Louis Gries - CEO & Executive Director Matthew Marsh - CFO & Executive VP, Corporate.

Ramoun Lazar - UBS Investment Bank Emily Smith - Deutsche Bank AG Peter Steyn - Macquarie Research Simon Thackray - Citigroup Andrew Peros - Crédit Suisse AG Keith Chau - Evans & Partners Pty. Ltd. Andrew Johnston - CLSA Limited Brook Campbell-Crawford - JPMorgan Chase & Co..

Thank you for standing by and welcome to the James Hardie Quarter 1 Financial Year 2018 Results Briefing Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker, Mr. Louis Gries, CEO. Please go ahead..

Thank you very much. Hi, everyone. This is Louis Gries. I'm in Dublin with Matt Marsh. We'll walk through our quarterly result pretty much the same way we do every quarter. So the slides are being flipped in Sydney, so I'll call out slide numbers, Page 2, Page 3, Page 4 and there's our agenda on Page 5.

We go to Page 7, that's the first slide I'm going to talk to. Obviously you can see our financial accounts were negative versus same quarter last year. This was driven by poor performance in the U.S. You can see the bullet points below. The first 2 relate to the U.S. and we'll talk through the U.S. in some detail.

So I'll just cut through those 2 bullet points. The third bullet point kind of just highlights we had a good quarter internationally. And along with the other financial metrics, cash flow was down a bit. And final point, we made the contribution or payment to the AICF consistent with the [indiscernible] and that was $102.2 million.

Slide 8, it is the first slide on the North American business. We'll go to volume first. So flatter than I think most people would expect. It was pretty close to or flat to the market index in exteriors and then we had a negative comment -- negative comp in interiors. The negative comp in interiors was driven by two things, one, we reset price April 1.

And we basically experienced the same thing pretty much any time we take a price increase in interiors which is driven by -- to a large extent, driven by retail business. And you normally kind of lose volume after a price increase and you got to work your way back. And we've been doing that. But for the quarter, we would've been down.

The other thing we did is we had reviewed our product line profitability and our segment profitability earlier this year and we discontinued our 4 by 4 G2 product line which was not a tiny product line for us. It was a small product line, but it didn't hit a profitability hurdle. And same thing with the gypsum segment.

That product line went largely into the gypsum segment and most of that segment was that product line so exiting one meant we exited the segment as well. On the price, the price was good. I think our guidance has been 3, 3-plus based on our market increase we took on April 1. That's kind of how it came out. We got a little help on mix.

The market increase fully came through, maybe a bit more than we were expecting but not significantly more than what we were expecting. As you know, the story in previous quarters has been manufacturing and that was the biggest driver of the poor financials relative to targets this year.

We had foreshadowed that we're going to kind of work our way through our manufacturing issues over a 2 or 3 quarter period and that we felt, in fiscal year '18, we'd be better as we went through the year. We do have that positive trendline where month-to-month unit cost is improving.

I think it was 5 out of last 6 months we had a decrease in unit cost. We're still incurring a relatively high freight because of the product shortages we had. So the delivered unit cost, when you comp at the last year, is still quite a bit higher. Having said that, I think we're on the right track.

We're through some of the big startups that were putting a drag on the financials. Notice our Plant City, Fontana which I'll probably comment later on Fontana, it's through its startup.

But where we're at capacity-wise now, we have brought Fontana down to running 1 line at a time until they can get their efficiencies on those lines up to where we need them to be to fit well into the network. So even though we're through the startup, there's still some work to do at Fontana. Cleburne startup went very well.

Now the new startup we have that did hit the first quarter was Summerville. But that's a single startup at this point, so it won't have the same kind of impact as the various startups we had last year. But we do need to work our way through that startup and get into our target range for unit cost in Summerville. So that kind of covers manufacturing.

I'm sure I'll get some questions. But we did foreshadow last result that our order file was soft.

It is still soft, so there's no doubt we're having to work our way back on basic customer demand coming out of the period of shortage which resulted in allocation, longer lead times in multifamily and, until just recently, a service position that was below expectations for both us and our customers.

So we go to Slide 9 and you can see the impact over the last couple of quarters. We're at the bottom of the range. Obviously this kind of market, first quarter, we wouldn't expect to be at the bottom of the range, although we did kind of foreshadow that's what this year was going to shape up like.

We probably had a little bit more volume factored in the equation when we did the results last time. So it's a little bit short of what we expected. But from a manufacturing standpoint, it's kind of going in the direction we thought it would.

It may take us an extra quarter or so to get right into the targeted range on unit cost, especially when you look at it on a delivered unit cost because even right now we're still experiencing higher freight than you would in a free supply situation. Let's go to Slide 10. It shows the -- obviously, the impact of the price increase.

And like I said, price increase came fully as expected. A little bit of mix frees up the floor. And then top line growth. So I guess, I should bring this back to the calendar year because we did have the price increase moving volumes around.

So calendar year was more like 8, better than that in exteriors, but certainly the quarter was only about half that in exteriors. So we're experiencing weaker demand. There's no way around that. And obviously, we're refocusing our efforts now that we're back into a service range that is more acceptable to our customers.

We're back focused on winning whatever business we lost during the shortage from whoever picked it up. Slide 11. Like I said, international we had a good quarter, pretty much the volume, price, revenue and EBIT are all kind of in the -- sales and EBIT, about the same range as far as improvement.

We get there -- as we go to Slide 12, we get there with a strong quarter in both Australia and New Zealand. Philippines, I think I commented last time about some more share competition. So there's been a bit of work going on in the Philippines as far as addressing the segments specifically rather than the market as a whole.

So that work's being done now. Sales were down as a result mainly on the price side. EBIT was down again on the price side. And volume up, obviously, you see the arrow on there. Europe was down on all 3 but not enough to worry about, so just very incrementally down. At this point, I'll hand it over to Matt to go through the financials..

Yes. Thanks, Louis. Slide 14 and it's the first quarter group results on a consolidated basis. You can see we reported sales of $507.7 million which was up 6%. And Louis hit the highlights already of these key drivers.

Average net selling price in both North America and international and higher volumes in both regions, although not as high in North America as we expected them to be.

Gross profits down 4% and gross margin percentage down about 370 basis points, primarily as a result of the continued delivered unit cost compression that we're seeing that we spoke about already. SG&A expenses increased 2%. As you'll see, they're up slightly more than that.

There was a gain on a building disposition that we did, unrelated to any of our production facilities. Excluding those gains -- that gain of about $3 million, SG&A's probably up 3%. And the business units, we're continuing to invest in organizational capability, labor as well as marketing programs related to future growth.

And adjusted net operating profit for the quarter of $61.7 million, down 7% from a year ago, primarily as the result of North America Fiber Cement EBIT decreased about 16% versus the same quarter a year ago. On Page 15 is the change in Australian dollars on FX.

You can see on a percentage basis, really no material change from an FX translation on sales, profit or adjusted EBIT. A 1% difference on adjusted net operating profit, but you can see the Australian dollar to U.S. dollar exchange rate relatively stable over the last 30 days -- sorry, 90 days. On Page 16, you can see our quarterly U.S. input cost look.

Almost all the input costs are up to varying degrees. You can see pulp is up about 12% versus the prior corresponding period. Cement's up about 6%. Freight is up -- from a market standpoint, freight rates and fuel are up about 10%.

In addition to that, we're obviously incurring freight inefficiencies as we work through the network supply and capacity constraints. Gas prices are up about 50-plus percent and electricity prices are about flat. So in the quarter, input costs were a headwind of, call it, $3 million to $5 million.

We expected that that'll hold fairly constant throughout the year and trail off towards the end of the year. But input costs and inflationary pressures will be a feature for the next several quarters on gross margins. If you go to Slide 17, we go through the segments. You can see in North America, we had North America EBIT decreased 16%.

It was primarily the result of softer volumes and higher production costs as well as continuing to invest in organizational cost in the business. And those were partially offset by price in the 4% range, trending a little bit higher than we had expected it to.

But nonetheless, the result on EBIT North America was EBIT down about 16% for the quarter compared to the first quarter of fiscal '17. International EBIT, we're up about 10% compared to the prior corresponding period. We were able to get price in both Australia and New Zealand as well as higher volumes in Australia and New Zealand.

Australia pays -- average selling price is up about 6%. That's a combination of some modest strategic price increases that we did at the beginning of the year and favorable mix. The New Zealand market continues to be healthy. It's up about 5%. We also realized about a 3% selling price increase in New Zealand.

And then the Philippines market is up higher than our volume, but our volume is definitely stabilized from the last several quarters. We're back to a favorable comp in the Philippines and we've deployed some tactical pricing for certain segments to address some of the market dynamics that we talked about on previous calls.

On Slide 18, our other businesses are fairly stable. You can see the -- we continue to incur losses, primarily in our Windows business as we continue to follow our strategy on Windows. And you can see that's up a little bit from last year and more or less flat over the last 3 years.

Research and development, no material change from the prior 3 first quarter results, all around $6 million a quarter. So that continues to be on strategy, just normal variations from period-to-period. General corporate costs, we reported $9.8 million in general corporate costs.

That's where we had a $3.4 million gain on -- with a storage facility out in our Fontana, California property that we were just using for storage that we've been -- we've had on and off the market for some time now. And we closed on that and sold that during the quarter. So there was a gain on that transaction.

When you add the gain back, the general corporate costs for the period are $13.2 million which is pretty comparable to the last several quarters. That's got a little bit of additional underlying labor cost as we fill out the management team, bring on various members of the GMT and Louis' direct reports.

And then just this particular quarter, you don't see that fully this quarter because of stock compensation was down a little bit in the quarter that sort of makes it look flat. On Slide 19, income tax for the year is estimated on an adjusted effective tax rate basis to 24.1%.

The adjusted income tax expense for the quarter decreased due to the geographical mix of earnings and the lower adjusted operating profit before income tax. No real change on where we pay taxes.

We continue to pay taxes and have taxes payable in Ireland, the U.S., Canada, New Zealand and the Philippines and do not currently pay or have payables in Europe or Australia. In Australia, it's due to the AICF deduction. On Slide 20, you can see we reported $102.9 million of cash flows from operations, down 11% from a year ago.

In addition to the decrease in net income which was primarily the result of the EBIT performance of the North America business, we're rebuilding inventory levels. We've built up about almost 35 million to 40 million standard feet of inventory in the quarter.

And you'll see on the balance sheet analysis a year ago, we went from about a $6 million drain of inventory to about an $11 million build of inventory in this period. So that's largely what's driving the working capital change. And then I think normal quarterly variations on most across the other current asset accounts.

Higher investing activity, you can see the increase in capacity expansions. We've completed the Summerville and that started up.

But we've ordered equipment for our Tacoma greenfield and are actively in the construction phase of that and I'll talk about that a bit later, as well as we've done some early equipment ordering for our Prattville, Alabama facility. And then you can see the proceeds from the sale of the Fontana building were about $7.9 million.

We had a book value and the difference between the book value and the $7.9 million you see in the cash flow is the gain. On Slide 21 we had reported first quarter CapEx spend of $48 million. That was an increase of $30.3 million compared to the prior corresponding period.

We started up our fourth sheet machine at our Plant City facility, so we have 4 active sheet machines now. We've commissioned the Summerville facility and that startup is -- they've been producing for about 60 days.

We also, as I said, we have ordered equipment in our mid-construction on the Tacoma, Washington facility that will be adjacent to our existing Tacoma facility. That was a previous announced capital, I think 2 result calls ago. So in February, we announced that capacity expansion.

We expect to commission that site in the first quarter of next fiscal year, so in about 4 quarters.

And then right after our last result call, we announced, with the state of Alabama and the city of Prattville, our intentions to greenfield a new facility and commission that facility in the second half of fiscal '19, so either the third or fourth quarter of fiscal '19 and that will be a new facility to the network.

We're almost complete in the Philippines with that facility expansion. We expect to be fully complete here later either in 2Q or 3Q. On Page 22, the financial management framework hasn't changed. It continues to start with strong financial management.

Obviously, margins and operating cash flows aren't as strong as they've historically been, but they're still quite strong by most measures. And you can see our ratings with the agencies have not changed during the quarter, so we continue to maintain the same ratings and outlooks from when we talked in May. No change in the capital allocation.

Obviously our priority from funding the business at the moment is on organic growth and strictly on capacity expansion between the 2 already announced greenfield projects and the additional wrap-up of the startups that have -- of the facilities that have already started up. That continues to be the focus of our investment dollars.

We've continued to maintain the ordinary dividend within the defined payout ratio. And no real change to how we think about flexibility for everything else. So we want to have enough flexibility to be strategic on inorganic opportunities as well as have plenty of liquidity and funding in the event of a change in the cycle.

You can see on the right our leverage continues to be well within the range of 1 to 2x. No real change in the overall underlying capital structure of the business. Our weighted average maturity is 2.4 years and 4.4 on total debt and plenty of liquidity, almost 70%, at the end of the quarter. On Page 23, the debt profile.

You can see the mix of available debt on the left. We continue to have a very strong balance sheet with over $112 million of cash, almost $428 million in net debt, 70% liquidity on our bank debt. No change in our corporate debt structure.

And at 1x net debt to adjusted EBITDA, excluding asbestos, we're right at the low end of kind of our targeted range. On Page 24, guidance for the year. The current range coming into the call was a low of $248 million and a high of $297 million.

Given where we've started the year with exterior volume and interior volume and our expectation about manufacturing in the U.S. and the continued recovery and delivered unit cost back to our historical expectations, we expect our net operating profit for the year to be between $240 million and $280 million.

Obviously that assumes a number of things outside of our control around U.S. housing starts and input cost and foreign exchange. We're assuming those as we've outlined on that page. With that, that will wrap up the presentation and I'll open it up to questions..

[Operator Instructions]. Your first question comes from Ramoun Lazar with UBS..

Just wanted to clarify a couple of things on volumes, Louis. So did I hear that you said excluding the drag from interiors, exterior volumes were up 4%? And if so, just wondering what you sort of see the impact from pull forward versus capacity being in the quarter? If you can quantify that..

Yes. I'd say that's pretty hard to quantify, especially the capacity because the capacity's kind of a -- more of a drag that's kind of developed over time, meaning last summer, we're on allocation. We came off in the winter, went on -- we had long lead times on multifamily so we lost business in that segment due to lead times.

And then we had the price increase. So the full quarter volume on the price increase pulled our inventories down so again into a bit of a service position. So it's kind of not being good for customers for probably 15 months now. So I think it's clear, we placed a drag on our efforts in the market.

Probably not so much on the market development stuff we're doing for the future business but just maintaining our base business. We're out of Trim products last year, we're short on a lot of different products in the South. So I can't remember what our estimate was for the pull forward in the fourth quarter.

But if you look at it on a 2 quarter basis, our -- we're definitely behind where we were, say, in the 4 quarters coming into that. So we, unfortunately, have a -- we've unfortunately put a drag in the business with the capacity problems. So now it's our job to work our way out. But the market index, somewhere between 5 and 6.

So for the quarter, we're behind the market index. For the 4 previous quarters rolling, we're above the market index, but kind of losing ground every quarter. So we got to start turning around and getting in the market's confidence back that we can supply and we'll be in free supply..

Okay. And just, I guess, just a follow-up on that, how are you thinking about the step through towards the back end of the year? I think end of the fourth quarter, you were sort of saying volumes should still be up about 12% for the full year, but it's not [indiscernible]..

Yes, we're [indiscernible] look, I think we did 12, I think, right around 12 last year. We want to do 12 this year. Like I said, we got out of kind of product line and interiors. So if interiors ends up flat for us, we've probably done a good job to make up that volume through market index and a bit of growth against the index.

Exteriors, right now, I'm sitting in the same spot we were last result. Our order file is weak. So I don't expect a good volume comp this quarter. Although I do expect a better EBIT comp this quarter, I don't expect a good volume comp.

So if we can get to the market index plus a little bit this year, I think unfortunately, that's the best we're going to do. On the manufacturing side which got us into trouble, we did make quite a bit more board this quarter -- first quarter of this year than last, like 22% more board.

So we definitely got ahead of that problem and now we got to stay ahead of it. So we got the Summerville startup to help us stay ahead of it and then we've got Tacoma coming on next year. And the reason we needed 22 to get out of trouble because first quarter last year, we were pulling down inventories.

And first quarter this year, we had to build inventory. So we're now at the point, pretty close to our target inventory, I mean, within like 10% or something. So we'll start mixing the plant volumes a little bit different to give us a little bit of advantage on the unit cost as well. So that's kind of where we're at manufacturing.

I won't say it's gone as easily as -- we know it's going to be hard but it was a little harder than we thought. But the -- we're at the point now where we see enough traction -- we still have a couple of sites that aren't performing the way they should and we're still working hard on those.

But we see enough traction to feel like, "Okay, we've got the supply thing straightened out for our customers and now it's a matter of getting back in front of all of our customers and see who made the switches off our product and who didn't come back and see if we can win that business back," which I'm sure we will, but it won't be a flip of the switch..

Okay, great. And just one for Matt. Matt, just on the tax rate.

I guess if you could just give us a bit of color on what do you expect that to be for the full year?.

Yes. I'd expect it to be in that 24% range. The way the effective tax rate estimate works is that, that first quarter is a pretty good indicator of kind of where we think it's going to be for the year and that adjusts, obviously, as our forecast adjusts. So for the year, I'd expect it to kind of be 24%, plus or minus 0.5 point -- 0.5%..

Your next question comes from Emily Smith with Deutsche Bank..

Just a couple of questions from me.

I think if you put together the higher costs that you talked about of just over 9 percentage points and I think that equates to about $38.5 million and you said $3 million to $5 million headwind from higher input cost, so there's like $35 million there that I just wonder if you can sort of give us some -- a feel for how much you think you can take out versus how much you think might remain in the system, is my first question.

And the second question is I was just wondering, obviously, if there was any update on some of those management positions that were outstanding..

Yes, I'll leave the numbers up to Matt. As far as management, yes, we announced that we brought Jack Truong on I think January. So he's in -- no, he came on April. Kirk Williams came on in January. And Sean Nielsen is coming on end of this month, August 21 he starts and he'll be our head of sales and marketing in North America.

So pretty happy with the way that recruitment of all 3 individuals has gone. So our plan to strengthen the North American management team, I think, is -- the game plan is working as we laid it out. So obviously there's a lot to do.

These 3 individuals are very capable, with good experience in other companies so -- but they're still kind of learning the business well, learning the industry. All 3 of them come from outside our industry. So obviously we're not getting full on back yet, but we like where we're headed there.

So I'll hand it to Matt for your question on I think EBIT margin..

Sorry, Louis.

Can I just ask quickly? So does that mean that the senior management hires are now complete?.

I'd still like to bring in a CTO. It's not as high urgency as the first 3 were. So with the first 3, we really did find the type of individual we were looking for. We're into the CTO search and coming up a little bit short on the type of individual we're looking for.

So we're not -- that's not super urgent for us, but we'll bring a CTO in in the next, I guess, 6, 8 months. Maybe pretty quick if we find the right person, but it may take 6 or 8 months..

Emily, on your 9 points of gross margin and we referenced this in our MD&A. Yes, so think about that as about half of that is plant performance which is just a variety of inefficiencies that were really pushing the base network which is already performing at a level that's consistent with kind of historical highs.

Obviously we're in a capacity constraint. Every percent that it's off of its sort of nameplate, we feel. But nonetheless, plant performance accounts for about half of that. Freight is another 2 to 3 points, component of that.

So it's 3 points, think of that as 1/3 market and 2/3 inefficiency as a result of us having to make product in plants that are outside their natural markets that they would normally win and normally service as well as us having to expedite.

And we would expect that some of that inefficiency would certainly decrease as we get back to more normal operations.

And then the remaining 3 points is kind of equally split across inflation on input cost, startup cost and some fixed cost as we continue to invest in things like nonroutine maintenance and infrastructure back into the facilities and some fixed labor cost back into the plants..

Right.

So I guess, if you sort of -- is that half, is that plant performance what you think you can -- over the course of the year, is that what you guys think that you can reduce? Is that -- and maybe some of the freight inefficiency, is that fair?.

Yes, that's fair. So it's the 4 to 5 points of plant and there's 3 points of freight. There's 1 to 2 that's inefficient freight that's not related to the market. So there's that 5, 6, 7 points of margin that, over time, you'd expect to work it out. I think obviously the key is how quick can we work it out of the system.

And as Louis said, earlier in the call, over the last 6 or 7 months, we've seen a good trend on 5 out of the 6 or 6 out of the 7. So we can definitely start to see it now. It gives us more confidence that it's going to come. It's just a matter of how fast it's going to come out..

Right. Okay.

And so when you talk about the guidance range for 20 to 25 margin for FY '18, I mean, what are the chances that you could get to the 25?.

For the year?.

Yes..

Yes, I don't think we'll get to the 25 for the year. But I think where we said it in May was that we could get to the middle of the range or maybe the upper end of the range.

And that's probably about as good as I think we're going to do for the year, just given where the volume is in the first quarter and what we're seeing in the order file here in early August to the first 6 weeks of the second quarter..

Your next question comes from Peter Steyn with Macquarie Group..

Can I just clarify your response very briefly to Emily's final question, Matt? So that your comment around margin, that would obviously be for full year perspective? So on a quarterly basis you would still expect to get a little bit towards the upper end of the range?.

Yes, that's right, Peter. Yes, I think what we had been saying in May and I'd say it's pretty consistent now, is that we're going to have a tough comp in the first quarter because a lot of the manufacturing inefficiencies didn't really start to come into full light until the second quarter or so last year and then into the winter.

And then we had input costs really as a tailwind up through the first 6 months of last fiscal year. And there's obviously a slight headwind here in the first quarter. So those dynamics I think are still the case which is putting the first quarter EBIT margins which are historically high when you look at the EBIT margin by quarter on Slide 9.

They're higher and they sort of -- they tend to be high in the first quarter. We're starting obviously with a low and it'll still build in the second quarter and the third quarter and the fourth quarter. So we're still expecting that. I don't think that, that math each quarter will get us to an EBIT margin that's at 25 for the year.

But I do think it will get us to an EBIT margin for the year that's either in the middle of the range or maybe in the upper end of the range..

Okay, perfect. So then just very quickly, could you talk us through the franchise health? I'm really interested to understand how customers are thinking about your ability to supply. Lou, you made comments about confidence.

So is that in the context of your ability to supply now? I mean, I'm sort of assuming that you have got an ability to deliver to orders now.

So how does that sort of all come together in terms of how customers are thinking about you as a business partner?.

Yes, I mean, obviously it depends on the customers and the market. But some of them will be fully back with us and some of them would be lagging. The reality is there's a percentage of our customers that had to find a different solution for whatever it is they were after last year and in a lot of cases it would've been Trim.

And they've landed on that solution, whether they're builders or dealers carrying for owners.

And now it's just re-engaging and going back and, like you say, let them know that we've got our supply side straightened out and we want to get back on our product which they were on in the first place, we think for the right reasons, so we're just getting it back there. So it's just a lot of reengagement.

And I don't want to mislead you, there's a lot of our customers that, if they did had to do any switching, they switch right back.

And but when you're talking about the type of percentages we're talking about, there's going to be other customers who landed on a different product and it's not their highest priority to get back to Hardie and we just go to be proactive with them and kind of reestablish our value for them..

And then just a very quick one on pulp. Matt, perhaps 12% increase in the period relative to index, that was probably a little bit below that.

Just curious why an above-average number out of pulp?.

Yes, I mean we still bob below the market index for the quarter. So it just happened -- that's just where the pulp index was for the quarter. I don't have a -- there was no inefficiency on our side or it's not like we had a bad quarter with respect to how we bought. We just happened to catch a quarter where pulp was up.

But we've -- our impact on the quarter was lower than that 12% that you have on the input slide. That input slide is meant to be a market index indicator. Our sourcing strategies were better than that..

Your next question comes from Simon Thackray with Citigroup..

Just a quick one on quantification. I think you called out DIFOT levels at the fourth quarter. Just wanted to understand how DIFOT levels are tracking by region if we just set the north and the south in the U.S.

to start with?.

Sorry, Simon, can you just repeat what level?.

The DIFOT, the delivery in full on time, you called that out last quarter?.

Yes, all right, sorry but you got a different acronym than we have it in the U.S. Anyway, it was tighter in the south because I don't know if you recall but we were short capacity, but we're specifically short at the HLD capacity.

So the Plant City line which we built and started up last year, is a product specific line or the majority in it, those hours go toward Trim. So we have a shortness on Trim for the south. In the north, our service position slipped but not anywhere to the degree that it did in Texas and the Southeast..

Okay. That's helpful, Lou. Just a couple questions the average selling price jump that we saw in the U.S., obviously appreciating the April lump price rise. But you also made reference to the tactical withdrawal from G2 and interiors going backwards versus the pcp.

So to what extent was the ASP influenced by the withdrawal from G2 and from interiors itself going backwards?.

Yes, it was -- like I said, the mix benefit was less than 1%. So -- and that mix benefit is kind of the backward use of the term. It was less multifamily because of our lead times and less backer because of our pulling out our product line. So it wasn't like we sold more high-value products. We sold less of the lower-priced products, relatively less..

Okay. That makes sense.

And then just in terms of the SG&A spend, of course, backing up the property sale, $3 million property sale for a second, was it more or less effective given this issue of customer allocation or customer pushback, was it more or less effective in the R&R market than the new housing market or are they both behaving the same way?.

Yes, as I said the SG&A spend is not directly related to the R&R or the new construction market. And we've got programs that are aligned with different segments and different products in any given time. The increase in SG&A continues to be associated with us putting more management capability and numbers into the organization.

So we're continuing to put labor cost into the business as we're trying to build out the management team and provide bandwidth and provide more capability in certain departments..

Okay, that's helpful, Matt. Maybe I can ask the question a different way then.

In terms of the re-winning hearts and minds of customers, is that more in the new housing, major homebuilder market or is it more in your repair and remodel market where the issues of getting people back on board are?.

I think everyone protects R&R to a greater degree, whether you're a dealer or a manufacturer because it's a more profitable segment. So now our big builder business is protected with contracts.

So it'd be more the guys kind of -- not the biggest builders but the guys that use Hardie on a regular basis and buy it through the dealer without any direct contact with Hardie and it's probably the easiest stuff for someone to switch it off, whether a dealer needed to switch it off or, I guess, it would mainly a dealer. But it was across the board.

If you use Trim, you got to work hard to find our Trim. So that would hit all the segments and the plants to a lesser extent, I would say..

Okay. So then I might belabor the point but if I go straight to the outlook and the range, the $240 million to $280 million NPAT and your comment about you'd be happy to make the sort of index growth for the market about 5% to 6%. I think that's what you call that, Lou, correct me if I'm wrong. I'm just trying to understand what the assumptions are.

That's a pretty wide range.

That's the best part of the quarter's profit in that range, what are the assumptions to get to that number this year?.

That kind of range -- I mean, I don't know if I look back on previous years but we always start wide and narrow down as we get later in the year. So we're not seeing it as a wide range. The assumption's obviously external. Our housing starts, R&R index and input cost and the internals would be -- current order file is weak.

So it's hard to be overly optimistic on just snapping that around. And then manufacturing, we get a decent trendline. But there's variance in how things work in plants and we hope we're on a -- we're going to maintain our positive trend and hit the targeted unit costs we're after and then, of course, freight as well.

So you've got a mix of internal and externals there and we don't think of the ranges that wide for an August call for the full year..

Okay. That's fair enough. And then Matt, just in terms of that inventory build which was 2.03 then went up to 2.15, so 2.03 at March and 4Q so up to 2.15 [ph] Is that all -- presumably, it's all the U.S. and you called out that you're still short in the south, Lou.

So where is that inventory? And what was the benefit to gross margin for the credit for the inventory in the period?.

Yes, I mean, the inventory is sort of evenly distributed throughout the network so it's not in any particular region.

We still have some areas in the country where we've got certain products that are below our minimum inventory band and I'd expect us to continue to build inventory in the second quarter and then do the normal inventory build in the winter in order to get ready for spring shipping season.

So I think we'll continue to put material in the inventory over the next couple of quarters. And I'd say it's by region and by product. So it's not 1 plant or even 1 product. It's kind of a mix.

We definitely got more plants that are now in the band and we've got more regions that have more products that are now within our range than we would've a quarter ago or certainly several quarters ago..

Sure. And just what was the financial benefit for that in the margin in the quarter, the U.S.

margin, Matt?.

Yes. I mean, we don't disclose kind of variance level detail, the standard. I mean, it obviously washes out over a 90-day period or so. We tend to turn inventory stock with above 60, 70 days..

I think what he's saying -- I think your question if I read it right is you're saying well you made more than you sold so you got the benefit of making more, is that what you're saying?.

Correct. Correct..

Okay. We're not in our targeted inventory. And well, it's interesting that you see it that way because we're kind of seeing it the other way. Our cost of goods manufactured is lower than our cost of goods sold because we've got inefficiencies coming along so -- but it takes 6 weeks to find the way into the EBIT line.

So I'd say whatever benefit there is, is more than being kind of offset by the fact that we're working our way down on unit cost. So what we sold this quarter was more expensive than what we produced..

Your next question comes from Andrew Johnston with CLSA..

A couple of questions. First of all, particularly it looks like the issues with fulfilling customer demand is being focused in the South.

What are customers shifting to? Are they shifting to alternative Fiber Cement suppliers? Are they shifting to engineered wood? Where do you think that's going? Has that got anything to do with what you're seeing, as you mentioned, Lou, a little harder to be, it appears to be, if I hear you correctly, it appears to be that you're finding it a little bit harder to get those customers back than what you thought..

Yes. Just so everyone on the call -- I mean, I did put it out there but everyone on the call needs to realize it's on the margins, so we're talking about maybe a 3% or 4% or 5% growth is missing. So 95%, 97% of our customers are probably fully back. But where it goes, it goes across alternatives. You can be pretty sure it doesn't go to vinyl.

So probably doesn't go to stock. Don't go to bricks. So you got your wood products and your cement products, so you've got your direct Fiber Cement competition. I think there's been a little bit of opportunistic importing of Trim products because that's the product we're shortest on.

So your Trim manufacturers are Miratec, LP and I think you got some Collins trims still out there. So it's going hard board, it's going OSB, it went CFC which is Compressed Fiber Cement. So it would have sprayed -- there's no big winner out there. It just would've sprayed around depending on what the market is and what the customer need was.

I still want -- I want to point out again, this isn't a rush -- a big run from Hardie, where a large percentage of our customers haven't come back. This is, again, probably more customers that we don't touch directly and we just got to work harder, work through the channel and make sure we get all our touches in..

[Indiscernible] you announced that they now started shipping Fiber Cement product into, I suppose you'd call it the Midwest, ahead of the Indiana plant prestarting later this year.

Are you seeing any of that or is that just too small to come up on your radar?.

I think they're probably shipping their excess capacity from Oregon in but we haven't tracked it. I mean, we know they have plans of starting up their plant. The CFC kind of market position is -- it's kind of one that we don't spend a lot of time on because they're going to find a number, they can sell a certain percentage of their board at.

And they don't seem to quite sell out even when we're sold out. So whether they want to sell it in the Midwest or in Denver or in Texas or wherever they want to sell it, I mean it's just, it's the same equation. So we don't really chase them around is, I guess, my short answer..

Okay. And the final question just around the international, is there any insights around how Australia is going, Philippines, any quick comments there? And Europe I suppose? Sorry..

Yes, I mean, you can see it from the slides, Australia and New Zealand, they both had nice quarters. Philippines has that little bit of a reset going into our new capacity coming online. So they're giving up a little price to protect market share against some importing.

And Europe, kind of even though all 3 arrows are down, it's more flat to down than down, down. So we're still working in Europe to find a better path forward. So that hasn't changed..

Your next question comes from Keith Chau with Evans & Partners..

A couple of quick questions of mine. Just firstly with respect to volume growth progression as we get through FY '18. Appreciate your comments of getting back to around market index or above by the end of the financial year.

Will it be likely that it's more going to be the third quarter that you get back to market index driving the second quarter? So, I guess, put it simplistically, should we expect PDGs to still be negative in the second quarter? And then just secondly on price, as you're kind of trying to win back customers, will you be discounting more and actually ceding a little price to get some customers back?.

Yes, I don't think I'd worry about price. I mean, like I said, it's a small percentage of your customers. So even if you did use some price incentives, it wouldn't be across the board price moves. I'm not saying that that's kind of the answer because I'm not sure it is.

It's really certainty of supply I think is way more important at this point to the customers that had been on Hardie and haven't come back yet. So no I wouldn't worry about that. And like Matt said, we're almost 6 weeks into the quarter and we've got a softer order file. So you read it right.

If we start picking up above the market index, it will probably start happening in the third and the fourth quarter..

Your next question comes from Andrew Peros with Crédit Suisse..

Lou, I just wanted to circle back to your answer that you gave to Andrew Johnston's questions about where the loss or gains of share are kind of going in terms of products.

I guess, if I look at the ply gym results overnight, they -- the vinyl guys are obviously calling out victory over the past quarters saying that vinyl gained market share over the past quarter. And they're also saying that Texas was particularly weak.

So I guess, in light of your weak order file that you're calling, I'm just wondering if you can reconcile that to perhaps what the vinyl guys are saying and maybe the Texas market.

And maybe we're kind of overanalyzing one quarter's volume weakness as maybe something systemic when perhaps it's not?.

Yes, you asked me my view on a vinyl come back, I don't see a vinyl come back. So if they got a positive quarter which I haven't seen the result, obviously we follow the volumes through the vinyl siding institute and we track their volumes against our volumes and our close alternatives. We don't see a vinyl comeback.

Your other question was they refer to a weak Texas, is that what you're saying?.

Yes..

Yes, we've had some weakness in Texas so we're not sure how much of it is carryover from our supply problem versus if there's a temporary kind of gap in market demand down there. But we're a little bit weaker in Texas than we want to be..

Your next question comes from Brook Campbell-Crawford with JPMorgan..

I just had a question on the regional volume performance. You talked a bit about the South and the Southeast, where there's some capacity issues in servicing customers.

But how are you seeing volume performance relative to markets and, therefore, PDG and some of the other areas like the Midwest or the West rather for instance?.

Yes. PDG's a metric that gets less accurate the smaller the things you measure, that's why we don't measure it quarterly and we don't use it so much regionally as well. We use a little bit by division. To answer your question on what do we think about regional and it kind of goes back to I think it was Andy's question before you.

Texas was the only one that we looked at the volume and said, "hmm, there's something wrong there." So we got to drill down there. We saw a few of our own internal problems so we're patching those up. And then we didn't really answer where's the market at. It's not officially kind of a small market.

But it seems like market demand's not as strong as you'd expect. So it's a market that builds less in the summer and more in the winter, when it starts cooling-off down there. So it may just be a little bit more of a kind of a weird thing around the timing. Like I said, Texas is a great market.

They're back on their front foot as far as growth projections. We did find some gaps in our programs down there. Of course, they use a lot of our HLD Trim which we're short of last year. So we think we'll get Texas tracking where we want it to. The -- and that's the only one worth commenting on. Everything else was kind of what you'd expect..

Just a question for Matt on the balance sheet and talked about leverage being at the low end of the range. And I appreciate you've just made the asbestos payments and there's some CapEx go in for the parts in the coming periods. But interested in your thoughts around capital margins.

Should people start to be thinking about buybacks in the coming periods at all?.

No. There's -- they shouldn't be thinking about buybacks or returns kind of above. We're going into a period of a pretty significant CapEx due to the capacity expansions we've got.

Obviously the ones that we've announced, Tacoma we've already announced is $120 million, $121 million of incremental capacity on top of the land we bought a couple of years ago. So it will be $150 million CapEx. 25 of land has already been spent and we've preordered some equipment. We've got quite a bit of Tacoma spend still to come.

We haven't announced a price tag on Alabama but you should assume it's going to be at least the price of Tacoma. And so that's to come. And that's just sort of in the immediate term, meaning over the next, call it, 12 to 18 months. And we're continuing to look at kind of a greenfield or brownfield capacity after Alabama.

So with all that kind of in mind and just thinking about how I think about the balance sheet knowing kind of margins are in the part of the range we really want them to be, a combination of those two things, we would continue to fund organic growth, continue to fund capacity expansion, maintain the ordinary dividend.

I wouldn't expect any kind of special returns though..

Your next question comes from Ramoun Lazar with UBS..

Just a follow-up question. Matt, just one on CapEx, just following up from Brook's question.

So what are your expectations now around CapEx for this year and the next two years given those capacity expansions?.

Yes. Yes, thanks, Ramoun. I think in May I said roughly $250 million per annum for each of the next 3 years. And I still think that's about how it will play out. I think this year, meaning fiscal '18, it could be higher than that.

I wouldn't be surprised if we're up in the $300 million range depending on how we decide to design the Alabama plant and how much of that spend gets done before the end of March. But given that we've accelerated the buildout of Tacoma, you should expect almost all of that Tacoma spend to go in.

I'd expect a large portion of Alabama to go in into this year. And then we've got a normal maintenance CapEx. And so right there, you can easily start to see we're probably in that $250 million and upwards of $300 million range this year. And then we've got to finish Alabama next year to our normal kind of $100 million, the maintenance CapEx.

And then we're still working through what additional capacity we need once we get Alabama designed and constructed. So I still think that that roughly $250 million a year for each of the next 3 years is about right.

I think the profile will end up looking slightly different, but I don't have a better guidance for you at this stage that I'd say would change any of the models materially..

Okay, great. And just one last one also for Lou. Just Lou just keen to get your sort of thoughts around feedback from customers on these new, how do they say it, HA silica rules. I think they're meant to the compliance stages from September this year.

So just I guess, what are you hearing there? And has there been you think any impact on the way customers are thinking about Fiber Cement?.

Yes. I'll start with the last part of your question. and say no. Now, we have worked hard to enable the market through the saws and saws and vacuums and other cutting methods so they can stay compliant with the new standard. So we spent a little bit of money -- at least we talk about our SG&A build.

Certainly we've spent a fair amount of money in that area kind of really enabling the market to hit the lower standard and, of course, some of our plant work was to make sure that all our plants are at the lower standard as well.

So -- but no, I don't think anyone -- so many building materials have silica as one of our key raw materials in the process. I don't think anyone's looking at Fiber Cement as less viable because of the change..

[Operator Instructions]. Your next question comes from Peter Steyn with Macquarie Group..

Just a quick follow-up. Louis, you mentioned manufacturing flexibility in general. You alluded to Fontana running on an optimized schedule now obviously still battling with the 1 line.

Could you talk us through just how you're seeing that startup play -- the startups playing through the year? Some of them pretty much done and been running along the expected curve. But just wanting to get a little more detail there on how you see the plant strategy working through the year..

Yes. So I think we might have put out -- around some but in Summerville, it has been in startup mode for a couple of months, mainly commissioning in June and then start up in July. It hasn't made a lot of material yet. We've got parts of that plant kind of fully commissioned and other parts we're still working on.

And then, of course, with a new site like that, the organizational capability is one of the key drivers of how productive the startup can be. So we're still working through Summerville. I'd say we're still on our early stages of startup.

I think the way you described it, well through their startup, I think they got another 4 or 5 months before we call them well through their startup. Now the other sites, like I said, PC4. Matt commented on PC3, Cleburne 3, Fontana 1 and 2. They're officially on a startup mode and they're on run mode.

That doesn't mean they're running full efficiency, but it means they're -- with the exception of Fontana and they're kind of in the target unit cost band that we're comfortable with, we still got some work to do in Fontana. And then we got the rest of the network and a couple of sites we'd like to see some improvement in.

We've been working at that and kind of having gotten there in a couple of sites yet. But overall, we're out of demand, unfortunately part of that is because demand's softer than we'd like it to be. But we produced 22% more board this first quarter than we did last year first quarter. So you can see we have a lot of capacity working for us now.

And still some upside in multiple lines in the company. So we won't run 24/7 through the winter is the way we're reading it, but we will run pretty strong until we get up to the targeted winter inventory levels. We'll take annual downs at each facility this year to make sure we stay up on the maintenance requirements.

So our manufacturing plant has basically gone from catch up, catch up, catch up, not ever caught up, it's okay. How do I do this balance delivery unit cost, service position, annual downs kind of work schedules for employees, stuff like that? So that's what we'll be doing through the winter.

And we'll probably in the September tour, give you guys more guidance just what's running what and why the different lines are some are running 24/7. And by that time, I think you'll at least have a couple of them running 3 shifts..

Your next question comes from Keith Chau with Evans & Partners..

Sorry, just a quick one for me, just to clarify.

So from what we're hearing, is it the case that you've got enough capacity now to service potentially a couple of years of growth? And it is simply just about getting volumes back into the system from customers?.

Yes and Keith, by the way, just for everyone on the call, we're in the, I think, our third or fourth follow-up question. So we'll cut the call after this question unless we have one last want to take, we'll take that last one. I won't oversimplify it like that. Our old 35/90 model has manufacturing improvements built into the model.

In other words, the financial model for Hardie isn't near as good if every time we sell another couple of hundred million feet of board we need another line. So we've been getting gains in the network and that needs to continue. That's part of our enabling strategy in manufacturing.

Otherwise, we're just building plants way too often and spending a lot of dollars on CapEx that hopefully we don't have to spend if we get more of existing lines. What we did last year is obviously we misread some startups and we also had a flat to down period on some of the key lines of the network. So that's how we got into trouble.

So in the future, we'll plan more buffer in there. But believe me, as long as you follow Hardie, Hardie will be working hard to get more out of the existing lines because kind of what Simon was referring to, we get that at a lot better incremental cost, you get it at an incremental cost basically and you get it without the investment.

So there's always plenty for us. It's more out of existing lines and then build lines as you need them. So I wouldn't oversimplify and say hey, you're all set, you're two years ahead.

If we do what we think we're supposed to do, we've got our capacity lined up with enough buffer in place to where if there's small variances we're not getting into trouble again..

Thank you. There are no further questions at this time. I'll now hand back to Mr. Gries for closing remarks..

Yes, that's great. I appreciate everyone joining the call. And for those of you coming to the September tour, we'll see you in a month or so. Thank you..