James Hardie Industries PLC (JHX) 2016 Q4 法說會逐字稿

Okay thanks.

Good morning everybody.

Appreciate you joining our results call today.

We're going to do this -- I'm Louis Gries obviously and Matt Marsh is here, our CFO.

We're going to do this like we do pretty much every time.

I give a very quick overview of the businesses, how they performed, and Matt will go into more detail.

After Matt's done, we'll go to Q&A for investor analysts and then at the end if we have any media we'll go to media questions.

So sorry I flipped through those early slides which is the disclaimer.

So I'm on slide number 6 I guess.

I think you've had a chance to look at the results.

Basically the quarter was flatter than you would have thought it was going to be in the quarter from both net operating profit and EBIT and that brought us in a little short where most of you were expecting for a full year a net operating profit.

That's kind of a one-off.

It's not a one-off from an accounting standpoint but it was an isolated incident we had in one of our manufacturing plants in the US so I'll go to that.

That's where we came up short on the EBIT side.

Overall I think we -- you know we finished a good year.

The growth was flatter than what we're used to and certainly that's our main focus as we move into fiscal year 2017.

We talked about the last couple quarters.

I think we do have some traction starting on the PDG again and that'll be our main focus going forward.

As far as the financials in the business in the US, they're strong -- Asia-Pac pretty much right through the region are strong.

Europe had a bad year in fiscal year 2017, somewhat due to the FX change.

I mean that dampened financials but in addition to that we just didn't run the business as well as we normally do or should have.

Cash generation was good as you see in the slide, good in next slide which drills down a little bit on North America.

The market's okay in the US so we're staying in that now getting to be pretty normal pattern of each year, housing is a little bit better than the previous year and when I say a little bit, it's when you think of our addressable starts it's less than 10% improvement year-to-year and that's what we've been looking at, 6% or 7% for the most part.

We kind of expect the same thing for fiscal year 2017, which again most of you that know our business know that that's not bad for us.

We like to focus on market share gains and market share gains are actually -- yes, they're much easier to get a builder to switch in a market that's not red hot, so 10% up if we get that next year, we'd be really happy with that.

If it's more like 6% or 7%, that's fine as well.

We don't see any way that it falls back at all.

So I talked about the one problem we had, higher production costs at one US plant.

We're not going to dwell on this but it was $7 million, so it's just short of $7 million and that's kind of what impacted -- well that is what impacted the financials differently than I think most of you were expecting and certainly we were planning for.

Having said that, pretty much the rest of the business performed well.

Like I said we got a little bit more traction in PDG.

Our other plants outside of that one incident performed well.

Input costs are okay, so no problem with the input costs.

It'll be a little bit higher maybe next year, but nothing to be too concerned about.

Our real -- and again, these are North American and Europe and when you look at North American, obviously the accounts -- or the results are stronger, so instead of the -- well we'll go to the next slide.

Instead of the slightly you know, at the high end of our target, US is actually over the target.

So we're running more like 26% and then that's being pulled down as we talked about before by our windows initiative which is early stages of starting up a business.

That initiative continues to track pretty well.

Got off to a shaky start first part of the year and got some things worked out on the operations side, about halfway into the year and since then we've had good momentum.

When I say good momentum, you know, relative to our plan for what we're trying to do at that start up business through the rest of the year.

So -- but that does drag down the EBIT margin some and then Europe like I said, we didn't have a good year on Europe and that dragged it down the rest of the way.

FX in Canada and Europe also affects our pricing that we publish for the US/Europe business and obviously that flows through to EBIT as well.

Again, we're pretty happy with the year.

Everything is running well.

We would have like to have grown at a higher rate.

When we became aware that we were losing traction and in our growth rate above market, we kind of tuned up our programs and we think we're on the right track there.

So next slide shows you the price.

Price is flat for the year which was a little bit of a surprise.

I think we went in the year, we said flat maybe plus 2%.

We didn't get to plus 2%.

Part of that was the FX outside of the US and part of that was we didn't get -- the mix didn't work out the way we originally forecasted it might and some of that was positive so we had HardieBacker sales were strong again last year so our growth rate on HardieBacker was very good.

So that pulled down price a little bit because that product line sells at a lower average price than Scyon.

ColorPlus is kind of flat in our mix now so we're not getting help from color on price, which we would have thought we would have gotten a little bit, so we've got some work to do there as well.

Now you know we don't sell color in the same way every market.

In some markets it's our standard product and in other markets, it's just for certain segments, certain applications.

So the mix on color can be somewhat what we're doing and then somewhat where the geographic mix is going in the country so more to the north, you're going to get more color as a percentage of total and that's going to give your help on mix.

We didn't have that last year.

As far as next year goes, most of your know we didn't take an across the board market increase on price in March or April.

We did the review and decided to leave the prices where they were and stay focused just on the growth side.

We think -- you know, we've kind of gone through the whole equation again, we're going to be flat, maybe down a hair.

So -- and down a hair will be more the mix, maybe a little bit of a change and a few rebates here and there, but the main thing would be we're not seeing a lot of help from mix next year so since we have no increase, you start out flat and if it's down 1%, it's probably down for mix.

Go to the next slide which gives you a little bit on Asia-Pac, Asia-Pac had a good year, except for the Carole Park startup.

They ran over budget on that by about AUD5 million.

It's obviously disappointing but, you know, it's a good line.

We're going to get very good unit costs off the line.

I visited the plant on Monday.

I think we're now in -- we're not at full utilization of the line but we're now in (inaudible) in the line so the financial impact on the line shouldn't carry into fiscal year 2017 to any real degree, but we did absorb an extra AUD5 million plus, we had planned for about AUD3 million so it cost us about AUD8 million to start the line and we haven't started to get any of the benefit of the lower unit costs yet.

Other than that I think the market trends are good down here.

I know the market, there's a lot of concern about the overall market coming off.

We're aware of that.

We still think it's going to be a good enough market for us to perform well again next year.

Philippines, we're going to add capacity because we're basically out up there so we'll be adding capacity in the next year or so.

In the meantime there will be some exports into some of their markets in order to kind of meet our commitments to the customers and that, so that wouldn't be at a great margin when you're coming out of either Australia -- I think it will be out of Australia, but again it's not something that's going to be negatively impacting our absolute results but it might -- from a margin standpoint, it doesn't contribute much.

So before I hand it over to Matt, summaries -- kind of all good.

I definitely think Europe will -- Europe is small.

You all know it's small but it had a bad enough year to where you could see the impact of a poor year.

We'll get that back on track.

The windows business I think will do -- from an expense standpoint, a negative EBIT dollar perspective, we think it's about half of what it was this year so that'll be an improved result financially but more importantly I think we're starting to prove out the business model there.

It's still very early days but we're kind of liking where we're at.

US business, better traction in the last two quarters.

You can't measure PDG quarter-to-quarter so we're always cautious.

You really should let it run for rolling quarters.

I don't think we'll know for sure exactly where we're at on PDG until the November announcement but certainly in the business we feel like we've got some traction.

I think the plants in the US will run well.

They're a little tight right now on supply of all products.

We're commissioning a Plant City line we built a year or so ago.

That'll probably cost us maybe a couple million this quarter and maybe a couple million next quarter, but the capacity is needed to service demand in the south and you know, we haven't been that happy with our last two startups so we're very focused on Plant City delivering a better startup result.

So again, traction on PDG.

We think all the plants will run well.

Freight's likely to be a little bit higher, somewhat due to inefficiencies and somewhat due to the market being a little tighter on basic trucking, flatbed trucking, but all in all, we see more of the same -- some growth in the market, some growth against the market and EBIT margins either in or in the high end or above our range.

Okay Matt, thanks.

Morning, thanks Louis.

So for the Group, fourth quarter Group results, net sales were up 6%.

As we've said, we had higher volumes in both segments, higher price in Asia Pacific.

Price was down a little bit in the fourth quarter in the North American Europe segment and for the Group overall, we had some headwind with the strong US dollar.

You can see gross profit was up about 40 basis points.

Overall that's a combination of the isolated production that Lou talked about in the US combined with the tail end of the Carole Park startup costs as well as the continued strong US dollar and the adverse effect that that's got on the (inaudible) purchases for Asia Pacific.

Adjusted net operating profit was up 4%.

If you take out the impact of FX, it'd be up 10%.

We don't talk about foreign exchange too much because we don't control it and we don't think it matters, but you'll see in a couple slides an aggregate for the year, it had a relatively big impact.

Adjusted EBIT was up 4%, again excluding FX it'd be up 7%.

Interest expense was up, obviously as the debt level was higher year-over-year.

So we had net operating profit in the quarter of $28.8 million.

For the full year, we had net sales of $1.728 billion, up 4%.

You know, a similar story, higher volumes in both segments, good price traction in Asia Pacific, flat price in the North America Europe segment.

Excluding the effect of foreign exchange, net sales would have been up 8%.

You can see gross profit margins are up 170 basis points.

As we've said in each of the last three quarters, the US plants had a good year overall and the production efficiencies that we've seen there over the last 12 to 18 months, that really helped contribute to the gross margin expansion.

That combined with we had a lot of the input prices going in the right direction in fiscal 2017 also across the board.

SG&A expenses were up, here you can see 4%.

Little bit of FX helped offset that so underlying SG&A was up closer to 6%, but you know, more I'd say BAU, we're investing -- business as usual -- we're investing in the businesses, mainly in growth programs, marketing programs and putting more feet on the streets so that's what's driving the SG&A.

Adjusted and operating profits, at $244 million for the year on a reported basis and on an adjusted basis, at $243 million compared to $221 million a year ago.

You'll see about a $7 million swing in other income.

About $3 million of that is foreign exchange, about $2 million of that is interest rate swaps and then almost $2 million of it is a small gain that we took in the first quarter on the sale of the pipes business.

Here's the foreign exchange slide we've been showing for quite some time.

Down in the lower right hand corner if you're looking at the screen, you can see the impact for the year.

So about a 4 point adverse effect if you will on sales growth on a reported basis and almost a 5 point impact on the growth rate for adjusted net operating profit.

So again we don't think that it's material to the overall value of the Company or it's certainly anything that we're trying to manage on a day-to-day basis but in the context of foreign exchange, the dollar is really strong this year and across the board on our major currencies, the year of the pound and the Aussie dollar, that had an adverse effect.

US input costs, pulp decreased by about 7% year-over-year.

Cement prices were up last year.

We think they're going to be up again this year.

The cement overall as a marketplace in the US has got a lot of demand more than supply, so prices continue to rise.

You can see the utilities are down, so gas was down a lot as you'd expect as fracking dried up and oil production stayed high.

On both the industrial usage and the residential usage gas prices were low, quite a bit lower.

We're not expecting that kind of reduction in 2017.

Electricity prices were also down.

Freight last year was down from pretty high levels the year before.

That was largely driven by fuel two years ago.

Last year a lot of the fuel prices came down as many of you know, and so that brought freight prices down.

A little more detail on the segments for the fourth quarter.

So you can see the North American Europe segment for the quarter in the full year was up 4% and 19% for EBIT.

As Lou said, the US only was over the 20% to 25% EBIT margin range, it was at 26%.

When you combine in the impact that windows had and FX and Europe, that drags it down to 24%, 24.5%, so it gets you into the upper end of the range for the segment but the US business operating above the range.

A lot of the dynamics in the North American business are very similar in the fourth quarter they were to the first three quarters, so freight was favorable, the plants performed well with that one exception, lower unit costs, volumes were good, a little bit of headwind with the SG&A improvements, investments that we're making.

In Asia Pacific in local currency for the quarter and the full year, EBIT was up 10% and 8% compared to the prior year, mainly as a result of higher volumes and average selling price.

Production costs as I've said were up, a combination of the US dollar impact on the pulp purchases as well as to a lesser extent the fourth quarter, the Carole Park startup but for the year Carole Park, as Louis mentioned, ran over what we had initially forecasted and caused some year-over-year headwind for us.

On R&D, I'd say very consistent in the fourth quarter as the prior three quarters.

So for the year we're happy with R&D is very much on strategy.

It continues to be in the range that we try to keep it in as a per cent of sales.

On general corporate costs for the full year, more or less flat.

The increase -- any increase would have been as a result of higher stock comp.

Adjusted effective tax rate for the year of 25.8%, so fairly close to where we had forecasted it to be.

Adjusted income tax expenses for the full year increased, primarily because of the mix, the geographic mix of earnings.

We had income taxes, were paid and payable in Ireland, the US and New Zealand as well as the Philippines and in both Europe and Australia, income taxes aren't paid and that's been again fairly consistent with prior quarters due to in Australia primarily the losses associated with the deduction relating to the annual contribution made to the fund.

Cash flow was strong for the year, so operating cash flow was up 45%.

Really three things -- the underlying operating cash from the businesses was up almost 15% so that was good.

There was a difference in the annual contribution you know, and every other year, one year is higher than the other and so there just happened to be a difference this year.

It'll go the other way for this coming year.

Then in working capital, we had some timing variances.

You'll see year-over-year some headwind if you will.

There's some cash use in receivables and payables.

Nothing to read into that.

It just happens to be with the way the timing of the quarters closed year-over-year and we fully expect that that cash will provide some nice headwind for us or sorry, some nice tail wind for us for fiscal 2017.

Inventory came down quite a bit year-over-year, so that was a total source of cash of almost $55 million.

We'd built up some inventory two years ago, blend that down in inventory levels, as Lou mentioned, the network's running tight at the moment and so as a result inventory levels are down a little bit.

Lower CapEx as you'd expect year-on-year.

Most of the CapEx that you see here and on the next page is maintenance CapEx.

A little bit of the final fine-tuning that we did in Cleburne and the Plant City investments are reflected in the CapEx numbers but that obviously was down on a year-over-year basis and then you can see lower financing activities as well.

So here's some more on CapEx.

For the full year we spent $73 million.

It was down from over $200 million the year before.

You can see the mix, the green bar is maintenance and the grey bar is capacity.

The capacity related is primarily the Plant City and the Cleburne new sheet machines.

So those are more or less completed.

We are in the process of commissioning the Plant City machine, expect to start that up in fiscal 2017.

The capacity expansion at Carole Park as you know is done and that line is up and running.

Similarly on a financial -- the financial management framework, no real change to the framework.

We continued to start with overall strong financial management.

You may have seen we got upgraded in the fourth quarter from S&P.

We're currently being reviewed as part of the annual process by Moody's and we'll see how that discussion goes.

No real change in the capital allocation priorities.

We continue to prioritize funding for organic growth first.

That covers both a combination of all the programs in the business, research and development, sales and marketing, an all the operating costs.

Maintained the ordinary dividend, so we were at the higher end of our dividend payout range for fiscal 2016.

We very much remain committed to paying within that range and then maintaining flexibility for sort of everything else, whether that's being strategic on the acquisition side or making sure we've got plenty of headroom, given market volatility and cycles as well as additional returns when that's appropriate.

If you see on the next page, no real change overall to the liquidity profile of the Company.

The facilities remain in place.

We've got the revolving credit facility now for $500 million.

We continue to have the senior unsecured note of $325 million over eight years.

Balance sheet I think is in good shape.

We had $107 million of cash at the end of the year, $406 million the net debt.

Plenty of liquidity and access given the Accordion event that we needed it and we're certainly at the low end or the very bottom end of our targeted net debt to EBITDA range.

You probably will note that we'll move out round within that one to two times X range at various points in the year.

There tends to be quite a bit of cash outflow in the first quarter of a fiscal year related to the payment to the trust primarily, so while we're at the low end we'd expect certainly for that to come back up here over the next 60 to 90 days.

Couple slides on asbestos.

KPMG and AICF completed their annual actuarial review and the report is available now on the website.

So that's been completed for March 31.

The undiscounted and uninflated central estimate decreased this year, to down to AUD1.434 billion, down from a year ago of about AUD1.566 billion.

The 8% decrease in the net present value was really three main things.

The estimated future number of non-mesothelioma claims decreased.

The lower average claim size, which I'll go through in a moment, as well as a lower projection on defense costs.

Those were partially offset a little bit by a Sullivan and Gordon regulatory change in the year.

You'll see a little bit of commentary in the report this year, where gratuitous services, those costs in the state of Victoria can be included in future claims.

Overall that impact wasn't -- was a AUD56 million for Sullivan and Gordon but overall the net present value down for the year.

Last year we made a contribution of $62.8 million.

We made a total of $799 million since the trust was established and this July we expect to make a US dollar payment of about $91 million to the trust.

A little bit more detail on claims.

So for fiscal 2016, claims received at AICF were 12% below the actuarial estimate and 13% lower than the prior year.

Claims reporting for mesothelioma were 4% lower than the prior year and just about on the actuarial estimate.

So I think that's a good piece of news.

They trended up from the actuarial estimate the prior two years and so being back on the actuarial curve is a positive outcome for AICF.

Reporting for non-mesothelioma claims were all down pretty significant, you can see down 31% from the prior year 33% from the actual estimate and that's across almost all the other claim categories other than meso.

Then overall good trends on average claim settlement size, so across almost all disease types the average settlement size is slower.

Nil settlement rates tracked below expectations and large claims also tracked below expectations.

So all that is positive.

AICF's gross cash flow for the year is about $20 million more favorable than it was originally projected to be, so that's good and I think the AICF and the claims process seems to be in good shape.

For fiscal 2017, Lou has mentioned a number of these already.

We expect the US housing market to be a lot like it was last year.

So fiscal 2017 we're expecting it to be moderate growth, below 10% -- 6%, 8%, 10%, somewhere in there, and most of the forecasts seem to be hovering around that.

So we've planned on US residential starts of about 1.2 million, 1.3 million is our planning assumption.

That's off of a total North America, meaning US and Canada, res and non-res headline number of about 1.4 million starts.

We expect the EBIT margins in North America to be at the high end of the range for the year, and you can see for Australia we've got detached starts forecasted to be around 100,000.

Obviously that's a segment we play in more favorably than in high density.

We expect New Zealand and the Philippines to also have a good, healthy market.

So to wrap up, over 2016 we think was a good year.

We had about a 10% increase in adjusted and operating profits, really strong operating cash flow for the year of almost 45%.

We've done a total of about $269 million of shareholder returns in the year, a combination of the dividends that we declared last year and the dividend we declared in the first half of this year plus the little bit of share buyback activity that we did.

We did announce today our intentions to do a $100 million share buyback as part of the fiscal 2017 program.

And with that we'll open it up for questions.

Good morning, Lou and good morning, Matt.

Just a couple of questions from me, Emily Smith from Deutsche Bank.

Just looking at your volume growth numbers, 11% looks like a pretty good number to me.

I wondered if you could clarify what that might have been on a like-for-like basis without the pull forward in the previous corresponding period.

So just wondering what the real volume growth might be.

And I guess bearing that in mind, looking into the Q1, you're obviously -- well, it was a tough comp this quarter, obviously a bit of an easier comp in the next quarter.

Just wondering if you can give us a little bit of help there.

And looking at your utilisation, your plants, you obviously mentioned Plant City.

Where is your utilisation sitting at the moment?

And just finally on PDG, you said November is probably when you'll know if you've been successful but is it -- would it be fair to say that the early signs are looking pretty positive that you guys feel comfortable that you're back on track in that PDG sense?

Okay, thanks Emily.

The first question is kind of an order file question.

We did have a price increase that had some pull forward volume last year, so we felt the first quarter -- or the fourth quarter comp was going to be a more difficult quarter to comp against than the first quarter coming up, and all that does remain the same.

So we definitely had a stronger volume quarter in the fourth quarter than we were expecting and our order file right now looks pretty good so we would expect to comp well against first quarter numbers.

What that means when you put them together and figure out well, put them together then you don't have to worry about the price increase and all that.

That's what I said, we're pretty happy with the number.

The market, we have different views on the market, even internally.

I think it's just a little bit better than it was, and then others think it's pretty much the same as it was.

So if you put all that together, that's why I say we aren't declaring that we're back on the PDG curve we want to be on but we do believe we have traction.

So the market might be growing a little bit better; if it is, obviously we're getting that benefit but we definitely feel we're getting some benefit of traction on the PDG side.

Utilisation, the way we calculate our utilisation on a gross hours basis, so we still have some plants that don't run 24/7 and we have some lines that don't run 24/7.

So the number is not -- the overall number is not really the issue right now, with certain product categories getting a little bit tight.

Probably the most significant one is Plant City -- I mean HLD, which is at Terminus South and that's why we need the Plant City line up.

Now, when the Plant City line comes up it will produce products other than the HLD or we'll get more capacity beyond just the HLD.

That's why we're tighter now from a product standpoint than we are from our overall capacity.

Our overall capacity is probably still in the 70s, so we're not bumping up against our overall capacity issue.

And I guess I covered the PDG.

Yes, you really want four-quarter rolling.

I think it's definitely too early now but we're feeling better, but probably by August we'll either confirm yes, we were right in feeling better and we don't know what the exact number is going to be, but it's not -- it's going to be up from what we had this year, which was only a couple of points on exterior products.

Andrew Johnston, CLSA.

Just a couple of questions around geography, Lou, if I could, around the US.

What trends are you seeing across different parts of the US?

And then secondly on those US margins, I think you mentioned that it would have been 26% without the Europe issue, without the FX issue, and is that also without the $7 million plant issue as well?

Yes, with the $7 million.

Okay.

So yes, we ran 26% and we could have run a little bit more than that in the US if we didn't have that production issue.

As far as JIRV, I know you're specifically interested in Texas, and Texas is fine; Houston a little bit off; Dallas real good shape.

Most other markets in Texas are in good shape.

So our volume in Texas is up year-over-year, so we sold more in fiscal year 2016 than we did 2015, and some of that's PDG but even our market index is slightly up in Texas.

So I don't know how the Texas market has held up to the oil price reduction as well as it has, but it's done pretty well.

As far as other parts of the country, I think everyone's back in a growth position.

Midwest, Northeast, Southeast, Mid-Atlantic, Pacific Northwest, California and obviously some are hotter than the others, but when you go -- and we did do this earlier when we were working on our PDG analysis, it really balances out to almost being meaningless for our Company.

So we're participating in all the markets and the variance between markets isn't great enough to really impact our growth rates.

So the US housing market, although it's low by historical standards, has been good from a year-to-year improvement.

How about the Northeast, because you were particularly targeting vinyl and the Northeast, and we saw some ridiculously high numbers for vinyl volumes in the first quarter.

I think we had some ridiculous numbers up there as well and that was just a monthly variance thing; I don't know why.

At the same time, we had a bit of a spike, they had a bit of spike.

But again, we track the VSI number.

We do look at -- we look at the public companies, the ones that give us the information.

We were able to correlate pretty closely with the reduction in PDG pretty well timed to a slowing of the rate of decline in vinyl siding.

And right now if you bring that forward six months and say okay, you think your PDG is better, do you think vinyl is doing worse?

You really can't declare that either.

They have an okay trend; they went through a softening and then they have an okay trend right now.

But believe me, if you're investing in Hardie you're investing on the basis that vinyl is going to continue to decline and we're certainly of that belief.

We think we're seeing it but you can't look at short-term numbers and always pull it out exactly, especially -- monthly numbers you just can't do.

But again, whether it's hard sidings, vinyl, we always look at everything four-quarter rolling.

And when we were talking to you in August we didn't like -- or even in November, we didn't like the four-quarter rolling.

We like the four-quarter rolling better for the three categories than we did either in November or August.

All right, thanks.

Thanks, Louis.

Peter Steyn, Macquarie.

Could you perhaps just give us a bit more of a sense and a background on the issue with the plants?

Yes, I can.

We're not going to give you all the details and we've decided to not tell you which facility just to embarrass the facility any further, but the -- yes, which is a management mistake, it was a breakdown in a management system.

We made product that shouldn't have been made and we had to rectify the situation and it cost us about $7 million.

That's obviously at the EBIT line?

Pardon me?

That's at the EBIT line?

Yes.

Costs of goods sold, it's in there, yes.

And then perhaps just the second question around costs, how you are seeing the cost environment specifically in the broader pulp context of the next period.

Some views on that?

Yes, I do have views but Matt's would be more informed.

These guys work on the numbers so I'll have Matt run through that for you.

Like we said for last year, obviously pulp was down compared to the prior year.

We think for fiscal 2017 we don't necessarily know if the forecasts are right, meaning the external forecasts; I think a lot of them are calling for it to come back up.

We're not seeing that yet; we continue to see it down to flattening.

So if it goes back up it will go back up or flatten back out.

So we're expecting pulp for the next year to be pretty similar to the pricing that we're seeing now and we'll just see how it plays out.

Obviously that's on the US dollar side.

For as long as the US dollar stays strong that will continue to have an adverse effect on how we purchase it in Asia Pacific.

Matt, Andrew Scott from RBC.

Louis mentioned the possibility of adding capacity in the Philippines; I think that market's bashing up against utilisation.

Can you just give us some guidance on what the spend might be and timeframe on that?

Yes.

We're just starting to go through the approval process -- we've gone through the approval process so we're just starting to go through the project's process.

I think it will be in the $20 million range is what that line and incremental facility cost will end up being.

We'll do most of the construction work over the next 12, 18 months and then start to move into a commissioning phase right after that.

And is that plant with a view to purely servicing the Philippines market or do you look either broader afield, maybe within Asia or specific product categories that maybe come down here?

Yes, it's primarily the Philippines.

They also service -- they do some export business and we've constrained that business, the Philippines business, on their export side.

Particularly this year we took a little bit of their capacity out of exports in order to fund the internal market; that's a higher-return sale for us obviously and it was a way for us to manage the capacity of that plant and maximize the returns while we were in until we get the new capacity on board.

As the new line comes on over let's call it 18 months from now, we would obviously allow them to start to ramp back up, the export sales.

But the main reason for doing the capacity expansion is because the Philippines market is quite good and that team is getting good traction there and that business is getting good traction in the market on its equivalent of PDG.

Thank you.

Any questions on the phone?

Your next question comes from John Hind of Merrill Lynch.

Please go ahead.

Good morning, Louis and Matt.

Congratulations on a good result.

Just a quick one, or a couple of quick ones from me.

Perhaps if we could talk about the strategy around the buyback program please?

Now, obviously you didn't get through much at the last one and share prices weren't at $19 then so what is the thinking around that?

How should we think about it, or how should we be thinking about it?

You probably -- you won't believe me until we actually do it I don't think, is probably what you're really thinking.

Obviously we changed a couple of things last year.

One, I was trying to shift away from special dividends and I think we've done that I think; there doesn't seem to be an expectation at the moment on the special and I think that's a good thing, that's in line with what we were trying to do on the balance sheet and from an overall capital allocation standpoint.

Two, historically for the last several years we've announced up to 5% of issued capital as the share buyback program, and obviously that would be a very large number.

And so this year what we're trying to do is announce a number that we're actually going to go do.

So that's the reason that we've announced the $100 million.

And then the other thing I'd say is we intend to actually go do it.

So it was a strategy all along a year ago when we moved away from specials to go to share buyback, step one of that was to get away from specials and then step two is get to a quantum and then actually go execute on the quantum, and I think now we'll go do that.

So I'm hoping over the next three to six months that we'll execute on the share buyback and either the next time that we're talking or certainly the next time that I'm here, we won't be talking about whether or not we're doing share buyback.

Thanks.

Louis, I think you mentioned some PDG program tune-ups this quarter.

Can you perhaps give us some color of what was involved there?

Are they ongoing and what do you think that the net impact can be, please?

Yes.

I think in our PDG, if you look at the story over the last year, I think as we started focus on doing some other things right in the business that either had financial returns or HardieBacker growth, the concerns about LP trying to grab a me-too position in our category, all that work distracted as from the main PDG work of positioning Hardie against vinyl with our market development models that we've developed over the last 10 years.

So I think it's just really reemphasizing the need to be running the vinyl as well as we do these things that are also important in the business and I think Ryan and his team in North America have definitely made that shift.

And market development isn't like sales development where you walk in the door, you talk to a customer and you walk out maybe with a few extra orders.

Market development is changing behaviors in the market you're participating in, so it takes a little time to see the results.

We get some early indications; obviously we see commitments and conversions before we see volumes so our early indicators are definitely ticking up for us, so we're pretty happy.

Now, that's all about -- everything I said there was mainly about new construction in vinyl markets.

Our programs in R&R have been performing well.

They probably softened a bit as far as the conversion right in R&R for a while.

We really didn't have to do much to reemphasize that.

There was a little bit of analysis required on the new construction side, not so much on the R&R side.

So we've got the people, we've added people into the business, we've structured it a little bit differently to where we get the right amount of attention on the exterior products and vinyl in particular, and still get a good result in interiors.

So they're out running as separate organisations now which I think is helpful.

So it's just that stuff, it's just tune up the organisation, resource allocation, just all the normal stuff you're supposed to do, and we just lost a little traction and we're trying to get it back.

Thanks.

Just one more on the new and R&R split.

Was there much of a change this quarter and how is it going to look -- how do you think it's going to look in FY17?

Sorry, I missed the first part of your question.

Sorry.

Your traditional split between R&R and new volumes, normally it's your 40-60.

Yes, sorry about that.

We're growing in both segments so it probably won't change radically until there's a change in market demand, meaning when -- next time we run into a housing recession.

Right now we're growing in both segments.

R&R is bigger than new construction, especially now because even though housing starts have improved for several years in a row, they're still not at the -- what the, quote, normal level is.

Yes, we're doing well in both segments and I'm pretty satisfied with where we're at.

Now, new construction, we talked a little bit about mix.

As new construction grows faster too than R&R -- which it does.

Say R&R is growing 4% to 5% now and say new construction grew 6%, 8% maybe last year, I don't know.

What happens is we sell more Cemplank, because in the south our new construction brand for big builders is Cemplank which does have a different price point than our Hardie brand.

So that was one of the mix things I was talking about.

If we get -- we will get another year we believe where new construction grows faster than R&R and that just naturally pulls your average price down a little bit.

Great.

Thank you very much, Lou.

Tack it on that question.

Okay.

Your next question comes from Andrew Peros of Credit Suisse.

Please go ahead.

Good morning, thank you.

Just a question around windows and the European business obviously still having a negative impact on margins.

Just wondering, how long do you think that will continue for before it starts to have a positive impact on the margins there?

Windows we're looking for a new product line for Hardie.

It's obviously not fiber cement, it does touch our fiber cement model in that it has a similar customer and value proposition in the R&R market but it's spending for a larger return down the road.

So going into the initiative we knew we were going to lose $X million for the first.

And the answer to your question is the first three years we think it's going to run negative EBITs.

And those negative EBITs will reduce significantly this year and then in fiscal year 2018, the way we've got it drawn up right now, is they would reduce again or possibly go away or by sure the following year would be somewhat positive.

So it's all expensed, so you're seeing everything, you're not seeing a bunch of capital spending and everything behind the scenes on windows; all you're seeing is expense.

It's not super-big dollars for what we're trying to do.

I think -- I don't know if you guys know that -- that runs under Mark Fisher as -- Mark Fisher has international and he has non-fiber cement so that runs under his non-fiber cement responsibility.

That team is separate from the US business; we did that specifically so we wouldn't be paying an opportunity cost.

In the US businesses we tried to start up a windows business and like I said, we had a little bumpy start, a few things were harder than we thought they were going to be.

It took us three, four months to sort out some of that stuff.

But over the last six months we feel like it's a well-controlled initiative that's giving us what we want to see in the market, and it's also given us the contribution margin at the unit level that we're looking for.

But that contribution right now does not cover the fixed costs in the business so that's how you end up with your loss.

But we are a positive contribution on the windows we're producing and selling at this point.

Okay.

Can I ask a question around US volumes slightly differently?

And I appreciate it might be a little bit hard to answer, but just wondering how much of the volume improvement that you saw was attributed to possibly the mild winter months that you saw over the last quarter.

Yes, just keen to get some thoughts around that.

Or mild weather.

Yes, the weather's not bad.

The weather's not bad; we don't talk about weather and I guess with only the exception when it's bad we don't talk about it, but we don't talk about it when it's good either.

But yes, I wouldn't have a way of guessing.

I think you'd see it in starts, completions; I think you can pull that out of the US data.

Obviously we don't think it's driving our numbers, so it's not like the northern markets are on fire because everyone's built through January and February; yes, we just haven't seen it.

But you can get it from the US builders, you can get it from the data on completions, but I don't have any specific information like a couple per cent came from that or whatever.

But the weather's been okay this summer; it hasn't been one of the bad ones up north.

Okay, thanks.

Your next question comes from Keith Chau from JP Morgan.

Please go ahead.

Good morning, Lou and Matt; a couple of questions from my end.

The first one, Lou, just revisiting the mix impact on the coming year, I was just wondering, there are a few of your larger customers, being the larger home builders or the end customers, suggesting that first home buyer activity is actually coming back into the market.

And a few of the larger guys are shifting their mix of product from move-up into the entry-level buyer.

Is that likely to have a further effect on mix in the years ahead or do you think the shift from the move-up buyer to the entry-level buyer isn't going to have too much of an impact on price?

It's a good question.

So when we weren't -- we clearly weren't happy with our PDG, we tried to go through all the arithmetic.

I already mentioned we went through the geographic mix but we also went through the housing mix as well.

And just to remind everyone, when we're selling against vinyl we're going to be much more biased to the top.

So in the Midwest, Mid-Atlantic, Northeast, Canada, we're going to be biased toward the top and that's where our market development programs are basically run.

When we're selling against hard siding then we're going to go all the way through to market.

We're going to go multi-family, starter home, first move, second move, semi and custom.

So it doesn't affect us nationally when one -- say the top is better than the bottom or vice versa, it doesn't affect us nationally but it does affect us in the northern markets.

Having said that, it's not enough to worry about.

It's not enough for us to change what we want to do and I don't think it's enough for investors to think this is going to be better than I thought or this isn't going to be as good as I thought.

Because I think in the end it's going to level out at some point where either the country continues to spend more on housing or less on housing and it will settle in at a basic terminal opportunity of whatever it be, X or Y, and then we're going to -- our 35% against that is going to give you a big number.

It's still going to give you a big number whether it's X or Y, and as you go through the business cycle it changes and we don't adjust much.

So we don't -- most of you know when we went into the downturn we definitely moved resources off of new construction and put them on R&R, so that kind of a big shift we would make if we had a similar situation.

But we wouldn't -- say there was a forecast out that starter homes were going to lag to market for the next seven years, we wouldn't pull resources off starter homes.

Because our position in each of those categories is kind of what adds up to in our value in the end.

There's always going to be enough starter homes -- first move, second move, customs --there are always going to be enough that we're going to want to target it with our resources.

So I wouldn't worry about it.

I can't remember what the trend is right now.

Over the years I always hear these trends.

I'll be honest with you, when we sit down and talk every month or so about how the month went, it's never the wrong houses are being built, it's we did the wrong things.

So we can things do as well as we wanted to.

Okay thanks Lou.

Just a follow up question, perhaps on some of the issues that you have done wrong that you've mentioned on the cost side, there's been a couple of issues on the manufacturing front.

Some a bit more systematic, being the manufacturing issues over the past kind of year or two that have now been resolved.

Some more sporadic, local management is an issue that you've just had.

Are there any internal issues -- sorry, internal processes that you put in place in order to prevent -- or, I guess, a risk mitigation strategy to prevent these issues from occurring?

Because it seems as though for each year there's a cost issue at some point during the year.

That's not a bad comment.

I don't know if we just tell you about our issues or other people don't have issues like we have.

Every 18 months, 24 months it seems like we're going to lose a ball mill in one place and then this thing wasn't so much equipment related and then we lose a ball mill in another place.

So I have to admit, as good a manufacturers as we are, it's kind of irritating.

Having said that, whenever we get in a situation like that, we do the root cause and we try and shore up our programs, both at the plant level and the oversight level.

So we've certainly done that with the most recent event.

Will it never happen again?

I doubt -- I think we'll have some bumps in the road.

I mean the manufacturing story is pretty interesting.

Matt kind of alluded to it.

When you look at the level of manufacturing efficiencies we're getting in the US business and to some extent, prior to start up at Carole Park, in the Australian business as well, we're on a steady improvement curve on manufacturing efficiencies, unit cost, waste generation, machine utilisation, delayed time, time between runs, all that stuff's good.

Then you have these bumps where all of a sudden you just have an episode you shouldn't have had and it costs you a fair amount -- enough money to where you've got to explain it, or I think you've got to explain it.

So, yes, I can't guarantee you we wouldn't have another one next year.

But I do believe that our organisation is kind of learning a lesson.

That you can aim -- we like to say step change.

When you bring a plant from running, say, 300 million feet a year and that same plant three or four years later is running 450 million feet, that's step change.

But you can't just do that.

You've got to do the incremental continuous improvement and have all the systems in place that make sure you don't have the bad events, a ball mill blows up on you -- they don't literally blow up, they just stop working -- ball mill goes out on you or a type of situation we had recently.

So we've just got to build it in.

It's got to be a tighter management system on the manufacturing side, and that's both at the plant level and the oversight level.

So I think Ryan, who has US responsibility, and Mark, who has Asia Pac responsibility, are committed to kind of making sure we get that in place.

But it's like Matt says about his buy-backs, coming off a bad event I'm not going to tell you we're never going to have another one.

So you're going to have to track us for a year, two years and then say, okay I haven't seen any of that stupid stuff happen, maybe they got it right.

Mm.

Okay, what else?

Thanks very much Louis, very helpful.

Your next question comes from James Rutledge of Morgan Stanley, please go ahead.

Thanks and good morning.

Firstly, just circling back to your earlier comments about backer board being a drag on average price mix.

I guess you're implying there that backer board's growing faster than your overall volumes.

I assume that's market share shift, given you're also saying that new construction's growing faster than R&R?

Yes, new construction is growing faster than R&R.

Backer board, actually as it turned out for the year, it was ahead of exteriors most of the year.

Then I think it pulled pretty even with the good exteriors quarter in the fourth quarter.

So what you used to see year-on-year is exteriors outgrowing backer, so we'd get some price improvement because of that exteriors outgrowing backer.

Last year, as it turned out, they grew almost the same.

So you got no benefit of that mix difference, it basically stayed even.

But, yes, Cemplank would be up in the south.

Not because of the percent of Cemplank but because in the segment was bigger relative to the R&R segment.

I really covered a big -- you get a big pull up from ColorPlus because you basically produce no more board and you put a lot of value add on with the paint.

We didn't get that last year, so that was another situation.

Some of that is, like I said, geography meaning we didn't grow as well in the north as we wanted to.

If we did we would have gotten a price improvement through mix.

But some of it's just -- even in the north we're not growing Color as a percentage of the total as well as we'd like.

So that's one of the areas Ryan and his guys are working on.

Okay, that's great, thanks.

Where would your market share be currently at backer board?

Was it market share, is that what the question --

Yes.

Yes, we'd be -- I don't know if we give that Sean, I don't know if we give it.

He says no.

We'd be the biggest producer of backer boards in the US.

So you have basically three types of backer boards.

You have fiber cement, which we would have 99 point something, you have glass mesh boards.

When you add them all together the glass mesh boards would have a higher market share than fiber cement still.

We still -- like last year we would have taken some market share from fiberglass mesh boards.

Then you have some gypsum kind of knock off boards that don't have a lot of share.

Then I guess you have DensShield with the glass mesh, which is a category that's probably growing because a patent came off so now several manufacturers have that technology, not just one.

So the long story is we have a very good position.

It's by the far the largest in the industry.

But we also see fiberglass mesh cement boards, our Arrum should give up share in the future and we think we're the natural taker of that share.

So we think we'll grow it more, even though we're currently the biggest.

Given that you're seeing good growth rates return after, I think it was two years ago where you took the large price increase, do you have any plans for price increases, more modest price increases, over the next 12 months in that product?

Yes, 12 months you're probably getting into a window we'd look at again.

So as far as this year, there may be little tune-ups of pricing, product lines, specific markets.

But we wouldn't take in across the market price increase.

I don't think we'll look at until -- I'm talking exteriors here -- I don't think we'd look at it until maybe December, January, for implementation in maybe February, March.

But I'm not saying we'd take it.

As investors and managers in a company, sometimes you aren't 100% aligned on every little point.

This is an area that management doesn't feel the same anxiety about as some of our investors do.

We think we need to price based on long term penetration of our product.

We're not necessarily annual takers of price.

We like our margins, we like our market position.

What we really want to do is grow.

Now a lot of times obviously you can take price and grow, that's an ideal situation.

We just felt like this year we'd be giving up some of the growth to get the price and we didn't think that was a good trade-off.

So I'm not saying we'll raise our price in 12 months.

But I am saying we'll certainly look at, as we do every year, and then consider whether we should take price or not.

It'll depend a lot on our growth rate and the competition within the hard siding category.

Okay, that's great.

I just have one other question around SG&A.

It looks like you've increased in the US, specifically within the March quarter, by about $5 billion, which is quite a ramp up compared to the other quarters.

Do you think you've hit most of the kind of current run rate of investment in SG&A?

Or do you think there's further to go there?

Yes, I think Matt might be closer to that than me.

Yes, we definitely stepped up the level of investment in the fourth quarter.

Most of that was in labor cost and most of that was in sales labor.

We've got additional market and product programs that we started to ramp up in the second half of the year and I'd expect that to continue through at least the early part of fiscal 2017.

Most of the investment is going directly into commercial facing programs and sales and marketing and product and segment oriented program and personnel, that we believe all should drive growth in the future.

So I think you saw a good sized bump in the fourth quarter and you should expect that that'll continue to grow a bit.

It certainly won't flatten out, at least in the first half of fiscal 2017.

Okay, thanks guys.

(Operator instructions).

Your next question comes from Matthew McNee of Goldman Sachs, please go ahead.

Thanks guys.

Just a couple of follow up questions.

Louis, just firstly on Carole Park, you said it had an AUD8 million impact.

So all things being equal heading into 2017, you should get AUD8 million higher impact there?

I think that's a fair assumption, that would be my assumption.

But I haven't specifically talked to the Australian business about that but I'm sure that's their assumption as well.

So we'd --

That's before obviously you've got the actual benefit of having the plant as well.

Yes, no, we'll start getting that benefit this year.

I don't think that benefit will kick in for the full year.

So we'll start seeing lower unit costs and lower freight costs as we bring more products up to the new line.

But, like you said, on a comp benefit, if we spent AUD8 million on a start-up and we don't have a start-up this year, we should start with that AUD8 million.

So you and I see it the same way.

Yes and just on the windows loss, is it $10 million thereabouts?

Or is it closer to the $10 million than $5 million for the full year?

Is it closer to $10 million than $5 million?

Yes, in terms of the --

Is it a game show or --

No, well, just trying to get a bit more info on the magnitude.

Because I think you said it was too hard.

That's not a bad guess.

So it's between those numbers and I think we'll have it again this year.

Obviously doubtful.

So you can see if we - if it was between those numbers and we have it this year, then it's becoming not such an issue for our US business results.

Okay, sorry, just to clarify, so it'll be similar loss this year in 2017, maybe halve in 2018?

Because I thought you said before that you thought it'd be close to break even in 2018, positive in 2019.

Yes.

And the loss would maybe halve this year.

I think you're trying to confuse me with all these years but --

Yes, sorry.

So for this year --

So 2016 we just figured and you win the prize because you picked two points that we were in between.

Then my guess is we're going to have our EBIT loss and run the business the way we want to.

So we're going to do all the market work we want and have out EBIT loss.

Then the following year I think you're either getting very close to break even or you're at break even by the end of the year.

Okay, but the loss --

And just to give you an idea of what goes with that, it's kind of doubling up of units.

So we get x number of units and we're looking to double that this year and we're looking to double again.

So I think it's a good plan.

But believe me, we're learning that part of the market, we wouldn't be good at it yet.

We're good at a few things and we have to build a capability.

But again, you guys know how Hardie thinks about this stuff.

If we're going to have another big category, like backer boards or exterior in the US, we want it to be a category that's going to generate good profitability.

So you can't go buy a $500 million revenue business and get that, they just don't exist in the US market.

So we're going to try and grow one.

In order to grow one, you basically start with zero capability.

We bought a parts manufacturer and we bought a windows assemblers, both very small.

We're now in the early stages of what we were, like US in the early 1990s, when we were trying to figure out how to make and market fiber cement in the U.S. market.

You go up a capability curve and we're going up that capability curve in windows.

It still looks like a good opportunity to us.

Our assumptions entering or launching the initiatives are mainly being proved out.

We don't have any that are show-stoppers, oh we didn't think about that.

Some of you guys know that we were in fiber cement pipe for a while in the US, that's a good example.

We hit a show-stopper a couple of years into that initiative and we didn't - we should have known that a couple of years ago but we didn't.

Well we're not quite a couple of years into windows but most of our assumptions are proven out.

Now there's no guarantee that we're going to be a big window producer, there's no guarantee that we're going to be successful with the initiative.

But we're doing a good job kind of exploring how you build a business model around fiberglass windows and generate returns that are well above our WACCs our investors will be happy with it and the scale is there in the end.

Yes and you're more confident that you were 12 months ago?

Yes, I mean just because of time, you know.

In other words, like I said, a lot happens in that first year and nothing really bad happened.

We didn't stumble onto anything that say, hey we had this thing wrong, we can't do it that way.

So far, so good.

One final question from me, Louis.

Last year in the US you talked about your manufacturing efficiency program and talked about getting about 10% more product from the same number of plant hours.

Putting aside what happened in the fourth quarter in that one plant, can you give us a bit of an update on how progressed you are through that 10% target?

Are you halfway there, are you pretty much seeing all the benefits?

Yes, I mean when you see Ryan -- I think you're going to see Ryan tomorrow in Melbourne, I'll be with him -- but he'll tell you he's probably almost all the way through the 10% and now he's looking for more.

So Matt kind of covered it, we're on a good trend line in manufacturing.

We definitely figured some things out that it kind of unlocked some of the potential of the approach we take to high throughput, low cost fiber cement manufacturing.

And of course the value add piece with Color and a few other things now.

So, again putting aside all the uncontrollable pulp prices in cement, like-for-like would you expect to get lower manufacturing costs in 2017, than 2016, just because of that manufacturing improvement?

Yes, if everything was normalised -- we've probably got a $4 million start up, so if all your input costs are normalised, you've got a $4 million start-up, do I think we have $4 million worth of improvements?

Yes, I would say we do.

Now you may not see it, depending on product mix and plant sourcing and all the rest of it.

But we'll definitely have that as -- well I shouldn't say definitely, I can't guarantee it -- but that would certainly be our expectation.

Okay, no worries, thanks.

Your next question comes from Kathryn Alexander of Citi, please go ahead.

Hi guys, just a couple of questions for you.

Firstly on primary demand growth, I know in the past you've articulated a short-term target of 5% to 7%.

I'm just wondering, can you confirm is this still the case and approximately how long do you think it is before you could realistically end up in this range?

Yes, our target is 6% to 8%.

I think we'd be able to tell you if we're in that range in November.

Okay, great.

Just a last one, probably one for you Matt, can you just provide some CapEx guidance for 2017?

Yes I think for the next couple of years, not just fiscal 2017 but probably for 2018 as well, we'll primarily be focused on maintenance CapEx.

We've obviously got the Plant City line that we're commissioning this quarter, we've got a Cleburne line that we're just about finished construction on and we'll commission that.

So we've got the capacity in the network in the US, so we don't see over the next couple of years the need for a brownfield, greenfield per se.

Obviously that's all subject to market demand and market penetration.

We'll have the capacity expansion in the Philippines which we've talked about.

And with the Carole Park facility in Australia we feel like we've got adequate capacity taken care of for Australia, the Australian market.

So I think you should think about fiscal 2017 primarily being a maintenance CapEx type year, with levels that look similar to fiscal 2016 levels, again kind of plus or minus.

So if we were around that $70 million, $75 million mark and you put a small range around that, that's probably the level that you should expect for fiscal 2017.

Okay, great, thanks so much.

There are no further questions at this time.

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

Alright, thank you, appreciate everyone joining our results call, appreciate it, bye.