James Hardie Industries plc (JHX) Q3 2015 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to the Q3 FY '15 Results Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Friday the 20th of February, 2015. I would now like to hand the conference over to your first speaker Mr. Louis Gries. Please go ahead, sir.

Thank you. Hello everybody and thanks for joining the call today. Matt Marsh and I are in Dublin and the buttons are being pushed in Sydney, so we comment on our slides as we go along. Start the presentation on first slide is the colored page. Second slide is the first page of our disclaimer. Third is the slide is the second page of our disclaimer. Fourth slide is the agenda which will be the same as we always use. I'll just give a brief overview on the businesses and then Matt will go into the financial review. Once we finish that, we will move to questions. Next slide's another colored page and Page number 6 labeled two things. So I think most of you had seen the results, it's very much in line with the first half of the year on the market side. Our plans ran a little better, so we got a little bit more help on the EBIT line. The result is also in line with the games that we've been providing. So in the quarter, group net sale is up 10%, operating profit grew it's up 11 adjusted obviously. We had higher volumes in all our businesses. We had average price up in the U.S. The U.S. housing market is still flat; it's slightly up, but pretty flat overall for new construction. As you probably know, we're spending a fair amount of money to get our capacity lined up as we continue to grow demand for fiber cement partly due to market opportunity and partly due to market share gains. And we'll cover that in more detail later in the presentation. And we continue to invest in the organic growth initiatives, some of them which are the market initiatives and then a lot of organization capability to deliver on those initiatives. Again our guidance is in line for the corporation and also our EBIT margin guidance for U.S. businesses, we're right in that range as well. Next slide page 7, you see the overview so EBIT is up 21% this quarter versus last year and operating profit up 11 and you can see the year-to-date numbers are positive as well. And the cash flow and we number that's significantly down. That's driven by the Asbestos [indiscernible] FX adjustment and an increase we've taken in working capital going into this summer. And on Page 8, it gives you a little more detail on the U.S. business. You can see volume up price up a bit, so net sales up 12. EBIT up 20 and again U.S. brands especially ran better this quarter than the first half, so that's healthy EBIT margin you can see versus last year up 140 basis points. Nine months result good everything tracking as we thought it would, really no issues in the business that are like you said pretty flat market but still a good market for us. Market seg running well and now the plans are running much better than they did in first four months or five months of the year. To the Page 9 you can see we've really settled down in the range I think it's seven quarters in a row or basically in the range that followed six quarters that we're out of the range so we've successfully kind of balanced what we're delivering with short-term financials with what we're investing in from the long-term growth perspective, so we're very comfortable where we are with the EBIT margin in U.S. business. Page 10 I guess I'll start from the bottom you can see stats are well below what you normal expect three years to four years annual recovery, but again it's still good enough market for us. We're doing well in this market running our different programs in the market. I think builders are [indiscernible] to our value proposition. Going up to the revenue line, you can see the revenue line is approaching our historical high and then the grey shaded area the volume that's [indiscernible] before we hit our historical high end volume obviously we expect to but we've got a little time before we do that. Page 11 graph shows that our U.S. price is clearly back on track after that fall off we had in fiscal year '12 and '13, so good bounce back last year and we built on that momentum this year as well. Page 12 gets you guys some details on the Asia-Pac business there are just a few things to understand here I think to explain in the result, but average price down that’s driven by a regional mix and in product mix the market pricing in all business is either flat or up. So it's not like we’re taking margin prices down by a product mix that was pretty significant shifts in one other businesses and then the regional mix between the three business is kind of pull that price down a bit. On the EBIT in Australian dollars up 20% that’s probably driven by an adjustment that was triggered when we purchased these low sale facility. So I think Matt covers that little bit more on later. And if you go in nine months and see the average price flat again that’s regional mix for the nine months mainly. So down market pricing isn’t coming off just mixed a bit differently. Good in next slide which is page 13 is the CapEx. So most of you know we get guidance 600 million over three years and I think when we gave the guidance we that indicated was in two in two is shaping up more like three one and two, the three obviously this year. The capacity is the big driver of that and we highlight to 154 million in capacities we have another 90 we already spent this year on maintenance and all products projects and we'll have roughly another 55 or so between now and when we close our books during the year. Page 14, which is our outlook just a little bit more of an update in this slide gives our order file is very good its stronger than the previous quarters but that’s partly related to a price increase that’s effective March 1st. So as far as underlying demand we're experiencing right now we think it's similar to what we’ve been experiencing right through the year. But we're likely to finish with a stronger fourth quarter during some forward buying before our price increase. And we're not sure if or how much that might offset the growth rate in the first quarter but there is a likelihood that will add some impact but obviously not enough to really drive our results in a negative way. Plans are running well that’s the other thing to know and we expect that to continue. So we're getting more momentum in the plans so we would expect the EBIT margin contribution we're getting from unit cost continuing to hit better for at least another quarter or two. Asia Pac we expected to continue like I said all the businesses are doing well and Asia Pac business as we continue to expect them to run well. Our guidance 210 to 222 tightened up a bit very consistent with market expectations and I don’t think there is any surprises there. So at this point I'll hand it over to Matt.

Thanks Louis, good morning everybody. On page 16 Louis has hit some of these already for the group earnings we're favorably impacted by sales volume across the all the business units in our segments higher average sales prices in the U.S and Europe segments input cost remain elevated for both the quarter in the nine months has been pretty consistent with what we’ve talked about throughout most of the year. As a result of production cost are higher for the nine months across the network as Louis said the plans are really starting to run well and are starting to offset a lot of that. Organization spend is higher compared to a year ago. But still as a percentage sales its trending in an area that we wanted to trend them it's largely related to organizational adds that we're making in order to have the capabilities in place for the expected growth that we see some discretionary spend as well as in foreign currency impacts. The net operating cash flows for the quarter were 104 million compared to 254 for the nine months a year ago and we'll go to that a bit really two primary drivers there the payment and the fund and some working capital of the two primary items and then as Louis is already highlighted. The continued capital expenditures on the capacity projects remain on track and are going to be little higher this year as we've eluted to in November. But for the over the course of 24 month period will be in line with that $600 million facing over the three year period that we've talked about. On page 17 these are the reported results, I'll take you over the next couple of pages through that for the quarter and then for the nine months. So net sales up 10 favorably impacted by sales volume and price in the U.S segment; gross profit margins are increase by 40 basis points, a combination of average sales price in the U.S. partially offset by the higher input cost price and those input cost prices are starting to partially be offset by the production efficiency and the plant performance in the network. And as I mentioned SG&A expenses are up year-over-year about 4% in the quarter, a combination of labor expense and the discretionary expense as well as foreign currency, items between EBIT so you get a reported EBIT of 33% and we'll go to the adjustments in a moment. The low EBIT and net income obviously interest expense has increased, it'll continue to increase as we're now in the debt position and we weren’t in a debt position a year ago, so that's got an adverse impact year-over-year as well as in other income some interest rate swaps as interest rates remain off of what I think are most people's expectations. Income tax expense are higher largely the result of two items one is just the geographic mix of earnings, but also a year ago, we had a tax adjustment related to the favorable resolution of an amended tax audit and a final receipt from that adjustment from the [indiscernible] I'll cover in a bit more detail later. If you go to Page 18, so now going from operating profit on reported basis down to the adjusted [audio-gap] were due to a 7% change in the Australian dollar and U.S. dollar exchange rate compared to a 4% change in the stock rates a year ago. We're viewing weather tightness improved year-over-year we had a favorable claim that settled within the third quarter and as a result of those of that combined with just higher rate of claim resolution overall that provision continues to increase and adjusted net operating profit of 48.6 for the three months up 11% and you can see most of the items we've already talked about for the most part. On Page 19 is the nine months, so very similar for the nine months net sales increased 11% similarly driven by sales volumes and average net selling prices in local currencies across all of our segments for the nine months. Gross profit margins are up slightly versus a year ago when you compare the nine months of '15 to the nine months of '14. Similar dynamics, higher average selling price partially offset by input prices remain high and plant performance starting to offset some of that, but a combination of those items is expanding gross margins for the nine months. SG&A expenses is a similar dynamic for the nine months as we've talked about earlier for the three months and earlier in the year. And non-operating items I think very similarly interest expense is up because of the debt facilities as well as foreign exchange and interest rate swaps unfavorably impacting the nine month period. You go to Page 20, the 263.6 net operating profit on a reported basis adjusts to 164.1 for the nine months ending December that's up 8% that's the difference there is really driven by asbestos adjustments were up 11% because of exchange as compared to about 14% change in stock rates a year ago. Moving on, weather tightness continues to move in a favorable way and adjusted net operating profit up 8 a combination of operating EBIT across the segments up about 14 for the group 14% partially offset by interest expense the other expense items which we talked about the interest rate swaps and foreign currency as well as income tax expenses are up in line with earnings. On Page 21 gross profits of 34.8% for the third quarter. You can see in line with the EBIT margin rates that we showed earlier for the U.S. and Europe segment [indiscernible] the gross margin rates have really stabilized over the last four quarters or five quarters and have trended up a bit. Prices has improved as we continue to execute on both the pricing and efficiencies as well as the market increases that we've done as well as getting the plant performance on a positive trend line has helped to offset some of the input cost as market prices for pulp, gas and silica and some of the other raw materials remain at elevated level. On Slide 22, is a similar chart to what we showed over the last several quarters on U.S. input cost. You can see that overall the input cost remain fairly elevated but they have started to at least paper and some of them for example electricity and gas have started to come down. They are up significantly year-over-year pulp in particular has remained much higher throughout the year than most forecast externally had nine months ago expected. We're performing I'd say in most of these categories our sourcing strategies are resulting in us having less inflationary impact in the marketplaces but nonetheless the marketplaces overall are up year-over-year. On page 23 so three year trends for the segments the U.S Europe fiber cement segment at nine months EBITA up to a 6.3 in comparison to 179 to 8 for the nine months of fiscal 14. For the quarter in the nine months the EBIT in the U.S up about 20% and 15% respectively compared to the prior periods and similar dynamics that we've already talked about. Volume and price partially offset by input cost and we're continuing in the U.S to invest in the organization for growth. Asia Pacific for the quarter and nine month EBIT is up 10% and 8% respectively compared to the same period a year ago and local currency the amounts are 20% and 14% for the quarter and nine months respectively. We go to page 24, research and development continues on a very similar term line broadly in line with our historical trends. Again we kind of see quarter to quarter fluctuations but that’s really just reflective of timing of various projects coming on and off really no change in research and development. For general cooperate cost for the quarter and for the nine months those are up year over year 33.3 for the nine months compared to 30.9 for the nine months of fiscal 14 a combination of discretionary spend which is both labor cost as well as discretionary spend in product and marketing and inner role cooperate activities some foreign exchange losses those were partially offset by decrease in stock compensation as a result of the changes in our share price. On page the most significant foreign exchange adjustments for us obviously the Australian dollar very similar chart exactly in chart that we showed now for quite some time. The strengthening of the dollar and the weakening in the Australian dollar had an unfavorable impact on the translation Asia Pacific segment results in the U.S dollar at a favorable impact on our cooperate cost that are based in Australian and incurred in the Australian dollar and then have a favorable impact on the translation of asbestos balanced. On slide 26 the ETR for the year is estimated to be 23.6 for the adjusted effective tax rate that’s largely in line with last quarter and reflected to what we think of these for the year. Adjusted income tax expense and adjusted ETR has increased year over year largely due to the geographic mix of earnings and earnings in jurisdiction with higher tax rates. We've address earlier the main difference in the adjusted income tax expense line item is primarily due to the non-recurring receive from the ATO relating to the finalization of the disputed amended assessment and that was in the third quarter of fiscal '14. And then just a couple other items on income tax are paid in payable and Ireland and U.S and Canada, New Zealand, Philippines are not paid or payable in Europe or Australia largely due to the Australian tax losses. And the deduction that result from the contributions that we make annually to the asbestos trust. On slide 27 we had cut cash flow from operations for the nine months of 104 million compared to 254.7 million for the nine months of fiscal '14. Adjusted EBIT increased almost 28 million compared to the prior corresponding periods, the cash flow from operating activity this year includes $113 million contribution AICF. Working capital is increased year over year and has driven a use of cash primarily driven by inventory really on three areas raw material as we've just try to rebalance the raw material across the network. Obviously the commissioning of Fontana has required inventory and then there is just a traditional seasonality that is contributing to higher inventory as well. We spend $241 million for the first nine months on capital expenditures largely to the plant capacity expansion and the land I'll provide some additional detail amount in the following page and our gross debt position of about 390 million at the end of December. On page 28 you do a breakdown of the CapEx spend for the first nine months of 241 breakdown in broadly in the three categories. So the two parcels of land that we purchased for about 65 million one of those was a purchase of Tacoma site that’s adjacent to our existing Tacoma facility we made that purchased in the summer and we anticipate that will be the site for some Greenfield capacities down the road. We in December closed on land transaction of our [Rotel] facility and we had previously leased that site and that came on market and we were able to purchase that land for a good economic outcome for us. So those are two pieces of land, the construction of the Brownfield capacities are largely complete or sort of nearing completion in plant city in Cleburne, Texas and in Carole Park and then the maintenance and other CapEx is broadly in line with historical levels for us. On slide 29, is the financial management framework that we've used now for a couple of quarters and you should expect us to continue to use no real change in the overall framework, we're continuing to start with the strong financial management which starts with strong margins and operating cash flows coupled with insuring that we're very transparent and have good governance mechanisms in place and then overall philosophy in terms of how we view the balance sheet? How we view our financial management policies as - investment grade like company. No real substantial change in capital allocation, our first priority is continues to be and will continue to be investing in research and development and capacity expansion to support the market penetration and the market opportunities for organic growth. We remain committed to maintaining ordinary dividend within the defined payout ratio and then maintaining flexibility on our balance sheet for a variety of items including either accretive and strategic organic opportunities, market cycle given them we're in a cyclical industry as well as further shareholder returns as those are appropriate. From a liquidity and funding standpoint at the end of December, we had $590 million of bank facilities was about 44% liquidity, at that time about 2.7 average weighted debt maturity on those profile and given our desired goal to have a long term debt position within our stated range of one to two times EBITDA minus - payment, we completed the sale of $325 million of 8 year senior unsecured notes price debt 5.875% just two weeks ago and that was as much about getting the maturity of the balance sheet in line with a long term debt strategy and ensuring that we weren't fully relying on short term bank facilities as it was anything else. Our leverage still remains very conservative within our stated range. Page 30, provides a little bit more information on liquidity, as of December the amounts in the bars and the tables did not reflect the bond but our balance sheet remains strong as $52 million of cash at the end of December, almost $600 million of bank lines adequate levels of liquidity, net debt on the books of about $328 million compared to net cash a year ago of 158. I have touched on the bond already, we remain committed to the net debt target of one to two times our EBITDA excluding asbestos and we remain in compliance with all our covenants. On slide 31 is an update on New Zealand weather tightness. You can see the blue line is continue to trend down for the nine months New Zealand weather tightness is moved from an expense of about 700,000 to a benefit of about 4 million, that’s really driven by a combination of few claims, favorable claim settlements, higher rate of claim resolution and a continued reduction in the number of overall claims. So at the end of December, that provision was approximately 2.4 million and that compared to about 12.7 million in the prior corresponding period. On page 32, an update on asbestos for the quarter and the nine months claims received by the trust during the quarter we're up about 11% above the actuarial estimates for the quarter and nine months they're up about 10% and 7% respectively higher than a prior corresponding period. The higher reported mesothelioma claims experience that we saw in fiscal '14 and in the first half of fiscal '15 that trend has continued for the nine months. The average claim settlement for the nine months is down about 5% versus prior corresponding period and down 15% versus the actuarial estimates. The average size of the claim settlement sizes are generally lower across all the disease types although I'd just caution that again were nine months into a full year and I think it's really best to look at some of the claims, trends with the full year of data. Actual dollars paid in compensation was about 1% above the nine months actuarial estimate and on pro-rata basis and you can see AICF on the right had cash and investments at the December of $48.8 million. On slide 33, just to summarize group net sales have increased 10% and 11% for the quarter and the nine months when compared to the same period a year ago. Adjusted group net operating profit is up 11% for the quarter and 8% for the nine months compared to the same period a year ago. Volumes and net sales for the nine months in our U.S. and Europe segment as well as our Asia-Pacific segment have increased. As Louis said at the beginning the U.S. residential market has remained slow or soft and that anticipate an accelerated growth that had not come to the first nine months. We're continuing obviously to invest in both our organizational capability and capacity as we're continuing to execute on our market penetration objectives and anticipation that the market will continue in the medium term and the long-term to recover and we continue to expect our EBIT margins to stay within our range our stated range of 20% to 25% for the U.S. and Europe segment. So with that, I'll we'll close and we'll open it up to any questions.

Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Jason Steed from JPMorgan. Please go ahead.

Just two questions. Just for starting your indications around the order file and the impact that you see that has through I guess your price increases as expected on March 1st, I wonder if you could just shed some light on the extent of that price increase and whether it's sort of across all product line and whether or not I was aware of exact timing of when you announced that whether or not that affected your volumes in this quarter? So that's the first question just around that price increase. And the second is PDG looked pretty good in the context of flat underlying markets and new housing and [R&R] up being that strong. Do you think getting a bit of share, did you give it back from [LPX] or is this really just continued wins from [indiscernible]?

Yes Jason thanks and the price increase I think we think it's going to average out around 3% the reason we would know is because it is it kind of varies by region by segment by product so it's not an across the board increase it only impacts exterior products we did not think of increase in interior products. So we want to see how it plays out next year, but I would guess around 3% is a decent estimate.

And when was it announced?

Sorry yes, it was announced in December but it would not have impacted this quarter's results. So they had plenty of time to forward buy before the March date so no there wasn’t any increased activity due to increase in December. Second question was our PDG we were pleased with our PDG we have read so many analyst reports that that we might get extra volume from LP evidently having a raw material shortage. We have not seen customers in the markets desperate for board because they connected LP so I don’t think that that really helped us at all last quarter now there is a lot of concern in the market about LP supply so there is more people kind of coming to us and giving proposals but as far as business switching quickly because they're out of board I don’t think that's the case.

And do you think where do you -- I mean I guess the numbers are relatively small for a quarter in context of LP volumes but do you think what they lost due to those log shortages is it been absorbed into the market or there's been a deferral purchase if it was just too hard to tell given the signs of the market?

Well I'll be honest with you we had a little trouble interpreting their announcement. I would guess that if they assured if the market some because they got in trouble on raw materials it would have been absorbed by the channel rather than felt by the end users. So we can't figure it out to be honest with you because most manufacturing businesses when we show our raw materials they go to plan B and bring it in from a different location or whatever and so we get something to add an impact on our volumes and but I think it's maybe created some concern about reliability to supply from LP and like I said we have had some LP users kind of come to us for proposals but we haven’t closed any of that business due to supply concerns on LP.

And just [audio-gap] would have been about around to sort of 5%-6% mark for the quarter?

Yes it looked better than that. I hate to use that direct quarter to quarter so we think that year is going to come in around 8 and last quarter would have been consistent with that. And by the way we always try and give you a little bit of information so interior business it grow last quarter, but not near the same rate as the exterior business.

And your next question comes from the line of Michael Ward from the Commonwealth Bank. Please go ahead.

Just on Asia-Pac you guys sort of delivered pretty good volume growth there around 6% to 9% can you just give us a sense of geographically where it might have been strong

Philippines was strong. So that’s what causes that regional mix on pricing. And Australia and New Zealand kind of came in where we thought they would.

And then just on cost I noticed someone talk of freight given with same with oil price. Can you make some comments around whether or not you might see a benefit on the freight side?

We are starting to see our freight rates come down a bit.

Alright thanks guys.

Not only the seasonal but you say the impact to the oil. So we're still above last year on freight for MSS but we might get into a position pretty quick where we're running better than same month last year.

And you're next question comes from the line of Emily Smith from Deutsche Bank. Please go ahead.

I just wanted to ask a couple of questions always about the PDT growth. You mentioned that would be around 8% for the year. I'm wondering where that gross is actually coming from if it's some the North or South new homes R&R if it's across the board, also wondered if you could I think last result you gave us some color around when you talked about new plants might some start up. I'm just wondering if that some changed it all.

Yes so PEG most of things are running and working and in fact can say all the things were running that worked in especially although interiors product is not in our PEG. We did get the momentum turning around we are in two year price. So we feel pretty good about that, but if I had a rank to the South running stronger than we thought it would. The North is running stronger than the South which it should but the delta between the two is smaller than you would think. R&R is running better than new construction in the North I think we're little slow to get our Vinyl substitution going again in the North because we realize we have a bigger opportunity to kind of knock LP back and go after further vinyl. So we got a few more resources point at that wood and few less point in that vinyl and construction. And you know that’s our one disappointment obviously vinyl has to decline for us to grow PEG. Our disappointment is that we're not getting all the decline. So that would be the LP piece. So it’s a good broad based result something is run better than others but overall really I don’t have any complaints about what we're accomplishing in the business either on the market side or the manufacturing side right now. The business in the U.S is running very well.

Great and the new plants.

Yes the new plants sorry Emily. All putting much ready to go we'll start commissioning Carole Park I think it's next month. And then in Plant City sitting we’re to go but with the market relatively flat this year and thought us looking similar next year maybe a little better. We don’t need three burn in plan C to come on as quickly as we thought so we will do a plan C is making you some the investment to lower our unit cost that’s a raw material investment we made down there and finishing investment which is a lot more efficient finishing line. So we're bring up about how it guess maybe that’s happen and investment and now quite half before we need the capacity and we'll with the sheet machine capacity when we need it. Cleburne I think is flatted behind Plant City because Plant City got two things it gives us more capacity but it gives us more HLD which is a product at single source that’s relatively tighten capacity. So that will probably trigger to sheet machine start up at Plant City as we run at HLD rather than overall capacity utilization so Cleburne will fall Plant City and it could be contain with margin does obviously. But it could be is long as 12 months behind and then behind Cleburne will be Somerville which should be low capital startup of mouth fall facility. And then behind that which is now well done a path we'll have a couple Greenfield opportunities one in Tacoma and one in the mid-South. So we'll have to see how regional demand develop before we start where to go there even resonating I'll tell you that well number one we bought the land in Tacoma. But the only thing is that doesn’t mean we're not doing we going to need to do work on those facilities I'm not talking of setting big dollars but a lot the design work on Tacoma and our mid-South is our next Greenfield needs to be done early enough because we're looking to get with our newer business model which has a lot of the investment pull start [indiscernible] we're looking to get better capital efficiencies especially on the [post auto grade] side. So that's a fair amount of rethinking and redesign work for us and -- finishing that so that kind of breach up today and we'll start Carole Park first, Plant City second, Cleburne third, Summerville fourth and probably a couple of years behind the Summerville startup you'd have our Greenfield start up in U.S. either to come on itself.

So, to get to a Summerville what sort of having starting that you think will be when you sort of open Summerville?

Yes, I mean you're right - start beginning its market share development and then it's time dependent. So, I don't know I mean that's a complicated equation and we don't have to solve because now that we know we have our capacity ready and we can bring up a lot fairly quick order. We really don't have to slate the details and the other thing I need to tell you is, we made some progress in our existing plants where it looks like our capacity out of existing plants may get lifted a bit with some of the recent manufacturing initiatives that we originally struggled with a year ago but it really come right in the last four to five months. So, if that momentum continues to manufacture that will also allow us to wait a little bit longer and capacity.

All right, and if I can just ask the question on pricing you mentioned that the same price crisis for one -- month - pull forward, I'm just wondering how much typically is pulled forward and I guess that's what I meant specifically FY16 you'd expect price increases obviously are this 8% given the mix shift as well?

Yes, I think it depends on a lot of things but I mean you could see between 3 and 4 I'd say that's probably the most likely range in this -- regional mix or product mix or to gain share you might be able to one or three years we will work for you might be able for. And how much it pull forward even looking at the order file it's still hard to figure out beyond - I know really six weeks certainly end of the quarter but I don't know say maybe I don't know I hate to give this kind of guidance because it's so and exact but maybe 3% to 7% extra volume kind of I don't know I'm telling you I just don't know that gives - we can't interpret how much is preordered and how much is a good strength build. There is some of the lease in the market that housing markets going to be pretty good but we see that like the last two years so we don't really know what to believe so it will pull a little bit forward, 3% to 4% would be my absolute guess, 7% would be my assuming those are very - depict numbers so we just have to wait and see.

Excellent thanks so much.

And your next question comes from the line of James Rutledge from Morgan Stanley, please go ahead.

Thank you, good morning. Firstly, I just want to clarify on the price increase, I think last year was the price increase effective from 01st of April and there is a slight change this year, is that correct?

It is and the reason we changed it, the spring build starts before April 01, so we are trying to match up better to endeavors would really bring in their inventories out. Having said that it's a one year adjustment, we're going to have to deal with and our comps, so this quarter our comp will little better than a theoretically shift because last year it was April 01 but next year we can't find because I'm sure we'll do - price increase last year it will be timed earlier in the season just like this one is. So rather than - what our financial we try to time it with [sleeping] build in the market.

So, I just had one other question relating just following on from that in terms of price increase of - and then asbestos we go into fiscal '16 you will see raw materials, hopefully that pressure lessens and you see some cost relief there but how do we think about margin side over the next 12 to 24 months given you've got a price increase where hopefully raw materials less of a constrain, are you going to be I mean I'm not looking for a number but just in terms of how you think about investing that in marketing or SG&A versus side taking some of that to bottom line?

Yes, so, again if your assumptions are right we get price, we get an extra volume obviously through - share growth and hopefully a little bit from the market opportunity and - I'm pretty sure that will be up again next year, the one that may not be up again next year's fall other than that I think we'll see some increases. But having said that we kind of -- we do a balancing act, we are very comfortable where we - even more Jim, it may drift up few more and then top of the range we're not going to try and push it up because we have an opportunity, we still have a lot of things we want to do in the market and if we have the management capability to run more programs in the market, we will spend that money and stay in the range that's kind of how we have the organization set out. I'm glad like I said seven quarters in a row basically and I'm glad that we're not having to work to get in the range anymore, so we're kind of more naturally in the range, spending our money, delivering our results, getting the PDG we're looking forward. If I can do one thing nice here guarantee that rather increase my PDG, so if I had a choice in go to 26 revenue margin and going to other point in PDG I think to point on PDG over a point on EBIT margin.

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

Question around Texas obviously with the oil price coming off there's some concerns they now expect that like most [indiscernible] seen any signs yet of slowing but talking to your customers how are they feeling about the outlook for Texas and how is that fading to into your thoughts about that state?

Yes as we get question it does relate back to Emily's question on capacity. Of course we've been sold out in Texas for several years and reporting board in so -- and we have two low cost plans in Texas, so we have done scenario planning with market decline in South Texas. We done it obviously for our financials and the impact in there isn’t what we would say would be material to our investors, but the impact on our production planning is pretty significant for the guys who run the business, so we've done the scenario planning just to make sure we could take full advantage of our low cost capacity in Texas and it doesn’t kind of get stuck there and we don’t end up running less 24/7. But what's the feedback from the market number one everyone's nervous there is no doubt [audio-gap] going to happen. People that run national businesses like ours, they think what's going to help me outside of Houston and a few other markets and it's going to hurt me in Houston and maybe Oklahoma and like we're pretty big in Alberta, so we think orders in Alberta I mean we're pretty big relative to the rest of Canada and Alberta. So we've got to plan 20% down in South Texas I think if you kind of shop that number around most people would think that's probably a little more than what will happen I can't guarantee it could be more but we plan that more scenario planning down 20 or financial still work. The more important thing like I said is we want to take full advantage of our low cost capacity in Texas and we want to make sure if that's to happen that we expand the shipping radius for the Texas plants.

And Matt apologies if you did mentioned, but how did that 3 million profit on main pitches arise?

Yes in [Roseville] because we leased the land we had to make whole provision that's required for the end of the lease and obviously it's part of the unwinding of the accounting related to that transaction that provision was no longer required because we're going to hone the land so.

And finally just on and Louis you commented that R&R was modest I mean I'm trying to get R&R numbers obviously initial R&R obviously really difficult but was that surprisingly soft because that in some big way we're talking about R&R being pretty strong?

I don’t know if I said R&R was soft I misspoke we've got it around 4% we use and we would and we believe that 4% that that field's right to us over the last couple of years 4% it's been pretty good number I think. Now we are growing mark we are growing market share in R&R so we're doing better than that in the segment.

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

Just a quick question just on the asbestos the approve time has come I think was announced potentially that was going to happen I think they announced that back in about September when currency was about 15% higher than what it is now so Matt have you got an update on what the fund expects I mean obviously you'll payments in Idaho should be a lot high going in does that change anything on when they may move into the approve time and or have you read any updates also with the negotiations with the government on the line and the availability of the line.

You hit on one of the key assumptions that goes into the establishing kind of the long-term liability certainly FX is a sensitive assumption and has been higher over the last couple of years and certainly in the strengthening of the U.S. dollar this year we would expect to have a favorable impact on the annual update that the actuary does through end of the year a couple other dynamics so just to keep in mind when we talk about asbestos obviously working favorably if you will for the size of liability average claim sizes are down, these average claim size for means of [indiscernible] is down the and the settlement rate is up. So this factors all positive along the foreign exchange that the number of claims and the number of [indiscernible] are elevated though. And so those are two factors that have an adverse impact potentially on hunting overall actuarial adjustment. So I say that the basket of those three major those three or four major assumptions is still few determined with our set to where the accrual assessment will come out at the end of the year. And we're just starting to have our discussions with the AICF and KPMG as they go through their annual refreshing. I'd say I wouldn’t necessarily say because of the Aussie dollar well over that it will go down. And may go down but it would be just exclude to because of the some other factors related to the announcement of the approved payment scheme. We haven’t been given any official update on that our understanding though from speaking with both the state and the trust it's really those two parties who are primarily working through the discussion is that they seemed to be making good progress on the discussion. And I think both parties remain optimistic that our good outcome for everyone will be reached. But there is we’re not in middle of those discussions and certainly nothing been we haven’t been notified that there is been any change as of this.

And is that something you will even think about when think a bad capital management and the timing and stuff like that at all.

Yes it’s a good question Matt I think we think we think about it. Because we did the questions and the input from our shareholders so that obviously makes us think about it. But I'd say our capital management objective is I think it will remain pretty consistent over the last several quarters and we haven’t talked about or thought about any changes to those capital management objectives. We think the balancing of the current and future claimants with the shareholders and lenders is really what the [app] was designed to do and the capital management objectives that we've outlined are really very consistent with allowing our shareholders as well as us to satisfy our obligation to the trust and keep those things in balance. So I say the questions and the discussion that we get from our shareholders is certainly from our good input but there is been no change and we're not expecting that the change would be made.

The next question comes from the line of Andrew Peros from Credit Suisse. Please go ahead.

Lou are you able to expand in one of the comments you made a little bit early around interiors and exteriors. I think a few quarters ago that you loss about 3 percentage points of market share I guess wondering how that interior business is going and whether you've been able to call some of that share back.

We have been able to reverse that trend Andrew. So at least for about four five month period now we're going the right way. So I think by the end of the year we may not give it all back but of course when we get it back not as important is if we're going to get it back I'm pretty confident we'll get it back and go on top of that even. We kind of identified some gaps in our game plan both on the execution side and the design side. That's seemed to be playing for us pretty well now.

[Operator Instruction] And your next question comes from the line of David Leech from UBS. Please go ahead.

I had two questions one Lou I wondered if you could just for begin a break up the total North American volume between actuary new builds, R&R new builds and interiors just in percentage terms of the current production right at the moment.

So I use rough number if you looked at our overall business. We're sitting around 55 R&R 45 new constructions right now that could be plus or minus little bit. But that’s roughly we're still more R&R but we've start at least coming from the 500 up 200 million we're up to 40 plus revenue mid-40s and the business is driven by new construction.

That’s right and then is the next area of the -- what percentage of the total?

Exteriors percentage in total just changed a little bit. But if you thought low 20s that’s about right I think in the down turn it might had 25 going into the downturn we might have been 20. But if you thought low 20 of that it will probably pretty good.

Sorry that’s interior is it? 20-25 and then I just had one question relating on tax just looking for the cash flow in the future. I think the tax tide is running at about half of tax expense as extremely crude it's that’s the way we should think about it going forward. As I guess the profit rise I'm just wondering obviously the tax expense will go up, will the tax paid go up proportionately?

Yes, I mean there is obviously a number of timing related items that kind of account for differences between the tax expenses and the taxes paid and depending on how the timing of those items and what else we have in the given year that amount could change. We don't provide obviously any kind of forward guidance on taxes paid I think the ETR that we currently have then is reflected about the ETR that you should expect for the year and would be a reasonable ETR that include in future periods but to try to give you a some guidance on how the difference between ETR and taxes paid in the future is going to compared to the present I think we're just would be a bit pretty mature given how the timing differences can change on jurisdiction and the types of timing differences that we can have at a given time.

That's right Matt, but just following on I mean the slide talks about taxes being paid in few jurisdictions other than Australia and I guess a lot of this expect at the U.S. profitable base of side that grows, is that taxes always are really complicated, is it wrong to think I mean how can I ask this question, is the correspondence between - tax right in the - and the tax paid I should be fairly close or not? Did I ask that question right?

Well depending on the question you're -- .

I'm trying to understand do you paid tax in the USA roughly according to the 38% or 35% or some sort of essential taxes paid there like what you might look at - tax expense?

Yes, we don't provide country levels that specifics on effective tax rate, obviously effective tax rate but by definition is for the group and it based on a jurisdictional blend of rates and deductions and so it's a difficult question for me to answer because it's just not something that we disclose, we don't pay taxes in Australia because there is no taxable profits in Australia, the lack of taxable profits in Australia are largely related to the asbestos deduction that we received. I'd say keep in mind that the asbestos deduction that we receive is taken over a 5 year period unlike some companies so, now that we've accumulated those tax losses based on 5 years or more of making the payment we will anticipate making tax payments or having tax profits, the tax payments would be applied to in the future for Australia either so it's probably the best answer I can give.

That's very helpful, thank you very much. Appreciate that.

Your next question comes from the line of John Hind from Merrill Lynch, please go ahead.

Good morning Louis and Matt, just - there a bit more color on what a commentary was conservative short term on U.S. housing because I guess during the call it's - holding pretty positive, is it because, if it just because of the prior long recovery or is it shape and mix of the recovery slightly different to what you're expecting and also just one more on corporate cost obviously up a little bit this quarter you mentioned there was an increasing marketing and - was that just relating to the Philippines and then ramping up and how should we look at it may be going forward -- ?

Yes, John, on your first question on U.S. housing, our short term outlook is just been cautious because we came in the last year like most which means our external forecast that had I think the matter which forecast you looked at whether it was Fannie and Freddie are own [Dutch] forecast that we primarily use or many other forecast had calendar 2014 new construction starts in the U.S. up in high double digit teens in the 17%-18% and I think most expected calendar '14 for new construction to look a lot like calendar '13 and calendar '12 and obviously that didn't play out that way and as we waited through the last year despite having three months and six months of new housing data those forecast were also still calling for the third quarter and the fourth quarter have a kind of growth and I guess - point for us it just was an inconsistency so we go into this year and while most of those external forecast aren't as optimistic for calendar '15 as they were for calendar '14 most external forecast still have a very healthy amount of new construction growth in the U.S. and we're not necessarily think that's not going to occur most of the external forecast would have starts up - 8% to 12% it’s a low teens. So, we're not - think it won't occur we're just saying there is a lot more uncertainty and we haven't seen a change in the trend lines in the last nine months just yet. Now unlike last year, this year we've got capacity in place so if the housing market does really start to heat up and the spring build turns out to be better than where the trend line has been over the last three months to nine months. We've got capacity in place or nearly in place and we'll be able to respond to that, so that's kind of some color if you will on the short-term. On the mediums and long-term, we're still at relatively low housing starts by all historical measures or hover depending on the data you look at somewhere between 1 million and little over 1.1 million housing starts and even if you had a healthy growth in calendar '15 double-digits or even 20%, you're still only talking housing starts that are still low below the historic average of 1.5 million and we still think that given the pent up demand and where housing starts have been on a relatively long recovery in the cycle that we think over the medium and long-term that there's still some good underlying economics and it's just going to pace more slowly. So hopefully that helps answer obviously to that question a bit. On general corporate cost no it's not Philippines related it's -- and we're continuing to add in the segment, so we're adding resources in the segment either through market related or product related activities and then SG&A it's for overall capability we're also doing the same at corporate level to ensure that we got the right management capabilities in place and in advance of where we think we're going to grow over the next 12 months to 24 months. So that kind of accounts for most of the labor expenses, discretionary expenses a really a variety of items largely earlier in the year it related to some products and marketing development work that we had done and that's continued throughout the nine months as well so we hold it on the discretionary just because obviously we would we pulled back on that in the event that we're not on the trend line that we want to be but we feel like we're on the right trend line and we're really trying to balance our top line growth and our increase in primary demand in all of our segments with staying with on profitable events.

Your next question comes from the line of Peter Steyn from Macquarie.

Just a quick question on your U.S. note issuance I'm curious to understand the strategic importance for you to extend the term particularly beyond the five year window given some of the increased cost on the curve that that incurred just curious to hear your views?

The note for us was all about getting the structure of the balance sheet in a place that from an overall liquidity and the credit management or risk management standpoint that we were comfortable with. And it really started with knowing that we wanted to stay in a net debt position over a long period of time. And although a modest level of net debt, we wanted to structure the base to close that debt over a longer period. The eight years well is a comparatively extensive if you're looking at that compared to our banking facilities, the banking facility is about 40% of those refinance every 18 months if you look at the current maturities. And by all historical context the 5.8% that we paid on the eight year note is well below 30 year to 40 year benchmark for that type of debt, so we felt like the opportunity was right and the market conditions were right for us to get comparatively cheap financing and structure the balance sheet in a way that provided long-term structural debt at a relatively cheap rate. And that's really why we chose to actually keep the transaction in February. You'll also note on the disclosure we do have a [callability] option on that note. We at this point in time would anticipate following the bond but there's certainly is that flexibility into the securities.

And there are no further questions at this time, Mr. Gries please continue.

Now that wraps it up and thanks everyone for joining the call. And we'll talk to you in next quarter. See you again.

That does conclude our conference for today. Thank you for participating ladies and gentlemen, you may all disconnect.