James Hardie Industries PLC (JHX) 2016 Q3 法說會逐字稿

Welcome to the James Hardie Q3 FY 2016 results briefing.

All participants are in a listen-only mode.

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

(Operator instructions) I would now like to hand the conference over to your first speaker today, Mr. Louis Gries, CEO.

Please go ahead.

Thank you.

Hi, everybody.

Thanks for joining the call this quarter.

We're going to take the same approach as we normally do.

I'll do a brief overview.

Then Matt Marsh, the CFO, will cover the financials in some detail.

When he's done with that, we'll come back for a Q&A, investors first, and then when we're done with investor questions, take any media questions we may have.

Matt and I are in Dublin, so the slides are being run out of Sydney.

So I'll just be calling out the slide numbers.

So slide 2 is the first page of our disclaimer.

Slide 3 is the second page of our disclaimer.

Slide 4 shows our short agenda, there.

Slide 5 is another overview page.

So slide 6 is the first one we're going to cover, group overview.

You can see everything's pointing up.

Adjusted net operating profit up 16% for the quarter to $56.2 million, and adjusted EBIT up to $82 million for the quarter.

Obviously, the margin improvement is 2.6%

So basically the story on the quarter is, it went very much as expected.

The volumes were good.

Plants continue to run well.

Price flat to slightly up.

And you can see on our final bullet point -- we'll talk about the EBIT margin for the quarter a little bit later, but for the full year, it's 25.1% in the North American and Europe business.

Slide 7 gives you the details on the North American business.

You can see, price was flat, so volume and sales were both up 12%, which is a little bit stronger than we were comping the first two quarters.

But again, it's pretty much in line with what we were expecting in the quarter.

We felt this quarter was an easier quarter to comp against.

And next quarter is actually a more difficult quarter to comp against because we had a price increase that pulled a little volume forward last year.

So I think the short story on volume is, it's tracking how it has been for the last three or four quarters, which is below our targeted levels.

So that continues to be our priority to increase the primary demand growth rate in the business.

The market index we're operating on this year with the starts where they are and with R&R where it is, is around 6%.

So we're still in that flat to slightly positive PDG, and we expect that for the year.

Obviously, we're working on getting it turned up, but that won't will in the next quarter.

On the cost side, or the EBIT side, you can see a 24% EBIT.

The way we got there was a little different than usual, or a little unexpected, I guess.

North American EBIT margin was actually 26%.

Europe did not contribute EBIT this quarter, which is very, very unusual, and we don't expect it to continue in the future; but they had a bad quarter where they didn't contribute any EBIT dollars.

So that dragged the percentage down.

And then also the non-FC runs negative EBIT, as we've covered in the past, so that brought it down.

So if you look at the segment as reported, it's 24%.

The North American fiber cement business ran at 26% for the quarter.

We're still getting some pretty favorable comps on freight and some of the input costs, so that's been kind of the story for the year, and that continues.

But basically, costs are being well controlled, plus we're getting a little help on input costs, so pretty strong EBIT margin performance.

Slide 8 shows a graph of a longer-term view of EBIT margin.

You can see for quite a few quarters now, we've been either in or above our range.

And our guidance has been pretty much been that we expect to continue that as long as the market remains good in the US, which we also expect that to continue.

Go to slide 9. It's our price slide.

Like I said, this quarter up three [box], so it's pretty flat.

It's actually up 2% in the US business.

But when you take into account European and Canadian FX, it brings it down to almost flat.

So we do have some price improvement in the US business that just doesn't jump out at you because of the FX adjustments, when you report the segment.

And then top line growth -- you know, the green lines -- you know, against the housing starts, obviously we're getting a little further apart each time, and again would expect that to continue.

And that's on a year-to-date basis (inaudible) showing a 7% increase in volume and 8% on price.

Slide 10 just gives you the overview of the Asia-Pac business.

A couple things to note on the volume.

We sold the pipes business in Asia-Pac, so that was in last year's volumes and not this year's volumes.

So when you look at the existing business, it did comp up 3% on volume.

And from an EBIT perspective, it's obviously flatter than you would expect with the improvement in revenue.

And that's really two things -- one, last year's third quarter had a [write-back] in it, so that was a one-off that's comping against.

And the Carole Park startup took longer and was less efficient than we had planned, so that chewed up some EBIT dollars, as well.

Again, I think that capacity is up and running and becoming -- kind of hitting the window where it's pretty reliable now.

I think we'll have some more cost inefficiencies this quarter, and my expectation with that should be the end of it, start getting the benefit of that investment starting next year.

At this point, I'll hand it over to Matt Marsh for the financials.

Thanks, Louis.

On page 12 -- the third quarter, we reported net sales of $414 million.

They were up 7% year over year.

EBITs up at 52.1[%] for the quarter on a reported basis, and net operating profit at 25.4[%] on a reported basis.

Net sales, as Lou talked about, increased as a result of higher volumes in both segments, Asia-Pacific and the US, higher average net sales prices and local currencies.

As Louis indicated, the headline number for the North American-Europe segment is flat price, and again, that's just at about the 2.5% price in North America, offset by about 2 points of FX and 1 point of each for Canada and Europe.

So that gets you kind of into the flat number.

The gross-profit margin is up about 130 basis points.

We continue to see good plan performance, and that's continuing to comp favorably versus fiscal 2015, and resulting in lower unit costs, a combination of the plants running well, and input costs are down year over year.

SG&A expenses have increased.

We're continuing to invest in the segments, and then some of that is partially offset by stock comp, which is down year over year because of the share-price performance in comparison to a year ago.

And then adjusted net-operating profits up.

It's really driven by the adjusted EBIT is up 23%.

That's really on the back of operating-segment interest expenses up, corresponding to the increase in our debt.

And taxes are up, corresponding with the operating improvement in the business.

On page 13 -- the story for the nine months is very similar.

So through nine months, we've got sales of $1.292 billion and net operating profit of $215.6 million, so net sales up for -- again, very similarly, higher volumes in both segments and similar price trends in the two segments for the nine-month period as well as the quarter.

Similar story on gross profit to the prior page.

Plant performance, primarily in the US, combined with input costs is driving the expansion of our gross-profit margins.

The drop-down to adjusted net operating profit is up, primary because of the adjusted EBIT.

You'll note in the other-interest-and-expense line item, that's favorable by about $8 million year over year.

It's really driven by three things.

There's a $4-million favorable change in foreign exchange [forward] contracts year over year, about a $3-million change in interest-operate swaps year over year, and a $2-million gain this year on the sale of the pipes business that obviously wasn't in the prior corresponding period from last year.

Slide 14 -- the change in the Ozzie dollar versus the US dollar -- you know, the US dollar continues show a lot of strength.

It did so in the quarter, and that's what this graph shows.

What's shaded there is the quarter period.

You can see that it certainly levelled off for the most part throughout the quarter, but in comparison to a year ago, it's down pretty significantly.

And the table on the bottom of the page -- you can see the impacts on net sales, gross profit, adjusted EBIT, and adjusted NOPAT -- it changes the sales comparison year over year by about 4 points and EBIT by about 4 points, as well as net operating profit by about 3 points, so a somewhat material change on our results as we're translating both Canadian, European, and Australian results, this being the focus of this page.

It's primarily on Australian dollars -- is on Australian dollars.

On slide 15, you get the US input costs.

Pulp has decreased by about 9% compared to a year ago, so that's obviously been a favorable impact to the business.

Cement prices continued to rise year over year.

They're up about 8% for us and up higher in the market.

Gas prices have come down dramatically, as you might expect, as have electricity prices -- are down 20%.

So that gives you some sense of the input-cost tailwind that we're seeing year over year that's helping to expand gross profits.

From a segment perspective, in the North American-Europe segment, for the quarter $79 million of EBIT in the quarter and almost $258 million for the nine months.

As Louis indicated earlier, what we reported in the segment for North America and Europe for EBIT margin was a 23.9%.

I'll just give you guys the pieces of that one more time.

That's a 26% underlying North America EBIT margin, and then that's partially offset by Europe, and that dragged -- Europe and the non-FC drag it down to 23.9%.

And then year-to-date, North America is at about 25.1% -- sorry, 26.7%.

And very similarly, Europe and non-FC brings it back down kind to the 25.1% range.

So for the quarter and year-to-date, EBIT is up significantly, 24%, 25% for the quarter and the year, primarily with lower production costs.

Certainly, the list-price change that we made in North America is helping, as well.

Fiber cement EBIT margins in North America did expand in the quarter and for the nine months, so they're up about 230 basis points in the third quarter and almost 340 basis points for the half year.

So while a good performance trend and a very similar year-over-year expansion, we saw here in the third quarter that we saw in the first half of the year.

In Asia-Pacific, EBIT in local currency for the quarter and year-to-date increased 1% and 7%.

Louis already hit on the lease write-back that we had in the third quarter of fiscal 2015.

We note that in our filing.

That's a $2.6-million gain in the third quarter of 2015 that obviously did repeat this year.

And then year-to-date, the Carole Park startup has had an impact in the $7-million to $9-million range that's also impacting the nine-month comparable.

On page 17, no real change in R&D.

We continue to track kind of in the range of 2% to 3% of sales.

There is a bit of decrease you'll note year over year, also impacted by US dollars and the strengthening of the US dollar and the translation of the R&D that we have outside the US.

But other than that, it's just normal variation, so no real change in the trends that we've talked about in prior calls on R&D.

General corporate costs for the quarter.

Discretionary expenses were down in the quarter, but it was just that, discretionary.

It wasn't anything kind of -- no strategic change, or -- it wasn't a change in labor; it was just the timing of some expenses.

We also had a decrease in some of the FX losses.

For the year, year-to-date, higher stock-comp expenses as well as a bit of a decrease in discretionary expenses.

But I'd say corporate costs are pacing where we want them to pace.

On income tax, page 18, we're estimating a 26.6% adjusted ETR for the year.

It's up slightly from what we said in November for the first half estimate for the year.

That obviously changes as our estimates become actual and we look at our geographic mix of earnings and are able to take a closer look at our taxes.

But it's trending in line with where we've been pointed all year.

Obviously, that changes with geographical mix of earnings.

We're paying income taxes in Ireland and the US, Canada, New Zealand, and the Philippines.

We're not currently paying them in Europe or Australia, due to the tax losses.

And the Australian tax losses, I'll just remind everybody, is primarily the result of the deduction we get from our annual contributions on AICF.

On page 19, we have $200 million of cash flow from operations for the nine months and fiscal 2016 in comparison to $104 million for the nine months of fiscal 2015.

That's really driven by a combination of a lower annual contribution this year versus last year and a favorable change in working capital, primarily in the US and primarily as a result of inventory.

That's a combination of -- the plants ran really much better this year, and we built inventory earlier in the year, and then we've been able to work that inventory down.

And then that was partially offset by some what I'll call normal variation in receivables and payables.

Receivables and payables has generated cash for us, just not as much as they did a year ago.

CapEx continues to trend in line with our expectations, $44 million through the first three quarters of the year.

It's obviously down substantially versus a year ago because of the reduction in the capacity projects.

The Australian project's complete, and that's started up now in Carole Park.

And then we're almost complete with our two US expansions.

And then on the financing side, you can see there was a decrease in the borrowings as well as -- that was partially offset by the decrease in the dividend paid.

On page 20, a little more color on CapEx.

The green bar outlines kind of maintenance CapEx, and the grey bar outlines capacity related, so you can see the capacity.

CapEx has continued to decline down, and the main feature is becoming maintenance CapEx.

So it's consistent with what we've said in the last few calls and consistent with what we would expect over the next several quarters.

We'll continue, obviously, investing in maintenance CapEx.

And we continue to defer both the Plant City and the Cleburne commissioning, but we are constantly monitoring that, both for overall capacity and product-specific capacity.

On slide 21, our financial-management framework remains unchanged.

Just to remind everyone, it starts for us with strong financial management, and we measure that through a combination of strong margins and operating cash flow, good governance, and financial ratios in line with investment-grade management.

So all that remains unchanged, and we feel good about that.

Capital allocation -- no real change, and our top priority remains investing in the organic growth of the business, both through R&D and capacity expansion, followed by maintaining our ordinary dividend, and with our third priority being flexibility for kind of everything else.

We are within our leverage range of 1 to 2 times adjusted EBITDA.

We're at the low end of that range.

You'll see on the next page that we've got about 5.8-year weighted-average facilities, almost a $500-million revolving bank facility, and 65% liquidity.

So we feel good about where we are from the overall strength of our balance sheet and our overall financial management framework.

On page 22, a little bit more on debt and liquidity.

In the quarter, we refinanced our revolving credit facility -- sorry, we replaced our bilateral loan facilities with a revolving credit facility.

We took that total amount from $590 million down to $500 million.

That's on top of the $325-million senior unsecured note.

That combined with an accordion feature that we have in the revolving-credit facility gives us an available debt -- you can see pictures on the left.

What we have for outstanding debt is represented in the bars to the right.

On our balance sheet, we've got about $95 million of cash, really strong liquidity position; and we're at the low end of our 1 to 2 times leverage range.

So we feel like we're on strategy overall from a balance-sheet perspective and feel good about our access to debt and to the markets.

On page 23, the guidance range -- sorry, the analyst forecasts are currently projecting between $237 million and $249 million of NOPAT adjusted net income for the year.

We've raised the low end of our guidance range to $240 million to $250 million.

And if you recall, last quarter we had a range of $230 million to $250 million.

Obviously, that's got a number of assumptions built into it.

We've got about six weeks to go.

And that's all I've got on guidance.

So with that, we can open it up to any questions.

(Operator instructions) Emily Smith, Deutsche Bank.

Good morning, Louis.

Good morning, Matt.

Just a couple of questions from me.

Firstly, in terms of your US margin, you obviously highlighted the Q3 margin ex the European and other businesses is very strong.

When I look back over the last five or six years, the Q3 EBIT margin has been seasonally weaker.

Is that something that you would expect to [dedicate] in FY 2016, as well?

And secondly, I just had a question on volumes.

I think -- you know, 12% volume growth obviously compares to -- appear that everybody looks at in [LP] being down 5% in the quarter.

And when you look at some of your other competitors, the volume growth also seemed a lot lighter than what you're reporting.

So it sort of -- while the housing starts are up 9%.

I'm just wondering if you can give us some clarity as to why it doesn't all seem to be adding up.

It seems to me, when you look at your competitors, that your market-share growth is actually a lot better than when you look at, say, the overall US housing-starts data.

Okay.

So on the EBIT margin -- yes, the third quarter is always the toughest quarter because you've got the holidays between Thanksgiving and New Year's in the US, where activity is pretty low.

So, yes, I think pretty much if the business runs right, the third quarter is always the toughest one to deliver the financials.

We did pretty good this quarter and kind of went through that.

I guess you hit on one of it.

Volume up 12% certainly helped.

And then the input cost and the plants running well also helped.

So that is a fact.

It's usually lower, and this year we did -- well, as you can see, we did 2.6 points better on EBIT margin than we did last year.

So obviously, we did relatively better in the quarter.

As far as our volume comp -- you know, quarterly comps are just hard.

There's just a lot of various because you either had a good quarter or a bad quarter last year you're comping against, and then you have this quarter.

And then you have volume that spills over to the next quarter, or maybe it was pulled in in a previous quarter, for whatever reason.

I think we look at it on a four-quarter basis, and we forecasted things out.

And we think the 12% probably does indicate a little bit of early traction, but more so it's just normal variance you get in a quarter-to-quarter comp.

So certainly we're not less optimistic about our volume tracking above the index than we were three months ago when we reported.

But really our view hasn't changed too much.

We're going for a lot more volume than we're getting right now, so we're coming up short.

We didn't come up as short in the third quarter as we did maybe in the first two.

But I think by the end of the year it'll look pretty much the same.

Great.

And so, the European windows businesses, are they -- would you expect those businesses to continue to detract from the US margin, or -- you mentioned Europe was unusually weak (multiple speakers) --?

Europe just had a stinker quarter.

So that -- we wouldn't expect a repeat of that.

Remember, we're reporting non-fiber-cement initiative revenue, which is very small in EBIT losses, which aren't large, but they're enough to drag down our EBIT margin a percent, or so.

Those will stay in the segment.

So until we're running positive EBITs, mainly the windows business right now -- until we're running positive EBITs, it'll dampen the EBIT margin in the North American and Europe segment.

Right.

Thanks very much.

John Hind, Merrill Lynch.

Good morning, Louis and Matt.

Just a quick question, following up from Emily's, about the market share.

(inaudible) coming through for the orders (inaudible) orders results (inaudible) to focus more on the 250 and below thousand-dollar category range.

I think your shares declined a little bit in those categories over the last couple of years.

Can you expect growth over and above the market if this is a real trend with the builders going forward?

It depends market by market what degree we participate in the, say, the bottom third of market.

In the southern markets, like Atlanta, Houston, and even the West Coast markets, Seattle, Portland -- those are, like, four big markets there -- we'll do well in the starter and first [move-up] home.

When you get into the vinyl markets, our market development hasn't gone that far, so we start at the top of the market, and we wouldn't be in the starter or first-move home.

So my answer would be, it doesn't -- you know, what type of house gets built really doesn't concern us much because we obviously have targets for participating in all of the different segments.

It's not something we can change.

There's not some product-development initiative you would launch if you felt there were going to be more starter homes built over the next ten years than they were the last ten years.

But we're not as biased away from starter and first move-up homes as you might think because of our big markets in the South.

We do participate quite well there.

Okay, great.

And on the capacity expansion, it looks like you're sort of idling two of the plants, Florida and Texas.

What level of starts would you need to see to switch these back on, or to ramp them up, or is this just because there's a little bit of regional softness?

I'm just a bit surprised, given the 12% volume this quarter.

John, we've got plenty of capacity.

One of the keys to running an organic-growth business like ours where we have such a large share of the total category is to make sure you never run out of capacity.

So we're -- if you run out of capacity, you're just shorting the market that's come over to your product.

So it's just -- certainty of supply becomes an issue for your customers.

So we've always committed to deliver on that certainty of supply by having excess capacity in the system.

You're right.

We've got two good lines, two large lines, modern lines, that we haven't started up in the US business.

Our planning for those lines was based on the original housing forecast, and quite honestly, this year a higher PDG for [our result].

But -- you know, it doesn't come down to housing starts.

We will probably start up that Florida line sometime next fiscal year, and it'll be driven more by capacity on a specific product than overall capacity that's being driven by housing starts.

So we're very comfortable where we're at in capacity.

We feel like we have a lot of capacity ready if the market did turn up at a quicker rate than it's currently forecasted.

Or we can, again, defer those startups -- and sure, you've got the carrying costs of the sheet machines, but that's not a huge problem for us, obviously.

Okay, great.

Thanks, Louis.

Peter Steyn, Macquarie.

Hi, Louis and Matt.

Thanks very much.

A couple of quick ones.

Just on the notion of destocking.

It seems to be a [thematic] that's coming out of the US [humbled is an] supplies, or across the board.

Have you seen any impact from destocking?

Clearly in the realms of 12%, probably not much, but could you more pertinently comment on your January sales performance to date, whether there's been any acceleration as a consequence of anything related to destocking?

You're right.

We've seen that -- I don't know what I'd call it -- explanation, I guess, a kind way of saying it.

We've seen that explanation in other company results, but we're not experiencing any of it.

Great.

That's clear, with 12%.

And then just on working capital, very strong performance in inventories.

Could you comment on how their progress is from here?

Is there sustainability of that improvement?

I'll let Matt cover that.

He's more on top of that.

We built up inventory last year.

Part of that was our normal winter build, but we also were putting a lot more board through the plant.

They were running significantly better in the back half of last year than they were in the first half of the year, and that resulted in higher stocking levels.

We saw that coming into this year, and we knew that we would, obviously, take those inventory levels down.

So we're pretty happy with where we've got our inventory at the moment.

Obviously, we look at it by region and by product.

And we feel like the majority of that cash has gone back into the system now and inventory's kind of at a more normalized level.

Thanks, Matt.

Matthew McNee, Goldman Sachs.

Louis, Matt, just a quick one, just on the margin.

Matt, you talked about the impact of the weak euro and the windows business, etc, on the margin.

But the Canadian business -- I know it's sort of part of North America, but can you give us a bit of a feel -- because that margin in that Canadian business must be sort of mid-teens at best, maybe even lower.

So is there any thought to maybe pushing out prices in Canada just to offset that depreciation that you're seeing in the dollar?

No.

I mean, we price based on our value position in the market.

By the way, the Canadian business is almost all ColorPlus on the exterior side, so it's a good EBIT margin business for us.

When we talk about the price adjustments, obviously we're talking about Canada and Europe due to FX.

When we talk about the EBIT kind of step-down, then we talk about the non-fiber-cement, which is mainly windows in Europe.

So we don't have a margin problem at all in Canada.

When you look at that 26% in North America, you were saying Canada's doing 26%, as well, I mean, US --?

I don't know.

No one's ever showed me that number, but I know what our price-cost-volume equation looks like up there, and I'd say it's fine.

It's not something you would take a price increase to try and fix.

It's not broken, so we don't have a problem up there.

And Louis, one of your competitors was sort of highlighting that another one of their competitors, which is I suspect were pointing at you, were doing some discounting in the quarter, and they were saying you guys are getting aggressive.

Is that what's driven the higher volume?

What -- is there any credence to that?

I'm not sure they were referring to us.

The way -- kind of the way it works -- and I know you know, Matt, because you've followed us for a long time -- is we set our price, and the discounters set their discount price against us.

So there's little benefit in us cutting a price, if it's not on a bid project because -- and most of our work, obviously, is not bid -- because they're just going to take their discount and apply it to our lower numbers.

So we sell at the premium, and then they pick their discounts.

So I'd have to assume they're talking about one of our [hard board] competitors rather than us.

Okay.

And just sorry, final one.

Obviously, it's early days, but it does look like the PDG is picking up a little bit.

Can you give us evidence or indication on specific markets, like the vinyl market?

Are you trying to get -- starting to get some traction there, or is it mainly more in other markets?

You know, I mean, the variance in PDG -- the normal variance in a PDG calculation is greater than whatever pickup we would have seen.

So we're not actually declaring that we've got PDG increasing.

Obviously, we feel pretty confident the things we're doing in the market are going to get us there, but you can't see it in the results yet.

And as far as what are we working on PDG -- I think we talked, probably in November, about the rate of decline of vinyl had started to slow over the last -- I think it was at that time 10 or 12 months.

So that's our focus, is vinyl, and most of vinyl's in the, kind of north and mid-Atlantic states.

So we are back having the right amount of resource pointed at vinyl.

So I definitely expect our PDG to improve.

But like I said, I think two quarters now, it's not going to happen overnight, and we don't think it's happened yet.

So I wouldn't read too much into the 12%.

No worries, thanks.

Andrew Peros, Credit Suisse.

Just an extension of the volume question, sorry to belabor the point.

But perhaps just as a point of clarification, maybe -- Lou, when you talk about the quarterly variances in that 12% volume growth, obviously there could be some distributed restocking or some (inaudible) activity.

But when we [sit here] six weeks into the fourth quarter, what's your order file looking like in the context of the 12% volume that you delivered last quarter?

Are you tracking above or below that, just to give us a bit of feel for how much of that is underlying activity versus perhaps that (inaudible) or restocking (multiple speakers)?

We'll go back to my destocking, now restocking question.

You know, our customers -- that's not normal practice for them.

I guess maybe they know they can rely on us for supply when we need it, so they're not going to -- I mean, our lead times are fairly short -- they're not going to take a bigger position on inventory than whatever their seasonal demand would indicate.

So it's nothing to do with restocking.

As far as our order file right now, it's fine.

But remember, I think we kind of indicated last year -- and I know, I think we indicated earlier this year, maybe even this call, I mentioned -- you know, we had a price increase last year in March, which pulled some volume forward from [2016 into 2015].

So we won't comp at 12% in the fourth quarter, but not because our order file is off.

It's because our comp is a lot higher in the fourth quarter than it was in the third quarter.

Okay.

And just in terms of the US prices flat to, I guess, incrementally down, can you maybe just aggregate how much of an impact you saw from the depreciation of the Canadian-US dollar versus maybe some adverse mix, and just that as a precursor to a question about the performance of interiors versus exteriors part of the business.

That's where you would get a little bit of mix is -- relative to last year, is our interior segment is running much better.

We did a little fix-up there just over a year ago, and we're still running pretty strong on that.

So our growth rate on interior is pretty good.

And that obviously does sell at a lower average price because it doesn't have the [pain] or some of the other features that exterior products have.

So there is a little bit of mix.

But the easy way to get to our price -- we were up about 2% in the US.

And then by the time you took care of FX in Canada and Europe, it was flat.

So, US business up 2%.

Thanks.

And just a final question for Matt, obviously the balance sheet is in pretty good shape.

Net debt to EBITDA doesn't [border man] of your target range.

Just wondering at what point do you start to think about capital management again, if we get to a situation where you're below that target range again?

It's not quite as formulaic.

Obviously, we want to stay within our range of 1 to 2 X. Already happy with where we're at.

Obviously, there's a lot of volatility in the debt market at the moment.

So being towards the low end of that range at this point in time with the volatility that we see seems like a reasonable strategy.

I'm happy with where we are with the balance sheet.

We obviously continuously monitor where we are within that range, and we'll continue to do that.

But just because we're at 1 versus 1.4 wouldn't necessarily drive a strategic decision on additional returns above the ordinary dividend.

That's great.

Thanks for your time.

Keith Chau, JP Morgan.

Good morning, Lou and Matt.

Just a followup question on Matt's question on the LP.

Lou, without [be not] raising its prices this year, it's likely that it'll probably impact overall competitive dynamics (inaudible) part of the US, regardless of whether the competitor that we're referring to was Hardie or a [hard board] competitor.

If you start seeing LP becoming a bit more aggressive on price [themselves], would you look to pull the price lever a little bit further, either through rebates or other mechanisms?

We're always going to use price as part of our marketing mix, whether it's competing for short-term business or positioning ourselves for the longer term.

So I wouldn't say we wouldn't use price, but I want to, again, stress -- you know, Hardie becomes somewhat easier to manage than other companies because we know that whatever we set our price, the discounters are going to pick a margin below that that they think they can sell the volume they want to sell.

So it really doesn't help us -- you know, if your price is X, and you drop it to 0.95 X and the discounter is selling 15% below you, he's just going to go 15% below your new price.

So we're value pricers, and of course, we have to deal with the discounters that are trying to sell a good enough product positioning.

But like I say, we're not tempted to try and chase more volume with price because we know what the rest of the market does when we do that.

Okay, thanks, Lou.

And just a second quick followup question on products outside of siding.

The interior segment, Lou, what percentage of total volume is that at the moment?

And just a second quick one around trim attachment rates and where you're seeing those?

I don't have the exact percentage of interior volume, but I can tell you it's growing at about the same rate as exteriors this year, which is good.

That's a much higher growth rate than they had been growing at.

And as far as trim attachment, we've talked a little bit [at code] about starting up Plant City number four, and Plant City number four is going to be a trim line.

So our trim attachment is pretty good, and the trend line is pretty good in a few of our regions, southeast being one of them.

So that's why that Plant City capacity will come on.

Overall, I'd still say we're not performing as well on trim as we want to.

So we'll be doing more things on trim in the next couple of years because we're still not satisfied that we're getting the attachment levels we should.

Okay, thanks very much, Lou.

Simon Thackray, Citi.

I'm sorry, Katherine Alexander just stepping in for Simon, here.

Can I just ask a question around the import cost behaviors that you talked to?

Can you give a sense of the relative contribution from each of your import costs?

I think we might have that in our materials somewhere.

Yes.

So for -- I'll give you a general sense.

For the nine months in North America, gross margins were up about 330 basis points, and the bulk of that came from production costs, with a little bit coming from price.

So the 330, you can think about that as 280 of that coming from production costs and 50 basis points coming from price.

And then of the production costs, about a third of that is coming from input costs, and two thirds of that is coming from plant performance.

So that gives you a general sense there.

The dynamic, obviously, is a bit different in Asia-Pacific, for two reasons.

One, the pulp we buy is in US dollars, and as the dollar strengthens, obviously that creates input-cost headwinds for the Asia-Pacific business.

And then the Carole Park startup that we've had throughout the year is obviously inflating production costs kind of temporarily.

So that's why you see for the nine months in Asia-Pacific, even in Australian dollars the gross margins are down by about 120 basis points.

And you can see the majority of that is actually -- or more than the majority of that is production costs because prices are up and performing pretty well for the region.

So hopefully that gives you a general sense.

Yes, that does, thank you.

And just one other question.

Just looking at your maintenance CapEx spend as per slide 20 on the presentation, it looks a little bit low, just tracking against the last three quarters.

Is that just seasonality?

And how should we think about that going forward?

Maintenance CapEx -- you know, like you'd hope, we try to manage the plants to a certain level of overall maintenance.

Obviously, we have the money when there's good projects or preventative maintenance to do, and sometimes the timing of that results in a bit of quarter-to-quarter lumpiness.

We think we're kind of in the general range of $75 million to $90 million per year of maintenance CapEx, and that's the range that we're pacing to.

This year we'll be a little bit short of that, but what we're planning for next year is in that vicinity.

Great.

Thank you.

And if I could just be really quick with one last question -- you obviously talk about primarily demand growth in the US as your key metric and key focus going forward.

Do you target primary demand growth in Australia and New Zealand, as well?

We actually do [internally] talk about it the same way.

Primary demand growth, you know, tries to indicate how much demand is being created by [your] category relative to others that would also [sell into the] market.

So in the US, it really does refer to our position and our growth against vinyl.

We're creating primary demand for fiber cement at the expense of vinyl.

In Australia, it gets a little bit more complicated because we have brick, and then we have our [flowing] products which go against wood.

We have our siding products go against brick.

And then we have interiors products.

We have commercial products.

So it's not as clear of a concept in Australia, but it is -- I guess generally it's the same thing.

We don't play market-share games, or category-share games, so we're not going to grow as large as we want by selling against [like] products.

We have to create the demand for our type of product from similar products.

In our case in the US, it's vinyl.

Great, thank you so much.

Andrew Johnston, CLSA.

Good morning, Lou.

Good morning, Matt.

Just two things.

Most of the questions have been asked.

Lou, can you just talk a little about why Europe's been so [cool], just to -- and then, obviously there's kind of that -- how you see that progressing over the next few quarters?

And then secondly, Matt, can I just -- the number you mentioned about the impact on Carole Park, was that a number for the quarter or was it the number for the nine months?

I think it was 5 to 9 -- $7 million to $9 million?

For the nine months.

It was for the nine months?

Okay, thanks.

And as far as Europe goes -- no, it was just a management gap in Europe.

We just had poor performance and -- no, we wouldn't expect it to continue.

We're already through the problem, so we don't expect it to continue.

Okay.

Was that a volume problem or a price problem there?

[Let's keep it as] management.

It wasn't price.

It wasn't price.

Okay.

Thanks very much, guys.

James Rutledge, Morgan Stanley.

Thanks, good morning.

I guess if I was to try and pick apart one negative from the result, I think the Asia-Pac volumes [seemed weak] even in the context of backing out of the pipes sale.

It seems to have declined a bit -- sorry, the [rider] price has declined in the quarter as compared to the second quarter.

Just wondering if you can talk around that?

I probably can.

I'd probably look at -- I mean, you're right [three is lower than seven] so I get it.

But I sat through a review of the Australian business, and I kind of came away -- the only issue we had in Australia is the Carole Park startup.

The volume is probably normal variance.

I don't know what timing of price increases and different things are down there.

But we actually like our growth rate against our market index in Australia, and I wouldn't read too much into the single quarter.

Okay, no worries, thanks.

Just secondly, around the normalization that you're [talking to] for Europe, I guess, over the next 12 months.

As those losses normalize, I guess that is going to improve your overall divisional EBIT margin there.

And even though you're not taking a price increase this quarter, if those input costs do continue to be favorable, then I guess you should be probably tracking above the 25% margin.

Are you comfortable in the short term with that margin tracking above 25%, or how should we be thinking about that?

I think our official comments have been near the top or slightly above our range.

And certainly it'll be that way this year.

And my guess would be the same next year.

You wouldn't worry about Europe next year.

You just take a look at the input costs.

And if they took a radical swing around, that might pull us down a little bit.

But we're pretty confident where we've been sitting now for the last four quarters at the top or slightly above our range.

Thanks a lot.

David Leitch, UBS.

Thanks for taking my questions.

Firstly, I wanted to just quickly ask about the vinyl penetration strategy.

Do you envisage a similar rate of growth in R&R as new vinyl (inaudible)?

It's actually -- I mean, it's more of an SG&A challenge in R&R, but it's actually a little easier market development in R&R because you're talking -- you know, the decision-maker is the individual who gets the benefit of the decision, where with the builders, they tend to want to multiply the premium by the number of houses they're going to build; and it becomes a little bit tougher decision for them than it is for the homeowner.

But the short answer to your question is yes, we see ourselves ending up every bit as good market-share-wise in the R&R as we will be in new construction and vinyl markets.

Thanks.

And that kind of goes to my [left-field] question, which really I shouldn't be asking now, but I will anyway.

I look at the population growth and housing development market [and household formation] in the United States, and the stats show that an incredible amount of population growth is in the over-55, over-60, and over 65 age category.

And I kind of think that's going to mean over the next 20 years there's going to be a big shift in the sort of houses that get built.

I'm just wondering whether you think about that, and does it have any input in your product strategy?

Or do you just (inaudible)?

Our job is to have a strategy for each segment.

So we don't have for high-rise construction here, but pretty much every other segment, whether it be senior living, starter homes, first-move, second-move, repair and remodels, we have our game plans.

And our game plans lead to more market share in those segments.

And as that segment becomes relatively larger or smaller over time, then we either get a little bit more or a little bit less.

So we don't have any big strategies we're working on for shifting the housing market in the US.

Thanks, guys.

Cheers.

(operator instructions) George Clapham, Arnhem Investment Management.

Hi, Lou.

Just the same question I always ask, but sort of split between R&R and new construction volume over the nine months, has there been much change in that?

And you talked a bit about share growth, but share growth in maybe the [reside] market, how are you addressing that, and what's happening there?

So a [rough split] coming into the year and still right now is about 60/40 between -- 60 in R&R and 40 in new construction.

As far as our R&R game plans, I think you know we've got our game plans we run in vinyl markets.

Then we enhance that in some markets with what we call our ambassador programs.

And then more in the hard siding standard markets, which are mainly fiber cement standard markets, we run our R&R a little bit differently.

I won't say that we're running every market as well as we want, but we're pretty effective doing market development against vinyl in the R&R segments.

We'd like to be doing it in more markets, probably doing it better in most markets, but overall I'd say we're pretty good.

(Inaudible)

So I think -- you know, obviously this PDG -- like I said, it's mainly pointed at vinyl because their rate of decline has slowed while we've spent some time on other things.

And we're back with the appropriate resource and focus on vinyl.

And as you say, that means vinyl new construction and vinyl -- which is mainly in the mid-Atlantic and northern markets -- and then vinyl R&R, which -- again, it's in those same markets, but a little bit more widespread in R&R.

It's more the standard in R&R even than it is in new construction.

Have you got a short of rough share of what you've got in that reside market versus vinyl?

I mean --?

Our estimate of our shares are almost identical.

They're probably both between 18 and 19, or 17.5 and 19.2, or something like that.

They're very close to each other.

Okay.

That's -- all my other questions have been asked.

Thanks, Lou.

Andrew Johnston, CLSA.

Thanks, Lou.

Sorry, I should've asked this one before.

But just can you talk about whether you're seeing different growth rates in Houston and in Texas compared with what you're seeing in the rest of the country and what you've been seeing in those markets over the last couple of years?

As far as our volume growth or the housing starts?

Well, we can see the housing-starts numbers and the growth rates in Houston coming off of -- just in terms of your volumes.

We've been in pretty good shape in Texas.

We've been concerned about some of the forecasts that had Texas housing coming way off.

I guess Houston is softer than it had been, but then other markets, like Austin and Dallas, have been pretty good.

So you ask me about our growth rate relative to the last couple years, and I'd say it's in the same range.

We're in pretty good shape.

Okay.

Great, thanks.

There are no further questions at this time.

I'll now hand back to Mr. Gries for closing remarks.

All right.

Thank you very much.

I appreciate everyone joining the call.

We'll talk to you next quarter.

Bye.

That does conclude our conference for today.

You may now disconnect.