Louis Gries - Chief Executive Officer Matt Marsh - Chief Financial Officer.

Emily Smith - Deutsche Bank Ramoun Lazar - UBS Keith Chau - JPMorgan Peter Steyn - Macquarie James Rutledge - Morgan Stanley Kathryn Alexander - Citibank Andrew Peros - Credit Suisse Michael Ward - Nikko Asset Management John Hind - Merrill Lynch.

Thank you for standing by and welcome to the James Hardie Q3 Results Briefing. All participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Louise Gries. Please go ahead..

Thank you. Hi, everybody, thanks for joining the call. Today is a little bit different; I'm in California and Matt's in Dublin so hopefully we'll be able to coordinate questions and the rest of that.

The reason why it's like that, I think a lot of you know I had a double knee replacement just before Christmas, so everything is going well, I got back to work in early January but I'm working out of our California office while I rehab, which is getting a couple of weeks less. So I didn't make the trip this quarter to Dublin with Matt.

So anyway, hopefully everything goes well on the, with the telephones. So they've put some slides in Sydney for us, cover slides. First, disclosures, forward-looking statements, note to reader, slide five some of the definitions, slide six just the normal approach. I take care of the front part of the presentation.

I give you a few comments on the businesses; Matt will go through the financials in some detail. And when you come back, I mean when we get done with that we'll got to questions from investors and analysts. And then if there's any media questions we'll take those at the end.

On the questions, a little bit different this time since we're in two different rooms, anyone can either ask a question of me or Matt upfront; it will help us figure it out. If you don't, we'll figure it out so it's no big deal. So next slide is another cover page slide, and then we're on to page eight, okay.

Unfortunately, this is a very easy quarter to read; top line good again but bottom-line short of what we had planned even as recently when we talked to you in November. It's largely driven by U.S. manufacturing performance. Now, the problem is, well, I'll talk about that when I get to the U.S. page.

I guess the other key point on this slide or the other noteworthy point on this slide is net operating cash for the year is still running a bit strong. Some of that's due to the inventories but the performance has been good this year. To slide nine. This is the U.S. slide. We see sales and volume up 10%, price flat.

And it's slightly below what the comp is for the year, but we consider it basically in the same range and kind of expecting similar results in fourth quarter.

Normally we talk to you later in the quarter with our results; we're only really a month in now, but I usually can indicate is there anything different about this quarter from our order file perspective? Not really.

We have a price increase announcement out, so it may take a little different shape as we get further into the quarter but we really expect it to be pretty much aligned with the first three quarters, up about that same amount. Maybe a little bit more, a little less, but no big change.

So again, the North American business, you can see the EBIT was actually down versus last year on better volumes. We are tracking the way we thought we would track with manufacturing, so the bringing new capacity on and the kind of resetting of some of our existing capacity to run more efficiently is going as planned.

I think last quarter I said it's a two or three-quarter project, so we're doing fine with it. The reality is it just cost us more than we thought this quarter. Maybe we should have been able to anticipate it better. You're optimizing around throughputs so you have higher freights, freight cost.

The startup costs are being optimized around throughput as well, so their curves look okay but their cost for the curve is higher than we anticipated, and with some of the resets in the plant, same thing. A couple of plants are lagging but as a general comment, the positive trend line at this point we were expecting, we do have a manufacturing.

We caught up on the order file, partly because of the positive journal line and partly because you get the lower demand around the holidays. But we caught up on the order file outside of our HLD trim product pretty much, say January 1. And then on the Trim product we'll be caught up say middle of February.

So we're working our way out of those problems and getting back into a free supply situation and expect to be in free supply next year. But it has cost us more than we anticipated. And of course, you probably already have seen we've changed guidance down and that would be the biggest driver of that change.

Next slide, slide 10, EBIT margin, and of course everyone knows our business. We're in the target range but for this type of market we should be at the top end or above that target like we have been in the last seven quarters. So again, it's reflecting the issues we had this year where we got behind on manufacturing.

When we did the drill-down we found out that the approach had drifted and was actually not delivering the reliability that we want in the plant, so we went through a fairly major reset plant by plant, started that in July. And like I said, in November we had two or three quarters left but we're confident we're on the right track.

And we're confident those EBIT margins come back up in the more normal range which is top or above for this type of market, which is a pretty good market. Obviously, it's not a high-growth market from a new construction standpoint but it's a pretty good market. Now to slide 11.

Net price flat, you can see it's kind of flat for three years, 2015, 2016 and now 2017. We did announce an increase as I mentioned earlier, market increase goes into effect April 1. So fiscal year 2018 we'd be back in a positive slope with the price chart.

The other side of this slide, top line growth, you see housing -- we don't have any complaints but it's flatter than what it was forecasted to be. Our growth above the market index has been good this year so no issues there for us. Next, slide 12, international fiber cement [indiscernible] and I think it's a tough slide.

AsiaPac has pretty much gone as planned. I think most of you know, about three years ago we made a big commitment to the Australian business with increasing investments in SG&A and increasing investments in capacity, so those are now starting to work for us.

So the Australian business has good comps, partly because they're getting a little bit more traction but also partly because they're going against that start-up comp last year on manufacturing.

Having said that, we think fiscal 2018 should be a year that we really start seeing the full benefits of both the extra SG&A and the extra capacity in Australia, so we're pretty optimistic about that. I go through the country walk-through in the next slide, but basically AsiaPac is pretty much where we want it to be.

We've got a little issue in the Philippines I think we flagged last quarter. So we go to slide 13. You can see Australian up on all three, volume, sales and EBIT. New Zealand, I commented last quarter, yes, it's flat on the EBIT line which we think is just a timing thing.

I think the business is pulling in the right direction there in their EBIT; improvements will start to show up that reflect the net sales improvements, the revenue improvements. The Philippines are definitely, we ran into a bit of a bump in the Philippines, new competition, import.

We're probably a little bit late to see it and we're going to work through it. It's not going to fundamentally change the market position in their business; we've added capacity; we'll be able to grow that business beyond what we have in the past. We think the returns are going to be good. But right now, the comps aren't good out of the Philippines.

Of course, it's a small part of even that division; it's a relatively small part. So not too much to worry about but certainly on the Hardie side we like to have all our parts working and all the business that we're in, we like to see them work and contribute.

The Philippines is still contributing but not at the same level that it has been in the past. And Europe, it's been a bounce-back year for Europe. We had a bad year last year and the guys have straightened things out and got into a positive, got some good, positive traction in Europe.

Now it's small business, obviously, but they've done a good job getting it back on track. Okay, I'll hand it over to Matt now for the financial review..

Good morning to those of you in Australia and good afternoon, everybody else. We're on slide 15, so group results for the third quarter, net sales are up 10%. Like Louis said, we had higher volumes in North America that were pretty consistent in the quarter with our yearly run-rate coming into the quarter so volumes looking good.

What drove international is really good volumes considering the market, but they're also getting a good price, both in terms of a smaller list price change than at the beginning of year, but they're getting a favorable product mix as well, and to some extent some region mix.

And so the combination of the product mix to the Scyon brand and the region mix is buoying up average net sales price for international.

Gross profits, for the quarter we're up 4%, gross margin rates were down almost 200 basis points and that's almost exclusively driving by the manufacturing performance that Louis mentioned in North American manufacturing for the quarter.

SG&A expenses were up 21% on a quarter-to-quarter basis, pretty consistent in terms of a run-rate so it's not as though SG&A is ramped up significantly more it's just it was depressed. A year ago, we were just getting ready to start the investment and the headcount additions that we made in North America.

There's also a little bit of foreign exchange losses in there but by far the primary driver there is additions we've made in the business and the investments that we're making in products, segments and marketing. Adjusted net operating profit was down 6%.

It's primarily driven by North America with EBIT being down, in North America, EBIT for the Group was down 10%. And you can see the next comment, the North America fiber cement EBIT was down almost 11% for the quarter. If you go to page 16, for the nine months, it's a pretty similar dynamic.

You can see for the quarter obviously, we performed worse than the first half, on some of the, on gross margin and on some of the EBIT and net operating profit growth. It's a bit more deluded in comparison to the third quarter but these are very similar stories.

So net sales increased 10%, again volumes for North America have been strong and sort of on track. And then similarly, international fiber cement market down with volumes up slightly and then price driving them up further. Gross margin rates are down almost about 50 basis points for the Group.

Again, similar dynamic largely being driven by North America and then that's largely been driven by manufacturing. The SG&A has been up for the nine months at 16% and net operating profit through the nine months was up 5%, largely driven by EBIT, up 4%, with not much happening between EBIT and net operating profit that's worth highlighting.

Slide 17 is the results of foreign exchange. It's been relatively stable, some variation throughout the year, that's what's highlighted in the chart, up and green. But it's more or less been in a pretty similar range. So FX translation is not as big of a feature in the result this year as it certainly was last year.

You can see in the lower right the translation impact is under $1 million on a net operating profit basis, or just over $1 million on a sales basis. So not a significant item for the year. On slide 18 is North America input costs.

We are starting to see several of our input costs trend up in the market, so the market price for pulp is up about 6% year-over-year. Cement prices have been up pretty consistently now for several quarters; we see them up about 5% compared to a year ago. Utilities are up, you can see gas and electricity are both up in that high single-digit range.

The freight market prices are down about 2%. Obviously given some of the capacity items that we're working through in the North America business, we've got some inefficiencies in freight as [Audio Gap] the normal home markets that the product is being made at. And so, but the actual, the market prices are down about 2%.

On page 19 a little bit more detail on the segment. So for the third quarter and the nine months you can see in the top for North America in the quarter EBIT was down about 11%. EBIT's about flat year to date. Obviously, volume has been good, price is down slightly but more or less flat. Where the leverage is being lost is really two or three things.

One is the plants as we have already mentioned, and the network, not running where we want it to run at the same time that we're incurring startup costs in the year to get additional capacity up and running. And then we continue to invest in the organizational capability and in some of the sales and marketing programs oriented around growth.

So we've tried to not make any kind of kneejerk reactions on the investment side, despite obviously the disappointment on the way the contribution margin and gross margins are playing out for the year.

And when you do that, obviously, it helps long-term performance and financials but in the short-term it compresses EBIT and that's what you're seeing in North America this year. On the international side, I think we've touched on a lot of them. For the third quarter, EBIT was up about 35%. Year-to-date is up about 22%.

I think as we mentioned, a lot of that is a favorable comp from a year ago with the Carole Park. We had quite a bit of startup costs in the prior year that didn't repeat. That being said, the mixed performance that we're getting in Australia and the team driving Scyon sales is certainly helping.

And then that's partially offset the international segment with the Philippines underperforming for the quarter and for the nine months. On slide 20, the other segments, I'd say not much has changed in the run-rate of the other businesses. You can see there's some improvement in the other businesses as the windows business continues.

We are getting traction year-over-year and that's helping to drive the losses down, but you can see we're still overinvesting in that segment and it's not cash flow positive yet, or it's not, sorry, EBIT-positive yet.

R&D, there's really no real change either for the nine months or the third quarter, it continues in the range of 2% to 3% of sales and the fluctuations are well with inside the normal variances.

On the general corporate costs front, we do continue to invest on the corporate side, and bringing in capability at some of the functional levels as well as at a corporate level to try to have the organizational capability and the people in order to be able to drive future growth.

And there is a small increase in foreign exchange losses but the primary driver of what you see is the quarter-on-quarter and the nine months on nine months change in growth is some investment that we've done in the organization. Slide 21, the effective tax rate is now 25.1% is what we're estimating for the year.

Obviously with the third quarter and the reduced level of EBIT expectations for the North America business, being that that's in a high-tax jurisdiction that has an effect on the adjusted, the estimated adjusted effective tax rate. So that's what you're seeing reflected there. Most of the other comments are pretty consistent with what we said.

Each of the quarters, we continue to pay taxes in Ireland, the US, Canada, New Zealand, the Philippines and we don't in Australia do the AICF deduction. On slide 22, cash flow is remains strong. You can see an increase in net income, especially when you adjust for the non-cash items year-to-date. There are favorable changes in working capital.

Some of that is timing, just the normal flows of when receivables and payables happen to get paid out and collected and the quarter points. But there is an underlying overall performance where inventory levels are at a more efficient level than they were in the past.

Obviously, with the supply issue that we had this year, and as a result you get a favorable cash benefit. We are working in the fourth quarter to bring those inventory levels back up to more normal levels. So some of that will come back, but the underlying cash flow performance is still very good.

And I'd expect cash flow from operations for the year to overall be strong. We are spending slightly more this year on maintenance CapEx. And most of the CapEx that you see so far is on projects that were effectively done or close to being done, and you'll see on a future slide that increased CapEx will be a feature going forward.

And then no real change on the financing side from our previous discussion. On slide 23, there is a lot of capacity work going on in North America. The third machine in Cleburne started up during the third quarter and has been on track and continues to have a good startup. We're happy with how that's gone so far.

It's early we're three months in, a couple of yes, we're about three months in at this point. But that team has done a nice job of both maintaining the performance of the base plant and ramping up the new line. We are continuing to start up the third sheet machine in Plant City and we're now doing work on a fourth sheet machine in Plant City.

The Plant City facility startup got off to a good start as we switched over to the Trim product, it definitely hit some bumps in the road. And now with another line coming on, that will be an additional capacity project.

It's an existing line so it's small-dollar investments, which is why we haven't noted it here, but it's nonetheless an additional capacity project. We have started work on the restart of our Summerville South Carolina facility that was mothballed during the downturn. We're on track to commission that plant in fiscal year 2018.

And we're in the process of continuing to start up both sheet machines in Fontana. So those North America capacity projects are all going on concurrently. Additionally, today we are announcing $121.5 million greenfield capacity project in Tacoma, Washington.

As some of you might remember, about 18 months ago we purchased the parcel of land that's adjacent to the existing Tacoma facility when it came onto the market with the expectation that we would have a greenfield capacity project there And that's what we're announcing today is that project.

The team is doing a lot of work to complete the engineering work and get going on the construction work and we would expect that we would commission that in the second half of fiscal 2019. And then we are continuing to expand the capacity of our Philippines facility. As you probably remember, that facility was very tight on capacity a year ago.

Obviously with some of the volume performance this year, it hasn't been as much of a constraint but we don't expect, we do expect that we'll need the capacity going forward and we're continuing with that investment.

So you should expect over the next several quarters that CapEx and capital expenditures will continue to be a feature of the discussion, and there'll be an increase of CapEx in future years compared to what they were this year. On page 24, no real change to the overall financial management policies of the company.

Our ratings of the agencies are unchanged from the last time that we spoke.

Our capital allocation priorities aren't changing but as you might expect, given that our top focus continues to be on investment and organic growth, a lot of that organic growth is in the form of OpEx through investing in the organization, but obviously also in CapEx as we're building out the plant network, particularly in North America.

And so that remains our top overall capital allocation priority. Number two is still the ordinary dividend and we continue to maintain the payout ratio of 50% to 70%.

And then number three is sort of everything else, wanting enough of a balance sheet and being conservative enough in our financial policies that we can be opportunistic should an opportunity present itself, and obviously weathering any changes from a market standpoint. Overall, the balance sheet is in really good shape.

We are still at a very conservative level of leverage, well with inside the range of one to two times adjusted EBITDA. I'm pleased with the weighted average maturity and our liquidity is good, so we're being consistent on the financial management framework, no change from our prior discussions. On slide 25, a little more on liquidity.

Again, the balance sheet is in good shape. We've got about $88 million of cash and about $411 million of net debt at the end of the quarter, 78% liquidity. No real change to the corporate debt structure, and you can see we're at the low end, or 0.92 on the leverage side.

But as many of you know, the third and the fourth quarter it tends to be at a low point and then in the first quarter it tends to be at a high point as the outflows tend to go higher over the summer as we make the payment to AICF and typically pay out the ordinary, the second half ordinary dividends about the same time.

So very much liquidity is on track. On slide 26 is guidance. As we've already mentioned, we've adjusted down to $245 million to $255 million. We're obviously disappointed by that; that's almost exclusively driven by the performance in the third quarter being below our expectations.

For the year, we see housing starts in the same range; obviously, it's not on the market side. Volumes continue to be good and perform where we expect them to perform. So with that, I'll close and we'll open it up to questions..

Thank you. [Operator Instructions]. Your first question comes from Emily Smith with Deutsche Bank. Please go ahead..

Good afternoon, Louis and Matt. Just a couple of questions from me. Firstly, Louis, just wondering if you can give us an idea as to the magnitude of the price increase for April 1? Another question for you Louis, and obviously, the production costs were higher than you expected.

Do you feel that going forward given the continued investment required that this probably FY '17 we might consider a bit of an unusual year from a cost perspective? And finally, a question for you, Matt, around CapEx, around expectations for CapEx given the capacity addition for FY '17 and FY '18. Thank you..

Okay, I'll take the price increase and the manufacturing. And then I'm going to pass it on to Matt for CapEx. On the price increase, it's not all, it's almost all of our markets, almost all of our product lines, but there would be some up-and-downs.

Right now we've got it calculated, it should come in at least 3% from our account basis versus fiscal year 2017. It may come in a little bit more than that. So it's kind of in the typical range when we take price, we're not aggressive price-takers and we weren't aggressive this year.

On the manufacturing, yes certainly fiscal year 2017 I'm hoping is an outlier as far as our manufacturing performance. But there are three components. We did lose track of our approach and should have been more on top of it, but we weren't we were late to see it.

We were getting pretty good unit cost numbers out of the network right up to about this time last year. And then we started to see some of the liability issues in some of the plans. We start talking about that, I think is starting in last February or something. When we really drill down on it, obviously you have normal variance in your network.

So right off the bat we probably don't think we have a problem. We think it's kind of more normal variance, but it kept going the wrong way. But then we drilled down in July, we just saw that we were our approach had drifted. We were too focused on the numerator part of the unit cost equation.

And we're losing our throughputs because we're blind on some basic maintenance in the plant. We had lost some of our organizational capabilities in the plant. And we just right there committed to and we need to kind of reassess and at least reset. And we did that through Ryan Kilcullen's organization.

It's been a ton of work, we're probably still early in the process as far as rebuilding capability and even on the catch-up side of maintenance. But we are heading down the right path. The other thing is, we're committed to a way different safety program also in July.

And there's some dollars that have to be spent to support that initiative that are being spent to support that initiative. I expect those dollars to go for two or three years. So that wouldn't be something that would come out in fiscal year 2018. But having said that, it's a smaller part of the increase by far.

The bigger part of the increase is how we run our plants, catching up on the programs and catching up on just the basic management capability on some of the plants. We've covered the start-ups….

Sorry..

Yes, go ahead..

Are you able to quantify the cost of that catch up on the program? Has it been….

I'll let that question go to Matt if he wants to just give you a little bit of an indicator on that. But the other part of it is, when you're starting up a line, if you're in free supply, you can cost optimize your start-up.

Basically, when you try to do that, is earn as much per dollar as possible, so your runs are fairly short, your downtime in between runs are fairly long and your organization are testing equipment, identifying things that have to be resolved, shutting down, taking care of them, starting off a short run.

We haven't had the luxury, unfortunately, of cost optimizing our start-ups. We had to throughput optimize them, meaning we were short on customers, so the runs were longer than they would have been.

So even though you're making board at a higher unit cost and you're running through a few issues as you do that, you're getting more board for your customers.

So we definitely see, Cleburne's done a good job, by the way, of starting to get back to more of a cost optimization approach and with the start-ups we have in fiscal year 2018, we think we're going to have the luxury of shifting fully back to cost optimized.

So your first question do I think fiscal year 2017 is an outlier, I actually do think it's an outlier, but it's not like an event that just happened on its own. Unfortunately, our management kind of approach slipped and we had to pay the price for that. We're definitely getting it back.

We've learnt some things that I think will be important for us in the future, not only about keeping better track of what we're doing, but also, we probably have improved our approach in a couple of areas because we've had the issues.

So I'm very confident that fiscal year 2018 is going to be a better year than 2017 from a manufacturing standpoint, but I don't think it's a one-year kind of capability build.

I think 2019 will be better than 2018 and I think that will reflect going beyond what we've been in the past, where 2018 will be just getting back to where we have been in the past. So I'll go to Matt on CapEx and whether he wants to give you any examples on how they cost on the manufacturing side breakout..

Yes, so just on the manufacturing costs, but specifically on the programs, it comes in a couple of different forms. Obviously, you get some OpEx, which is pretty inconsequential, it's probably $5 million plus or minus a bit. But you also get it on, sorry, that's on the OpEx side, but you also get it on the CapEx side.

So part of the safety program is reinvesting in non-routine maintenance in the plants. It's infrastructure products, it's addressing things in the plants like lighting or infrastructure or just things that we should be taking care of that we weren't. Obviously, that doesn't all immediately flow through the P&L.

So that's probably another $5 million plus or minus. So incremental programs are probably in that $5 million to $10 million range, which is a pretty wide range. So it's a driver for the year, but it's not the driver for the year. On capital expenditures, this year you can see what we've spent so far on slide 23, year-to-dates are on 59.

I think this year we'll end up north of $125 million. Obviously, what we've announced over the next couple of years, that will ramp up significantly. I'll provide kind of wide ranges because some of it will just depend on the timing of the outflow.

But for fiscal 2018, we're probably going to be north of $275 million of CapEx and in fiscal 2019, it'll probably be north of $200 million of CapEx. When we get to May and obviously August, I know this will be a continued discussion, but we'll start to tighten those numbers down a bit. But I think the key point is it will definitely be elevated.

We'd expect the non-capacity related CapEx that you see today. It's probably increased a little bit as we continue to invest in the plants on safety and infrastructure, as well as just the normal business as usual items.

And then the real feature going forward for the next couple of years will be the capacity in not just the Tacoma project that we've announced and wrapping up the Summerville project, but there'll be additional extension projects that we're doing work on now.

And we'll start doing more work on, we'll continue to do more work on, over the next six-or-so months..

Great, thank you..

Thank you. Your next question comes from Ramoun Lazar with UBS. Please go ahead..

Good afternoon guys, just a couple from me. You mentioned you're sort of catching up on the order profile in January and the coming weeks. Just wondering where you expect PDG to get back to in the coming quarter or quarters.

And then also just cognizant of the fact, I think you mentioned last quarter manufacturing issues cost you about 2% on volume growth.

Then just one for Matt on the SG&A, should we be assuming that your annualized SG&A costs are around $70 million per quarter?.

Okay Andrew, I'll take the PDG question. I mean obviously, we look in reverse, like DVC. And normally in the business we go back four months, go back 12 months, go back 24 months. Twelve months look back, it's pretty good. We're kind of in that target range we want to be. Go back 24 months, little bit less than that.

Kind of what I think on PDG, I think we had a good bounce back year and broke above the index. But I also see some areas that we're not fully addressing growth opportunity. We obviously are trying to change that and we've got some new programs in place. We've got some a larger emphasis on some areas that I think we're missing a bit there.

So I feel pretty good about PDG, but I wouldn't want everyone to get infatuated with our fiscal year 2017 growth above the index. Because I think it's kind of dangerous to just take four quarters and say hey, that's what's going to happen in the future.

I do believe we're approaching that target range and we'll kind be like what the EBIT range will be in our target range more often than not. So I think that's what we'll look like going forward. As far as the volume growth, 2%, yes, I don't know. I guess we gave you an estimate.

Of course we've debated this internally how much of that volume got deferred versus how much it had to go somewhere else. We don't have an exact number.

I think the reality is for us, we need to go back to our customers, make sure they understand there's supply fiscal year 2018 and forward and any of the customers, that they'd go to alternative materials when we were short, give us a look and we get back as many of those customers as possible.

We are out of the problem now, I said middle of February for HLD trim but I think most of the market knows that within a couple of weeks being out of the [indiscernible] as well, so I don't expect that it'll carry forward, but there is some earn back.

As far as SG&A, Matt, do you want to comment on the SG&A?.

Yes. So I mean would expect to continue to invest in fiscal 2018. Even if we weren't investing, you'd still expect 3%, 4%, 5% kind of increase in SG&A pre-investment. That's just doing some wage increases as market wages continue to climb.

But we are continuing to invest in the organization; we're putting resources in the plants, we're building more central capability in the operations team and Ryan Kilcullen's team so we can avoid some of the approach issues that we've had this year that have obviously cost us during the fiscal year.

Then obviously, we're going to continue to invest in growth-oriented programs. We feel good about the selling resources that we put into the business, in the North America business this year, but then there are programs that are segment, product specific. So I'm not going to provide a specific number of where SG&A is for next year.

Obviously, we're not ready to do forward guidance, but that gives you some framework to work with, that there's the normal inflation of 3%, 4%, then on top of that there's some incremental investment that's oriented either around growth or putting capability in place to support growth..

Okay, thank you..

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

Good afternoon gentlemen, a couple of questions on my end. The first one, just around the growth rates across different products, please Louis, exteriors versus interiors and also how trim is tracking now and whether that's penetrating the market at a faster rate than exteriors.

Then just another point on pricing, on the flipside of pricing there's obviously rebates, just where rebates are sitting at the moment and whether you're offering a higher level of rebates to try and really ramp up that PDG in the coming quarters and years. Thanks..

Yes, Keith, so question on growth rate of exterior versus interior, exterior is growing quicker than interior. Interior has had a good year; they'll be up five-plus or something like that, so a little less than half of what the overall business is.

Since you know the splits, roughly know the splits between exterior and interior, you can come to our exterior growth rate by factoring that in. But both, basically all of our both our main product lines, if you think exterior interior, they've had good years' growth wise.

Trim specifically, we've been out of trim in the south, which is our biggest trim market since early summer. So we didn't get an opportunity to grow our HLD trim product line like we could have.

So we've been just on tight allocation of that product line making sure the product got to the customers that needed it the most for projects that were already committed in that. So I think we'll come out and should in 2018 back in growth mode on HLD trim.

Then the other trims, NT3 okay in the mid-west, less in the north-east, [indiscernible] but not much of a story there and not worth talking about. It's just kind of let's say you know you said is it growing faster than siding product line or slower, I'd say it's kind of in the same range.

So our attachment rates not really changing dramatically with the NT3. West Coast, same thing, with the BHP pipeline. So we still have a lot of work to do with trim. Our product portfolio is not it's got some gaps we still have to take care of. We've taken care of some of those gaps over the last several years itself.

But we still have some gaps that remain if you're going to hit all your users. As far as rebates, rebates are higher for a couple of reasons. One, we use rebates as the main lever for tactical pricing. So the big builders have grabbed mortar starts and the big builders get more than their share of the rebates in new construction.

So just them grabbing mortar starts means our rebates go up, which is fine. We've got a good position with big builders. We think we've got to position at the right level price wise. So it all works, but the number does change. And then similar thing with some volume dealers, been some consolidation at the dealer level on the US.

And so our volume dealers have been growing quite a little quicker rate than more of our independent dealers. We support the two different types of dealers differently, so the volumes that are more interested in the price of the product and maybe a little bit extra and back and rebate.

The other dealers are more interested in can we help them with creating demand or a supply chain that allows them to participate. And then finally there were some rebates used in competitive situations, whether it be against one of the close alternatives, whether it would be a wood product or a fiber cement product.

But that's kind of the three things there. I think we can do a little better with our tactical pricing in the future, but we don't have a problem, we just had some as I said, mix work against us that has been a large part of the change..

Okay, thanks Louis. So just a quick follow-up on that one. So in terms of the 3% to 4% price increase you're implementing this year.

What do you think would actually flow to the bottom line on a net basis?.

Yes, that might be a bit optimistic, so you might want to put a little discount on it. But I think our net increase will be pretty close to our gross increase. So if we get a 3% growth, I'm expecting a 3% net.

That could be fraction off, but I'm not expecting, well I don't know, I mean I'm not that good a forecaster obviously, but I'm not expecting this mix problem with the big builders and the consolidation with the dealers, I don't expect another big shift there next year..

Thank you. Your next question comes from Peter Steyn with Macquarie Group. Please go ahead..

Morning, thanks gents, or should I rather say good afternoon. Quick one just on Tacoma, if you could give us a sort of sense of what drove the decision to add capacity in that market as opposed to some of the others that you have been considering.

Then just on start-up costs, Louis, you mentioned that from a capacity point of view you'll be in the clear going into FY18, just curious on start-up costs.

There's obviously still a few in the system, do those wash out? So do you enter FY18 with a relatively clear slate from an operational cost point of view relating to those start-ups?.

Okay. Tacoma, why Tacoma? Yes, we have a national network, so some of our plants shift pretty long radiuses and a few of our plants shift very tight radiuses because they don't have capacity to serve the local market. Tacoma would be one of those plants that shifts a very tight radius.

Then other plants coming in for board in the Pacific north west for us, so that would be Reno and Peru, Illinois that goes in there with some board. So the opportunity in Tacoma is they can take care of their local market and those plants exporting in, on a deliver cost basis, our higher cost board in the market, so we take that out.

The other thing is, I think Tacoma can usually push down when Northern California want more board, so Northern California is a pretty good market for us.

So we just balance the network, like obviously you would never bring three different plants on at the same time just for shipping radius, but when you do bring a plant on, you look at the net effect across the network from the shipping costs or shipping radius.

We're looking at something in the north east and something in the mid-south, we'll do them both, but even now you can't quite tell which one will you do first because they're a pretty close call on as far as our overall freight number drops.

So it might be driven by when can you be ready first, what's the total cost of investment in one versus the other. So it becomes an incremental decision after you get through the freight.

So Tacoma won because of the freight and it'll probably end up being that something similar will emerge where you'll tip either towards the north east or mid-south as we get closer to those projects. But we're working to get them both ready so we have that choice if one is preferred over the other from which one's first.

As far as start-up costs, so we're going to start Summerville next year and we'll finish up Cleburne, Plant City I would hope would be near finished up, so the big difference will be the number of start-ups going on at the same time.

But the other thing is, I commented earlier, we feel strongly we'll be able to cost optimize these start-ups rather than throughput optimize them and that'll help us as well. So as far as having a clean slate, we will have start-ups going on, but I don't expect them to be of the same magnitude of costs at a bottom line that we did this year.

I hate to do it because it was a management mistake. I will remind you our problem this year was we had our equation wrong as far as when we needed capacity because we just had it too tight. Then when our plant started underperforming, we quickly got very tight on board. And we had to really accelerated start-ups. So that was the big cost for forward.

Now if we didn't have that problem and say we got through this year okay and we would be starting up Cleburne, maybe starting in May or something. So we pulled that start-up forward so theoretically fiscal year 2017 has more start-up in it than we would have planned in fiscal year 2018, to your point it has a little less than I would have planned..

Thanks Louis. Sorry, can I quickly flick one more in, just around CapEx. Matt, I suppose the broad expectation is that your base load CapEx is somewhere in the $80 million to $100 million mark. So the profile that you mentioned at $125 million for the full year that would imply that we've got a fairly big fourth quarter ahead of us.

Then $275 million for 2018 and $200 million for 2019, those are pretty big numbers in the context of the $120 million for Tacoma.

I'm just trying to understand how those pieces of the puzzle piece together?.

Yes. So for fiscal 2017, obviously with the announcement of Tacoma, we'll have some of the costs that we expect over the next 60 days as we were eager to get going and get some of the equipment ordered. So that's number one. Number two, we lease the land that our Waxahachie facility is on and we're looking to buy that piece of land.

And we think that that will likely hit at some point over the next 90 days. We expect that outflow will occur. It's about $16 million, it's a good economic tradeoff for us.

And so those two, some money for Tacoma and the Waxahachie added to the $60 million, plus just the normal fourth quarter run rate is how you go from the $60 million to the number I gave you for fiscal 2017. Obviously, the bulk of the Tacoma expansion is sitting in fiscal 2018 and 2019.

But we've talked now the last couple of quarters and Louis just mentioned, our intention is to also expand in the north east and mid-south. That will come in a couple of steps. We've got teams actively looking for sites in those two geographies. And as soon as we identify a site that we think is attractive, we will look to buy that land.

Then during fiscal 2018, you should expect that we're talking about one of those two locations as another expansion project for later in fiscal 2019 or 2020. And so some of those funds that I've included in the forecast are earmarked for either north east or mid-south's expansion on top of the Tacoma expansion that we've already announced.

So there's a fair bit of capacity work that is going to get done so that we can stay ahead of demand and build back the insurance that we should have had in the network a year ago to avoid the problem we had this year..

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

Thank you, just questions around price.

Louis, just to clarify, the 3% to 4% price increase that you're talking, is that an average weighted kind of price that we'd expect to see flow through or is that an announced price increase on exteriors, for example? Then I guess one question around price, the guidance for fiscal 2017, obviously with price increases coming through April 1, you'll see a bit of forward buying into the fourth quarter, just wondering if your guidance allows for that..

Okay, so on the price increase, we have taken increases in both exteriors and interiors. The 3% to 4%, which I must have said, because a couple of you have repeated it, I want you to think about 3%, but I think it's going to come in higher than that. If it comes all the way up to 4%, I'd be surprised.

When we take a price increase, we do it market-by-market, so there'd be some markets, well, there'd be a few markets where the increase, you couldn't even see it. It'd be smaller, maybe just a couple of products and there'd be a couple of products where the increase would be small.

But generally, the business as a whole, interior plus exteriors, is expected from an account basis next year to be three plus for a market price increase. .

Okay. Yes. Thanks. That's clear.

I just guess on the guidance maybe, Matt?.

Yes. Yes, we do have that built in into the guidance number. We, because of the way the network this year has run and being tight on supply, we think that the overall impact as a result of the announced price increase will be smaller this year than it has been two years ago, for example, when we last announced a price increase.

But nonetheless, there is some pull forward volume that we're expecting as people take, as customers take advantage of the allocation that we've put in place. So, but that's already included in the guidance range we gave today..

Okay. Thank you..

Thank you. Your next question comes from Kathryn Alexander with Citi. Please go ahead..

Hi, guys. Firstly, just a question around the senior executive search. I'm hoping you can provide a bit of an update in terms of how many of those positions are still vacant and needing to be filled. Then just a question, I guess, following up on the price increases.

Given the sort of inflation that you're seeing in wages and import costs, do you expect the price increases to offset that net-net?.

Okay. Yes, the second one, we didn't take an increase, market increase, last year, so when you think of our increase running just about 3% over a two-year basis, it goes, it does cover your normal inflation in your business. That's not how we price, but it would cover that.

There's probably just one year's, one year worth of those increases, then probably the 3% exceeds that, but like I say, if you're going to look at it that way, you've got to look at it since we took our last increase, the 3% probably covers the inflationary items in the business model. I'm glad you asked me about the senior executive search.

I meant to cover it in my overall comments. So, yes, we definitely have some news on that point. One is I think a lot of you people know Mark Fisher. He's been with us 23 plus years. He's been on the GMT probably the last, I don't. I should have looked, but probably the last eight or nine years.

Mark currently has responsibility for R&D and our business development outside of fiber cement. Mark did give me notice over the weekend and it became official on Monday that he wanted to resign. He's looking to do other things. So he will be leaving the business April 1. So kind of how that kind of plays into what we're doing with the senior team.

First, we did identify three positions we want to recruit externally for. Those were head of HR, basically head of sales marketing in the US business and international. We've we do have a new head of HR, Kirk Williams, starting in the business January 3. So he's still in the onboarding process, but we're pretty happy.

We've taken a very positive step forward there with the things we want to do organizationally. I think Kirk kind of brings a lot of that with him to the Company and we're looking forward kind a benefiting from much more more of a leadership approach in the HR than we've had in the past. We probably have had HR support in the past.

And we're aiming for HR leadership and I think that's exactly where we're going to end up. The next search priority-wise after HR was international. I'd say we're through the we're about two-thirds of the way through that search. We do have a preferred candidate. Obviously, he hasn't joined the Company yet.

We're both in the process, especially on his side to encourage them to do the due diligence and make sure he really understands the Company and everything before we make him an offer. So he is our preferred candidate. If we bring him on, I'm going to be very pleased.

And if we don't, we've seen some other candidates that I think kind of fit what we are looking for to brief. We're looking for an international. But like I said, hopefully we're well down the track there where a preferred candidate does join the Company. Head of sales and marketing in the US, also a GMT position.

We're just coming into first round interviews on that search within the next couple of weeks. The searches have been taking us about 90 days, so I would be hopeful that we can have that individual in the business within 60, 75 days from now.

Then when we will backfill for Mark with a GMT position leading up our technology, both the fiber cement technology, which is obviously critical to the current business model, and our investment in non-fiber cement technology, which started about six or seven years ago.

And originally focused on coatings and has been expanded to include fiberglass and some composites. We see that as an important point of our technology going forward. So we'll be looking for to recruit. That will be behind the head of sales and marketing. So say, there's a possibility that could be an internal choice.

We think we have some internal capability in the R&D area that we will consider. But we're certainly going to look at the external market for that position as well. So that's kind of where we're at. We actually feel pretty good about where we're at and kind of reshaping the senior team..

Thank you..

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

Hi. Just a question on depreciation, if I may. Perhaps just one for Matt. Obviously, the depreciation charges stepped up this year as CapEx has accelerated, so I guess I'm just wondering if you're expecting a similar step up going into 2018.

I know you mentioned that your expectations are for the purchase of the land in Waxahachie, but outside of that, if you could just give us a sense of how that might play out, that'd be appreciated..

Yes. I would expect a smaller step up in 2018 and 2019. Obviously, what's driving a lot of our fiscal 2018 CapEx will remain on the balance sheet until we start up those projects, really with the exception of the maintenance, which is shorter term in nature and the BAU, which obviously is shorter term in nature, and as you noted, the Waxahachie.

But certainly, most of the Tacoma and any of the land purchases that we were to do in either of the two new locations or any of the pre-engineering or construction work for either the north-east or mid-south sites, I mean, none of that would kind of flow through within the year.

So the bump up this year largely had to do with the amount of capacity that we brought online throughout the year and as we move through commissioning, we start depreciating those assets, so I would expect there would be a step up again next year. I don't think it'll be to the same order of magnitude as you saw fiscal 2017 compared to 2016.

I do think it'll be up a bit. Obviously with the higher amount of capital expenditure that we're expecting in fiscal 2018 and in the out years, you'd expect depreciation to continue to step up as the plant network expands..

Thank you. Your next question comes from Michael Ward with Nikko Asset Management. Please go ahead..

Hi. Louis, it's probably a question for you. You've obviously outlined Tacoma. You've outlined something in the north-east or mid-south.

At that point, is the network sufficient to service sort of a mid-cycle housing market of maybe 1.5 million starts or do you think there's probably more capacity required over and above that?.

Yes. I mean, there's more capacity as our market share keeps picking up, so, yes, your housing starts ticking up and, yes, you could, market share picking up, so, but we probably see only one more site, so obviously, expansion of existing sites would probably be the next more rather than more sites.

So that's it and Matt's given you the guidance, big numbers. We've talked about basically three new sites. Tacoma's a sister site to our existing site.

So we get kind of a weird message, right, hey, we're not running, we're not having as a good a year as we want to have, but we're going to invest a lot in this business, because we're seeing what we want to see. That's exactly how it is internally. There's a lot of frustration, as you know, as far as just taking care of the business every day.

We kind of lost sight of a few important things that we've had to pay a price for this year. But on the growth side, we've done well. Like Matt says, kind of every, always have a bit of overreaction, so we're trying to guard against that. But we've learned our lesson this year. We're not going to cut capacity tight.

So we want to get extra capacity in the system to allow some growth spurts in the future, whether it being housing [indiscernible] spurts or more likely market share spurts. So yes, we go to Tacoma, we go New England, we go mid-south. That's probably all in the next three to five years.

And then behind that you probably go second-line somewhere in mid-south and New England. Maybe a Colorado plant shows up at some point, maybe it doesn't. But at this point, I'd say if you thought five to seven years out, you're probably thinking those three new sites take care of this and you may have multiple machines in one or two of the sites..

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

Good afternoon, Louis and Matt. Just a quick question from me. I think you gave Louis, you gave a little bit of like, some broad guidance on the call last quarter around FY'18 volume growth and price. That was quite strong guidance.

Are you still comfortable around that level for volume?.

I can't remember if I gave you a number, but I would like to maintain our existing momentum in the market. I kind of flagged earlier that I think in order to do that, we've got to have more programs in place next year than we have this year.

Sean Gannon's group are working with Mark Wallace's organization, mainly in bottom markets, to make sure we get there. And then price, price we've covered, so that's there [indiscernible]. I think Emily started with the question please tell me fiscal year 2018 manufacturing costs are going to be better than 2017.

And we certainly feel that'll be the case. So yes, what I said is we're expecting a bounce back year next year from a bottom line perspective. But expecting it and delivering it you guys. We thought we'd do better this year, so we think we're going to do well, but I think it takes our organization's full commitment to kind of deliver that.

And I think we have that obviously, but we'll be looking to put some runs on the board early in the year next year..

Just one more. Given I guess your long-term target, this goes on from Michael's question just previously, your 3590 target. You're obviously going to be adding capacity that you've talked to.

How do we get more confidence that I guess the inefficiencies that we've seen come through in the last couple of quarters ratchet you seen in ratcheting improvement near term?.

Yes, I know it's tough, because you guys I think rightfully think of Hardie as a good manufacturer and we are a good manufacturer. I mean, we're lights out for our category, being fiber cement. We're ahead of everyone else that tries to do what we do.

But we also kind of like to see us benchmark well against other more established categories, something like gypsum board paper, roofing installation and that. We got to knock some of the variance out of what we do. And part of the variance is there for good reason. And that's we're changing things a lot. We're still evolving as a technology.

Certain things we use are, aren't that [indiscernible] has only been around. I can't even remember how long, but say in the last six years or so we go into [indiscernible] which is very different technology than [indiscernible]. We use a lot of embossing now. We do way more density modification. We're trying to do better surface technology.

So part of the reason we have the variance is there's a lot of new stuff that kind of gets introduced to the manufacturing class that we don't talk a lot about. That would include additives. We manufacture some of our own raw materials in the plants now.

So some of the variances, just because we're always doing something new and our plant organizations have to kind of absorb that and build that new capability, but some of it is, in this case, we just lost track of what makes us do well; so what are the key drivers of good manufacturing performance in a fiber cement plant? I think we got a little bit over-confident and start pushing budgets rather than, started pushing the what more than the how.

I think Hardie has always been a good how you do things company and it's paid off for us, and obviously part of our reset has been getting back to that. It's not, just not what you're going to or how you're going to do it and track it and make sure it's going the way it should go.

So maybe in the September tour [indiscernible] can kind of show you guys the kind of variance we're used to long term and then show you the kind of variance we had this year and where he's at in September. I'm sure it's going to be a good story.

It's already starting to shape up as a pretty good story and I'm highly confident that maybe not by September, but by some point in the not too distant future, say, a year, a year and a half out, the amount of variance we have in our kind of network will be a, really, a large reduction of what we, just a fraction of what we've had even long term.

So I'm quite optimistic about the approach we're taking on the manufacturing side, but I'm paying the bills. So it's not easy seeing the EBIT performance like we had this quarter, but like we say in the business, it's a senior team, hey? We've just got to stay the course. These aren't, well, most companies would be happy with these numbers.

We're not happy with them, but we're not unhappy enough to really change where we, what we want to do with this long term. So we're just staying the course. We're going to let, we're going to post the numbers in this case.

We're posting some numbers we're not proud of, but we are proud of the work we're doing there, and I think the reset is going to be a really, it's going to be good for everyone involved over this period that we're trying to climb the market share chart. So that's where we're at.

Maybe we'll show you some more in September or, some of you guys with your models can probably see the fluctuations, going to watch the input cost obviously. Input costs are now starting to be headwind. In the early part of the year, they were tailwind for us, but we'll show you something in September.

I don't know how to show it in a quarterly result, but on that tour we can do a little bit more..

obviously, there's been a few changes at the executive level that we're, we've been made completely aware of. You're talking to you have sort of lost track of what you do best.

Is, has there been changes at the plant levels as well, Louis, in the last 12 months?.

Yes. There are changes at the plant level. Yes. There has been changes at the plant level. Hardie's always had, and I guess we covered this in September a bit, we've always had lower retention that we want. We've always delivered fine. We've always delivered business results despite the lower retention, but it's just becoming too much work.

So our organizational efforts are really important right now. And that's recruiting development and just some small shifts in our culture that we think will all lead to better retention and higher, just more organizational capability. So at the plant level, we've had changes.

And I think right across Hardie, I think Hardie is going through a little bit of an organizational reset. And so some of those changes are about the organizational reset. And we definitely want to do things in a different way going forward than we did, say, 10 years ago. Now, you'd say well, what about how you did them two years ago? Yes.

I want to do them, I think our organization needs to operate differently than the organization operated two years ago. So that's why we're importing some talent on your senior team, we're importing some talent on the senior teams, direct report teams. And we're importing it at the plant management level, so, yes, we're in the middle of a reset here.

How long does it take? I don't know. I mean, when the senior team obviously are running, we're running open roles. We'll fill those sometime halfway through the year or something like that. Everything will be filled. We're not running open roles necessarily in other parts of the in the plant organization, plant management organization.

We do have one open role as a plant manager. But we're getting an experienced plant manager actually in that plant on an interim basis. So, yes there's a bit of an organizational reset going on at Hardie and it's probably going to take two or three years.

And we think like everything else, whether it be product line or programs in the market or whatever it's needed. If we want to go to 3590 it's needed. We're committed to it and we've just got to make it work..

Thank you. Your next question comes from Christopher Knightly with CLSA. Please go ahead..

Good afternoon, gents. Just wondering with the North America, you're saying that you expect to see the margins increase in FY '18 as inefficiencies decline.

Do you expect to see that dip again as we see more startup costs coming through with the plants in FY'19 and beyond?.

Yes. I mean, it's hard to, we should have been at the top end of our range or maybe slightly above it this year. And I would expect next year we'll be there. So there's a lot of moving parts, input costs, new capacity coming online, market demand.

I mean, housing is pretty, I don't know how all of you read our housing market over here, but it's pretty flat, which is good. It's flat to slightly up maybe 3% or 4%. So then, I mean, things can change. But, I'd still expect, we don't belong where we're at in the EBIT range right now and I don't think we'll be there next year.

So there is a lot of factors that go into that, but I just don't see it playing out again next year..

Okay.

What about the FY '19? Do you think you'll see a drop again?.

No. I think with 2019. As long as the market's good, meaning housing market's good, we should be at the top end of our range. The range is really really set up to where when the market isn't that good, we can still kind of be at the bottom end of the range.

So the bottom end of the range is not designed for a good market unless there's super heavy investment going on in SG&A and we don't have that planned for the next two years. So anyway, we expect to live at the top of the range as long as the housing market is good..

Thank you. That does conclude our question and answer session. I'll now hand back for closing remarks..

Yes. No, no closing remarks. I appreciate everyone joining the call. Thanks, and we'll see you guys maybe in person in May. Thank you..