our actual PDG is and what we would like it to be is that LP is doing better than we would expect them to be doing. So that is kind of how we are working.

We are positive, LP positive, vinyl negative but we feel we are not getting our full share of the vinyl decline at this point. So that hasn't changed over the last six to eight quarters. It has flattened out but not going the other way which is what we are trying to do.

As far as CapEx, I will take that question for Matt. Like we said, the guidance for three years is about the same. We will come in closer to 300 this year than 200 and we will come in closer to 100 next year than 200. Now, that is pretty far out so it might change, depending on demand, but that is what it looks like to us. A bit of a spike this year, a drop off next year and coming back to that, what we see is the underlying number for the third year.

Morning, Lou, Matt. Jason Steed, JP Morgan. A couple of questions. Lou, you referenced it yourself in terms of the breadth of, effectively, the second half guidance, about $30 million on that second half. Is that your concerns around where the market might land [about your business] cost and services?

Yes. It would not be internal concerns. So it would be the exactness of the market forecast, yes. So right now, usually I get a heads up where we are at on our order file when we announce results. Right now, our order file is similar to what it has been the last two quarters. If it is anything, it is a hair short rather than a hair long but it is very similar growth against the market we are looking at right now.

So yes, it is a pretty wide range. We had big debates but then we thought what is it? It doesn't change much. So we just left it where it was.

Then a question for Matt. I might have this wrong but my recollection was in the first quarter of mesothelioma issue, there was an indication that this quarter, if they were to clarify in terms of KPMG advice as to whether that peak was going to occur later and result in that, I think they said, 22% increase in that central claim. Looking at the balance sheet, it looks like the liability has gone down. I presume that's maybe more FX but where are we on that because -- or maybe it is just me, but when we look at those points around that liability, there is quite a variety of issues going up, in one instance going down. Can you talk about that? It is obviously a big issue in terms of where your liability stands.

Yes. So from a liability -- it went down this quarter because of FX and only FX. So the liability only changes really once a year in terms of its substantive underlying assumptions and that is when the actuarial report is issued and that is issued as part of our March results.

It is really only at that point in time that a full study is completed and any changes in either the claims costs that are anticipated or the claim numbers in the future would get adjusted. So KPMG typically has not typically made any adjustments in a period or at the half to what those trend lines would normally do. So what you see the other three quarters of the year, for the first half result, is just changes in foreign currency.

Now, I guess, to the extent that you are seeing those claims continue to rise, [is this] the indication that we are headed towards [that] higher number or you are going to sort of reserve judgment on that at this point?

Yes. I think it is best to reserve judgment on that and I think you have got to keep in mind that the liability has several big assumptions, one of which is claims, but another of which is the average claims cost. The average claims cost is trending below both the actuarial estimate in the prior year and that has partly to do with the type of claim and it has part to do with the size of claim and it has part to do with foreign exchange.

Because those four variables can really move the liability quite a bit, and we talked about that in our MD&A, we do not feel like it is appropriate to go through an adjustment in an individual quarter around the half. Not to mention that the only time that we would go through an adjustment is the annual study and the annual study that KPMG does is only done once per year.

Okay. Thanks Matt.

Andrew Johnston, CLSA. Matt, just a question on cash flow, just taking out the asbestos. What is happening to cash flow in the business?

Well, I mean, we obviously had a large cash outflow really to the dividends that we declared last year and paid in August. So there was three dividends that made up the $355 million on the cash flow. That was probably the largest outflow, so that's the second half ordinary from fiscal 14, the 125 special from fiscal 14 and the special dividend from fiscal 14.

So those three dividends were paid out in the first half and that is the largest outflow. Then really CapEx; I think it's at 158 at the half year. So those two outflows, which are in line with -- from a capital allocation standpoint and from what we have been communicating -- are in line with kind of what our expectations were.

The underlying operating cash flows are very good in the business. Operating EBIT is up. It is up more at the half than revenues are across the segments. Working capital -- the underlying working capital performances is in line with expectation. There was a use of cash for the quarter, largely related to inventory, resulted in about $10 million of inventory that was largely with the recommissioning of the plants, as well as in a little bit of replenishing, but nothing really material.

The underlying operating receivables are performing well and the underlying operating tables are performing well. We had that one sundry receivable item year-over-year that didn't repeat. So in terms of how I think about underlying operating cash flows in the Company, they are quite strong. The free cash flow is in line with where we thought it would be, given that we went from a net cash position to a net debt position over the last 12 months.

Louis, just on the housing starts numbers, we are seeing a bit of a divergence between the official numbers coming out of census and what we are seeing out of some of the major homebuilders. Just wondering if you have got any sort of comment on or views on that?

Then your business tends to do really well when the market is growing really strongly in terms of PDG, primary demand growth, but you are still putting some pretty reasonable primary demand growth numbers, even though the underlying market is flat. I am just interested to how you are seeing the business now in relation to that past relationship with market share growth versus PDG.

Yes. I think, you know, the last time the market grew really strongly for housing was really back before the downturn. I think the main difference in our PDG growth rates during the downturn and before the downturn now is just LP. So LP is getting some of the vinyl decline where before the downturn they were not getting much of it. They were holding a position with panels and trim and that was about it. That was how they were participating.

So maybe [it is some] market share growth since then and that is what has kind of dampened our PDG a bit. So it is obviously something we are working on. The value proposition is they are cheaper than Hardie, they are easier to install than Hardie; but we do not think that offsets the benefits you get on our product and durability and maintenance versus their product. But we haven't demonstrated that. We can share that to the market to start turning their trend line the other way. So we are still working on that.

As far as the market itself, [I saw] some of the big builders came out a little bit more optimistic. There is theories that big builders are getting more to market so they would do better than the overall start. If that is the case, we are well positioned with the big builders. We sell 20 out of 20 of the top builders. A lot of them are tied exclusively to us, either in fiber cement or in what we call hard sidings. So when they grow, we grow.

They still use vinyl and vinyl markets but where they use fiber cement they use Hardie. They do not buy it. They are our lower price segment. A lot of Cemplank goes into that segment. So we get their volume benefit but not the same degree of revenue benefit, but it is still good business for us.

As far as the housing market itself, I mean, to me it has been very similar for, when you look at it, maybe two years now. Everyone's expecting it to take off and it does get better, but it doesn't take off. So that would be our guess next year as well. It will be up but it won't be up significantly. I think some of the forecasts did have it up significantly next year and now they're coming back to more moderate increases and we'd be planning below the moderate increases.

As far as being able to grow demand for our product in a market like this, we should have no problem. Like I say, it's a one -- it's really a one factor equation for us. Vinyl continues to shrink, LP continues to grow. The problem for us is LP taking some of that vinyl decline. So that's what we're working on.

Hi, it's Michael Ward from CBA. Louis, you made the comment that organisational costs were up in the period. Can you firstly maybe elaborate on what that actually is and then secondly elaborate on whether or not, given the market's probably a bit softer than you thought it would be, would you actually maybe fall back on some of that investment that you're actually making?

Yes, now we think we're pretty well balanced actually. Again, I know some of you would like to see us in the top of our 20% to 25% range. That's not what where we're trying to be. We're trying to balance the financials with the investment and growth. We're very comfortable where we're at. (Inaudible) cost is up for obvious reasons, head count would be one and then programs we're running in the market would be another. Then we do have some head count going in the capacity and that which is obviously related to growth within the -- if we didn't have the growth, we wouldn't need the capacity. But we're pretty comfortable with where we're at.

We're spending the money I think pretty effectively. So if we were spending it and it [rated] that we weren't doing it well, we'd definitely pull it back. But I don't see that being the case.

So a few years ago you were investing at rate, maybe well above where the market was. It's not similar -- it's at a lower level than that you would think. Is that what you're suggesting?

Yes; I don't know, a few years ago, basically if I look at the history of the business I'm just doing it off the top, so we are really a new construction company until about 2005 and then we start focusing resources and repair and remodel and we -- as we got into downturn we really allocated a lot of resource away from the construction under repair and remodel quite successfully.

So we're coming out of a downturn. We're holding and adding to some of those remodeled programs, those of you that were there in September would have heard about the ambassador program.

But we're also ramping up new construction, so reallocating back in the new construction and we need to do more in the small markets. We're pretty well situated in all the tier one markets. But there's tier two and three tier markets that we're on the way in. So we still have to get resources up in those tier two and tier three markets.

I think the reality is as a business model evolves what you're after is harder than what you've already gotten and sometimes it takes a bigger investment. Then for the first time, we're having to look behind us at the same time as we look forward, meaning we're having to look at LP, trying to put a hole in the bucket at the same time we're trying to create more demand against vinyl. So that adds to it a little bit as well. So our Midwest resources which is by far LP's strongest region have gone and will continue to go up. We need to do a better job in the Midwest.

Okay.

Maybe if I can just add. I'd say -- and we did adjust spending in the second quarter versus the first quarter and you can see that in the operating EBIT leverage. So for the second quarter operating EBIT was up 17% for the half. It's up 11% on sales and 12% for over the quarter and the half. So for the quarter, it gives you a better indication of run rate. While we're still investing, we're not investing ahead of topline sales. That would be one thing to look at.

The other thing is I'd say (inaudible) as a percent of revenue, while Australian dollars are up, revenues are also up versus 2013 levels. So as a percentage, those are broadly tracking in line.

Can I also just ask on capital management, I appreciate you've given us a few more detail around that. But there was a distinct lack of any active capital management in the quarter. I was just wondering if you can give some further comments around what factors may have influenced that this year?

Yeah it's a good question. We talked a little bit about this in September with a few of you. I think if you were to look over the last several years, we've historically not been very active in the first half of the year from a share buyback perspective. The main reason for that is if you go to the financial policy slide that we laid out, it obviously starts with underlying Group results and we feel like those are good.

But second is around transparency and governance and there's quite a bit of -- there's a number of black out windows and dates within the first half of the year, just given how we've historically released results. So May we do obviously the final year results. June we announce the Annual General Meeting. In August we do the General Meeting and we do the first quarter results.

We've -- you know my bias is on any kind of share buyback program to be more programmatic than opportunistic and to move an adequate amount of share activity within a period, that program's got to run over a longer period of time. When you have a lot of black out windows, it makes it difficult to put an effective program in place that I feel good about standing up in front of everyone and saying we had share buyback activity in the quarter and it was material.

So it becomes very difficult in the first half of the year to do that, given some of those constraints that we put on ourselves. That being said, I think the activity that we had in the first quarter is very consistent with what we historically had as well. Traditionally at the half, we've only done kind of an ordinary dividend and any special dividends have only really been considered at the full year results.

So at last from our perspective, what we've done for the first six months of the year is very much consistent with what we've historically done. Well we probably haven't done as good of a job as explaining why the share buyback activity doesn't tend to occur in the first half of the year and it tends to be bias more towards the second half of the year, when some of those black out windows, you don't have as many black out widows to navigate.

Thanks, James Rutledge from Morgan Stanley. Just on the reference to Fontana and the ramp up inefficiency there. I'm just wondering, if you can give us the sense of the time frame of those inefficiencies going into that ramp up and how significant those extra costs are?

I can't remember if we gave you the magnitude in the last quarter; no? Okay. So the -- we've got one machine running at Fontana now and it's pretty close to design. So it's over the last couple of months ramped up from about 60% to now it's approaching design which is very good. The time to get to that 60% was longer than it should have been.

But having said that, I mean it's still -- that's a two line plant. So we won't get our good unit costs out of that plant until we have it utilised at about 75% or something like that. And that will probably take a little while. Meaning even next year with a good summer that still may only be about two thirds utilised that facility.

So when you look at it, we brought up Waxahachie last year, extra line in Waxahachie and we'll bring up -- like I said at the end of next year we'll probably bring up Cleveland. So bringing up a line is kind of normal. It's going to happen a lot over the next three, four years if the market keeps expanding. What I tried to flag is we just didn't do it well enough. Now we're kind of past that point. We're doing it well enough now so that problem's behind us and that doesn't mean we don't have higher unit costs in Fontana than we will in the future, but that will be more utilisation related rather than how well the plants being managed.

So would you say what's embedded in the result today as you go forward to roll out more plants and ramp up the plants is kind of on a run rate basis, embedded in the design?

Yes it's certainly in our 20% to 25%. I mean we talk about these things in a margin. And then we won't repeat our mistakes at Fontana. So to me those were one off mistakes that we won't repeat.

Alright it looks like we're done with questions in the room. Do we have any investor questions on the phone?

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

Thanks very much. Good morning guys. Just a quick one going back through the rise in costs and the input cost strategies that you're talking to Louis. I'm sorry if I've missed this. Could you just talk about the strategies that you want to adopt in terms of the input cost strategies? Is it more around the pricing environment or are there other strategies that need to be engaged to deal with the rising input costs that you talk to in terms of cement, electricity, gas, pulp et cetera?

Yes, no. I don't think we have any big strategy. Input costs normally go up, or commodity costs normally go up as market demand improves. I think when you look at cement, power and gas, that's likely to continue to be the case. Pulp for some reason has been running on a different curve, not so much it was expected to start to soften the demand hasn't been that high and they've held their prices or gone up a bit more. So that's been a little bit off the forecasted curve.

So what we do with those commodities is we buy against indexes and at Matt said, we try and make sure if some goes up 10% we don't go up the full 10% and we're kind of in that. So we're buying pulp a little better than the index. We're buying -- I don't want to mislead you. We buy pulp well discounted to the index. But our increase is slightly less than the increase in the index.

Power is a little bit different. It's not as competitive market. Some of our sites are tied to certain providers. Gas, more again a pure commodity. We're not that sophisticated in purchasing gas, but we're okay at it. Cement, we're probably pretty good because we're a base load for most of the plants we do business with. So we end up at the bottom end of their price range for the net realised price back to mill.

So other than just a basic purchasing strategy and how you buy things and different types of markets, we don't have anything. You can't substitute power. We don't use coal or anything, substitute gas. We don't use anything to substitute pulp and we don't use anything -- we don't change our formula when the price of cement goes up. Okay.

Yes, no that's fine. Not to read too much into it where you say you're going to look at input cost strategies is the point, which is what you've put in your release.

Oh okay, sorry about that. That's just procurement, trying to become more sophisticated in how we buy things.

No that's alright. No drama. Of course Louis, the whole issue around capacity and capacity expansion you've talked to in detail and quite eloquently about that. The point of staying ahead of the competitors, the competitors in terms of making sure you've got the capacity to absorb the market when it moves and so that they cannot establish a competitive foothold is clear.

What are you seeing? What are you anticipating in terms of the competitors and their capacity and also some discussion about LP with its same product making a move back into Texas?

Okay we'll start with the direct competitors. As far -- we're not aware of any expansions in fiber cement capacity in North America. Those businesses are -- have kind of been in the position where they are for several years now.

When we get to LP, that's where the change is taking place. So LP has added capacity in response to their success and growing market share. Texas not so much; most of their gains from our perspective are still trim, kind of in broad markets and a lot of that trim goes into our homes, so Hardie is siding with LP trim so they have a good position there.

But the growth in plants would be largely in the mid-west, so Texas not so much; I'm sure they have some increases in taxes, just as we do, because it's a good market right now, but that wouldn't be where most of your market share gain. Most of your market share gain would still be in the mid-west.

Weren't their issues the last time LP was in there with the product in terms of its performance in the climate? I seem to recall.

Yes, the hardboard--LP has two basic technologies, one is hardboard which goes back to the 1960s and one is OSB siding which goes back to the 1970s. Both of those products did have performance issues and most of the participants in those technologies are getting out of the industry.

So would have had most of your big forest products companies in there like Weyerhaeuser and GP, Boise, of course Masonite I think was the category creator for hardboard. LP was the category creator for OSB, Omni Wood from LP, so almost all of them have gone out.

You have LP in there and you have some smaller players like Collins up in Oregon, small company. LP has CanExel in Canada; there's a company called MiraTEC who I think is owned now by Masonite Doors or I can't remember if they sell it, but they'd be a trim producer.

So yes, there is a history of product performance. Obviously LP is successfully communicating to at least some of the market that those performance problems wouldn't be the same in their current day product as they had been in the past. So I guess that remains to be seen.

Okay, thanks very much Lou.

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

Thanks. Guys, you mentioned Carole Park was expected to show some unit cost improvements, I was just wondering if you could give us some sense of what percentage or just some sort of a feel for how much more competitive you will be in the Australian market.

Yes, no good question. I don't have an answer for you. I tell you, it's not a game changer, so when I say that, what I'm trying to indicate is that almost all of our capacity is competitive enough to where you can't build a new line and shut one down and come out ahead, okay?

But what you do sometimes get is either a freight or a product advantage with new capacity and what they'll do is, in Carole Park, they'll get some unit cost advantage due to the scale of the machine, but the main unit cost advantage we'll get is in freight and in the product itself, because that line will eventually use products that are currently being shipped up to Carole Park from Rosehill.

So that's where they get the adds, but we built that new capacity for demand creation purposes. We would not have built it if the size of the Australian business was going to be the same in 10 years as it is today, we wouldn't have built that capacity just on a unit cost basis. We would not be ahead investing the amount of money we put into that plant if all we got back was a unit cost advantage. But since we have invested it, you can kind of incrementally get an advantage by bringing it up and reducing freight and reducing some product costs and then getting the scale advantage.

Thanks very much, cheers.

Your next question comes from the line of David (sic) McNee from Goldman Sachs. Your line is open, please go ahead.

Yes Matt.

Matthew McNee, your line is open, please go ahead.

Yes, sorry Louis, just on the recent data, I know it's hard to track, but the A&A data we've been sort of seeing has been a bit softer. Is that what you guys are seeing as well or how are you seeing the A&A market tracking at the moment?

Yes, I think the forecasts are right, I think they came in pretty bullish at 7% and they're well off that now, which I think is right. Having said that, we do like our growth in what we call R&R. Now are you talking A&A and --

Yes, R&R, yes.

R&R in the US originally came in with a really high forecast for the year, 7%, which is super high for the R&R segment and they've come off that some. We're getting good growth in the segment. Part of that is due to the segment being better and part of that is due to the programs against vinyl have done very well.

Alright and so do you think year-to-date would it be 3%, 4% growth or 5%, something like that, you think, in the underlying R&R?

Yes, Matt says 4% to 5%, he keeps a track of that stuff better than me.

Yes, no worries, thanks.

Your next question comes from the line of [Stephen] Johnson from the Australia Associated Press. Your line is open, please go ahead.

Good morning Louis. Just in terms of your full year forecast, you've kept the guidance the same as the previous quarter but you do have some short term concerns about the US housing market. Could that affect your full year guidance?

Yes, you know I'll be honest with you, we had that guidance in August and we stuck with the guidance. Now the business has really done what we thought it would do in the second quarter. So far in the third quarter, pretty much on track, housing is pretty much what we thought.

But with the US market forecast moving around a lot, we just didn't think tightening up the range did us much good. So I think most people know kind of where we think we'll come in. Our even margin in the US kind of drives a lot of it; we've already confirmed the guidance there. That was just one of those things we didn't think it was worth changing. We didn't think the market would learn anything by us moving it around because it's kind of where we think it, you know, it's where we thought it should be in August and it's where we think it should be now.

I acknowledge that three months has gone by so we could have taken a little bit off the range, but we didn't take anything off the range.

Louis, just to add, in your statement you say there's continued uncertainty about the short term recovery, can you tell me what you think the uncertainties are and what the variables are with the US housing market where you derive much of your earnings?

Yes, I mean I'm not an economist. When I say uncertainties, I just look at the forecasts the guys bring us and it seems to me the forecasts are always kind of downgraded as you move quarter-to-quarter rather than, there's no forecasters up there that I'm aware of that are actually showing higher forecasts than they would have thought three months ago.

So you know, the US economy is not in bad shape, housing is not recovering at the anticipated rate. I'm sure there's some good underlying reasons for that; I'm not sure I can pinpoint them.

But I think the important thing for our investors is, well number one, you believe that housing is going to continue to increase, rather than go into a downturn and we certainly feel that it will continue to increase.

Then two is the level of market activity, kind of play to our strength as far as organic growth and balancing that with financial returns and we think we're in a decent window, even though it's only a million starts which is historically low for the US. We still think it's a good window to operate in. So outside of the manufacturing blip we had early in the year, we're doing what we want to do and as covered again, we don't like that LP's getting what we consider more than their fair share, especially in the mid-west, so we had some work to do there.

Also, on Australia, I know it's a smaller part of your market, but do you think that attached housing segment of the Australian market is looking relatively promising?

I think, yes, I mean the Australian market's good right now, it doesn't play as well to our strengths as we'd like; we're more single family, new construction type product in Australia than we are medium density and the density is moving in Australia. So we've got a little work to do on kind of product line development to make sure we're more balanced across the segments in Australia. But I don't want to underplay how well the Australian business has positioned itself and how well they're currently running. I think we have a really good business in Australia.

Finally, on asbestos liabilities, do you see any unanticipated increases coming up in the financial year, in the full year?

Well no, again, our asbestos liability is tied to the AFA, so that's a calculation on our net operating cash flow. So we have our forecast for the forecast low and we know what percentage we pay into the fund near July, so I'd say that's as accurate as our financial forecast. There's nothing outside of that.

Okay, thank you Louis.

Yes.

It appears as though we have no further questions.

Alright, thank you very much, appreciate it.

That concludes today's conference, thank you all for your participation. (Operator instructions).