James Hardie Industries PLC (JHX) 2015 Q3 法說會逐字稿

Thank you for standing by and welcome to the Q3 FY2015 results conference call.

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

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

(Operator Instructions).

I must advise you that this conference is being recorded today, Friday February 20 2015.

I would now like to hand the conference over to your first speaker, Mr Louis Gries.

Please go ahead sir.

Thank you.

Hello everybody and thanks for joining the call today.

Matt Marsh and I are in Dublin and the buttons are being pushed in Sydney, so we'll be calling out our slides as we go along.

I'll start the presentation.

The first slide is the cover page, the second slide is the first page of our disclaimer, the third slide is the second page of our disclaimer, the fourth slide is the agenda which will be the same as we always use.

I'll just give a brief overview on the businesses and then Matt will go into the financial overview.

Once we finish that we'll go to questions.

The next slide's another cover page and page number 6, labelled Key Themes.

So I think most of you who have seen the results.

It's very much in line with the first half of the year on the market side.

Our plants ran a little better so we got a little bit more help on the EBIT line.

The result is also in line with the gains that we've been providing.

So in the quarter Group net sales up 10%, operating profit for the Group up 11% adjusted obviously.

We had higher volumes in all our businesses.

We had average price up in the US.

The US housing market is still flat.

It's slightly up but pretty flat overall for new construction.

As you probably know, we're spending a fair amount of money to get our capacity lined up as we continue to grow demand for fibre cement partly due to market opportunity and partly due to market share gains.

We'll cover that in more detail later in the presentation.

We continue to invest in the organic growth initiatives, some of which are the market initiatives and then a lot of our investments also just in the organizational capability to deliver on those initiatives.

Again, our guidance is in line for the Corporation and also our EBIT margin guidance for the US business is we're right in that range as well.

The next slide, page 7.

You see the overview so EBIT up 21% this quarter versus last year, net operating profit up 11%.

You can see the year-to-date numbers are positive as well, and the cash flow (inaudible - technical difficulty) number that significantly down.

That's driven by the asbestos both the payment, the FX adjustment and an increase we've taken in working capital going under this summer.

Go to page 8 gives you a little more detail on the US business.

You can see volume up, price up a bit, so net sales up 12%, EBIT up 20%, again the US plants especially ran better this quarter than they did the first half so that's helped the EBIT margin you can see versus last year up 140 basis points.

Nine month result good, everything tracking is as we thought it would, really no issues in the business at all.

Like I said, pretty flat market but still a good market for us.

Market side running well and now the plants are running much better than they did first four or five months of the year.

Go to page 9.

You can see we've really settled down in the range.

I think it's seven quarters in a row we're basically in a range that followed six quarters that we were out of the range.

We've successfully balanced what we're delivering with short term financials with what we're investing in from a long term growth perspective.

So we're very comfortable where we are with the EBIT margin in the US business.

Page 10.

Just a step from the bottom you can see stats are well below what you'd normally expect three to four years into a recovery, but again it's still a good enough market for us.

We're doing well in this market, running our different programs in the market.

I think builders are receptive to our value proposition.

Going up to the revenue line, you can see the revenue line is approaching our historical high.

The grey shaded area the volume, that's got a ways to go yet before we hit our historical high and volume.

Obviously we expect to but we've got a little time before we do that.

Page 11.

The graph shows that our US price is clearly back on track after that fall off we had in fiscal year 2012 and 2013, so a good bounce back last year and we've built on that momentum this year as well.

Page 12.

Gives you some of the details on the Asia Pacific business.

There are just a few things to understand here and I they're explained in the result, but average price down.

That's driven by a regional mix and a product mix, yet the market pricing in all businesses is either flat or up.

So it's not like we're taking market prices down but to reach our product mix that was a pretty significant shift in one of the businesses, then a regional mix between the three businesses pulled that price down a bit.

On the EBIT in Australian dollars up 20%.

That's probably driven by an adjustment that was triggered when we purchased the Rosehill facility so I think Matt covers that a little bit more later.

If you go back, you go back nine months, you see the average price flat, again that's regional mix for the nine months mainly.

So again our market pricing isn't coming off, just mixed a bit differently.

Good index slide which is page 13, it is the CapEx.

So most of you know we gave guidance $600 million over three years and I think when we gave the guidance we indicated it would be $200 million, $200 million and $200 million.

It's shaping up more like $300 million, $100 million and $200 million.

The $300 million obviously this year.

Capacity's the big driver of that.

We highlighted the $154 million in capacity.

We have another $90 million we've already spent this year on maintenance and/or product projects and then we'll hit roughly another $55 million or so between now and when we close our books at the end of the year.

Page 14 which is our outlook.

Just a little bit more of an update than this slide gives you.

Our audit file is very good.

It's stronger than the previous quarters, but that's partly related to a price increase that's effective March 1.

So as far as on your underlying demand we're experiencing right now, we think it's similar to what we've been experiencing right through the year.

But we're likely to finish with a stronger fourth quarter due to sub-forward buying before a price increase.

We're not sure if or how much that might offset the growth rate in the first quarter, but there's a likelihood that'll have some impact but obviously not enough to really drive our results in a negative way.

Plants are running well.

That's the other thing to know.

We expect that to continue so we're getting more momentum in the plants so we would expect the EBIT margin contribution we're getting from unit costs to continue to get better for at least another quarter too.

Asia Pac we expect it to continue.

Like I said, all the businesses are running well and the Asia Pacific businesses we continue to expect them to run well.

Our guidance $210 million and $222 million tighten up a bit, very consistent to what market expectations are.

I don't think there's any surprises there.

So at this point I'll hand it over to Matt.

Thanks Louis, good morning everybody.

On page 16 Louis has hit some of these already.

For the Group earnings we're favourably impacted by sales volumes across all the business units and segments, a higher average sales prices in the US and Europe segment.

Input costs remain elevated.

For both the quarter and the nine months have been pretty consistent with what we've talked about throughout most of the year.

As a result, the production costs are higher for the nine months across the network.

But, as Louis said, the plants are really starting to run well and are starting to offset a lot of that.

Organization spend is higher compared to a year ago, but still as a percent of sales it's trending in an area that we want it to trend in.

It's largely related to organizational adds that we're making in order to have the capabilities in place for the expected growth that we see.

Some discretionary spend as well as some foreign currency impacts.

The net operating cash flows for the nine months were $104 million -- sorry, for the quarter were $104 million compared to $254 million for the nine months about a year ago, and we'll go through that a bit.

Really two primary drivers there, the payment to the fund and some working capital are the two primary items.

Then as Louis has already highlighted, the continued capital expenditures on the capacity projects remain on track and are going to be a little higher this year, as we've alluded to in November.

But over a 24 month period we'll be in line with that $600 million pacing over a three year period that we've talked about.

On page 17 these are the reported results.

I'll take you over the next couple of pages through that for the quarter and then for the nine months.

So net sales up 10%, favourably impacted by sales line and price in the US segment.

Gross profit margins have increased by 40 basis points, a combination of average sales price in the US, partially offset by the higher input cost price and those input cost prices are starting to partially be offset by the production efficiency and plant performance in the network.

As I mentioned, SG&A expenses are up year-over-year about 4% in the quarter, a combination of some Labor expense and discretionary expenses as well as foreign currency.

Items between EBIT-- so you get a reported EBIT up 33% and we'll go through the adjustments in a moment.

Below EBIT the net income interest expense.

It has increased, it'll continue to increase as -- we're now in a net debt position and we were in a debt position a year ago so that's got an adverse impact year-over-year.

As well as in other income some interest rate swaps as interest rates remain off of what I think are most people's expectations.

Income tax expense are higher, largely the result of two items.

One is just the geographic mix of earnings.

But also a year ago we had a tax adjustment related to the favourable resolution of an amended tax audit and a final receipt from that adjustment from the ATO.

I'll cover it in a bit more detail later.

If we go to page 18.

So now going from net operating profit on a reported basis down to the adjusted (inaudible - technical difficulty), were due to a 7% change in the Australian dollar and US dollar exchange rate compared to a 4% change in the spot rates a year ago.

New Zealand weathertightness improved year-over-year.

We had a favourable claim that settled within the third quarter and as a result of that, combined with just a higher rate of claim resolution overall, that provision continues to decrease.

Adjusted net operating profit of $48.6 million for the three months, up 11%.

You can see most of the items we've already talked about for the most part.

On page 19 is the nine months.

So very similar for the nine months.

Net sales increase 11%, similarly driven by sales volumes and average net selling prices in local currencies across all of our segments for the nine months.

Gross profit margins are up slightly versus a year ago when you compare the nine months of 2015 to the nine months of 2014, similar dynamics.

Higher average selling price, partially offset by input prices remaining high and plant performance starting to offset some of that.

But the combination of those items is expanding gross margins for the nine months.

SG&A expenses, a similar dynamic for the nine months as we've talked about earlier for the three months and earlier in the year.

Non-operating items, I'd say very similarly interest expense is up because of the debt facilities, as well as foreign exchange inventory swaps unfavourably impacting the nine month period.

If you go to page 20 the $263.6 million, the net operating profit on a reported basis adjusts to $164.1 million for the nine months ending December.

That's up 8%.

The difference there is really driven by asbestos adjustments, were up 11% because of exchange as compared to about a 14% change in the spot rates a year ago.

New Zealand weathertightness continues to move in a favourable way and adjusted net operating profit up 8%, a combination of operating EBITs across the segments of about 14% for the Group, 14%, partially offset by interest expense -- the other expense items which we talked about, the industry swaps and foreign currency, as well as income tax expenses are up in line with earnings.

On page 21, gross profits of 34.8% for the third quarter you can see in line with the EBIT margin rates that we showed earlier for the US and Europe segment in a band.

The gross margin rate it really stabilized over the last four or five quarters and trended up a bit.

Prices have improved as we continued to execute on both the pricing and efficiencies as well as the market increases that we've done, as well as getting the plant performance on a positive trend line has helped to offset some of the input costs and market prices for pulp, gas and silica.

Some of the other raw materials remain at an elevated level.

On slide 22 is a similar chart to what we've showed in the last several quarters on US input costs.

You can see that overall the input costs remain fairly elevated but they have started to at least taper and some of them, for example electricity and gas, have started to come down.

They are up significantly year-over-year.

Pulp in particular has remained much higher throughout the year than most forecasters -- most forecast externally -- had nine months ago expected.

We're performing I'd say -- in most of these categories our sourcing strategies are resulting in us having less inflationary impacts than the market prices, but nonetheless the market prices overall are up year-over-year.

On page 23, so a three year trend for the segments.

The US and Europe fibre cement segment had a nine month EBIT of $206.3 million in comparison to $179.8 million for the nine months of fiscal 2014.

For the quarter and the nine months the EBITs in the US up about 20% and 15% respectively compared to the prior periods.

Similar dynamics that we're already talked about, volume and price, partially offset by input costs and we're continuing in the US to invest in the organization for growth.

Asia Pacific for the quarter and nine months EBIT is up 10% and 8% respectively compared to the same period a year ago, and local currency the amounts are 20% and 14% up for the quarter and nine months respectively.

If we go to page 24, research and development continued on a very similar trend line, broadly in line with our historical trends.

Again we see quarter-to-quarter fluctuations but it's really just reflective of timing of various projects coming on and off, really no change in research and development.

For general corporate costs for the quarter and for the nine months those are up year-over-year $33.3 million for the nine months compared to $30.9 million for the nine of fiscal 2014.

A combination of discretionary expend which is both labour costs as well as discretionary spend in product and marketing and overall corporate activities.

Some foreign exchange losses; those were partially offset by a decrease in stock compensation as a result of the changes in our share price.

On page 25 the most significant foreign exchange adjustment for us is obviously the Australian dollar.

It's a very similar chart -- the exact same chart that we've showed now for quite some time.

The strengthening of the dollar and the weakening in the Australian dollar had an unfavourable impact on the translation of the Asia Pacific segment results.

Into US dollars had a favourable impact on our corporate costs that are based in Australia and incurred in the Australian dollar, and then had a favourable impact on the translation of the asbestos liability balance.

On slide 26 the ETR for the year is estimated to be 23.6% for the adjusted effective tax rate.

That's largely in line with the last quarter and reflective of where we think it'll be for the year.

Adjusted income tax expense and adjusted ETR has increased year-over-year largely just due to the geographic mix of earnings and earnings in jurisdictions with higher tax rates.

We've addressed earlier that the main difference in the adjusted income tax expense line item is primarily due to the non-recurring receipt from the ATO relating to the finalization of the disputed amended assessment, and that was in the third quarter in fiscal 2014.

Then just a couple of other items on income taxes -- our paid and payable in Ireland, the US, Canada, New Zealand and the Philippines.

They've not paid or payable in Europe or Australia largely due to the Australian tax losses and the deductions that result from the contributions that we make annually which is an asbestos trust.

On slide 27 we had cut cash flow from operations for the nine months of $104 million compared to $254.7 million for the nine months of fiscal 2014.

Adjusted EBIT increased almost $28 million compared to the prior corresponding period.

The cash flow from operating activity this year includes the $113 million contribution to AICF.

Working capital is increased year-over-year and has driven a use of cash primarily driven by inventory really in three areas -- raw materials, as we've just tried to rebalance the raw materials across the network.

Obviously the commissioning of Fontana has required inventory, and then there's just the traditional seasonality that's contributing to higher inventory as well.

We've spent $241 million for the first nine months on capital expenditures largely for the plant capacity expansions and the land.

I'll provide some additional detail on that on the following page and our gross debt position of about $390 million at the end of December.

On page 28 gives you a breakdown of the CapEx spend for the first nine months of $241 million.

The breakdown is broadly into three categories.

So the two parcels of land that we purchased for about $65 million, one of those was the purchase of a Tacoma site that's adjacent to our existing Tacoma facility.

We made that purchase in the summer.

We anticipate that'll be the site for some green field capacity down the road.

We, in December, closed on a land transaction of our Rosehill facility.

We had previously leased that site and that came on the market and we were able to purchase that land for a good economic outcome for us.

So those are the two pieces of land.

The construction on the brownfield capacities are largely complete or certainly nearing completion in Plant City, in Cleburne in Texas and in Carole Park.

Then the maintenance and other CapEx is broadly in line with historical levels for us.

On slide 29 is the financial management framework that we've used now for a couple of quarters and you should expect us to continue to use.

No real change in the overall framework.

We're continuing to start with strong financial management which starts with strong margins and operating cash flows, coupled with ensuring that we're very transparent and we have good governance mechanisms in place and an overall philosophy in terms of how we view the balance sheet and how we view our financial management policies as being an investment-grade like company.

No real substantial change on capital allocation.

Our first priority continues to be and will continue to be investing in research and development and capacity expansion to support the market penetration and the market opportunities for organic growth.

We remain committed to maintaining ordinary dividend within the defined payout ratio and then maintaining flexibility on our balance sheet for a variety of items including either accretive and strategic inorganic opportunities, market cycle given that we're in a cyclical industry as well as further shareholder returns as those are appropriate.

From a liquidity and funding standpoint at the end of December we had $590 million of bank facilities at about 44% liquidity.

At that time, about a 2.7 average weighted debt maturity on this profile and given our desired goal to have a long term debt position that within our stated range of one to two times EBITDA minus our AICF payment, we completed the sale of $325 million of eight year senior unsecured notes priced at 5.875% just two weeks ago.

That was as much about getting the maturity of the balance sheet in line with a long term debt strategy and ensuring that we weren't solely reliant on short term bank facilities, as it was anything else.

Our leverage still remains very conservative and within our stated range.

Page 30 provides a little bit more information on liquidity.

This is as of December so the amounts in the bars and in the table do not reflect the bond.

Our balance sheet remains strong of $62 million of cash at the end of December, almost $600 million of bank lines, adequate levels of liquidity.

Net debt on the books of about $328 million compared to net cash a year ago of $168 million.

I've touched on the bond already.

We remain committed to the net debt target of one to two times our EBITDA excluding asbestos and we remain in compliance with all of our covenants.

On slide 31 is an update on New Zealand weathertightness.

You can see the blue line has continued to trend down for the nine months.

New Zealand weathertightness has moved from an expense of about $700,000 to a benefit of about $4 million.

That's really been driven by a combination of fewer claims, favourable claims settlements, a higher rate of claim resolution and a continued reduction in the number of overall claims.

So at the end of December, that provision was approximately $2.4 million and that compared to about $12.7 million in the prior corresponding period.

On page 32 for an update on asbestos, for the quarter and the nine months, claims received by the trust during the quarter were up about 11% above the actuarial estimates.

For the quarter and nine months they were up about 10% and 7% respectively, higher than the prior corresponding period.

The higher reported mesothelioma claims experience that we saw in fiscal 2014 and the first half of fiscal 2015, that trend has continued for the nine months.

The average claim settlement for the nine months is down about 5% versus the prior corresponding period and down 15% versus the actuarial estimate.

The average size of the settlements, claim settlement sizes are generally lower across all the disease types, although I would just caution that again, we're nine months into a full year and I think it's really best to look at some of the claims trends with a full year of data.

Actual dollars paid in compensation is -- was about 1% above the nine month actuarial estimate on a pro-rated basis and you can see AICF on the right had cash and investments at the end of December of $48.8 million.

So on slide 33, just to summarize, Group net sales have increased 10% and 11% for the quarter and the nine months when compared to the same period a year ago.

Adjusted Group net operating profit is up 11% for the quarter and 8% for the nine months compared to the same periods a year ago.

Volumes and net sales for the nine months in our US and Europe segment as well as our Asia Pacific segment have increased.

As Louis said at the beginning, the US residential market has remained slow or soft and that anticipated accelerated growth has not come to the first nine months.

We're continuing obviously to invest in both our organizational capability and capacity as we're continuing to execute on our market penetration objectives and in anticipation that the market will continue in the medium term and the long term to recover.

We continue to expect our EBIT margins to stay within our range, our stated range of 20% to 25% for the US and Europe segment.

So with that, we'll close and we'll open it up to any questions.

Ladies and gentlemen, we will now begin the question and answer session.

(Operator instructions)

Your first question comes from the line of Jason Steed from JP Morgan.

Please go ahead.

Hi.

Good morning Louis, good morning Matt.

Just two questions.

Just first starting, Louis with your indications around the order file and the impact that you're seeing that have through I guess your price increases and expected on March 1.

Wondering if you could just shed some light on the extent of that price increase and whether it's sort of across all product lines and whether or not -- I wasn't aware of the exact timing of when you announced that, whether or not that affected any of your volumes in this quarter.

So that's the first question just around that price increase.

The second is PDG looked pretty good in the context of a flat underlying market for new housing and R&R not being that strong.

What's that stemming from?

Do you think you're getting a bit of share -- so do you get a bit back from LPX or is this really just continued wins from vinyl?

Yes Jason, thanks.

On the price increase, I think we think it's going to average out around 3%.

The reason we wouldn't know is because it is -- you know, it kind of varies by region, by segment, by product.

So it's not an across the board increase.

It only impacts exterior products.

We did not take an increase on interior products.

So we'll have to see how it plays out next year but I would guess around 3% is a decent estimate.

When was it announced, Lou?

Was it announced--

Sorry, yes it was announced in December but it would not have impacted this quarter's results.

Okay, great thanks.

So they had plenty of time to forward by before the March date.

So now there wasn't any increased activity due to the increase in December.

Second question was our PDG -- we were pleased with our PDG.

We have read some of the analyst reports that thought we might get extra volume from LP evidently having a raw material shortage.

We have not seen customers in the markets desperate for board because they cannot get LP.

So I don't think that really helped us at all last quarter.

Now there is a lot of concern in the market about LP supply.

So there's more people kind of coming to us and getting proposals.

But as far as business switching quickly because they're out of board, I don't think that's the case.

Do you think -- really I mean I guess the numbers are relatively small for a quarter in the context of LP's volumes, but do you think what they lost due to those log shortages has just been absorbed into the market or there's been a deferral of purchase or is it just too hard to tell, given the size of the market?

Well, I'll be honest with you.

We had a little trouble interpreting their announcement.

I would guess that if they shorted the market some because they got in trouble with raw materials, it would have been absorbed by the channel rather than felt by the end users.

So you know, we can't figure it out to be honest with you because most manufacturing businesses, when they're short raw on the field they go to a plan B and bring it in from a different location or whatever.

So we just don't think it had an impact on our volumes, but I think it's maybe created some concern about reliability of supply from LP.

Like I said, we have had some LP users kind of come to us for proposals but we haven't closed any of that business due to supply concerns on LP.

Got you.

Thanks Louis and just that (inaudible - technical difficulty) would have been about around the sort of 5%, 6% mark for the quarter?

Yes a little better than that.

You know I hate to use that metric, quarter-to-quarter.

We think the year's going to come in around 8%.

Okay.

And last quarter would have been consistent with that.

Okay great.

Well that sounds good.

Thanks Louis.

By the way, we always try and get a little bit of information.

So the interior business did grow last quarter, but not near the same rate as the exterior business.

Okay got you.

Thank you, thanks.

Your next question comes from the line of Michael Ward from the Commonwealth Bank.

Please go ahead.

Hi guys.

Just on Asia-Pac, you gave sort of -- well you delivered pretty good volume growth there around 16%.

Can you just give us a sense of geographically where it might have been stronger or weaker?

Philippines was strong.

So that's what caused that regional mix on pricing.

Right, okay.

Yes, and Australia and New Zealand kind of came in where we thought they would.

Okay and then just on costs, I noticed there was sort of no talk of freight.

Given what we've seen with the oil price, can you make some comments around whether or not you might see a benefit on the freight side?

Yes, we are starting to see our freight rates come down a bit.

Right okay.

All right, thanks guys.

So not only the seasonal but like you said, the impact in the oil.

So we're still above last year on freight per msf but we might get into a position pretty quick where we're running better than same month last year.

Okay, thank you.

Yes.

Your next question comes from the line of Emily Smith from Deutsche Bank.

Please go ahead.

Good morning.

I just wanted to ask a couple of questions, Louis, about the PDG growth.

You mentioned it would be around 8% for the year.

I'm wondering where that growth is actually coming from, if it's the north, the south, new homes, R&R or if it's across the board.

I also wondered if you could -- I think last result you gave us some colour around when you thought the new plants might start up.

Just wondering if that's changed at all?

Yes okay.

So PDG, most of the things are running, are working.

In fact I'd say all the things were running and working, especially -- although interiors products is not in our PDG calc, we did get the momentum turned around with our interior products so we feel pretty good about that.

If I had to rank them, the south is running stronger than we thought it would.

The north is running stronger than the south, which it should.

But the delta between the two is smaller than you would think.

R&R is running better in the new construction in the north.

I think we were a little slow to get our vinyl substitution going again in the north because we realize we have a bigger opportunity to kind of knock LP than go after further vinyl.

So we've got a few more resources pointed at wood and a few less pointed at vinyl and new construction.

You know, that's our one disappointment.

Obviously vinyl has to decline for us to grow PDG.

Our disappointment is that we're not getting all of the decline, so that would be the LP piece.

So it's a good broad base result.

Some things run better than others, but overall, really I don't have any complaints about what we're accomplishing in the business, either on the market side or the manufacturing side right now.

The business in the US is running very well.

Great, and the new plants?

Oh yes, new plants.

Sorry Emily.

They're all pretty much ready to go.

We'll start commissioning Carole Park, I think it's next month.

Then in Plant City we're ready to go but with the market relatively flat this year and to us, looking similar next year, maybe a little bit better, we don't need Cleburne and Plant City to come on as quickly as we thought.

So what we'll do at Plant City is we can use some of the investment to lower our unit cost, that's a raw material investment we made down there and finish the investment which is a lot more efficient finishing line.

So we'll bring up about I would guess maybe that's half that investment, not quite half, before we need the capacity and we'll follow with the sheet capacity when we need it.

Cleburne I think is slotted behind -- Cleburne is slotted behind Plant City because Plant City does two things.

It gives us more capacity but it gives us more HLD, which is the product that's single source that's relatively tight on capacities.

So that'll probably trigger the sheet machine start up at Plant City is when we run out of HLD rather than overall capacity utilization.

So Cleburne will follow Plant City and it could be -- depending on what the market does obviously -- but it could be as long as 12 months behind.

Then behind Cleburne will be Summerville which will be a low capital start-up of a mothball facility.

Then behind that, which is now we're down the path, we'll have a couple greenfields opportunities, one in Tacoma and one in the Mid-South.

So we'll have to see how regional demand develops before we decide where to go there.

The only reason I tell you that, well number one we bought the land in Tacoma but the other thing is, that doesn't mean we're not doing -- going to need to do work on those facilities.

I'm not talking about spending big dollars but a lot of the design work on Tacoma and/or Mid-South as our next greenfield needs to be done early enough because we're looking to get with our new --our newer business model which has a lot of the investment post-autoclave, we're looking to get better capital efficiencies, especially on the post-autoclave side.

So that's a fair amount of rethinking and redesign work for us on that finishing that.

So that kind of brings you up to date.

We'll start Carole Park first, Plant City second, Cleburne third, Summerville fourth and probably a couple years behind the Summerville start-up you'd have a greenfield start-up in the US, either Tacoma or Mid-South.

So to get to Summerville, what sort of housing starts do you think will be out when you sort of open Summerville?

Yes I mean you're right, it's housing start dependent, it's market share development dependent and then it's time dependent.

So yes, I don't know.

I mean that's a complicated equation that we don't have to solve because not only know -- we have our capacity ready and we can bring up a lot in fairly quick order.

We really don't have to sweat the details and the other thing I need to tell you is we've made some progress in our existing plants to where it looks like our capacity out of existing plants may get lifted a bit with some of the recent manufacturing initiatives that we originally struggled with a year ago, but had really come right in the last four or five months.

So if that momentum continues in manufacturing, that will also allow us to wait a little bit longer on capacity.

Great and if I can just ask a question on price, you mentioned that 3% price increase for March 1 might cause some pull forward.

I'm just wondering how much typically is pulled forward and I guess therefore that means for FY16 you'd expect price increases of obviously over 3%, given the mix shift as well.

Yes I think, you know, it depends on a lot of things but yes, I mean you could see between 3% and 4%, I'd say that's probably the most likely range and if mix worked against your regional mix or product mix worked against you, you might be a little under 3% or if it worked for you, you might be over 4%.

How much is pulled forward?

Even looking at the order file, it's still hard to figure out, to be honest with you.

I know we're only six weeks from the end of the quarter but -- I don't know -- say maybe -- I had to give this kind of guidance because it's so inexact but maybe 3% to 7% extra volume.

I don't know though.

I'm telling you, I just don't know that because we can't interpret how much is pre-order and how much is a good spring build.

There is some belief in the market that the housing market is going to be pretty good.

But we've seen that the last two years.

So we don't really know what to believe.

So it'll pull a little bit forward, 3%, 4% would be my (inaudible) guess, 7% would be my ceiling.

But those are very unscientific numbers.

So we'll just have to wait and see.

Excellent.

Thanks very much.

Your next question comes from the line of James Rutledge from Morgan Stanley.

Please go ahead.

Thank you.

Good morning.

Firstly I just wanted to clarify on the price increase.

I think with -- last year was the price increase effective from April 1 and it's a slight change this year.

Is that correct?

It is.

The reason we changed it because the spring build starts before April 1. So we are trying to match up better to when dealers would be bringing their inventories up.

Now, having said that, it's a one year adjustment we're going to have to deal with in our accounts.

So this quarter will comp a little better than it theoretically should because last year was April 1.

But next year will account fine because I'm sure we'll do -- if we do a price increase last year it'll be timed earlier in the season just like this one is.

So rather than time it with our financials we tried to time it with the spring build in the market.

Sure.

Okay.

Thanks.

The --

Sorry.

Did you have anything else James?

Yes.

Sorry.

Just my other question relating -- just following on from that.

In terms of that price increase of 3% and then I suppose as we go into fiscal 2016 you'll see raw materials -- hopefully that pressure lessens and you see some costs relief there.

I suppose how do we think about margins over the next 12 to 24 months given you've got a price increase where hopefully raw materials are less of a strain?

Are you going to be -- I mean, I'm not looking for a number but just in terms of how you think about investing that in marketing or SG&A versus, say, taking some of that to the bottom line?

Yes.

So again, if your assumptions are right we did price -- we get a little extra volume obviously through market share growth and hopefully a little from the market opportunity and input costs aren't up.

I'm pretty sure cement will be up again next year.

The one that may not be up again next year is pulp.

Other than that, I think we'll see some increases.

But having said that, we do a balancing act.

We're really comfortable where we're at with EBIT margin.

It may drift more into the top of the range but we're not going to try and push it up because we have an opportunity.

We still have a lot of things we want to do in the market and if we have the management capability to run more programs in the market we'll spend that money and stay in the range.

That's kind of how we have the organisation set up.

I am glad, like I said, seven quarters in a row of basically in range.

I am glad that we're not having to work to get into range anymore.

So we're kind of more naturally in the range spending our money, delivering our resovles, getting the PDG we're looking for.

We -- if I could do one thing next year guaranteed I'd rather increase my PDG.

So if I had a choice going to 26% on EBIT margin or you can go another point on PDG I'd take the point on PDG over a point on EBIT margin.

Okay, great.

Thank you.

Your next question comes from the line of Andrew Johnston from CLSA.

Please go ahead.

Good morning Louis and Matt.

A question around Texas.

Obviously with the oil price coming off there's some concerns there.

Now I expect that you're not like most everyone else you're not seeing any signs yet of slowdown.

But in talking to your customers, how are they feeling about the outlook for Texas and how does that feed into your thoughts about that state?

That's a good question and it does relate back to Emily's question on capacity.

Of course, we've been sold out in Texas for several years and importing board in.

So -- and we have two low cost plants in Texas.

So we have done scenario planning with a market decline in South Texas.

We've done it obviously for our financials and the impact on there isn't what we would say would be material to our investors.

But the impact on our production planning is pretty significant for the guys who run the business.

So we've done the scenario planning just to make sure we could take full advantage of our low cost capacity in Texas and it doesn't get stuck there and we don't end up running those plants 24/7.

But what's the feedback from the market?

Number one, everyone's nervous.

There's no doubt what's going to happen.

People that run national businesses like ours, they think oh, it's going to help me outside of Houston and a few other markets and it's going to hurt me in Houston and maybe Oklahoma.

We're pretty big in Alberta so we think it'll hurt us in Alberta.

I mean, we're pretty big relative to the rest of Canada in Alberta.

So we've got it planned to 20% down in South Texas.

I think if you shop that number around most people would think that's probably a little more than what will happen.

I can't guarantee you it couldn't be more.

But we've planned it -- more scenario planning down 20%.

Our financials still work.

The more important thing, like I said, is we want to take full advantage of our low cost capacity in Texas so we want to make sure that if that's to happen that we expand the shipping radius for the Texas plants.

Okay.

Great, thanks.

Matt, apologies if you did mention, but how did that $3 million profit on land purchase arise?

In Rosehill, because we've leased the land, we had a make whole provision that's required for the end of the lease and obviously as part of the unwinding of the accounting related to that transaction that provision was no longer required because we're going to own the land.

So that -- (multiple speakers).

Okay, okay.

All right.

Great.

Thanks.

Finally just on -- Louis, you commented that R&R was modest.

Were -- I mean, trying to get R&R numbers obviously -- national R&R numbers are obviously really difficult but was that surprisingly soft?

Because some people have been talking about R&R being pretty strong.

No.

I don't know -- if I said R&R was soft I misspoke.

We've got it around 4%.

We use Hanley Wood and we believe that 4%.

That feels right to us over the last couple of years.

4% has been a pretty good number I think.

Now, we are growing market share in R&R.

So we're doing better than that in the segment.

Okay, great.

All right.

Terrific.

Thanks gentleman.

Great to -- a really solid result and good to see things running so well.

Thanks.

Your next question comes from the line of Matthew McNee from Goldman Sachs.

Please go ahead.

Guys, just a quick question just on the asbestos.

The approved payment scheme, I think, was announced.

Potentially that was going to happen -- I think they announced back in about September when the currency was about 15% higher than what it is now.

So Matt, have you got an update on what the fund expects?

I mean, obviously your payments in Australian dollars should be a lot higher going in so that change -- change anything on when they may move into the approved payment?

Have you had any updates also with the negotiations with the government on the loan and the availability of the loan.

Yes.

Thanks Matt.

That's a good question.

Yes, you hit on one of the key assumptions that goes into the establishing the long-term liability.

Certainly FX is a sensitive assumption and has been higher the last couple of years.

Certainly the strengthening of the US dollar -- this year we would expect to have a favourable impact on the annual update that the actuary does for the end of the year.

A couple of other dynamics just to keep in mind when we talk about asbestos.

Obviously working favourably, if you will, towards the size of the liability, average claim sizes are down.

The average claim size for mesothelioma is down and the nil settlement rate is up.

So those factors are all positive along with foreign exchange.

The number of claims and the number of mesothelioma claims are elevated though.

So those are two factors that have an adverse impact potentially on the overall actuarial adjustments.

So I'd say that the basket of those three major -- those three or four major assumptions is still to be determined with respect to where the actuarial assessment will come out at the end of the year.

We're just starting to have our discussions with AICS and KPMG as they go through their annual refresh.

I'd say -- I wouldn't necessary say because the Australian dollar is lower that it will go down.

It may go down but it wouldn't be just exclusively because of that because of some of the other factors.

Related to the announcement of the approved payment scheme, we haven't been given any official update on that.

Our understanding though from speaking with both the state and the trust -- it's really those two parties who are primarily working through the discussion -- is that they seem to be making good progress on the discussions.

I think both parties remain optimistic that a good outcome for everyone will be reached.

But there's a -- we're not in the middle of those discussion and certainly nothing's been -- we haven't been notified that there's been any change as of today.

Matt, is it anything -- is it something you even think about when you think about capital management, the timing and stuff like that at all?

Yes, that's a good question Matt.

I think we think about it because we get the questions and the input from our shareholders.

So that obviously makes us think about it.

But I'd say our capital management objectives I think have remained pretty consistent over the last several quarters.

We haven't talked about or thought about any changes to those capital management objectives.

We think the balancing of the current and the future claimants with the shareholders and lenders is really what the AFFA was designed to do and the capital management objectives that we've outlined are really very consistent with allowing our shareholders as well as us to satisfy our obligation to the trust and keep those things in balance.

So I'd say the questions and the discussions that we get from our shareholders certainly provides good input but there's been no change and we're not expecting that a change would be made.

Yes.

No worries.

Thanks.

Your next question comes from the line of Andrew Peros from Credit Suisse.

Please go ahead.

Lou, are you able to expand on one of the comments you made a little bit earlier about interiors and exteriors.

I think it was a few quarters ago that you lost about 3 percentage points of market share.

Just -- I guess wondering how that interiors business is going and whether you've been able to claw some of that share back.

We have been able to reverse that trend Andrew.

So -- at least for about a four or five month period now we're going the right way.

So I think by the end of the year we may not get it all back.

But of course, when we get it back is not as important as if we're going to get it back.

I'm very confident we'll get it back and grow on top of that even.

We identified some gaps in our game plan, both on the execution side and the design side that seem to be playing for us pretty well now.

Okay.

That's all I had.

Thanks.

(Operator instructions) Your next question comes from the line of David Leitch from UBS.

Please go ahead.

Hi.

I have two questions.

One Lou I wondered if you could just for a beginner break up the total North American volume between exterior new builds, R&R new builds, and interiors just in percentage terms at the current production rate at the moment?

Okay.

So I use rough numbers.

If you look at our overall business, we're sitting around 55% R&R and 45% new construction right now.

That could be plus or minus a little bit.

But that's roughly -- we're still more R&R but with starts at least coming from the 500,000 up to the million.

We're up to 40%-plus, mid-40%s on the business being driven by new construction.

That's right.

Then exteriors would be what percentage of the total?

Exteriors' percentage of the total I guess changes a little bit.

But if you thought low 20%s, that's about right.

I think in the downturn it might have hit 25%.

Going into the downturn we might have been 20%.

But if you thought low 20%s now I think you'd probably be pretty good.

Sorry, that's interiors is it?

Yes.

That's interiors.

20%, 25%.

Thank you.

Then I just had -- thanks a lot.

Then I just had one question relating on tax just looking for the cash flow in the future.

I think that the tax paid is running at about half -- the tax expenses -- as an extremely crude number.

Is that the way we should think about it going forward?

As, I guess, the profit rises, I'm just wondering -- obviously the tax expense will go up.

Will the tax paid go up proportionately?

Yes -- I mean, we -- there's obviously a number of items -- a number of timing related items that can account for differences between the tax expense and the taxes paid and depending on how those -- the timing of those items and what items we have in a given year, that amount could change.

We don't provide obviously any kind of forward guidance on taxes paid.

I think the ETR that we currently have is reflective of the ETR that you should expect for the year and it would be a reasonable ETR to include in future periods.

But to try to give you some guidance on our -- how the difference between ETR and taxes paid in the future is going to compare to the present, I think would just be a bit premature given how the timing differences can change based on a jurisdiction and the types of timing differences that we could have in a given time.

That's right Mike (sic).

But just following on, the slide talks about taxes being paid in jurisdictions other than Australia.

I guess a lot of us expect that the US profit will be the side that grows.

Is it -- tax is always very complicated.

Is it wrong to think -- how can I ask this question?

Is the correspondence between the prima facie tax rate in the USA and the tax paid, are they basically fairly close or not?

Umm

Did I ask that question right?

It depends on the question you were trying to ask.

I'm trying to understand do you pay tax in the USA roughly according to a 38%, 35% or some sort of -- is the actual taxes paid there like what you might look at that prima facie tax expense?

Yes.

We don't provide country-level specifics on effective tax rates.

Obviously effective tax by definition is for the Group and is based on jurisdictional blend of rates and deductions.

So it's a difficult question for me to answer because it's just not something that we disclose.

We don't pay taxes in Australia because there's no taxable profits in Australia.

The lack of taxable profits in Australia are largely related to the asbestos deductions that we receive.

I'd say keep in mind that the asbestos reduction -- deduction that we receive is taken over a five year period unlike some companies.

So now that we've accumulated those tax losses based on five years or more of making the payment, we wouldn't anticipate making tax payments or having tax profits -- the tax payments would be applied to in the future for Australia either.

So that's probably the best answer I can give.

That's very helpful.

Thank you very much.

Appreciate that.

That's all I've got.

Your next question comes from the line of [John Hind] from Merrill Lynch.

Please go ahead.

Good morning Louis and Matt.

I'm just after a bit more colour on why the commentary was conservative short-term on US housing because I guess during the call it's all been pretty positive?

Is it because -- is it just because of the prolonged recovery or is the shape and mix of the recovery slightly different to what you're expecting?

Also just one more on corporate costs.

Obviously up a little bit this quarter.

You mentioned there was an increase in marketing and labour.

Was that just relating to the Philippines and then ramping up?

How should we look at it may be going forward as well please?

John, on your first question on US housing, our short-term outlook has just been cautious because we came in the last year like most listening to external forecasts that had -- I think no matter which forecast you looked at, whether it was Fannie or Freddie, our own -- the Dodge forecast that we primarily use or many other forecasts had calendar of 2014 new construction starts in the US up in the high double-digit teens -- 17%, 18%.

I think most expected calendar 2014 for new construction to look a lot like calendar 2013 and calendar 2012.

Obviously that didn't play out that way.

As we went through the year last year, despite having three months and six months of new housing data, those forecasts were also still calling for the third quarter and the fourth quarter to have (inaudible - technical difficulty) amount of growth.

It got to a point where, for us, it just was an inconsistency.

So we go into this year and while most of those external forecasts aren't as optimistic for calendar 2015 as they were for calendar 2014, most external forecasts still have a very healthy amount of new construction growth in the US.

We're not necessarily saying that's not going to occur.

Most of the external forecasts would have starts estimates up 8% to 12% into low teens.

So we're not necessarily saying it won't occur.

We're just saying there's a lot more uncertainty and we haven't seen a change in the trend lines in the last nine month just yet.

Now, unlike last year, this year we've got capacity in place.

So if the housing market does really start to heat up and the spring build turns out to be better than where the trend line has been over the last three to nine months, we've got capacity in place or nearly in place and we'll be able to respond to that.

So that's some colour, if you will, on the short-term.

On the medium to long-term, we're still at relatively low housing starts by all historical measures.

We're going to hover, depending on the data that you look at, somewhere between 1 million and a little over 1.1 million housing starts.

Even if you had healthy growth in calendar 2015 of double-digits or even 20%, you're still only talking housing starts that are still well below the historic average of 1.5 million.

We still think that given the pent-up demand and where housing starts have been on a relatively long recovery in the cycle that we think over the medium to long-term that there's still some good underlying economics and it's just going to pace more slowly.

So hopefully that helps answer that question a bit.

On general corporate costs, no, it's not Philippines related.

It's -- as we're continuing to add in the segments -- so we're adding resources in the segments either for market-related or product-related activities and some SG&A for overall capability.

We're also doing the same at a corporate level to ensure that we've got the right management capabilities in place in advance of where we think we're going to grow over the next 12 to 24 months.

So that accounts for most of the labour expenses.

The discretionary expenses are really a variety of items.

Largely earlier in the year it related to some product and marketing development work that we had done.

That continued to -- that's continued throughout the nine months as well.

So we call it out as discretionary just because obviously we would -- we pull back on that in the event that we're not on the trend line that we want to be.

But we feel like we're on the right trend line and we're really trying to balance our top line growth and our increase in primary demand in all of our segments with staying within our profitability bands.

Okay.

Thank you very much.

Your next question comes from the line of Peter Steyn from Macquarie.

Please go ahead.

Good evening gents in Dublin.

Just a quick question on your US note issuance.

I'm curious to understand the strategic importance for you to extend the term particularly beyond the five year window, given some of the increased cost on the curve that that incurred?

Just curious to hear your views.

It's a good question Peter.

The note for us was all about getting the structure of the balance sheet in a place that, from an overall liquidity and a credit management and a risk management standpoint, that we were comfortable with.

It really started with knowing that we wanted to stay in a net debt position over a long period of time.

Although a modest level of net debt, we wanted to structure the base load of that debt over a longer period.

The eight years, while it is comparatively expensive if you're looking at that compared to our banking facility, the banking facility is about 40% of those refinanced every 18 months if you look at the current maturities.

By all historical contexts the 5.8% that we paid on the eight year note is well below a 30 to 40 year benchmark for that type of debt.

So we felt like the opportunity was right and the market conditions were right for us to get comparatively cheap financing and structure the balance sheet in a way that provided long-term structural debt at a relatively cheap rate.

That's really why we chose to execute the transaction in February.

You'll also note on the disclosures we do have a call ability option on that note.

We, at this point in time, wouldn't anticipate calling the bond.

But there certainly is that flexibility built into the security.

Yes.

Great.

Thanks very much Matt.

There are no further questions at this time.

Mr Gries, please continue.

That wraps it up then.

Thanks everyone for joining the call and [we'll get back to you in the next quarter.

See you.

That does conclude our conference for today.

Thank you for participating.

Ladies and gentleman, you may all disconnect.