James Hardie Industries PLC (JHX) 2015 Q4 法說會逐字稿

We'll get stated here.

I'll just do a quick overview of the business and then I'll cover most of the details.

I think most of you have seen the result that came in very consistent to what we've had in other quarters.

So the year has been a very consistent year for us.

Our growth rate has been about the same right through the year and our bottom line has been good right through the year.

So just go through slide number six here.

So like l said, 9% and 11% for the quarter and the full year.

Operating profit was better in the fourth quarter and we'll talk a little bit about bottom line improvement we get in the fourth quarter, relative to what we've had in the first three quarters.

We announced our dividend today.

We've had higher volumes in selling price right across the business.

Basically the theme is everything is working well.

So that's price cost volume right through all the businesses.

We are growing faster than market index in the US.

We'd like to be -- actually, we're working now on getting it up another two or three points from where it's been the last eight quarters or so.

But we are growing above the market index.

EBIT margin, as you can see, fell right in the middle of our 22% to 25% range and we're all set on capacity.

So we started up Carole Park recently, so we're good on Australian capacity and we've got Cleburne and Plant City ready to go in the US.

So we're good there as well.

These just show you the numbers for the quarter 41% improvement on EBIT versus the 20% for the year, obviously the effect on EBIT margin, operating profit 26% and 12%.

So again, the quarter on the bottom line was stronger than the other three quarters.

The reduction in net operating cash flow was due to basically two big things.

One, the large asbestos AICF payment we made last year and change of working capital, where our working capital went up this year as well.

The US, again quarter and full year look very similar [to FY15], up on the net sales.

9% up on the volume for both quarter and full year.

Average price up a hair more in the full year than it was the quarter.

Then the EBIT line quite different and what's driving that improvement on EBIT line is really two things.

We have efficiencies better right through the business.

But in manufacturing, we're getting a pretty good [get].

So our sites are running better pretty much across the board in the US and in this quarter we started to get some help on things that have been going against us.

So pulp was down a little bit, freight was down, energy was down.

So that gave us, obviously, extra EBIT dollars.

This is our chart which I know you guys see on a regular basis.

We now have eight quarters right in range.

Fiscal year 2014 we came in at the bottom range.

This year we're right in the middle of our range.

I think as we continue through the recovery in the US you'll see us now start operating at the top of the range.

This is the -- showing you three things, the volume for Hardie, the revenue for Hardie and then housing starts, addressable housing starts in the US.

You can see the slope of the line for revenue is quite good relative to the housing starts.

Now housing starts are still less than half of our demand for our products.

Were fairly modest in more than demand than housing starts.

The index on R&R was about 4%.

So we did run above on market index when you combine the two on both volume and revenue, but a little better on revenue than volume.

That's due to this chart.

As you know, we kind of lost our way in 2012 and 2013 and lost a little bit of price in the business.

Certainly have corrected that and 2015 was a strong year, without any big market increases.

So from that $626 million to the $675 million you've got product mix.

But the biggest contributor was we fixed up our (inaudible) pricing.

We now get our right pricing into right segments and we had lost that in 2012 and 2013.

Now we've had some small market increases as well.

Asia Pacific, like the US, running very well and very consistently.

If you just jump to the bottom line, EBIT margin run at a hair above where we run in the US.

So that's a good result.

They are also slightly ahead at our market index.

Now the market index, keep in mind, are much more penetrated in detached housing than they are in medium density.

So a lot of the increase in the market has been in the medium density segment.

That doesn't really drive our business result much.

That's one of the challenges for the Australian business, is trying to get a better position with medium density, because we would see that as being more of a longer term trend in the country.

But having said all that, we're in good shape, good volume growth, 9% for the full year.

A little bit less in the quarter.

That's no big deal.

Pricing a little better in the quarter, reflecting that recent price change.

EBIT dollars, in Australian dollars, very strong.

So a very good result there.

I already commented, we started up the Carole Park capacity, which is good because we're actually starting to get tight on capacity, if you look at what we use to have in the business.

So the timing of that investment seems to be working out pretty much perfect for us.

Speaking of capacity, we spent a lot of money.

So that's really one of the unusual things in our results for this year, is how much money we spent on CapEx and most of that was capacity driven and was really just putting the capacity in ahead of demand.

Obviously, we have demand projections for pretty much all the businesses we have.

Plant City, we spent just short of $50 million there, Cleburne, just short of $25 million, Carole Park $36 million.

Tacoma, we bought some land to put a future site next to our current site and that was -- it looks like $28 million and then we did the same thing in Rosehill.

We bought the land, so we don't have a lease on that facility anymore.

So $173 million of that -- like $275 million or so was straight capacity place.

I'll head over to Matt.

Good morning.

So a summary of the Group results.

As Louis has already talked about, earnings were really affected by good volumes, average selling price in both segments.

That was partially offset by some input costs, mainly market related raw materials, partially offset by some improvements in our plants, particularly in the last nine months of the year.

The plants did much better than they did in the first quarter.

Then we continued to invest in the organisation and that's both in capability and in growth areas.

That resulted in higher organisational spend in dollars.

As a percent of sales, it's actually down a little bit.

Net operating cash flow of about $180 million for the full year.

That was compared to $322.8 million.

We'll go through that in a little bit.

That's primarily, as Louis said, the ACIF payment that we made last July, some working capital year-on-year.

So we'll go through that.

We had about $276 million last year in capital expenditures.

It was basically in line with where we had guided throughout the year.

Almost $180 million of that was CapEx related and the remaining balance was maintenance CapEx, if you will.

We announced a total -- we announced dividends of $120 million for the second half and $98 million for the special for the year.

Okay, so for the fourth quarter we'll just walk down the face of the PNL on a reported basis for both fourth quarter and full year and then on an asbestos adjusted basis.

So net sales up 9%.

You can see profit margins -- I'll show you another chart in a minute on those -- up about almost 400 basis points, 380 basis points.

Really a combination of volume and scale on the plants, plant performance, average net selling price and then offset by input costs, like we talked about.

SG&A spend up primarily on labour costs.

A little bit of discretionary year-over-year, as we continue to invest in growth programs.

Then foreign exchange, we had about $3 million of foreign exchange in SG&A for the year for translation.

Then non-operating interest expenses were up really related to our debt position.

We would expect on a year-on-year basis those will continue to rise until we get the full year of the higher level of debt reflected on our interest expense.

Then income tax benefits decreased, primarily because of the unfavorable asbestos adjustment year-on-year, compared to the prior quarter.

Results for the quarter, going from net operating profit of $27.7 million to the adjusted number of $57.3 million for the quarter.

So asbestos adjustments, there was $111 million unfavorable movement in the underlying actuarial valuation, which will go through.

That was offset by about $48 million of foreign exchange, as the Aussie dollar moved.

About 7% down compared to about 3% up in the prior corresponding period.

New Zealand weathertightness continues to trend in the right direction, both favorable claims settlements and a higher rate of claim resolution and then not many new claims.

You'll see on the chart we'll get to in a minute that that liability has really declined to a pretty small amount.

On an adjusted net operating profit basis of $57.3 million, so that's up about 26%.

That's driven really by about 40% growth in EBIT and the operating segments.

An increase in adjusted income tax expense of almost $6 million and then other expenses of about $2 million and gross interest of about $4 million, gets you to the $57.3 million.

For the full year, net sales up 11%.

Gross profit margins up about 100 basis points.

I'd say sales and gross profits for the year were very consistent dynamics, as we've talked about the last couple of quarters.

SG&A expenses on a dollar basis are up.

They're down slightly on a percent of sales basis, 14.8% for fiscal 2015, down from about 15% interest for 2014.

So while up 9% on a dollar basis, up less than both gross profit.

Net sales, that, in part, helps with the EBIT and the net operating profit leverage that you see reflected.

Then some of the items that are affecting net operating profit, obviously interest expense that we've already mentioned.

We had some unrealised effects and interest rate swaps, as interest rates stayed much lower than any of us would have projected and then income tax year-over-year.

For the full year $291 million of reported net operating profit, on an adjusted basis of $221 million.

The largest item affecting that result is asbestos adjustments -- $145 million of favorable exchange rates helped to offset about $111 million of underlying adjustments in the actuarial valuation.

Again, New Zealand weathertightness for the year, about a $4 million benefit verses almost a $2 million expense in the prior year.

(Technichal difficulty) related tests continued ongoing (technical difficulty) level.

So we called that out and adjusted net operating profit of $221 million, up 12% for the year.

You'll see the segment EBIT in a moment is up about 20% for the full year.

Tax increased about 15%.

That was largely related to the ATO settlement on the RCI matter.

We had some interest expense that got reflected there.

So that was a nonrecurring benefit in fiscal 2014 and then the same dynamics on other expense interest rates swaps and foreign exchange.

Gross profits for the Group.

We ended with 37.1% gross profit rate.

Pretty similar dynamics, price moving in the right direction.

Plants performing well.

Input costs for the first half of the year were working against us and they've started to trend more favorably at both market rates and our performance versus the market.

You can see input costs have started to trend back down over the last several quarters, which is a positive outcome.

They're generally higher versus last year, but on the right trend.

The price of pulp reached its peak about halfway through (technical difficulty) trend back down to below $1000.

Cost of gas and electric for industrial users increased.

Those are also starting to trend back.

Okay, so for the segments, again the quarter and the full year, the quarter being the grey bar and the full year being the blue.

So for the full year you can see volume was up 9% in the US, price up 4%, sales up 13%, gross profit up 17%, which gets you to the EBIT result of 22.4% for margin.

Asia Pacific, as Lois already talked about, volume up 9%, price up for the year about 1%.

EBIT margin of 23.6%, that gets you to the $89.8.

In local currency EBIT in Asia Pacific is about 22% for the quarter and 15% for the full year.

So again, both businesses for the quarter and the full year performing where we wanted them to perform.

No real significant change in research and development.

It continues to be within the historical range of about 2% to 3% of sales.

You see some of the quarterly and the annual fluctuations that continues to just be the result of when projects come online and offline.

So we fund all good projects that we think have got good returns or that are on strategy and R&D continues to be within the band that we want to keep it in.

General corporate costs, 15% to 14%, relatively flat.

Compensation up a bit, as we continue to build some of the organisation capability.

I mentioned foreign exchange, you'll see an increase from 13%.

A lot of that is FX, 14% to 13%.

So about $5 million of that jump is foreign exchange, two of it is stock comp.

Then the other 5% to 7% is organisational build, either through headcount or growth programs, but then relatively consistent 2014 to 2015.

A chart that we show just about at every result, changes in the Australian dollar and US dollar.

Obviously the Aussie dollar weakened and the US dollar strengthened.

It had an unfavorable impact in US dollars on the Asia Pacific reported results.

It's got a favorable impact on corporate costs in Australian dollars and a favorable impact on corporate costs in on the asbestos liability.

All of those which you see reflected in the results.

Income tax, ETR of 23.7%, right about where we had projected it to be, so no real surprise there.

Adjusted income tax expense increased due to just a higher rate of earnings and a higher rate to tax jurisdictions.

Income tax is -- we continue to pay them in Ireland, the US, Canada, New Zealand and the Philippines and we're not paying income taxes in Australia, due to the asbestos deduction.

So that will continue.

Cash flow, so net income increased about $190 million.

You'll see the real changes were in the annual payment was made last July of $113 million and there was no payment in fiscal 2014 because we made the early payment in fiscal 2013 and then working capital.

Working capital is really a combination of accounts payable and inventory.

We did some inventory, planned inventory build that was associated with the Fontana start-up and then you'll see finished goods is up about 13%, mostly in line with seasonal expectations as we just build in the winter to get ready for the spring and the summer.

So it's pretty consistent with where we thought it would be.

The capital expenditures of $277.9 million, that's basically the CapEx that we've showed you already with a little bit of capitalised interest as well of about $1.07 million.

And then we ended the year with about $397 million in gross debt and I'll take you through that in a moment.

So here's a breakdown of the $276 million, the CapEx, excluding the capitalised interest.

You can see about 37% of it was maintenance CapEx, about 24% was land and buildings and that was primarily the two sites, Tacoma, buying the adjacent piece of land adjacent to our current property for a future greenfield and then converting the leased land at our Rosehill plant here just outside Sydney -- that we had leased and then we purchased it.

And then about 39% of -- sorry, about 24% of -- I think I got out of synch with my numbers -- 24% of that is land and buildings, 39% of it is capacity and 37% is maintenance.

So about $100 million or so of maintenance CapEx in there.

Very consistent with the last few results, we'll continue to show you the slide on how we're thinking about managing the balance sheet.

It obviously starts with good margins and good cash flows and those continue.

Strong governance and transparency are important.

I think at the November result I mentioned our intentions to be more active on the share buyback program, and we knew at that time that we were going to be in market with the issuance of our bond.

And we really didn't -- we thought that that was market-sensitive information and the markets in December and January were fairly volatile in the bond market.

And as a result we delayed the issuance of that bond until February, and it just didn't feel like the appropriate time to be purchasing, being active on the share buyback.

So by the time we finished the bond we only had about a four or five week window for the year in order to do share buyback activity and that really wasn't going to allow us enough of a window to do any material amount of share repurchase.

So that's really the reason that I said or signalled if you will that we'd be going more down the share buyback road and we didn't, it had a lot more to do with being a first-time issuer in the bond market and wanting to oversee from a governance standpoint the right way.

What you should expect -- today we did the special dividend.

What you should expect though starting for fiscal 2016 is a strong preference toward share buyback.

We'll continue with the ordinary dividend within the ordinary dividend payout range of 50% to 70% so there won't be any change there.

But we do think that it's a little bit more clear and a little bit more transparent if we're active doing share buybacks.

Obviously we've got our own financial management policies and so we would purchase at an appropriate market price but that aside, we wouldn't expect to do both a share buyback and a special dividend going forward, so that's our bias.

From a capital allocation standpoint, no real change.

We're going to continue to prioritise high return or organic growth first, maintaining the ordinary dividend and then following that, accretive and strategic and organic.

We want to have enough liquidity and we want to have a financial management program in place that allows us to weather uncertainty and market volatility.

Then we'll continue to consider additional returns either in special or share buybacks but like I said, for fiscal 2016 and forward you should really expect a move towards share buybacks.

From a liquidity standpoint the balance sheet is in very good shape.

We've got about $70 million of cash, almost $600 million of bank debt facilities, we've got the eight-year $325 million unsecured note which helps on the maturity side at a good rate, and we've got about 64% liquidity at the end of March.

So the balance sheet continues to be in good shape.

We have net debt of about $331 million at the end of 2015.

That was obviously compared to net cash of $167 million or so at the end of 2014.

We did do the bond last year.

We have net debt within our target range of one to two times EBITDA minus the -- excluding asbestos and we would expect to maintain that range.

We're very comfortable there and you should see our actions will be consistent with that.

And we're in compliance with all of our debt covenants.

Quickly on New Zealand weathertightness.

It continues to trend very positively, you can see the weathertightness move from an expense of $1.8 million to a benefit of $4.3 million you can see that the provision now is down below $5 million and has really moved out of what we would consider a material liability.

So overall, favorable claim settlements, fewer open claims, higher claim rate resolutions, no new claims is all helping to drive that provision down.

On asbestos, the actuarial report was completed per the terms of the AFFA as of the end of March.

The undiscounted, uninflated central estimate increased to about $1.566 billion and that was up from about $1.547 billion.

So up just a little bit year-on-year.

There are some underlying dynamics that we're going to talk about.

First, we did do the contribution last year of about $113 million.

Since the fund was established in 2007 our total contributions are in excess of AUD718 million.

Then we expect this year to make a further contribution of July 1 of about $62.8 million and that's obviously -- it will be paid in Australian dollars subject to foreign exchange rates at that time.

And the $62.8 million is obviously 35% of our operating cash flow per the terms of the AFFA.

So the change in the estimate, the net present value is now about AUD2.143 million.

That's increased from about AUD1.8 billion at the end of fiscal 2014.

The AUD273 million was really a few different factors.

About AUD200 million increased due to lower discount rates across the board and the Australian Commonwealth bond yields moved down on all maturity and terms late last year through March, and that was the really the largest change in the liability year over year.

Claims reporting for mesothielioma were up about 11% higher in fiscal 2014 versus the prior year and 11% higher than the actuarial estimate from March 2014.

The other disease types were broadly in line with the actuarial expectations.

Average claim settlement size were lower than the actuarial estimate, so that's a positive dynamic and large mesothelioma claims were lower, which was also a positive dynamic.

So the way that I think about the actual asbestos liability of the shares, net present value increased, largely because of the bond yield.

The actuarial change was about $70 million, $68 million.

That was a combination of a negative trend on a number of claims, but positive trends on large claims, claims settlement rates and nil settlement rates, all positive dynamics to help offset the negative dynamics on the number of claims.

This is a chart we've used historically to show where the range of sensitivities are and the liability.

As you'd expect over time, both the orange bar, which shows the higher end of that range and the lower end of that range, continues to both tighten and come down as you would expect.

The undiscounted central estimate, which is the orange line and the discounted central estimate, which is the blue line, obviously over time will continue to come together as well.

So they're broadly moving in a direction that we would think.

The high end of the range is just over about AUD5 billion with the low end of the range of about AUD2 billion.

A lot of this I've already touched on, so claims received during the full year are about 9% in total, higher than both the prior year and the actuarial estimate.

There were a higher reported number of meso claims.

That trend that we saw in fiscal 2014 continued throughout fiscal 2015.

I think it's worth noting that the national trend of mesothelioma claims throughout Australia aren't showing that same trend.

So it appears as though AICF is receiving a disproportionate number of claims in comparison to the national trend.

The average claims settlement is flat for the year and actual dollars paid in compensation was about 4% up versus the actuarial.

Heading into fiscal 2016, we thought it would be helpful to provide some of our planning assumptions.

Obviously we'll provide full guidance for the year in August, so fiscal year 2016 addressable markets are going to be broadly in line with the fiscal year 2015 markets and their growth rates.

We do expect some improvement in the US new construction market, in particular last year in new construction, turned out to be up 1% or so.

We do think we'll have some improvement in that market this year.

We use McGraw Hill and the Dodge residential new construction starts as our source information.

They're forecasting starts to be up between 1.1 million and 1.2 million this year, that's off about a million starts last year, so those kind of underpin our planning assumptions.

Repair and remodel was good last year.

It was in the 3% to 4% range.

We'd expect to repeat that this year.

Input costs should broadly be flat in fiscal year 2016, we don't expect a major inflationary or deflationary effect there.

Average sales prices will be up 2% to 3%, slightly less than what we saw in fiscal 2015 but still up.

Segment EBIT, we'll continue to try and manage those within the range of 20% to 25%, balancing both growth and returns.

Asia Pacific, those businesses, they're going to continue to deliver improved results broadly in line with the market conditions in which the businesses are operating.

You should expect the balance sheet stays within the one to two times debt to EBITDA range less asbestos and there's a corresponding amount of interest expense for the full year 2016.

So just to wrap up, Group net sales were up 9% and 11% for the quarter and the full year versus a year ago, net operating profit up 26% for the quarter and 12% for the full year and then good overall position of financial management in the Company and disciplined capital allocation.

We're continuing to invest both in inorganic capacity expansion and shareholder returns.

So that will open up to questions.

Thanks very much Louis and Matt.

Just a couple of questions from me, just firstly on the margin in Q4, I think in the information you indicated about 2.6 percentage points came from pricing.

Just wondering if you can break that down a little bit for us, because obviously there was about a 3% price increase that you guys took March 1, how much of that is market price increase and how much is mixed?

Because obviously March 1 was only one month in the quarter, so it probably wasn't all that.

Then just looking at the 2% to 3% expectation for pricing in FY16, wondering if you can sort of overlay something around how you're going in terms of gaining share against LP.

Okay, as far as the pricing, I mean not a lot's changed in the business over the last couple of years, so we've got the improvements in tactical pricing which are basically, I think, behind us, so that is one thing that's kind of almost run its course, probably pretty close to fully run its course.

So then you're left with mix and market price, but we haven't taken anything on our interior product line and then on the exterior product line.

We took a small increase March 1 so some of that would be in this result, how much of it I'm not sure.

But I think what you're probably going to see going into 2016 is maybe a third of our increase being mixed and two-thirds being the market price we took.

So if it falls around the 3%, obviously you have your segment mixes, geographic mixes and all that, but we don't worry about that too much, they even out over time.

As far as market share in LP, if you look at it quarter to quarter, it's pretty confusing, but if you look at a four quarter rolling, we're basically in the same area as far as market share growth or volume growth, whatever you want to call it.

We have different market indexes, but I'm not sure whose market index is necessarily higher at this time.

We don't get information on their OEM business, which is shed.

So they're working new construction sheds, they worked more trim, we work more planks, they work more trim.

So the market indexes are a bit different.

The reality is we're coming up with a very similar result when you even it out over four quarters.

How long that continues that way, I just can't predict.

The other thing is, we can't add much insight into the result.

There's certain things that we don't get in their business, we just don't understand it well enough as far as raw material shortages and inventory rundowns and stuff like that.

We just don't get that stuff, so I think what we're going to ask you to do is you guys track LP and you track Hardie and then you guys decide.

So we're not going to give you a lot of interpretation of the results because, to be quite honest, I don't think we're that expert on it.

Now we do have our kind of phase two kind of game plan in place.

Obviously everyone knows the kind of re-emergence of OSB or chipboard siding as gross product in the US.

It caught us by surprise, so most of our strategies were set up purely against vinyl, but probably two-and-a-half, three years ago we put our phase one game plans in place.

I think that evened out the share gains between the two categories, meaning OSB and the fibre cement and then more recently put in phase two.

We like our game plans, but we can't guarantee exactly where they're going to end up, but we are raising our expectations in the business for primary demand growth this year.

As you can see, we've been in range for eight quarters on the EBIT margin.

I think we're in good shape on investment, so we're liking the capital efficiencies we're getting out of our recent additions in the US.

Even though they're not started, they're going to be a very efficient capacity when we bring them on.

So I think we're in a position now and the business is really running well.

There's very few gaps in what's happening every day and what we're trying to make happen every day, so we're definitely shifting more of our management attention to how do we accelerate the top line growth and less of our attention on how do we get capacity in place and how do we get the bottom line efficiencies we're looking for.

We've done more of that over the last two years than we're going to do in the next two years because I think we're in that position where we can.

What do you think your PDG was in FY15?

I think it came in between 7% and 8% and we'd be looking for 8% to 10%, 9% to 11%, something like that.

Now I do need to tell you, usually when before in the quarter I gave you an indication of where we are right now with our order file and usually we're either right where we think we should be or a little bit ahead and this time we're a little bit behind where we think we should be.

Now I want you to know I don't think there's any place for that business to go, so I think it's just a market thing as far as our price increase, the spring build, where the dealers think the market's going to come out.

So I think our volume comp in the first quarter will be relatively weak, not super weak I don't think, but relatively weak.

I think it won't be reflected in our bottom line.

I think our bottom line's being really driven now by the fact that the price is very consistent and the cost, it's come to a lower level in the business.

So I think our bottom line doesn't rely as much on volume as it did six or eight quarters ago.

But for the full year, I'm looking for -- it'd be nice if we'd get to 10% PDG, that's what we're aiming for and we've set up most of the programs in the business to accomplish that and we'll just see if we can do it.

Right, thank you.

Good morning.

Louis, can you just talk about your volume growth in terms of exteriors and interiors.

I think in the past you had a bit of an issue with the interior kind of business, so if you could give us some feel for how that's going, that'd be great.

Yes, we did have a kind of a market share problem developing in the interiors business where we experienced decline in market share.

It probably lasted eight quarters or so and I hate to admit it, but it was just probably management attention more than anything.

So since we've retuned those programs, we are back in positive growth with interiors.

I'm not sure we're in market share growth with interiors right now as much as I'm sure, because I can measure it exactly, that we're comp'ing better than last year in interiors.

I think we're coming pretty close to market share growth in interiors.

There's not a lot off site.

I think most of you know on cement backer boards in the US, we're already over 40 and there's a lot of other participants in the field, so there's not a tonne of upside like there is on the 35/90 and the exterior side, but we're back in positive growth.

Now having said that, exterior's running way harder than interior, so mostly you use -- 25% is our estimate of interiors revenues, so if you figure most of that's growing -- most of the 25% growing very slowly, then the 75% is growing a lot quicker than the 9%.

So that's how we measure PDG.

PDG is an exterior calculation that doesn't include interiors.

Hi, Michael Ward from the CBA.

I notice just, you're selling Blandon.

Can you just sort of talk through -- I mean you're always pretty secretive about your assets so I was wondering who you're thinking of selling it to and what you're actually selling?

You know, I wish I could tell you.

I have no idea.

It's a vacant facility so--

No, no assets in the shed?

We gutted it.

We gutted it.

Right.

Yes, so just for some of you that haven't been following the Company for a long time, back I think it was in -- in fact I know it was in 2001, we bought two plants from Etex Corporation.

They had exited the US.

They had exited the US.

We bought their Blandon facility, their Summerville, South Carolina facility.

Their technology is a little bit different than ours.

We definitely made a mistake in Blandon.

We should have gutted it like we did the temple facility we bought in Waxahachie and put all our stuff in and basically stuck with just the infrastructure.

You know, you can get raw material, power supplies, basic water and that.

What we try and do, we tried to modify our machines to kind of make them work for Hardie products and Hardie throughput type cost, our unit cost.

We fought it for a long time, we didn't get there, okay.

In the Summerville facility, we did the same thing and we kind of got there so the older plant we didn't get there, the newer plant, we did.

Now, when we went into the downturn, those two plants were both mothballed along with Fontana just because we were going to have a more competitive network, bringing those three plants out.

I think it was around two years ago, we decided Blandon's not worth reinvestment.

So it's actually been under market as just, you know, industrial plant for that period of time and I'm not sure who bought it but there wouldn't be any of our fibre cement equipment in it.

Summerville we'll restart, so that's kind of our next capacity plan in the US.

Once we start utilizing Plant City new capacity, Cleburne new capacity and see a further need, we'll start Summerville.

Just in terms of Fontana, you brought that on and you sort of mentioned that there were some costs in this period associated with that.

When -- you expect that to start contributing positively from 2016 I assume or -- and to its full potential in 2016 or does it take a little bit longer than that?

I think it depends on market demand.

The west coast -- the way the market demand is set up right now, the west coast plants are having to complete with Texas plants for certain markets and certain products and so Texas is super low cost relative to the west coast plants.

So as we get generally more demand, Texas have come more in again and (inaudible) shipment ready so we're down and then the west coast plants have come up and that's when Fontana plays a more important role for us.

Just so everyone knows, we always have been kind of importers into Texas.

We've gotten that straightened out through increased throughputs in Texas and we also have more capacity coming on into Texas so Texas probably over the next two, three years will be an exporter where the last -- not so much this year but previous years, they've been an importer of product.

So it's more of a full network thing than a Fontana thing.

So Fontana's ready to go.

It's running reliably when we run it and it'll run more as we generate more demand overall in the business.

Okay and just one last question around the CapEx.

You mentioned stone business was around $100 versus depreciation sort of around $70.

Do you expect it to remain at that elevated level above depreciation or should we expect that that will come back over the next couple of years?

Yes.

We had -- a year ago we had said that we expected to spend about $250 per annum over three years and we're still on that track.

Last year we spent a little bit more.

This year I think we'll spend somewhere, $75 to $100 and then we'll go back to a $200 to $250 number probably in fiscal 2017.

Yes, I think maintenance CapEx broadly in line with depreciation is probably a fair assumption.

It may be a little higher in fiscal 2016 just with the way the timing of some of the programs works but, you know, it'll just depend on where some of the additional capacity projects are.

So just as a final, another comment on capacity, I just -- there's been a bit of a shift.

Now we think about our capacity in our plants -- our plants are going to continue to get bigger.

So some, you know -- obviously that's -- the money we spent directly on capacity and existing facilities goes to capacity CapEx but a lot of times, as you bring more product lines in and you bring -- and you scale up the plants, you get other costs and that doesn't always fall just directly in capacity.

So we do have greenfield plans for the north west and the mid-south but as you can see, we may even get through another three years of this recovery just using brownfield capacity ads which is super-efficient capacity.

Andrew Johnston, CLSA.

A couple of questions.

First up on the actual result for 4Q, you indicated that there may have been some pull forward.

Certainly at the 3Q result you indicated there's some pull forward.

So how much of that is impacting this result?

Yes it's kind of tough to call.

So I said the order file's kind of weak today relative to what our forecasts forward would be, but we're still going to be up on last year.

You know, I'd say maybe there's a point or two there or maybe not, so do I think we only grew at 7% last quarter?

We had a pretty good quarter prior year on volume, maybe we only grew at 7% and maybe 2% is coming out of this quarter.

So it's like that range, one to two, it's not like a ton of volume where the result is going to look really weird quarter-to-quarter.

It's going to be fine.

Just looking at how strong that margin was for the US business, it looks like you're going to have to start spending a lot of money to try and keep that margin below 25% given 4Q is generally a bit weak.

Is there -- I suppose first of all, was there something there that made that margin sort of look so good compared to previous 4Qs.

Then the segue to that, to what sort of things are you going to be doing to drive PDG?

Okay so, the EBIT margin, you know like I said, we're fighting the headwind and import costs for a lot of quarters and then it started to kind of settle down in the third quarter and it kind of reversed itself in the fourth quarter.

So we had lower freight, lower fault, lower energy.

Now we don't micro-manage our spending to that degree.

So if those things continue to get kind of cheaper, it'll show up on our bottom line.

We wouldn't say hey, pulp costs are down $100, let's go spend that money.

So the trick for us is, do you have the money to spend?

Because we're trying to balance these things, the answer is yes and then how much of it can you spend?

Well -- and that's partly driven by, you know, kind of, do you have initiative in the business that's kind of a three year, five year, seven year and which of those you want to fund and how do you get it going.

Then, do you have the management to kind of have -- do that?

Have you done all your upfront work to get on the flat part of that S curve?

So we figured out our spending for this year.

So my point on EBIT margin would be, we know what we're going to spend.

We know what we're going to fund in the business.

So if import costs are low or plants run really well and keep in mind, if we start up any new capacity this year, it will probably be toward the end of the year.

So you could have a very, very good run on unit cost if these input costs are trending the way they -- or keep trending the way they started, say four or five months ago.

If that brings us over 25%, it brings us over 25%.

So we're not going to go out and buy advertising or anything just to kind of do that.

So I think I said in my opening remarks, I think the way the business is running, we're probably more toward the top of the range now and then your fluctuation would be you know, top of the range now, over the range quarter-to-quarter, you probably won't see any quarters drop below the range or that.

So as far as what we're funding, we definitely are very interested in increasing our penetration in the Midwest markets and that has some product stuff, some field resources, some management, some -- when I say product -- yes, product stuff and then has some program stuff as well.

So it's a pretty big program and we've actually kind of put a -- it's significant enough that we've actually put a separate management team in place.

It's still part of the northern structure but specifically on the Midwest to accelerate our growth in the Midwest.

Now vinyl is, you know, kind of not having a very good time in the Midwest and we're doing well.

Our growth rates in the Midwest are very good.

We're doing well and we feel LP is doing well.

So we think it's important that we get that market position where it plays more to our advantage than their advantage.

In the south, there's bit a lot of focus on trim products and just our normal products, whether it be R&R our normal initiatives R&R, non-metro.

You guys have heard of our top of the market product line we're working on developing and launching.

So it's pretty broad based.

Some of them are shorter term like the Midwest and the trim in the south and some of them are longer term like top of the market and some of those others.

Finally, just in terms of your price growth versus competing product price growth, now obviously LP is the one but I'm focusing just on not their reported but just what you're seeing in the market.

Are you seeing similar levels of price growth to what you think they're putting through?

Yes, keep in mind we're very different pricers.

So we believe in value pricing with regular small increases.

LP as a company is a capacity utilisation pricer, so I don't think anyone should take comfort in the fact that they're running their prices up because I think they're running their prices up because their capacity is tight and so they're using that to dampen demand possibly.

Then I think when they get their new capacity online, it may reverse itself.

That's their behaviour in the rest of their business, so I wouldn't look at our price and their price.

I'd just look at, you know, is Hardie pricing the way they price and is it balancing out the volume and the returns part to try and balance it and I'd say yes.

We're doing well with our pricing, I think.

I want to come back to trim because I didn't answer all your questions on what we're investing in.

We have done a lot of work in our trim line and several of us were working on it in the business out in the market in the last couple weeks.

I still think we have some more work to do there, so that'd be an area we're going to put more money into as well.

You were looking at an alternative trim product, looking at acquiring alternative technology for trim.

Where are you on that?

Yes, I mean we have our MCT product in the market now.

I think it's kind of addressing some of the gaps we've had in our product line when you build certain types of houses, but I think there's some more gaps.

Not so much when you build that type of house but again, trim's -- those of you that follow -- trim's a very regional business.

So we're not talking about southern trim.

We've got all our gaps straightened out there and we're growing the way we want to grow.

We get the returns we want, but that northern trim, the difference between the Midwest and northeast, difference between a custom home and say a middle of market home, it's really requiring more solutions than we've provided thus far.

I think our basic capabilities in trim as a producer has improved significantly but I think our capability, more from a market side, the builder is not seeing enough opportunities where our trim is the obvious answer for them.

So we -- take a look at every 10 buildings, we may be the obvious answer on two or three, but we've got to get to the obvious answer on six or seven and then we worry about the other three later.

That two to three out of 10 is for the northeast, is that what you're talking about?

Yes just generally north and that would be -- actually we do -- it's different segment to segment.

So a new construction, that'd be ahead of our raid in new construction.

Our referring model's a bit higher and multifamily is higher as well.

Thanks very much.

Thanks very much.

Simon Thackray from Citi.

Most of the stuff I wanted to ask has been covered with the exception of the channels, Lou, just in terms of the national builders and what proportion of volume they represent and what's happened, particularly in terms of ColourPlus penetration, where you had a higher rate of penetration than a number of the national builders and that seems to at least anecdotally have been cut back.

So can we just talk about channel strategy, national builders, volume and what we should be expecting in 2016?

Yes, so -- I'm just going to change the terminology a little bit.

When we think of the channel, we're thinking of distributors and dealers, okay and most of you know that we kind of did a channel reset three or four years ago when we started working our price and there were a lot of things with the channel that had to be addressed as part of our pricing issues.

I think that's gone really well.

I think we're getting to be a company and probably as you go around the market, you probably also hear that Hardie is now kind of like, you're supposed to be in a channel, we're not kind as, you know, pushy as far as which way we want something to go versus, you know.

So anyway, I think we've done a good job on the channel.

I think we're not in the top tier of companies as far as how you operate in a channel but we're kind of at least in the middle now which we weren't before, so that's gone well.

Now we look at big builders as a segment rather than a channel.

So big builders would buy through a dealer base which we kind of -- they'll either buy through one steppers, which is one type of dealer, or they'll buy through what we call volume lumber yards which is another type of dealer.

So as far as the big builders, we've always done well with them.

Now I say always and you know, when you think of the 20 years, there's probably a six or eight year period when we were making a lot of change in our products and made the product more expensive that, you know, maybe the most price conscious buyers in the market weren't going to support.

By the way, the big builders normally fall under that most price conscious buyers in the market.

Over the last several years we've had pretty much all the big builders on agreements with us.

Those are rebate agreements, so we basically send them a cheque once a quarter based on our product usage.

They commit certain things to us which is they're -- normally they're -- either they're -- when they're using fibre cement, they'll use Hardie or some of them, when they're using hard sidings, they'll use Hardie.

Then we commit certain things to them.

Obviously they get the big builder segment pricing through the rebates and they also get surety of supply.

So right now I think it's 20 for 20.

We -- the latest builder to come over with that formal agreement was Beazer.

We went several years without Beazer having an agreement with us.

Right now we're 20 for 20.

We don't necessarily aim to be 20 for 20, we just happen to be 20 for 20.

Our target with big builders would be 17.

We'd like to have 17 out of 20 on a contract, you know, kind of ensure some base volume for us in a market through to channel and yes, we're in good shape.

Just in terms of mix between products into that segment, Colourplus versus prime board versus trim so--

Yes okay, Colourplus, sorry.

Yes we made a mistake.

When we launch colour in the south, we went to big builders to get base demand, get enough supply so basically you get your scale.

In the south, the value proposition for builders with colour just isn't strong enough.

So we are kind of forcing the product into the market.

With some of the builders, we did it for three or four years, hoping that we go through the kind of the learning curve between the two organisations and get there but we just never did.

The take-offs weren't efficient enough, the inventory in market just never was right for the service position they require because they're production builders, obviously they can't be held up by unavailability of a colour or something like that.

So I think, you know, maybe a year and a half, two years ago, we just stepped back and said hey, you know what?

The value proposition of colour does exist in southern markets but it's not with your most price conscious, highest production builders.

So -- not that will just differ a little bit regionally.

Like there's some volume builders using it in the Carolinas, but when you have a fibre cement standard market like Texas, like Atlanta, we've just de-emphasised those programs and the builders have been happy to step back from colour and go back to prime.

So we maintain their business but we don't maintain it on colour.

Okay, it looks like, any questions on the phone would be the next.

All right.

We'll now begin the question and answer session to the phone.

(Operator instructions) Our first question comes from the line of Jason Steed with JP Morgan.

Please go ahead.

Hi, good morning Lou, morning Matt.

Just had a couple of questions.

Going to Texas for a second.

I guess some of the indications are that perhaps the downturn that you alluded to -- I know it was just a conservative planning estimate of 20% in south Texas, probably hasn't come to pass, which is good.

I was just wondering if you might be able to give a bit more colour around some of the key markets.

It sounds like Dallas and San Antonio are still pretty strong, Houston weak.

What are your exposures and I guess what are you seeing and are you thinking about reviving that kind of worst case scenario?

Yes, I don't know if there's much motivation internally to revise it because we have those markets covered with product.

What we're really guarding against there is anticipating more volume than we're going to get and then efficiently using our Texas capacity.

So, similar to the Fontana question earlier, we have Texas plants pointed outside of Texas now with similar volume.

And, obviously, there's a fair amount of volume that if the market was off 20% in, say, South Texas, a fair amount of volume that would go elsewhere.

It doesn't have to go elsewhere because the West Coast plants specifically can react quick enough that if South Texas stays good, that the West Coast plants will just produce more board and cover more of the markets out west.

So my guess, if you ask me my guess now -- because we have been -- the guys have been following this week to week -- we're looking like flat to slightly down, South Texas and opportunity.

So my guess is that 20% -- although it was prudent planning, it'll never come into play, so we won't be down -- we won't -- I don't think we'll be dealing with a market situation where South Texas is off 20%.

I think we'd start to see that -- we would already see that in some of the data points we have now, and we're not seeing that.

Okay.

Thanks, Lou.

And then just moving on to cement pricing, it does sound as though the one input cost that is going up quite meaningfully is cement.

Is it the fact that pulp, silica and energy are going down enough to offset that for you?

Is that--

Yes, cement's important.

I mean it's fibre cement, but it really can overwhelm our numbers.

The input costs can really make a difference as pulp, and then energy's right behind that.

Silica, not so much.

It was working against us.

I think it may work for us if things stay the same in the oil industry and, of course, freight's a big importance.

Right now we like we're at.

We have pulp coming down.

We have cement going up, but only slightly.

And, of course, I mean cement's very predictable commodity pricing, so if housing starts continue to increase in, say, the next five years, you're going to see cement prices increase the next five years.

There's just no disconnect between the utilisation and pricing in cement.

As the utilisation goes up, the price will go up.

So we're living in a little bit of a nice window on input costs.

So if we stay in that window, like I said, you'll see a bit more money to the bottom line.

Okay, got you.

And just one last one, I guess, for Matt.

Matt, you talked about the mesothelioma claims, and I see that KPMG has pushed out again.

I recall -- and correct me if I'm wrong -- that you had said in the past this would probably be a point whereby we'd get some certainty on whether or not the peak in claims needed to be pushed out, but it appears that's still too early to tell.

Is that a change?

No, there's no change.

Keep in mind on the peak year, the peak year's a modelled year of a combination of exposure, the peak exposure year which, I think, in the actuarial study, is in the late 1960s, early 1970s, and the latency period.

And then in the report the actuarial sensitivity says that there'll be normal variation around that, that peak year.

And up to and including this March report -- the latest report -- KPMG has not moved the peak year.

So while, certainly, the trend in claims has increased adversely, if you will, they've continued to increase since the peak year, but still within the normal variation that would have been provided within that peak year assumption for the actuarial model.

So, obviously, we're continuing to watch it, and KPMG is continuing to watch it.

There was discussion as the report was built for the year, but there's been no discussion around moving the peak year.

Okay.

And then does it have to do with the fact the national claim percentage rate is lower in Australia?

Is it to do with that that?

Or is it just a separate point and it's too early to tell?

Yes, I think it's too early to tell.

I offer the national claims, in part, out of some explanation why AICF's trends on claims continues to move in one direction, the national tends to stay flat.

You could certainly imply from that that AICF is bearing a disproportionate burden of those claims, but those are separate points.

Okay.

Thanks, Matt.

Thanks, Lou.

Okay.

Is that it on the phone?

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

Thanks, guys.

Louis, I'm just going to ask this question a little bit different because I know you already said for your margin you expect to be in the range.

But if you look at fourth quarter next year, for fiscal 2016, you're obviously yet to get the full benefit of the price increase, your amounts -- or implemented on March 1. Pulp's fallen a bit further since the end of the quarter; other things, assuming they're flat.

Is there any reason you would see the fourth quarter 2016 margin not to be at least as good as what you just reported in the fourth quarter 2015?

Well, I mean you've got a lot of assumptions around input costs there, so pulp's come off.

I can't remember-- (multiple speakers).

Given what we see today?

Given what we see today and what we're going to see in 12 months.

I think I already covered it, Matt.

Our forecasts show us being in the top of the range, okay.

And then, if things are more favorable than our forecast, obviously, to pull us over the range.

We're not going to try and manage ourselves [down end] of the range, obviously.

We've decided what we're going to spend.

We've got our forecast for input costs.

We've got our forecast for volume.

We've got our forecast for throughputs in the plant and how we're going to source the material, and it all comes up to top of the range.

So it can go over the range if we have favorable input costs relative to our plan or, I guess, if everything doesn't work out like we think -- our volume's a little short or our plants don't run quite as well, our sourcing isn't as seamless as we move more board back to the west coast.

So my guidance is we think we'll be in the top of the range, but there's some variance around that, things that could happen.

Yes.

The answer to your question directly, I could see a scenario where we don't hit (inaudible) in the fourth quarter next year, but I don't think -- we're not operating quarter to quarter.

Yes.

Just moving to the volumes, you were saying you're hoping to get PDG growth this year up to 10%.

And I think your housing starts forecast is saying anywhere from 10% to 20% growth in housing starts, and R&R of about 3% or 4%.

So if you assume the exterior products is about 50/50, you're getting -- using the low end of those ranges -- you're still going to get about circa 7% or 8% underlying market growth.

Now, I know your interior's -- let's assume they don't grow.

So if you look at the actual exterior products, 10% prime and (inaudible) growth probably ends up being something in the mid-teens for total exterior product growth.

Is that the right numbers that you guys are thinking about?

Your arithmetic's definitely a bit different than ours.

I think we had in our presentation here 1.1% to 1.2% on housing, which seems to be pretty much where the forecasters are at now.

We're definitely not planning that.

We're planning the market up about 7% on new construction.

So if you take your 7% and multiply that by 0.4, that's 2.8%.

And then, say, R&R's up 4% and that's times 46, so that's 2.4%.

So we think our market index is more likely to be 5% next year.

So it doesn't change the question that much because 10 on top of 5 for the exterior part of our business is hard, okay.

So that's an acceleration that we don't think has started yet.

So hitting that 10% PDG next year is hard, but that's definitely what we're gearing ourselves to do.

So less management time on capacity, because we've set up less management time on bottom line efficiency because we think we have things working the way they should, and more management time on growth, and 10's the battle cry.

Now, I don't want you to think I'm guaranteeing you 10%.

I just want to tell you that's what we're after.

And we get a little bit of growth out of backer segment, yes, but like you say, it would pull down the 15% you're looking for in exterior; we pull it down.

Yes.

No worries.

Thanks.

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

Thank you.

Good morning.

Sorry, Lou, to labour the point, but just, firstly, a question around your comments around phase 2 against LP.

Just wondering if those costs relating to phase 2 were basically fully embedded in the fourth quarter of 2015, or do they ramp up into (inaudible)?

No, they'll ramp up.

I mean I think you're into, hopefully, a three year period of ramping up costs.

So we've done a good job to control our increased spend, and we'll try and do that in the future.

Like I said, the test in the business is -- you start spending money, but you've got to step back and say am I spending it well.

I think, so far, we're spending it well, but we're actually having trouble getting a few things in place, just from a management capability, on some of the initiatives, so the spending's also lagging of where, ideally, we'd like to be spending right now.

I think we'll catch up on that a little bit, but you will see -- probably not to where it shocks you, but you'll see a steady increase in spend on the market programs.

Now, when you take it as a percentage of SG&A, maybe it doesn't jump out if we get the volume line in growth to offset it.

Maybe it doesn't spread out, but as far as dollar spent, it'll definitely be ramping up -- continue to ramp up.

And in terms of the significant (inaudible) compared to what was spent in the fourth quarter?

I don't know.

Maybe Matt has a better feel.

I mean maybe it's too much information, I don't know.

I think it's too much information.

Yes.

I mean we try to give you the points to be looking for as far as what kind of years are you going to have.

We've been very consistent on our results, and the reason is because even though the market demand is slower than everyone anticipated, it's still been very steady increases.

So we're consistently moving quarter to quarter with a little better market opportunity.

We've been moving quarter to quarter with our volume performance above our market index.

And then the nice thing is we've been moving quarter to quarter and really building more efficiency in our business model.

So everything's going well and, like I said -- I repeat myself -- we've put a fair amount of management time into capacity, a fair amount of management time into bottom line efficiency.

I'm really quite proud of what's been accomplished on both those fronts, okay.

But if we don't move off of that stuff now and move back on the top line, I think we're missing an opportunity.

So that's what we're trying to do internally and that's what I'm telling you now.

I guess we're going after that 10% PDG and we're not there on whatever it is today, okay.

So we're already six weeks into the year and we're more like what we did PDG last year than what we want to be on PDG.

So the 10% is a hard number and it's something to keep but I can't -- and I think rightfully so, to some degree you guys are linking to us in LP as far as well this -- 10% to happen.

And our view is that we've got to make the 10% happen and we'll see what else is happening.

Is vinyl declining faster than we think, and that's -- and LP is getting their share and that's why we're getting our 10% or are we getting our 10% because there's some deceleration in LP's model or whatever it is?

But our focus is on us and what business could be converted, whether it be vinyl or wood-based.

Sure, Good, thanks.

Matt, just a question around the dividend, the ordinary dividend went backwards by $0.05 on the CCP to $0.27.

Just wondering the reason behind it.

Yes.

I think -- so the way we do the ordinary dividend is it's the adjusted NOPAT minus the asbestos adjustments.

So last year when the asbestos liability increased it had a positive effect on the adjusted NOPAT that we use for calculating the ordinary dividend of about $100 million or so.

And then this year obviously with the liability not increasing you don't get that same effect.

So if you've already used that formula I think it's $291 million which was the adjusted number minus about $33 million of asbestos adjustments.

If you take the first half and second half ordinary and divide that out it's right within the range of 50% to 70%.

So that's why you see on a per share basis year on year the amount go down.

Okay, great.

Thanks.

Okay, I think that's it.

Our next question --

Wait, one more question I believe.

Our next question comes from David Leitch with UBS.

Please go ahead.

Last and probably least, and congratulations Lou on a great result and as usual very helpful explanations which I've always found very informative.

But just getting into the questions, I just -- briefly I wondered, in the costs, beside the raw material costs coming down, non-controllable if you like, is there anything else that helped the cost in the current quarter?

Yes.

The plants.

I think Matt covered it in his comments a little bit.

I'll put it in a little more context so you can understand.

We've always been high-throughput manufacturers in fibre cement but about two years ago we just felt like we are really starting to flatten out on our improvement curve in manufacturing, and this was both in Australia and in the US.

And we started to work on hey, what does the next phase of manufacturing improvements look like for Hardies?

It is pre-autoclave, is it post-autoclave?

Is it lines to produce specialty products versus flexible lines?

We started to do some of that work, and well, number one the work wasn't leading us to an obvious answer.

We found our opportunities but we weren't able to put it in a game plan quick enough for the organisation to understand, kind of hey here's how we're going to do it.

I think we actually started to lose some day-to-day momentum as the organisation tried to figure out what this shift looked like.

We were putting parts in place, it was working in some places, not other places.

Australia took a little bit different approach, philosophically heading in the same direction but executing it differently.

So we had kind of a frustrating about three or four quarters of manufacturing where we weren't getting any improvements.

And then just about second quarter this year it started to kick in and the momentum has been building since then.

So we're running much higher throughputs in some of our plants, which is great from a unit cost perspective because you get most of that extra product at raw material plus energy cost rather than full conversion cost.

And it's great for capacity planning.

So right now -- and there's just momentum building, it's not -- no signs of it starting to flatten out or reverse the trend, going to regress back to the mean, there's no sign of that happening.

So we think we made it through and we got some upside in manufacturing.

And it goes back to, I think it was Matt's question, could you see yourself being above 25% or why aren't you going to be above 25%?

And I'll be honest with you, if manufacturing momentum continues through this year it would have a material effect on our bottom line.

So we're getting some really significant gains in manufacturing.

So in addition to the input cost in the fourth quarter you're starting to see those manufacturing gains drag the bottom line to a greater degree than you were getting say four quarters ago.

That's very helpful, and I have one final quick question, I hope.

It's just on the PDG.

If you had to break up how much of that was coming from R&R and how much from you, how would you -- what would you say about that?

I'd say in the south it's coming more from new and in the north it's coming more from R&R, and we've got to fix that in the north.

We've got to get our new construction northeast running at a higher rate.

Midwest, Midwest growth rates were very good last year so probably a bit ahead there, but the northeast, mid-Atlantic, which is a big market, we can do better in new construction and Sean Gadd and his team are working on that, and pretty confident we'll start moving in that direction.

In the south we've been doing well because you know, in a lot of the southern markets we're the big player if it's not a stucco market.

In the south we've been doing well, making sure we manage our category share right and then finding the other opportunities, whether it be smaller markets or trim opportunities.

So south PDG has been pretty strong actually.

Thanks very much indeed.

Cheers.

I believe we've got one more question.

Okay.

Our next question comes from Tim Binsted with the Australian Financial Review.

Please go ahead.

Good morning, guys.

Just a couple from me quickly thanks, Louis.

Firstly, do you think it's fair that you guys paid a special dividend but are relying on the New South Wales Government to top up a shortfall in asbestos funding?

Well, yes.

So our dividends and the way we declare the dividends aren't related to the commitment we have to the AICF and making our payment each year per the AFFA of up to 35%.

So we always prioritise making that payment and then we start to allocate our capital starting with what's left over.

And we would allocate capital based on organic growth first, followed by the ordinary, followed by special returns after that and the special dividend was in line with that strategy for fiscal 2015.

Sure, but you guys wouldn't come to the table and the New South Wales Treasurer came out and said that he would have to extend and change the loan terms because Hardie was possibly going to leave people getting paid in instalments.

Why can you -- why are you happy with that situation?

We were pleased that the AICF and the State of New South Wales were able to come to a favorable agreement for all parties.

Okay.

And secondly, on tax issues, there's been a lot of coverage of Joe Hockey and so on chasing people not paying what's viewed as their fair share of tax in Australia and Hardie has been under fire on that in the past.

Are you at all in discussions with the tax office and are you worried that there might be changes to the way you're paying tax in this country?

No, we're not under any discussions.

And you're not concerned that there might be changes, Matt?

Yes, I'm not sure that -- I think it's a very dynamic tax environment at the moment and so we're certainly mindful of watching how tax legislation and tax laws in all jurisdictions move and we'll continue to monitor those.

Thank you.

Our final question comes from the line of Greg Brown with The Australian.

Please go ahead.

Hi, Louis.

Just wondering, in the Budget there was a couple of -- there's been a couple of recent measures to curb foreign investment in housing.

Of course they're boosting a lot of construction such as application fees at a Federal level and then in Victoria there's been additional stamp duties placed.

Do you think this will have much of an impact on housing construction?

Yes.

Sorry, I wouldn't be an expert in the kind of demand of housing the Australian market.

It's obviously been a very healthy market.

Ourselves and other building materials companies have been working hard to supply the materials and are benefiting from that, but I think there's a lot of people that understand demand for housing in Australia better than I would.

Okay, sure.

Given that there's so much of a push for high-rise apartments, is that going to be a market that you're going to focus on penetrating?

Yes, that's a good question.

I covered that a little bit earlier I think.

We're not positioned in medium-density or high-rise construction as well as we are in detached housing or renovations.

So yes, our Australian management team over the next say three to seven years I think will be looking for opportunities to participate in those segments to a greater degree than we do.

Okay.

Could there be an opportunity for corporate activity do you think to get into those segments or do you think there's opportunity for further penetration in the Australian market through corporate activity?

Yes.

We have a strong bias toward organic growth.

I'm not saying we wouldn't do an acquisition in Australia to open up an opportunity but if you look at our history, we normally strongly prefer investing in organic growth.

So that would be identifying the opportunities, developing a solution and then bringing it to market.

Okay, sure.

And just one last question.

Given that you're not very confident on US market, US housing and you are on Australian, is that going to -- are you going to look to shift further resources and put a bit more of a focus on making the most of the construction boom in Australia?

No.

We run through business cycles so we think our job is to manage our position through a business cycle rather than go overweight or underweight.

So we think we're fully resourced in Australia for the opportunity here and the same in the other countries we participate in.

Okay.

Okay, thanks so much.

Appreciate it.

All right.

Thank you.

I appreciate everyone's attendance.

Thanks.