James Hardie Industries PLC (JHX) 2016 Q1 法說會逐字稿

Thank you for standing by, and welcome to the Q1 FY 2016 briefing conference call.

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

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

(Operator instructions.) I must advise you that this conference is being recorded today, Friday the 14th of August, 2015.

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

Please go ahead, Mr. Gries.

Okay.

Thank you, Eileen.

Hi, everybody.

Thanks for joining the call.

Matt Marsh and I will walk through our results in the normal way, as Eileen said, Q&A at the end.

And any media questions we might get would be after investor and analyst questions.

Matt and I are in Dublin tonight, so the slides will be flipped in Sydney so we're going to be calling out slide numbers.

So, the first one is obviously a cover sheet.

Slide number two is page one of the disclaimer.

Slide number three is page two of the disclaimer.

Slide four is the normal agenda we follow.

Slide five is a cover sheet, and slide six starts the overview that I'll be talking through.

So, net sales are only up 3% for the quarter.

That's partly because the US is flatter than it has been this quarter, comping against last year, than we have been experiencing.

And the other part is the other businesses comp well in local currencies, but got knocked back as we brought in the US dollar.

So, sales up 3%.

The operating profit line is kind of the opposite story.

That's up strongly.

That's really driven a lot by the US and just manufacturing efficiencies and some input cost benefits in the US.

But, again, all businesses performed well on the bottom line.

Again, all the businesses had higher volumes and a higher sales price.

The US, again, below our target and below what we've been experiencing, and we'll talk about that some.

As I said, the big bottom line comp in the US really drove the large improvement on the bottom line, both for that business and the Group.

We came in at a 26.6% EBIT margin in the US business, which is above our -- obviously above our 20% to 25% target.

That's not that unusual for the first quarter, but we also feel like we'll operate above that target for the full year.

So, we really feel pretty comfortable how the business is operating.

And the contribution margin we're getting through the better manufacturing performance is likely to carry itself through the year.

As we had indicated, we are going to be more active in the share buyback, and we have been.

So, Matt will cover that in some detail.

And we also have talked in the past about the Carole Park capacity startup.

That continues to go well.

We'll go to page seven.

It gives you the Group's kind of bottom line financials.

Everything up strongly, so a very good bottom line result for the quarter comping against last year same quarter.

Slide number eight brings us back to the US.

Basically, the summary on the quarter in the US, it was a good quarter.

We just need to gain traction on the market side.

We indicated going into the year we're growing above our market index.

Market indexes we normally look at are our PDG, which is how we perform against the market index.

We normally look at a four quarter rolling.

We are above our market index.

It's debatable whether this single quarter came in above the market index.

The market wasn't great, but the 4% volume growth fell short of what our targets were for the quarter.

So, going to the chart, you see sales up 5%, volume up 4%, and average price up 1%.

And we kind of get to the average price increase in an usual way.

The market price was up close to 3%, which we'd indicated that was our expectation, but the 3% got knocked back in the quarter by both product mix and by foreign exchange.

And foreign exchange is mainly the Canadian dollar coming off against the US dollar.

And we have a reasonable position in Canada now, so that did affect the average price as it's published.

Again, EBIT margin up 32%.

We've been talking for several quarters now -- actually it's been about a year since we started to really gain momentum in manufacturing, and that momentum continues.

The first quarter comp for the US business on the EBIT and the EBIT margin side was a little bit easier because what we'll see in future quarters is we were starting to get some of those manufacturing gains last year, where last year's first quarter didn't have any of the gains in the results.

So, the 32% up on the EBIT line shows where we're at on manufacturing compared to where we were last year.

And it also shows more favorable input costs for pulp and energy mainly.

We'll go to slide nine.

It's just our normal chart.

You can see a nice upward trend since fiscal year 2014.

We're pretty much at the top or above the range now for about five quarters.

And like I said, we actually feel like we're going to stay above that 25% for the full year.

So, we're pretty confident about how the business is running.

Like I said, our focus will be on top line growth, which brings us to the next slide, page 10.

The market index for Hardie's would be up slightly.

We're still trying to figure out the new construction, exactly where this year is likely to come in on the new construction.

As most of you know, we kind of felt we were going into a year that new construction would be up slightly.

I think that's still our view.

And how flat it is right now, we haven't really taken a view.

It's obviously not a strongly up market we're operating in.

Most of you know we have a good position in the Texas market, which is not up so far this year.

So, the impact that a lot of you had questions about in previous quarters, if Texas isn't a good market this year, how do our results come out?

And I think we're kind of showing you that.

Of course, the top line, if Texas isn't a contributor on the top line, it's big enough to dampen that result some.

But, our bottom line result, we can power through even without our good market in Texas and deliver the financials.

Now, having said that, I don't want anyone to misinterpret my comment, that our top line problem is Texas.

I think we have a couple things in play.

Again, most of you that were on the call last quarter, we would have indicated we had moved out kind of annual price review up a month so that the board could get into the system before the building season started.

So, we went with a March 1st increase, which did bring some of our volume forward from the first quarter this year to the fourth quarter last year.

And obviously we have an estimate of how much volume that is.

It's probably come in about where we thought it would.

So, that definitely was a factor.

Now, what I don't want to get away from is the reality that we're working to increase our primary demand growth or our market share gains or our volumes above market index, however you want to describe it.

And I think it's clear in the business that so far we don't have traction on that lift up that we're looking for.

Now, there's normal variance you get in your volume, especially when you're comping quarters.

I think we have kind of normal variances.

That's a little bit on the low side this time, but I do think it's normal variance.

Most of you would have seen that LP didn't comp well this quarter, and vinyl was slightly positive but not much this quarter.

So, it's not like this is a market share problem.

We think it's a market momentum situation where we're trying to increase traction in the market, and so far that hasn't begun to happen.

So, again looking at slide 10, the other thing that would be different this quarter than last quarter are our volume and revenue tick up would be about the same, because we only got the 1% price improvement.

Assuming that the Canadian dollar starts to stabilize at or near the level it's at, I think you'll see us come back to a more -- closer to 3% that we're talking about.

By the way, I didn't expand on the product mix.

But, part of the product mix price dampening is actually good news, because most of you know since about this time last year we've been focused on increasing our growth rate in interiors in our backer board business.

And clearly that's started to happen and it's picked up momentum quarter-to-quarter.

So, this quarter backer, meaning first quarter backer, was much better than last quarter backer, and it was actually a higher mix of our sales.

Page 11 is just our price chart.

You can see, except for that period of time in 2012 and 2013 where we kind of got off track with some of our tactical pricing, the price story is still a pretty good story.

And like I said, we don't think the 1% improvement on last year we saw in the first quarter will play out in the full year.

We think we'll be closer to that 3% we've been talking about.

Asia-Pac business obviously operating in a good market.

All of the increases in housing, meaning in the medium density that you've seen in Australia, doesn't necessary play to our strengths.

But, we're still in a good market in Asia-Pac.

That goes for the Philippines and New Zealand as well.

In local currency -- or Australia dollars, sorry, up 15%, volume up 10%, so we have 5% on price.

Of course, in US dollars the EBIT doesn't look good, but in Australian dollars it does.

Now, a point meaning it follows the top line, but there's no leverage against the top line.

And the only thing I want to point out is they don't get the same input cost benefits the US does because they buy pulp in US dollars so they don't get that benefit.

And their plants are on an improvement trend line like the US, not quite as steep of a slope.

But also, they're going through a startup at Carole Park, so you got your startup dollars in their quarterly result as well.

We think we're about three-quarters of the way through those startup dollars.

Like I said, the startup is going well, so it's been a very positive result for the Australian business, but it is largely absorbed in the Q1 results.

I'll hand it over to Matt for the financial overview.

Thanks, Louis.

Page 13 is a flip to go to page 14, just a summary of the Group results and then I'll go through the normal set of pages that we've covered in prior quarters with you.

So, strong earnings growth, as Louis indicated.

Volumes were up across all of our business units, albeit a little bit lower than we expected them to be.

Average sales prices were up in both the US and Europe, as well as Asia-Pacific.

And lower input costs we're seeing in both segments, more so in the US than, as Lou just indicated, in Asia-Pacific.

But, we're seeing a lot of our major input costs, pulp, utilities, that are trending favorably from a market index standpoint, and then we're performing a little bit better than that.

And so, that's providing some additional uplift to margin rates.

And we'll take you through the input cost trend lines in a little while.

Organization costs were up a bit, mostly consisting of stock compensation that corresponded to the share price being up 14%.

And the second biggest driver is foreign exchange losses as the US dollar increased.

And the core SG&A expenses in the business units were actually down a little bit, and the corporate SG&A expenses were up just slightly.

Net operating cash flows were $55 million for the quarter.

Those were up in comparison to a year ago where they were about $43 million.

From a capital allocation standpoint, no real change in the strategy.

We continue to execute on that.

After the quarter end on July 1st, we made a payment to the AICF of AUD81.1 million, $62.8 million.

That represents 35% of our free cash flow for last fiscal year.

And after the June period, we purchased approximately 1.7 million shares for about $23 million as part of the share buyback program that we talked about in May, on strategy to shift our additional shareholder returns this year to share repurchases from special dividends.

If we go to page 15, we'll walk through the Group results on a reported and an adjusted basis as we normally would.

So, for the quarter, we reported sales of $428 million.

They were up about 3% on both higher volumes and sales -- sorry, higher volumes and prices in local currencies.

Gross profits of $157.6 million, those are up about 320 basis points, primarily driven by the performance of the plants in the US.

Also a significant contributor were the input costs in the US.

And the gross price increase is partially offset by the FX dynamics in the mix, dynamics that Lou talked about earlier.

Total SG&A of $61.5 million in comparison to $59.9 million a year ago, so up about 3%.

Like I said, stock compensation was the primary driver there.

That's up about 14%, corresponding to the share price.

Discretionary expenses and foreign exchange were both higher.

And those were partially offset by kind of core SG&A expenses in the business units.

And the divisions, if you will, were flat to down.

On the non-operating side, we had EBIT of about $85 million in comparison to $50 million a year ago.

Between EBIT and net operating profit, really three dynamics; one, interest expense increased now that we're feeling the full effect of our debt position.

Two, we had announced the sale of our Australian pipes business, and there was a small gain on that sale.

And so, that's in other income, as well some unrealized foreign exchange gains and impacts of interest rate swaps are down in that line item.

And I'll talk about that more later.

Income tax expense increased primarily as a result of the operating income.

And I'll go through ETR as well.

If we go to page 16, you can see asbestos adjustment in the quarter of about $4.5 million in comparison to $21.5 million a year ago.

Those adjustments are really driven by a 1% change in the Australian to US dollar exchange rate from the beginning to ending balance sheet date.

And that compares to about a 2% change in the spot rate.

So, in the first, second, and third quarter, the liability in the asbestos adjustments are all foreign exchange related typically.

The adjustments on net operating profits -- sorry, the adjusted net operating profits were up strongly, as we've talked about, almost 30%, a 26% increase on adjusted EBITDA, a $6 million swing in other income and expense.

Again, there's really three major items in there.

About $2 million of favorable foreign exchange on forwards, about $2 million favorable change in interest rate swaps, and the $2 million gain in pipes is how you get to the $6 million change in that line item year-over-year.

And gross interest expense of about $6 million in the quarter.

If you go to slide 17, you can see the gross margins continue to perform well.

They're up at about almost 37%, quarter-to-quarter approximately flat, up obviously substantially versus a year ago, all driven by the dynamics that we've already talked about, price improvements in all of our businesses, and then we're benefitting from both plant performance as well as market for input costs, as well as our sourcing against those market trends.

On slide 18, you can see from an input cost standpoint that pulp has stabilized and is starting to trend down.

The NBSK is down 3%, 4%, 5% year-over-year, which is helpful.

On the utility side, gas in particular is down quite a bit.

Cement is one of the input costs that are up.

Cement definitely has a capacity -- or certainly a strong demand in the US.

And as a result, cement pricing is up and we're feeling that a bit.

And then, you can see electricity year-on-year is down a bit, but it stabilized over the last several quarters.

If we go to page 19, we'll run through the segments in a little more detail.

So, you can see the US has EBIT of about $90 million, $89.5 million, up about 32% compared to last year, all off the dynamics that we've already talked about.

Asia-Pacific, the grey bar is in US dollars.

That's what we report.

You can see that on a US dollar basis it's down.

On a local currency basis, in the blue bars, it's up.

So, for the quarter on a local currency basis AUD25.4 million, on a US dollar basis $19.7 million.

So, again, in local currency, that business is performing well.

It's being adversely affected by the strengthening dollar and a weakening Australian dollar.

But, in local currency, the segment results on EBIT in Asia-Pacific were up about 15% compared to last year.

On page 20, no significant change in R&D.

The trend is broadly in line with our historic investment goal of having about 2% to 3% of our top line invested in research and development.

The fluctuation quarter-to-quarter or year-on-year is just normal variation, so no real change on research and development.

On general corporate costs, you can see up $13.5 million, mostly on the back of stock compensation, which I've already talked about; a slight increase in discretionary expenses as well.

But, the primary driver there is really stock compensation.

Slide 21 is the chart that we normally show on the changes in the Australian versus the US dollar.

You can see that that translation trend had an unfavorable impact on the Asia-Pacific results, which we've indicated.

It has a favorable impact on our corporate costs in Australian dollars which, at the Group level, is not a substantial driver, and has an unfavorable impact on the translation of the asbestos liability.

Slide 22, our effective tax rate for the year we're estimating to be an adjusted effective tax rate of 26.5%.

That adjusted income tax expense has increased due to the operating profits primarily in the US.

The differences between adjusted income tax expense and income tax expense on a reported basis are up primarily due to lower asbestos and other tax adjustments.

We continue to pay income taxes.

And they're either paid or payable in those jurisdictions you can see on the page, so in Ireland, the US, Canada, New Zealand, the Philippines.

Income taxes aren't currently payable or paid in Australia excluding Ireland -- sorry, Europe excluding Ireland or in Australia.

The Australia tax losses primarily result from the asbestos deduction.

The 26.5% effective tax rate is up largely because of the geography of the earnings growth in the US.

And then the Australian translation of their result into the US dollar, reported results, acts as a headwind as well.

Slide 23, for a cash flow perspective, we had $55 million of cash flow from operations, up about 30% from a year ago, where we reported about $43 million.

Net income increased $31 million compared to last year.

Working capital improved in the quarter, and both inventory turns and accounts payable turns were slightly favorable year-over-year.

Those were partially offset by accounts receivable in the quarter.

The accounts receivable is really just related to the timing of when billing and collections out.

I think we'll see that come back within the next quarter.

So, for the half year, I'd wouldn't expect AR to be working as an unfavorable dynamic.

The capital expenditures are obviously lower.

Last year we were investing heavily in some capacity projects.

As those wrap up both in Carole Park, Plant City, and Cleburne, you should expect capital expenditures year-over-year to come down.

You're seeing that in the cash flow.

We're obviously going to continue to invest in maintenance capital this year.

And we would expect our CapEx this year to be more in line with kind of the $100 million, $75 million to $100 million range, in comparison to the last couple of years, which was significantly more elevated than that.

On the financing side, no dividends were paid in the current period in comparison to about $125 million payment last year that related to the one-time special dividend for the 125 year anniversary.

And that was the major swing in the financing activities.

Page 24, a very similar -- this is exact same chart we've now shown for several quarters around financial management and how we're thinking about our balance sheet.

The fundamentals remain strong from a financial management standpoint.

Margins and operating cash flow are in good shape.

We continue to stay focused on governance and being very transparent.

We're still managing ourselves and thinking about our balance sheet from an investment grade perspective.

Our capital allocation strategy has not changed.

Our first priority continues to be investing in both research and development and supporting market organic growth programs.

Ordinary dividend continues to be our second priority, and then our third area of priorities continue to be around flexibility to withstand cycles, having a balance sheet that can support strategic and accretive inorganic opportunities, as well as additional shareholder returns.

From a funding and liquidity standpoint, no real change since we last talked, still about $590 million of bank facilities.

Our liquidity position is very strong at about 68%.

We've got a little over a two year weighted average maturity on the bank facilities.

The bond is obviously in place at $325 million over eight years.

Our leverage continues to be within our target range.

If we go to page 25, a little bit more on liquidity.

The balance sheet continues to be very strong.

We've got about $90 million cash, about $380 million of gross debt, $590 million of bank facilities, the bond, and plenty of liquidity.

So, we feel good about where we are from a capitalization standpoint.

Our net debt at the end of June was $290 million compared to net debt of $331 million at the end of March.

Also at the end of June, we had the bond and the first interest payment was due -- or will be due on the 15th of August.

And as I said on the previous page, we're still well within our net debt target range of 1 to 2 times EBITDA, excluding asbestos, and in compliance with all covenants.

On page 26, an update on asbestos for the quarter.

So, claims that were received at the trust during the quarter were 15% below the actuarial estimate and 11% lower than the prior corresponding period.

Mesothelioma claims were up slightly in the quarter, both versus the expectation and the actuarial estimate.

They're down about 5% versus a year ago.

The average claim settlement sizes are generally lower this year.

The average claim settlement is significantly lower at the moment in comparison to the actuarial estimate although, as I think I've said in prior years, the first couple quarters there tend to be a large number of large claims that the trust has to work through throughout the year.

So, while it is a positive trend, the average claim settlement is below the actuarial estimate by 23%.

We have to see how those large claims work themselves through before I take any great comfort in that one quarter performance.

On slide 27, just a quick wrap up.

So, as Louis and I have both said, Group sales up 3% for the quarter.

Adjusted net operating profit is up 27% based on all the dynamics that we talked about, primarily really strong performance in the US from the plants and good local performance in Asia-Pacific.

The financial management of the Company continues to be on strategy.

And we continue to execute on the capital allocation that we've talked about, including funding organic, the payment we made in July to the trust, the share buyback activity that we've done in July, and doing that still maintaining a balance sheet position that we think is both conservative and representative of an investment grade company.

On page 28, if we go to guidance, so the range of forecasts for net operating profit coming into the call was between $244 million and $286 million.

As many of you will recall, last year we did $221 million.

We expect our full year adjusted NOPAT to be somewhere between $240 million and $270 million, obviously with a number of assumptions in there.

Probably the most significant assumptions are around seeing how the housing market and the conditions in the US market continue for the rest of the year, as well as input prices and foreign exchange.

With that, we can open it up for questions.

Michael Ward, The Commonwealth Bank.

Look, just very quickly, in the release this morning you talk about the margin in FY 2017 coming back into that range of 20% to 25%.

Is there anything specific around why that will actually come down, or is it more just you guys sort of trying to stick with what you've always said, that in the long term it'll be around that 20% to 25% mark, and you don't necessarily think it will continue beyond sort of FY 2016?

Yes, I think you got it there with the last part of your question.

I think we're far enough into the year to feel pretty confident that -- where 2016 is likely to come in.

But, as far as predicting 2017 at this point with input costs and program spending, we're just not going change our target range.

We may come in above the target, but that's not something we're planning to do.

Okay.

And then I guess, Louis, just extending on that, can you sort of outline what some of those target spending initiatives actually are that may dampen that margin next year?

It's kind of all the stuff you hear about, and you guys that come on the September tour will hear more about it.

But, it's on the market side.

Obviously you can see kind of the trends in the business.

Prior to 2014, we had a kind of a bottom line efficiency gap relative to what we were trying to do, so we fixed that.

Over the last 12 months, we grew our volume about 9% over prior four quarters.

But, this quarter we're coming off a volume comp of 4%.

And we think it'll be better in the second quarter, but it won't be up to 9%.

So, we're going to come out of the first half with lower volume comps that we've been experiencing the last couple years.

So, that's where most of our work is.

So, that's all the stuff you always hear about, non-metro markets, R&R in fiber cement standard markets, holes in our trim product line, ColorPlus outside of the north, top of the market product line which probably has a fair amount of spending that's going to be attached to it.

So, it's all the same stuff that's kind of part of our 35/90 and just getting -- just moving that stuff down the track.

Okay.

And sorry, just finally the manufacturing.

It looks like you made pretty decent gains this period, especially relative to a pretty tough comp last year.

How much longer do you think that manufacturing momentum will support sort of margins?

Yes, I think you got to watch last year's first quarter comp.

I don't think it was that tough, just because the manufacturing improvements weren't starting to come in at that point, whereas each quarter after that you started to see some of it.

And you saw more of it this quarter than you did last quarter, but they'll get -- the EBIT will be relatively tougher to comp against because the manufacturing improvements will start being built in then in some future quarters, or some of the later quarters last year.

But, hey, I think -- somewhere along the line in the last two quarters, I think we got through kind of the next phase of manufacturing development that we were working hard to get through over probably a six or eight quarter period.

And we were having some trouble, and I think we broke through.

And I think one of the reasons we feel better about coming through the winter months with our EBIT margin is because we're not using high utilizations to get that last little bit out of manufacturing.

We're still not running our plants high utilization.

So, I think we're just generally better running the plants and don't have to rely 24/7 on all machines to get that last bit of efficiency, so I think it's going to continue.

But, like I said, some of it's already built into later quarters last year so it won't look as big as far as EBIT improvement goes.

Okay.

Thank you.

Yes.

Emily Smith, Deutsche Bank.

Hi, Louis and Matt.

I have a couple of questions in terms of you mentioned PDG.

You weren't so sure how it went in the quarter.

Just wondering how you think it is tracking for the full year.

We're obviously in sort of mid -- or halfway through the next quarter.

Just wondering how you're seeing sort of volumes are so far in the Q2.

And just finally, the volume growth that you guys did achieve in the quarter, up 4%.

I think it shows that you outperformed LP, whose volumes were down around 6% in the quarter.

Just wondering if you can give us an update on how you think you're tracking versus LP at the moment.

Yes, okay.

So, I've got my normal quarterly warnings.

It's a pretty short snapshot.

As far as us and LP, if you look at four quarter rolling, the last four quarters, we both up 9% on volume.

So, that longer story is a story we've been talking about for a couple years.

There at the end of the downturn and beginning of the recovery they grew faster than us.

They have a different market index, so it's kind of hard to compare apples to apples.

So, if you just go to the raw numbers, they grew faster than us and then we kind of pulled even with them.

And our plan is to get ahead of them on volume growth, and over the last four quarters we haven't done that.

Now we've done it for one quarter, but big deal.

They did it the prior quarters.

And even if you put those two quarters together, it just -- it doesn't really say we're where we want to be.

As far as PDG this year, I think we'll kind of have to get to where we've been the last two years as the best case.

So, as you know, we're trying to kick it up two points.

I definitely think we're going to lag with that expectation that we'd kick up PDG at least a couple points of where we've been running.

I think this year we might come in a little bit lighter than we have the last two years.

But, I think that's more kind of normal variance than it is market share loss because, as you pointed out, LP is not outrunning us anymore.

And vinyl did better this quarter but, again, it's only a quarterly number.

I think the four quarter number on vinyl also points to their long term trend, and that's where I expect them to be.

So, I've already kind of let you know we'll be -- we expect to be up on our volume comp in the second quarter, higher than the 4% we realized in the first, but it's not going to be a lot higher.

So, we're going to come out -- like I said, we grew volume 9% over the last four quarters.

We're going to come out of these first two quarters, and we're going to be well short of 9% on a volume comp.

Okay.

And, sorry, so where do you think the PDG will end up?

Was it 8% last year, or 6%?

I mean, we've been operating in that 6% to 8% range the last couple years.

And what I tried to say is, if I get to 6%, I think that'd be okay looking at it right now.

It might be a hair below 6%.

I don't expect it to be at 8%.

Okay, great.

And so, does that sort of mean in the quarter you sort of feel that the market growth was negative?

Yes, I think I made that comment.

If you want to look at just a quarter, I think you'd have to say the market index was higher than 4% but not much.

I think new construction numbers aren't quite in, but I still feel like R&R is up around 4%.

And that's a good part of our business.

We're up 4%.

So, if new construction actually is less than 4%, then we eked out a very small gain.

And I don't expect new construction is up much more than the 4%.

So, I just think it's -- I just think we track with market index.

LP for the quarter tracked below their market index.

Vinyl tracked below their market index.

Brick's not taking share.

Stone's not taking share.

Stucco's not taking share.

So, I just think it's a crew-only deal rather than anything you can point to as something that's happening in the market.

Okay, great.

And just finally, do you think that there was some pull forward in the Q4 of 2015?

Oh, yes.

Yes, there was some pull forward.

And there's a bit of Texas playing in our numbers.

But, again, at the end of the day none of that stuff matters.

It's a market share gain we're trying to play.

And even if you do all your adjustments and explain everything away, at the end of the day we're still coming up short on where we want to on the market share gain.

And that's our main job.

Okay, great.

Thank you.

Simon Thackray, Citi.

Thanks very much.

Morning, guys.

Just following on from Emily, I just want to understand you comment, Lou, on R&R, saying that that's growing reasonably well, growing about 4%.

Just given the trajectory for US housing is pretty moderate for new construction, can you just remind us of where you sit now in terms of volume mix between R&R and new construction and, given the trajectory of new housing versus R&R, how you expect that mix to change, if at all, over the next 12 to 24 months?

Yes, it doesn't change much.

Obviously we have a market share in each segment, and then we have a growth rate in each segment.

Even if our growth rate in the R&R segment is faster, it's not fast enough to change it in a two year period.

So, yes, and what do we have as our current split, Matt, on R&R and new construction?

60/40.

60/40 is kind of where we think we are on R&R and new construction.

And if you ask me you like your programs better in R&R or you like your programs better in new construction, I would say in the market share growth areas I like our programs better in R&R.

So, if you ask me which one I'd like to see the guys fix up the most, I'd say new construction.

But, again, it's not going to dramatically change the mix.

I mean, we're just shooting for market share growth in the two separate segments.

And they're kind of independent of each other.

Now, they come together when you do a market index and your growth against that index.

That's where they come together.

Sure.

So, just clarifying, was that 60% R&R, 40% new construction?

That's correct.

Okay, cool.

Then just another one.

Just stepping through, Matt, if we can, the tax rate expectations for the balance of 2016 and then, going forward, an expectation of absorbing any of the losses, what we think about 2017.

Obviously the US, as it ramps up, is lifting the tax rate.

What should we be looking at for the full year for 2016?

And then, maybe give us a bit of a feel with those tax losses when we start -- what the tax rate might look like next year.

Yes.

So, for the year, obviously we've estimated an effective tax rate of 26.5%.

So, with the way adjusted tax rate works, that is our estimate for the year, especially for the first quarter.

So, that's what we would expect.

The extent that that total year estimate changes in subsequent quarters, you may see that swing from quarter-to-quarter.

But, our best estimate at the moment is that, for the year, the ETR should be -- the adjusted ETR should be 26.5%.

It feels like about every other quarter I get the question on trying to forecast out ETR, and obviously we don't provide forward guidance on it.

And I actually don't spend a whole lot of time trying to forecast it out -- multiple years out on ETR.

So, I don't have a specific number that I would want to guide you to for next year.

I'd say for this year the 26.5% is our best estimate.

It is up, obviously, over the last year and up over the last two years.

That shouldn't be of too great surprise, given that the US is a high tax rate jurisdiction and a greater percentage of the total Group profits are coming from that tax jurisdiction.

And so, it's really just the geographic mix of earnings that's causing the rate to rise.

No, that's fine.

I mean, would it be easier for me to ask how many underutilized or unutilized tax losses are still left in Europe and Australia?

Yes.

I mean, that's not something that we would disclose.

Okay, that's fine.

We'll move on just in terms of whether it's possible or not in the quarter to get a bit of a waterfall on the dollar impact of the input costs in terms of pulp and utilities.

Yes.

So, I think in the MD&A, in the US we had about a 440 basis point increase in gross margin rates.

A little over 1 point of that is related to price and another 3 points of that's related to production costs.

I think the best way to think about the production costs is about 25% of that benefit is coming from input costs, and another 75% is our performance with the plants running better.

As I indicated on the input cost chart, we're seeing at the moment favorable market conditions on pulp and utilities, and unfavorable dynamics on cement.

Obviously those can change from quarter-to-quarter.

So, I think it's a positive that obviously the vast majority of that performance is coming from the plants.

Terrific.

That's very helpful.

And then, one really quick one, Louis, if I may.

Texas has record wet weather in May and then into June.

So did Oklahoma.

Historically you've said your share in those markets has been about 29%, from recollection.

Was there any impact in the quarter from wet weather at all that you could -- that was material to volumes?

Well, I mean, not only our quarter but through year-to-date.

As we sit here today, our Texas volumes are down.

So, yes, I mean, our volume growth's being pulled down.

I don't think it's 29%.

We'd have to check that number.

But, our volume growth's being pulled down because a relatively large chunk of the business is running negative.

And it's not running negative due to our market share.

It's running negative due to market opportunity.

Right.

But, there's no number you can put around it in terms of the impact for the --?

Not that we're going to talk about.

I don't -- again, we play a market share growth game.

And there's no problem with our market share in Texas, so it's not of huge concern to us if it rains or if the oil price knocks off some demand for housing.

It's just something (multiple speakers).

Sure.

I'm just trying to understand it in the context of the volume number that you delivered year-on-year, that's all.

Yes.

What I want you to hear on volume is I don't like our traction on market share programs.

So, that's what I want you to hear today.

Loud and clear.

Thanks, Louis.

Thanks, Matt.

Jason Steed, JP Morgan.

Morning, Lou.

Morning, Matt, or I guess good evening to you.

Just wanted to come back on -- just on the PDG point.

And I guess, Lou, you just mentioned that you're not happy with where you're seeing your market traction at the moment.

I guess in the last three months from when you reported in May, quite a significant scale back in that PDG from that sort of 10% to 11% territory that you were talking about then.

Just curious as to exactly what you think is not gaining traction.

Is it a case of making more investment, as you referred to in your comments, or is it when the market is I guess soggy and tepid like this that you don't -- that it's a more difficult market to gain traction?

Just trying to understand, because I guess it is a big shift versus three months ago.

Yes, I guess that's a good point.

I did have a different view three months ago.

I knew what things we were bumping up funding on.

I knew what things we had management in place on.

And I guess all you could say is I underestimated the lag time between what we do and what happens as far as the movement in the market.

Now, you framed your question exactly right.

PDG doesn't mean you're going backwards.

So, when your PDG drops, it doesn't mean you're going backward.

It just means that you're not doing enough to get the next piece and the next piece and the next piece.

So, that's kind of where we're at.

I don't think we're going backwards.

I just think some of the emphasis or some of the programs you run in a market, you get really good gains.

And then you kind of get near the end of that kind of little S curve, and then you got to keep putting more S curves in front of that if you want PDG to stay at the same level.

And if you want it to accelerate, obviously you got to get more in front of it.

So, that's where we're at.

Believe me, I do not think this is a major problem in the business.

I think this is a temporary situation just like it was in 2013 and some of 2014 when we got our pricing -- technical pricing off, or we got our EBIT margins to where we thought we were going to come in higher on EBIT margins.

We didn't come in on our EBIT margin.

I think it's just normal stuff that happens in an organization when you try and juggle five balls.

And every once in a while, one of them is not being as well managed as it theoretically could be based on our forecast.

So, that's where we're at.

I don't have much -- I don't have a lot of concern.

I think we certainly, as an organization, kind of know how to think about these things and know how to execute game plans.

But, right now we're lagging behind where we thought we would.

Okay.

No, I understand that, and it sounds as though the sort of expectations are to recover from that lagging position.

Just one further question.

But, I don't want you to be too easy on us.

You don't get to a 35% market share by growing a 4% comp.

So, we're not in the business for 4% volume comp.

So, it's a quarterly result.

We won't have a 4% for the year, but we won't have the kind of volume comp for the year that lines up well with 35/90.

So, we have some work to do.

Understood.

And I guess that sort of ties in with your guidance, that you do expect obviously not to be where you were in terms of your guidance three months ago, but certainly in sort of an improving trajectory, I presume, on the PDG front.

Yes, that's the emphasis.

And right now we're not delivering on that, but that is our emphasis.

That's still our commitment.

Okay, great.

Thanks.

One final question.

In circumstances like this in prior years where volume's fallen short of where your expectations for the market are, it's proven to be difficult from a manufacturing perspective.

And you've always seen pretty sharp movements in your manufacturing costs in light of getting ahead of the market, as you've described it in the past.

Is it the case that you're now just fine-tuned sufficiently and, even when you fall short of market expectations, we're just not going to see the kind of variance that we have in the past?

Is that the reason why there's no drop off?

Yes.

Of course anyone that runs a plant, I used to run plants, you like volume.

You can do more with volume than you can do with less volume.

But, yes, I think we've just matured our manufacturing model and approach to where the guys that run these facilities know that volume's going to vary.

And it's their job to deliver efficiencies at a given volume.

So, for instance, when we start up Plant City four, there'll be several machines in our system that lose volume because we started up that machine.

And all those plant managers know that it's their job not to say, hey, I got higher costs because I got lower demand or lower utilization.

It's their job to say, okay, my new utilization is X, and here's how I run my plant to optimize my performance around X.

So, yes, that's what I was trying to allude to earlier.

I think in the past we did live a lot on 24/7, delivering that last little bit of manufacturing.

And clearly now we have a lot of machines that are used to not running 24/7, so that's not kind of like the key to getting the extra.

We're getting the extra without the super high demand on -- or super high utilizations on the machines.

Great.

Thanks, Lou.

Yes.

Matthew McNee, Goldman Sachs.

Thanks.

Louis, look, most of my questions have been answered, but just a couple of small ones.

Can you give us a feel for Canada, what percentage of volumes that is for the segment, just to give an idea of the materiality?

Yes.

Canada is between 10% and 15%.

Of volumes, not revenue?

Yes, of volumes.

And higher of revenue because it's almost all ColorPlus up there.

I shouldn?t say that.

It's almost all ColorPlus when you get out of BC, and then BC has a decent ColorPlus position.

Yes.

And just to clarify, Louis, you were saying that for the full year you expect the average price to get closer back to that 3% up.

Is that right?

I do expect that.

And like I say -- now, yes, I do expect that, but I did -- no one's jumped on my comment about interiors yet, because part of our mix, quote, problem in the first quarter was very good performance in interiors.

So, if we keep getting the type of growth rates we had in interiors, that will dampen our price.

But, it'll be a good story rather than a bad story.

It'll dampen our average price.

Matt, I think the thing I'd add on prices, probably the one thing that's a bit out of our control on getting to the 3% is just FX.

So, while it should trend up that way, just keep in mind we are seeing the 3% for a gross standpoint.

So, we are seeing the price realization come through based on the actions we took for March.

And that's dampened a bit by mix, which is the part that'll really start to come back, we think.

And then, we would expect there to be some stabilization in the Canadian dollar, but that's --.

Yes.

So, on that basis, you expect to get to the 3%.

But, if the Canadian dollar depreciates further, it might put a bit of pressure on that.

Yes, that's right.

Just the other one, obviously in Australia specifically, the margin was down.

You've already mentioned that obviously A dollar pulp prices where up, which would have pulled on that.

But, was there any Carole Park drag on the margin, or was Carole Park -- the ramp up there not having an impact?

No, a startup of a big machine like Carole Park is enough to impact a business the size of Australia's results.

So, we didn't tell you how much the startup cost.

It's going well, but it's in their numbers.

So, yes, you got to a little dampening, but you say they're down.

They're down 10 basis points.

Is that what you're referring to down?

Yes.

Yes.

Okay.

I just wanted to know whether there was a bit of a pull down on the Carole Park ramp up.

Louis, the other thing you mentioned is the margin in the quarter at 26.6% for the US -- this is a question I know you're not going to answer, but I'm going to have a go.

If volumes are up 9%, just have a stab at where that margin could have been.

You've already mentioned that volume is always better.

But, where could that have been?

Well, I want to answer your question, so I'll tell you it could have been higher.

And the other thing, just going back to Jason's question about a fair change from three months ago on where I think you said you were targeting 10% PDG.

You may not get there this year, but you're pretty confident you would get to a run rate of 10%.

I mean, how much visibility do you see out?

I mean, could October be a totally different PDG number, plus or minus 2% or 3% compared to what you think, or do you have a fair bit of visibility on that?

I mean, how hard is it to gauge those sort of things?

Yes.

I mean, when you talk about PDG, you can't talk months, and really I hate to talk quarters.

So, when you get to October -- could we have a good market momentum and have a better volume comp in October even in a similar market we're in?

The answer is yes.

But, when you look back over four quarters, which is kind of the appropriate measurement period for PDG, whatever happens between now and October, or November 1st even, isn't going to dramatically change the PDG for the kind of trailing 12 months.

So, I'm trying to balance two things here.

I don't want you to think we have a PDG problem that we don't think -- that we think is long term.

But, I'm also acknowledging, hey, we don't have the market momentum that we want in order to get to a 10 PDG.

And that's what we're working on.

Yes.

No worries.

Thanks.

Yes.

Andrew Johnston, CLSA.

Good evening, guys.

Just a couple of questions, Louis, and a question on interiors.

So, can you give us a number on volume growth in interiors?

No.

I mean, what I can give you is kind of just a general update.

I think about this time last year we told you we were tracking behind, even though the market index for interiors was ahead.

We started working on a deep dive to figure out how much of it's the cement board category itself.

Is it being substituted for, to what degree, by mats and membranes?

How much of it was the pro channel versus the box channel where we have the bigger position in the box channel?

So, we went through all that.

We went to positive growth, I think.

I'm going by memory here, but somewhere in like November we went to positive growth.

And we felt by about February we're above the market index, and we'd continue to pick up from there.

So, you got a 4% total volume growth for the US business.

Interiors was actually higher than exteriors, so interiors was more than 4%.

Okay.

And, I mean, that's obviously good news for interiors, but also indicates that the PDG for the exteriors, which is what your target -- which is what you really think about on PDG, isn't it, Louis, your exterior market?

Yes, that's our calculation.

Interiors is not into our PDG calculation.

It's just exteriors.

Okay, which implies that that exteriors number might actually be a bit softer than that 4%, from what we can see there.

If backer's higher than 4%, by definition exteriors is.

And so, I have interiors at about 25% of volumes.

Is that about the right figure?

Yes, that's a good estimate.

Okay.

And just on marketing and R&D costs, I was sort of expecting those two to actually be tracking higher, with the savings coming out of the manufacturing improvements in particular and obviously lower input costs as well.

You'd flagged that we should expect to see higher marketing and R&D costs this year.

Has your view changed on that, I suppose?

And particularly, has it changed given that the market's now a bit softer than -- and your volume's a bit softer than where you were hoping for?

No, I don't think our view has changed at all.

Obviously we've just given you a little bit of guidance.

We think we're going to come in above our 25% target for EBIT margin.

But, we've always had -- so, we have the money to spend, but we've always had a second criteria.

We've got to be able to spend it well.

And right now I think the spend it well, do we really think if we would have taken that 1.6% EBIT margin, put it in the programs, if we would have ended up a different result this year?

And the answer is no, we don't.

We think we're funding some of these initiatives at a pretty high level, and we just got to make sure we get the traction on the spend so we kind of getting the market share result that we're looking for.

Having said that, there is increased spending that's being put in the business, not so much on the R&D side because that's more project driven.

But, on the market side there increased spending that will continue going in the business.

Okay.

And finally on PDG, are you being a bit hard on the business from a Group perspective, because you say you're focused on primarily demand growth in regions?

So, as you say, you're not losing share in Texas, it's just that it rained in Texas.

And Texas -- and consequently, Texas is a bit weak.

But, is it possible that that's actually the reason for your primary demand growth?

And then, is it realistic to be expecting to be getting strong national primary demand growth when you've overweight Texas?

No, I mean, obviously we -- you only get to look at our national numbers.

We look at our regional numbers, and I'd say there's an opportunity, a gap in almost every region as far as our market share program.

So, Texas has nothing to do with the Northeast.

It has nothing to do with the Southwest.

It has nothing to do with the Southeast.

And we're not where we want to be on PDG trend lines pretty much in most of our exterior regions.

Again, you got to remember PDG is about taking someone else's market share.

So, it's not -- when your PDG drops, that doesn't mean you've lost market share.

That means you're taking less of someone else's market share.

So, that's why I call it an opportunity gap.

If we were actually negative PDG in any of the regions, that means you're losing market share.

That's more of a performance gap, in my mind.

So, it's an opportunity to (multiple speakers).

Yes.

Sure, okay.

No, that's great, because if Texas is growing slowly, you can still actually be taking share in every particular region.

But, on a national basis, your PDG could still look quite soft.

Is that the right way to think about it?

That is the right way to think about it.

Okay, great.

Thanks very much.

Peter Steyn, Macquarie.

Thanks.

First, Matt, sorry to labor the point.

I was curious just to come back to Simon's question and, to some extent, what has just gone before around Texas.

Curious if you could just sort of split out your thoughts around the fundamentals of that market in the context of the oil price and what we're seeing in Houston particularly versus where they impact.

I think it'd be useful just to understand some of those fundamentals and how you saw that in the quarter.

Yes.

I think we're trying to look at the same information that you are and the rest of the market is.

And so, a few things that we try to look at, we've been looking at payrolls and we've been looking at just employment in the state.

And early in the calendar year, there was obviously some effect with the oil companies announcing layoffs, particularly in the southern part of Texas.

But, those seem to have really subsided, and we haven't seen major changes in payrolls.

And unemployment has kind of stabilized and remained actually fairly healthy.

So, we haven't seen really significant employment trend changes in Texas the way that we might have thought, given how much lower oil is and the dependency in that state on oil.

Another thing that we watch is how other manufacturers and builders are experiencing their volumes and permits and new holes that they dig in the state.

And I think for the first -- for this reporting period, I think that data has been pretty mixed as well.

So, you saw some builders and some manufacturers talk about Texas as a drag.

Others talked about it as a strength.

And others were either neutral or quiet about it.

So, our view is Texas is obviously a significant portion of our overall mix in the US.

It's not trending up, but what we're trying to understand is what the new construction market did.

And a lot of those indexes still aren't out yet.

I think you know we use Dodge, and that indicator won't come out until the end of the month.

And until we get a better sense of what happened in the new construction market, it's a bit hard to say how much did some of the drivers that you're hearing other manufacturers and builders talk about, like weather, how much did that really play into effect?

And if so, you should see that in the market data.

And if not, you might see a different trend in the market data.

So, we're trying to withhold drawing a quick judgment until we get some of the data.

And I'd say it's been a mixed bag of indicators at best with what's going on in Texas.

Great.

Thanks, Matt.

And then, perhaps just to ask a question around the new sales segment and some of your developments with the builders, the major builders, how that's going, if you could comment on it.

Yes.

I think as far as the national builders, I'd have to say that's an area that we're pretty happy with our progress on.

It's a lot of national builders.

Obviously you guys know they're just mostly the most price conscious builders, because they got all the volume.

They got professional purchasing organizations, this and that.

But, we've have some pretty good success.

We still have agreements with the top 20.

I think we added the 20th one sometime in the last three or four months.

Plus we're also getting more inclusive agreements, some of them including trim and some of them including backer.

So, our progress with big builders is good.

So, no issues there.

That's not one of the areas that we really have to find that next level with.

We're pretty comfortable with where we're at with big builders, and I think they're pretty comfortable with where they're at with our products.

I think that's a pretty good situation for us.

Okay, great.

Thanks very much.

John Hind, Merrill Lynch.

Good morning, Louis, Matt.

You said earlier you wouldn't get that 30% target market share on 4% growth.

How are you going to need to adjust the business to get that volume growth, just keeping in mind the FY 2017 margin guidance that you gave, which -- does that imply some price reductions to get that market share growth, given the lack of benefit from the manufacturing investment?

Yes, I think that's -- I'm glad you bring that up, because it's not going to be price.

We've talked before -- when you're taking market share it's normally not a price game, okay?

Because we cost about twice as much installed as vinyl on a new construction and about 50% more on an R&R, so we're already a big gap.

So, any price adjustments, whether it be on our end or their end, doesn't really make much difference, because when you're done with those price adjustments it's still a big gap.

So, you obviously got to sell the value of a Hardie house over a vinyl house.

And in order to do that, it's way more market development than it is sales development.

You got to be in front of the right customers at the right time, the right influence on the rest of the market.

So, no, it's not price.

Remember on our fiscal year 2017, we haven't really given you guidance that our EBIT margins are coming down.

We've just told you we're not willing to go out and say, hey, we think our EBIT margins are going to be above range anything more than this year.

And this is pretty unique.

I think this is the first time we've done that.

I think in the past we've always said we're either going to be in range or we're going to struggle to stretch up to the range.

So, I don't want you to read that as we're peeling off some money for 2017 and we're definitely going to use it.

It's kind of like I said, we'll be able to use money.

We'll have some money to use.

And if we can use it well, we'll use it.

And if input costs stay low and manufacturing performance is good again, then you can fall above the range.

And I do expect manufacturing performance to be good again.

So, I don't want you over reading what we're going to do.

There's no real switches being flipped.

It's just that reality that, hey, we've done a good job on the financial efficiency side of our business model.

And at the same time, we're starting to lag on the market share growth side of our business model.

So, to me, market share -- there's some product development involved, obviously.

And maybe you could even go all the way back and say, hey, there's some basic R&D that needs to happen in the next three or four years as well.

But really, on the market side, it's game plan design, game plan execution.

We'll have some new products come along, but they'll not be real silver bullet new product that's going to change the PDG.

It's game plan design, game plan execution, and we just need to put more of our management time into those two areas.

And I think the GMs that are running the business probably are in a position, now that the manufacturing thing has got about 12 months of momentum behind it now, and they can move away from that a little bit and spend even more time on the market side.

They already spend a lot of time on the market side, but I think they can spend even more time on the market side.

Thank you.

And just finally, you softened your, I guess, consensus expectations by about 4% this morning.

In your mind, can you advise what the key risks -- what key risks have you built into those estimates on the upside and the downside aside from, I guess, US housing volumes, or is it just that -- I think your consensus was getting a little bit excited at the top end?

Yes.

So, we don't comment on ranges until August of each year.

So, we haven't changed anything.

Our expectations for the year are a little bit down on volume from where we started, and a little bit higher on margin from where we started.

But, the actual number you're talking about for the Group is -- we haven't changed our view.

There's a range we would have been comfortable with three months ago.

But, again, we don't comment externally until August on ranges.

So, the external range was higher than our internal range, so that's kind of what we're trying to align.

Okay, great.

Thanks very much, Louis.

(Operator instructions.) Emily Smith, Deutsche Bank.

Sorry, just a follow up question for me on CapEx.

Just wondering if you guidance for CapEx for the full year has changed.

No, no change on that, Emily.

We still expect for the year to be somewhere in the $75 million to $100 million range, kind of a normal maintenance CapEx level, certainly a reduced level from the heightened levels last year and the year before as we're back into kind of the normal maintenance cycle for the year.

Okay, great.

And I might just ask another question on LP, if I may.

Louis, do you think that your programs that you currently have in place are going to put you in a good position versus LP and there's just a lag before it actually -- before it impacts your volumes?

You mentioned 12 month rolling.

Or, do you think that there's more work to do to get there?

And do you have those sorts of plans in place?

Yes.

Certainly there's more work to do, but a lot of our LP game planning is being built over time.

So, it's been added to in the last year versus what it was the year before, and I would expect that would continue.

I think most people that use LP know what to expect from a wood-based product in the exterior of a home.

So, I just think we just need to have that value right for the homeowner that's willing to trade one thing for a lower upfront cost.

Now, as I said in an earlier comment, you really can't get there by changing your price because you're still going to have a higher upfront cost.

So, that's always going to be an attraction to a buyer that's not maybe being as logical as far as he's getting a discount, but what's he giving up to get the discount?

And I think we've talked about this before.

But, I think we -- being a company that was so focused on vinyl as our market share opportunity, we forgot to -- continuing to message the market about the tradeoffs you're making when you're with a wood-based product.

So, it kind of goes back to what I said earlier about market programs.

It's game plan design, game plan execution.

I'd say on game plan design, if I had to rate it one out of 10 where do I think we're at, we're probably somewhere between six and eight.

I like our game plan.

And then, execution I think is the same thing.

Now, there's more enhancement in programs, more markets we can run programs in, more resources we can put into certain markets.

So, that would go more into the execution side of it.

Now, you say, well, why haven't you done that yet?

And the only answer is we want to do it well.

So, we kind of -- phase one of LP, we wanted to prove out the 100% Hardie value in the market.

I think we've proved that out, so now we're like, okay, how do you tweak that program and bring it to more markets?

And how do you resource to do that well and all the rest of it?

So, this isn't a big -- LP is not consuming us right now on new stuff.

It's really we kind of like our reset to position ourselves against both the vinyl and a wood me-too product.

So, we kind of like the work that's been done there, and we got to execute well and let it play out.

But, I'm sure there'll be enhancement to our programs, and there'll be programs run more broadly as we move forward and feel more confident in their effectiveness.

Okay.

Thank you.

George Clapham, Arnhem Investment Management.

Louis, I was just wanting to get a better feel for the margins in the Australian/Asia-Pacific business.

I mean, obviously they're below versus the US but you've made considerable investment there.

What's the potential to expand margins?

Well, in Australian dollars, the Asia-Pac business EBIT margin is running about where the US --.

Yes.

I mean, it's definitely no dilutive.

So, it runs about the same.

It runs about the same.

But, Carole Park capacity should help from two standpoints.

One, it gives us the Scyon production, a lower freight rate on Scyon production, and then you should get our machine scale unit cost advantage as well.

But, yes.

I mean, George, I'm the same in the US as I am in Australia now.

Don't tell me what you can do with your EBIT margin.

Tell me what you can do with growth, because we got a lot of capacity down there now.

And the best way to create shareholder value is sell more of what we do at the kind of same or close to same margin per unit -- contribution margin per unit.

So, I really don't think they have any kind of an EBIT margin issue in the US -- I mean in Australia.

What I do think they have is an opportunity with a lot more capacity now to really grow the business quicker than we have over the last, say, five or six years, which hasn't been bad.

That's why we built the new capacity, is because we have grown the business against the market index.

Now, you guys know your market's been on fire down there.

So, part of it is the market being pretty hot.

But, I think Australia's way forward in the next five years is to grow market share against alternative products.

Okay.

And just a question on the US R&R market.

Where do you sort of see that growing?

How do we benchmark the sort of growth of --?

Yes, I think Hanley Wood is kind of pretty confident in a 4% forecast, and I think we don't see anything that makes us doubt that.

So, I'd say we think it's running around 4% based on Hanley Wood and based on what we see from our customer base.

Okay.

Thanks very much.

Yes.

Andrew Peros, Credit Suisse.

Thank you.

Matt, just a quick one on the buyback.

You're obviously more active in terms of buying back stock over the past quarter relative to last year.

But, I guess even at the current run rate, you probably won't even get close to buying back the 4% or 5% of the indicated buyback.

Just wondering what your thoughts are there in terms of whether you anticipate in terms of stepping up the process going forward, or where there fewer opportunities to buy back stock over the past quarter which kind of led you to only buying back a few shares?

Yes, just if you could talk us through that, that would be great.

Yes.

I mean, I'd like to think that subsequent to the quarter we bought more than just a few shares back.

We were in the market for about $22 million, or almost AUD30 million.

So, it's not an insignificant amount.

I think I've said in the past that we're a bit restricted in the summer months because of the various blackout and governance windows, and the way in which the buybacks get administered kind of on a daily basis.

All that being said, we're kind of right where I'd want us to be at this point in the year.

I think you'll know that from the way we do ordinary dividends, as an example, we tend to want to see how the year is going to play out.

And so, the activity that we do in the beginning of the year is always less than the activity that we do in the second half of the year.

And you should expect the way that we do special returns like share buybacks follows -- maybe not an exact pattern, but at least a similar pattern.

Obviously, the main subject is having favorable market conditions to buy at a price that works within our financial framework.

So, I'm pretty happy with where we are and how we've executed.

It's a more significant amount than we've done in the share buyback activity, certainly than (inaudible -- technical difficulty) several quarters.

And it's kind of heading down the track that we'd expect it to.

Just one clarification.

We did announce that the buyback would be up to 5%, so it wasn't an indicator that we'd necessarily go all the way to 5%.

But, I feel good about how we executed in the quarter on that, and I feel like we're on track.

Okay.

Thanks.

John Hind, Merrill Lynch.

Sorry, one more from me just circling back to low (inaudible).

You obviously achieved better volume growth than them this quarter.

Is this due to some traction in the east following your expansion in the sales force there, or is this going to be a little bit more long dated?

Can you provide a bit of an update for us?

Yes, I don't think you should care about the quarterly number.

So, we obviously follow LV, and we can't figure out their quarters.

For the number, you should remember the last four quarters.

They were up 9%.

We were up 9%.

And I think that's the score sheet.

So, we're not losing, we're not winning, but we certainly don't like breaking even either.

So, we'll see how it plays out.

Obviously, the negative 6% they comped this year wasn't bad news at Hardie, but it's certainly not anything to celebrate.

It's one quarter.

Sure.

Thank you.

Eileen, why don't we try one or two more questions?

Okay.

Matthew McNee, Goldman Sachs.

Just a very small housekeeping one.

Just on the pipes business, what sort of contribution was that making?

And going forward, what should we drop out?

It's a rounding error, Matt, within your models.

It's not even an amount that we've disclosed in the past.

It won't move your volume, your sales, or your EBIT numbers one way or the other.

Yes, no worries.

All right.

Thanks for that.

It was less than -- it was a single digit kind of contribution to EBIT.

Yes, no worries.

Thanks.

Maybe one more.

Greg Brown, News Corp.

Hi, guys.

Just a question on you mentioned obviously the Asia-Pacific business is doing well because the Australian housing market is doing very well.

There's been some calls -- particularly one of Australia's biggest developers in their results yesterday said the housing market in Sydney has peaked, and there's been a number of people come out and said that this week.

I mean, do you see that affecting the growth of the business in Australia?

The market in Australia has been very good, obviously, for the last several years, and it's been very hot.

A lot of the growth has come from high density and multifamily type, as well as single family residential.

And so, we don't -- obviously our market index is a bit different, just given that we're more weighted towards low rise as well as weighted towards single family.

So, we don't experience the same kind of market index as the headline numbers do.

I think the other factor is a little bit of regional mix and where we're stronger in certain states versus other states.

But, we see from the first quarter a good market.

For us, it's a similar market index to what we experienced last year.

And last year we felt good that we grew above our market index, and we feel like we're on the same track and trajectory both within the quarter and for this year.

So, we'd expect Australia to grow above market for the year, and we felt like it grew above market for this year.

And that market index for the quarter and for this year is pretty similar to where it was last year for us.

Okay, sure.

Where is your regional weighting?

Like, where are you most weighted to?

Primarily in Queensland and New South Wales is the primary market.

Okay.

And, I mean, just going on that, obviously the banks -- the regulators are really looking at that sector, and a lot of people are saying the reduction in the Chinese yuan could have an affect on new homes as well, the amount of investment.

I mean, does that not give you a bit of cause for concern, I suppose?

No, because we don't spend a lot of time reacting to kind of week to week or month to month macroeconomic news.

We tend to look at the data points over a longer period of time.

Similar to the US, our game plan in Australia is about market share gain and increasing our market penetration with existing products and new products.

And we think Australia is a good market.

We think our position in Australia is very strong.

We think we've got an opportunity to continue to improve that position.

And we wouldn't react to kind of a short term indicator of what the market may or may not do.

Sure.

And have you had any movement in moving into the higher density space that you flagged last quarter?

No.

I mean, I'd say our mix of addressable market is pretty similar within the quarter as it has been historically.

Sure.

Just one more question.

I mean, there's been a bit of -- you've mentioned a bit about the impact in currencies in specific parts of the business.

I was hoping for just a bit of a broad outline of, with the Fed expected to raise rates and the Aussie to go down compared to the US, I mean, what sort of impact are you seeing the currency have on the business at the moment and sort of for the rest of the financial year?

Well, in the quarter it obviously had an effect, and you can see that on the way the Asia-Pacific results were translated into US dollars.

When you've got an Australian dollar that's weakening to the extent that it has, it's obviously going to have an impact, just given the percentage of our business that comes from Asia-Pacific and from Australia.

But, that being said, we don't really think of foreign exchange as a strategic component to the Company.

So, we don't spend that much time thinking about our business strategy with how it's going to get affected from foreign exchange.

We think of that as just normal variation.

It is down.

We don't spend much time on the speculative statements at all.

I think we've heard everything from the Australian dollar is going to dip into the 60s all the way -- and as late as 12 months ago.

And I've been hearing for two years that the Federal Reserve is going to raise rates.

And I'm sure at some point they will, and at some point the prognosticators will be right.

But, none of those things are things that we can affect.

None of those things are part of our core strategy.

We think of those as things that are going to have normal variance on our numbers.

And at least for the first quarter, it had an adverse effect.

And how that plays out for the rest of the year I think is -- we're as interested and eager to see how it plays out as many of you are.

Okay, sure.

Okay, thanks a lot.

Okay.

Okay.

Appreciate everyone joining the call, and we'll see you next quarter.

Thank you.

Thanks, Eileen.

That does conclude our conference for today.

Thank you for your participation, ladies and gentlemen.

You may all disconnect.