James Hardie Industries plc (JHX) Q2 2014 Earnings Report, Transcript and Summary

Okay. We'll get started. I appreciate everyone coming this morning. We're going to walk through this, just like we always do. I'm going to take care of a bit of an overview on the business. Russell will take care of the financials and then we'll go to Q&A. Investors and analysts first, and then if we have any media questions, at the end. Let's see here. Okay so most of you would have seen, we had a very good quarter. We posted largely on performance in the U.S. business. But really everything in the company ran very well in the second quarter. Markets are, for the most part, good. In fact, I should say they're good across the board, with the exception in Europe. Europe's still kind of flat but we're very small in Europe so it's not affected us as much. Looking at the middle row. I think the more important number is the half year. Most of you know we had a pretty good quarter last year, first quarter. And then second quarter last year wasn't very good. So the second quarter comp is partly so big based on the weak quarter we had last year. But if you put the 2 together, it's a very balanced kind of half-year for us, both years. So and you look at the improvement on this year over last year, and that's, I think, telling you what's happening in the business. Just a few points down below. Like I said, everything is running well and all the markets are in good shape. So things are kind of back to normal at Hardie. The -- I guess one of the big debates probably come up in question is how much is R&R up? So you'll see soundbites saying it's low-single-digit, it's high single digits, no one's saying it's, I think, in double-digits. R&R is definitely up. It's regional. So there are a few regions where it's really lagging. But for the most part, it's up. And we estimate that based on the information we use, that it's up in the low-single-digits, I think we've been saying 2 to 3, it's probably a bit higher than that now. But we're not seeing the 7, 8, 9 that some other companies are talking about. So I think that's regionally driven. Our price is up pretty strongly this quarter, 4 points. That's got everything going right, okay? We talked about those pricing inefficiencies which we felt we had dealt with, and certainly we feel even more so now. That's been tracking very well. So the right price is getting in the right segment with the right product line. So that's part of the equation. The other part of the equation is this quarter, we had a nice mix, a higher value mix. So that contributed some. HardieBacker price increase which was effective kind of middle of the summer, is mostly in this result. So it's not every dollar in this result, but it's mostly in this result. We did take Cem up, the very low markets on Cem, Cemplank. We took up just on a market-specific and really just took the floor price up, not necessarily the whole -- the list price for Cemplank didn't come up, more of the floor price came up or the discounts to certain markets, certain customers. And then multifamily pricing, bid pricing is up bit as well. We are seeing higher input costs, about $6 million for the first half. We think it's going to end up $10 million or $12 million for the year. So we're obviously going to be able to kind of work through that. It's a reality. We are in the bottom of the market on cement. So cement has gotten more expensive, it will continue to do that for the next couple of years, I believe. Not dramatically more expensive, but it will go up, I think every year for the next couple of years if their utilizations to go up. And then pulp has been stubbornly high. So it's not dramatically higher than last year, but it is higher than last year. The next comment is about Fontana. Fontana is kind of tracking as we want it to as far as what's being expensed and what's being capitalized. I think little bit different how we forecast it as we got a bit of rehab work. But basically, the project's going to come in at about the number we thought that it should and it's going to come in on time and we're going to have all the capacity that we anticipated in that facility. And then I guess, that last comment is really talking about -- a lot of my soundbites last year was we put the organizational costs in ahead of the volume. Well now the volume's starting to catch up to that and the organizational cost has slowed down, so kind of it's all coming back into balance. So those are the quarterly numbers, which you can see are all up strongly for the U.S. And then like I said, I think this half yearly is a better comp to look at because last year's quarters were so unbalanced. So net sales up, price up, almost 3, I guess. And then sales volume, 15. Our forecast for housing is -- we look at housing, we look at U.S. and Canada as targetable, and then we pull out high-rise, okay? So our targetable housing went from 808. We think it's coming in at 957, so just under 20%. And then of course, we have a big position in R&R. So you don't just go straight up with new construction. So we are indexing -- we are growing above the market index currently as we calculate it. I don't think there's much question when you look at vinyls growth or the lack thereof, and then you look at LPs slowing down their growth. I think you can see that Hardie is growing faster in the market. So average price up, EBIT's up strongly and EBIT margin, 22. So this half-year result is very much in line with what we're talking about the full-year forecast. So I know it was a little bit hard to figure out at the end of the first quarter because normally the first quarter is our highest margin quarter. And we were aware of the fact that the second quarter was going to be our higher-margin quarter and that's kind of how that plus-20 forecast we were pretty confident on. We remain confident on our forecast. Obviously, if something external changed, it might impact it. But we had a pretty big drop off, third quarter last year and then fourth quarter was more of a drop off than we normally see in the fourth quarter. We don't anticipate that will be the same next year. We will have the drop off in the third quarter but it won't be as dramatic as last year, and then the fourth quarter will come back more strongly than we sell [ph] the fourth quarter come back, that's our assumption anyway. That kind of talks to this. You could see last year on EBIT margin, we had that problem where our second quarter didn't even come in range, which is a problem. And then we had a big drop off third quarter and kind of a normal type of recovery in the fourth quarter now. This year, we had a good second quarter. We see less of a drop off in the third quarter and a better recovery in the fourth quarter, so that's where we get our EBIT margin forecast for the U.S. business. Going to where we're at in housing. This brings you back to 2000, shows you volume revenue in housing starts for the U.S. business. So you can see that -- I mean, you can see a couple of things from the slides, things you guys already know, our participation per start, or our market share is up quite a bit. And that's again, we grew our position in R&R quite a bit over the last several years. And you can see that after price started coming down, the revenue was growing slower than volume. At least, so far this year, we've reversed that trend, and we expect that trend to continue. Okay on this -- on the price reset, I think Sean's gotten a couple of questions already on it. We're getting ready to buy a small fabrication business to make windows, okay? And back in the early 2000s, Hardie became a global fiber cement company. Basically we got rid of everything else. Over time, we started to do a few things here and there that kind of complement the fiber cement business in the U.S. like we sell building wrap now. We sell things that aren't attached to fiber cement, but things that are attached to the building at the same time as fiber cement. Building wrap's probably the biggest one. But last year, we bought a little company we called Razor, which is making parts for fiberglass windows, okay? So what happened when we had all these little bits of revenue, we just dump them in and divide by the footage of fiber cement. It was no big deal. It didn't really change the equation very much at all. But now with the purchase of Razor, our actual attachment of building paper with our product is going up. And buying a fabrication business now, it would just really start misleading you on what's happening with fiber cement price. So we went back and restated fiber cement price without any of those extras in it for that base period, so you could kind of see what's happening just with fiber cement. By the way, I think Sean is taking a couple of questions. Well if you would've done it the old way, what would the comp be on this quarter and the answer is it's basically the same thing. So it would've been up by about 4%, because we haven't done anything dramatically different this quarter, outside of fiber cement. But when we put the windows business -- we were concerned about putting the windows business in the old way of calculating price, so that's where we needed to change. So you can see the last half of that downturn, which most of you guys know. We just kind of lost control of our pricing much more than we should have. And that's reflected in the fiscal year '12. And even though the market was getting better in fiscal year '13, we weren't able to turn it around that quick. So we do have it turned around now, and I think your price strength going forward will be positive even without the big market increases. Asia Pac. Most of you follow the Australian market. So new construction's better. Of course, detached homes, where we make most of our money, is up but not up near as much as kind of medium density. So -- and then the other thing that's kind of a bit strange is the renovations isn't up right now. It actually is down. So the market index for -- even though the headline number of housing starts is up dramatically, our market index for the opportunity in Australia, for our business is just slightly up. Despite that, I think that the business is performing pretty well. They continue to grow the brand, the Scyon brand which is kind of the main strategy in the business and hold our position on the more traditional fiber cement products. New Zealand's a good market. We're kind of up with that market. I think we can grow faster than we are in New Zealand, so we need to work on that. Some pricing's up in the region. Manufacturing costs are actually down in the region. So some of the work we did on the new capacity, although we don't have the new capacity yet, some that work on -- showed us some opportunities on the manufacturing side. So you guys are getting a little better manufacturing costs this year. And then of course the results are kind of -- it's hard to read, but the change between the U.S. dollar and the Australian dollar. But from our perspective, we always look at local currency. Australia and New Zealand are tracking well. Philippines is kind of a flat year so far even though the market's up. So we have some work we can do in the Philippines. Okay that's Asia Pac, second quarter. Like I said some of that is in US dollars which is kind of jerked around by the change in exchange, price up 4% and the local currency volume up. So obviously, the local currency revenues up pretty strongly. EBIT's up pretty strongly as well. And for the half year, similar story, actually a little better for the half-year than second quarter. So the full half-year results a little better than the second quarter result in Asia Pac. So the outlook, what do we expect? We had a very good quarter. Obviously, for 2 reasons and we talked about this at the September tour and I think even at our last result, we have a good market. We finally have a good market back in the U.S. I'd say it's not like the boom years by any stretch, but it's an increasing demand market. Less obsession about cutting costs in a home when you build it and a little bit more thought about selling the home and marketing the home. So we're very happy with market conditions, pretty much across-the-board. Like I said, Europe is the only exception to that. And then the other part is the business is running really well. So some of the problems we fought over the last couple of years, they're behind us. So we're back on our game on pricing. We're back on our game on market development. We're back in our game in distribution. So a few areas we had issues we've addressed and we're moving forward pretty well now. Asia Pac didn't have those type of problems I talked about that the U.S. had over last couple of years. So I think with a better market, they'll get more on the front foot again and start growing the business quicker than they have over last year or so. The Philippines. Just -- I assume I'll get a question on it, but I'll just say that the Philippines, as far as the storm, we didn't have any personal injuries in the business. All of our employees are fine. The plant's fine. We had a few raw material sourcing issues as far as getting material to the plant. It's considered to be very short-term, we have some alternative sources that we may need to tap into. But in as far as a change in market demand, we don't see any change in market demand. So I think the Philippines' storm, fortunately, did not impact our business one way or the other. Obviously, we've been doing a lot of work in capacity. So I think last quarter, we told you we bought the land up in Carole Park. That project's going as planned. It will start up early next year, calendar year. And again, we always want to repeat that, that plant starting up doesn't shut anything down, so we're going to run 3 sites in Australia, like we always have. And then the U.S. where a lot of capacity work is going on, we have Fontana ready to start in January. Some of you would've been there on the tour. We got these little bit out of order. Actually, Cleburne's going to come on first, with a third sheet machine. It's a pretty low-investment for a lot of capacity, and that's because it fits well in some space. We used have a Trim operation in that plant and we had a lot of the infrastructure that goes with the extra capacity. So we're just -- were investing in mainly a sheet machine and just a few other things, rather than everything that goes with the production facility expansion. Plant City is different. It is going in the spot that we used to have a pipe plant, so we do save some money on the investment this -- the product line here will be density modified. It'll give us a second source for HLD Trim, which is our southern Trim product. So it's a little bit more expensive. It has a lot of finishing, post autoclave investment that goes along with it and that's what drives that number up to $65 million. But if it was a Greenfield plant, it would be quite a bit more than the $65 million. So we are benefiting from having this space in an existing site. And they're going to come online. I think they'll come online about 6 months apart. And I think Cleburne will be first and then Plant City. And probably Cleburne early calendar year 2015, and then Plant City middle of the year, maybe. Okay, I'll hand it over to Russell.

Thank you, Louis, and good morning, everybody. So as Louis has explained, we had very favorable outcomes on sales volumes on local currency revenues, EBIT and EBIT margins in all of the major business units and that includes Europe. Even though Europe is pretty soft in terms of economic and construction activity, it's actually doing reasonably well for us at the moment just because we're relatively early in our startup phase. We've had some unfavorable movements but not all that material in the quarter in New Zealand, weather tightness just a $0.3 million charge this quarter, $4.9 million for the half-year. Because of the fall in the Aussie dollar, we had a $90.4 million correction or downturn in the asbestos liability in the first half. It was less than that in the quarter. And the depreciation of the Aussie dollar has had an adverse impact on the translation of the Asia Pac earnings. Cash flow, I think, was a real highlight for us. So far this year, $175.4 million of cash generation is a significant turnaround from last year. And we'll see that a bit more in the cash flow statement as to the causes of the difference. Our CapEx is up as you'd expect, given that we've announced capacity expansion projects. So a favorite of investment going into the Carole Park expansion and also the Fontana refurbishment. Dividends for the half-year totaled $163.6 million, which was paid in July at $0.37 per share. And that was on top of the $0.05 interim dividend or first half dividend last year. So giving a total distribution of $0.42 from FY '13 earnings, and the total payout was about $185 million. We've announced an $0.08 dividend today, which is an increase from $0.05 last year, for the first half. And we've also announced an increase in the dividend payout ratio going forward and effective within this financial year, and we'll talk a bit more about that in a subsequent Slide. Going to, oh sorry, I'm not sure what's happened there. Oh sorry. Going to Q2 results. You can see the net sales were up 17% for the quarter. Gross profit up 20% and the asbestos adjustment showing a $4.1 million reduction as a result of a slight decrease in the Aussie dollar in the quarter. I think the primary important issue is what the normalized earnings look like, and you can see that on Slide 21, 56.3 [ph] was up 45%. And the pleasing thing, I think, was the way the -- all the numbers falling down from revenue and volume were actually higher than in the line above. So it's been a very pleasing result for us in that sense. For the half-year, looking at the reported earnings, EBIT of $224.7 million versus $105.3 million, but a lot of that was due to asbestos, $90 million of it due to asbestos, which is really just a noncash adjustment resulting from the depreciation of the Aussie dollar. Net sales, up 13%, GP up 17%. So the same sort of trend that we saw in the quarter. So it's a pretty pleasing result. And on Slide 23, looking at the normalized earnings, you can see that the result is $108.3 million [ph] for the year-to-date. So what's a little unusual for this quarter for Hardie is our second quarter has been stronger than our first quarter in terms of earnings, which isn't the normal pattern. But for the reasons that we referred to, you've recovery in the market, stronger pricing, we've actually had a change against the normal pattern. Not material, but it is a pleasing sign for us. Earnings per share for the quarter were $0.244, which was up 30%. And as, I indicated before, we've declared an ordinary dividend for the first half of $0.08 which is up from $0.05 last year. So a 60% increase in the first half dividend on earnings up -- earnings per share up 30%. The segment EBIT, on Slide 24. Asia Pac obviously impacted by the downturn in the Australian dollar. So the Australian dollar earnings were up 15%. In spite of the fact that in US dollars, we're showing only 4%, so a very good outcome there. And the total segment EBIT, excluding the New Zealand, product liability expenses up 42%. The general corporate costs, this is a slightly misleading indication, it suggests there it's up 51% for the quarter. But last year, we had some gains, the controllable costs are actually running very much in line. And that's also the case for the half-year. So the total EBIT was $67.8 [ph] million after the adjustment of items, which was up significantly on the 22.8. The half-year segment EBIT, a similar sort of story. U.S. EBIT up very strongly. Asia Pac impacted by a downturn in the value of the Aussie dollar relative to the U.S. General corporate costs again showing some change there. But in fact, it's not as bad as might be indicated because we had 2 one-off items last year, which were a benefit of that $8 million. So you can see that the expense is actually running much more in line on a controllable basis. Turning to Slide 26. This Slide actually probably is just useful as a picture of what's been going on with the currency. And you can see that during the quarter, it didn't move a great deal. But certainly from -- compared with the prior corresponding period and compared with March 31, it's down pretty significantly. And that obviously translates through to earnings in the balance sheet in the way that we've highlighted here, which is the normal way we present this. There's been about an 11% of depreciation of the Aussie against the prior corresponding period, and a 7% depreciation in our financial year to date, so in the first 2 quarters. Looking quickly at income tax expense. The ATR [ph] for the quarter was 21.5%. That compares with 23.6% for the prior corresponding period. And a fairly similar outcome for the half year. Just a couple of pips different. I would highlight that the movement that's apparent between the 2 halves and the 2 quarters relative to prior corresponding period, is really a bit misleading. We finished FY '13 with a rate of 21.3%. And so in the way the U.S. accounts for tax expense, which is always looking forward to the year end, we actually misread the full-year impact last year or full-year forecast last year, finished up at 21.3%. So where we are with Q2 ATR and where we are with the half year are very much in line with the full-year last year. And that's the way we'd expect to be in the low 20s in terms of ATR, going forward. Looking at the cash flow, which I indicated was a bit of a highlight for us so far this year. You can see here that we've have $31.4 million reduction in working capital in the half year. That's been across almost all of the activities, U.S. business and also Asia Pac, just about optimized in terms of working capital, both -- or all of inventory, accounts receivable, accounts payable. So we'd had a big gain in cash flow there. Last year, we made a large contribution to the AICF, $184 million. This year we haven't made a contribution to the fund. That's been a big item, obviously, in the cash flow. But I think the underlying performance of the business in producing $175 million in half a year is a very good one. Dividends paid roughly in line year-to-year. And we finished the period with ending net cash of $126 million, which is not a significant reduction on the 31 March position of $154 million, given that we've paid such a large dividend in that 6-month period. Capital expenditure. It's up on last year, as you might expect. We've spent $25 million at this point last year. Spend this year is up to $44 million, and we'd anticipate that, that will increase during this year, or the rate of spend will increase as we have some quite large projects that are getting to a more advanced stage -- Carole Park expansion, Fontana refurbishment. And as Louis highlighted, the board approved this morning some additional expansions in the U.S. And we do have further expansions under evaluation for the U.S. business. So $102 million is the expenditure on these 2 expansions announced today, and there probably will be more to come. In terms of capital management, 2 changes in dividends that we announced this morning. One, was the increase in the first half dividend, from $0.05 to $0.08. And also, an increase in the payout ratio. About this time last year, we announced that we were increasing the payout ratio to 30% to 50%, with effect from this current financial year, FY '14. We then actually delivered on that early by applying that to the FY '13 result. And now, we're increasing the payout ratio to 50% to 70%, and that will apply for the FY '14 year and beyond. I think the other things there are fairly apparent. We did have a small purchase of -- under the share buyback program at the end of July. There was a dip in both the share price and the Aussie dollar, which was very favorable for us, and that window hasn't been opened for us since that time. In terms of debt facilities, we remain with a $405 million of facilities, committed facilities. They're currently unutilized given the cash position. And we have therefore, $532 million of liquidity. New Zealand product liability, on Slide 33. No substantial change here. We've been dealing with this issue for some time in relation to product that were sold into the market between 1998 and 2004. Initially, there was significant insurance cover available for us, but the insurance cover is now being exhausted. And that led us about 15 or 18 months ago to start taking some charges over and above the insured amount. And we've revised that periodically. But in this quarter, the impact was quite immaterial. Then in April of this year, we had a claim from the New Zealand Ministry of Education in relation to product used on school buildings. We're continuing discussions with the New Zealand Government on that claim, as well as preparing for potential litigation. But we still have a $20 million provision at the end of the period. And we think that, that's adequate given the state of knowledge at the moment and the impact on the Q2 result was minimal. The asbestos fund. Some details here on Slide 34. The fund started this year with $128 million Australian dollars of assets. That's been reduced by claims paid of $73 million and with other movements, that nets out to be about $72 million of assets at the end of September. We have seen some concerning trends in mesothelioma claims which we'd highlighted previously. I think we've now got a much better handle on the what and the how. What we still don't quite understand is the why that's occurring, and there's still quite a bit of work going on in that space. But there is a definite trend in -- an increase in mesothelioma claims that the fund is experiencing. There's further detail of that in Note 7 of the financial statements, for anybody who wishes to catch up with it. So in summary, a very good quarter and a very strong half year as well. Result for Q2 was $56.3 million; for the full year, $108.3 million. Sales volumes and higher-average net sales prices. What's not apparent so apparent, I guess, in the result is that we have had some increases in costs, particularly pulp. But the business has been able to weather that, and we produced much improved margins in both of the major segments. Significant amount of work going on in capacity expansion throughout the business and also an increase in trends in dividends. Hardie's perhaps in a fairly unusual place. We've got very low debt, in fact 0 debt, strong cash position. We're expanding the business but at the same time, we're actually increasing dividends. So I'd expect that this is a trend that will go on for some time, because the cash generation at Hardie when we're in this growth mode is incredibly strong, and we see that as continuing into the near future at least. In terms of FY '14 guidance. At June, we guided the market towards a result of around $164 million to $181 million. That's been held by the analysts through that period. And as a result of the strong quarter we've had and the outlook we see for the next 6 months or so, we've actually increased the guidance to a range of $180 million to $195 million. That obviously is subject to the Australian dollar, to U.S. dollar rate remaining at about $0.93. And that's to do with Asia-Pac earnings that's ignoring asbestos, which we don't obviously take account in this guidance. But as long as the Aussie dollars stays at around that $0.93, the $180 million to $195 million guidance is relevant. So we'll turn it over to questions, and Louis will chair that. Sean O’Sullivan: Thanks, Russell. Okay. This time, we're looking for one question per analyst and then maybe [indiscernible]. Okay.

Feels a little restrictive, but never mind.

You mean one at a time.

One at a time. I got a -- I do have one question to ask. But before I do, I just want to formally acknowledge Russell for this final result and to thank him for all the help and assistance over the years, and we wish him the very best in all the endeavors after this. Russell, so thanks very much.

Thank you, Simon.

Quick question, Lou, just in terms of the public homebuilders. D.R. Horton came out with their Q4 yesterday or day before, I can't remember now, saying that the summer had been a bit disappointing relative to the first half. Just in terms of trajectory of sales, given you lag that cycle, I'm just interested in your views on whether this half, this quarter in particular, you've been a beneficiary of the very strong first half of the public homebuilders. And do you see it somewhat diminishing in terms of the trajectory or flattening out a little bit over the next half?

Yes. I mean, the market's increasing but it definitely tapered off. It spiked a bit in the first half of the year and it's tapered off, I guess, in the last 3 to 4 months. And we do lag anywhere from 3 to 6 months, so we'd still be enjoying the very strong growth that the homebuilders had in the first half. As far as our full year forecast, we're pretty confident that we've got that tapering off built into our forecast. So we don't expect the market to go the other way. I don't think any of the builders do either, it just slowed down the growth rate a little bit.

It's Michael Ward from CBA. You made some comments around Cemplank pricing, list pricing, floor pricing. Can you just elaborate on that?

Yes.

And what -- sorry, and pardon my ignorance, but what the effective difference between those 2 actually is?

The list price and the floor price? Yes. Well, certain customers would pay list price and then as you get into larger customers, they'd be paying closer to floor price. So basically, we feel like in some markets, our floor price got too low. And rather than move up the overall Cemplank price, we just kind of tightened the range between list and floor. We did that in Pacific Northwest, Colorado and Georgia, somewhat in Texas. So wasn't -- it wasn't an across the board. There was no price increase. It wasn't across the board. And again, it was just tightening of the range rather than pulling the whole market up.

Given the pricing you had in Cemplank, it was weaker through that downturn...

I think you just broke Sean's rule.

Oh, but it's...

I'm going to allow it. I'm going to allow it actually.

Do you think that will be the one that will be first to move ahead of sort of standard board?

Sorry, sorry, I missed the question. So which would be the first to move?

Well, do you think there's more room to move now in Cemplank pricing than there is on standard board pricing?

Yes. I mean, that's what we've been trying to do. We've been trying to tighten the range between the commodity fiber cement, which Cemplank is one of them, and of course, our competitors are the rest and where Hardie's at. Now we haven't pulled Hardie down, so we pulled the floor up on Cemplank. I think, like all building materials, when we're -- you're in an increasing demand market, most people that sell on price do try and pull their numbers up. So I think the competition has come up off their floor levels and Cemplank comes off its floor levels in some markets, and Hardie stayed about the same. So the gap has tightened a little bit. Jason Harley Steed - JP Morgan Chase & Co, Research Division: Hello. Jason Steed, JP Morgan. Just a question on PDG, I guess you -- I know you stopped providing numbers on that front for reasons you explained at the time. But obviously, you're making some pretty good progress on penetration. The question is, do you see that accelerating as -- I think you said in September, you've dealt with the SmartSide risk. How do you see that moving quarter over the next 2 years as you think of 35-90, I guess?

Yes. I definitely think we're going to be in a accelerating growth mode against the index. And part of that is, as the market gets further in a downturn, the obsession with price gets less and less. And thinking about features in a home get more, so we'll have a more favorable market. They'll be more receptive to some of the premium kind of offerings we have. And then the other thing is, our organization is just running better. So I think we did a great job going from a boom market to downturn. And I think we ran well in the downturn for a while. But near the end, I think we got a bit confused. And we had a lot of trouble transitioning to an increasing market out of that really dead market. So we just weren't that effective. If you remember, one of the big things we did in the downturn is reallocate a lot of field resources from new construction to repair and model. And that's -- they really helped us in the downturn. And we are just slower to get those resources kind of retrained and regeared toward new construction. I think we're kind of 40% of the way there now. And I think it's developing pretty rapidly now. So I do think we'll grow at a much -- at a higher rate than we have this year and next year, so yes. Jason Harley Steed - JP Morgan Chase & Co, Research Division: Any rough sense of it, at just the half year, rough sense of the number or in terms of PDG at the half year?

I -- we -- I didn't even calculate it. I haven't calculated. I think it will come in somewhere between 6 and 10 for the year. But we didn't calculate it for the half year. The -- what's more important to me now, when we're looking at that, because I don't like -- I don't -- I like the calculation but I don't like the input on R&R. Because we're so big in R&R and it's an inexact input. So what we do is we look at us and then we look at others. And when you look at the others this year, you can definitely see, even though the market's good, vinyl's having trouble growing. So vinyl's giving up business, so who are they giving it up to? Are they giving it up to fiber cement to wood, to stucco? So we kind of look at that as well. So as you guys would point it out, there are couple of quarters, at least a couple of quarters where LP comps were better than our comps. So theoretically, what vinyl was giving up, LP was getting more of than we were. And I think over the last 2 or 3 quarters, we're kind of showing that, that trend is changing.

Lou, it's Andrew Scott, CIMB. Just a quick one for me. I think you spoke last period and on the U.S. tour about the change in distributor you had, I think, it was in the Texas market, and that was a pretty bit of a drag on the first quarter and bit of a burst in this quarter. I'm just wondering if you can give us some quantification around how much that actually helped this quarter.

Yes. Well, like I said, look at the 2 quarters together. So anyone trying to figure out where we're at, don't look at the quarters, look at the half. That's the best thing to do. Because we did have that -- Texas is a big market for us and we had a total swap-out of distribution. So you had inventories going down and then inventories being rebuilt, and that didn't all happen in the same quarter. But in addition to that, we just had a lot tougher comp in the first quarter than we did in the second quarter. So if you look at the half year, I think you're much better off. But that distribution change in Texas has worked well for us. We haven't lost any business. It's actually worked out fine. It's worked out well. I mean, we didn't proactively seek to change. But I think we took advantage of the opportunity. Sean O’Sullivan: We might go to questions from the phone now.

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

Just a -- my one question on EBIT margins. You've increased slightly your expectation for '14 to now be above 20%. I'm just wondering if we continue volume growth in the U.S. and continue PDG growth as you've just said, would you surely not expect margins to increase, given some operating leverage in the business?

Yes, I think -- yes, I think if you look at it over 2, 3 years, if things play out the way we think they will, I mean in a good market, business running well, our struggle with that 20% to 25% range is probably behind us. Next year, I would think it'd be a lot easier to just naturally fall in that range. But again, what we're trying to balance is the growth with the returns. And for a lot of years, we were getting both very easily. In the downturn, we had to work hard to get the return and we shifted the emphasis to R&R to kind of protect our market share and grow whatever market share we could in a bad market. And now we come out of the downturn and we're well positioned in R&R, where we engage new construction. We got our pricing fixed up, so our manufacturing plants are running well. We'll be starting up a lot of manufacturing plants. So theoretically, there'll be a little bit of cost blip as you start those plants up. We started one up this year at Waxahachie, a production line. But yes, we would think the concerns about our 20% to 25% range, both internally and externally, will probably go away if things play out the way we think they will.

Your next question comes from the line of James Rutledge of Morgan Stanley.

I was just wondering about the outlook for the spend on R&D and SG&A over the next 12 to 18 months and just noticed that the R&D number, at least in this quarter, seems to have come off the fairway.

R&D's numbers are down. Our headcount in R&D is about the same. So we haven't intentionally kind of restricted R&D. But there was one major project we finished up early last year, so we're not -- you're not seeing spending on that anymore. It's all expensed now. So I think R&D will come back to previous levels kind of naturally. We're not going to race to get it back up, but we're not trying to hold it down either. And when I say it's going to get back to previous levels, that's more on an absolute dollars than any percentage, so we don't see the percent R&D growing with the business. We see the spend in R&D being very similar to what it's been. And if we see a need for kind of a new technology that has a large investment, obviously, we'll flag that for you before we get too far into it. SG&A -- we grew SG&A ahead of volume and now, volume is definitely growing faster than SG&A. There is -- there are a few things we want to do in the business, which are going to require more SG&A. And we're just starting to think about how and at what rate to put that stuff in the business. So I think you will see higher SG&A next year. But on a percent term, probably not higher. In other words, the volume would be faster than the SGA growth -- SG&A growth.

Your next question comes from the line of Liam Farlow of Macquarie Bank.

Yes. I had a follow-up. Just a follow-up question regarding that Texas distributor. I recall that shift away was during primarily -- due to the refusal to solely carry high-end [ph] product. How is that strategy playing out with other distributors? And how do you think that's contributing to your volume growth and sales at this juncture?

Yes. I think the -- we kind of took on a major initiative to upgrade our channel strategy about 2 years ago now. And we started implementing the game plans about a year ago, maybe less than a year ago. And I do think we've gotten better, because right through this -- right through the project, you could see our people picking up on the fact that we're going to change our approach with the channel. So even before we had the game plans developed, we had -- we put more resources in the channel, and we had kind of started relating to the channel a little bit differently. So I think the alignment is better. I think the distribution strategy, which is separate from the dealer strategy, distribution strategy, which is in the process -- well in their process of being rolled out, is favorable. It increases alignment between our distributors and the company, which has been a problem in the past. So I think that's a positive trend. As far as what I see in this year's numbers, from that, it would be hard to guess how much impact it's had. But I'd say it's positive now. Again, all the changes we've made in that distribution program weren't favorable and that's favorable for the distributor. They were mostly favorable for the distributor, but there were a few things we wanted to increase alignment and that's what kind of led to the breakup in Texas. We haven't had that specific issue outside of Texas.

Your next question comes from the line of Andrew Johnston of CLSA.

Louis, you talked a bit about the difference between pricing on interior and exterior products. Can you just talk about where the growth of those 2 products or the comparison of growth between those -- between the 2 product segments?

Yes. The exteriors is growing much faster than interiors. So that's part of the mix equation. By the way, I'm glad the question came up because I didn't mention it earlier. Interiors is growing. It's growing with the market. It's not growing market share right now. And exteriors is growing with the market, which is more new construction than interiors. So interiors has a very high mix of -- a higher mix of repair remodel than exterior. So just naturally, the index -- the growth index for exterior is higher than for interior. And then we're growing market share in exterior, so we're getting that bump as well. Yes, so we don't actually give you the -- I think what we've given you is rules of thumb in the past that interiors is about 25% of business. It got bigger during the downturn and it will get smaller during the recovery. So it'll probably go from 25% to 20% here in the next 2, 3 years is our guess. So it's still growing, just not the same rate.

And you're not picking up the same this year [ph]. I mean, during the site visit, you mentioned some threats from a new category, any particular change, are you competing better against it or how do you think [indiscernible]?

The comment was in September. I think we covered in the September tour that the use of cement boards behind tiles has flattened out and started declining very slightly, okay? And this is driven by this substitution by lighter-weight, easier-to-use materials, mainly in commercial, but now creeping into residential as well. We don't have a change in strategy for HardieBacker right now. We are doing a review of our strategy in HardieBacker. I doubt if we're going to have any big shift. It's just a matter if we get in to a few different types of SKUs or not, is probably going to be the outcome of that strategy. It's a very good business for us. Good returns, very, very good money. We're leading backerboard. We continue to grow share in our target channel. We sell at huge premiums to what other backerboard sells. Our retailers sell at huge premiums so it's -- there's a lot of value creation both for us and for the channel with our backerboards. So there's no concern about decline in our backerboard business. It just -- it's not growing as fast as it had in the past.

Your next question comes from the line of Matthew McNee of Goldman Sachs.

Louis, just a question on that price. No matter which way you cut it, you got nearly 4% year-on-year price increase. Just trying to understand how much of that was mix shift between things like Cemplank Prevail versus the more premium products. So I think previously, Cemplank Prevail was around about 20% of your board or siding volumes. Can you give us an update on where that's moved to? And also, is color -- are we starting to see a little bit more color or more boards sold as color than a year ago?

Yes, the reason we were up that kind of 4% is because everything was going in the right direction. So color was up. Cemplank, relative to Hardie, wasn't growing anymore. So Hardie was holding its position or growing its position in some markets, the Hardie prime boards. We had Trim increases relative to the rest of the mix. HardieBacker growing slower than -- our interior products growing slower than exterior parts helps you on mix pricing, so it was multifamily. Bid [ph] pricing has come up some. So it's just kind of a bunch of little moves that added up to 4%. And then of course, we had the HardieBacker price increase.

But you still haven't seen a big shift in that percentage that's Prevail and Cemplank. That's still about the same as the percentage?

Yes, it's -- I'd say the way you describe it now, it's running flat right now.

You have a follow-up question from the line of Emily Behncke of Deutsche Bank.

I just wondered if we could get some sense as to CapEx expectations for FY '14 and FY '15 in light of the capacity expansions announced today?

Yes. I think we've kind of reviewed that recently. We do have a lot of capacity projects we're working on. So if the market demand runs faster than our forecast, we will pull a few things forward. But right now, we're fairly comfortable with our comments around $150 million a year. Now we won't -- I don't think we'll get there this year. So kind of whatever we don't spend this year kind of spills over. But $150 million a year is kind of what we're thinking. If market demand is better than forecasted, we will pull some projects forward. We have a lot of projects we're working on. We've rebuilt that capability in the company, and we're just kind of paranoid if -- when you looked at that earlier slide of the volume growth of the business, you can see housing starts came down pretty quick relative to how they're coming back. And oddly enough, that's our preference. But if it did, if that housing starts started ramping quicker, we'd have to bring on more capacity forward. So we're actually trying to get the time to build down on the future projects beyond Cleburne and Plant City. And that would obviously pull CapEx forward, if we did that.

Okay. And can I have one more question, really quickly?

Yes.

Just the higher payout ratio, the 50% to 70%, is that going to impact in any way any potential return if you don't complete the buyback?

Yes. I think we're seeing ordinary separate from the other returns. So -- and then we're seeing buybacks and maybe specials tied together. So if we're -- if we don't do as well with buybacks as we intended, then we'll turn that money into a special. But the ordinary kind of stands on its own. Any other questions in the room? Yes?

You have one final question from the line of Stephen Johnson from the Australian Associated Press.

Just 2 questions. The first one about the Australian housing market now, in your notes you're saying while residential building is picking up, earnings performance is only likely to be slightly improved compared to the previous period in 2012. Why is it the case for the Australian housing market?

Yes. I think the headline number for the housing market in Australia is up. So it's up to a good level, 155,000 starts is the forecast. So that's a good level in Australia. There's been a little bit of a shift that affects our business. And that's, I think, the detached housing is up 3% or 4% and medium density is up like 28%. We don't participate in the medium density near to the same degree as we do in detached. And the other thing is the -- what we call R&R in the U.S. is flat to slightly down right now in Australia. That's kind of unexplainable to me, but we've always used the same market information for that. So it is showing a decline. So I'm not concerned about the Australian market. It looks to me like it's going to be a good market for us. I think what that guidance in our group outlook is more about, well, based on the forecasts that are out there, we had a very big first half and we might not have as big a second half. I -- that's how I'd read that comment.

And just a follow-up about asbestos. Just looking through accounting, Russell did touch on this. The weakening Australian dollar since the middle of year has affected your asbestos liabilities. So it has -- it's now a $90 million in front [ph]. Will you just be able to explain how the falling Australian dollar is -- whether it's put up or down your asbestos liabilities?

Falling Australian dollar decreases our liability in U.S. dollars terms. So the 11% decrease in the Australian dollar is -- actually, that's not a good indication. Because it's about a 7% decrease compared with the 31st of March through the 30th of September, which are the relevant dates, and that's what's led to the decline of USD 90 million in the value of the liability. Is that clear?

Okay, so that means you'll be paying $90 million less than what you would have been otherwise?

Our payments for asbestos, in terms of James Hardie, are tied to our cash flow. So we pay up to 35% of James Hardie's annual net operating cash flow to the asbestos fund. And we record the liability that the fund's actuaries arrive at on an annual basis, so the 2 things are disconnected. I -- there's no guarantee that what Hardie contributes is going to satisfy the liability, because our liability for contributions is tied to the success of the company.

And you mentioned earlier, Russell, about how there are increasing cases of mesothelioma and you'll see more cases of payout for. Would you be able to elaborate on what you said earlier?

Well, mesothelioma is the most expensive of the asbestos disease types to -- in terms of compensation. The fund is seeing an increase in the inflow of claims, and almost all of the increase in claims appears to be mesothelioma disease rather than the other types of disease. And that's increasing the amount of payments relative to both last year and relative to the actuarial assessment that was done at March 2013. Beyond that, I don't think I can elaborate too much because the -- a, it's a matter for the fund; and b, we don't -- as far as I'm aware, we don't fully understand exactly the causes of the increase in claims as of yet.

There are no further questions from the line.

Okay. Simon, do you have another?

Yes. Just one quick follow-up question. You were talking about multifamily pricing, the space shuttle algorithmic model, whatever it is that you had for pricing that used to dive towards the bottom and caused so many headaches before. How has that pricing gone up? Is that a function of what's actually happening in the market? Or is it something you fine-tune in terms of pricing mechanism?

I -- yes, I think it's a combination of both, but we're as big a part of the market as we are, obviously when we change our model, that's likely to have an impact on what the market's going to do. So we did change the model a little bit on the floor pricing, so that was part of it. And then like I said, I think building material companies that sell on a commodity price basis, they're just used to going up in price when they're utilization is going up. So we haven't changed our percent of the category. So as we've grown with the increased demand, our competitors have grown as well. So they would be getting closer to their utilization -- target utilizations, so that I think their pricing would go up naturally.

Right. So mark -- broad market base pricing is going up.

Yes. Any other second questions in the room? Okay. Thank you very much. I appreciate it.