James Hardie Industries PLC (JHX) 2017 Q1 法說會逐字稿

Thank you for standing by, and welcome to the James Hardie Q1 FY17 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. It's Louis Gries. I'm in Dublin this evening with Matt Marsh. We'll work through the results very much like we normally do, quarter-to-quarter. The slides are being managed in Sydney, so I'll be going out through page numbers. Start with page 6, which shows you the agenda.

Again, the same as we normally do, I'll cover the very high level overview, a little bit on the operations. Matt will go through the financials. We'll finish up with Q&A, investors and analysts first. Then if we have any media questions at the end.

I go to slide 8, which is basically the first slide on overview. You probably have seen we had a pretty straightforward quarter. On the first page you get the green arrows point up everywhere but EBIT margin. That was driven by a thinner EBIT margin in the US business but, as a general comment, things ran like we like to see them run, in the US and the businesses outside the US.

Before I go to the next slide, which is the US business, I'll just give you my quick summary up front. Volume comp was better, basically 16% on all products. That's more like an 18% on exteriors. For those of you that follow the Company, probably remember we had a soft comp we were going against last year because of the timing of a price increase, so if you kind of normalize it I'd see it more like a 13% and a 15%, 15% on interiors -- exteriors, sorry.

Price is where it has been. EBIT line a little short given the volume increase. That's really due to about four things. One of them was our planned SG&A increase, which we've talked to you about. The second one was we've accelerated some of our capacity start-ups, so you're starting to see that cost come in.

The third one is the manufacturing networks. Just running a little bit short of where we normally like to see it, so lost a little bit on the bottom line there. Then we are running some logistics inefficiencies due to supply chain being -- our supply being tighter than planned.

Anyway, if we go to slide 9 you can see the result of that, with the sales in the US up 15%, volume 16%, price, like I said, 1% off pretty much where we've been, and EBIT up 4%. A good absolute number, but obviously a little bit lower than you would expect with that kind of volume increase. You see all the bullet points we have on the slide there are pretty straightforward kind of dealt with my summary I just gave you.

Slide 10 -- that's the EBIT margin slide. Obviously, you can be reminded, I guess, this is seven quarters now where we're comfortably on top of our range. This one for the first quarter a little bit closer to the top than you'd expect, I'm sure. We still see the 25% top of the range performance going through the year, so we have no real concerns about how the year's going to go unless something changes externally, I think (inaudible) internally.

I go to slide 11. I said price has kind of been where it's been. What I mean by that -- if you look a fiscal 2015, 2016 and 2017 we basically have a $4 spread. You probably remember we didn't take price at the end of fiscal year 2016. We reviewed it and did not take it on either interior or exterior. I mean there were a few price adjustments. I'm talking more across the board.

So you see in that flatness we did take price the year before, and it only went up $3. That's some program costs that show up in price rather than SG&A. We will review price again this spring, as we always do. Not sure what decision we'll take. We're comfortable where we're at with pricing. As you know, our focus is more on the market share growth.

Slide on the right -- or the graph on the right, I guess, shows you coming out of the downturn. That gradual increase in housing starts, which we've talked about being pretty favorable for us as far as the way we like to run our business. Obviously had more starts, we'd have more business, we'd have stronger financials but, at the end of the day, the market gets too hot market share growth becomes tougher. So we're comfortable where we're at in the market.

Our PDG -- we're a little bit more encouraged by our PDG now than we were a year ago, so that's good. Like I said, pricing, we're okay with where we're at, although we know we've been flat for the last couple of (inaudible) years.

Go to slide 12. That's the international. Again, good story internationally. I guess the only red arrow there is on volume, but you'll remember that was driven by the pipes business sale. So right across -- well, Australia's running well. New Zealand's running well. Philippines -- you'll see in the next slide, slide 13, has a few competitive issues that we haven't faced in the past, so our guys need to work through that, which I'm confident that they will.

The country numbers -- which are shown here in US dollars -- you guys, I know, have easy access to exchange rates, but you can see Australia up 11%, I guess, in local dollars. It's more like 16% or even -- EBIT's up more substantially, up 38% (sic - see slide 13, "32%"). That's because last year we had a lot of start-up costs for Carole Park, and this year, obviously, doesn't.

A similar story in New Zealand. Sales are up 12% (sic - see slide 13, "8%), so prices off just a hair. Well, I shouldn't say hair; a couple of per cent, but that's more mix. The EBIT's down for the same reason. Again, the absolute number's good. It's just how it's comping against last year.

Philippines -- like I said, we're more competitive than we have been over there as far as facing competition. We're able to, in local dollars, improve EBIT by 8% (sic - see slide 13, "6%), so we get a little help from manufacturing there because the price was up just a little bit.

Europe -- numbers look good for Europe, but remember Europe was a poor year for us last year. We had a poor year in Europe last year, so we're just comping against a bad year. The business has rebounded nicely, but I wouldn't get too bullish on the big percentage of (inaudible) especially.

At this point I'll hand over to Matt Marsh.

Thanks, Louis. Slide 15 -- I'll take everybody through the financial results. So for the first quarter we reported sales of $477.7 million. They're up 12% compared to a year ago. Volumes were up, as Louis already talked about, in all the operating segments, price was also higher in the international segment.

You'll see when we get to the next slide sales were adversely impacted by about a percentage point of growth as a result of the strong US dollar. For the most part gross profits, on a rate basis, were about flat. They increased proportional to sales, up about 12%.

SG&A expenses were up 17%. That's really against a low comp in the North America business from a year ago. That'll start to normalize in the second, third and fourth quarter as we were ramping up sales and marketing and PDG initiatives throughout last year, we didn't really get that work going until the back half of the year, so the first quarter a year ago is just a lower SG&A number.

Then adjusted net operating profit was up 5%. That's on adjusted EBIT, up 9% compared to a year ago. We had an increase in other expenses of about $3 million and adjusted income tax went up proportionally with adjusted EBIT.

If you go to slide 16 you can see the impact of the dollar and Australian dollar exchange rate had about a one point adverse impact on net sales and gross profit as well adjusted EBIT and then operating profit.

On slide 17, in North America, input costs -- pulp remained relatively flat compared to a year ago, both in the market. We think we continued to have effective sourcing strategies across all the inputs, including pulp, so we're purchasing better than the market. The market's about flat. Cement continues to be up. That's pretty consistent with, I think, what we've said the last several quarters. We're seeing it up about 5% compared to a year ago.

Gas prices are down and freight prices are down market-wise. As Louis said, there's some inefficiencies due to our own internal supply constraints. Then on electricity prices, they're down about 4%. So overall, input prices are trending flat to down.

On slide 18 you've probably noted we've -- before I go into the slide, we did change our reporting segments this quarter. We thought providing better visibility into just the North America segment -- and what we've done historically is haven't had Europe in the North America segment. We thought there'd be greater clarity for investors and analysts on just reporting North America, so that's what we've done. And we included Europe in the international segment, as well as broken out or non-fiber cement initiatives on a separate segment, and then kept research and development as its own segment.

So on slide 18 is that North America segment. EBIT was up 4%. When compared to a year ago, volume was good for the quarter, as Louis talked about earlier, 16% on a reported basis. That was partially offset by prices down a little bit, but the real impact on EBIT, as I indicated earlier, was the higher SG&A costs.

Those dollars were invested directly into sales and marketing and commercial initiatives pointed at PDG and market penetration programs to help drive growth. Then production costs were up slightly, a bit, from manufacturing, but the real driver on EBIT for North America was the increased level of SG&A.

In the international segment EBIT was up 20%. Volumes were good in most of the businesses. You saw that the price discussion overall were -- we're getting good price in the key businesses and international. We definitely benefited in the quarter with not having the Carole Park start-up cost this year, the way we did last year. We're continuing to invest internationally in growth and organizational capability.

On slide 19, the other business segment represents our non-fiber cement businesses. Those EBIT losses, as we've indicated, would narrow this year as we continue to make progress in the windows business on being able to operate that business the way that we want to be able to operate it. So the higher gross profits in the quarter within the windows business drove the overall segment results.

Research and development continues to be on strategy. We continue to invest about 2% to 3% of our net sales. The normal fluctuations. There's nothing we need to report on R&D. General corporate costs were about flat for the quarter for both the general corporate costs as well as the stock compensation costs.

Slide 20 is our income tax expense. We're estimating an adjusted effective tax rate for the year of about 27%, 27.1%. The adjusted income tax expense and adjusted ETR for the quarter increased due to where the earnings are increasing geographically. We continue to pay income taxes and have income tax payables in Ireland, the US, Canada, New Zealand, the Philippines, and we currently are not paying income taxes or have payables in Europe, excluding Ireland, or Australia. Australia, again, as a reminder, just due to the tax losses, and the tax losses are primarily a result of the deduction that we received related to the AICF contribution.

Slide 21, cash flow. Cash flow from operations was strong for the quarter. The combination of the underlying net income adjusted for non-cash items was up about 13%. Then we had a favorable change in receivables and accounts payable. You might remember from last quarter we showed working capital as being receivables and payables working against us and inventory levels coming down.

The explanation at that point was it was just timing of how the 31 March period ended. What you're seeing here is that timing come back the other way, so nothing unusual to read into underlying performance of the receivables or payables. It just happens to be the way the timing works.

Capital expenditures were down slightly compared to about a year ago, but relatively flat. You can see there we had proceeds of about $3.7 million a year ago related to the sale of some property and facilities at our old [blending] facility. That's what the $3.7 million is. Obviously, that didn't repeat. Overall, a good cash performance for the quarter.

On slide 22, the first quarter CapEx spend was about $17.8 million dollars. That was down slightly, within normal variation level. From a capacity standpoint we've commissioned the new line in Plant City during the quarter. We're in the process now of starting that up and getting sellable board off of that product -- off of that sheet machine.

We're in the process of completing the Cleburne facility with a goal of completing that and then starting that up later in the year. Then, as we talked about in May, we've begun construction on a new line in the Philippines facility. That's expected to cost about $11.7 million.

If we go to page 23, no change overall in the way we're thinking about the balance sheet. Our financials continue to be good. We always start the equation that we want strong financials in the Company. So for us that is strong margins and operating cash flows and continuing to think of the balance sheet in our overall financial management policies from a -- as an investment grade credit.

We did get two upgrades recently in the quarter. Moody's upgraded us to a Ba1 on the credit rating. That was followed by S&P's upgrade in February to BB. And Fitch reaffirms the BBB minus.

No change in capital allocation, so the priorities remain the same. Our top priority is to fund the fiber cement business, both from an R&D and OpEx and SG&A standpoint to ensure that the plants are running well and that we've got the sales and marketing programs in the organization in place in order to be able to grow organically.

Maintained the ordinary dividends, so no change there, and continue to execute the ordinary within the defined payout ratio. Then everything else comes thereafter; a combination of wanting to have availability of capital for strategic opportunities and non-fiber cement, whether it's market cycles and then additional capital returns on top of that (inaudible) funds exist.

From a liquidity standpoint, no change there. We continue to have a conservative policy of keeping leverage within one to two times adjusted EBITDA. We still have the $500 million revolving bank facility, the $325 million senior unsecured note, and we did an additional re-offering of about $75 million of notes in July to take advantage of good pricing and a good market opportunity. That financing as I'll talk about on the next page, creates some flexibility for us down the road. Our weighted average maturity is about 4.4 years on bank facilities, 5.3 years in total, and liquidity's in good shape.

On page 24 you can see the debt profile on the left: $500 million of a revolving facility, $325 million of an eight year senior unsecured note. We did the re-offering of those same notes. We were happy with the execution on that re-offering.

Cash remains in a good place: $95 million at the end of the period. Net debt and liquidity are within the financial management target that we set and you can see the leverage ratio, we continue to execute within that 1-times to 2-times, well within that 1-times to 2-times leverage ratio.

For the fiscal year on page 25, the analysts' forecast was $264 million to $302 million right before the call. We're guiding to $260 million to $290 million for fiscal year 2017. Obviously that is predicated on several things. Housing conditions in the US do continue to improve at kind of a steady rate and we're continuing to forecast US housing starts on the new construction site of 1.2 million to 1.3 million.

The adjusted net operating profit range is subject obviously to foreign exchange levels continuing at or near current levels, and overall market conditions remaining about the same.

So with that, we'll open up to questions.

Thank you. (Operator Instructions). Your first question comes from Emily Smith with Deutsche Bank, please go ahead.

Good morning Louis and Matt, just a few questions from me. Firstly, around pricing, obviously prices were a little bit lower in the quarter. Just wondering if you can give us some color around what we should expect going forwards from a pricing perspective?

Secondly, just wondering if, from an SG&A perspective, you can give us a bit more color around the sorts of headcount that perhaps has been added, and if you would expect that growth to continue? Just finally, wondering around the increase in production costs, if that's something that you were expecting and, in fact, if that is something that will likely continue for the remainder of the fiscal year. Thank you.

Okay, thanks Emily, I think I can comment on your three questions. Pricing, we haven't done anything on pricing and, like I said, we'll review it in the spring. So I think you're seeing the type of pricing that we're going to have through this fiscal year.

It could be a little softer as we go through the year, depending on mix, whether it be regional or products or if there's a few more programs that start building more scale. Then we'll look at it at the first of the year and, if we were to go for a price increase, you'd start seeing it in next year's numbers but not this year's numbers.

On the headcount, we did add a lot of headcount, mainly in the sales and marketing areas. Some other areas as well but the focus was sales and marketing, either in the field or in the office. It won't continue at the same rate.

We started that ramp-up last year. So the comps, you see the big percent increase this quarter. But that's mainly because we hadn't started adding very much early last year but we did through the rest of the year. So we'll add some more but this is probably the biggest percent increase you'll see, my guess would be right through the next several years. We did add a lot of SG&A.

Then finally, production cost, the accelerated start-ups kind of reflect the fact that we had our calculations a little bit off on how fast we could stretch up to higher demand levels. So we've definitely gotten a little bit nervous that we're running tighter than we should. Our service position on most products has dropped. Still in acceptable range, and one product dropped below an acceptable range, so we're doing what we can to play catch-up there.

So you'll have some freight inefficiencies because we're going to optimize around throughputs, machine throughputs, rather than freight, so you'll see some inefficiencies there. Like I said, the plants didn't run as good as we though they would.

It's probably in the normal variance range. But it's also possibly being contributed, just because we have more activities going on with start-up in PC, ramp-up in Fontana, getting ready to start up Cleburne, and then we have some people working on our Summerville facility as well. So we're just spread a little bit thinner than we were planning to be spread at this point in the year.

Great, thank you. I guess the 18% of volume growth that you mentioned on exteriors is a very solid number and implies that the market share -- you guys are winning, I guess, from a market-share perspective. How are you seeing primary demand at the moment? Are you pleased with that volume number?

Well I mean certainly we look at four-quarter rolling and we really didn't like where we were last year this time, and we're definitely in better shape. But I wouldn't get too attached to the 18%.

And I don't want to mislead you, our volume looks good so far this quarter. So we're feeling pretty good about it but it's a longer game than one, two or three quarters. But we're definitely kind of ticking up on a PDG, but we're not where we want to be.

Great, thanks very much.

Thank you. Your next question comes from John Hind with Merrill Lynch, please go ahead.

Good morning Louis and Matt. Perhaps we can quickly just continue on from the PDG question. Are you able to give us a little bit more color on the R&R market? That seems to be, I guess, the holy grail of getting more of those volumes. How are you sitting there and are you doing anything differently this quarter, versus this time last year? Then I've got one other question after we touch on that.

Yes, now on the R&R, most of you that are familiar with our program, R&R, it's mainly against vinyl and it's a good program, we run it pretty well. I've commented in the past the variability market-to-market on how well it's run is more than we like. We've got some markets you just hit out of the park year after year, and then you have some markets that kind of don't quite get the traction we want.

But I would say, overall, we're doing well with our R&R program. You know and our market I think is also pretty good. Probably the number we're looking at is just above the 4% which is probably what we went in the year expecting.

Most of our emphasis on PDG is new construction. So as we build PDG, and I hope we continue to in coming quarters, it'll be largely on hold our momentum on R&R and build more momentum on new construction.

Thanks. So would the split have been your typical 60-40 R&R to new this time round, this quarter?

Yes, I mean I don't think that -- I mean it's the growth rate in those segments that kind of changes that percentage. And I don't think that the growth rate over the last year or two has been enough to really knock it too much off the 60-40. So I'd say that's still a good, rough estimate. It may be a little bit more, it may be 59-41 or something like that, but I wouldn't worry about that.

Okay and just quickly on Plant City, obviously commissioned, can you give us some sort of estimation where you think you'd be sitting with volumes from that plant over the next, say, 12 to 24 months? Is it -- I mean when do you expect it to be in line with the rest of your plants?

Yes, I mean, again, it's a big sheet machine and we're ramping it up on plank products now and we're going to move to trim products as soon as we get to a certain level of efficiency in the line. So we're going to have kind of a double ramp.

First you ramp -- you know, planks is an easier product, so you start the line on planks. Then once you feel you've got the thing pretty settled down, we'll put trim on and there'll be a second ramp just to get trim going. It's kind of what we call a product efficiency ramp, rather than a process efficiency ramp.

So my guess would be the new line in Plant City, you know maybe by the end of this year we'd be two thirds of throughput rate. But we do focus a lot on sheet machines, but yet there's other things that have to happen as well, and we're a little bit bottlenecked down at finishing. The sheet machines actually come up at a quicker rate than our finishing, so we'll have to work through that.

Then we also think we need to restart one of the lines we shut down in anticipation of a big line coming up. So we think our calculation there wasn't -- it was too tight. So we'll be ramping up, I think it's [PC3] we have down, and so we're working on that.

So what you guys are going to be looking at on our manufacturing is you're going to be looking at a fair amount of ramp-up cost over the next six months. Now I think with the business as big as it is, and with the extra volume, we should be able to handle that. It won't dampen, you know, EBIT as a rule, because you're getting the extra volume to offset whatever inefficiencies you have on those new lines.

So we're not that concerned about it. We're just kind of disappointed, in that we had a schedule for bringing these lines on and we just realized that we were playing too close, so we're having to accelerate two or three of them at the same time. Which I do think stretches our guys a little thin.

Okay, thanks very much Louis.

Yes.

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

Thanks guys, just a couple of ones, just to follow up. But, Louis, just on price, you said that you haven't done anything on price but you mentioned, in the result, the strategic pricing and tactical pricing. So does that mean bigger rebates, you know the big home builders getting lower prices?

I note that LPs prices have been down a couple of percent in the last couple of quarters and also the vinyl guys are pushing their prices down on the back of lower input costs. So is that impacting you guys? Also, if we continue to see these others cut, is that going to make a price increase next year highly unlikely?

I wouldn't be able to tell you what we'll do with price next year, but I don't think it falls into the highly unlikely category. So where we're at in the business generally, and price I guess specifically, is we're really focused on growth.

Because we're well into this recovery and we hope we have a lot of years -- maybe another five or six years -- of increasing housing starts because they haven't spiked on us, so that's good news from our perspective. We just feel like we've got to go for the market share gains now and not let other things get in the way.

That's why I'm a little bit disappointed that we missed on the capacity needs short-term. Because now we're kind of going hand to mouth and it's -- you know, we'll get out of it this winter but it's harder to grow the business, it's hard to kind of sign-up new business if your service provision is still on your base business.

So having said that, I saw LP was down a little bit. Their results are always a little hard for me to read because I don't know what they do with the OSB, that they produce out of those plants.

But vinyl, I know you know the business well, Matt, vinyl doesn't affect us at all because we're such a premium to vinyl to the end user, whatever moves they make don't really change that we're a big premium. So it's a very small difference for someone deciding to spend the extra money for fiber cement.

Theoretically LP is a closer alternative to Hardie, so our pricing with them would look more like it does with competitive fiber cement. But the situation we have with pricing right now is not being impacted by LP, and I wouldn't anticipate that that's going to become a problem for us.

Because there is a very different value proposition for a builder that's going to use our product, versus chipboard. Now they are going to go to chipboard to save a little bit of money, but -- you know, a certain percentage of the market will be after that savings and make the trade-off, but we don't think our target customers fall into that category.

But the price decline is not just mix, there's actual price declines in the --

Yes.

-- some of the products.

Yes, sorry, you had a soundbite in your question that I forgot to pick up. You said rebates.

Yes.

So we do have higher rebates on some program stuff. Like 100% Hardie, you know some of our programs that bundle the -- even in the [non-color] markets that bundle the trim with the siding, they can get a rebate on kind of going with a 100% Hardie exterior. So our percent discounts in new construction has increased and that's part of what's causing that 1% decline.

And it's fair to say that they only get the lower price if it's higher volume, so the two go hand in hand.

Yes -- well, yes, that's true. So even if you -- say you're a siding user, you don't think you can afford our trim, we sharpen our pencil and come up with a kind of whole house cost for you that's, on an MSF basis a little bit lower for us but higher revenue for the house. So you're right, we'd end up with more revenue, but a little bit lower price per MSF.

And, sorry, just two very quick ones. Just on your SG&A, we only see that at the Group level. So can Matt maybe give us a bit of an idea, was it an extra $2 million, extra $5 million for the quarter for the US business? Or what sort of magnitude are we talking about?

Yes, it's about $10 million, Matt, for the quarter.

Okay.

And this is definitely the toughest comp, so if a high percent increase, you'd expect that to have, as you go into the second half of the year. And by the time you get to the fourth quarter, we would have been well into both the headcount additions that we were doing last year and the program expenses. And so you get to kind of a much more normalized rate. Another way to kind of think about it is as a percent of sales, versus a year ago there's about a 1% increase as a percent of sales.

Yes.

And what you'd expect kind of it to normalize towards is closer to where we were on the fourth quarter. So if you were to take first quarter that we just recorded and compared it to the most recent quarter as a percent of sales, that's more of a representative run-rate. And you're just seeing a particularly tough comp this time because we weren't adding in the business at this stage the way we should have been, and we didn't really get going on some of those additions and some of those programs until later in the fall.

Yes and, sorry to bring this one up Louis, but just on Ryan's recent departure, any comment on how that changes your plans? We don't need to know the exact reasons why he left but just your plans and what it means, how long it might take to find someone else?

Yes and it's fine, Matt, yes. So unfortunately I think my retirement's been talked about mainly as a date. And people were focused and I also talked about my commitment to the Board to stay until 65, so I think everyone took that as a hard date. And you know it shouldn't be a hard date, it should be readiness.

So Ryan's exit from the business, does that change our readiness for succession? I would say, yes, if everything worked out well, we probably would have been ready when I turned 65. We may still get there but we may not and my commitment to the Board is readiness, rather than a date.

Okay, no worries, thank you.

Thank you. Your next question comes from Peter Stein with Macquarie Group, please go ahead.

Morning gents, or rather should I say good evening, thanks very much for your time. Could I just get a quick sense just on the capacity expansion costs, could you give us a view of what it cost you in the quarter and how you see that progressing over the next four quarters?

Yes, within the quarter it was probably a couple of million dollars within the quarter on that Plant City line. Now we'll continue to incur some costs on Plant City, as we continue to ramp that up. Obviously the early days of a start-up you get some inefficiencies within the board that you're getting off of the line, and some additional labor, and a combination of those two result in the start-up costs.

Once we finish the construction in Cleburne, you'd expect that in the back half of the year probably something similar in order of magnitude on the Cleburne plant. So probably in total for the year, by the time you start up those two lines and get Fontana running the way that we want to get Fontana running, we could be in the $5 million to $10 million range of start-up costs for the year between all three of the sites.

Okay. Then just one thing I wanted to pick up on, Louis in his opening remarks just spoke about the plants not quite running at the capacity intended. Then, on the other hand, some supply shortages leading to logistics inefficiencies. It kind of strikes me that there's perhaps some regional aspects to what you're facing there. Could you give us a bit of a sense whether there's regional dislocations that are specifically impacting your capacity and demand linkage?

Yes, you're right, there's always regional. But we cover up the regional shortages with freight, so that's some of the inefficiencies we talk about. But we're shorter in the south than we are in the north and our bigger problem is right now we're short on XLD trim. So that new line in Plant City is intended to make XLD trim. But, like I covered, until you have a certain reliability in a new line you don't want to put a difficult product on it, or you just kind of magnify the issues.

So we're kind of having to be patient to get to a certain level on start-up, before we move the trim to that line. So that's really -- that's a product that's in very much short supply. The rest of it is just a little bit off our service position and I think our customers are able to work through that pretty well.

But the XLD's a problem we've got to work through and we'll get through it by about 1 December. But, quite honestly, we would have preferred not to have the problem at all because it's a great product line for us.

If I may, just a last quick one. How are you thinking about your buyback now that it's formally in place?

Yes, that's a good question, Peter. So I think I've said in the past, buying in the first quarter proves always to be a lot more difficult than I'd frankly care for it to be. Mainly because governance and blackout windows, with the way we space out our fourth quarter results, are -- for remuneration report, our notice of meeting, our annual general meeting, we did a bond within the quarter to kind of add an additional blackout complexity, and then obviously this quarter the releasing of the new fiscal year.

So it does make it difficult in the first quarter to buy activity. In May, what I said was we specifically went to a buyback program of $100 million, and that was to give everyone a quantum that we could actually go execute on. The goal was to go execute on that within the first six months of the year.

So obviously we haven't done that yet, but I fully intend to go execute on that and I'll keep my comments at that. I'd say those two guideposts remain the same, with respect to the buyback though.

Okay, perfect, thanks Matt, I'll leave it there.

Thank you. Your next question comes from Simon Thackray with Citi, please go ahead.

Thanks very much. Good evening gentlemen, just a couple of follow-up questions if I can. I just want to go to the international division. Lou or Matt, the volume for international was down 2%, the impact from pipes is included in there.

But ex-pipes Australia was up 9%, New Zealand was up 14%, Europe was up 5% and Philippines was down 5%. So just for clarification, what was the contribution to volume that pipes was making, for volume to be down 2% overall?

Yes, I mean for the year it was about the equivalent of 30 million standard feet of total volume. So call that within a quarter $7 million to $10 million, depending on the quarter. And, you know, obviously that goes to zero within this quarter.

Got you. And just while we're on New Zealand Lou, I'm slightly at odds and maybe a little bit surprised that the volume's up 14%, the sales are up 8%, the EBITs down 12%, and I note your comment on low average sales price and product mix. That's been probably one of the better performing housing markets in the world. What's actually happening there, that you're getting adverse mix and adverse price?

Yes, I think it's just quarterly variance. So the sales are down [12] in local dollars, so the price is just off a little bit.

Up [12].

Up [12], yes, sorry. Sales are up [12] so your price is down just a hair. And it's just quarterly variance, I think if it doesn't correct by the half year, we'll correct as we move through the year. So we don't have any problems in the New Zealand business.

Okay.

We're doing well.

Alright, cool, well we've move on from that. In terms of the input costs, I note that the stability, if you like, on page 17, the quarterly US input costs, probably, without exception, in the current quarter all of those have ticked up, gas is up 25%.

So you've got, it seems to me, along with an improving macroeconomic backdrop, we're seeing some rising costs in the U.S. No doubt everybody will back out extra SG&A and will back out ramp out costs and all the other things this year.

But with the actual input costs rising against the market recovery, what are you assuming in your margin guidance that you'll hit the top end of that 25% range? Could any further acceleration in these costs derail that target for the year, given everything else that's happening?

Yes, I think pulp would just have to go on an incredible run to do that. So, again, we don't see that yet.

So no issues around cement, gas, electricity, freight, diesel?

Our contract's on cement, we know what we're going to pay, so we don't have to worry about that. And gas and power, yes, we're confident that, yes, that's not going to derail us, as you say.

Okay, excellent, alright, thanks guys.

Thank you. Your next question comes from James Rutledge with Morgan Stanley, please go ahead.

Thanks, good morning. Just firstly, Lou or Matt, can you remind us where your utilization currently stands and I guess how we should be thinking about extra capacity coming online over the next couple of years? Or is it just specific lines that need to come on, given specific shortages?

Yes, hey, James, I don't know if you're going to be on the September tour but clearly we don't like our equation, the result of the equation we had. So we are doing work in that area. But, in the meantime, we've kind of taken a safe approach and dusted off all the capacity that we have ready and we're going to get that started up.

So I could give you a much better answer, one of our guys can give you a much better answer on the September tour, and if you're not going to be there obviously it'll become public. But, yes, we just cut it too tight. So our mathematicians have to go back to work and figure out what the market variance, what the PDG variance, what the manufacturing variance, what ramp up variance. We just cut it too tight so we need more insurance in the system.

Okay, so we shouldn't be thinking about 72% or 75% utilization, or wherever it was for last quarter on that calculation.

No, I think we were wrong, I don't think we had that weighted well for the machines and the product mix. But, like I said, the guys are working on it now. Yes, I mean it's pretty embarrassing.

We just became aware of this a couple of months ago. And you know how these things build, the guys thought we were okay and it got tighter and tighter and tighter. And before you know it, you're not okay and you're getting further behind.

But, again, I wanted to point out, again just so everyone understands, this is an HLD problem. And we have the line, we obviously should have started up earlier, we didn't, we should have. And then the rest of our product is kind of tighter than we'd want but it's not what I would consider a shortage at this point. But there is a shortage on our HLD product.

Okay, thanks. I guess, secondly, hearing that the competitive fiber cement products are being extremely aggressive on price in the last few months, are you seeing any competition concerns there or anything that worries you from competitive fiber cement?

We're not really aware of any change in approach by direct competitors.

Okay. Thanks. I guess just finally, given LPs volume growth and their comments around potential for further capacity lines, even greenfield lines, I guess, over the next few years, how are you thinking about them as a competitor in the context that, I guess, over the last 12 or 24 months you've said that you really need to see LP disappear almost from the market for you guys to achieve your 35% fiber cement target.

Yes. I'd have to check, but I think my comments has been, yes, if LP grows, they're growing at our expense, because we're the ones converting vinyl to fiber cement. If they're behind us converting fiber cement to chipboard, then that's a problem for us. So not go away because their relative advantage on panels is real, so the shed market's a good market for them.

They do alright in manufactured housing for the same reason -- the panel product is good. Their chip product is well established in a lot of markets. It's like what they're trying to do with their siding. It's not as durable as you'd want to see for a long term exterior product.

But they're trying to grab a good enough position with a savings for the end user, whether it be a builder or a contractor. The comp they just delivered was not unexpected by us, so we kind of knew, because of where they were at with the capacity that they needed to come out with a comp like that, so like we always say on theirs, we're not going to look at it quarter to quarter. We're going to look at four year (technical difficulty) and we don't want to do the market development to see the vinyl share decline and then see them get a portion of it.

So they -- if they -- if they start taking market share in any real way that's not necessarily a showstopper for the $35 million but it's not our intention to see that happen. We have to make the market understand the tradeoff they're making. You're going to have your most price conscious end users still go for their product at times, but I don't think that that's going to be the normal situation.

Okay. That's clear. Thanks.

Thank you. Your next question comes from Andrew Johnston with CLSA. Please go ahead.

Good evening, guys. Just a couple of follow up questions. First on the increased marketing expenditure, I mean, the last couple of years, you've spent a fair bit of time talking to us about where you're targeting metro, non-metro, R&R. So those additional -- that additional SG&A or marketing expenses that you're putting in, whereabouts is that targeting?

Yes. That's -- well, I commented earlier, we think in this business cycle and in a good recovery market, most of our share gains will come from -- in the new construction segment. So a lot of it is pointed toward new construction or the channel that (technical difficulty) into construction.

But I don't want to mislead you. We also, as I said earlier, our (inaudible) program is a bit variable market to market. So we've also shored up (technical difficulty) in that area. Finally, I commented that we had some in the office as well.

It's not insignificant what we've done in the office. It goes both in the strategic market and tactical market in the office. So I would say -- Andrew, I know you've been following the company for a while -- everything we've talked about, I would say everyone in those programs are still active and still getting more resources.

Okay. Finally, on PDG, your comment was that it's not quite where you wanted it at the moment. I mean, looking through the 18% number and I know it's often easier comp and that, but it's not quite where you want it. I'm guessing that when it's above 8% you're happy. Would that be a -- would that be a fair guide? At the moment, you sort of see it running around the mid-single digit numbers?

Yes. So if we were above 8% three quarters in a row, I'd be happy. So, yes, play the [double 8] there.

Okay. All right. Great. Thanks very much.

Yes.

Thank you. Your next question comes from Andrew Peros with Credit Suisse. Please go ahead.

Thank you. Just a quick follow up from that last question. Lou, what are you expecting in terms of volume growth for this financial year?

Yes. We don't forecast a volume but -- you guys know the market as well as we do as far as housing starts. You can calculate our PDG over the last four quarters and we expect maybe add on to that a little bit. By the way, we have in fact, our interiors business is running well. So we get some volume off of that.

But it's fair to say, our volumes could be higher this year than we -- when we've -- what we've planned going in, but it's still -- it's still coming in range, but it's going to be better than we planned going in.

Okay. I just wanted to also confirm that those operational issues that you had in the fourth quarter last year have completely washed through and there was no spillover into this quarter. I guess what I'm specifically referring to is you had the issue in Europe. I know you briefly touched on Carole Park, but I just want to confirm that there was no additional ramp up costs in this quarter and those manufacturing issues in the US have completely washed through. So any thoughts around that would be great.

Yes. I mean, Europe has rebounded, but -- I mean, it was ranked poorly and it's rebounded. So you can see that in their comp. Carole Park, yes, the

start-up's pretty much behind them, so you can see that in their comp. I think the reality is we're trying to grow on -- we're trying to grow in Australia with the new capacity.

We're obviously trying to grow in the US. We've got the Philippines capacity we're invested in. I think that the normal for the next, you know, two, three years is start-up costs will always be in our result and we'd probably need to start talking about it less and just see it as part of the cost of growing, bringing out new lines.

But because it comes -- Carole Park start-up costed more than that it should have and more than we planned, so we did talk about that. But the Plant City start-up is -- at this -- at this point has gone pretty much as planned on the cost side. If we deliver that with Cleburne and Summerville be a bit more difficult, but -- because it's been down for several years, but I think that's just going to be the normal right through this business cycle.

Because if we grow -- if we -- if we grow our market share and the market continues to recover, even at a slow rate, there's going to be lines coming on every year.

Maybe, Andrew, just one add on comment. So I think you're also referencing from the fourth quarter when we had the operational issue in one of our US plants that we talked about and that was all contained within the fourth quarter and there was no carry over effect into this quarter.

Thanks Matt. Also just finally, the windows business, is the expectation still that this will be the final year of losses there and it will, I guess, effectively wash its face going into FY2018?

I actually thought our -- my comments in the past were next year there would be some small losses and then we should be -- you know, it depends on what we do. I mean, we continue to learn about the opportunity in windows and we continue to learn about our capabilities, which are improving obviously.

So you can the -- like, I think you can probably see the numbers come down. It's a very manageable number. What's more important now is what's the potential for windows and what are the trigger points for going a lot harder after windows? So as far as the base kind of business model we're running right now, we get more efficient both in the market and in operations, so the losses will come down.

But on the expense side, product line design, new segments, new markets, if we double down and want to do a lot more with windows, you're going to see -- you're going to see those costs hit the EBIT line. But now they're in a place where you can see them, so you'll know when it happens.

Yes. Okay. Just finally, a bit of housekeeping for Matt, any guidance around the effective tax rate for the full year and any CapEx guidance for perhaps this year and next year?

Yes. So the effective tax rate is -- the effective tax rate for the year is the 27.1%. That's the best estimate that we've got at the end of this period. We think we'll have largely maintenance CapEx this year that's kind of in line with last year.

I think the one item that we weren't talking about the last couple of times we've talked is Summerville. So as we start think to think about getting that site ramped up, that won't be maintenance CapEx. It will be a little bit capacity costs for the brownfield site. So that will be pretty inexpensive at capacity. We'd expect that that project runs a lot lower than both the Plant City and the Cleburne start-ups or -- sorry -- the new lines.

But we haven't gotten to a stage yet where we're ready to kind of announce what that project will cost. I'd say, by the time we get to November, we'll certainly be talking about that.

Okay. Thanks very much.

Thank you. Your next question comes from Keith Chau with JP Morgan. Please go ahead.

Good evening, Lou and Matt. Apologies for laboring the points, but just a couple of questions on pricing in SG&A. Matt, just on SG&A, you mentioned that you expect that to continue to rise or -- sorry -- normalize this year. So I just want to look at it from a dollar perspective. I mean, the first three quarters of last year it was tracking around the $62 million range, ramped up in the fourth quarter to $69 million and now hitting $72 million.

So you when say normalize, are you suggesting that that number remains at around the $70 million mark for the next three quarters or is there an opportunity for that to increase further?

Yes. The number in total is going to be pretty consistent with that fourth quarter number. The $72 million -- and I'm trying to -- I'm just looking -- has got some general corporate cost in it.

So the reason I paused on that was -- just keep in mind, the general corporate cost, obviously can fluctuate up and down with stock comp sort of expenses, which isn't operational in nature. It's more of a kind of valuation based on the share price.

So -- but as a rule, I think you've got the right framework, Keith, that the fourth quarter and the first quarter look a lot alike. They're pretty similar quarter-to-quarter. This particular quarter, if you were to compare it to 1Q a year ago, there's that step up in cost and you're seeing that in the result.

But you'd expect for that to start to decrease in terms of the comp in 2Q, 3Q and 4Q and get into that kind of more normalized rate of what you see in the last couple of quarters.

Sure. Okay. Just, Lou, quickly one on pricing again. I just want to ask the question a bit more simply. So just as a proportion of the total customer base, are a high proportion of customers receiving discounts and rebates and are these discounting levels higher than last year?

Yes. There's certain discount level programs that are higher than last year. I would say the same group of customers are probably receiving the rebates, but that group of customers is doing a higher percentage of the business.

Okay. Thanks very much Lou.

Thank you. Your next question comes from Andrew Scott with Royal Bank of Canada. Please go ahead.

Yes. Thank you, gents. Louis, just a question -- obviously we're working our way through the re-segmenting here. But if we look at North America for FY2016 and the North American division versus USFC, the margin for the FY16 year was -- I think it was about 1.8% higher. Given that as a context, I'm sort of interested that we're still talking to 20% to 25% margin target. Should that really be sneaking its way up to sort of a couple of points higher?

I would say that would be maybe your target, but our target's still the same, because our target's through the business cycle and you remember in the -- in the bottom of the cycle we were -- we were working hard to stay close to the 20%. Then in the top of the cycle, like you say, it's not as hard to -- it's not that hard to stay at the top or slightly above.

So -- you know, and this goes back to the previous question on SG&A, which Matt answered, but we're really - what I want to remind you is we've got a lot of things we think we can do to grow the business and deliver increased shareholder value in the long term, but we've got to have the capability to do it well.

If we have the capacity to do it well and we have the money to do it, we're going to do it. So we're going to trade off that EBIT margin for some extra growth opportunity. Now, what we've been in the last little bit is our capability to do it well was less than we'd want so we're a little slow to kind of spend the money if we couldn't do it well. But with new resources coming into the business and those resources kind of ramping up on both the industry and the Company, I think we're going to want to spend at a higher rate.

Maybe not the rest of this year, but certainly years going forward, whether it be fiscal year 2018, 2019, 2020, something like that. So, yes, I mean, it wouldn't surprise if 27% became the new normal going through recovery, but it wouldn't be our intention for that to happen.

Okay. Great. Just your content with spending some of -- spending a little bit ahead, I note the outlook comments talk about a margin in the top end of the 20% to 25% range. I think historically you might have said at the top end or above. Am I being too pedantic there or do you expect it will be within that 20% to 25% range this year?

Yes. It's a good question. I think what we're -- what we want to figure out before we tighten that language is really what happens with these start-ups. The start-ups running at -- think about just Carole Park last year, where it was a start-up that -- that we said -- we thought -- we left some money on the table by not having that start up go quite as planned.

That was a start-up -- I think the numbers have quoted the last couple of results is $7 million, $8 million in total for that start-up. That was a start-up that didn't goes towards according to plan. Plant City, on the other hand, we like how that start-up's going so far, but we're still in a relatively early period with that machine and we've still got the Cleburne lines to start-up and then depending on what Summerville shapes out to be.

So you've got those variables that we'd like to get a little bit further into the year before we incorporate that into kind of both a tighter guidance range as well as kind of giving you some comments that help you steer towards the top end of that range versus being above that range.

Got it. Thank you, guys.

Yes. I'm going to go back to the first part of your question, because I didn't answer you as clearly as I should have. We won't manage to a 27% number. If a 27% number drops out, we're obviously going to post it. But we're not managing up to a 27% number. We're managing towards the top of the range and trying to balance out growth when we have the capability to spend the money well.

Understood. Thanks, Louis.

Yes.

Thank you. There are no further questions at this time. I will now hand back to Mr Gries for any closing remarks.

All right. Thank you very much. I appreciate everyone joining the call. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.