Louis Gries - CEO Matt Marsh - CFO.

Michael Ward - CBA Andrew Johnston - CLSA Matt McKee - J.P. Morgan Emily Smith - Deutsche Bank John Hind - Merrill Lynch Andrew Peros - Credit Suisse Matthew McNee - Goldman Sachs Simon Thackray - Citi James Rutledge - Morgan Stanley.

Okay, good morning, everybody. Thank you for joining the second quarter results. I will walk through this, or we’ll walk through it the same way we always do. I will take you through the just high level business results and then Matt Marsh, CFO of James Hardie, will walk you through the financials, and then we will come back to question and answer.

So go to the first page, that’s the group overview. I guess the pertinent things on this slide as far as the real graphs go, we are flat on net operating profit adjusted. We are up 12%, so like I said Matt will go through the financials and you will see how that arithmetic worked out.

On higher volumes, we did have higher volumes in all businesses, but I think everybody who follows Hardie knows we're not satisfied with the volumes we're getting out of the U.S., so I will cover that when we get to the U.S. We did have average higher net sales price in all businesses as well in local currencies. Obviously everything outside the U.S.

gets translated into U.S. dollar, so in U.S. dollars in the currencies - I mean some of the pricing was down, but in local currency which reflects mark-to-market position, everyone was up. Plants continue to run well, basically the businesses right through the company continue to run well.

Half year EBIT 25.6%, mostly we would have seen for a quarter was 24 points, so we will talk about that a bit, that’s U.S. and Europe and then the dividend of $0.09. So going to the next slide, I’ll go through the U.S. Net sales is up 8% in the quarter, 7% on volume, just 1% price.

Right off the bat on the volume, we think our market index is around 5% to 7% right now, so we're running flat to the market index, so PDG is flat. So that's kind of the headline for the company, I think, both internally and externally. Price, we took a 2%, 3% increase last year.

We're only seeing about 1% come through, that's partly because of the FX in Europe and Canada, a big part actually. And then there's also mixes and working force this year to the degree we normally have gotten help from mix.

And that’s because HardieBacker is actually growing faster than exterior products this year and our ColorPlus product, which basically is value-add feature growing right on top of some of our products shipped into the market, that’s been flat. So those two things basically means mix isn’t helping. It’s not really hurting, it’s just not helping.

On the EBIT line, we are getting help from lower freight, lower pulp and lower gas relative to last year and at least for the time being or the short term we expect that to continue. Going to next slide, you can see the last data point thus far, just 25% top of the range. It doesn’t concern U.S.

too much, but I know it gets a lot of attention externally and I guess the biggest thing is the U.S. business ran 26% plus. So the - we are down as the FX here in Canada and the windows loss. The windows business that we're starting up we are putting our U.S., Europe fiber smelter results.

The losses in that business increased its first half as planned as we start participating in more markets with our window offering. So again the U.S. business 26% plus and it brings the number you see down to about 24.8% when you deal with the FX and the FX out of Europe and the windows loss.

Top line growth, I guess it recovered which is tracking with market index now, so it is going up, but it's not going up at market share this year, which is some more addressing obviously. Average price, they also recovered, trend is still good, but again we are only getting 1% this year for those reasons I talked about.

Asia-Pac had a pretty good result, probably the market is good in Australia. Our businesses is will set up, our Scyon product line continues to grow which is the main initiative in the business.

What pulled the result down a little bit was the Carole Park startup, the large high throughput line we put in Carole Park didn’t start up as planned, so there is some inefficiencies on both, on the cost of goods sold in the business due to the less than planned startup.

And we did have to delay orders and some of that, not a lot of it’s built into the next quarter. So that’s the overview of the businesses and I will hand it over to Matt for the financials..

Good morning. So on slide 12, the Group's second quarter results, as Louis said, net sales were up about 2% on a reported basis, volumes were up in all the operating segments and I will show you those when we go through the segment results here in a minute.

He has also talked a little bit about higher averages and selling prices in local currencies year-over-year. Gross profit margins are up about 240 basis points primarily as a result of the U.S. plant performance and then we are getting help on input costs, almost across the board on our key inputs are all down year-over-year.

SG&A expenses, up about 3%, really driven by two things, both stock compensation and FX losses, you will see that the half year as well. Adjusted net operating profit for the second quarter was up 2, that’s on EBIT up 11%, so the operating businesses are up.

That gets compressed as a result of both the higher income taxes, as a result of the mix of earnings in high tax jurisdiction countries, primarily the U.S. And then gross interest expense is up about $5 million in the quarter and that corresponds to the higher level of debt.

If we go the half year, you see net sales for the half year up 2%, gross profit is up 11%, EBIT up 25% and net operating profit is up 22% for the half year, all in comparison to the first half of the year ago. Similar drivers and dynamics, if you will.

Volumes up in the segments, sales prices up in local currencies, compressed a bit by foreign exchange.

We get some tailwind on plant performance which is contributing to the gross margin rate increase of almost 270 basis points as well as lower input cost, SG&A again up very similarly of about 3%, you see it’s up about $4 million, half, almost literally half of it is foreign exchange and the other $2 million is stock compensation as a result of the change in the share price.

And then you can see very similar dynamics on net offering profit, so strong EBIT growth of 25% growth, offset by income tax, gross interest expense being up corresponding to the debt and then you will see about a $6 million swing in - a favorable swing in other income and expense.

Some of that’s unrealized foreign exchange of $4 million, unrealized foreign exchange is about $2 million is the gain on sale for the pipes business here in Australia. Foreign exchange here in Australian dollars, you can see the impact on the lower left side of the chart here, lower rate.

So a total foreign exchange impact of about $41 million on sales, almost $9 million on EBIT and $5 million on net operating profit. So the strong dollar is having an effect on our results in both Aussie dollars as well as Canadian exchange. We are seeing that through price and the European results when we translate those.

And you can see the impact that that has on a percentage basis year-over-year and we wouldn’t typically talk about foreign exchange, but we felt like foreign exchange is certainly material enough to changing some of the operating discussions that we thought we had highlighted a little differently this quarter.

On input costs, so they have stabilized quarter-to-quarter, but year-on-year we're still getting lower input costs that are positively contributing to both gross margin rates and EBIT rates. So you can see pulp is down about 2% versus a year ago, cement prices are up. The cement industry in the U.S.

continues to be positioned well and pricing continues to trend up and we expect that to continue. Gas is down over 20%, you can see electricity is down a little bit, electricity has kind of stabilized, just to give a sense on input costs. So for the second quarter and half year, in the segments, you can see the U.S.

and Europe segment fir half and quarter EBITs were up 20% and 25%, respectively, primarily on plant performance, a little bit with volume, but the real leverage that we're getting is the result of the plants performing better and input costs being down.

Asia Pacific results in local currencies for the first half were up 8% for the quarter and 11% for the first half in local currencies versus a year ago. It’s a combination of higher volume year-over-year.

They got about 6% price which is a combination of list price changes that they executed, plus they are getting favorable mix and then offset a bit by the production costs. Production costs primarily are two dynamics, one is they buy their pulp in U.S.

dollars, they are getting foreign exchange in Carole Park, which we mentioned earlier is we had some of those costs built into the result and they're running a little bit higher than even those. The other two segments, R&D, no real change in R&D. We continue to kind of be within this 2% to 3% range of our sales.

You will see some fluctuations very consistent with prior quarters. On general corporate costs, you will see that they are up 4%, like I said earlier that’s $2 million of foreign exchange, $2 million of realized exchange losses. The actual increase in labor and marketing programs is also up, but it’s not driving the result.

Income tax, we are estimating for the year to be 26.2%, again I would say similar to last quarter. I think this adjusted a bit, but pretty consistent. Rates are trending up obviously as we earn more in higher tax rate jurisdictions like the U.S., our effective tax rate goes up.

We're paying income taxes as we’ve said in prior results, in Ireland, the U.S., Canada, New Zealand and Philippines. Australia, we don’t pay income tax as a result of the deduction we get from the asbestos contribution each year. On cash flow, for the first half of '16, $85.5 million of operating cash flow in comparison to $34.1 million a year ago.

That’s primarily as a result of the operating segments performing well and contributing operating cash flow. It's also as a result of lower contribution year-over-year to AICF. You can see a net change in working capital of a couple of million dollars, about 20% on a rate basis. AR and AP moved against us.

So AR was up along with our sales, payables went down primarily because of the capacity expansion projects that we were purchasing last year and our CapEx is obviously down year-over-year as our payables balance comes down accordingly. And then we’ve - you see that those are largely offset by a reduction in inventory.

Lower CapEx, as I mentioned, almost 80% less CapEx, about $34 million in the first half. I will show you a chart in a minute on those. As we wrap up our capacity expansion projects in the U.S. and Carole Park, obviously we’ve been signaling and telling you that we'll spend less on CapEx and that will continue to remain. I will show you that in a minute.

And then you can see on the financing side a decrease in the dividend and an increase in the share buyback in the first quarter primarily. And then obviously we're drawing under. CapEx, $42 million of CapEx in the first half compared to about $117 million a year ago, that’s almost all related to the capacity projects last year versus this year.

That $15 million, you see they are related to capacity is just wrapping up those three projects, Cleburne, Plant City and Carole Park, respectively. Those are more or less done, so the CapEx that we should expect on a go forward basis is going to largely be maintenance CapEx.

On the balance sheet side, no real change to our capital allocation strategy or balance sheet priorities. Strong margins and operating cash flows continue to drive the strategy. Our allocation remains the same. So we're funding organic growth first.

Obviously we're committed to the ordinary dividend within our payout ratio that’s reflected in today's $0.09 declaration. And then the priorities below that remain the same. So flexibility for certain strategic or M&A as it comes up being able to withstand market cycles and then additional distributions above that.

But as I said in the last result really the additional distributions above the ordinary is something that we're starting to pull back on. And we have done so over the last six to nine months.

On liquidity, we’ve got about $600 million of banking facilities, $590 to be precise, good sufficient liquidity, almost 44% and almost a two year weighted average maturity. We're working on strategies to extend that.

And we remain well within our 1 to 2 time target on the balance sheet, but I'm happy with where we are on the debt side and feel like we've executed pretty well with respect to debt.

So the balance sheet is in good shape, we’ve got about $84 million of cash as of September, almost $600 million of banking lines, more than sufficient liquidity, weighted $500 million net debt which is right where we thought it would be and right where we really like it to be. So it’s in that 1 to 2 time net debt adjusted for asbestos range.

On slide 23, for fiscal '16, we've adjusted guidance to $230 million to $250 million of adjusted NOPAT.

This is primarily a reflection of where we see PDG coming in for the first half and for the year and we know that the range is that - the consensus was that it’s kind of in this $252 million to $270 million range and we think the $230 million to $250 million is more reflective of what we see for the year. So with that I'll open it up for questions..

It’s Michael Ward from CBA. Just Louis in the release you talked about the issues around PDG not being an external issue. I was just hoping you can elaborate on that a little bit, please..

Yeah, I mean, the housing market is fine. I don’t think there has been any shift externally between the products that are fighting for share. I think when you have a reduction in PDG, that doesn’t mean you are losing share, that means you are not gaining share at the same rate you had been and I think that’s the situation we are dealing with.

Most of you would have seen LP produced results below the market index. So at least for this half year, we don’t think it’s an LP situation. We really think that our programs against final, we have to run them as well and probably as broadly as we need to, so that’s the adjustment we are trying to make in the next couple of quarters..

And the management change in the context of all that..

Yeah, the management change, basically it was triggered by the business running well, but not growing at the rate we expected to grow at. We went through the analysis, external versus internal, and in internal how much was game plan design and how much game plan execution.

And we just feel like with the two divisions, really the Northern division being the growth division against vinyl. We just weren’t getting the traction we needed in our programs up there.

We looked at the resources available in the company and we just felt like going back to a national structure was the best structure considering what we are trying to accomplish and management resource available..

Okay.

Also just on the gross margins, there is some interesting detail in the release, you get around, both the US and AsiaPac, I think you say the production cost benefit in the US is sort of 2.5 basis points or something, I was just wondering if you can split that between sort of raw materials and whether or not that’s - how much of that might be from improved manufacturing efficiency..

Probably one-third, two-thirds. One-third is raw materials, two-thirds efficiency.

Keep in mind, first half this year versus first half last year, network didn’t run well last year and so the comp is just an easier comp on top of the plans we are in which is a lot better, the first half of this year in comparison, so you’re going to get more favorability in the first half for plant performance than you will for the full year..

And then the IPO says it’s the other way round, it’s sort of modest 2.5 or so.

When would we expect the [indiscernible] should actually a positive contributor to that?.

My guess would be starting next year. I think they still have a little bit this year, I mean, this quarter and hopefully next quarter to work through the rest of it, and by fiscal year ‘17 we will get the benefits that are in line both in service position and in lower unit costs of that line..

Okay. Thank you..

Thanks. Andrew Johnston, CLSA.

Louis, could you comment on regional Primary Demand Growth and how that’s varied across different regions?.

Yeah, what I can tell you Andrew is we went through the business and we asked planning people to tell us if we are benefiting or kind of being hurt by regional mix and it balanced out almost perfectly. So this isn’t a regional mix story.

Again, from an external perspective, I think our PDG in the North is less than it should be and that’s where most of the vinyl is.

So when I say it’s internal, that’s what I’m saying, there has been a lot of speculation about the Texas market being not so good, and other markets be real good and when you average it all for Hardie, it comes out about - it’s fine, the regional mix isn’t hurting us.

But the vinyl is biased toward the north and I think our market share development programs in the north haven’t been as running as well as they need to for us to move forward on 3590. I think a lot of that’s short-term, say a next couple of years, it’s just running and program is better.

I think there will be some tweaks as we get in kind of smaller segments, tougher value proposition type segments, going to be small markets or things like that. But I think right now, our programs are good. We just have to run them better..

And you might have already answered this question, but is there any build up in inventory in the channel over this last quarter that would cause you to be more concerned..

We saw those comments in our results, we don’t feel like it’s affecting us at all..

And just with your more focus on growing, getting PDG back to where you wanted, there doesn’t seem to be a lot of increase in SG&A.

So what sort of - in terms of percentage terms so far this year and perhaps looking at the next year, what sort of increase in sales and marketing expenses have you had and do you to expect have?.

Where are we so far?.

Yeah, we have been in the 6% to 8% range and most of that SG&A increase is within the segments, a little bit of increase in corporate. I would say, corporate is going to run lower than that, probably in the 3% to 5% range.

But both in Asia-Pacific and the US and Europe, they have been running in the 5% to upwards of even like 8%, and we expect that that will continue..

So we do have some organizational holes, we are working hard to fill, some of them are in the field and some of them are in areas like product and segment management. But it’s not a big spend to get back on track.

We do have to spend some to get our PDG kicked up, but it’s not like - there is no trade-off being made here where we’re going to check growth for EBIT, it’s on the margin. The amount of costs that needs to go under the business, it’s real dollars, but that’s not the fix, spending twice as much on SG&A is not the fix.

The fix is running our programs better. Having said that, there is few gaps capability wise that we need to address..

I probably had some other question, ultimately it was just trying to get a bit of understanding of how much frontloading was in that marketing spend you’re stressing that there was - could you talk us through how you see the pay off over the several quarters if you quote, how that will develop?.

Yeah, I mean, the pay-off for Hardie is real easy. I mean, we get paid well - we get paid very well for volumes. So if you’re starting something from scratch, like for instance, right now, we haven’t talked about market initiative, something like that, that might run negative for three, four years, okay. But that isn’t what we would be talking about.

We are not looking at topping the market to deliver our PDG. We are looking for our existing programs either in new construction or repair and remodel to deliver more with roughly the same resources, say, you were looking for about - let’s say another 7% or 8%, 10% more resources, but again not double.

And with our margins, when the volume comes, the pay back is pretty quick..

And then perhaps just a broader question around the market and capacity, there has been lot said about labor and its ability to deliver 1.3 million starts next year. How would you see that across your business mix both R&R and new..

I would say, we hear the same things directly from builders and residers, so there does seem to be shortage of labor in the construction industry. It’s not great for us, because of course, we are a lot better than bricks and some other things that take a lot of labor per unit to install.

But we take more in the vinyl and wood, a lot more than vinyl, a little bit more wood. So it’s not great for us, but it’s a crisis type situation. I think the builders talk about a lot because there are really delays in closings. So it’s cash flow very important for them in the business.

I think starts are more important in closings for business like ours. So if order for subdivision gets delayed 45 days or 30 days because of labor, tight labor market, really don’t affect us that much.

So I do think the housing starts, we are getting into a regular occurrence of forecast, housing starts being higher than actual housing starts and I think that’s partly driven by the labor situation and it wouldn’t surprise me if that existed again next year where the forecast weren’t reached in actuality..

Good morning, Louis. Matt McKee from J.P. Morgan. Couple of quick questions from us. First of all, just around your targeted PDG, I think you spoke to PDG running below target. Just firstly to clarify what you mean by target PDG, I think couple of quarters ago, we were talking about 10%, 6%. So I just want to get a bit more color on that.

And in relation to that, just around the timeframe, I mean, is this an FY17 or backend of FY17 story before we see some meaningful PDG?.

Yeah. Just to kind of get everyone up to the same page, coming out of the downturn several years ago, we kind of set a 6% to 8% PDG target and we were hitting it. And we are in a market that we really like and that the market wasn’t really spiking at all, it was little steady increase.

So we really felt like this was going to be an extended recovery because it’s not overheating at all and that we are putting more money on the growth side and trying to get that PDG up to the 8% to 10% level, obviously without trading off to financial returns in the business.

So our timing on that was bad, because I think we declared that about last year and now we are sitting pretty flat this year. So not the greatest forecast there on our part. So I think, if you look at how we are going to step in to - of course, we see everything by market, you don’t see things by market.

So by market is really important to us to tell how the different programs are running in different markets because your positioning is little bit here and there - a little bit different here and there. But if that get back to 5% and then kind of push on to 10%, 10% is still - that 8% to 10% is still the right target.

But I think it’s pretty hard to go from flat to 8% to 10%. I think we are going to look for that step in between that we are at, which was more the 6% to 8%, 5% to 7%. So I’d say short-term 5% to 7%, maybe second year back to the 8% to 10% target. Keith brings up a good point. This thing has settled down over the four, five quarters.

It’s not like our - I mean, when you guys read our results, you probably think it happened in the last couple of quarters, but again, we drag the business a little bit differently and we not only look at ourselves, we look at our vinyl sales, we look at LP sales.

You can actually see vinyl decline started to slow about five quarters ago and you can see our PDG start to slow at about the same time. So it only becomes clear I think to the market when you got four-quarter rolling and it’s like we are now four-quarter rolling. I think we are somewhere around 4% or 5% four-quarter rolling.

In order to get that momentum back, it’s going to take some time. You can’t do it one quarter, you can’t post to 20 in one quarter and have that four-quarter rolling all of a second, come back up to 7% or 8%.

So my guess, when we get a tough comp coming up - Matt, talked about an easy comp in the first quarter on the EBIT side, we got a tough comp coming up on the fourth quarter on the volume side, because we are not going with a price increase in March this year like we did last year.

So there will be no pull forward volume, which we normally get when an increase, it’s not a huge amount, but it does make it harder to comp with the price increase not being there. Again, it doesn’t matter much to us because we look at PDG on a four-quarter rolling basis.

But we think we are probably fiscal year ‘17 before we can realistically expect to be back at the 5% to 7%, and probably fiscal year ‘18, we can try and hit that higher target that we have set last year..

Thanks, Louis. Just a follow-up on mix, I think that has been reasonably flat until now, just how that’s tracking.

And also interiors versus exteriors, I think first quarter interiors was pretty strong?.

Yeah, interiors was strong first half, so it continued into second quarter. So we like - we had concerns about interiors now probably only not quite two years ago, maybe a year and a half ago. And we kind of did a similar assessment to what we just done on an exteriors and I think we've got interiors the way it should be.

I think we’re going to see potentially some acceleration in interiors, so we expect that to continue. So exteriors is really the - gap is on the volume side, it's not interiors.

Any questions on the phone?.

Your first question comes from the line of Emily Smith from Deutsche Bank. Your line is open. Please go ahead..

Good morning Louis, good morning Matt. Just a couple of questions from me. I’m just wondering is it only the PDG side of things that’s changed between the last result and today that changed your overall guidance expectation. Also just wondering if you can give us a sense for how the December quarter is looking sort of at the moment.

And obviously the price up 1% this quarter, you’ve outlined that it relates predominantly to mix. Do you expect that at some stage that mix change might turn around and you might start to get a positive benefit from mix again, and what do you looking for that to happen? Thank you..

Yes, three questions, I forgot your middle question, so I'm going to give that one to Matt. The change has really been our volume forecast. So, the guidance already had a tax rate that we seem to be tracking to and the FX isn't far off of what was in our forecast.

So the reduction in our guidance is the reduction in the volume that we think we’ll sell the share in the US. Now again, we hadn't decided not to take the price increase in March until just recently, so that would have led some more volumes about a year so that played a small part in it. As far as the price 1% backer, backer on a good role.

Not sure if we’ll take a price increase next year, but we've known we’ve taken in the spring, so if we get through to spring without an increase, I'd say the probability of an increase that would affect our numbers very much next year is fairly low. I would think price would be flat you know up 2.

And it could even if backer went on a realtor, it could even be flat to minus 1, so it might add. But I would call it flat, we’re not looking for big price improvement over the next five quarters, six quarters actually.

I don't remember your middle question now, what do we look like right now this year - this quarter? We look very much like we have over the last couple of quarters. So the business is tracking in that same range it has been tracking I think for four quarters now.

So we think we’re growing at probably just a little bit above the market index, plants are running well, input costs are staying favorable relative to last year. So everything kind of, this quarter is going to, in my mind track a lot like the previous three of four quarters..

And the 1.7 point benefit you got from lower production cost, how much of that would be manufacturing efficiency versus input cost savings?.

I don't know if you heard Matt’s earlier response, but it is a rough estimate is two thirds due to plant performance and one third due to input costs.

But he kind of gave a little warning there that our plants started running well in August or about September last year, so the comps in the winter on that performance in plants is going to be tougher comp than what we’ve had so far. So we won't get the same benefit just because we’re against a better running system this time last year.

Having said that, I think that's one of the things we want to keep in the front of your mind, we actually think we are on a long-term improvement trend line with our manufacturing plants.

We got the blip here but we think in both regions we're pretty optimistic, we’re going to be able to continue to drive efficiencies greater efficiencies in our operating plans. So that would be one of the areas we're pretty pleased with as far as we think we can deliver over the next couple of years..

Just finally, what was the reasoning behind not proceeding with the price increase in March?.

We want to keep the field focused on executing. A lot of what we’re trying to change is, as Lou said is internal execution and we're trying to take the distractions away from the sales team. So we just felt like we were happy with where price has been over the last couple of years.

And the benefit of taken a modest price increase next year versus the work that that would require from the team over the next couple of months to get that in place just weren't as great as keeping everybody focused on getting growth back to where we want to get to and getting PDG back to where we needed to be..

Your next question comes from the line of John Hind from Merrill Lynch. Your line is open. Please go ahead..

Just wondering how you expect to grow PDG in this slower environment without really having to reduce prices to some degree.

Obviously flat pricing coming up is a little bit of a flag for me and also with some of the problems, is it the west with PDG, is it the west market share sort of at its limit and some of the easy wood gains have already been made and I mean how much stickier is vinyl than you previously thought?.

I'll kind of start where you finished. So, I think the vinyl equation is the same as it's always been. So first thing we want to do is address the price problem. This is in a situation where you can increase PDG by lowering price because PDG stands for primary demand growth, meaning you’re growing from others outside of your category.

So again, it's not market share growth within your category it’s growth outside of your category. So less vinyl more Hardie and that's the equation we’re dealing with. So because we sell about twice the premium from an install cost to a builder about maybe 50% or 60% for our reset or homeowner.

The price of the product doesn't play a big part, okay because, if say vinyl were to drop their price 10%. Their premium they put on Hardie would go from like $4,500 to $4,680. Okay, so they are large premiums that a builder actually has to deal with when he is deciding to go away from vinyl and come to Hardie. So pricing is not it at all.

If it was competition within a category than pricing becomes important, but that's what we’re talking about here.

You can see the - as I said, five quarters ago, the rate of decline in vinyl market share started to slow down and you can see in about the last looks like three or four months it's too early to call, you can see it start accelerating again.

Now it's not anywhere near what where it was five quarters ago, but it has started to come down a little bit again. I think selling against vinyl is market development. We are the company that does market development.

So if we don't do it, it doesn't get done and I think the reality is we haven't been doing as well as we should do and vinyl had a temporary benefit from that. But I don’t see the positioning of vinyl in the market has changed one bit.

It's been in decline for a lot of years, is still in decline, it’s just at a - in decline at a slower rate than it has been and we think that rate will pick back up..

Thank you, I mean, obviously clearly a few issues with margins, EBIT margins outside the US which you have addressed. I’m just wondering obviously windows had a negative impact on EBIT.

Given the impact, is it appropriate for you to provide a little bit more detail around revenue and potential run rate for business yet?.

Is the windows business?.

Yes..

I mean, remember, I mean because we look at the margin so closely in the US business, when I say we, we, I talk external. It gets a lot of attention, but it's not at all material to the corporation. It is a market development initiative, it's meant to cost money. It's what we talk about when we talk about balancing growth with returns.

This just happens to be outside of fiber cement. So normally when we talk about growth and returns, we're talking about market initiatives within fiber cement, but this is a market initiative outside of fiber cement.

It is very small business, you guys are going to quickly be able to figure out how many dollars I’m talking about and estimate how many are foreign exchange and then you can come up with your guess on windows. And it's not insignificant, but it's not going to break the bank. And we do expect this year's loss will be highest of that initiative.

We’ll move into a lower loss position next year and that would be kind of we’re thinking about two and half years if the initiative runs away. We expect until before we make further investment decision in windows, we’d be at a neutral position on EBIT, so it wouldn't be pulling down the EBIT line for the US. We haven't gone through that gate yet.

So we've got a relatively small investment in this initiative, we haven't gone through the reinvestment gate which should be a significant decision by the company.

And of course when we get there, we’ll lay everything out, if we reinvest and decide to try and grow windows, fiberglass windows into large business, we’ll lay that out for your guys why, and how we’re going to do it, but at this point we haven't made that decision..

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

Thank you. Sorry, just to clarify your last comment on the windows business, can you confirm whether that's now included in the US and Europe [indiscernible] or whether that's still being carried elsewhere in the business..

Now it's in the numbers you see for US and Europe, but the numbers haven't been big enough until this year for you to care about it. So last year, the EBIT loss because we’re just starting up the business would have been smaller than we are dealing with now..

So, I guess my question is, why would you put it into that division contribution if you're not sure if you're going to continue with it longer term?.

Or again, if I have a market initiative that has a three-year stage gate process and say I don't go ahead with the business in the next three years from now, it comes out. It looks a lot like, a lot of initiatives we are running in the US business. Again, it just don’t happen to be fiber cement its fiberglass.

So we have debated that but, and if we reinvest in the business and we think there is good reason from a shareholder perspective to pull it out a fiber cement numbers, we’ll do it at that time, but, again, our investment is small and the loss is relative to the US business are small as well..

Just a question to Matt around the balance sheet capital management. You obviously haven't been very active with the buyback for the past quarter and I think Matt you made the comment that you're pulling back on distributions above ordinary dividends.

Does that mean that you won't be paying any special dividends if you don't execute that 5% on either buyback?.

I think we started saying probably last February, and certainly in the May results that our focus on distributions would be on the ordinary first and anything above the ordinary we’d move away from specials and I like at that time, I said it was because I felt like there was confusion around some guess work, I really felt like it was only guessing what the special dividend would be and there is really no need for that, and some of the specials that we've done over the last couple of years.

I think the circumstances aren’t the same as there will be kind of going forward. So now that we've got the balance sheet where we wanted, if we do distributions above and beyond the ordinary, it would be in form of share buyback, but our focus going forward is really around maintaining the ordinary in that 50% to 70% range.

Obviously, we've got the buyback, we haven't been active with that since the summer and so we’ll continue to operate with the buyback open, but our focus is on maintaining the ordinary in the 50% to 70% range and you shouldn't expect kind of a special dividend in the second half of the year or any additional amounts would be done through share buybacks..

Okay, and so that was deliberately effort to pull back on the buyback, is that right or was it because there weren't any trading windows, I think, which was kind of an issue you had in the past..

The trading widow restrictions are definitely greater in the summer than they are in the fall. And so that was, it was obviously a conscious decision that we are making as we were going through the last couple of months..

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

Thanks, guys. Just a little bit more expanding on some of the pricing and margin impacts. So, Louis, I think 7% or 8% of your volumes are in Canada and Europe. Now, both those currencies are down sort of circa 15%, which simple calc would have taken about 1% of your average price and something a little bit less than that obviously op margin.

Have you thought about or have you announced any price recovery in those markets or thought about pushing prices up in those markets, just given all your costs or lot of your costs are obviously in US dollars..

Yeah. No, Matt. We market price on all our markets. So, we don’t pass cost on and we don’t drop prices from cost cut downs. So at this point, we haven’t had any discussion about adjusting Canadian prices beyond the normal, little bit of tweaking we did up there recently, which had nothing to do with our exchange rate and then in Europe, same thing.

So no, we wouldn’t try and recapture the cost and price, we want to be price positioned right for what we’re trying to do at volume and markets. So -.

Yeah. But obviously you’ve got some pretty big cost savings here with the currency.

Louis, just to allow us to do that calc you mentioned before a little bit better, on the Windows loss, when you said the US business on its own is doing 26% plus margins, is it low-26, high-26?.

It’s about mid.

How is that?.

Okay.

So maybe $3 million loss something like that out of windows?.

How much?.

2 or 3?.

You can do your own work. Yeah. But it’s not hard to figure out, you guys can figure it out..

And sorry, Louis, just going back to PDG thing, as you said op is probably down 10% year-to-date for you guys year-over-year and the [indiscernible] growing market.

So where - even though that might only be a few percent, where do you think that PDG growth is going, it’s obviously not bricks, we can sort of see that in Boral, but is Stucco picking up or is it really, and can you give us a little bit more color on your regional mix.

Is it one region doing a lot worse than others? I know you mentioned the northeast and the north, but you’re sort of hard lent in the south and the west, are they still growing or are they flattened out, just a bit more color on that would be good..

Yeah. The first part, we did go through that exercise of, if we’re not getting it, vinyl’s not getting it, LP is not getting it, who is getting it, and I’ll be honest with you, we didn’t find it. So it is just a couple of percent, of course with our numbers, with our volumes, we know exactly what they are.

With vinyl, we use published numbers, but you can’t be certain how accurate they are, what LP we use their results which are hard for us to interpret at times. And we don’t track the bricks much. And then, you get here all the delayed closings and stuff like that.

So, we just stopped, okay, and the reason we stopped is because we went back to that, by the way, you said we are like 10 points ahead of LP so far this year, but we only look at things four quarter rolling and four quarter rolling, they’re kind of flat, they’re zero and I think we’re 6 or 7. So we’re pretty sure it’s not LP.

Now, LP being flat to last year, that’s another thing you got to keep in mind. We don’t know how much their capacity has played in to that and how much is some of the other stuff they’ve done like pricing or if the market is just seeing that chipboard probably isn’t the answer for a cheaper alternative, the fiber cement.

So we can’t interpret that till they’re back in free supply. It doesn’t look like they’ve sold their capacity over the last year, but maybe they haven’t and we’re just not aware of it.

But the compelling chart, if you plot vinyl over that five-quarter period, you’re going to see the rate of decline slow and you’re going to see during that same five quarter period, you’re going to see our rate of PDG slow down as well. So theoretically their rate of decline during that period slowed, so there is less coming our way.

And again, a market sits on a standard unless there is a compelling reason to move, okay and we started against vinyl when they were something like 36% of market and the compelling reason to move was fiber cement, okay, it was a big premium, but it had value to target customers greater than the premium to move to Hardie.

We’ve done a lot of good things in the US business over the last 2, 3 years, but I think we’re just not as good market development against vinyl as we had been 2 or 3 years ago and as we need to be to keep driving toward that 35.

So the whole game is us against vinyl, keeping an eye on LP, which are trying to sell themselves as a cheap alternative to fiber cement. So that’s the market model on the exterior side..

And just your observations by region, has there been any marks?.

Yes. Sorry, you want me to answer both questions. It’s vinyl, I guess that’s the reason I didn’t answer it. The Midwest, Northeast, Canada, Carolinas, it’s all the same. Those are the big vinyl regions and one of them is not doing significantly better than the others, we’re just not doing as well against vinyl as we were two or three years ago..

Yeah. No worries. Thank you..

By the way, I’ll give you a bonus answer too, because if we got that one segment wise, we see it the same thing, it’s not one segment, new construction or R&R, it’s both segments, we’re just not doing as well as we need to do..

Your next question comes from the line of Simon Thackray from Citi. Please go ahead..

Thanks very much. Louis, you made a point earlier about interiors had been, they’d made a strong contribution to mix and that was obviously affecting price to a certain degree. And 18 months ago, you were a bit worried about that and you want to deal with it. You’re obviously dealt with it. And it’s accelerating.

Can you talk to that strategy and then talk to your strategy around PDG, because I mean you guys sound somber I got to say in terms of where PDG has ended up, you were like this about interiors 18 months ago and now, it’s a strong contributor.

So can you just really help us nail down, I know you’re going to say, we’ll wait for September for strategy, but talk to exactly what we should be expecting in terms of initiatives over the next four quarters?.

Yeah. I don’t think you should expect any new initiatives in the next four quarters. Our focus, Ryan is focused on that with the new structure, they’ve spent a fair amount of time doing a current state assessment on the business and working out the game plan, both short term, medium term. Short-term game plan is execute what we do better.

So we like our nine box, we’re using new construction, we like R&R program and vinyl markets, we know what to do with the channel now, we’re getting better with the channel. We just need more attention on the growth side of the business.

Now, Simon brings up the point that we did have a problem, which I agree with 100% on HardieBacker market share maybe 18 months ago, maybe a little bit longer and the organization has responded quite well.

Now, the problem is we’ve also, you can remember two, three years ago, we were operating fro I think two years in a row just below our 20 based on our EBIT margin range and we took care of that. We had tactical pricing problems, which was a big part of taking care of that. We took care of it.

I think the story for our organization internally has been, hey, we can’t do it one at a time, we got to do the interior things right and then we got to run our exterior strategy, we got to have our tactical pricing and plans have to go.

So I think Hardie coming out of a downturn, now five, six years ago whatever it’s been has become a much better company, but we’re still not a company, we’re not that juggler that can keep six balls in the air, seems like we’re always finding a way to drop one of them and I think the one we drop now is growth against vinyl and we got to get that back in the air, what I’ll drop in one of the other ones.

So that’s what you should expect out of Hardie is a lot more intensity around how well we’re executing and the fact that we’re executing all segments, all product line strategies at the same time, which would be, it will be a challenge.

So I’m very confident, we got it done, that’s what drove the organizational structure change, but you’re going to have to see how the results come out..

Yeah. And I guess I would say the following question, what you answered really is the management structure that you’ve now put in place supports that strategy to be able to juggle all those six balls at one time..

Yeah. I covered earlier Simon the structure, there is a lot of reasons we went to, with the structure we went to, but it was triggered by our inability to grow or take market share at the rate we’re continuing to take market share.

So that’s what started to process of evaluation and we ended up with the structure change, we ended up with execution as being our main thing we need to change over to next four, five quarters to get back on track PDG wise.

There is a lot of game plan enhancement, value proposition bumps that we’re going to do over the next five years, but that’s not what we’re focused on right now. We’ve got some people working on that, but the majority of the organization is committing to higher level of execution on existing game plans..

Louis, just one final question if I can, I mean, housing starts certainly for our type of work were pretty lackluster just a bit above a mil, it turned it’s sort of okay, with the trajectory certainly a lot slower than people would expect, now we used to think that that was a benefit for you guys, both in terms of PDG and manufacturing cadence.

What’s your expectation now that an acceleration would be much better for the business or that it’s irrelevant, you just need to be executing a lot better..

Yeah.

We like the market, I mean I know if the market was larger now, market demand was more just because of more housing, we will make more money, but we like the market, I’m not an economist, I tell you guys all the time, I think X number of houses are going to be built in this recovery and you can either build them in five years, you can build them in nine years and it looks to me like if it doesn’t just take off, it’s going to be a longer recovery and a longer recovery for a market share company is good because you’ve got more years to kind of build on the momentum of the previous year.

So, we like the market, no complaints about the market..

Okay. Thanks so much gentlemen..

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

Thank you. Good morning.

Just wanted to clarify how we should be thinking about price increases going forward, given I guess it seems at least on the face of it that no price increase this year, seems to be because of how PDG growth is tracking, if as you cite hopefully these initiatives and you see PDG growth return to that 5% to 7% over the next 12 to 18 months.

Should we be expecting a 2% to 3% price increase in 18 months’ time?.

Yeah. I mean I think if you go to the history of the business, we review price every spring, most years, we take 2 to 3, we’re careful not to be greedy on price, but we don’t want to kill potential, we don’t want to lower the terminal share for fiber cement by creating a perception that we need more price every time you turn around.

So we’ve been very disciplined on pricing. Every once in a while we skip a price increase and it looks like the share at least this spring, we’re going to skip the price increase. I think Matt summed it up well, I actually didn’t know I’d answered the question, but he did answer it well.

Our focus on the exterior side of the business is volume and we just didn’t want a lot of distractions for the people that are trying to execute on our strategies. So we took a pass on pricing. And I wouldn’t expect that would be a regular occurrence, I would think that would be more of a one-time occurrence..

Okay. Thanks.

And just I’m not sure if I missed this earlier, but can you clarify what the exterior versus interior growth was for the half or the quarter, I think you had indicated that interior was stronger?.

Interior was a bit better than exterior and so if you look at our overall growth and go a little bit higher in our interior, little bit lower on exterior, you’re probably pretty close..

Okay. Thanks a lot..

It appears so that we have no further questions. I’d now like to hand back for any additional or closing remarks..

Okay. We appreciate everyone’s interest in the company. Thank you very much..