James Hardie Industries plc (JHX) Q1 2013 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the James Hardie Industries Q1 2013 Results Conference Call. [Operator Instructions] I must advise that this conference is being recorded, Monday, the 13th of August, 2012. I would like to now hand over the conference call to your first speaker, CEO of James Hardie Industries, Louis Gries. Please go ahead, Mr. Gries.

Thank you. Russell and I are in Dublin. I don't have control of the slides, so I won't be reading off the slides. We'll start and look through the slides until we get to Slide 5. I think the result's been out in Sydney for a little while, so probably you've -- you're all across it. Basically, from my perspective, the result was good. Volumes up in a stronger market in the U.S. and we've started to put the resources in the U.S. business in anticipation that the recovery will continue at, at least, a moderate pace. And those resources are all directed obviously toward starting to grow share for Fibre Cement in the market. So back to our 35-90 as the primary focus if indeed the market is in recovery for a long period of time, which we anticipate it may be. Asia Pac numbers are off, largely due to the Australian decline and market opportunity. The rest of Asia Pac is tracking pretty well. And because of that lower opportunity in Australia, we have started to pull back Australia business consistent with the lower demand. So we'll go through the slides. Slide 5, see on [ph] the net profit operating, and excluding the asbestos and other things, we're up 11%. And if I go to Slide 6, volume is good. Construction's up obviously greater than our volume's up, but when you take the whole market index, it's not up quite as much as our volume. So we did have, at least for the quarter, what looks like a pretty strong PDG. We'll see how it plays out over 2 or three quarters, but right now, we're on the strong side on PDG. Price, down 2%. I think I gave you guidance over the last couple of quarters. I expect it to be, price -- price to be flat to up or down 2% this year. Obviously, first quarter, we're at the low end of that range I gave you. I think it's a good range for the year, see how it goes. I think it may be start's inching back up as the year goes on, but we'll see. And then EBIT, up 5% just slight tick up there from last year. And EBIT margin just hit the 20%. So just touching that range in the first quarter obviously means we're still in the game for 20% EBIT, but as we've done the last couple of years, we'll be kind of reaching for that 20% rather than easily exceeding it as we had in pre-downturn years. Again, I'm not going to let the 20% EBIT margin drive what we do in the business. We're really very committed that back to growth is our first objective, and that's what you're going to see in this quarter and right through the year as we put more resources in. If we don't have the volume and price offsets, we'll be stretching to that 20%. I go to Slide 7. Again, you can see fiscal year '12 kind of flattened out on price and fiscal year '13 starting the same way and I anticipate it to continue that way. We have had a very small market kind of tweak on pricing, which will have a little bit of a positive impact. But what you're seeing coming through is at the end of the downturn, and especially when we lost category share and then had to win it back, that did dampen our price. Now we're selling a little bit more Cemplank brand than we had pre-category share loss and we're selling Cemplank at a lower number. Our commitment is to protect the kind of entry level most price-conscious segment of the market. So that has pulled our price down. In addition to that, this quarter, we didn't get the mix improvement that we were targeting. We did get a slight mix improvement but not as much as we were targeting. And that had to do more with color and trend, so the reality is kind of the bob [ph] in the market has more to say in our price. And then we didn't do as well with the tougher market products this quarter. Now I anticipate that that's a temporary situation with the slower growth rate on color and trim, but obviously something we'll continue to work on. Go to Slide 8, that's just the EBIT margin slide that you see. We just touched 20%, which is low for our first quarter. There's no doubt about that. The cost side of the business isn't bad. The manufacturing plants are running well. We get a few exception with a couple of the plants not ran quite as well as we'd like, but overall, the network is running well. Pulp relative to last year is okay. Freight, I don't know if the market for freight is much better but our performance on freight is a little bit better. So it's really not a cost problem on the kind of variable cost side of the business, but we are spending more, as I said, to get ready for a better market. I already commented that has a lot to do with the market development initiatives, but also on the operation side of the business. We're resourcing up in manufacturing. We're currently working on 6 capacity additions, which obviously pulls engineers out of the plants and puts other engineers in the plants. So just generally cost are up in the business in anticipation of the sustained market recovery although at a slow rate. We go to Slide 9, Asia Pac numbers. As I commented, Asia Pac numbers are really kind of pulled down due to the market decline in Australia. New Zealand is okay. Philippines is real good, and then Australia is down probably not as much as the new construction starts in Australia, obviously, but pretty consistent with the market index. Maybe we're doing a little better than the market index down there. And the other things in the results are okay. With Australia being the bulk of the Asia Pac business, obviously, it's pulled down our profitability a bit. Our guys in Australia are working to get everything balanced as far as what we have in the business based on anticipated demand. We're probably lagging that just a little bit, but I think overall, we have no problem getting where we need to be. Slide 10, just the summary slide, which I've already picked up with my comments for the most part. I will repeat from previous quarters, the recovery is kind of nice because it's very consistent month-to-month, so our guys have been able to plan it pretty well. We get tug and board, just in one market, and then had to import board and some freight inefficiencies. Other than that, our production scheduling is kind of been right on with the demand increase. So everything is kind of going in a pretty planned way in the business. And that's largely because we're not getting spikes in demand and then fall off. It's pretty steady month-to-month and that's been going on for about 13 months now. Asia Pac, again, I already commented. Australia is the market that's off. New Zealand is not great but relative to last year, we can count well on New Zealand. I believe we did fine in the first quarter. And then the Philippines is coping strongly against last year in the first quarter and we expect that to continue. And Slide 11, housing starts. You can see last 3 quarters, up pretty strongly. In addition to that, we're kind of in the right type of market as far as where the demand is. It's not all in the bottom, it's not all in the top. So the markets we're -- or the segments we're good at, demand has been increasing. There's no good external number for R&R but R&R has also started to improve, not to the same degree obviously as new construction, but the R&R market is better. We're doing well, especially in the northern markets with our R&R initiatives and that's probably where most of our PDG growth is coming from, not so much from new construction. On the outlook slide which is number 12. Obviously, you're not -- we're not going to declare the recovery is here to stay, but certainly, we're planning around a sustained recovery although at a moderate rate, which to be honest with you, they're both kind of -- are preferred. We wouldn't want to see the market spike. We don't think it will. And we wouldn't want to see it kind of run out of gas in a year or 2. And for the most part, we don't think that will happen either. Obviously, that depends a bit on our general economic conditions in the U.S., which are not as probably solid as most of us would want them to be, but we seem to be going okay quarter-to-quarter at this point in the U.S. Australia, I don't know, most of you would know the Australian situation better than I. We'll be ready for whatever happens in Australia. If it starts to stabilize, we'll be in good shape, if it were to come off a bit more, we know what to do in order to react to that. Slide 13, I mean, there's not much on this slide. It's our normal summary slide. We're certainly not moving off strategy now that we're coming into a recovery situation in the U.S. We'd actually be more doubling down than moving off. So we're generally steady, but again, our shift is from trying to balance the top line and bottom line to getting more top line focused again. And so everything is the same there. And then repeating myself, in Australia, we'll be careful in Australia until we understand kind of where that market's going to go and when and what the recovery might look like down there. At this point -- that was Slide 13, by the way. At this point, I'm going to hand it over to Russell Chenu to go through the financials.

Thank you, Louis, and good afternoon, everybody. So looking at Slide 15 on the highlights of the quarter's results, we saw, as Louis noted, improved volume in the U.S. in a more favorable market. Starts were up significantly, R&R improving a bit and that enabled us to grow volume. Price in the U.S. has been constrained substantially by product mix, as Louis referred. A higher proportion of Cemplank. The significant weakness in the Australian market, and that had a particularly big impact on volume but also on cost as I'm sure you guys in Australia are aware, very enlarging costs in Australia is a much bigger challenge than it is in the U.S. and so we've seen a somewhat delayed response to -- in the cost environment to any downturn in volume. We were also reducing inventory during the period, so the -- that cost impact was actually magnified relative to the sales volume as we took inventory down. We had a nonrecurring foreign exchange gain of $5.5 million as we've noted in the results. That was a realized gain. It arose on the repayment of intercompany loan balances following the settlement of the RCI case. And it is obviously a nonrecurring item, so we've called it out pretty substantially in the narrative to make sure that people understand that it has impacted the result. We had strong net operating cash flow in the quarter. We finished the quarter with about USD 300 million in cash with 0 debt. So a very strong position at the end of March. It was actually improved during the quarter. We contributed to AICF a total of $184 million so far in 2013 financial year and that represents 35% of the FY '12 cash flow. We made that in 2 separate payments and we'll see the impact of that on AICF in a later slide. Subsequent to the end of the quarter, we've also paid a dividend of $0.38 per security during July and the total amount of that dividend was $166 million. On Slide 16, looking at the impact of movement in foreign exchange. I think it's pretty apparent from the 2 shaded areas, which represent the A dollar-U.S. dollar exchange rate during this latest quarter and the prior year's equivalent quarter. There was a decline in the value of the Australian dollar. It was about 4% depreciation compared with an appreciation in the prior year and that impacted the translation of the Asia Pac result into U.S. dollars by about $700,000. So an adverse movement there in terms of translation as a result of depreciation of the currency. On Slide 17, you can see there the increase in net sales was 8% on the volume movements that we had, with particular growth in the U.S. downturn and Australia, but it averaged out to be an 8% increase in sales in U.S. dollar terms. The SG&A expenses at 44.3%, that's where the $5.5 million foreign exchange gain reported. So that 3% downturn in SG&A expenses is, in fact, if you rule out the $5.5 million foreign exchange gain, was actually an increase. Asbestos adjustments showing a gain because of the depreciation of the Australian dollar this year versus a gain -- an appreciation last year, which produced a translation adverse movement. And the net operating profit as reported as a result of those results, the $68.5 million this year versus only $1 million last year. If you look at Slide 18 where we look at the adjusted basis, adding back the asbestos adjustments and other items, you can see that the recurring profit, other than the foreign exchange item, was $43.8 million this past quarter versus $39.4 million last year, so an 11% increase. But if you adjust also for the foreign exchange, it was a slight downturn of just less than 3%. It would have been $38.4 million. On Slide 19, the segment sales, obviously a stronger upturn in the U.S. than the group as a whole, 15% increase, 17% increase in volume, partially offset by a 2% downturn in price. Asia Pac was a 7% reduction in sales value to $87.7 million. 5% of that was due to foreign exchange, 2% due to volume and there was a small movement in price. So the overall sales were up 8%. On Slide 20, looking at the segment EBIT. You can see that the U.S. had a 5% upturn. Asia Pac was down 16%. As I indicated, foreign exchange accounted for about 3/4 of a million of that downturn to $17.7 million. We had some costs that we've been incurring, including in this latest quarter where the activity level that has increased on feasibility study work for a potential expansion in the Asia Pac region. And that's had an adverse impact on earnings, as well as the cost issues that I talked about in volume as well. So the total segment at EBIT was $62 million, which was 3% down on the prior year. And then corporate expenses as described in the total EBIT, excluding asbestos and ASIC, was very flat. On Slide 21, looking at tax. Adjusting for asbestos and minor tax adjustments produced an effective tax rate of 23.5% in that latest quarter compared with 26.5% in the prior corresponding quarter. And I think both of those were within the guidance we've given previously of an ETR of around 25% but plus or minus 2%. On Slide 22, cash flow. The cash generated by trading activities was $60.8 million versus $73.2 million in Q1 of last year. The net operating cash flow, however, after all the movements was $49.6 million versus $22 million last year. So there's been an improvement at the net operating cash flow level. Main reason for that is that we had a large tax payment last year in the first quarter, $25 million on a net basis, which was not recurring this year. We haven't had any significant tax outflows so far this year. And so that's produced an increase in the net operating cash flow for the quarter. CapEx is up a little bit and we expect that, that trend will continue. We've got a number of initiatives going on in terms of capacity tune-ups, as well as the normal BAU CapEx. So we're expecting some increase in capital spend over the coming quarters. It won't be dramatic but it will be, I expect, fairly steady. And the movement in net cash as a result of all of those cash changes was a $32 million increase in cash position, to almost $300 million at the end of the quarter. Turning to Slide 23. On capital management, as I mentioned, we paid a dividend in July. So that's subsequent to quarter end. The total dividend paid from FY '12 earnings was $0.42 per security and that was right at the end of the dividend policy payout ratio of 20% to 30%. We also announced with the May results that we were reactivating a share buyback capability of up to 5%. All the administrative arrangements for that are in place, but we haven't seen the sort of market conditions that we've regarded as conducive to the attractiveness of share buyback, so we haven't been active. But we're positioned to be active in the event that the circumstances are right for us. Onto Slide 24. Looking at debt, you can see that we still have $280 million of debt facilities. We have cash of $300 million so there's no need for us to be drawing debt and therefore we haven't. Since the end of the quarter, we've contributed a further $45 million to the asbestos fund and we've also paid a dividend. So the position regarding cash has changed pretty dramatically since the 30th of June. About $200 million of that has gone out. So we're holding a much reduced cash balance right at this point in time. On Slide 25, a bit more detail on AICF's cash position. As you can see, the fund repaid the New South Wales' government early in April as a result of Hardie contributing AUD 132.3 million, which occurred on the 2nd of April so that at the end of June, the fund had AUD $142 million in cash and deposits. We have made a further contribution to the fund on the 2nd of July. And on a pro forma basis on the 2nd of July, the fund would have been holding AUD 187.6 million. It has had a fairly heavy quarter in terms of claims paid. There's been some relatively large claims settled in the quarter and $35 million in gross claims was paid out during the quarter. on Slide 26, just noting key ratios. I don't think there's anything there that's really worth commenting on. But the strong -- relatively strong performance in terms of ratios continues and our debt service capacity indicators are extraordinarily strong. In summary, on Slide 27, the first quarter result was $43.8 million. Obviously, assisted by the foreign exchange gain of $5.5 million on the intercompany loan completions. We've had a moderately improved U.S. but subdued U.S. operating environment. The higher sales volume in U.S. and Europe has persisted strongly. We've had a slight reduction in SG&A expenses but it's only really due to foreign exchange gain, because, as Louis commented, we're actually gearing up on some initiatives, particularly in the U.S. And we also had depreciation of the Asia Pac currencies against the U.S. dollar which helped us in terms of translation of the asbestos liability that was a bit of a drag in terms of the translation of Asia Pac earnings. So that concludes the presentation and I'll just hand back to Louis for any questions. Thank you.

Okay. Thanks, Russell. We'll go to questions now if the facilitator could help us out there.

[Operator Instructions] Our first question comes from the line of Andrew Johnston from CLSA.

Louis, just in relation to the U.S., with the focus now back on market share growth, Louis, what are the metrics that you're giving your guys to determine how much they spend in terms of SG&A costs and market development costs?

Yes. They're really not working with a ratio and so, unfortunately, our U.S. business is small enough, we can kind of sit down and plan it as a team. We're not working on ratios as much as we are out to support a particular initiative and what rate. So I mean, it depends a bit on the volume ramp-up, but I'm not expecting anything to spike in the business. I don't think you should think our SG&A is going from max to x-plus a lot, but we will be putting expenses in the business both on market side and, as I indicated, on the capacity side. All the different projects we have going on are currently expensed because there's no capitals approved at this point.

And Louis, you made a comment about the northern region. You think the R&R market in the northern region is going particularly well for you and that's probably where your PDG has come from. What are the -- can you just talk a little bit about the -- what are you doing differently out there or where -- what the progress is of the initiatives up there compared to other parts in the U.S. and I suppose the quality, obviously, is what that means for -- as you progress those initiatives elsewhere in the market, what that means to your business there?

Yes, okay. So PDG obviously is mainly against vinyl. And most of the vinyl runs in the north or down to about the Carolinas. So when we get kind of traction in R&R in the southern market, it's normally already a fibre cement market to some degree, meaning where fibre cement standard siding in a lot of those markets. So if we pick up more volume there, it's going to be in Trim or possibly color from prime. Wherein the south -- I mean, wherein the north, everything we pick up is against vinyl. So that's where you're getting your true primary demand growth. The program does run better in the north right now than the south because when you're developing a market against vinyl at the curb, the people can see -- people in the neighborhood can see the improvements made at a house at the curb. In the south, where they might have prime Hardie with Trim or prime Hardie field painted and you convert them kind of the more to our preferred solution, which is full ramp color, you can't see that from the curve. They get that benefit over a longer period of time. So my comment was mainly about the fact that when we convert R&R business in the north, it's normally off of vinyl, so that's going to bump your PDG numbers. And then secondarily, there is a point that our programs run better in the north than they do in the south. And we're working on kind of enhancing the program in the south, but we haven't quite figured it out yet.

Next question comes from the line of Jason Steed of JPMorgan.

A couple of questions. Maybe, Louis, just to start, in terms of your comments around the mix improvement that you were targeting not coming through, it sounds that that's particularly obviously in ColorPlus. Is that just a function of the, I guess, the hangover of the -- of where the market is and you expect to see that higher-end, high-value product to push through across the remainder of the year?

Yes, so that's a good question. And they're a little bit different -- we've had kind of a below-target quarter on both Trim and ColorPlus. On the Trim side, we got good traction in several key markets last year. We have done -- I think, most of you know, we've done a lot of product development in Trim, which has been very successful and we went for kind of relaunches in several key markets, we got good traction. There are a couple of regions where we don't have that traction yet. Some of it's due to product positioning and some of it's due to our programs haven't been run as well we should run them there. So do I think that Trim kicks up and that's more of a blip, I really do. Now whether it's a 1-quarter blip or maybe 2 quarters, I'm not sure. But I think we'll get Trim back on the growth rate we're aiming for in the short term. ColorPlus is a bit of a mix issue, meaning geographic mix. So we sell -- a high percentage of what we sell in the north is color. So you have some very high color markets that aren't growing at all anymore because they're probably at their terminal share, which a few of them are at 90% and a couple more in the 80s. So we've got to get some of the other markets that got stuck at 45%, 55% growing again in the north, so working on that. I don't think that's much of an issue just more good work by our guys. And then the south -- the west is a challenge. Those of you coming on the investor tour, we're going to get you back up to date on why the west is more of a challenge than even the south. But we have good traction in the south and limited traction in the west. So do I expect color to kick right back up? We'll grow color in share, I'm pretty confident of that, but probably not at the rate we had targeted so -- but do I think we'll grow color over a longer period of time at the rate we're targeting? Yes, I do. It's just right now, we just got some work to do to get back up to the rates we're looking for.

Great. And maybe the next one, which I guess, follows on to a certain extent, the fixed capacity additions that you're making at this point. In looking at the cost for the quarter and I appreciate it's just a quarter, but if you net out pulp and freight, it appears as though that underlying COGS has gone up quite significantly. Is -- presumably, that's all to do with the fixed -- well, mostly to do with the fixed capacity additions. How do you see the run rate going through the year? Because it appears to us at least to be quite a big shift from where you were last year to where things are in this quarter?

Yes. Some of that I think we might have covered at full year. We have a few different accruals. We've adjusted some of our accruals, which are noncash cost in manufacturing. So I think that's part of the difference between this year and last year. As far as the plants, the plants are actually running quite well. Because the price mix isn't up, the cost mix isn't up as much as it would have been either. We're pretty satisfied with the way we're going in manufacturing. Like I said, we have a couple plants that are not quite where we want them to be, but the network as a whole is actually run at a higher rate than it's ever run. We've brought on extra shifts. So that's a good accomplishment overall, although, there's a couple of spots. And this one is as well as we'd like, but we're pretty confident that will straighten itself out. So as far as the cost of goods sold, which obviously you see it all lumped together, we see the part where they plan to provide unit costs on a cash basis every month. And then there's the other things, depreciation and, like I said, certain accruals. Those would be up but the cash costs would be in good shape right now.

Okay. And then, Russell, a quick question on tax. Obviously, towards the bottom end of your range that you indicated at the full year, maybe you could give an idea where you expect to land up in the full year. And perhaps just elaborate on why we're getting sort of towards the bottom end, if you wouldn't mind?

So the reason for the bottom end, Andrew, is that -- oh, sorry, Jason, is that we've -- we just had a change in the geographic mix. So as we go forward, I'd expect that sort of 25% plus or minus 2% that we've previously indicated is where we think we'll finish up. In fact, under U.S. GAAP, what you do is to predict the full year result at the end of each quarter and that's how you determine the effective tax rate. So that 23.5% is an indication of what we're expecting based on current knowledge of the full year result.

The next question comes from the line of Michael Ward from the Commonwealth Bank of Australia.

Just more questions on the manufacturing performance. Louis, I think you've said a couple of times now that the performance as a whole has been quite good. But there was a comment around Asia Pac, where there were some plant performance issues, which impacted the gross margin. Is that where you think the network has been weak or have there been specific instances in the U.S. where it's been weak as well?

No. We've had -- we've had a couple of plants in the U.S. just a little bit off the mark where they should be, which isn't that unusual. I mean, obviously, you've got -- we've got 7 plants running, so you are going to have a bit of curve where a couple are running real stronger than you thought and a couple are weaker. And we definitely have a couple of running weaker. In Asia Pac, it's more the ability to kind of react to the lower demand. And as Russell said, I just think in Australia, it's harder to do than it is in the U.S. But in addition to that, probably our U.S. guys, I don't know, were just a little bit better prepared for the kind of loss of volume that we had. And the Australian plants are probably not -- because they're not as modern as the U.S., they're not set up to pick up the volume as quickly as -- and kind of if you're wrong and there's more volume there, kind of go back the other way and put it back out as quickly as the U.S. plants. Having said that, I mean, I just think it's kind of an early learning for our guys in Australia that they're manufacturing both this year are down in a softer market. In future years, they're just going to have to be more flexible. So we just need to kind of build that in the capability down there. And I don't think the guys have done poorly. I just think it kind of looks like we're lagging the downturn a little bit on our ability to pull the costs out. So not the end of the world, but it's something we'd like to see them kind of do a better job with the next couple of quarters if the demand is soft.

Okay, great. And maybe just as an extension to that question and I guess your answer that maybe it's hard for the U.S. when it's firing as much as you had -- well as you had hoped. I think you also make a comment in that gross margin section of the release that fixed costs added into the U.S. business in the manufacturing side. Is that -- was that all deliberate or was it -- was some of it actually a function of the fact that the plants didn't perform as well as you'd hoped?

No, it's all deliberate. Yes, I mean, we're now -- I mean, we haven't gone from one extreme to the other, but we're now feel like our main job is to make sure we get the capacity ahead of demand again. So that's not only now what we're running relative to the demand, but also, like I said, we have 6 projects. Well, based on our forecast, which is always a little bit below the external forecasters, you really don't need those 6 projects, but the cost of being short on capacity is just too great to the business. So we're going to build insurance in and make sure even under a very strong recovery, we have the capacity available. So we're spending a fair amount of money on that. I mean, you could say if we've done, if it's right, if we knew exactly what we're going to sell, we'd time it a little differently than we are now, but it's still just a deferral of costs rather than kind of avoiding costs. So we look at it as insurance policy, but we're definitely going to be early on capacity.

Okay. And sorry, just the final question. I think you made a comment earlier that you had taken some sort of small market price increases in different products. Can you give us a sense of what you're talking about there?

Yes. We took a small increase on HardieBacker pretty much across the board. It varied a little bit region-to-region, but it would be -- you would definitely sum it up as a small increase. And then on the siding product lines, that was more of a tune-up where we had some adjacent regions not quite right relative to each other and so we took a little bit here and there. We didn't reduce any prices, so when we had that situation, we just took care of the delta with a small increase. And that was mainly on colored by the way not so much on primed. I don't think we did anything of any note at all on prime board.

The next question comes from the line of Simon Thackray of Nomura.

Just following on from Michael's question there, you said a tune-up on price happened in color and not in prime, and PDG's been coming out of R&R in the northeast, where, particularly in New England I think, penetration's up 80% to 90% in some of those markets. Theoretically, can you just tell me what happens if where you get the northwest, Pacific Northwest, Texas are continuing to fire and the south firing faster than the north and you get a mix towards those primed broad market over the next couple of quarters?

Yes. Again, we probably already had that a little bit, so that would be kind of reflected in the numbers. And that's why it's kind of hard to -- it's hard for you to see price obviously the same way we see price. We look at price by category and -- or price by product line and price by region. But having said that, I don't want to sugar coat it. I think I've made it clear in the past we made a mistake when we let our category share slip. And to reestablish our business with those customers cost us more than if we would have never lost the business in the first place. So part of the funk [ph] we're in on color is just that. It's just kind of the recovery process and category share. But having said that, you're right. I mean if you got -- if we had a much stronger -- and by the way, the Texas market is pretty strong, that's the one I referred to that we had to import board into. If we have a strong Pacific Northwest and Texas and say, Georgia market. Georgia is not strong now. Pacific Northwest has been okay. Texas has been hot. So when you get more prime board in markets like that, our average price is going down and you guys ought to react to that because that's what you see. Of course, we wouldn't react to it because it's just -- our job is to price per product per market, it's not to deliver an average price. But having said that, I don't want to downplay it, part of our price [indiscernible], as I just said, is that category share. Number one, we have more of the Cemplank in our product mix now, not only because some of our Hardie customers slipped to Cemplank, but because some of that Cemplank business in the comp in the quarter was with another manufacturer. So we have more of our Cemplank in the mix and also Cemplank price through that whole process slipped some because of the -- like I said, the whole reestablish yourself with certain customers process. So that's our main issue on price. I understand why it's an issue for the market. Internally, we don't like that we missed on category share and had to kind of go back that way. But the reality is we've kind of moved on. So we're pretty happy. I think we're pretty happy that we have our category share and we're happy that we make margin on all our products. But I do think what we've shown ourselves is we have to be better with pricing in the future so we don't make a mistake like we made a couple of years ago.

Okay. That's helpful. Just then as a sort of segue to the next part, the fourth quarter of '12, I think from memory, finished with the average net sales price in the U.S. was $6.28 and it's gone to $6.49, from memory, which is actually a reasonable jump. I mean, I know that's obviously mix as well, but is this all coming out of the higher -- or the proportion of the growth that you've seen in PDG in the Northeast. Is that what's driving that change in the average pricing for the quarter?

Hey, I'm not looking at those same price comparisons, but just generally in the winter, because HardieBacker is still a pretty good demand product in the winter because they're indoor projects versus siding which is a next-door -- exterior project. When I look at our forecast for the full year on pricing, it's -- we do start picking up at the end of the year a little bit, but it's pretty flat. So we're not seeing fundamental shifts in pricing and we have not gone out to the market with any attempt to "correct pricing". Our pricing, like I just said is -- it's kind of okay with us. We have to deal with the realities of it was our mistake and our percentage and our price on the Cemplank line is not what it was but it's fine. So I wouldn't look at the quarter-to-quarter change in price and think that we did anything. That's just largely driven by the mix of business during those quarters.

Okay. That's helpful. And, Russell, you said before that there was a $5.5 million FX benefit, I think, in the SG&A, which sort of depressed the delivered or stated SG&A price. So that would have taken, in fact, closer to $48 million, $49 million from what I can see in the quarter, which is really not much different to where it was in the Q4. So was there something that I've missed in the Q4? I'm trying to find out where the actual growth in the SG&A is, the underlying growth in the SG&A expenses.

We have -- when we compare, at least externally, Simon, we compare with the prior corresponding quarter rather than the prior quarter so...

Okay, talk about that, appreciate that, I'm just trying to understand quarter-on-quarter.

Well, there hasn't been an increase quarter-on-quarter as you've noted. But relative to Q1 of last year, there has been an increase because of the funding of initiatives. So we had a few things going and when you get advisory costs involved, that can add to costs.

So we should expect that to rise from here?

Yes. So, I think kind of the comment is that the costs we're incurring are kind of ramping up. They're not being slugged into the business. So we didn't mean to mislead you, that in the first quarter, we put a zillion dollars in all of a sudden, but it is becoming -- the actual operating SG&A is becoming greater quarter-to-quarter. I think when you look at the fourth quarter, if you want to think about it, as operating SG&A versus some other SG&A. We would be up on the operation side in our SG&A and there were maybe a few slugs in the fourth quarter that weren't so much about the operations.

Our next question comes from the line of Andrew Peros from Crédit Suisse.

I'll start off with a few questions for Louis. Firstly, Louis, could you quantify the market and category share gain achieved throughout the quarter? I've noticed the prime and growth chart you typically include in the pack is missing this time around. And secondly, on pricing, apologies for focusing on this, but I think I missed your earlier comment. Could you just perhaps clarify whether there's been any discounting in absolute terms to grow share in any of your markets?

Okay. Yes, so the primary demand chart, which we used to publish, I guess we started it several years ago when there were external indexes for R&R that we felt pretty comfortable with. And a year ago, and I think every quarter since, we indicated that because we were now having to calculate our R&R index externally, we weren't comfortable publishing PDG numbers, especially on a quarter-to-quarter basis. Having said that, obviously, we're somewhat confident that we have a decent index for the market. So we do it internally. The other thing we watch internally is we watch substitute products, so we watch vinyl siding numbers, which are published through their institute and then we watch engineered wood or chipboard siding, which are kind of in the Louisiana-Pacific results, if you read the results and make a few assumptions. So based on our calculation, we're happy with our volume actually. But as I just said, we don't publish it because we feel it's good for internal purposes but to go out there and declare it externally, we just got a little bit uncomfortable, it was too much our work and not easily verified externally. So that's where we're at there. On the pricing, are there any discount specific that we're trying to use to generate demand for fibre cement? If I ask the question in that way, I'd say pretty much, no. Probably across most of our programs, we have bundling programs for color. We have job app [ph] programs, which is basically a bundling program. We have big -- so we have the different kind of segment pricing. We have big pricing on multifamily. So we have all the same types of pricing that we've had in the past. The reality is on the Cemplank line, we don't control our price the way you would probably think. What we do is we react to competitive price with our Cemplank brand. And all of the other brands we have, we're kind of the proactive pricer. But actually, with Cemplank, we're more of a reactive pricer than a proactive pricer. So has Cemplank declined in price? I'm adding another question. Not recently, but when we're in the process of reestablishing ourself with those customers that had moved to off brands, yes, we did make price adjustments at Cemplank and that's part of what you see in our results as I covered earlier.

Okay. And maybe one final question. I think the comments around the buyback are a little different to those expressed at the last result. I'm wondering if you could clarify what conditions specifically you're looking for to see that resume and perhaps the desired capital structure of the business going forward or at least over the next few years?

Yes. Why don't I hand that question over to Russell.

Thanks, Louis. So, Andrew, I'm not sure that they are different and I'm not sure that we also want to flag exactly what sort of thresholds we're looking for or what will guide our activity. But at the sort of prices that have been prevalent or prevailing during the last quarter, it certainly wasn't attractive for us. But as I said, we are ready to -- really to be active if the market circumstances are attractive for us.

And the capital structure?

The capital structure, as we flagged at the full year and in all of the annual report materials that we released, it is our intention to move into a position where we have a more efficient capital structure than the one which we've had for quite some years. But it's particularly the case now when we're with zero debt and substantial cash. Now we won't be moving there straightaway but over time, we expect to be getting back to a stronger or a greater debt position -- net debt position than Hardie has had for some years. And the reason for that is that we've managed to eliminate almost all of the contingencies that we had and certainly all the material ones have gone so that we've got a more predictable business. And with the exception of Australia, most of our markets are either looking flat or stronger. So we feel a little more confident about the market circumstances as well as the corporate circumstances.

Our next question comes from the line of Guy Bunce of Citi.

My first question is, are the large U.S. home builders continuing to take market share at the expense of custom builders? And what impact is that having on James Hardie?

Okay. The large builders, I think that's kind of an 80-20 deal, largely who builds the house is determined by what category your home is being built. Right now, my guess would be -- my personal experience in the market would be, the top of the market's doing a little bit better than the other segments, but obviously, the top of the market's a pretty small part of the market, so you don't see much of it. The other reality is a lot of the small builders went out of business and fewer large builders went out of business, so there's a greater mix of big builders versus small builders now than there was going into the downturn. So in that respect, big builders would increase their market share. How does it affect Hardie? Not so much in my view. I mean, the big nationals normally use our Cemplank brand or our color brand. They don't use the Hardie prime brand. The more custom-type builders, if they're not going to use color, would be more likely to use Hardie. But I'll tell you, it's -- when you add up all our numbers, it's not going to move anything to a great degree. As far as our participation with the big builders, especially the nationals, we'd probably be higher market share with the nationals than we are the market as a whole. So that certainly doesn't hurt us. National builders do get volume breaks from all the manufacturers in the U.S., including us, so it's a slightly lower contribution margin. So it's kind of a mixed bag. I mean, the way we look at it is we have to participate with every segment, whether it's large builder, custom builders, whether it's custom homes, kind of middle-market homes and even in some markets, we participate with the starter home segment. So it's not anything we worry about, the shift in either category homes being built or the type of builders that are building them.

So, Louis, does that sort of explain partly the unfavorable mix on the U.S. price? And can you give us an idea specifically of what sort of percentage volume was sold into the more price-sensitive multifamily and starter home segments?

Well, again, because you only see the numbers kind of on average, and you also see the numbers relative to a period of time when our category share wasn't as good in the fixed starter home segment or the multifamily segment, it definitely plays a part. But this is -- I'm going to repeat myself again, I'm not trying to run from our average price. Our average price does reflect kind of a penalty that we incurred because we didn't handle our price increase in 2010 as well as we should have. So I'm trying to tick the head here and everyone else wants to explain it in a different way. So there's some mix involved, but this is just the reality of where we're at. We have lower numbers for the most part at Cemplank and we have somewhat higher volume on Cemplank. In addition to that, we didn't sell -- we're not selling at the target rate on Trim and color. Now we're more selling more Trim and color but just not enough to offset the lower priced products at same degree as we had planned. So last quarter specifically and the quarter before, I kind of indicated our price was flat to slightly up or slightly down in the foreseeable future. We're just way more concerned about market development or volume growth than we are about price improvement. There's not a product line we sell that we don't make good returns on, so I understand why there's so much interest in our price. I've tried to take responsibility for it, so I just can't explain it any better than I have. So yes, there's some mix impact on our price that wouldn't be helping us, but it's not because of -- this year, it's not because of the houses that are being built and it's not because of the builders that are building the houses. It's more kind of what we've done in the market.

Okay. Just one final question, if I can, and that is just -- sorry to labor on the point, but the issue of investing in SG&A in the U.S. So if you look at the group level, SG&A expenses as a percentage of net sales for the period were 13%. Where do you see that percentage going in the U.S. over the next, say, 2 to 3 years?

Well, obviously, there's 2 -- there's a numerator and a denominator. I really am not sure it won't stay the same or go down, but it's not going to be timed perfectly with the volume. So again, we're not a large company where corporate would tell the businesses what percent they can sell on SG&A. We fund our initiatives based on our 35-90 strategy and what we think the market conditions are like and how receptive they're going to be to our programs. And I guess I've covered before, most of our market initiatives run pretty negative for at least 3 years. So right now, we're putting money into the business that you may not get a return on for 3 years and this is expense money. But again, I don't expect the 13% to spike because at the same time, we're going to get volume increases if our assumption is right that the recovery is sustainable. So all I'm saying is it's not perfectly timed and if I have to choose one or the other, I'm going to choose to do -- to fund the growth initiatives and have a little bit of a variance in our EBIT margin. Having said that, I guess the reason we established our 20 to 25 target several years ago is we wanted to kind of make sure you guys knew how we balanced things, okay. That we weren't growth at all costs, so we're not going to put so much money into the business that we don't get good returns, but we're not trying to optimize the bottom line either at the expense of future growth. So right now I'm saying, hey, we're probably looking to stretch the 20 again this year and part of the reason for that is we're going to put some more money in the business that supports some growth initiatives. So kind of that's what I'm telling you. We're still committed to our 20 to 25, but I'm saying this year, rather than be 1 year late with growth initiatives by delivering whatever we deliver, say, whatever you want to, say it was a 21, 22, 23, instead of a 20. Rather than be wait the year and deliver a few extra points on EBIT margin, I'd rather get things started earlier rather than later. So that's kind of the balance, the trade-off we're making.

Your next question comes from the line of Emily Behncke of Deutsche Bank.

Just a couple of questions. Obviously, the 17% volume growth in the U.S. is when you look at your -- the percentage of your business exposed to new housing. It implies pretty significant market share growth and you mentioned R&R as being the main driver there. I think, back in 2010, with the price increase that you were talking about earlier, you lost some market share. So could you quantify at all the extent of the primary share that you guys have gained and where you sit currently?

I haven't looked right back on last year same quarter to figure out what our category share was. And I thought -- I did -- you guys picked up my comment, which is correct. It's a good 2 comment that I think that the driver of our growth against the market right now is against vinyl. And for the most part, that would be a fair remodel [ph]. Having said that, I don't want to overplay that because we've seen some good trends even with some big builders kind of wanting to move away from vinyl even very early in the recovery. So there are examples and I know you guys talk to the big builders. There are examples of some of the big builders moving away from vinyl in certain developments right now. So, but anyway, if I had to guess, I'm a simple person, so I'm going to say 1/3, 1/3 and 1/3.

Okay. And so we've talked a lot about pricing on the call, but just in terms of your expectations around volume growth and market share, are they tracking in line or ahead of your expectations at the moment?

Yes, they're in line. I mean, I think I said the first quarter was a very nice quarter. The second quarter, looking about the same. So obviously, we get into this time of the year and you want to be -- I mean, into a recovery, you want to build momentum. And I think we have built market momentum, but I think the industry got a quick start in the first quarter and is now kind of slowed down in how they're -- where they're at in their construction cycle on some of our business. So second quarter, I think similar, maybe a hair down from the first quarter, which isn't that unusual by the way. And then the third quarter, we just don't have a look yet. But what I like is, I like that both -- I like how the markets feel. When we visit the markets, I like how everyone in the market is thinking, whether it be builders or dealers or homeowners, and then I like how our guys are back on their front foot as far as what we're trying to accomplish getting ready for growth. By the way, I'm going to circle back and change my guess. I'd say, if you had 100%, say you had a PDG growth of x, I would say, maybe 20% might be category share, 20% might be new construction and then 60% would be R&R. So R&R is the bigger piece that's driving it, but we do have some help in those other 2 areas as well. And as you know, the category share gain is coming to an end because we're very close to where we're comfortable with our category share.

Sure. And on Slide 10, there's a comment there saying that partially offset by average -- low average sales price and fixed -- higher fixed manufacturing and organizational costs. I'm just wondering are some of those temporary or should we expect some of those to reduce in the next quarter?

Okay. So here, I guess this is the question that hasn't come up and maybe it shouldn't come up, maybe it should be a comment by me. You've got to remember when we went into the downturn, we were very successful making a lot of our costs variable, okay. So costs that are classified as fixed, we were able to reduce that close to or at the same rate as volume was being reduced. A lot of other people -- a lot of other companies in our industry and probably most of the companies in our industry don't take that approach, okay. So they kind of sat on their cost structure to some degree. So they had what they call is a lot of operating leverage now coming out because their incremental margins will be much higher than their average margins they've been gained. We, on the other hand, have put a lot of those costs right back into the business, so we did without those costs for the 4- or 5-year period, so we had that benefit. But now they run a factory 24/7, some of those costs have to go back in. And the -- our class fight is [ph] fixed cost and the way you count for things in a manufacturing business. So our -- I guess, I've talked to investors about this in the past, our situation is our incremental margins aren't necessarily going to be significantly better than our average margins we've been getting because we make so much of our costs variable. Having said that, obviously, you have depreciation and real estate tax and stuff like that, that is fixed.

And just looking at your quarterly margins, usually the Q1 is the highest margin of the fiscal year. Do you think that with high utilization rates, et cetera, that, that may not be the case this fiscal year?

Yes. And that's a really good point, Emily, because normally our Q1 is our leading margin. I guess, I kind of didn't quite point that out in the -- when we looked at that slide, our EBIT margin slide. So we're -- our kind of stretch to 20% EBIT margin this year is driven on the assumption that we'll continue recovery. So the seasonal downturn won't have as big of an impact on our business as it would in a normal year. So yes, I think if we hit the 20% for the year, it's going to be a pretty flat 20%. Meaning, that we're out of the gates at 20% first quarter, and second quarter probably be there, maybe a little bit shorter there. So the fourth quarter has to make up for any shortfall you have in the third quarter. Third quarter with all the holidays, Thanksgiving and Christmas, you probably aren't going to hit the 20% even in a recovering market, but the fourth quarter, you may be able to exceed it. So that's how you get there on 20%. You're exactly right. Pretty close to 20% first half; third quarter it drops; fourth quarter, it comes back above the 20%. That's how you've the 20% EBIT margin.

And just finally, your capacity utilization at the moment?

It's a good question, which I don't have an answer to. I think right now, we're thinking it's in the mid-60s because we -- I don't want to make it sound like we don't calculate it. I just don't have the number off the top. And the last time I had a discussion, it's in the mid-60s. And that's driven by change in product mix during the downturn, as much as it is kind of square footage of board that you guys see that we're showing. I can run through the type of capacity projects we're thinking of, just so you guys have a clue. I don't think I did it last time -- last quarter, but we had the Fontana restart up, so we're going to reengineer some -- we're going to reengineer Fontana before we start up. That's our plan A at the point. We haven't got a proposal together, but -- and what we're trying to do with Fontana, if we can, is make a California plant kind of competitive with the other plants by shipping a fairly tight shipping radius, which means that we're going to make a very full product mix and be efficient on everything. And the 4-foot wide machines, they're a little bit hamstrung to do that. So we're kind of looking at how we might approach that. So we've got that started up. And we also have a similar situation in Summerville, which we haven't done much work on that, but we've got to figure out what product mix we want to produce at Summerville and what kind of reengineering needs to go into that. And then we have -- we actually had some #2 line start up, which we are underway with, and that's a pretty good example. You'd have expenses going into that currently. We'll probably start that up in January. And then we anticipate the need for a new sheet machine in Texas, which would probably go into Cleburne, in the area that we are dismantling the initial XLD Trim line. With our NT3 Trim in Peru, we need more capacity, so we'll be adding that. And I'd like to get our Artisan capacity on the East Coast. So that's kind of the nature of our capacity projects that we are working on right now. So it's a pretty -- because, again, we talked about this variable in fixed cost. Of course, we were, for 15 years, building plants nonstop and we had resources in our business to do that. When we hit the downturn, very few of those resources actually got laid off; they got reallocated into manufacturing. So now -- so then you finish the downturn and you don't have those people available to take care of your capacity projects. So we're in the process of kind of rebuilding that construction organization by pulling some of those people back out of manufacturing into construction, which means that you have to hire and replace into manufacturing or in some cases, we've actually recruited new people for construction.

Okay, great. So the CapEx for FY '13, what sort of number should we be expecting?

I can't remember if we give any guidance, but we're -- we've been running down near $100 million and we're definitely going to grow over $100 million, start going over $100 million and we'll hit some -- even in the U.S. business -- I think in the U.S. business, $100 million's probably not bad estimate at this point. And then in Australia, we're planning a major capacity addition, which will be expensive because everything is expensive in Australia.

Next question comes from the line of Andrew Scott from RBS.

Just 2 quick ones from me. Louis, first of all, just hoping you could expand on the parameters around guidance a little bit. Obviously, you're sort of below the analyst range. Just the commentary around that says assuming a stable housing market, you've just sort of spoken at length about the housing market improving. Is that stable market very conservative or does stable mean more of a continuation of the trend we've seen to date?

Yes, we'll take the mystery out of our guidance there. We took the share of our range and went a little bit on each side. So I mean, we took our forecast as it fits today, internally and put some money on each side of it or put a range around it. So obviously, we have assumptions in our forecast and market analysts would have assumptions in their forecasts. And I think most of the difference would be in what we're doing internally. I'm not sure the marketing analysts are believing those bullish forecast for housing and we're not either. We think housing is going to come in somewhere almost midpoint where we forecasted it versus the Zelman forecast, which is the forecast we found to be most reliable. So I doubt if we're thinking different in housing units. I think mainly we're thinking different internally. A lot of that stuff I already covered today, which would be the difference, I believe, between market analysts' forecast and ours. And, of course, the market analysts wouldn't have any real information as far as far as how we're trying to plan our business for the recovery. So I think it's kind of a normal disconnect and a lot of the call has been me letting you know -- you guys know what we plan to do with the business in a recovery. And it's more cost here and more cost there, it's not focused on market increases. So all that stuff that if we were optimizing EBIT, we'd probably easily be able to get to the market forecast. But really, that's not where most of the value creation is, mostly the value creation is go and get the market development kind of kicked up for Fibre Cement against vinyl and wood products.

Thanks, Louis. Do I take it you're intentionally avoiding giving a specific housing number that's baked in there?

A specific housing number, no we don't.

Yes. But I think you guys know where we came in and I think you know where development is and still to halfway, so it's not hard to figure out where we're at.

No problem. And just quickly, obviously we're seeing some pretty significant flooding in the Philippines, not a huge part of the business, but maybe just any damage there and any disruption and particularly, given I guess that's going to be coinciding with the weak Aussie market at the same time?

No, we don't have any impact forecasts in our business.

Your final question comes from the line of Bridget Carter [ph] from the Australian Newspaper.

I was just wanting to ask about the Australian housing market. I mean you've talked about a deteriorating market in quarter's results. Can I ask how much worse has it got since the previous -- when you reported the full year results? And I guess the other question I have has to do with the carbon tax and how much of a difference that's made with respect to the Australian result and what your view is on that as well?

Well, being an American, I'm not the best guy to ask. I'm going to hand this over to Russell, okay.

Thanks, Lou. So with regard to the movements since we announced the full year results, there certainly hasn't been any improvement apparent in the Australian market as far as we can see it. Approvals seem to be down, starts are down. There seems to be a general lack of confidence, although some people are reporting that since the reserve bank reduced the cash rate in more recent months, they think that things are going to improve. But we haven't seen that come through yet. And with regard to the carbon tax, Carmen [ph], I think that's a very long-term issue. We haven't seen any evidence of a significant impact arising from carbon tax in our business at this point, but that's not to say that it won't be something that comes through over the longer term.

There are no more questions from the audio participants.

Okay. Thank you very much, and I appreciate everyone joining the call today. See you. Bye.